10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014 OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________

Commission File Number: 000-33155

COATES INTERNATIONAL, LTD.

(Exact name of registrant as specified in its charter)

Delaware	22-2925432
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

2100 Highway 34, Wall Township, New Jersey 07719

(Address of principal executive offices) (Zip Code)

(732) 449-7717

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 the 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
(Do not check if a smaller reporting company)

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

As of May 9, 2014, the Registrant had 385,431,636 shares of its common stock, par value $0.0001 per share issued and outstanding.

COATES INTERNATIONAL, LTD. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

CONTENTS

MARCH 31, 2014

		Page
PART 1  -	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Balance Sheets	3
	Statements of Operations	4
	Condensed Statements of Cash Flows	5
	Notes to Financial Statements	6-26
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27-33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II  -	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34-35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	36
Item 6.	Exhibits	36
SIGNATURES		37

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Coates International, Ltd.

Balance Sheets

	March 31, 2014			December 31, 2013
	(Unaudited)
Assets
Current Assets
Cash	$	28,527		$	49,274
Inventory, net		111,752			111,752
Deferred offering costs and other assets		10,559			12,423
Total Current Assets		150,838			173,449
Property, plant and equipment, net		2,164,095			2,179,646
Deferred licensing costs, net		49,945			51,016
Total Assets	$	2,364,878		$	2,404,111
Liabilities and Stockholders' Deficiency
Current Liabilities
Accounts payable and accrued liabilities	$	2,206,428		$	2,263,947
Mortgage loan payable		1,498,284			1,513,284
Promissory notes to related parties		558,138			603,138
Deferred compensation payable		366,974			287,664
Derivative liability related to convertible promissory notes		254,263			366,590
Convertible promissory notes		135,062			125,018
Current portion of finance lease obligation		47,394			43,311
Current portion of license deposits		19,200			19,200
Unearned revenue		19,124			19,124
10% convertible note		10,000			10,000
Total Current Liabilities		5,114,867			5,251,276
Non-current portion of finance lease obligation		67,958			81,452
Non-current portion of license deposits		298,200			303,000
Total Liabilities		5,481,025			5,635,728
Commitments and Contingencies		-			-
Stockholders' Deficiency
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 162,181 and 141,473 shares of Series A Preferred Stock issued and outstanding at  March 31, 2014 and December 31, 2013, respectively		162			141
Common stock, $0.0001 par value, 1,000,000,000 shares authorized, 342,759,313 and 327,749,176 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		34,276			32,775
Additional paid-in capital		31,337,945			30,712,778
Accumulated deficit		(34,488,530	)		(33,977,311	)
Total Stockholders' Deficiency		(3,116,147	)		(3,231,617	)
Total Liabilities and Stockholders' Deficiency	$	2,364,878		$	2,404,111

The accompanying notes are an integral part of these financial statements.

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Coates International, Ltd.

Statements of Operations

For the Three Months Ended March 31

(Unaudited)

	2014			2013
Sublicensing fee revenue	$	4,800		$	4,800
Total Revenues		4,800			4,800
Expenses:
Research and development costs		114,170			-
General and administrative expenses		265,085			623,612
Depreciation and amortization		16,621			16,621
Total Expenses		395,876			640,233
Loss from Operations		(391,076	)		(635,433	)
Other Income (Expense):
Decrease (increase) in estimated fair value of embedded derivative liabilities		117,016			(70,414	)
Loss on conversion of convertible notes		(36,624	)		-
Interest expense		(200,535	)		(100,001	)
Loss Before Income Taxes		(511,219	)		(805,848	)
Provision for income taxes		-			-
Net Loss	$	(511,219	)	$	(805,848	)
Basic net loss per share	$	(0.00	)	$	(0.00	)
Basic weighted average shares outstanding		336,256,678			328,516,041
Diluted net loss per share	$	(0.00	)	$	(0.00	)
Diluted weighted average shares outstanding		336,256,678			328,516,041

The accompanying notes are an integral part of these financial statements.

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Coates International Ltd.

Condensed Statements of Cash Flows

For the Three Months Ended March 31,

(Unaudited)

	2014			2013
Net Cash (Used in) Operating Activities	$	(377,394	)	$	(188,601	)
Net Cash Provided by (Used in) Investing Activities		-			-
Cash Flows Provided by (Used in) Financing Activities:
Issuance of common stock and warrants to related party		290,000			35,000
Issuance of common stock under equity line of credit		104,138			3,041
Issuance of convertible promissory notes		33,333			67,000
Issuance of promissory notes to related parties		-			125,329
Repayment of promissory notes to related party		(45,000	)		(23,000	)
Repayment of mortgage loan		(15,000	)		(15,000	)
Payments of finance lease obligation		(10,824	)		-
Net Cash Provided by Financing Activities		356,647			192,370
Net Increasee (Decrease) in Cash		(20,747	)		3,769
Cash, beginning of period		49,274			13,303
Cash, end of period	$	28,527		$	17,072
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	41,394		$	29,452
Supplemental Disclosure of Non-cash Financing Activities:
Conversion of convertible promissory notes	$	112,810		$	92,200
Deferred compensation payable paid with common stock		-			1,761,175
	$	112,810		$	1,853,375

The accompanying notes are an integral part of these financial statements.

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Coates International, Ltd.

Notes to Financial Statements

March 31, 2014

(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”), is a Delaware corporation organized in October 1991 as successor-in-interest to a Delaware corporation of the same name incorporated in August 1988.  Coates International, Ltd. operates in Wall Township, New Jersey.

The Company has acquired the exclusive licensing rights for the 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 and his son, Gregory 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 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 cylinder, 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 (“Coates 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 higher RPM’s, greater volumetric efficiency and thermal efficiency can be achieved with the CSRV® system technology, is a function of the engine design and application.

Management believes that internal combustion engines incorporating the CSRV® system technology can deliver better fuel efficiency, reduced harmful emissions, longer intervals between engine servicing and longer engine life than conventional internal combustion engines.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

Hydrogen Reactor Technology Owned by George J. Coates

George J. Coates, President and Chief Executive Officer, has developed a hydrogen reactor, which rearranges H2O water molecules into HOH molecules also known as Hydroxy-Gas. The Hydroxy-Gas produced by the hydrogen reactor is then harvested for use as a type of fuel. Mr. Coates is continuing with development of this technology to enable the harvested Hydroxy-Gas to be utilized as the fuel source to power the Company’s patented CSRV® engines. Mr. Coates is continuing with research and development of the next application of this technology in an attempt to power larger, industrial engines. If successful, this application will only require a ready supply of water and would be suitable for stationary engines and generators. Conventional internal combustion engines employing poppet valve assemblies require lubrication and would experience excessive heat and friction if powered with Hydroxy-Gas. This, in turn, would cause the engines to burn out in a rather short period of time. The materials and components of the CSRV® engines do not require such lubrication and are designed to operate relatively trouble-free on various alternative fuels, which would also include Hydroxy-Gas. There can be no assurance that this technology can be developed successfully, or that if developed, it will be feasible to penetrate the internal combustion engine market with this technology. Applications for patent protection of this technology will be filed upon completion of the research and development. At this time, no arrangements have been made between the Company and George J. Coates, owner of the technology, regarding licensing of the hydrogen reactor. Accordingly, the Company does not have any rights to manufacture, use, sell and distribute the Hydrogen Reactor technology, should it become commercially feasible to manufacture and distribute products powered by the Hydroxy-Gas fuel. The Company has been and continues to be responsible for all costs incurred related to the development of this technology.

The accompanying unaudited financial statements of Coates International, Ltd. (the “Company”, or “CIL”) have been prepared in accordance with accounting principles generally accepted for interim financial information and rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2014 and 2013 are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

Going Concern

As shown in the accompanying financial statements, the Company has incurred recurring losses from operations of ($34,489,000), primarily in connection with research and development activities; and, as of March 31, 2014 had a stockholders’ deficiency of ($3,116,000). The Company will be required to renegotiate the terms of an extension of a $1,498,000 mortgage loan which matures in July 2014, 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 current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest their funds and low investor confidence, has introduced additional risk and 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. The financial statements do not include any adjustments that might be necessary should the Company become unable 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 carry out the Company’s activities related to research and development activities, entering the production phase of operations, developing additional commercially feasible applications of the CSRV® system technology, seeking additional sources of working capital and covering general and administrative costs in support of such activities. The Company continues to actively undertake efforts to secure new sources of working capital. At March 31, 2014, the Company had negative working capital of ($4,964,000) compared with negative working capital of ($5,078,000) at December 31, 2013.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

Majority-Owned Subsidiary

CIL is currently the majority shareholder of Coates Hi-Tech Engines, Ltd. (“Coates Hi-Tech”), a Delaware corporation which was formed in July 2012. It has not commenced operations and has no assets.

For the three months ended March 31, 2013, the financial statements of CIL were consolidated with the accounts of Coates Oklahoma Engine Manufacturing, Ltd. (“Coates Oklahoma”). In May 2013, Coates Oklahoma was shuttered and has since been formally dissolved. There were no outstanding obligations or expenses in dissolving this company.

Reclassifications

Certain amounts included in the accompanying financial statements for the three months ended March 31, 2013 have been reclassified in order to make them comparable to the amounts presented for the three months ended March 31, 2014.

2.   ACCOUNTING POLICIES

Loss per Share

Basic net loss per share is based on the weighted average number of common shares outstanding without consideration of potentially dilutive shares of common stock. There were no shares of preferred stock outstanding with rights to share in the Company’s net income during the three-month periods ended March 31, 2014 and 2013. Diluted net income per share is based on the weighted average number of common and potentially dilutive common shares outstanding, when applicable.

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 Series A Preferred Stock issued and certain limited anti-dilution rights granted to George J. Coates as more fully described in Note 17, 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.

3.   CONCENTRATIONS OF CREDIT AND BUSINESS RISK

The Company maintains cash balances with one financial institution. Accounts at this institution are currently fully insured by the Federal Deposit Insurance Corporation.

The Company’s operations are devoted to the development, application 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.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

4.   LICENSING AGREEMENT AND DEFERRED LICENSING COSTS

The Company holds a manufacturing, use, lease and sale license from George J. Coates and Gregory 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 Coates granted to the Company an exclusive, perpetual, royalty-free, fully paid-up license to the 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 Coates.

Under the License Agreement, George J. Coates and Gregory Coates agreed that they will not grant any licenses to any other party with respect to the CSRV® Intellectual Property.

At March 31, 2014, deferred licensing costs, comprised of expenditures for patent costs incurred pursuant to the CSRV® licensing agreement, net of accumulated amortization, amounted to $50,000. Amortization expense for the three months ended March 31, 2014 and 2013 amounted to $1,000 and $1,000, respectively.

5.   AGREEMENTS ASSIGNED TO ALMONT ENERGY INC.

Almont Energy Inc. (“Almont”), a privately held, independent third-party entity based in Alberta, Canada is the assignee of a sublicense which provides for a $5,000,000 license fee to be paid to the Company and covers the use of the CSRV® system technology in the territory of Canada in the oil and gas industry (the “Canadian License”). Almont is also the assignee of a separate research and development agreement (“R&D Agreement”) which requires that Almont pay the remaining balance of an additional $5,000,000 fee to the Company in consideration for the development and delivery of certain prototype engines. The Company completed development of the prototypes in accordance with this agreement at the end of 2007. The R&D Agreement had not been reduced to the form of a signed, written agreement.

Almont is also the assignee of an escrow agreement (the “Escrow Agreement”) that provides conditional rights to a second sublicense agreement from the Company for the territory of the United States (the “US License”). The US License has been deposited into an escrow account and the grant of the license will not become effective until the conditions for release from escrow are satisfied. The US License provides for a license fee of $50 million. 

The Escrow Agreement requires that Almont, as the assignee, make a payment (“Release Payment”) to the Company equal to the then remaining unpaid balance of the Canadian License licensing fee, the R&D Agreement fee and the down payment of $1,000,000 required under the US License. It is not likely that Almont will be able to make additional payments of the Release Payment until the Company can raise sufficient new working capital to commence production and shipment of Gen Sets to Almont. At March 31, 2014, the remaining balance of the Release Payment due to the Company was $5,847,000.

In connection with the assignment of the Canadian License and the rights to the US License, Almont has also assumed all of the obligations set forth in the Escrow Agreement, with the following modifications:

● The Release Payment Date, as defined in the Escrow Agreement had been extended to March 19, 2014. In order to compensate for the delay caused by the delay in our ability to deliver Gen Sets, the Release Payment due date will be reset as appropriate, once the Company commences its production phase of operations. Provided that Almont remits this entire unpaid balance to the Company of the Release Payment Date, the US License will be released from escrow and granted to Almont. Almont is required to remit to the Company 60% of all monies it raises from future equity or debt transactions, exclusive of proceeds from equipment purchase financing transactions, until the Release Payment is paid in full.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

● Almont also became obligated to pay the $49 million balance of the US License Fee to the Company. Payment shall be made quarterly in an amount equal to 5% of Almont’s quarterly net profits. In addition, Almont is required to remit a portion of the proceeds it receives from equity or debt transactions, exclusive of equipment financing transactions to the Company until the entire balance of the US License fee is paid in full. However, the entire $49 million licensing fee is required to be paid on or before February 19, 2016.

The Canadian License

The Canadian License exclusively sublicenses within Canada the use of the CSRV® system technology for industrial engines designed to generate electrical power. Additional provisions of the Canadian License agreement are as follows:

● Sublicensee shall have the exclusive right to use, lease and sell electric power generators designed with the CSRV® system technology within Canada.

● Sublicensee will have a specified right of first refusal to market the electric power generators worldwide.

● Upon commencement of the production and distribution of the electric power generators, the minimum annual number of generators to be purchased by Sublicensee in order to maintain exclusivity is 120. The Company has temporarily waived this provision due to the delay in delivery of Gen Sets.  In the event Sublicensee fails to purchase the minimum 120 CSRV® generator engines during any year, Sublicensee will automatically lose its exclusivity. In such a case, Sublicensee would retain non-exclusive rights to continue to use and sell the CSRV® generator engines in the territory of Canada. Until otherwise agreed between the parties, the price per generator shall be $159,000.

● Sublicensee is required to pay a royalty to the Company equal to 5% of its annual modified gross profit (which has been defined as sales, less cost of sales, plus $400,000).

● All licensed rights under this license agreement related to the CSRV® system technology will remain with the Company.

The US License

The US License will, upon Almont satisfying the Release Payment, grant to Almont the right to use, sell and lease within the defined territory, Licensed Products manufactured by the Company which are designed to generate electrical power.  Licensed Products consist of CSRV® Valve Systems, CSRV® Valve Seals, CSRV® Rotary Valve Spheres, CSRV® Valve Components and CSRV® Engines. Almont is also obligated to pay a royalty to the Company equal to 2.5% of its annual modified gross profit (which has been defined as sales, less cost of sales, plus $400,000).

The manufacture of any Licensed Products by Sublicensee is prohibited.  Sublicensee is required to procure all internal combustion engines incorporating the CSRV® Valve System from the Company or its designee. The license granted to Sublicensee is exclusive within the Territory, provided that Sublicensee satisfies the minimum annual purchase commitment of 120 internal combustion engines incorporating the CSRV® system technology, the Coates Engines and all component parts. The agreement also grants Sublicensee a right of first refusal in the event that the Company negotiates an offer with another third party for a worldwide license to use the Licensed Products for the generation of electrical power.

The business plan of Almont, which is highly dependent on its ability to raise sufficient additional working capital, is based on its projected assessment of the marketplace demand for industrial generators and projects Gen Set purchases of up to 11,000 CSRV® Units per year over the first 5 years. The Company would not be able to accommodate that demand until it ramps up its production capacity, which would likely require several years, once it enters into large scale production. Almont intends to issue standard purchase orders, issued based on market and customer demand. The Company is unable to confirm any orders until it has sufficient working capital in place to manufacture generators on a larger scale. Almont plans to finance its purchases from cash flow and by way of project and/or equipment financing, proceeds from issuance of equity or corporate debt instruments and conventional bank financing.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

6.   INVENTORY

Inventory was comprised of the following:

	March 31, 2014			December 31, 2013
Raw materials	$	440,000		$	440,000
Work-in-process		59,000			59,000
Finished goods		-			-
Reserve for obsolescence		(387,000	)		(387,000	)
Total	$	112,000		$	112,000

7.   LICENSE DEPOSITS

License deposits, which are non-refundable, primarily relate to a $300,000 sublicense deposit received in prior years as a down payment on the Canadian License. This sublicense deposit is being recognized as revenue on a straight-line basis over the remaining life of the last CSRV® technology patent in force through 2027. Sublicensing fee revenue for the three months ended March 31, 2014 and 2013 amounted to $5,000 and $5,000, respectively.

8.   PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment were comprised of the following:

	March 31, 2014			December 31, 2013
Land	$	1,235,000		$	1,235,000
Building		964,000			964,000
Building improvements		83,000			83,000
Machinery and equipment		658,000			658,000
Furniture and fixtures		39,000			39,000
		2,979,000			2,979,000
Less: Accumulated depreciation		(815,000	)		(799,000	)
Total	$	2,164,000		$	2,180,000

Depreciation expense for the three months ended March 31, 2014 and 2013 was $16,000 and $16,000, respectively.

9.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

	March 31, 2014		December 31, 2013
Legal and professional fees	$	1,391,000	$	1,388,000
General and administrative expenses		343,000		301,000
Accrued interest expense		297,000		264,000
Research and development costs		115,000		115,000
Accrued compensation		60,000		196,000
Total	$	2,206,000	$	2,264,000

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

10.   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 which matures in July 2014. Interest expense for the three months ended March 31, 2014 and 2013 on this mortgage amounted to $28,000 and $30,000, 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, 2014 was $1,498,000. 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 five million 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. Up to $500,000 of the principal balance of the mortgage loan may be prepaid each year without penalty. A prepayment penalty of 2% of the outstanding loan amount would be imposed if the loan is repaid in full at or before maturity unless such prepayment funds are obtained from a permanent mortgage loan with the lender.

11.   FINANCE LEASE OBLIGATION

In August 2013, the Company entered into a sale/leaseback financing arrangement with Paradigm Commercial Capital Group Corp. (“Paradigm”) pursuant to which it sold its research and development and manufacturing equipment in consideration for net cash proceeds of $133,000. These cash proceeds were net of a deposit on the lease of $15,000 and transaction costs of $5,000. Under this arrangement, the Company is leasing back the equipment over a 24-month period, with an option to extend the lease for an additional six months. The fixed recurring monthly lease payment amount is $8,000. If the Company does not exercise the six-month extension option, then the parties will negotiate a repurchase price to be paid by the Company for the equipment. If the Company does exercise its option to extend, then ownership of the equipment will automatically revert back to the Company at the end of the option period. The effective interest rate on this lease is 36.6%.

In accordance with generally accepted accounting principles, this sale/leaseback is required to be accounted for as a financing lease. Under this accounting method, the equipment and accumulated depreciation remains on the Company’s books and records as if the Company still owned the equipment. This accounting treatment is in accordance with ASC 840-40-25-4, Accounting for Sale-Leaseback Transactions. In addition, the discounted present value of the lease payments is recorded as a lease finance obligation. The difference between the gross sales price for the equipment and the net proceeds received amounted to $20,000, which has been recorded as unamortized discount on finance lease obligation. This amount is being amortized to interest expense using the interest method over the 30-month term of the lease, including the option period. The finance lease obligation is secured by all of the equipment included in the sale/leaseback transaction.

For the three months ended March 31, 2014, the interest expense on this lease amounted to $14,000 which is included in interest expense in the accompanying statements of operations.

12.   PROMISSORY NOTES TO RELATED PARTIES

During the three months ended March 31, 2014 and 2013, the Company issued, in a series of transactions, promissory notes to George J. Coates and received cash proceeds of $-0- and $82,000, respectively, and repaid promissory notes in the aggregate principal amount of $30,000 and 17,000, respectively, bringing the outstanding principal balance at March 31, 2014 to $450,000. The promissory notes are payable on demand and provide for interest at the rate of 17% per annum, compounded monthly.

-12-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

During the three months ended March 31, 2014 and 2013, the Company issued, in a series of transactions, promissory notes to Bernadette Coates, spouse of George J. Coates and received cash proceeds of $-0- and $43,000, respectively, and repaid promissory notes in the aggregate principal amount of $15,000 and $7,000, respectively, bringing the outstanding balance at March 31, 2014 to $108,000. The promissory notes are payable on demand and provide for interest at the rate of 17% per annum, compounded monthly.

For the three months ended March 31, 2014 and 2013, aggregate interest expense on all promissory notes to related parties amounted to $40,000 and $30,000, respectively. Unpaid accrued interest on these promissory notes amounting to $270,000 is included in accounts payable and accrued liabilities in the accompanying balance sheet at March 31, 2014.

13.   CONVERTIBLE PROMISSORY NOTES AND EMBEDDED DERIVATIVE LIABILITIES

From time to time, the Company issues convertible promissory notes. The net proceeds from these transactions are used for general working capital purposes. The notes may be converted into shares of the Company’s common stock at a defined discount from the trading price of the common stock on 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 unregistered shares of common stock is permitted. The holder of the unregistered shares of common stock can generally sell the conversion shares immediately by relying on an exemption from registration under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”). In addition, the conversion formula meets the conditions that require accounting for them as derivative liability instruments.

8% Convertible Promissory Notes

At March 31, 2014, there were two 8% convertible promissory notes with a conversion rate of 61%, outstanding (the “8% Notes”) in the principal amounts of $47,000 and $33,000 which mature in July 2014 and August 2014, respectively, if not converted prior thereto. The 8% Notes may be converted into unregistered shares of the Company’s common stock, par value $0.0001 per share, at the conversion price, as defined below, in whole, or in part, at any time beginning 180 days after the date of issuance of the Notes, at the option of the holder. The conversion price shall be equal to 61% multiplied by the Variable Conversion Rate which is equal to the average of the three (3) lowest closing bid prices of the common stock during the 10 trading day period prior to the date of conversion. These notes may be prepaid during the six months the notes are outstanding by paying 130% during the first 60 days, increasing in 5% increments each month to a maximum of 150% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default.

-13-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

In a series of transactions during the three months ended March 31, 2014, an 8% convertible promissory note with an aggregate principal balance, including accrued interest of $55,000 was converted into 2,059,138 unregistered shares of common stock.

The Company has reserved 46,750,000 shares of its unissued common stock for potential conversion of these 8% Notes.
 

10% Convertible Promissory Notes

The Company has entered into two agreements with different investors, whereby, under each agreement, it is permitted to issue two $28,000 tranches of convertible promissory notes which bear interest at 10% per annum and mature on the one-year anniversary date of the funding (“10% Notes”). At March 31, 2014, there was one $28,000 convertible note outstanding under each agreement. These notes mature in December 2014, if not converted prior thereto. The convertible notes provide for a 5% original issue discount on the principal amount of each tranche, which was netted against the amount funded to the Company. Each drawdown of the promissory note may be prepaid at any time within the first 90 days after funding. The holder may convert the 10% Notes into restricted shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to 58% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock over the 18 trading day period ending on the date of conversion. The Company has reserved 7.8 million shares of its unissued common stock for potential conversion of these two 10% convertible notes.

12% Convertible Promissory Notes with a 60% Conversion Rate

The Company has also entered into an agreement whereby it is permitted to issue in a series of tranches up to $335,000 of convertible promissory notes which bear interest at 12% per annum and mature on the one-year anniversary date of the funding (“12% Notes”). At March 31, 2014, there were two 12% Notes with an outstanding balance totaling $37,000, which mature in August 2014 and September 2014, respectively, if not converted prior thereto. The arrangement provides for an approximately 10.5% original issue discount on the principal amount of each tranche, which is netted against the amount funded to the Company. Each drawdown of the promissory note may be prepaid at any time within the first 90 days after funding, upon which the interest for the outstanding period will be forgiven. The holder may convert the 12% Notes into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to the lesser of $0.035 per share or 60% of the lowest trade price of the Company’s common stock in the 25 trading day period prior to the date of conversion. The Company has reserved 35 million shares of its unissued common stock for potential conversion of this 12% Note agreement.

During the three months ended March 31, 2014, 12% convertible promissory notes with a 60% conversion rate, having a principal balance of $58,000, including accrued interest, were converted into 3,050,000 unregistered shares of common stock. At March 31, 2014, the unused portion of this convertible note facility was $184,000.

12% Convertible Promissory Notes with a 70% Conversion Rate

In January 2014, the Company has entered into an agreement whereby it is permitted to issue in a series of tranches up to $100,000 of convertible promissory notes which bear interest at 12% per annum and mature on the one-year anniversary date of the funding, if not converted prior thereto. The initial funding upon closing of this facility was in the amount of $33,333, net of 5% original issue discount. The convertible note, including accrued interest thereon, may be prepaid during the first six months after funding, along with a 30% prepayment penalty. The holder may convert the notes into restricted shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to the lesser of $0.05 per share, or 70% of the lowest trading price of the Company’s common stock in the 20 trading day period prior to the date of conversion. The Company has reserved 6.5 million shares of its unissued common stock for potential conversion of this convertible note agreement. At March 31, 2014, the unused portion of this convertible note facility was $65,000.

-14-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

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 estimated fair value of the embedded derivative liabilities related to convertible notes outstanding was measured as the aggregate estimated fair value, based on Level 2 inputs, which included the average of the quoted daily yield curve rates on six-month and one-year treasury securities and the calculated 12-month historical volatility rate on the Company’s common stock.

The embedded derivative liability arises because, based on historical trading patterns of the Company’s stock, the formula for determining the defined 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 details of the outstanding convertible notes at March 31, 2014 and December 31, 2013, including the balance of the unamortized discount and the amount of the embedded derivative liability, where applicable:

	Principal Amount										Unamortized Discount				Embedded  Derivative Liability
Date Issued	March 31, 2014		December 31, 2013		Nominal Interest Rate			Effective Interest Rate(1)			March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
1/21/14	$	35,000		N/A		12	%		147	%	$	26,000		N/A		41,000		N/A
12/11/13		28,000	$	28,000		10	%		134	%		11,000	$	22,000		37,000	$	43,000
12/10/13		28,000		28,000		12	%		117	%		9,000		19,000		44,000		45,000
12/9/13		28,000		28,000		10	%		134	%		11,000		22,000		37,000		43,000
11/27/13		32,000		32,000		8	%		133	%		11,000		25,000		33,000		33,000
10/11/13		47,000		47,000		8	%		147	%		4,000		31,000		49,000		48,000
8/14/13		9,000		28,000		12	%		147	%		-		14,000		13,000		45,000
8/8/13		-		53,000		8	%		147	%		-		14,000		-		53,000
6/4/13		-		28,000		12	%		92	%		-		-		-		45,000
3/21/13		-		-		12	%		76	%		-		-		-		12,000
	$	207,000	$	272,000							$	72,000	$	147,000	$	254,000	$	367,000

(1) The effective interest rate reflects the rate required to fully amortize the unamortized discount over the six-month period until the Notes become convertible.

Other income (expense) resulting from the change in the estimated fair value of the embedded derivative liabilities amounted to $80,000 and ($70,000) for the three months ended March 31, 2014 and 2013, respectively. These amounts are included in the accompanying statements of operations as Decrease (increase) in estimated fair value of embedded derivative liabilities. Interest expense resulting from accretion of the unamortized discount for the three months ended March 31, 2014 and 2013 amounted to $111,000 and $38,000, respectively.

The Company made the private placement of these securities in reliance upon Section 4(2) of the Securities 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 Securities Act, as applicable.

-15-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

14.   10% CONVERTIBLE NOTE TO RELATED PARTY

The 10% Convertible Note, which is held by Dr. Michael J. Suchar, director, is convertible at the option of the holder, into shares of the Company’s common stock at an initial conversion rate that is determined by dividing the principal amount of the note being converted by $0.45. This convertible note is payable on demand. Interest shall accrue at the rate of 10% per annum and shall be payable at the time of repayment of principal. All interest shall be forfeited upon conversion, in which case the holder would be entitled to dividends declared, if any, on the Company’s common stock during the time the convertible note was outstanding. The Company has reserved 22,222 shares of its common stock for conversion of this note. At March 31, 2014, accrued interest on this convertible note amounted to $7,000.

15.   UNEARNED REVENUE

The Company has a remaining balance of a non-refundable deposit of $19,000 received from Almont in connection with its order for a natural gas fueled electric power CSRV® engine generator, which is included in unearned revenue in the accompanying balance sheets at March 31, 2014 and December 31, 2013.

16.   CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations and commitments at March 31, 2014:

			Due Within
	Total		2014		2015		2016
Mortgage loan payable	$	1,498,000	$	1,498,000	$	-	$	-
Promissory notes to related parties		558,000		558,000		-		-
Convertible promissory notes		208,000		173,000		35,000		-
Finance lease obligation		133,000		39,000		72,000		22,000
Settlement of litigation		60,000		50,000		10,000		-
10% promissory note		10,000		10,000		-		-
Total	$	2,467,000	$	2,328,000	$	117,000	$	22,000

Total non-cash compensation cost related to nonvested stock options at March 31, 2014 that has not been recognized was $3,000. This compensation expense will be recognized in the future over a remaining weighted average period of approximately 8 months.
 

17.   CAPITAL STOCK

Common Stock

The Company’s common stock is traded on OTCQB; an OTC market tier for companies that report to the SEC. Investors can find quotes and market information for the Company at www.otcmarkets.com under the ticker symbol COTE. The Company is authorized to issue up to 1,000,000,000 shares of common stock, par value, $0.0001 per share.

Pursuant to anti-dilution provisions which became effective in January 2012, Mr. Coates was awarded one share of restricted common stock for each new share of stock issued to any individual or entity that was not a member of, or controlled by, the Coates Family. On August 30, 2013, these anti-dilution provisions were canceled and Mr. Coates voluntarily returned all shares of common stock awarded to him under these provisions.

-16-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

The following common stock transactions occurred during the three months ended March 31, 2014:
 

● In a series of transactions, the Company made private sales, pursuant to stock purchase agreements of 7,339,286 unregistered shares of its common stock and 7,339,286 common stock warrants to purchase one share of common stock at an exercise prices ranging from $0.035 to of $0.04 per share in consideration for $290,000 received from the son of Richard W. Evans, a director.

● In a series of transactions, the Company issued 2,561,713 registered shares of its common stock to Dutchess Opportunity Fund II, LP under an equity line of credit in consideration for $104,000.

● The Company issued a 12% convertible promissory note and received cash proceeds of $35,000. The lender may convert the promissory note into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to 70% of the lowest trading price of the common stock in the 20 trading day period ending on the date of conversion.

● An 8% convertible promissory note with an aggregate principal balance of $55,000, including accrued interest was converted into 2,059,138 unregistered shares of common stock.

● In a series of transactions, 12% convertible promissory notes with an aggregate principal balance of $58,000, including accrued interest were converted into 3,050,000 unregistered shares of common stock.

The following common stock transactions occurred during the three months ended March 31, 2013:

● In a series of transactions, the Company made private sales, pursuant to stock purchase agreements of 999,999 unregistered shares of its common stock and 2,000,001 common stock warrants to purchase one share of its common stock at an exercise price of $0.035 per share in consideration for $35,000 received from the son of Richard W. Evans, a director.

● In connection with an agreement to issue up to $335,000 convertible promissory notes, in March 2013, the Company issued a $67,000 principal amount convertible promissory note and received cash proceeds of $60,000.

● In a series of transactions during 2013, 8% convertible promissory notes with an aggregate principal balance of $88,000, plus accrued interest of $4,000 were converted into 5,705,447 unregistered shares of common stock.

● In a series of transactions, the Company issued 6,705,446 unregistered shares of its common stock to George J. Coates for anti-dilution protection related to new shares of common stock issued in 2013. The estimated value of these shares, based on the closing trading price of the stock on the dates of the issuances was $203,000. In January 2013, the Company issued 20,895,046 unregistered shares of its common stock to George J. Coates in satisfaction of a deferred compensation liability consisting of 20,275,046 shares for anti-dilution protection for the year ended December 31, 2012 and a 620,000 share stock award originally granted in 2011. The value of these shares, based on the closing trading price on the dates of the anti-dilution or the date of the stock award was $1,761,000, of which $1,674,000 and $87,000 was charged to stock compensation expense during the years ended December 31, 2012 and 2011, respectively. All of the shares issued to George J. Coates during the three months ended March 31, 2013 were subsequently voluntarily returned to the Company and restored to authorized, unissued status in August 2013.

At March 31, 2014, the Company had reserved 134,597,343 shares of its common stock to cover the potential conversion of convertible securities and exercise of stock options and warrants.

Preferred Stock and anti-dilution rights

The Company is authorized to issue 100,000,000 new 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 shall have authority 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, 1,000,000 designated, 162,181 and 141,473 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively. Series A Preferred Stock entitles 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 Preferred Stock are owned by George. J. Coates.

· Series B Preferred Stock, 1,000,000 designated in January 2014, no shares issued and outstanding as of March 31, 2014. The Series B Convertible Preferred Stock does 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 One Thousand restricted shares of the Corporation's common stock. Holders of the Series B Preferred Stock are entitled to one thousand votes per share of Series B Preferred Stock 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 Preferred Stock may be immediately converted at the option of the holder into one thousand restricted shares of the Company's common stock.

-17-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

In order to enable the Company to raise needed working capital, an anti-dilution arrangement was established which authorized the issuance of shares of Series A Preferred Stock to George J. Coates to restore the Coates Family’s voting percentage upon any future issuance of new shares of the Company’s common stock as a result of a sale or conversion of securities into common stock, provided, however, that no anti-dilution protection shall be available in connection with public offerings of the Company’s securities.

During the three months ended March 31, 2014, 20,708 shares of Series A Preferred Stock were granted and issued to George J. Coates pursuant to this anti-dilution agreement, resulting in the right to 207,080,000 aggregate additional votes. No shares of Series A Preferred Stock were granted or issued during the three months ended March 31, 2013. At March 31, 2014, Mr. Coates held 162,181 shares of Series A Preferred Stock which entitles him to 1,621,810,000 votes in addition to his voting rights from the shares of common stock he holds.

Each issuance of shares of Series A Preferred Stock to George J. Coates did 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.

In 2010, the Company arranged for an independent professional services firm to determine the estimated fair value of the shares of Series A Preferred Stock provided to Mr. Coates. Based on this estimated valuation, the aggregate estimated fair value of the Series A Preferred Stock issued to Mr. Coates during the three months ended March 31, 2014 amounted to $52,000. This amount, which did not require any outlay of cash, was recorded as stock-based compensation expense in the accompanying statement of operations for the three months ended March 31, 2014.

18.   INVESTMENT AGREEMENT WITH DUTCHESS OPPORTUNITY FUND II, LP

In June 2011, the Company entered into an investment agreement (the “Investment Agreement”) with Dutchess Opportunity Fund II, LP, a Delaware limited partnership (“Dutchess”). Pursuant to the terms of the Investment Agreement, Dutchess committed to purchase, in a series of purchase transactions (“Puts”) up to Twenty Million ($20,000,000) Dollars of the Company’s common stock over a period of up to thirty-six (36) months.

The amount that the Company is entitled to request with each Put delivered to Dutchess is equal to, at its option, either (i) two hundred percent (200%) of the average daily volume (U.S. market only) of its common stock for the three (3) Trading Days prior to the applicable Put Notice Date, multiplied by the average of the three (3) daily closing prices immediately preceding the Put Date or (ii) the lesser of the market value of the remaining unsold registered shares or five hundred thousand dollars ($500,000). The purchase price to be paid by Dutchess for the shares of common stock covered by each Put will be equal to ninety-four percent (94%) of the lowest daily volume weighted average prices of the common stock during the five day trading period beginning on the effective date of the Put.

In connection with the Investment Agreement, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”), covering 17,500,000 shares of the common stock underlying the Investment Agreement. In addition, during the term of the Investment Agreement, the Company is obligated to maintain the effectiveness of such registration statement.

During the three months ended March 31, 2014 and 2013, the Company sold 2,561,713 and 86,128 registered shares of its common stock, respectively, under this equity line of credit with Dutchess and received proceeds of $104,000 and $3,000, respectively, which were used for general working capital purposes. There were no offering costs related to the sales of these shares. At March 31, 2014, there remained 8,927,934 registered shares underlying the Investment Agreement. 

-18-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

19.   LOSS PER SHARE

For the three months ended March 31, 2014 and 2013, diluted net loss per share was based on the weighted average number of common shares outstanding without consideration of potentially dilutive shares of common stock because the Company incurred a net loss in those periods and the effect of including any of the potentially dilutive shares of common stock in the calculation would have been anti-dilutive.

The following presents the potentially issuable shares of common stock upon assumed conversion of:

Description	Number of Underlying Shares of Common Stock		Exercise Price			Number Vested		Number Non-Vested
Common stock options		100,000	$	0.0420			-		100,000
Common stock options		5,607,000		0.0600			5,607,000		-
Common stock options		1,800,000		0.2400			1,800,000		-
Common stock options		2,000,000		0.2500			2,000,000		-
Common stock options		50,000		0.3900			50,000		-
Common stock options		360,000		0.4000			360,000		-
Common stock options		100,000		0.4300			100,000		-
Common stock options		1,750,000		0.4400			1,750,000		-
Common stock options		30,000		1.0000			30,000		-
Common stock warrants		500,000		0.0200			N/A		N/A
Common stock warrants		666,667		0.0225			N/A		N/A
Common stock warrants		1,000,000		0.0250			N/A		N/A
Common stock warrants		333,333		0.0300			N/A		N/A
Common stock warrants		2,714,287		0.0350			N/A		N/A
Common stock warrants		7,125,000		0.0400			N/A		N/A
Common stock warrants		333,333		0.0450			N/A		N/A
Common stock warrants		400,000		0.0500			N/A		N/A
Common stock warrants		2,181,819		0.0550			N/A		N/A
Common stock warrants		2,000,000		0.0600			N/A		N/A
Common stock warrants		4,269,838		0.0625			N/A		N/A
Common stock warrants		571,429		0.0700			N/A		N/A
Common stock warrants		666,666		0.0900			N/A		N/A
Common stock warrants		416,667		0.1200			N/A		N/A
Common stock warrants		1,200,000		0.2500			N/A		N/A
Common stock warrants		833,333		0.2700			N/A		N/A
Common stock warrants		333,333		0.3000			N/A		N/A
Common stock warrants		153,846		0.3250			N/A		N/A
Common stock warrants		1,028,570		0.3500			N/A		N/A
$10,000, 10% Convertible promissory note		22,222		0.4500			N/A		N/A
8% Convertible promissory notes with 61% conversion discount		3,561,164		(1	)		N/A		N/A
8% Convertible promissory notes with 70% conversion discount		1,382,896		(1	)		N/A		N/A
10% Convertible promissory notes		2,817,427		(1	)		N/A		N/A
12% Convertible promissory notes		2,221,904		(1	)		N/A		N/A
Total		48,530,734

(1)   The principal amount of convertible promissory notes outstanding at March 31, 2014 was $207,000. Under the convertible terms of these notes, the number of shares of common stock into which these notes are convertible is variable because the conversion rates of the notes are based on the trading price of the common stock over a defined number of trading days leading up to the conversion date during a defined conversion rate pricing period. The actual number of shares underlying these convertible instruments will likely vary from the number assumed above. The number of shares underlying these convertible notes was determined based on the defined conversion rates of the various convertible notes, assuming conversion had occurred as of March 31, 2014.

-19-

Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

20.   SUBLICENSING FEE REVENUE

Sublicensing fee revenue for the three months ended March 31, 2014 and 2013 amounted to $5,000 and 5,000, respectively. The Company is recognizing the license deposit of $300,000 on the Canadian License as revenue on a straight-line basis over the remaining life until 2027 of the last CSRV® technology patent in force at that date.
 

21.   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 (“incentive stock options”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, options not intended to qualify as incentive stock options (“non-statutory options”), restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of the Company. A total of 12,500,000 shares of common stock may be issued upon the exercise of options or other awards granted under the Stock Plan. The maximum number of shares with respect to which awards may be granted during any one year to any employee under the Stock Plan shall not exceed 25% of the 12,500,000 shares of common stock covered by the Stock Plan. At March 31, 2014, there remained 703,000 shares of common stock available for stock options or awards under the Stock Plan.

The Stock Plan is administered by the board and the Compensation Committee.  Subject to the provisions of the Stock Plan, 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.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

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, 2014 and 2013, no employee stock options were granted and no stock options became vested. There were 100,000 unvested stock options with an exercise price of $0.042 per share outstanding at March 31, 2014.

During the three months ended March 31, 2014 and 2013, the Company recorded non-cash stock-based compensation expense related to employee stock options amounting to $1,000 and $90,000, respectively, which is included in general and administrative expenses in the accompanying statements of operations.

Details of the common stock options outstanding under the Company’s Stock Option Plan 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, 3/31/14	$	0.06 -1.00		11,797,000		14		11,697,000	$	0.019	$	0.180

No stock options were exercised, forfeited or expired during the three months ended March 31, 2014 and 2013.

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 initially obtained the volatility factor of other publicly traded engine manufacturers that were also in the research and development stage. Subsequently, once sufficient trading history became available, the volatility factor was calculated based on the historical daily closing prices of the Company’s common stock on the OTCQB.

● 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.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

● 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 black-out 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.

22.   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 $59,000 and $255,000 for the three months ended March 31, 2014 and 2013, 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 the periods.

No liability for unrecognized tax benefits was required to be reported at March 31, 2014 and 2013.  Based on the management's evaluation, it was concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements.  Management's evaluation was performed for tax years ended 2010 through 2013, 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, 2014 and 2013, there were no penalties or interest related to the Company’s income tax returns.
 

23.   RELATED PARTY TRANSACTIONS

Compensation and Benefits Paid

The approximate amount of base compensation and benefits earned by George J. Coates, Gregory Coates and Bernadette Coates is summarized as follows:

	For the Three Months Ended March 31,
	2014		2013
George J. Coates (a), (b), (c), (d), (e)	$	4,000	$	29,000
Gregory Coates		44,000		45,000
Bernadette Coates (f)		1,000		13,000

(a)   For the three months ended March 31, 2014 and 2013, George J. Coates earned additional base compensation of $63,000 and $43,000, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

(b)   For the three months ended March 31, 2014, George J. Coates was awarded 20,708 shares of Series A Preferred Stock for anti-dilution protection related to new shares of common stock issued in 2014. The estimated fair market value of these shares amounted to $52,000.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

(c)   George J. Coates was awarded 6,705,446 unregistered shares of the Company’s common stock for anti-dilution protection related to new shares of common stock issued in 2013. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

(d)   In January 2013, the Company issued 20,895,046 unregistered shares of its common stock to George J. Coates in satisfaction of a deferred compensation liability consisting of 20,275,046 shares for anti-dilution protection for the year ended December 31, 2012 and a 620,000 share stock award originally granted in 2011. The value of these shares, based on the closing trading price on the dates of the anti-dilution or the date of the stock award was $1,761,000, of which $1,674,000 and $87,000 was charged to stock compensation expense during the years ended December 31, 2012 and 2011, respectively. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

(e)   During the three months ended March 31, 2013, the Company recorded stock-based compensation expense amounting to $29,000 in connection with employee stock options granted to George J. Coates during 2012.

(f)   For the three months ended March 31, 2014 and 2013, Bernadette Coates earned additional base compensation of $17,000 and $6,000, respectively, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

Promissory Notes to Related Parties

The Company issued promissory notes to related parties during the three months ended March 31, 2013 and repaid certain of the promissory notes during the three months ended March 31, 2014 and 2013. These transactions are discussed in detail in Note 12. The promissory notes to related parties are payable on demand and bear interest at the rate of 17% per annum, compounded monthly.

Issuances of Common Stock and Warrants

Issuances of common stock and common stock warrants to related parties during the three months ended March 31, 2014 and 2013 are discussed in detail in Note 17.

These transactions were private sales of unregistered, restricted securities pursuant to stock purchase agreements.

Personal Guaranty and Stock Pledge

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 for a mortgage loan on the Company’s headquarters facility.

Other

During the three months ended March 31, 2014 and 2013, Barry C. Kaye, Treasurer and Chief Financial Officer was paid compensation of $30,000 and $-0-, respectively. For the three months ended March 31, 2014 and 2013, Mr. Kaye earned compensation of $42,000 and $29,000. Commencing in the fourth quarter of 2012, the Company began deferring payment of Mr. Kaye’s compensation in order to preserve its working capital. As additional working capital is made available, a portion of this deferred compensation is being paid to Mr. Kaye. At March 31, 2014 and 2013, the remaining deferred balance of his compensation amounted to $132,000 and $71,000, respectively. These amounts are included in accounts payable and accrued liabilities in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

24.   LITIGATION AND CONTINGENCIES

Mark D. Goldsmith, a former executive of the Company, filed a lawsuit against the Company in January 2008 in which he asserted that the Company was liable to him for breach of an employment contract. On August 30, 2013, the parties executed a settlement agreement. The settlement provides that the Company pay the plaintiff $125,000 in five installments of $40,000, $25,000, $25,000, $25,000 and $10,000 due on November 28, 2013 and the 15th day of March 2014, June 2014, September 2014 and February 2015, respectively. The parties also executed mutual releases. The remaining unpaid balance of the settlement of $60,000 is included in accounts payable and accrued liabilities on the accompanying balance sheet at March 31, 2014. In the event that the Company is delinquent in the payment of any installment, the total amount of the judgment may be increased up to $200,000.

The Company is not a party to any other litigation that is material to its business.

25.   RECENTLY ISSUED ACCOUNTING STANDARD

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless the net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under applicable tax law or if the company does not intend to use the tax benefit towards the settlement of a disallowed tax position, if any. Adoption of this standard did not have a material effect on the Company’s financial statements.
 

26.   SUBSEQUENT EVENTS

The following events occurred subsequent to March 31, 2014:

Stock-based Common Stock Award to George J. Coates

On April 28, 2014, pursuant to a board resolution, $950,000 of additional paid-in capital was converted into a non-interest bearing promissory note due to George J. Coates. Initially, this conversion was characterized as repayment to Mr. Coates of cash outlays from his own personal funds to acquire the Company's headquarters, research and development and warehouse facility. Mr. Coates contributed this property to the Company and did not receive any consideration for this contribution.

On April 29, 2014, Mr. Coates and the Company mutually agreed to convert this $950,000 promissory note together with $50,000 principal amount of 17% promissory notes due to Mr. Coates into shares of common stock of the Company at the closing price per share of $0.0252 per share on April 29, 2014. As a result, 39,682,540 shares of common stock were issued to Mr. Coates.

After due consideration, on May 13, 2014, pursuant to a board resolution and the mutual agreement of the Company and Mr. Coates  the treatment of this transaction was revised to reflect it as a payment due to Mr. Coates to cover his losses in relation to the transfer of title to the headquarters, research and development and warehouse facility to the Company. The Company has also agreed to be responsible for any of Mr. Coates' incremental personal income taxes attributable to this transaction. As a result of this transaction, the Company recorded stock-based compensation expense of $1,425,000, which includes the estimated liability for Mr. Coates' income taxes. Although the estimated lost benefits of ownership to Mr. Coates exceeded the value of the award, including the income taxes to be paid by the Company, the parties mutually agreed not to increase the award amount and Mr. Coates did not request that any interest be paid to him. The net effect on the Company's balance sheet of this stock-based common stock award and the conversion of $50,000 principal amount of 17% promissory notes due to Mr. Coates was to increase current liabilities by $425,000 and increase the stockholders' deficiency by $425,000.

Conversion of Paid-in Capital to a Non-interest Bearing Promissory Note to Gregory Coates

On April 28, 2014, the board of directors authorized the conversion of $1,462,000 of paid-in capital originally contributed to the Company by Gregory G. Coates into a non-interest bearing promissory note, payable on demand. During the period from August 21, 1995 to February 14, 1996, Gregory G. Coates made cash outlays from his own personal funds in a series of payments on behalf of the Company, in an amount which aggregated $1,462,000 to provide needed working capital to the Company in order for it to continue its operations. Gregory Coates contributed these funds to the Corporation and did not receive any consideration for this contribution. At that time, the $1,462,000 of cash outlays was added to the Company’s additional paid-in capital. The net effect on the Company’s balance sheet was to increase current liabilities by $1,462,000 and increase the stockholders’ deficiency by the same amount.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

Partial Repayment of 17% Promissory Notes Issued to Related Parties

Subsequent to year-end, the Company partially repaid 17% promissory notes due to George J. Coates and Bernadette Coates amounting $25,000 and $15,000, respectively. When coupled with the conversion of promissory notes to George J. Coates discussed in the prior paragraph, the remaining balance of the promissory notes due to George J. Coates as of May 9, 2014, was reduced to $425,000.

9.75% Convertible Note Facility

In April, 2014, the Company entered into a 9.75% convertible note facility agreement (the “Agreement” with an investor. The Agreement provides that the investor will fund up to $317,000, including an initial tranche of $107,000, which was funded at the closing of the Agreement and four additional tranches of $52,500 each. The investor may convert the convertible notes at any time beginning six months after funding, into shares of the Company’s common stock at a fixed rate of $0.055 per share. In addition, there are mandatory monthly conversions beginning 180 days after funding. Each monthly conversion amount shall generally be equal to one-twelfth of the original amount funded, plus accrued interest and any other fees or penalties assessed in accordance with the Agreement. The Corporation may, at its option, pay all or any portion of a mandatory note conversion in cash, or a combination of cash and conversion shares, without penalty, provided it makes a timely election to do so. The number of shares of common stock to be initially delivered upon conversion shall be equal to the dollar amount being converted divided by the variable conversion price. The variable conversion price is the lesser of $0.055 per share, or 70% of the average of the three lowest volume weighted average trading prices over the 15 day trading period prior to the date of conversion. The number of shares of the Company’s common stock required to be issued to the investor upon any mandatory conversion may be subsequently adjusted upward in the event that the recalculated variable conversion price on the 23rd trading day following the date of conversion is lower than the calculated variable conversion price on the date of conversion. In such case, the Company would be required to deliver the incremental number of shares to the investor, determined based on the recalculated variable conversion price.

Issuance of 8% Convertible Note

The Company issued a $40,000, 8% convertible note which matures in January 2015, if not converted prior thereto, and received proceeds of $35,000, which were net of transaction costs. The Company may prepay the convertible note during the first 180 days the note is outstanding by paying 130% during the first 60 days, increasing in 5% increments each month to a maximum of 150% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default. The lender may convert the promissory notes into shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate is equal to 67.5% of the average of the two lowest trading prices of the Company’s common stock during the 25 trading day period prior to the date of conversion. The Company has reserved 7,750,000 shares of its unissued common stock for potential conversion of the convertible note.

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Coates International, Ltd.

Notes to Financial Statement (Unaudited) – (Continued)

Funding of additional tranches of Convertible Notes

In April 2014, the Company issued a $67,000, 12% convertible note, which represented an additional tranche of funding provided for in its $335,000 convertible note facility. The Company received cash proceeds of $60,000, which was net of an approximately 10.5% original issue discount. The terms and conditions of the 12% convertible notes with a 58% conversion rate are discussed in more detail in Note 13. This note matures in August 2014, if not converted prior thereto. The remaining balance of this facility available for future funding in one or more additional tranches is $117,000.

In April 2014, the Company issued a $35,000, 12% convertible note, which represented an additional tranche of funding provided for in its $100,000 convertible note facility. The Company received cash proceeds of $33,333, which was net of a 5% original issue discount. The terms and conditions of these 12% convertible notes with a 70% conversion rate are discussed in more detail in Note 13. This note matures in August 2014, if not converted prior thereto. The remaining balance of this facility available for future funding in one or more additional tranches is $30,000.

Conversion of Convertible Promissory Notes

Subsequent to year-end, $55,000 principal amount of the 8% convertible promissory notes, including accrued interest thereon, was converted by the holder into 2,059,138, unregistered shares of the Company’s common stock.

Subsequent to year-end, $58,000 principal amount of the 12% convertible promissory notes, including accrued interest thereon, was converted by the holder into 3,050,000, unregistered shares of the Company’s common stock.

Shares of Common Stock Sold to Dutchess Opportunity Fund II, LP

Subsequent to year-end, the Company sold 2,561,713 registered shares of its common stock to Dutchess under its equity line of credit and received cash of $104,000 which was used for working capital purposes.

Issuance of Anti-dilution shares to George J. Coates

Subsequent to year end, the Company issued 7,070 shares of Series A Preferred Stock to Mr. Coates representing anti-dilution shares related to newly issued shares of common stock. The estimated fair value of these shares was $18,000. The additional shares of Series A Preferred Stock entitle Mr. Coates to 70,700,000 additional votes on all matters brought before the shareholder for a vote.

Grant of Stock Options

On April 30, 2014, Gregory Coates and Barry C. Kaye were each granted 351,500 stock options with an exercise price of $0.028 per share which vest on the one year anniversary date of the grant and expire in 2029.

Modification of 10% Convertible Note

On April 30, 2014, by mutual consent between Dr. Michael J. Suchar, director and the Company, the terms of the $10,000, 10% convertible note due to him, were modified to eliminate the conversion provisions of the note.

Deferred Compensation

Through May 9, 2014, George J. Coates, Bernadette Coates and Barry C. Kaye agreed to additional deferral of their compensation amounting to $29,000, $8,000 and $16,000, respectively, and Mr. Kaye was paid $25,000 of his deferred compensation, bringing the net balanced of their total deferred compensation to $322,000, $81,000 and $123,000, respectively.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Notice Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future operations, future cash needs, business plans and future financial results, and any other statements that are not historical facts.

From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-K and 8-K, in our press releases, in our presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this Report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors.  Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

For a discussion of factors that we believe could cause our actual results to differ materially from expected and historical results see “Item 1A - Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission.
 

Background

We have completed development of the Coates spherical rotary valve (“CSRV®”) system technology. This technology has been successfully applied to natural gas fueled industrial electric power generator engines, automobile engines, residential generators and high performance racing car engines. We have also designed and retrofitted the CSRV® system technology into a diesel engine which is suitable for and can be applied to heavy trucks. We have been primarily investing our management time and resources in trying to secure new working capital and developing plans for transitioning to large scale production in order to be properly positioned to take advantage of this technology as it achieves acceptance in the marketplace. This includes consideration of an optimal location, shipping logistics, manufacturing capacity and quality of the labor pool for such large scale manufacturing.

In the fourth quarter of 2011, we identified cracks on the lower engine heads that resulted from a manufacturing defect by one of our suppliers. Based on our testing of the Gen Sets to confirm our resolution of this problem, we believe we have determined the cause of this cracked head condition. As soon as we raise the substantial amount of working capital needed to procure new cast-steel head castings to resolve the cracked head problem, we will undertake to retrofit and repair the Gen Sets originally shipped to Almont and begin field testing the generators. Thereafter, we will begin to ramp-up production.

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We continue to be engaged in new research and development activities in connection with applying this technology to other commercially feasible internal combustion engine applications and intend to manufacture engines and/or license the CSRV® system technology to third party Original Equipment Manufacturers (“OEM’s”) for multiple other applications and uses.

Plan of Operation

We have completed development of the CSRV® system technology-based generator engine and are prepared to commence the production phase of our operations. Initially, we intend to sell the engine generators to Almont pursuant to a (i) a license agreement covering the territory of Canada; and, (ii) certain rights to a license covering the territory of the United States. Almont is a privately held, independent third party entity based in Alberta, Calgary, Canada.

We plan to take advantage of the fact that essentially all the components of the Gen Sets may be readily sourced and acquired from subcontractors and, accordingly, expect Gen Sets will be manufactured in the two following ways:

● Assembly – to develop assembly lines within our premises. We intend to initially commence production on a small scale. This will enable us to prove our concept for the CSRV® system technology. We believe there exists substantial demand in the marketplace for the Gen Sets. We plan to address this demand by establishing large scale manufacturing operations in the United States. Transitioning to large-scale manufacturing is expected to require a substantial increase in our work force and substantial capital expenditures. To date, we have not been successful in securing the necessary working capital for this purpose.

● Licensing the CSRV® system technology to OEM’s. This will enable us to take advantage of third party manufacturers’ existing production capacity and skilled plant workers.

Our ability to establish such manufacturing operations, recruit plant workers, finance initial manufacturing inventories and fund capital expenditures is highly dependent on our ability to successfully raise substantial new working capital in an amount and at a pace which matches our business plans. Sources of such new working capital include issuances of promissory notes and convertible promissory notes, selling shares of our common stock through the equity line of credit arrangement with Dutchess Opportunity Fund II, LP, sales of our common stock and warrants through private transactions, sales of CSRV® products, sales of our equity and/or debt securities through private placement offerings, pursuing and entering into additional sublicensing agreements with OEM’s and/or distributors. There can be no assurance that we will be successful in raising adequate new working capital or even any new working capital to carry out our business plans.  The current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest funds and low investor confidence, has introduced additional risk and difficulty to our challenge to secure such additional working capital.

New Hydrogen Reactor Technology Owned by George J. Coates

George J. Coates has developed a hydrogen reactor, which rearranges H2O water molecules into HOH molecules also known as Hydroxy-Gas. The Hydroxy-Gas produced by the hydrogen reactor is then harvested for use as a type of fuel. Mr. Coates is continuing with development of this technology to enable the harvested Hydroxy-Gas to be utilized as the fuel source to power our patented CSRV® engines. If successful, this application will only require a ready supply of water and would be suitable for stationary engines and generators. Conventional internal combustion engines employing poppet valve assemblies require lubrication and would experience excessive heat and friction if powered with Hydroxy-Gas. This, in turn, would cause the engines to burn out in a rather short period of time. The materials and components of the CSRV® engines do not require such lubrication and are designed to operate relatively trouble-free on various alternative fuels, which would also include Hydroxy-Gas. There can be no assurance that this technology can be developed successfully, or that if developed, it will be feasible to penetrate the internal combustion engine market with this technology. Applications for patent protection of this technology will be filed upon completion of the research and development. At this time, no arrangements have been made between the Company and George J. Coates, owner of the technology, regarding licensing of the hydrogen reactor. Accordingly, we do not have any rights to manufacture, use, sell and distribute the Hydrogen Reactor technology, should it become commercially feasible to manufacture and distribute products powered by the Hydroxy-Gas fuel. We have been and continue to be responsible for all costs incurred related to the development of this technology.

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Significant Estimates

The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires our management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and 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 as a result of variable conversion rate provisions, determining a value for Series A Preferred Stock issued and certain limited anti-dilution rights granted to George J. Coates, assigning useful lives to the Company’s property, plant and equipment, determining an appropriate amount to reserve for obsolete and slow moving inventory, providing a valuation allowance for deferred tax assets, assigning expected lives to and estimating the rate of forfeitures of stock options granted and selecting a volatility factor for the Company’s stock options in order to estimate the fair value of the Company’s stock options on the date of grant. Actual results could differ from those estimates.

Recent Developments

Intention to Merge with China-Based Manufacturing and Casting Company

In August 2013, we signed a letter of commitment with a China-based manufacturer and casting company. This company also owns coal mining operations in China. The parties agreed to enter into negotiations and undertake due diligence with a mutual goal of merging the two companies for the purpose of establishing large scale production in China of industrial CSRV® electric power generators. An important element in ensuring success of this transaction is that we intend to undertake a public offering in the U.S. and Hong Kong to raise US$300 – 500 million. As this transaction is at an early stage and progress to date has been slow, there can be no assurance that it will be consummated.

Results of Operations

Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Our principal business activities and efforts for the three months ended March 31, 2014 and 2013 were devoted to (i) undertaking efforts to raise additional working capital in order to fund the start-up of large scale manufacturing operations, and (ii) developing plans for transitioning to large scale manufacturing. In addition, during the three months ended March 31, 2014, we conducted continued research and development to apply the aforementioned new Hydrogen Reactor technology to power a CSRV® engine. During the three months ended March 31, 2013, we were also engaged, to a limited extent, in research and development activities related to applying the CSRV® technology to industrial engines.

Although we incurred substantial net losses for the three months ended March 31, 2014 and 2013 of $511,219 and $805,848, respectively, it is important to consider that in the 2014 period, a portion of these losses resulted from non-cash expenses and in the 2013 reporting period, a substantial portion of these losses resulted from non-cash expenses required to be recorded for financial reporting purposes in accordance with GAAP. These net losses should be considered in view of the fact that actual cash used for operations was less than these net losses. Cash used for operations for the three months ended March 31, 2014 and 2013 amounted to ($377,394) and ($188,601), respectively.

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Revenues

There were no sales and no revenues from research and development for the three months ended March 31, 2014 and 2013.
 

Sublicensing fee revenue for the three months ended March 31, 2014 and 2013, amounted to $4,800 and $4,800, respectively. The Company is recognizing the license deposit of $300,000 on the Canadian License with Almont as revenue over the remaining life of the last CSRV® technology patent in force.

Operating Expenses

Research and Development Expenses

In the first quarter of 2014, the Company continued research and development of the Hydrogen Reactor. No research and development expenses were incurred in the first quarter of 2013. Research and development expenses for the three months ended March 31, 2014 amounted to $114,170. Included in research and development expenses for the three months ended March 31, 2014 was $102,100 of allocated compensation and benefits and $12,070 of parts and materials.

General and Administrative Expenses

General and administrative expenses decreased to $265,085 for the three months ended March 31, 2014 from $623,612 in the corresponding period in 2013. This net decrease of $358,527 primarily resulted from the following: A decrease in non-cash stock-based compensation expense of $239,607, a decrease in compensation and benefits of $103,399 which was primarily due to the allocation of $102,100 of compensation and benefits to research and development expenses in the first quarter of 2014, a decrease in patent maintenance of $35,592, a decrease in property taxes of $5,953 and a net decrease in other general and administrative expenses of $1,207, partially offset by an increase in legal and professional fees and expenses of $12,028, an increase in miscellaneous expenses of $5,111, an increase in financing costs of $4,227, an increase in utilities of $3,518, and an increase in investor relations expenses of $2,347.

Depreciation and Amortization

Depreciation and amortization for the three months ended March 31, 2014 and 2013 remained constant at $16,621.

Other Income (Expense)

Other income (expense) for the three months ended March 31, 2014 and 2013, consisted of a decrease (increase) in the fair value of embedded derivative liabilities amounting to $117,016 and ($70,414), respectively, loss on conversion of convertible notes of $36,624 and $-0-, respectively, and interest expense of ($200,535) and ($100,001), respectively.

Provision for Income Taxes

The change in deferred tax assets for the three months ended March 31, 2014 and 2013 was fully offset by a valuation allowance, resulting in a $-0- net income tax provision.

Net Loss

We incurred net losses of ($511,219) and ($805,848) for the three months ended March 31, 2014 and 2013, respectively.

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Liquidity and Capital Resources

Our cash position at March 31, 2014 was $28,527, a decrease of $20,747 from the cash position of $49,274 at December 31, 2013. We had negative working capital of ($4,964,029) at March 31, 2014, which represents a $113,797 improvement from the ($5,077,826) of negative working capital at December 31, 2013. Current liabilities of $5,114,867 at March 31, 2014, decreased by $136,409 from the $5,251,276 balance at December 31, 2013. Current liabilities were primarily comprised of accounts payable and accrued liabilities of $2,206,428, a mortgage loan in the amount of $1,498,284, promissory notes to related parties totaling $558,138, embedded derivative liabilities related to convertible promissory notes of $254,263, deferred compensation payable of $366,974, net carrying value of convertible promissory notes of $145,062, the current portion of license deposits of $19,200 and unearned revenue of $19,124.

Operating activities utilized cash of ($377,394) during the three months ended March 31, 2014, which primarily consisted of a net loss for the period of ($511,219), decreased by non-cash stock-based compensation expense of $52,807, non-cash interest expense of $159,141, an increase in deferred compensation of $79,310, depreciation and amortization of $16,621 and non-cash financing costs of $2,562, partially offset by an ($80,392) non-cash decrease in the estimated fair value of embedded derivative liabilities related to convertible promissory notes and non-cash sublicensing revenues of ($4,800). In addition, changes in current assets and liabilities amounted to ($91,424) consisting of a net decrease in accounts payable and accrued liabilities of ($57,624), a decrease in the derivative liability related to convertible promissory notes of ($31,935) and a net decrease in deferred offering costs and other assets of ($1,865).

There were no investing activities for the three months ended March 31, 2014.
 

Financing activities generated net cash of $356,647 for the three months ended March 31, 2014, consisting of proceeds from issuance of common stock and warrants of $290,000, proceeds from issuance of common stock under an equity line of credit of $104,138, proceeds from issuance of convertible notes amounting to $33,333, offset by partial repayments of promissory notes to related parties amounting to ($45,000), partial repayments of the principal amount of a mortgage loan of ($15,000) and finance lease obligation payments of ($10,824).

In the opinion of management, we will be required to raise additional working capital to fully achieve our objectives to enter the production phase of our operations. Various potential sources of such additional working capital are anticipated to come from one or more of the following: issuances of convertible notes, issuances of promissory notes to related parties, private sales of common stock and common stock warrants and sales of shares of common stock to Dutchess Opportunity Fund II, LP under the equity line of credit.
 

Going Concern

We have incurred net recurring losses since inception, amounting to ($34,488,530), as of March 31, 2014, primarily consisting of research and development expenses and had a stockholders’ deficiency of ($3,116,147). These research and development expenses which were incurred to develop the CSRV® system technology could begin to create value if we are able to raise sufficient working capital and commence production of our CSRV® engines. We will need to obtain additional working capital in order to continue to cover our ongoing cash expenses.

These factors raise substantial doubt about our ability to continue as a going concern. In addition, the current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest funds and low investor confidence, has introduced additional risk and difficulty to our challenge to secure needed additional working capital. Our Independent Registered Public Accountants have stated in their Auditor’s Report dated March 31, 2014 with respect to our financial statements as of and for the year ended December 31, 2013 that these circumstances raise substantial doubt about our ability to continue as a going concern.

We have restricted variable costs to only those expenses that are necessary to perform activities related to efforts to raise working capital to enable us to commence production of our CSRV® system technology products, research and development and general administrative costs in support of such activities.

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During the three months ended March 31, 2014, we raised additional working capital of $427,471, consisting of proceeds of $290,000 from sales of common stock and warrants to the son of Dr. Richard W. Evans, a director, proceeds from sales of common stock under an equity line of credit of $104,138 and proceeds from issuance of a $33,333 convertible note. Subsequent to March 31, 2014, we raised additional working capital of $228,063 from issuances of convertible notes.

Our financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Additional Release Payments are currently due us amounting to $5,846,817 under the Escrow Agreement with Almont. At this time, Almont is unable to pay the balance due us until it raises sufficient new working capital. As a result, we have needed to rely on other sources for raising new working capital for our operations. Almont, which has been assigned the Canadian License and rights to the US License, is required to remit to us 60% of the proceeds from any new working capital raised, with the exception of proceeds from equipment lease financing transactions. In addition, the annual minimum purchase requirements under both the United States and Canadian licensing agreements of 120 engine generators per year will also become effective upon the commencement of production of the Gen Sets for Almont. At this time, we do not anticipate receiving additional Release Payments until we raise sufficient new working capital to commence production and begin shipments to Almont.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

The Company’s significant accounting policies are partially presented in the Company’s notes to financial statements for the three months ended March 31, 2014 which are contained in this filing, the Company’s quarterly report on Form 10-Q and are fully presented in the notes to financial statement for the year ended December 31, 2013 which are contained in the Company’s 2013 Annual Report on Form 10-K. The significant accounting policies that are most critical and aid in fully understanding and evaluating the reported financial results include the following:

The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America. These principals require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the board of directors; however, actual results could differ from those estimates.

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. We did not recognize any impairment losses for any periods presented.

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A number of other accounting policies rely on significant estimates which include determining the fair value of convertible notes containing embedded derivatives and variable conversion rates, determining a value for Series A Preferred Stock issued, and certain limited anti-dilution rights granted, to George J. Coates, 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.

New Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. This update requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless the net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under applicable tax law or if the company does not intend to use the tax benefit towards the settlement of a disallowed tax position, if any. Adoption of this standard did not have a material effect on our financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are not required to provide the information under this item as we are a smaller reporting company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), we carried out an evaluation, with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (our principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO 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 recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Mark D. Goldsmith, a former executive of the Company, filed a lawsuit against us in January 2008 in which he asserted that we were liable to him for breach of an employment contract. On August 30, 2013, the parties executed a settlement agreement. The settlement provides that the Company pay the plaintiff $125,000 in five installments of $40,000, $25,000, $25,000, $25,000 and $10,000 due on November 28, 2013, the 15th day of March, June and September 2014 and February 2015, respectively. The parties also executed mutual releases. The November and March installments have been paid leaving a remaining balance of $60,000. In the event that the Company is delinquent in the payment of any installment, the total amount of the judgment may be increased to as much as $200,000.

With the exception of the settlement discussed above, we are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company's or our company's subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

Item 1A. Risk Factors

We believe there are no changes that constitute material changes from the risk factors previously disclosed in the Company’s 2013 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following issuances of securities since December 31, 2013 were exempt from registration pursuant to Section 4(2), and Regulation D promulgated under the Securities Act. We made this determination based on the representations of the Investors which included, in pertinent part, that such Investors were “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, and that such Investors were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the Investors understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

In a series of transactions during the first quarter of 2014, we made private sales, pursuant to stock purchase agreements of 7,339,286 unregistered shares of our common stock and 7,339,286 common stock warrants to purchase one unregistered share of our common stock at exercise prices ranging from $0.035 to $0.04 per share in consideration for $290,000 received from the son of Dr. Richard W. Evans, a director.

In January 2014, we issued a $35,000 principal amount, 12% convertible note to an accredited investor and received cash proceeds of $33,333, net of original issue discount. The lender may convert the promissory notes into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate is equal to 70% of the lowest closing trading price of the Company’s common stock during the twenty trading day period prior to the date of conversion.

In a series of transactions during the first quarter of 2014, the holder of an 8% convertible note converted $55,120 of convertible notes, including accrued interest thereon, into 2,059,138 unregistered shares of common stock.

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In a series of transaction during the first quarter of 2014, the holder of 12% convertible notes converted $57,690 of convertible notes, including accrued interest thereon, into 3,050,000 unregistered shares of common stock.

Subsequent to March 31, 2014, we issued the following convertible notes:

1.   On April 4, 2014, we issued a $106,500 principal amount, 9.75% convertible note to an accredited investor and received cash proceeds of $100,000. The investor may convert all, or a portion of  the promissory note, into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding at a conversion rate of $0.055 per share. If not converted by the investor prior thereto, the Company is required to make twelve monthly installment payments of principal and interest either, in cash or by conversion of the installment amount into shares of the Company’s common stock. The conversion rate for such monthly installments shall be equal to the lesser of $0.055 per share or 70% of the average of the three lowest daily volume weighted average trading prices of the common stock during the 15 day trading period prior to the date of conversion. The conversion rate is subject to adjustment 23 trading days after the date of conversion if the defined conversion rate on that day is lower than the defined conversion rate on the original date of conversion.

2.   On April 14, 2014, we issued a $40,000 principal amount, 8% convertible note to an accredited investor and received cash proceeds of $34,730, net of financing costs. The investor may convert all, or a portion, of the promissory note, into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding at a conversion rate of 70% of the average of the two lowest daily closing trading prices of the common stock during the 25 day trading period prior to the date of conversion.

3.   On April 16, 2014, we issued a $35,000 principal amount, 12% convertible note to an accredited investor and received cash proceeds of $33,333, net of original issue discount. The investor may convert all, or a portion of the promissory note, into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding at a conversion rate of 70% of the lowest daily closing price of the common stock during the 20 day trading period prior to the date of conversion.

4.   On April 16, 2014, we issued a $67,000 principal amount, 12% convertible note to an accredited investor and received cash proceeds of $60,000, net of original issue discount. The investor may convert all, or a portion of the promissory note, into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding at a conversion rate of 58% of the lowest daily closing price of the common stock during the 25 day trading period prior to the date of conversion.

On April 10, 2014, the holder of a 12% convertible note converted the $12,827 remaining balance of a convertible note, including accrued interest thereon, into 577,508 unregistered shares of common stock.

On April 14th and April 17th, 2014, the holder of an 8% convertible note, converted a $49,400 convertible note, including accrued interest thereon, into 2,286,975 unregistered shares of common stock.

Net proceeds from the above transactions were used for general working capital purposes.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

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Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number	Description
10.1	9.75% Convertible Note, Dated April 2, 2014 Issued to Typenex Co-Investment, LLC
10.2	Securities Purchase Agreement between the Company and Typenex Co-Investment, LLC, dated April 2, 2014
10.3	8% Convertible Promissory Note, Dated April 14, 2014 Issued to Auctus Private Equity Fund, LLC
10.4	Securities Purchase Agreement between the Company and Auctus Private Equity Fund, LLC, dated April 14, 2014
31.1	Section 302 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Section 302 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-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 Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Schema
101.CAL*	XBRL Taxonomy Calculation Linkbase
101.DEF*	XBRL Taxonomy Definition Linkbase
101.LAB*	XBRL Taxonomy Label Linkbase
101.PRE*	XBRL Taxonomy Presentation Linkbase
101.DE*	XBRL Taxonomy Extension Definition Linkbase Document

In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	COATES INTERNATIONAL, LTD.
Date: May 14, 2014	/s/ George J. Coates
	George J. Coates
	Duly Authorized Officer, President and Chief Executive Officer (Principal Executive Officer)

Date: May 14, 2014	/s/ Barry C. Kaye
	Barry C. Kaye
	Duly Authorized Officer, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-10.1

Exhibit 10.1

SECURED CONVERTIBLE PROMISSORY NOTE

Effective Date: April 2, 2014 U.S. $316,500.00

FOR VALUE RECEIVED, Coates International, Ltd., a Delaware corporation (“Borrower”), promises to pay to Typenex Co-Investment, LLC, a Utah limited liability company, or its successors or assigns (“Lender”), $316,500.00 and any interest, fees, charges and late fees on the date that is eighteen (18) months after the Effective Date (as defined hereafter) (the “Maturity Date”) in accordance with the terms set forth herein and to pay interest on the Outstanding Balance (as defined below) (without regard to Conversion Eligible Tranches (as defined below)) at the rate of nine and three quarters percent (9.75%) per annum from the Effective Date until the same is paid in full. This Secured Convertible Promissory Note (this “Note”) is issued and made effective as of April 2, 2014 (the “Effective Date”). For purposes hereof, the “Outstanding Balance” of this Note means, as of any date of determination, the Purchase Price (as defined below), as reduced or increased, as the case may be, pursuant to the terms hereof for redemption, conversion or otherwise, plus any original issue discount (“OID”), the Carried Transaction Expense Amount (as defined below), accrued but unpaid interest, collection and enforcements costs (including attorneys’ fees) incurred by Lender, transfer, stamp, issuance and similar taxes and fees related to Conversions (as defined below), and any other fees or charges (including without limitation late charges) incurred under this Note. This Note is issued pursuant to that certain Securities Purchase Agreement dated April 2, 2014 as the same may be amended from time to time (the “Agreement”), by and between Borrower and Lender. All interest calculations hereunder shall be computed on the basis of a 360-day year comprised of twelve (12) thirty (30) day months, shall compound daily and shall be payable in accordance with the terms of this Note.  Certain capitalized terms used herein but not otherwise defined shall have the meaning ascribed thereto in the Agreement. Certain other capitalized terms used herein are defined in Attachment 1 attached hereto and incorporated herein by this reference.

This Note carries an OID of $15,000.00.  In addition, Borrower agrees to pay $1,500.00 to Lender to cover the Lender’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of this Note (the “Carried Transaction Expense Amount”), all of which amount is included in the initial principal balance of this Note. The purchase price for this Note (the “Purchase Price”), therefore, shall be $300,000.00, computed as follows: $316,500.00 original principal balance, less the OID, less the Carried Transaction Expense Amount.  The Purchase Price shall be payable via Lender’s delivery to Borrower at the Closing of the Secured Buyer Notes, the Buyer Notes, and cash in the amount of the Initial Cash Purchase Price.

Notwithstanding any other provision contained in this Note, the conversion by Lender of any portion of the Outstanding Balance shall only be exercisable in five (5) tranches (each, a “Tranche”), consisting of (i) an initial Tranche in an amount equal to $106,500.00 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents (as defined in the Agreement) (“Tranche #1”), and (ii) four (4) additional Tranches, each in the amount of $52,500.00, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents (each, a “Subsequent Tranche”). Tranche #1 shall correspond to the Initial Cash Purchase Price, $5,000.00 of the OID and the Carried Transaction Expense Amount, and may be converted any time subsequent to the Effective Date. The first SubsequentTranche shall correspond to Secured Buyer Note #1 and $2,500.00 of the OID, the second SubsequentTranche shall correspond to Secured Buyer Note #2 and $2,500.00 of the OID, the third Subsequent Tranche shall correspond to Buyer Note #3 and $2,500.00 of the OID, and the fourth Subsequent Tranche shall correspond to Buyer Note #4 and $2,500.00 of the OID.  Lender’s right to convert any portion of any of the Subsequent Tranches is conditioned upon Lender’s payment in full of the Secured Buyer Note or Buyer Note, as applicable, corresponding to such Subsequent Tranche (upon the satisfaction of such condition, such Subsequent Tranche becomes a “Conversion Eligible Tranche”). For the avoidance of doubt, subject to the other terms and conditions hereof, Tranche #1 shall be deemed a Conversion Eligible Tranche as of the Effective Date for all purposes hereunder and may be converted in whole or in part at any time subsequent to the Effective Date, and each Subsequent Tranche that becomes a Conversion Eligible Tranche may be converted in whole or in part at any time subsequent to the first date on which such Subsequent Tranche becomes a Conversion Eligible Tranche.  For all purposes hereunder, Conversion Eligible Tranches shall be converted (or redeemed, as applicable) in order of the lowest-numbered Conversion Eligible Tranche.  At all times hereunder, the aggregate amount of any costs, fees or chargesincurred by or assessable against Borrower hereunder, including, without limitation, any fees, charges or premiums incurred in connection with an Event of Default (as defined below), shall be added to the lowest-numbered then-current Conversion Eligible Tranche.

1.             Payment; Prepayment.  Provided there is an Outstanding Balance, on each Installment Date (as defined below), Borrower shall pay to Lender an amount equal to the Installment Amount (as defined below) due on such Installment Date in accordance with Section 8. All payments owing hereunder shall be in lawful money of the United States of America or Conversion Shares (as defined below), as provided for herein, and delivered to Lender at the address furnished to Borrower for that purpose. All payments shall be applied first to (a) costs of collection, if any, then to (b) fees and charges, if any, then to (c) accrued and unpaid interest, and thereafter, to (d) principal. Notwithstanding the foregoing or anything to the contrary herein, so long as Borrower has not received a Lender Conversion Notice (as defined below) or an Installment Notice (as defined below) from Lender where the applicable Conversion Shares have not yet been delivered and so long as no Event of Default has occurred since the Effective Date (whether declared by Lender or undeclared), then Borrower shall have the right, exercisable on not less than five (5) nor more than ten (10) Trading Days (as defined below) prior written notice to Lender to prepay the Outstanding Balance of this Note, in full, in accordance with this Section 1. Any notice of prepayment hereunder (an “Optional Prepayment Notice”) shall be delivered to Lender at its registered address or email (provided that for any such Optional Prepayment Notice to be deemed effective if delivered via email, each of the following persons must be copied on such email: John M. Fife (jfife@chicagoventure.com), Coby Neuenschwander (cneuenschwander@chicagoventure.com), Chris Stalcup (cstalcup@chicagoventure.com), Tina Saxton (tsaxton@chicagoventure.com), and Jonathan K. Hansen (jhansen@hbaalaw.com)) and shall state: (y) that Borrower is exercising its right to prepay this Note, and (z) the date of prepayment, which shall be not less than five (5) nor more than ten (10) Trading Days from the date of the Optional Prepayment Notice. On the date fixed for prepayment (the “Optional Prepayment Date”), Borrower shall make payment of the Optional Prepayment Amount (as defined below) to or upon the order of Lender as specified by Lender in writing to Borrower not more than one (1) Trading Day prior to the Optional Prepayment Date. If Borrower exercises its right to prepay this Note, Borrower shall make payment to Lender of an amount in cash (the “Optional Prepayment Amount”) equal to 125%, multiplied by the then Outstanding Balance of this Note. If Borrower delivers an Optional Prepayment Notice and fails to pay the Optional Prepayment Amount due to Lender within two (2) Trading Days following the Optional Prepayment Date, Borrower shall forever forfeit its right to prepay this Note pursuant to this Section.Upon issuance of an Optional Prepayment Notice, Lender shall not circumvent the intention of Borrower to make a prepayment pursuant to this Section 1 by attempting to convert the portion of the Outstanding Balance for which Borrower has given notice of its intent to prepay during the period beginning at such time that it receives the Optional Prepayment Notice and ending on the Optional Prepayment Date set forth in the applicable Optional Prepayment Notice.

2.             Security. This Note is secured by that certain Security Agreement of even date herewith, as the same may be amended from time to time (the “Security Agreement”), executed by Borrower in favor of Lender encumbering the Secured Buyer Notes and the Buyer Notes, as more specifically set forth in the Security Agreement, all the terms and conditions of which are hereby incorporated into and made a part of this Note.

2

3.             Lender Optional Conversion.

3.1.           Lender Conversion Price. Subject to adjustment as set forth in this Note, the conversion price for each Lender Conversion (as defined below) shall be $0.055 (the “Lender Conversion Price”).

3.2.           Lender Conversions. Lender has the right at any time beginning 180 days after the Effective Date, including without limitation until any Optional Prepayment Date (except if Lender has received an Optional Prepayment Notice, then, with respect to the portion of the Outstanding Balance subject to the Optional Prepayment Notice, only with the prior written consent of Borrower during the period beginning at such time that it receives the Optional Prepayment Notice and ending on the Optional Prepayment Date), at its election, to convert (each instance of conversion is referred to herein as a “Lender Conversion”) all or any part of the Outstanding Balance into shares (“Lender Conversion Shares”) of fully paid and non-assessable common stock, $0.0001 par value per share (“Common Stock”), of Borrower as per the following conversion formula: the number of Lender Conversion Shares equals the amount being converted (the “Conversion Amount”) divided by the Lender Conversion Price. Conversion notices in the form attached hereto as Exhibit A (each, a “Lender Conversion Notice”) may be effectively delivered to Borrower by any method of Lender’s choice (including but not limited to facsimile, email, mail, overnight courier, or personal delivery), and all Lender Conversions shall be cashless and not require further payment from Lender.  Borrower shall deliver the Lender Conversion Shares from any Lender Conversion to Lender in accordance with Section 9 below within three (3) business days of Lender’s delivery of the Lender Conversion Notice to Borrower.

3.3.           Application to Installments. Notwithstanding anything to the contrary herein, including without limitation Section 8 hereof, Lender may, in its sole discretion, apply all or any portion of any Lender Conversion toward any Installment Conversion (as defined below), even if such Installment Conversion is pending, as determined in Lender’s sole discretion, by delivering written notice of such election (which notice may be included as part of the applicable Lender Conversion Notice) to Borrower at any date on or prior to the applicable Installment Date. In such event, Borrower may not elect to allocate such portion of the Installment Amount being paid pursuant to this Section 3.3 in the manner prescribed in Section 8.3; rather, Borrower must reduce the applicable Installment Amount by the Conversion Amount described in this Section 3.3.

4.             Defaults and Remedies.

4.1.           Defaults. The following are events of default under this Note (each, an “Event of Default”): (i) Borrower shall fail to pay any principal when due and payable (or payable by Conversion) hereunder; or (ii) Borrower shall fail to deliver any Conversion Shares or True-Up Shares (as defined below) in accordance with the terms hereof; or (iii) Borrower shall fail to pay any interest or any other amount when due and payable (or payable by Conversion) hereunder; or (iv) a receiver, trustee or other similar official shall be appointed over Borrower or a material part of its assets and such appointment shall remain uncontested for twenty (20) days or shall not be dismissed or discharged within sixty (60) days; or (v) Borrower shall become insolvent or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any; or (vi) Borrower shall make a general assignment for the benefit of creditors; or (vii) Borrower shall file a petition for relief under any bankruptcy, insolvency or similar law (domestic or foreign); or (viii) an involuntary proceeding shall be commenced or filed against Borrower; or (ix) Borrower is not DWAC Eligible; or (x) Borrower shall become delinquent in its filing requirements as a fully-reporting issuer registered with the SEC; or (xi) Borrower shall fail to observe or perform any covenant, obligation, condition or agreement of Borrower contained herein or in any other Transaction Document, including without limitation all covenants to timely file all required quarterly and annual reports and any other filings that are necessary to enable Lender to sell Conversion Shares and True-Up Shares pursuant to Rule 144; or (xii) any representation, warranty or other statement made or furnished by or on behalf of Borrower to Lender herein, in any Transaction Document, or otherwise in connection with the issuance of this Note shall be false, incorrect, incomplete or misleading in any material respect when made or furnished; or (xiii) the occurrence of a Fundamental Transaction without Lender’s prior written consent. Notwithstanding the foregoing, Borrower shall be provided with (a) a fourteen (14) day cure period in which it may cure the first two (2) occurrences of any Events of Default pursuant to Sections 4.1(ii) and 4.1(ix) hereof prior to Lender seeking any of the available remedies contained in Section 4.2, and (b) a cure period of two (2) days following Lender’s delivery to Borrower of written notice of such an Event of Default during which it may cure the first two (2) occurrences of any Events of Default pursuant to Section 4.1(i) hereof prior to Lender seeking any of the available remedies contained in Section 4.2. Beginning with the third Event of Default pursuant to any of Sections 4.1(i), 4.1(ii) and 4.1(ix) hereof, Borrower shall no longer have the cure rights set forth in the foregoing sentence.

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4.2.           Remedies. Upon the occurrence of any Event of Default and, if applicable, subsequent to the cure period provided for in Section 4.1, Lender may at any time thereafter accelerate this Note by written notice to Borrower, with the Outstanding Balance becoming immediately due and payable in cash at the Mandatory Default Amount (as defined hereafter).  Notwithstanding the foregoing, upon the occurrence of any Event of Default and, if applicable, subsequent to the cure period provided for in Section 4.1, Lender may, at its option, elect to increase the Outstanding Balance by applying the Default Effect (subject to the limitation set forth below) via written notice to Borrower without accelerating the Outstanding Balance, in which event the Outstanding Balance shall be increased as of the date of the occurrence of the applicable Event of Default pursuant to the Default Effect, but the Outstanding Balance shall not be immediately due and payable unless so declared by Lender (for the avoidance of doubt, if Lender elects to apply the Default Effect pursuant to this sentence, it shall reserve the right to declare Outstanding Balance immediately due and payable at any time and no such election by Lender shall be deemed to be a waiver of its right to declare the Outstanding Balance immediately due and payable as set forth herein unless otherwise agreed to by Lender in writing). Notwithstanding the foregoing, upon the occurrence of any Event of Default described in clauses (iv), (v), (vi), (vii) or (viii) of Section 4.1, the Outstanding Balance as of the date of acceleration shall become immediately and automatically due and payable in cash at the Mandatory Default Amount, without any written notice required by Lender. The “Mandatory Default Amount” means the greater of (i) the Outstanding Balance (without regard to whether any Tranches are Conversion Eligible Tranches) divided by the Installment Conversion Price (as defined below) on the date the Mandatory Default Amount is either demanded or paid in full, whichever has a lower Installment Conversion Price, multiplied by the volume weighted average price (the “VWAP”) on the date the Mandatory Default Amount is either demanded or paid in full, whichever has a higher VWAP, or (ii) 125% multiplied by the Outstanding Balance (the “Default Effect”), provided that the Default Effect may only be applied with respect to one (1) Event of Default. At any time following the occurrence of any Event of Default, upon written notice given by Lender to Borrower, (a) interest shall accrue on the Outstanding Balance beginning on the date the applicable Event of Default occurred at an interest rate equal to the lesser of 22% per annum or the maximum rate permitted under applicable law, (b) the Lender Conversion Price for all Lender Conversions occurring after the date of the applicable Event of Default shall equal the lower of the Lender Conversion Price applicable to any Lender Conversion and the Market Price (as defined below) as of any applicable date of Conversion, and (c) the true-up provisions of Section 11 below shall apply to all Lender Conversions that occur after the date the applicable Event of Default occurred.  Additionally, following the occurrence of any Event of Default, Borrower may, at its option, pay any Lender Conversion in cash instead of Lender Conversion Shares by paying to Lender on or before the applicable Delivery Date (as defined below) a cash amount equal to the number of Lender Conversion Shares set forth in the applicable Lender Conversion Notice multiplied by the highest intra-day trading price of the Common Stock that occurs during the period beginning on the date the applicable Event of Default occurred and ending on the date of the applicable Lender Conversion Notice. In connection with acceleration described herein, Lender need not provide, and Borrower hereby waives, any presentment, demand, protest or other notice of any kind, and Lender may immediately and without expiration of any grace period, if applicable, enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law.  Such acceleration may be rescinded and annulled by Lender at any time prior to payment hereunder and Lender shall have all rights as a holder of the Note until such time, if any, as Lender receives full payment pursuant to this Section 4.2.  No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.  Nothing herein shall limit Lender’s right to pursue any other remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to Borrower’s failure to timely deliver Conversion Shares upon Conversion of the Notes as required pursuant to the terms hereof.

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4.3.           Certain Additional Rights. Notwithstanding anything to the contrary herein, in the event Borrower fails to make any payment or otherwise to deliver any Conversion Shares as and when required under this Note, then (i) the Lender Conversion Price for all Lender Conversions occurring after the date of such failure to pay shall equal the lower of the Lender Conversion Price applicable to any Lender Conversion and the Market Price as of any applicable date of Conversion, and (ii) the true-up provisions of Section 11 below shall apply to all Lender Conversions that occur after the date of such failure to pay, provided that all references to the “Installment Notice” in Section 11 shall be replaced with references to a “Lender Conversion Notice” for purposes of this Section 4.3, all references to “Installment Conversion Shares” in Section 11 shall be replaced with references to “Lender Conversion Shares” for purposes of this Section 4.3, and all references to the “Installment Conversion Price” in Section 11 shall be replaced with references to the “Lender Conversion Price” for purposes of this Section 4.3.

5.             Unconditional Obligation; No Offset.  Borrower acknowledges that this Note is an unconditional, valid, binding and enforceable obligation of Borrower not subject to offset (except as set forth in Section 19 below), deduction or counterclaim of any kind. Borrower hereby waives any rights of offset it now has or may have hereafter against Lender, its successors and assigns, and agrees to make the payments or conversions called for herein in accordance with the terms of this Note.

6.             Waiver. No waiver of any provision of this Note shall be effective unless it is in the form of a writing signed by the party granting the waiver.  No waiver of any provision or consent to any prohibited action shall constitute a waiver of any other provision or consent to any other prohibited action, whether or not similar.  No waiver or consent shall constitute a continuing waiver or consent or commit a party to provide a waiver or consent in the future except to the extent specifically set forth in writing.

7.             Rights Upon Issuance of Securities.

7.1.           INTENTIONALLY OMITTED.

7.2.           Adjustment of Lender Conversion Price upon Subdivision or Combination of Common Stock. Without limiting any provision of hereof, if Borrower at any time on or after the Effective Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Lender Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. Without limiting any provision hereof, if Borrower at any time on or after the Effective Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Lender Conversion Price in effect immediately prior to such combination will be proportionately increased. Any adjustment pursuant to this Section 7.2 shall become effective immediately after the effective date of such subdivision or combination. If any event requiring an adjustment under this Section 7.2 occurs during the period that a Lender Conversion Price is calculated hereunder, then the calculation of such Lender Conversion Price shall be adjusted appropriately to reflect such event.

7.3.           INTENTIONALLY OMITTED.

8.             Borrower Installments.

8.1.           Installment Conversion Price. Subject to the adjustments set forth herein, the conversion price for each Installment Conversion (the “Installment Conversion Price”) shall be the lesser of (i) the Lender Conversion Price, and (ii) 70% (the “Conversion Factor”) of the average of the three (3) lowest VWAPs in the fifteen (15) Trading Days immediately preceding the applicable Conversion (the “Market Price”). If at any time after the Effective Date, Borrower is not DWAC Eligible (as defined below), then the Conversion Factor will automatically be reduced by 5% for all future Conversions. If at any time after the Effective Date, Borrower is not DTC Eligible (as defined below), then the Conversion Factor will automatically be reduced by an additional 5% for all future Conversions. For example, the first time Borrower is not DWAC Eligible, the Conversion Factor for future Conversions thereafter will be reduced from 70% to 65% for purposes of this example. If following such event, Borrower is no longer DTC Eligible, the Conversion Factor for future Conversions thereafter will be reduced from 65% to 60% for purposes of this example.

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8.2.           Installment Conversions. Beginning on the date that is six (6) months after the Effective Date and on the same day of each month thereafter until the Maturity Date (each, an “Installment Date”), Borrower shall pay to Lender the applicable Installment Amount due on such date, subject to the provisions of this Section 8. Payments of each Installment Amount may be made (a) in cash, or (b) by converting such Installment Amount into shares of Common Stock (“Installment Conversion Shares,” and together with the Lender Conversion Shares, the “Conversion Shares”) in accordance with this Section 8 (each an “Installment Conversion,” and together with Lender Conversions, a “Conversion”) per the following formula: the number of Installment Conversion Shares equals the portion of the applicable Installment Amount being converted divided by the Installment Conversion Price, or (c) by any combination of the foregoing, so long as the cash is delivered to Lender on the applicable Installment Date and the Installment Conversion Shares are delivered to Lender on or before the applicable Delivery Date. Notwithstanding the foregoing, Borrower will not be entitled to elect an Installment Conversion with respect to any portion of any applicable Installment Amount and shall be required to pay the entire amount of such Installment Amount in cash if on the applicable Installment Notice Due Date (defined below) there is an Equity Conditions Failure (as defined below), and such failure is not waived in writing by Lender. Moreover, in the event Borrower desires to pay all or any portion of any Installment Amount in cash, it must notify Lender in writing of such election and the portion of the applicable Installment Amount it elects to pay in cash not more than twenty-five (25) nor less than five (5) Trading Days prior to the applicable Installment Date. If Borrower fails to so notify Lender, it shall not be permitted to elect to pay any portion of such Installment Amount in cash unless otherwise agreed to by Lender in writing or proposed by Lender in an Installment Notice delivered by Lender to Borrower.

8.3.           Installment Conversion Procedures. On or prior to each Installment Date (each, an “Installment Notice Due Date”), Lender may, but shall not be obligated to, propose an allocation of the applicable Installment Amount between payment of the applicable Installment Amount in cash and via an Installment Conversion by delivery of a notice to Borrower by email or fax substantially in the form attached hereto as Exhibit B (each, an “Installment Notice”). Following its receipt of such an Installment Notice, Borrower may either ratify Lender’s proposed allocation or elect to change the allocation by written notice to Lender by email or fax on or before 12:00 p.m. New York time on the applicable Installment Date, so long as the sum of the cash payments and the amount of Installment Conversions equal the applicable Installment Amount, provided that Borrower may not change the allocation to increase the portion of the Installment Amount payable in cash unless it has previously given Lender not more than twenty-five (25) nor less than less than five (5) Trading Days advance written notice of such election as set forth in Section 8.2 above. If Borrower fails to notify Lender of its election to change the allocation prior to the deadline set forth in the previous sentence, it shall be deemed to have ratified and accepted the allocation set forth in the applicable Installment Notice. If Lender does not deliver an Installment Notice to Borrower as set forth above in this Section 8.3, then Borrower may, subject to the last two sentences of Section 8.2 above, propose an allocation in an Installment Notice delivered to Lender by email or fax on or before 5:00 p.m. New York time on the applicable Installment Date, provided that if Borrower fails to notify Lender of its allocation election prior to such deadline, it shall be deemed to have elected to allocate the entire Installment Amount to be converted via an Installment Conversion. Borrower acknowledges and agrees that regardless of which party prepares the applicable Installment Notice, the amounts and calculations set forth thereon are subject to correction or adjustment because of error, mistake, or any adjustment resulting from an Event of Default or other adjustment permitted under the Transaction Documents (an “Adjustment”). Furthermore, no error or mistake in the preparation of such Installment Settlement Sheet, or failure to apply any Adjustment that could have been applied prior to the preparation of an Installment Settlement Sheet may be deemed a waiver of Lender’s right to enforce the terms of any Note, even if such error, mistake, or failure to include an Adjustment arises from Lender’s own calculation, provided, however, that any such failure by Lender shall not be deemed an Event of Default. Borrower shall deliver the Installment Conversion Shares from any Installment Conversion to Lender in accordance with Section 9 below on or before each applicable Installment Date.

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9.             Method of Conversion Share Delivery. On or before the close of business on the third (3rd) Trading Day following the Installment Date or the third (3rd) Trading Day following the date of delivery of a Lender Conversion Notice, as applicable (the “Delivery Date”), Borrower shall, provided it is DWAC eligible at such time, deliver or cause its transfer agent to deliver the applicable Conversion Shares electronically via DWAC to the account designated by Lender in the applicable Lender Conversion Notice or Installment Notice.If Borrower is not DWAC Eligible, it shall deliver to Lender or its broker (as designated in the Lender Conversion Notice or Installment Notice, as applicable), via reputable overnight courier, a certificate representing the number of shares of Common Stock equal to the number of Conversion Shares to which Lender shall be entitled, registered in the name of Lender or its designee.  For the avoidance of doubt, Borrower has not met its obligation to deliver Conversion Shares by the Delivery Date unless Lender or its broker, as applicable, has actually received the certificate representing the applicable Conversion Shares no later than the close of business on the relevant Delivery Date pursuant to the terms set forth above.

10.           Conversion Delays.  If Borrower fails to deliver Conversion Shares or True-Up Shares in accordance with the timeframes stated in Sections 3, 8 or 11, as applicable, Lender, at any time prior to selling all of those Conversion Shares or True-Up Shares, as applicable, may rescind in whole or in part that particular Conversion attributable to the unsold Conversion Shares or True-Up Shares, with a corresponding increase to the Outstanding Balance (any returned Conversion Amount will tack back to the Effective Date). In addition, for each Conversion, in the event that Conversion Shares or True-Up Shares are not delivered by the fourth Trading Day (inclusive of the day of the Conversion or the True-Up Date (as defined below), as applicable), a late fee equal to the higher of $2,000 per day and 2% of the applicable Conversion Amount or Installment Amount, as applicable (but in any event the cumulative amount of such late fees shall not exceed the applicable Conversion Amount or Installment Amount) will be assessed for each day after the third Trading Day (inclusive of the day of the Conversion and the True-Up Date) until Conversion Share or True-Up Share delivery is made; and such late fees will be added to the Outstanding Balance (under Lender’s and Borrower’s expectations that, for purposes of Rule 144 only, any late fees charged will tack back to the Effective Date).

11.           True-Up. On the date that is twenty-three (23) Trading Days (a “True-Up Date”) from each date Borrower delivers Free Trading (as defined below) Installment Conversion Shares to Lender, there shall be a true-up where Lender shall have the right to require Borrower to deliver to Lender additional Installment Conversion Shares (“True-Up Shares”) if the Installment Conversion Price as of the True-Up Date is less than the Installment Conversion Price used in the applicable Installment Notice. In such event, Borrower shall deliver to Lender within three (3) Trading Days of the date Lender delivers notice of its right to receive True-Up Shares to Borrower (pursuant to a form of notice substantially in the form attached hereto as Exhibit C) the number of True-Up Shares equal to the difference between the number of Installment Conversion Shares that would have been delivered to Lender on the True-Up Date based on the Installment Conversion Price as of the True-Up Date and the number of Installment Conversion Shares originally delivered to Lender pursuant to the applicable Installment Notice. For the avoidance of doubt, if the Installment Conversion Price as of the True-Up Date is higher than the Installment Conversion Price set forth in the applicable Installment Notice, then Borrower shall have no obligation to deliver True-Up Shares to Lender, nor shall Lender have any obligation to return any excess Installment Conversion Shares to Borrower under any circumstance.

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12.           Ownership Limitation. Notwithstanding anything to the contrary contained in this Note or the other Transaction Documents, if at any time Lender shall or would be issued shares of Common Stock under any of the Transaction Documents, but such issuance would cause Lender (together with its affiliates) to beneficially own a number of shares exceeding 4.99% of the number of shares of Common Stock outstanding on such date (including for such purpose the shares of Common Stock issuable upon such issuance) (the “Maximum Percentage”), then Borrower must not issue to Lender shares of the Common Stock which would exceed the Maximum Percentage. For purposes of this Section, beneficial ownership of Common Stock will be determined under the 1934 Act. The shares of Common Stock issuable to Lender that would cause the Maximum Percentage to be exceeded are referred to herein as the “Ownership Limitation Shares”. Borrower will reserve the Ownership Limitation Shares for the exclusive benefit of Lender. From time to time, Lender may notify Borrower in writing of the number of the Ownership Limitation Shares that may be issued to Lender without causing Lender to exceed the Maximum Percentage. Upon receipt of such notice, Borrower shall be unconditionally obligated to immediately issue such designated shares to Lender, with a corresponding reduction in the number of the Ownership Limitation Shares. Notwithstanding the forgoing, the term “4.99%” above shall be replaced with “9.99%” at such time as the Market Capitalization of the Common Stock is less than $10,000,000.00. Notwithstanding any other provision contained herein, if the term “4.99%” is replaced with “9.99%” pursuant to the preceding sentence, such increase to “9.99%” shall remain at 9.99% until increased, decreased or waived by Lender as set forth in Section A11 of Attachment 1 hereto. 

13.           Payment of Collection Costs. If this Note is placed in the hands of an attorney for collection or enforcement prior to commencing legal proceedings, or is collected or enforced through any legal proceeding, or Lender otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note then Borrower shall pay the costs incurred by Lender for such collection, enforcement or action including, without limitation, attorneys’ fees and disbursements. Borrower also agrees to pay for any costs, fees or charges of its transfer agent that are charged to Lender pursuant to any Conversion or issuance of shares pursuant to this Note.

14.           Opinion of Counsel.  In the event that an opinion of counsel is needed for any matter related to any Note, Lender has the right to have any such opinion provided by its counsel.  Lender also has the right to have any such opinion provided by Borrower’s counsel. Lender shall pay for any opinion of counsel with respect to the availability of an exemption from registration under Rule 144 or other exemption available to it in connection with any conversions of this Note, regardless of whether such conversions are Lender Conversions or related to Installment Conversions.

15.           Governing Law. This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of Utah, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Utah or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Utah. Subject to Section 16 below, Borrower hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in Utah for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.

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16.           Resolution of Disputes.

16.1.           Calculation Disputes. In the case of a dispute as to any arithmetic calculation hereunder, including without limitation calculating the Lender Conversion Price, Lender Shares to be delivered, Installment Conversion Price, Installment Shares to be delivered, the Market Price, or the VWAP (collectively, “Calculations”), Borrower or Lender (as the case may be) shall submit the disputed determinations or arithmetic calculations (as the case may be) via facsimile or email with confirmation of receipt (a) within two (2) Trading Days after receipt of the applicable notice giving rise to such dispute to Borrower or Lender (as the case may be) or (b) if no notice gave rise to such dispute, at any time after Lender learned of the circumstances giving rise to such dispute. If Lender and Borrower are unable to agree upon such determination or calculation within three (3) Trading Days of such disputed determination or arithmetic calculation (as the case may be) being submitted to Borrower or Lender (as the case may be), then Borrower shall, within two (2) Trading Days, submit via facsimile the disputed Calculation to an independent, reputable investment bank or accounting firm selected by Lender. Borrower shall cause the investment bank or accounting firm to perform the determinations or calculations (as the case may be) and notify Borrower and Lender of the results no later than ten (10) Trading Days from the time it receives such disputed determinations or calculations (as the case may be). Such investment bank’s or accounting firm’s determination or calculation with respect to the disputes set forth in this Section 16.1 (as the case may be) shall be binding upon all parties absent demonstrable error. The investment banker’s or accounting firm’s fee for performing such Calculation shall be paid by the incorrect party, or if both parties are incorrect, by the party whose Calculation is furthest from the correct Calculation as determined by the investment banker or accounting firm. In the event Borrower is the losing party, no extension of the Delivery Date shall be granted and Borrower shall incur all effects for failing to deliver the applicable Conversion Shares in a timely manner as set forth in this Note.

16.2.           Arbitration of Disputes. The parties shall submit all claims, disputes and controversies (“Claims”) arising hereunder, other than Claims related to Calculations (which shall be resolved pursuant to Section 16.1 above) and Payment Defaults (as defined below), to binding arbitration to be held in Salt Lake County, Utah according to the then prevailing rules and procedures of the American Arbitration Association, where the findings and decision of the arbitrator shall be binding upon all parties to such Claims. All fees and costs (including reasonable attorneys’ fees) incurred pursuant to the resolution of any Claims to which this Section 16 applies shall be paid by the losing party. For the avoidance of doubt, Lender shall not be bound by this subsection 16.2 in the event of a Payment Defaults.

17.           Amendments. The prior written consent of both parties hereto shall be required for any change or amendment to this Note.

18.           Assignments. Borrower may not assign this Note without the prior written consent of Lender. This Note and any shares of Common Stock issued upon conversion of this Note may not be offered, sold, assigned or transferred by Lender without the consent of Borrower, which consent shall not be unreasonably withheld.

19.           Offset Rights. Notwithstanding anything to the contrary herein, or in any of the other Transaction Documents, (a) the parties hereto acknowledge and agree that Lender maintains a right of offset pursuant to the terms of the Secured Buyer Notes and the Buyer Notes that, under certain circumstances, permits Lender to deduct amounts owed by Borrower under this Note from amounts otherwise owed by Lender under the Secured Buyer Notes and the Buyer Notes (the “Lender Offset Right”), and (b) in the event of the occurrence of any Event of Default (as defined in the Secured Buyer Notes, the Buyer Notes, or any other note issued by the initial Lender in connection with the Agreement), or at any other time, Borrower shall be entitled to deduct and offset any amount owing by the initial Lender under the Secured Buyer Notes and the Buyer Notes, as applicable, from any amount owed by Borrower under this Note (the “Borrower Offset Right”).  In the event that Borrower’s exercise of Borrower Offset Right results in the full satisfaction of Borrower’s obligations under this Note, Lender shall return the original Note to Borrower marked “cancelled” or, in the event this Note has been lost, stolen or destroyed, a lost note affidavit in a form reasonably acceptable to Borrower.  For the avoidance of doubt, Borrower shall not incur any prepayment premium set forth in Section 1 hereof with respect to any portions of this Note that are satisfied by way of Borrower Offset Right.

20.           Time of the Essence. Time is expressly made of the essence of each and every provision of this Note and the documents and instruments entered into in connection herewith.

 (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

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IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed as of the Effective Date set out above.

BORROWER:
Coates International, Ltd.
By:	/s/ Barry C. Kaye
Name:	Barry C. Kaye
Title:	Chief Financial Officer

ACKNOWLEDGED, ACCEPTED AND AGREED:

LENDER:

Typenex Co-Investment, LLC

By:	Red Cliffs Investments, Inc., its Manager
	By:	/s/ John M. Fife, President
		John M. Fife, President

[Signature Page to Secured Convertible Promissory Note]

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ATTACHMENT 1

DEFINITIONS

For purposes of this Note, the following terms shall have the following meanings:

A1.           “Deemed Issuance” means an issuance of Common Stock that shall be deemed to have occurred on the latest possible permitted date pursuant to the terms hereof or any applicable warrant in the event Borrower fails deliver Conversion Shares as and when required pursuant to Sections 3 or 8 of the Note.

A2.           “DTC” means the Depository Trust Company.

A3.           “DTC Eligible” means, with respect to the Common Stock, that such Common Stock is eligible to be deposited in certificate form at the DTC, cleared and converted into electronic shares by the DTC and held in the name of the clearing firm servicing Lender’s brokerage firm for the benefit of Lender.

A4.           “DTC/FAST Program” means the DTC’s Fast Automated Securities Transfer Program.

A5.           “DWAC” means Deposit Withdrawal at Custodian as defined by the DTC.

A6.           “DWAC Eligible” means that (i) Borrower’s Common Stock is eligible at DTC for full services pursuant to DTC’s operational arrangements, including without limitation transfer through DTC’s DWAC system, (ii) Borrower has been approved (without revocation) by the DTC’s underwriting department, (iii) Borrower’s transfer agent is approved as an agent in the DTC/FAST Program, (iv) the Conversion Shares (as defined below) are otherwise eligible for delivery via DWAC; (v) Borrower has previously delivered all Conversion Shares to Lender via DWAC; and (vi) Borrower’s transfer agent does not have a policy prohibiting or limiting delivery of the Conversion Shares via DWAC.

A7.           “Equity Conditions Failure” means that any of the following conditions has not been satisfied during any applicable Equity Conditions Measuring Period (as defined below): (i) with respect to the applicable date of determination all of the Conversion Shares are freely tradable under Rule 144 or without the need for registration under any applicable federal or state securities laws (in each case, disregarding any limitation on conversion of this Note); (ii) on each day during the period beginning one month prior to the applicable date of determination and ending on and including the applicable date of determination (the “Equity Conditions Measuring Period”), the Common Stock is listed or designated for quotation (as applicable) on any of The New York Stock Exchange, NYSE Amex, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, the OTC Bulletin Board, the OTCQX or the OTCQB (each, an “Eligible Market”) and shall not have been suspended from trading on any such Eligible Market (other than suspensions of not more than two (2) Trading Days and occurring prior to the applicable date of determination due to business announcements by Borrower); (iii) on each day during the Equity Conditions Measuring Period, Borrower shall have delivered all shares of Common Stock issuable upon conversion of this Note on a timely basis as set forth in Section 9 hereof and all other shares of capital stock required to be delivered by Borrower on a timely basis as set forth in the other Transaction Documents; (iv) any shares of Common Stock to be issued in connection with the event requiring determination may be issued in full without violating Section 12 hereof (Lender acknowledges that Borrower shall be entitled to assume that this condition has been met for all purposes hereunder absent written notice from Lender); (v) any shares of Common Stock to be issued in connection with the event requiring determination may be issued in full without violating the rules or regulations of the Eligible Market on which the Common Stock is then listed or designated for quotation (as applicable); (vi) on each day during the Equity Conditions Measuring Period, no public announcement of a pending, proposed or intended Fundamental Transaction (as defined below) shall have occurred which has not been abandoned, terminated or consummated; (vii) Borrower shall have no knowledge of any fact that would reasonably be expected to cause any of the Conversion Shares to not be freely tradable without the need for registration under any applicable state securities laws (in each case, disregarding any limitation on conversion of this Note); (viii) on each day during the Equity Conditions Measuring Period, Borrower otherwise shall have been in material compliance with each, and shall not have breached any, term, provision, covenant, representation or warranty of any Transaction Document; (ix) without limiting clause (viii) above, on each day during the Equity Conditions Measuring Period, there shall not have occurred an Event of Default or an event that with the passage of time or giving of notice would constitute an Event of Default; (x) the Common Stock shall be DTC Eligible as of each applicable Installment Notice Due Date and Installment Date; and (xi) the ten (10) day average VWAP of the Common Stock is greater than $$0.01.

i

A8.           “Free Trading” means that (a) the shares or certificate(s) representing the applicable shares of Common Stock have been cleared and approved for public resale by the compliance departments of Lender’s brokerage firm and the clearing firm servicing such brokerage, and (b) such shares are held in the name of the clearing firm servicing Lender’s brokerage firm and have been deposited into such clearing firm’s account for the benefit of Lender.

A9.           “Fundamental Transaction” means that (y) (i) Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, consolidate or merge with or into (whether or not Borrower or any of its subsidiaries is the surviving corporation) any other person or entity, or (ii) Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of its respective properties or assets to any other person or entity, or (iii) Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, allow any other person or entity to make a purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of voting stock of Borrower (not including any shares of voting stock of Borrower held by the Person or Persons making or party to, or associated or affiliated with the persons or entities making or party to, such purchase, tender or exchange offer), or (iv) Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, consummate a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with any other person or entity whereby such other person or entity acquires more than 50% of the outstanding shares of voting stock of Borrower (not including any shares of voting stock of Borrower held by the other persons or entities making or party to, or associated or affiliated with the other persons or entities making or party to, such stock or share purchase agreement or other business combination), or (v) Borrower or any of its subsidiaries shall, directly or indirectly, in one or more related transactions, reorganize, recapitalize or reclassify the Common Stock, other than an increase in the number of authorized shares of Borrower’s Common Stock, or (z) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act and the rules and regulations promulgated thereunder) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding voting stock of Borrower.

A10.            “Installment Amount” means the greater of (a) $26,375 ($316,500.00 ÷ 12), plus the sum of any accrued and unpaid interest as of the applicable Installment Date and accrued, and unpaid late charges and other fees, if any, under this Note as of the applicable Installment Date, and any other amounts accruing or owing to Lender under this Note as of such Installment Date, and (b) the then Outstanding Balance divided by the number of Installment Dates remaining prior to the Maturity Date.

A11.           “Market Capitalization of the Common Stock” shall mean the product equal to (a) the average VWAP of the Common Stock for the immediately preceding fifteen (15) Trading Days, multiplied by (b) the aggregate number of outstanding shares of Common Stock as reported on Borrower’s most recently filed Form 10-Q or Form 10-K. By written notice to Borrower, Lender may increase, decrease or waive the Maximum Percentage as to itself but any such waiver will not be effective until the 61st day after delivery thereof. The foregoing 61-day notice requirement is enforceable, unconditional and non-waivable and shall apply to all affiliates and assigns of Lender.

A12.           “Payment Default” means (i) an Event of Default that occurs pursuant to Sections 4.1(i), 4.1(ii) or 4.1(iii) hereof, or (ii) any failure, for any reason, by the Borrower to timely pay any amount due hereunder, whether pursuant to an Installment Conversion, a Lender Conversion, on or before the Maturity Date, or otherwise. For avoidance of doubt, any such failure shall be a Payment Default for purposes of this Note including, without limitation, Section 16.2 hereof, irrespective of any defenses, excuses or Claims asserted by Borrower.

A13.           “Trading Day” shall mean any day on which the Common Stock is traded or tradable for any period on the Common Stock’s principal market, or on the principal securities exchange or other securities market on which the Common Stock is then being traded.

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EXHIBIT A

Typenex Co-Investment, LLC

303 East Wacker Drive, Suite 1200

Chicago, Illinois 60601

Coates International, Ltd.	Date: __________________
Attn: George Coates
2100 Highway 34 & Ridgewood Road
Wall Township, New Jersey 07719

LENDER CONVERSION NOTICE

The above-captioned Lender hereby gives notice to Coates International, Ltd., a Delaware corporation (the “Borrower”), pursuant to that certain Secured Convertible Promissory Note made by the Borrower in favor of the Lender on April 2, 2014 (the “Note”), that the Lender elects to convert the portion of the Note balance set forth below into fully paid and non-assessable shares of Common Stock of the Borrower as of the date of conversion specified below.  Said conversion shall be based on the Lender Conversion Price set forth below.  In the event of a conflict between this Lender Conversion Notice and the Note, the Note shall govern, or, in the alternative, at the election of the Lender in its sole discretion, the Lender may provide a new form of Lender Conversion Notice to conform to the Note. Capitalized terms used in this notice without definition shall have the meanings given to them in the Note.

A. B. C. D. Date of Conversion: ____________ Lender Conversion #: ____________ Conversion Amount: ____________ Lender Conversion Price:  _______________

E. Lender Conversion Shares:  _______________ (C divided by D)

F. Remaining Outstanding Balance of Note:  ____________*

G. H.  Remaining balance of Buyer Note(s): ____________* Outstanding Balance of Note net of balance of Buyer Note(s): ____________* (F minus G)

* Subject to adjustments for corrections, defaults, interest and other adjustments permitted by the Transaction Documents (as defined in the Agreement).

The Conversion Amount converted hereunder shall be deducted from the following Conversion Eligible Tranche(s):

Conversion Amount Tranche No.

Please transfer the Lender Conversion Shares electronically (via DWAC) to the following account:

Broker:  ____________________________________	Address:      _____________________________________
DTC#:  ____________________________________	_____________________________________
Account #:  _________________________________	_____________________________________
Account Name: _______________________________

A-1

To the extent the Lender Conversion Shares are not able to be delivered to the Lender electronically via the DWAC system, please deliver all such certificated shares to the Lender via reputable overnight courier after receipt of this Conversion Notice (by facsimile transmission or otherwise) to:

_____________________________________

_____________________________________

_____________________________________

Sincerely,

Lender:   Typenex Co-Investment, LLC
By:	Red Cliffs Investments, Inc., its Manager
	By:
		John M. Fife, President

A-2

EXHIBIT B

Coates International, Ltd.

2100 Highway 34 & Ridgewood Road

Wall Township, New Jersey 07719

Typenex Co-Investment, LLC	Date: __________________
Attn: John Fife
303 E. Wacker Dr., Suite 1200
Chicago, IL 60657

INSTALLMENT NOTICE

The above-captioned Borrower hereby gives notice to Typenex Co-Investment, LLC, a Utah limited liability company (the “Lender”), pursuant to that certain Secured Convertible Promissory Note made by the Borrower in favor of the Lender on April 2, 2014 (the “Note”), of certain Borrower elections and certifications related to payment of the Installment Amount of $_________________ due on ___________, 201_ (the “Installment Date”). In the event of a conflict between this Installment Notice and the Note, the Note shall govern, or, in the alternative, at the election of the Lender in its sole discretion, the Lender may provide a new form of Installment Notice to conform to the Note.  Capitalized terms used in this notice without definition shall have the meanings given to them in the Note.

INSTALLMENT CONVERSION AND CERTIFICATIONS

AS OF THE INSTALLMENT DATE

A. INSTALLMENT CONVERSION

A. B. Installment Date: ____________, 201_ Installment Amount: ___________

C. Portion of Installment Amount Borrower elected to pay in cash: ____________

D. Portion of Installment Amount to be converted into Common Stock: ____________ (B minus C)

E. Installment Conversion Price:  _______________ (lower of (i) Lender Conversion Price in effect and (ii) Market Price as of Installment Date)

F. Installment Conversion Shares:  _______________ (D divided by E)

G. Remaining Outstanding Balance of Note:  ____________ *

H. Remaining balance of Buyer Note(s): ____________*

I. Outstanding Balance of Note net of balance of Buyer Note(s): ____________* (G minus H)

B. EQUITY CONDITIONS CERTIFICATION

1. Market Capitalization of the Common Stock:________________

(Check One)

2. _________The Borrower herby certifies that no Equity Conditions Failure exists as of the Installment Date.

B-1

3. _________The Borrower hereby gives notice that an Equity Conditions Failure has occurred and requests a waiver from the Lender with respect thereto.  The Equity Conditions Failure is as follows:

Sincerely,

Borrower:  Coates International, Ltd.

By: ________________________________

Name: ______________________________

Title: _______________________________

B-2

EXHIBIT C

Typenex Co-Investment, LLC

303 East Wacker Drive, Suite 1200

Chicago, Illinois 60601

Coates International, Ltd.	Date: __________________
2100 Highway 34 & Ridgewood Road
Wall Township, New Jersey 07719

TRUE-UP NOTICE

The above-captioned Lender hereby gives notice to Coates International, Ltd., a Delaware corporation (the “Borrower”), pursuant to that certain Secured Convertible Promissory Note made by the Borrower in favor of the Lender on April 2, 2014 (the “Note”), of True-Up Conversion Shares related to _____________, 201_ (the “Installment Date”). In the event of a conflict between this True-Up Notice and the Note, the Note shall govern, or, in the alternative, at the election of the Lender in its sole discretion, the Lender may provide a new form of True-Up Notice to conform to the Note.  Capitalized terms used in this notice without definition shall have the meanings given to them in the Note.

TRUE-UPCONVERSION SHARES AND CERTIFICATIONS

AS OF THE TRUE-UP DATE

1. TRUE-UP CONVERSION SHARES

A. Installment Date: ____________, 201_

B.   C. True-Up Date: ____________, 201_   Portion of Installment Amount converted into Common Stock: ___________________

D. True-Up Conversion Price:  _______________ (lower of (i) Lender Conversion Price in effect and (ii) Market Price as of True-Up Date)

A. True-Up Conversion Shares:  _______________ (C divided by D)

B. Installment Conversion Shares delivered: ________________

C. True-Up Conversion Shares to be delivered: ________________ (only applicable if D minus E is greater than zero)

D. Installment Conversion Shares to be retained by the Lender because of a Payment Default: _________________ (only applicable if D minus E is less than zero and a Payment Default has occurred)

1. EQUITY CONDITIONS CERTIFICATION (section to be completed by Borrower)

A. Market Capitalization of the Common Stock:________________

C-1

(Check One)

B. _________The Borrower herby certifies that no Equity Conditions Failure exists as of the applicable True-Up Date.

C. _________The Borrower hereby gives notice that an Equity Conditions Failure has occurred and requests a waiver from the Lender with respect thereto.  The Equity Conditions Failure is as follows:

Sincerely,

Lender: Typenex Co-Investment, LLC
By:	Red Cliffs Investments, Inc., its Manager
	By:
		John M. Fife, President

ACKNOWLEDGED AND CERTIFIED BY:

Borrower:  Coates International, Ltd.

By: _______________________________

Name: _____________________________

Title: ______________________________

C-2

EX-10.2

Exhibit 10.2

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of April 2, 2014, is entered into by and between Coates International, Ltd., a Delaware corporation (the “Company”), and Typenex Co-Investment, LLC, a Utah limited liability company, its successors and/or assigns (the “Buyer”).

A.           The Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”).

B.            The Buyer desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement, a Secured Convertible Promissory Note, in the form attached hereto as Exhibit A, in the original principal amount of $316,500.00 (the “Note”), convertible into shares of common stock, $0.0001 par value per share, of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such Note. This Agreement, the Note, the Secured Buyer Notes (as defined below), the Buyer Notes (as defined below), the Security Agreement (as defined below), the Pledge Agreement (as defined below), and all other certificates, documents, agreements, resolutions and instruments delivered to any party under or in connection with this Agreement, as the same may be amended from time to time, are collectively referred to herein as the “Transaction Documents”).

C.            For purposes of this Agreement: “Conversion Shares” means all shares of Common Stock issuable upon conversion of all or any portion of the Note; and “Securities” means the Note and the Conversion Shares, as applicable.

NOW THEREFORE, the Company and the Buyer herebyagree as follows:

1.             Purchase and Sale of Securities.

1.1.           Purchase of Securities. On the Closing Date (as defined below), the Company shall issue and sell to the Buyer and the Buyer agrees to purchase from the Company the Note. In consideration thereof, the Buyer shall pay (i) the amount designated as the initial cash purchase price on the Buyer’s signature page to this Agreement (the “Initial Cash Purchase Price”), and (ii) issue to the Company the Secured Buyer Notes and the Buyer Notes (the sum of the initial principal amount of the Secured Buyer Notes and the Buyer Notes, together with the Initial Cash Purchase Price, the “Purchase Price”). Subject to Section 1.5, the Secured Buyer Notes shall be secured by the Pledge Agreement substantially in the form attached hereto as Exhibit B, as the same may be amended from time to time (the “Pledge Agreement”). Initially, only the Secured Buyer Notes will be secured by the Pledge Agreement pursuant to the terms and conditions of the Pledge Agreement, the Secured Buyer Notes and this Agreement, but the Buyer Notes may become secured by the collateral described in the Pledge Agreement subsequent to the Closing Date at such time as determined by the Buyer in its sole discretion. The Purchase Price is allocated to the Tranches (as defined in the Note) of the Note as set forth in the table attached hereto as Exhibit C.

1.2.           Form of Payment. On the Closing Date, (i) the Buyer shall pay the Purchase Price to the Company against delivery of the Note by delivering the following at the Closing: (A) the Initial Cash Purchase Price, which shall be delivered by wire transfer of immediately available funds to the Company, in accordance with the Company’s written wiring instructions, (B) Secured Buyer Note #1 in the principal amount of $50,00.00 duly executed and substantially in the form attached hereto as Exhibit D (“Secured Buyer Note #1”); (C) Secured Buyer Note #2 in the principal amount of $50,00.00 duly executed and substantially in the form attached hereto as Exhibit E (“Secured Buyer Note #2,” and together with Secured Buyer Note #1, the “Secured Buyer Notes”); (D) Buyer Note #3 in the principal amount of $50,000.00 duly executed and substantially in the form attached hereto as Exhibit F (“Buyer Note #3”); and (E) Buyer Note #4 in the principal amount of $50,000.00 duly executed and substantially in the form attached hereto as Exhibit G (“Buyer Note #4”), and together with Buyer Note #3, the “Buyer Notes”); and (ii) the Company shall deliver the duly executed Note on behalf of the Company, to the Buyer, against delivery of such Purchase Price.

1.3.           Closing Date. Subject to the satisfaction (or written waiver) of the conditions set forth in Section 5 and Section 6 below, the date and time of the issuance and sale of the Securities pursuant to this Agreement (the “Closing Date”) shall be 12:00 noon, Eastern Time on or about April 2, 2014, or such other mutually agreed upon time. The closing of the transactions contemplated by this Agreement (the “Closing”) shall occur on the Closing Date at the offices of the Buyer unless otherwise agreed upon by the parties.

1.4.           Note Collateral. The Note shall be secured by the collateral set forth in that that certain Security Agreement attached hereto as Exhibit H listing the Secured Buyer Notes and the Buyer Notes as security for the Company’s obligations under the Transaction Documents (the “Security Agreement”).

1.5.           Secured Buyer Note Collateral. At the Closing, the Buyer shall execute the Pledge Agreement, thereby granting to the Company a security interest in the collateral described therein (the “Collateral”). The Buyer also agrees to file a UCC Financing Statement (Form UCC1) with the Utah Department of Commerce in the manner set forth in the Pledge Agreement in order to perfect the Company’s security interest in the Collateral. Notwithstanding anything to the contrary herein or in any other Transaction Document, the Buyer may, in the Buyer’s sole discretion, add additional collateral to the Collateral covered by the Pledge Agreement, and may substitute Collateral as the Buyer deems fit, provided that the net fair market value of the substituted Collateral may not be less than the aggregate principal balance of the Secured Buyer Notes as of the date of any such substitution. In the event of a substitution of Collateral, the Buyer shall timely execute any and all amendments and documents necessary or advisable in order to properly release the original collateral and grant a security interest upon the substitute collateral in favor of the Company, including without limitation the filing of an applicable UCC Financing Statement Amendment (Form UCC3) with the Utah Department of Commerce. The Company agrees to sign the documents and take such other measures requested by the Buyer in order to accomplish the intent of the Transaction Documents, including without limitation, execution of a Form UCC3 (or equivalent) termination statement against the Collateral within five (5) Trading Days after written request from the Buyer. The Company acknowledges and agrees that the Collateral may be encumbered by other monetary liens in priority and/or subordinate positions. The intent of the parties is that the net fair market value of the Collateral (less any other prior liens or encumbrances) will be equal to or greater than the aggregate outstanding balance of the Secured Buyer Notes.  To the extent the fair market value of the Collateral (less any other liens or encumbrances) is less than the total outstanding balance of all the Secured Buyer Notes, then the Collateral will be deemed to only secure those Secured Buyer Notes with an aggregate outstanding balance that is less than or equal to such net fair market value of the Collateral, applied in numerical order of the Secured Buyer Notes. By way of example only, if the fair market value of the Collateral is determined by appraisal to be $100,000 and the Collateral is encumbered by $50,000 of prior liens, then the net fair market value for purposes of this section is $50,000 ($100,000 - $50,000). Accordingly, the Collateral will be deemed to secure only Secured Buyer Note #1, while Secured Buyer Note #2 shall be deemed unsecured. If the Collateral is subsequently appraised for $125,000 with all prior liens removed, then the Collateral will automatically be deemed to secure Secured Buyer Note #1 and Secured Buyer Note #2.

1.6.           Original Issue Discount; Transaction Expenses. The Note carries an original issue discount of $15,000.00 (the “OID”). In addition, the Company agrees to pay $1,500.00 to the Buyer to cover the Buyer’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of the Securities, all of which amount is included in the initial principal balance of the Note (the “Carried Transaction Expense Amount”). The Purchase Price, therefore, shall be $300,000.00, computed as follows: $316,500.00 original principal balance, less the OID, less the Carried Transaction Expense Amount. The Initial Cash Purchase Price shall be the Purchase Price less the sum of the initial principal amounts of the Secured Buyer Notes and the Buyer Notes.

2

2.             Buyer’s Representations and Warranties. The Buyer represents and warrants to the Company that: (i) this Agreement has been duly and validly authorized; (ii) this Agreement, the Secured Buyer Notes, the Buyer Notes, and the Pledge Agreement have been duly executed and delivered on behalf of the Buyer, (iii) this Agreement constitutes a valid and binding agreement of the Buyer enforceable in accordance with its terms; and (iv) the Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D of the 1933 Act.

3.             Representations and Warranties of the Company. The Company represents and warrants to the Buyer that: (i) the Company is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has the requisite corporate power to own its properties and to carry on its business as now being conducted; (ii) the Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary; (iii) the Company has registered its Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and is obligated to file reports pursuant to Section 13 or Section 15(d) of the 1934 Act; (iv) each of the Transaction Documents and the transactions contemplated hereby and thereby, have been duly and validly authorized by the Company; (v) this Agreement, the Note, and the Security Agreement have been duly executed and delivered by the Company and constitute the valid and binding obligations of the Company enforceable in accordance with their terms, subject as to enforceability only to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors’ rights generally; (vi) the execution and delivery of the Transaction Documents by the Company, the issuance of Securities in accordance with the terms hereof, and the consummation by the Company of the other transactions contemplated by the Transaction Documents do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (a) the Company’s formation documents or bylaws, each as currently in effect, (b) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any listing agreement for the Common Stock, or (c) to the Company’s knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of the Company’s properties or assets; (vii) no further authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders or any lender of the Company is required to be obtained by the Company for the issuance of the Securities to the Buyer; (viii) none of the Company’s filings with the SEC contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading; (ix) the Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company with the SEC under the 1934 Act on a timely basis or has received a valid extension of such time of filing and has filed any such report, schedule, form, statement or other document prior to the expiration of any such extension; (x) the Company is not, nor has it ever been, a “Shell Company,” as such type of “issuer” is described in Rule 144(i)(1) under the 1933 Act; (xi) the Company has taken no action which would give rise to any claim by any person or entity for a brokerage commission, placement agent or finder’s fees or similar payments by the Buyer relating to the Note or the transactions contemplated hereby; and (xii) except for such fees arising as a result of any agreement or arrangement entered into by the Buyer without the knowledge of the Company (a “Buyer’s Fee”), the Buyer shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other persons for fees of a type contemplated in this subsection that may be due in connection with the transactions contemplated hereby and the Company shall indemnify and hold harmless each of the Buyer, the Buyer’s employees, officers, directors, stockholders, managers, agents, and partners, and their respective affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorneys’ fees) and expenses suffered in respect of any such claimed or existing fees (other than a Buyer’s Fee, if any).

3

4.             Company Covenants.  Until all of the Company’s obligations hereunder are paid and performed in full, or within the timeframes otherwise specifically set forth below, the Company shall comply with the following covenants: (i) from the date hereof until the date that is six (6) months after all the Conversion Shares either have been sold by the Buyer, or may permanently be sold by the Buyer without any restrictions pursuant to Rule 144, the Company shall timely make all filings required to be made by it under the 1933 Act, the 1934 Act, Rule 144 or any United States securities laws and regulations thereof applicable to the Company or by the rules and regulations of its principal trading market, and such filings shall conform to the requirements of applicable laws, regulations and government agencies, and, unless such filings are publicly available on the SEC’s EDGAR system (via the SEC’s web site at no additional charge), the Company shall provide a copy thereof to the Buyer promptly after such filings; (ii) so long as the Buyer beneficially owns any of the Securities and for at least twenty (20) trading days thereafter, the Company shall file all reports required to be filed with the SEC pursuant to Sections 13 or 15(d) of the 1934 Act, and shall take all reasonable action under its control to ensure that adequate current public information with respect to the Company, as required in accordance with Rule 144, is publicly available, and shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination; (iii) the Common Stock shall be listed or quoted for trading on any of (a) the NYSE Amex, (b) the New York Stock Exchange, (c) the Nasdaq Global Market, (d) the Nasdaq Capital Market, (e) the OTC Bulletin Board, (f) the OTCQX, or (g) the OTCQB; (iv) the Company shall use the net proceeds received hereunder for working capital and general corporate purposes only; provided, however, the Company will not use such proceeds to pay fees payable (A) to any broker or finder relating to the offer and sale of the Securities unless such broker, finder, or other party is a registered investment adviser or registered broker-dealer and such fees are paid in full compliance with all applicable laws and regulations, or (B) to any other party relating to any financing transaction effected prior to the date hereof; and (v) from and after the date hereof and until all of the Company’s obligations hereunder and the Note are paid and performed in full, the Company shall not transfer, assign, sell, pledge, hypothecate or otherwise alienate or encumber the Secured Buyer Notes or the Buyer Notes in any way without the prior written consent of the Buyer.

5.             Conditions to the Company’s Obligation to Sell. The obligation of the Company hereunder to issue and sell the Securities to the Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions:

5.1.           The Buyer shall have executed this Agreement, the Secured Buyer Notes, the Buyer Notes and the Pledge Agreement, and delivered the same to the Company.

5.2.           The Buyer shall have delivered the Purchase Price in accordance with Section 1.2 above.

6.             Conditions to the Buyer’s Obligation to Purchase. The obligation of the Buyer hereunder to purchase the Securities at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Buyer’s sole benefit and may be waived by the Buyer at any time in its sole discretion:

6.1.           The Company shall have executed this Agreement and delivered the same to the Buyer.

6.2.           The Company shall have delivered to the Buyer the duly executed Note in accordance with Section 1.2 above.

6.3.           The Company shall have delivered to the Buyer a fully executed secretary’s certificate evidencing the Company’s approval of the Transaction Documents substantially in the form attached hereto as Exhibit I.

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6.4.           The Company shall have delivered to the Buyer a fully executed share issuance resolution to be delivered to the Company’s transfer agent substantially in the form attached hereto as Exhibit J.

6.5.           The Company shall have delivered to the Buyer fully executed copies of all other Transaction Documents required to be executed by the Company herein or therein.

7.             Reservation of Shares.  At all times during which the Note is convertible, the Company will reserve from its authorized and unissued Common Stock to provide for the issuance of Common Stock upon the full conversion of the Note. The Company will at all times reserve at least three times the number of shares of Common Stock necessary to convert the total Outstanding Balance (as defined in and determined pursuant to the Note) of the Note, but in any event not less than 19,000,000 shares of Common Stock shall be reserved at all times for such purpose (the “Share Reserve”). The Company further agrees that it will immediately add shares of Common Stock to the Share Reserve in increments of 2,000,000 shares as and when requested by the Buyer in writing from time to time.

8.             Governing Law; Miscellaneous. The provisions set forth in this Section 8 shall apply to this Agreement, as well as all other Transaction Documents as if these terms were fully set forth therein.

8.1.           Governing Law; Venue. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Utah for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Subject to Section 8.2 below, each party hereto hereby (a) consents to and expressly submits to the exclusive personal jurisdiction of any state or federal court sitting in Salt Lake County, Utah in connection with any dispute or proceeding arising out of or relating to this Agreement, (b) agrees that all claims in respect of any such dispute or proceeding may only be heard and determined in any such court, (c) expressly submits to the venue of any such court for the purposes hereof, and (d) waives any claim of improper venue and any claim or objection that such courts are an inconvenient forum or any other claim or objection to the bringing of any such proceeding in such jurisdictions or to any claim that such venue of the suit, action or proceeding is improper.

8.2.           Arbitration of Disputes. The parties shall submit all claims and disputes arising under this Agreement or any other Transaction Document, other than claims and disputes related to Calculations (as defined in the Note) and Payment Defaults (as defined in the Note), to binding arbitration to be held in Salt Lake County, Utah according to the then prevailing rules and procedures of the American Arbitration Association, where the findings and decision of the arbitrator shall be binding upon all parties to such dispute. All fees and costs (including reasonable attorneys’ fees) incurred pursuant to the resolution of any dispute to which this Section 8.2 applies shall be allocated to the losing party. For the avoidance of doubt, this Section 8.2 shall not apply to Payment Defaults under the Note.

8.3.           Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. A signature delivered by electronic means (i.e., by “pdf” signature) shall be deemed and original for all purposes.

8.4.           Severability. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform to such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.

8.5.           Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the parties hereto.

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8.6.           Notices. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of: (a) the date delivered, if delivered by personal delivery as against written receipt therefor or by e-mail to an executive officer, or by confirmed facsimile, (b) the fifth Trading Day after deposit, postage prepaid, in the United States Postal Service by certified mail, or (c) the third Trading Day after mailing by domestic or international express courier, with delivery costs and fees prepaid, in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) calendar days’ advance written notice similarly given to each of the other parties hereto):

If to the Company:

Coates International, Ltd.

Attn: Barry C. Kaye, CFO

2100 Highway 34 & Ridgewood Road

Wall Township, NJ 07719

If to the Buyer:

Typenex Co-Investment, LLC

Attn: John Fife, President

303 East Wacker Drive, Suite 1200

Chicago, Illinois 60601

With a copy to (which copy shall not constitute notice):

Hansen Black Anderson Ashcraft PLLC

Attn: Jonathan K. Hansen

2940 West Maple Loop, Suite 103

Lehi, Utah 84043

8.7.           Successors and Assigns. This Agreement or any of the severable rights and obligations inuring to the benefit of or to be performed by the Buyer hereunder may be assigned by the Buyer to a third party, including its financing sources, in whole or in part, but only with the prior written consent of the Company, which consent shall not be unreasonably withheld. The Company may not assign its rights or obligations under this Agreement or delegate its duties hereunder without the prior written consent of the Buyer.

8.8.           Survival. The representations and warranties of the Company and the agreements and covenants set forth in this Agreement shall survive the Closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Buyer. The Company agrees to indemnify and hold harmless the Buyer and all its officers, directors, employees, attorneys, and agents for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in this Agreement or any of its covenants and obligations under this Agreement, including advancement of expenses as they are incurred.

8.9.           Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

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8.10.         Buyer’s Rights and Remedies Cumulative; Liquidated Damages. All rights, remedies, and powers conferred in this Agreement and the Transaction Documents on the Buyer are cumulative and not exclusive of any other rights or remedies, and shall be in addition to every other right, power, and remedy that the Buyer may have, whether specifically granted in this Agreement or any other Transaction Document, or existing at law, in equity, or by statute; and any and all such rights and remedies may be exercised from time to time and as often and in such order as the Buyer may deem expedient. The parties agree that the amount of damages for a breach by the Company of the Transaction Documents is difficult to determine at this time and that the fees and charges included in the Transaction Documents are a reasonable estimation of the amount of liquidated damages for any such breach under the circumstances existing at the time this Agreement is entered into and are not penalties.  All fees and charges provided for in the Transaction Documents are agreed to by the parties to be based upon the obligations and the risks assumed by the parties as of the Closing Date. The liquidated damages provisions of the Transaction Documents shall not limit or preclude a party from pursuing any other remedy available in law or in equity; provided, however, that the liquidated damages provided for in the Transaction Documents are intended to be in lieu of actual damages.

8.11.         Ownership Limitation. Notwithstanding anything to the contrary contained in this Agreement or the other Transaction Documents, if at any time the Buyer shall or would be issued shares of Common Stock under any of the Transaction Documents, but such issuance would cause the Buyer (together with its affiliates) to beneficially own a number of shares exceeding the Maximum Percentage (as defined in the Note), then the Company must not issue to the Buyer the shares that would cause the Buyer to exceed the Maximum Percentage.  For purposes of this Section, beneficial ownership of Common Stock will be determined under the 1934 Act.

8.12.         Attorneys’ Fees and Cost of Collection.  In the event of any action at law or in equity to enforce or interpret the terms of this Agreement or any of the other Transaction Documents, the parties agree that the party who is awarded the most money shall be deemed the prevailing party for all purposes and shall therefore be entitled to an additional award of the full amount of the attorneys’ fees and expenses paid by such prevailing party in connection with the litigation and/or dispute without reduction or apportionment based upon the individual claims or defenses giving rise to the fees and expenses.  Nothing herein shall restrict or impair a court’s power to award fees and expenses for frivolous or bad faith pleading. If (a) the Note is placed in the hands of an attorney for collection or enforcement prior to commencing legal proceedings, or is collected or enforced through any legal proceeding, or the Buyer otherwise takes action to collect amounts due under the Note or to enforce the provisions of the Note; or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting the Company’s creditors’ rights and involving a claim under the Note; then the Company shall pay the costs incurred by the Buyer for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, without limitation, attorneys’ fees and disbursements.

8.13.         Waiver. No waiver of any provision of this Agreement shall be effective unless it is in the form of a writing signed by the party granting the waiver.  No waiver of any provision or consent to any prohibited action shall constitute a waiver of any other provision or consent to any other prohibited action, whether or not similar.  No waiver or consent shall constitute a continuing waiver or consent or commit a party to provide a waiver or consent in the future except to the extent specifically set forth in writing.

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8.14.         Waiver of Jury Trial. EACH PARTY TO THIS AGREEMENT IRREVOCABLY WAIVES ANY AND ALL RIGHTS SUCH PARTY MAY HAVE TO DEMAND THAT ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT OR THE RELATIONSHIPS OF THE PARTIES HERETO BE TRIED BY JURY.  THIS WAIVER EXTENDS TO ANY AND ALL RIGHTS TO DEMAND A TRIAL BY JURY ARISING UNDER COMMON LAW OR ANY APPLICABLE STATUTE, LAW, RULE OR REGULATION. FURTHER, EACH PARTY HERETO ACKNOWLEDGES THAT SUCH PARTY IS KNOWINGLY AND VOLUNTARILY WAIVING SUCH PARTY’S RIGHT TO DEMAND TRIAL BY JURY.

8.15.         Time of the Essence. Time is expressly made of the essence of each and every provision of this Agreement and the other Transaction Documents.

[Remainder of page intentionally left blank; signature page to follow]

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SUBSCRIPTION AMOUNT:

Principal Amount of Note:	$	300,000.00
Initial Cash Purchase Price:	$	100,000.00

IN WITNESS WHEREOF, the undersigned Buyer and the Company have caused this Agreement to be duly executed as of the date first above written.

BUYER:
Typenex Co-Investment, LLC
By:	Red Cliffs Investments, Inc., its Manager
	By:	/s/ John M. Fife
		John M. Fife, President

COMPANY:
Coates International, Ltd.
By:	/s/ Barry C. Kaye
Printed Name: Barry C. Kaye
Title: Chief Financial Officer

ATTACHED EXHIBITS:

Exhibit A Note

Exhibit B Pledge Agreement

Exhibit C Allocation of Purchase Price

Exhibit D Secured Buyer Note #1

Exhibit E Secured Buyer Note #2

Exhibit F Buyer Note #3

Exhibit G Buyer Note #4

Exhibit H Security Agreement

Exhibit I Secretary’s Certificate

Exhibit J Share Issuance Resolution

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EX-10.3

Exhibit 10.3

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

Principal Amount: US$40,000	Issue Date: April 14, 2014
Purchase Price: US$40,000

CONVERTIBLE PROMISSORY NOTE

FOR VALUE RECEIVED, COATES INTERNATIONAL, LTD., a Delaware corporation (hereinafter called the “Borrower”), hereby promises to pay to the order of AUCTUS PRIVATE EQUITY FUND, LLC, a Massachusetts limited liability company, or registered assigns (the “Holder”) the sum of US$40,000 together with any interest as set forth herein, on January 14, 2015 (the “Maturity Date”), and to pay interest on the unpaid principal balance hereof at the rate of eight percent (8%) (the “Interest Rate”) per annum from the date hereof (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise.  This Note may not be prepaid in whole or in part except as otherwise explicitly set forth herein with the written consent of the Holder which may be withheld for any reason or for no reason. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid (“Default Interest”).  Interest shall commence accruing on the date that the Note is fully paid and shall be computed on the basis of a 365-day year and the actual number of days elapsed.  All payments due hereunder (to the extent not converted into common stock, $0.0001 par value per share (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United States of America.  All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note.  Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date.  As used in this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed.  Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement dated the date hereof, pursuant to which this Note was originally issued (the “Purchase Agreement”).

This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.

The following terms shall apply to this Note:

ARTICLE I. CONVERSION RIGHTS

1.1      Conversion Right.  The Holder shall have the right from time to time, and at any time during the period beginning on the date which is one hundred eighty (180) days following the date of this Note and ending on the  later of (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III, each in respect of the remaining outstanding principal amount of this Note to convert all or any part of the outstanding and unpaid principal amount of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the Conversion Price (as defined below) determined as provided herein (a “Conversion”); provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock.  For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso, provided, further, however, that the limitations on conversion may be waived by the Holder upon, at the election of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver).  The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”).  The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion plus (2) at the Holder’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion Date, provided however, that the Borrower shall have the right to pay any or all interest in cash plus (3) at the Holder’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof.

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1.2      Conversion Price.

(a)           Calculation of Conversion Price.  The conversion price (the “Conversion Price”) shall equal the Base Conversion Price (as defined herein) (subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events).  The "Base Conversion Price" shall mean 67.5% multiplied by the Market Price (as defined herein) (representing a discount rate of 32.5%).  “Market Price” means the average of the lowest two (2) Trading Prices (as defined below) for the Common Stock during the twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.  “Trading Price” means, for any security as of any date, the closing price on the Over-the-Counter Bulletin Board (the “OTCBB”), OTCQB or applicable trading market as reported by a reliable reporting service (“Reporting Service”) designated by the Holder or, if the OTCQB is not the principal trading market for such security, the closing price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing  price of such security is available in any of the foregoing manners, the average of the closing prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc.  The Conversion Price may be adjusted downward if, within three (3) business days of the transmittal of the Notice of Conversion to the Borrower, the Common Stock has a closing price which is 5% or lower than that set forth in the Notice of Conversion. If the shares have not been delivered within three (3) business days to the Company, the Notice of Conversion may be rescinded. In the case that the Borrower’s Common Stock is not deliverable by DWAC, an additional 5% discount will apply.  In the case that the Borrower’s Common Stock is “chilled” for deposit into the DTC system and only eligible for clearing deposit, an additional 10% discount shall apply while the "chill" is in effect.  If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Notes.  “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTCBB, OTCQB or on the principal securities exchange or other securities market on which the Common Stock is then being traded.

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(b)           Conversion Price During Major Announcements.  Notwithstanding anything contained in Section 1.2(a) to the contrary, in the event the Borrower (i) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which the Borrower is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Borrower or (ii) any person, group or entity (including the Borrower) publicly announces a tender offer to purchase 50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the date of the announcement referred to in clause (i) or (ii) is hereinafter referred to as the  “Announcement Date”), then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which would have been applicable for a Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth in this Section 1.2(a).  For purposes hereof,  “Adjusted Conversion Price Termination Date” shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a public announcement as contemplated by this Section 1.2(b) has been made, the date upon which the Borrower (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer (or takeover scheme) which caused this Section 1.2(b) to become operative.

1.3      Authorized Shares.  The Borrower covenants that during the period the conversion right exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note issued pursuant to the Purchase Agreement.  The Borrower is required at all times to have authorized and reserved five times the number of shares that is actually issuable upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to time) (the “Reserved Amount”).  The Reserved Amount shall be increased from time to time in accordance with the Borrower’s obligations pursuant to Section 3(d) of the Purchase Agreement.  The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable.  In addition, if the Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes.  The Borrower (i) acknowledges that it will promptly instruct its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note.

If, at any time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of the Note.

1.4      Method of Conversion.

(a)           Mechanics of Conversion.  Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 5:00 p.m., New York, New York time) and (B) subject to Section 1.4(b), surrendering this Note at the principal office of the Borrower.

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(b)           Surrender of Note Upon Conversion.  Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid principal amount of this Note is so converted.  The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion.  In the event of any dispute or discrepancy, such records of the Borrower shall, prima facie, be controlling and determinative in the absence of manifest error.  Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal amount of this Note.  The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.

(c)           Payment of Taxes.  The Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid.

(d)           Delivery of Common Stock Upon Conversion.  Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “Deadline”), provided however, for purposes of defining the three business day Deadline herein only, any Notice of Conversion received after 3:00 p.m., New York, New York time, shall be deemed to have been received on the following business day (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement.

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(e)           Obligation of Borrower to Deliver Common Stock.  Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion.  If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion.  The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 5:00 p.m., New York, New York time, on such date.

(f)           Delivery of Common Stock by Electronic Transfer.  In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, the Borrower shall use its commercially reasonable best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal At Custodian (“DWAC”) system.

(g)           Failure to Deliver Common Stock Prior to Delivery Deadline.  Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline (other than a failure due to the circumstances described in Section 1.3 above, which failure shall be governed by such Section) the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower fails to deliver such Common Stock.  Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note.  The Borrower agrees that the right to convert is a valuable right to the Holder.  The damages resulting from a failure, attempt to frustrate, interference with such conversion right are difficult if not impossible to qualify.  Accordingly the parties acknowledge that the liquidated damages provision contained in this Section 1.4(g) are justified.

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1.5      Concerning the Shares.  The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless  (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of  counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“Rule 144”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor (as defined in the Purchase Agreement).  Except as otherwise provided in the Purchase Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

The legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer legend if (i) the Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act, which opinion shall be reasonably accepted by the Borrower so that the sale or transfer is effected or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold. In the event that the Borrower does not accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of the Note.

1.6      Effect of Certain Events.

(a)           Effect of Merger, Consolidation, Etc.  At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof.  “Person” shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.

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(b)           Adjustment Due to Merger, Consolidation, Etc.  If, at any time when this Note is issued and outstanding and prior to conversion of all of the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof.  The Borrower shall not affect any transaction described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations of this Section 1.6(b).  The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.

(c)           Adjustment Due to Distribution.  If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Borrower’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.

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(d)           Purchase Rights.  If, at any time when any Notes are issued and outstanding, the Borrower issues any convertible securities or rights to purchase stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(e)           Notice of Adjustments.  Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.6, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based.  The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Note.

1.7      Trading Market Limitations. Unless permitted by the applicable rules and regulations of the principal securities market on which the Common Stock is then listed or traded, in no event shall the Borrower issue upon conversion of or otherwise pursuant to this Note and the other Notes issued pursuant to the Purchase Agreement more than the maximum number of shares of Common Stock that the Borrower can issue pursuant to any rule of the principal United States securities market on which the Common Stock is then traded (the “Maximum Share Amount”), which shall be 4.99% of the total shares outstanding on the Closing Date (as defined in the Purchase Agreement), subject to equitable adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date hereof.

1.8      Status as Shareholder.  Upon submission of a Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Borrower to comply with the terms  of this Note.  Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversion of any portion of this Note for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Borrower) the Holder shall regain the rights of a Holder of this Note with respect to such unconverted portions of this Note and the Borrower shall, as soon as practicable, return such unconverted Note to the Holder or, if the Note has not been surrendered, adjust its records to reflect that such portion of this Note has not been converted.  In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 1.3) for the Borrower’s failure to convert this Note.

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1.9      Prepayment.  Notwithstanding anything to the contrary contained in this Note, the Borrower may prepay the amounts outstanding hereunder pursuant to the following terms and conditions:

(a)           At any time during the period beginning on the Issue Date and ending on the date which is thirty (30) days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 125%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note plus (y) Default Interest.

(b)           At any time during the period beginning the day which is thirty one (31) days following the Issue Date and ending on the date which is sixty (60) days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 130%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note plus (y) Default Interest.

(c)           At any time during the period beginning the day which is sixty one (61) days following the Issue Date and ending on the date which is ninety(90) days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 135%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note plus (y) Default Interest.

(d)           At any time during the period beginning the day which is ninety one (91) days following the Issue Date and ending on the date which is one hundred twenty (120) days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 140%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note plus (y) Default Interest.

(e)           At any time during the period beginning the day which is one hundred twenty one (121) days following the Issue Date and ending on the date which is one hundred fifty (150) days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 145%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note plus (y) Default Interest.

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(f)           At any time during the period beginning the day which is one hundred fifty one (151) days following the Issue Date and ending on the date which is one hundred eighty (180) days following the Issue Date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full by making a payment to the Holder of an amount in cash equal to 150%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note plus (y) Default Interest.

(g)           After the expiration of one hundred eighty (180) days following the date of the Note, the Borrower shall have no right of prepayment.

Any notice of prepayment hereunder (an “Optional Prepayment Notice”) shall be delivered to the Holder of the Note at its registered addresses and shall state: (1) that the Borrower is exercising its right to prepay the Note, and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice.  On the date fixed for prepayment (the “Optional Prepayment Date”), the Borrower shall make payment of the applicable prepayment amount to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date.  If the Borrower delivers an Optional Prepayment Notice and fails to pay the applicable prepayment amount due to the Holder of the Note within two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

ARTICLE II. CERTAIN COVENANTS

2.1      Distributions on Capital Stock.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders’ rights plan which is approved by a majority of the Borrower’s disinterested directors.

2.2      Restriction on Stock Repurchases.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower or any warrants, rights or options to purchase or acquire any such shares.

2.3      Reserved.

2.4      Sale of Assets.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business.  Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.

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2.5      Advances and Loans.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, credits or advances (a) in existence or committed on the date hereof and which the Borrower has informed Holder in writing prior to the date hereof, (b) made in the ordinary course of business or (c) not in excess of $100,000.

ARTICLE III. EVENTS OF DEFAULT

If any of the following events of default (each, an “Event of Default”) shall occur:

3.1      Failure to Pay Principal or Interest.  The Borrower fails to pay the principal hereof or interest thereon when due on this Note, whether at maturity, upon acceleration or otherwise.

3.2      Conversion and the Shares.  The Borrower fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, the Borrower directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for three (3) business days after the Holder shall have delivered a Notice of Conversion.  It is an obligation of the Borrower to remain current in its obligations to its transfer agent. It shall be an event of default of this Note, if a conversion of this Note is delayed, hindered or frustrated due to a balance owed by the Borrower to its transfer agent. If at the option of the Holder, the Holder advances any funds to the Borrower’s transfer agent in order to process a conversion, such advanced funds shall be paid by the Borrower to the Holder within forty eight (48) hours of a demand from the Holder.

3.3      Failure to Deliver Advance Fee Shares.  The Borrower fails to deliver the Advance Fee Shares (as defined in the Purchase Agreement) to the Holder within three (3) business days of the date such shares are due.

3.4      Breach of Covenants.  The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents including but not limited to the Purchase Agreement and such breach continues for a period of ten (10) days after written notice thereof to the Borrower from the Holder.

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3.5      Breach of Representations and Warranties.  Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.

3.6      Receiver or Trustee.  The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.

3.7      Judgments.  Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any of its property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.

3.8      Bankruptcy.  Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower.

3.9      Delisting of Common Stock.  The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB, OTCQB or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange, or the NYSE MKT.

3.10    Failure to Comply with the Exchange Act.  The Borrower shall fail to comply with the reporting requirements of the Exchange Act; and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.

3.11    Liquidation.   Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.

3.12    Cessation of Operations.  Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern” shall not be an admission that the Borrower cannot pay its debts as they become due.

3.13    Maintenance of Assets.  The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future).

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3.14    Financial Statement Restatement.  The restatement of any financial statements filed by the Borrower with the SEC for any date or period from two years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.

3.15    Reverse Splits.   The Borrower effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Holder.

3.16    Replacement of Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, and provided that the policies of the successor transfer agent permit it to honor irrevocable transfer agent instructions and to reserve shares of stock of the issuers it represents, if the Borrower fails to provide at least ten (10) days prior written notice of such intended change to the Holder and prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form agreed upon by the parties (including but not limited to a provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.

3.17    Cessation of Trading.  Any cessation of trading of the Common Stock on at least one of the OTCBB, OTCQB or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange, or the NYSE MKT, and such cessation of trading shall continue for a period of five consecutive (5) Trading Days.

3.18    Cross-Default.  Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by the Borrower of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. “Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the Borrower, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory notes; provided, however, the term “Other Agreements” shall not include the agreements and instruments defined as the Documents.  Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Holder.

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Upon the occurrence and during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due at the Maturity Date), the Note shall become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein).  UPON THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) 150%. Upon the occurrence and during the continuation of any Event of Default specified in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on this Note upon acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14, 3.15, 3.16. 3.17 and/or 3.18 exercisable through the delivery of written notice to the Borrower by such Holders (the “Default Notice”), and upon the occurrence of an Event of Default specified the remaining sections of Article III (other than failure to pay the principal hereof or interest thereon at the Maturity Date specified in Section 3,1 hereof), the Note shall become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to150% times the sum of (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “Mandatory Prepayment Date”) plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in clauses (x), (y) and (z) shall collectively be known as the “Default Sum”) (the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity. 

If the Borrower fails to pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall have the right at any time, so long as the Borrower remains in default (and so long and to the extent that there are sufficient authorized shares), to require the Borrower, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect.

ARTICLE IV. MISCELLANEOUS

4.1      Failure or Indulgence Not Waiver.  No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges.  All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.

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4.2      Notices.  All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice.  Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be:

If to the Borrower, to:

Coates International Ltd.

Highway 34 & Ridgewood Road

Wall Township, NJ 07719

Attn: Barry C. Kaye; Chief Financial Officer

Facsimile: (732) 449-0764

If to the Holder:

Auctus Private Equity Fund, LLC

101 Arch Street, 20th Floor

Boston, MA 02110

Attn: Lou Posner

Facsimile: (617) 532-6420

With a copy by fax only to (which copy shall not constitute notice):

Lucosky Brookman LLP

101 Wood Avenue South, 5th Floor

Woodbridge, NJ 08830

Attn: Joseph M. Lucosky, Esq.

Facsimile: (732) 395-4401

4.3      Amendments.  This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder.  The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.

4.4      Assignability.  This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns.  Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the 1933 Act).  Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.

4.5      Cost of Collection.  If default is made in the payment of this Note, the Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys’ fees.

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4.6      Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws.  Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the state courts of Massachusetts or in the federal courts located in the Commonwealth of Massachusetts.  The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens.  The Borrower and Holder waive trial by jury.  The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs.  In the event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law.  Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement.   Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

4.7      Certain Amounts.  Whenever pursuant to this Note the Borrower is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Note may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note.  The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.

4.8      Purchase Agreement.  By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Purchase Agreement.

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4.9      Notice of Corporate Events.  Except as otherwise provided below, the Holder of this Note shall have no rights as a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide the Holder with prior notification of any meeting of the Borrower’s shareholders (and copies of proxy materials and other information sent to shareholders).  In the event of any taking by the Borrower of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time.  The Borrower shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 4.9.

4.10    Remedies.  The Borrower acknowledges that a breach by it of its obligations hereunder may cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby.  Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, regardless of whether or not the breach has caused irreparable harm to the Holder, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.

[signature page follows]

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IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer as of the date first above written.

COATES INTERNATIONAL, LTD.
By:	/s/ Barry C. Kaye
Name:	Barry C. Kaye
Title:	Chief Financial Officer

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EXHIBIT A

NOTICE OF CONVERSION

The undersigned hereby elects to convert $_________________principal amount of the Note (defined below) into that number of shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forth below, of Coates International, Ltd., a Delaware corporation (the “Borrower”), according to the conditions of the convertible note of the Borrower dated as of April 14, 2014 (the “Note”), as of the date written below.  No fee will be charged to the Holder for any conversion, except for transfer taxes, if any.

Box Checked as to applicable instructions:

o	The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal At Custodian system (“DWAC Transfer”).
	Name of DTC Prime Broker: Account Number:
o	The undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:
	Name: [NAME] Address: [ADDRESS]
	Date of Conversion:
	Applicable Conversion Price:	$
	Number of Shares of Common Stock to be Issued Pursuant to Conversion of the Notes:
	Amount of Principal Balance Due remaining Under the Note after this conversion:
	[HOLDER]
	By:_____________________________ Name:  [NAME] Title:  [TITLE] Date:  [DATE]

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EX-10.4

Exhibit 10.4

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of April 14, 2014, by and between COATES INTERNATIONAL LTD., a Delaware corporation, with headquarters located at Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719 (the “Company”), and AUCTUS PRIVATE EQUITY FUND, LLC, a Massachusetts limited liability company, with its address at 101 Arch Street, 20th Floor, Boston, MA 02110 (the “Buyer”).

WHEREAS:

A.           The Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”);

B.            Buyer desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement an 8% convertible note of the Company, in the form attached hereto as Exhibit A, in the aggregate principal amount of US$40,000 (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the “Note”), convertible into shares of common stock, $0.0001 par value per share, of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such Note.

C.            The Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Note as is set forth immediately below its name on the signature pages hereto; and

NOW THEREFORE, the Company and the Buyer severally (and not jointly) hereby agree as follows:

     1.            PURCHASE AND SALE OF NOTE.

a.      Purchase of Note.  On the Closing Date (as defined below), the Company shall issue and sell to the Buyer and the Buyer agrees to purchase from the Company such principal amount of Note as is set forth immediately below the Buyer’s name on the signature pages hereto.

b.      Form of Payment.  On the Closing Date (as defined below), (i) the Buyer shall pay the purchase price for the Note to be issued and sold to it at the Closing (as defined below) (the “Purchase Price”) by wire transfer of immediately available funds to the Company, in accordance with the Company’s written wiring instructions, against delivery of the Note in the principal amount equal to the Purchase Price as is set forth immediately below the Buyer’s name on the signature pages hereto, and (ii) the Company shall deliver such duly executed Note on behalf of the Company, to the Buyer, against delivery of such Purchase Price.

c.      Closing Date.  Subject to the satisfaction (or written waiver) of the conditions thereto set forth in Section 7 and Section 8 below, the date and time of the issuance and sale of the Note pursuant to this Agreement (the “Closing Date”) shall be 12:00 noon, Eastern Standard Time on or about April 14, 2014, or such other mutually agreed upon time.  The closing of the transactions contemplated by this Agreement (the “Closing”) shall occur on the Closing Date at such location as may be agreed to by the parties.

 2.            REPRESENTATIONS AND WARRANTIES OF THE BUYER.  The Buyer represents and warrants to the Company that:

a.      Investment Purpose.  As of the date hereof, the Buyer is purchasing the Note and the shares of Common Stock issuable upon conversion of or otherwise pursuant to the Note (including, without limitation, such additional shares of Common Stock, if any, as are issuable (i) on account of interest on the Note or (ii) as a result of the events described in Sections 1.3 and 1.4(g) of the Note, such shares of Common Stock being collectively referred to herein as the “Conversion Shares” and, collectively with the Note, the “Securities”) for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act; provided, however, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act.

b.      Accredited Investor Status.  The Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D (an “Accredited Investor”).

c.      Reliance on Exemptions.  The Buyer understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities.

d.      Information.  The Buyer and its advisors, if any, have been, and for so long as the Note remains outstanding will continue to be, furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors.  The Buyer and its advisors, if any, have been, and for so long as the Note remains outstanding will continue to be, afforded the opportunity to ask questions of the Company.  Notwithstanding the foregoing, the Company has not disclosed to the Buyer any material nonpublic information and will not disclose such information unless such information is disclosed to the public prior to or promptly following such disclosure to the Buyer.  Neither such inquiries nor any other due diligence investigation conducted by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer’s right to rely on the Company’s representations and warranties contained in Section 3 below.  The Buyer understands that its investment in the Securities involves a significant degree of risk. The Buyer is not aware of any facts that may constitute a breach of any of the Company's representations and warranties made herein.

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e.      Governmental Review.  The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities.

f.      Transfer or Re-sale.  The Buyer understands that (i) the sale or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws, and the Securities may not be transferred unless (a) the Securities are sold pursuant to an effective registration statement under the 1933 Act, (b) the Buyer shall have delivered to the Company, at the cost of the Buyer, an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in comparable transactions to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, which opinion shall be accepted by the Company, (c) the Securities are sold or transferred to an “affiliate” (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) (“Rule 144”)) of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, (d) the Securities are sold pursuant to Rule 144, or (e) the Securities are sold pursuant to Regulation S under the 1933 Act (or a successor rule) (“Regulation S”), and the Buyer shall have delivered to the Company, at the cost of the Buyer, an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in corporate transactions, which opinion shall be accepted by the Company; (ii) any sale of such Securities made in reliance on Rule 144 may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any re-sale of such Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder (in each case).  Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.

g.      Legends.  The Buyer understands that the Note and, until such time as the Conversion Shares have been registered under the 1933 Act may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Conversion Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities):

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of any Security upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for sale under an effective registration statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such holder provides the Company with an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Security may be made without registration under the 1933 Act, which opinion shall be accepted by the Company so that the sale or transfer is effected.  The Buyer agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any.  In the event that the Company does not accept the opinion of counsel, in the form, substance and scope described above, provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline (as defined in the Note), it will be considered an Event of Default pursuant to Section 3.2 of the Note.

h.     Authorization; Enforcement. This Agreement has been duly and validly authorized.  This Agreement has been duly executed and delivered on behalf of the Buyer, and this Agreement constitutes a valid and binding agreement of the Buyer enforceable in accordance with its terms.

i.      Residency.  The Buyer is a resident of the jurisdiction set forth immediately below the Buyer’s name on the signature pages hereto.

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  3.           REPRESENTATIONS AND WARRANTIES OF THE COMPANY.  The Company represents and warrants to the Buyer that:

a.      Organization and Qualification.  The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted.  Schedule 3(a) sets forth a list of all of the Subsidiaries of the Company and the jurisdiction in which each is incorporated.  The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect.  “Material Adverse Effect” means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith.  “Subsidiaries” means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest.

b.      Authorization; Enforcement.  (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Note and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Note by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Note and the issuance and reservation for issuance of the Conversion Shares issuable upon conversion or exercise thereof) have been duly authorized by the Company’s Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) this Agreement has been duly executed and delivered by the Company by its authorized representative, and such authorized representative is the true and official representative with authority to sign this Agreement and the other documents executed in connection herewith and bind the Company accordingly, and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the Note, each of such instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

c.      Capitalization.  As of the date hereof, the authorized capital stock of the Company consists of: (i) 1,000,000,000 shares of Common Stock, $0.0001 par value per share, of which 342,759,313 shares are issued and outstanding; and (ii) 100,000,000 shares of Preferred Stock, $0.001 par value per share, of which 141,472 shares are issued and outstanding. Except as disclosed in the SEC Documents, plus an additional 19,388,385 shares reserved for stock purchase warrants and 89,572,222 shares for conversion of convertible notes, and 11,797,000 shares reserved for issuance pursuant to the Company’s stock option plans, no shares are reserved for issuance pursuant to securities (other than the Note) exercisable for, or convertible into or exchangeable for shares of Common Stock and 7,750,000 shares are reserved for issuance upon conversion of the Note.  All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and non-assessable.  No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the shareholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company.  Except as disclosed in the SEC Documents, as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of its or their securities under the 1933 Act and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Note or the Conversion Shares.  The Company has filed in its SEC Documents true and correct copies of the Company’s Certificate of Incorporation as in effect on the date hereof (“Certificate of Incorporation”), the Company’s By-laws, as in effect on the date hereof (the “By-laws”), and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto.  The Company shall provide the Buyer with a written update of this representation signed by the Company’s Chief Executive on behalf of the Company as of the Closing Date.

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d.      Issuance of Shares.  The Conversion Shares are duly authorized and reserved for issuance and, upon conversion of the Note in accordance with its respective terms, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof.

e.      Acknowledgment of Dilution.  The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares upon conversion of the Note.  The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Note in accordance with this Agreement, the Note is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company.

f.      No Conflicts.  The execution, delivery and performance of this Agreement, the Note by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance of the Conversion Shares) will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws, or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii)  result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect).  Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being conducted, and shall not be conducted so long as the Buyer owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity.  Except as specifically contemplated by this Agreement and as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self-regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement, the Note in accordance with the terms hereof or thereof or to issue and sell the Note in accordance with the terms hereof and to issue the Conversion Shares upon conversion of the Note.  All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof.  The Company is not in violation of the listing requirements of the Over-the-Counter Bulletin Board (the “OTCBB”), the OTCQB or any similar quotation system, and does not reasonably anticipate that the Common Stock will be delisted by the OTCBB, the OTCQB or any similar quotation system, in the foreseeable future.  The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

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g.      SEC Documents; Financial Statements.  The Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein as the “SEC Documents”).  The Buyer acknowledges that it has been provided full access to the SEC Documents for its review and its records at the SEC’s website for this purpose as www.sec.gov, including such exhibits and incorporated documents.  As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  None of the statements made in any such SEC Documents is, or has been, required to be amended or updated under applicable law (except for such statements as have been amended or updated in subsequent filings prior to the date hereof).  As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto.  Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved  and fairly present in all material respects the  financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).  Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 2013, and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. The Company is subject to the reporting requirements of the 1934 Act. For the avoidance of doubt, filing of the documents required in this Section 3(g) via the SEC’s Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) shall satisfy all delivery requirements of this Section 3(g).

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h.      Absence of Certain Changes.  Since December 31, 2013, there has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations, prospects or 1934 Act reporting status of the Company or any of its Subsidiaries.

i.      Absence of Litigation.  There is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such, that could have a Material Adverse Effect.  Schedule 3(i) contains a complete list and summary description of any pending or, to the knowledge of the Company, threatened proceeding against or affecting the Company or any of its Subsidiaries, without regard to whether it would have a Material Adverse Effect.  The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

j.      Patents, Copyrights, etc.  The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all patents, patent applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights (“Intellectual Property”) necessary to enable it to conduct its business as now operated (and, as presently contemplated to be operated in the future). Except as disclosed in the SEC Documents, there is no claim or action by any person pertaining to, or proceeding pending, or to the Company’s knowledge threatened, which challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct its business as now operated (and, as presently contemplated to be operated in the future); to the best of the Company’s knowledge, the Company’s or its Subsidiaries’ current and intended products, services and processes do not infringe on any Intellectual Property or other rights held by any person; and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing.  The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual Property.

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k.      No Materially Adverse Contracts, Etc.  Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company’s officers has or is expected in the future to have a Material Adverse Effect.  Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company’s officers has or is expected to have a Material Adverse Effect.

l.      Tax Status.  The Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.  The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax.  None of the Company’s tax returns is presently being audited by any taxing authority.

m.      Certain Transactions.  Except for arm’s length transactions pursuant to which the Company or any of its Subsidiaries makes payments in the ordinary course of business upon terms no less favorable than the Company or any of its Subsidiaries could obtain from third parties and other than the grant of stock options disclosed on Schedule 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

n.      Disclosure.  All information relating to or concerning the Company or any of its Subsidiaries set forth in this Agreement and provided to the Buyer pursuant to Section 2(d) hereof and otherwise in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading.  No event or circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed (assuming for this purpose that the Company’s reports filed under the 1934 Act are being incorporated into an effective registration statement filed by the Company under the 1933 Act).

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o.      Acknowledgment Regarding Buyer’ Purchase of Securities.  The Company acknowledges and agrees that the Buyer is acting solely in the capacity of arm’s length purchasers with respect to this Agreement and the transactions contemplated hereby.  The Company further acknowledges that the Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by the Buyer or any of its respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyer’ purchase of the Securities.  The Company further represents to the Buyer that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.

p.      No Integrated Offering.  Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the Securities to the Buyer.  The issuance of the Securities to the Buyer will not be integrated with any other issuance of the Company’s securities (past, current or future) for purposes of any shareholder approval provisions applicable to the Company or its securities.

q.      No Brokers.  The Company has taken no action which would give rise to any claim by any person for brokerage commissions, transaction fees or similar payments relating to this Agreement or the transactions contemplated hereby.

r.      Permits; Compliance.  The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the “Company Permits”), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits.  Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect.  Since December 31, 2013, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect.

s.      Environmental Matters.

(i)           There are, to the Company’s knowledge, with respect to the Company or any of its Subsidiaries or any predecessor of the Company, no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company’s knowledge, threatened in connection with any of the foregoing.  The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

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(ii)          Other than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company or any of its Subsidiaries, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company’s or any of its Subsidiaries’ business.

(iii)         There are no underground storage tanks on or under any real property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law.

t.      Title to Property.  Except as disclosed in the SEC Documents the Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects or such as would not have a Material Adverse Effect.  Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect.

u.      Internal Accounting Controls.  Except as disclosed in the SEC Documents the Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company’s board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

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v.      Foreign Corrupt Practices.  Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

w.      Solvency.  The Company (after giving effect to the transactions contemplated by this Agreement) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured) and currently the Company has no information that would lead it to reasonably conclude that the Company would not, after giving effect to the transaction contemplated by this Agreement, have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts mature.  The Company did not receive a qualified opinion from its auditors with respect to its most recent fiscal year end and, after giving effect to the transactions contemplated by this Agreement, does not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year. For the avoidance of doubt any disclosure of the Borrower’s ability to continue as a “going concern” shall not, by itself, be a violation of this Section 3(w).

x.      No Investment Company.  The Company is not, and upon the issuance and sale of the Securities as contemplated by this Agreement will not be an “investment company” required to be registered under the Investment Company Act of 1940 (an “Investment Company”).  The Company is not controlled by an Investment Company.

y.       Insurance.  The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. Upon written request the Company will provide to the Buyer true and correct copies of all policies relating to directors’ and officers’ liability coverage, errors and omissions coverage, and commercial general liability coverage.

z.      Shell Status.  The Company represents that it is not a “shell” issuer and has never been a “shell” issuer, or that if it previously has been a “shell” issuer, that at least twelve (12) months have passed since the Company has reported Form 10 type information indicating that it is no longer a “shell” issuer.

aa.    Breach of Representations and Warranties by the Company.  If the Company breaches any of the representations or warranties set forth in this Section 3, and in addition to any other remedies available to the Buyer pursuant to this Agreement, it will be considered an Event of Default under Section 3.5 of the Note.

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  4.           COVENANTS.

a.      Best Efforts.  The parties shall use their commercially reasonable best efforts to satisfy timely each of the conditions described in Section 7 and 8 of this Agreement.

b.      Reserved.

c.      Use of Proceeds.  The Company shall use the proceeds from the sale of the Note for working capital and other general corporate purposes and shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person (except in connection with its currently existing direct or indirect Subsidiaries).

d.      Notice of Subsequent Transaction.  While any amount remains outstanding under the Note, the Company shall, prior to the closing of any equity financing (including debt with an equity component) (“Future Offerings”), provide written notice to the Buyer describing the proposed Future Offering, including the terms and conditions thereof.  In the event the terms and conditions of a proposed Future Offering are amended in any respect after delivery of the notice to the Buyer concerning the proposed Future Offering, the Company shall deliver a new notice to the Buyer describing the amended terms and conditions of the proposed Future Offering.  The foregoing sentence shall apply to successive amendments to the terms and conditions of any proposed Future Offering.

e.      Expenses.  At the Closing, the Company shall reimburse Buyer for expenses incurred by them in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the other agreements to be executed in connection herewith (“Documents”), including, without limitation, reasonable attorneys’ and consultants’ fees and expenses, transfer agent fees, fees for stock quotation services, fees relating to any amendments or modifications of the Documents or any consents or waivers of provisions in the Documents, fees for the preparation of opinions of counsel, escrow fees, and costs of restructuring the transactions contemplated by the Documents.  When possible, the Company must pay these fees directly, including, but not limited to, any and all wire fees, otherwise the Company must make immediate payment for reimbursement to the Buyer for all fees and expenses immediately upon written notice by the Buyer or the submission of an invoice by the Buyer.  The Company’s obligation with respect to this transaction is to reimburse Buyer’s expenses shall be $2,750 plus the cost of wire fees.

f.      Financial Information.  The Company agrees to send or make available the following reports to the Buyer until the Buyer transfers, assigns, or sells all of the Securities: (i) within ten (10) days after the filing with the SEC, a copy of its Annual Report on Form 10-K its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K; (ii) within one (1) day after release, copies of all press releases issued by the Company or any of its Subsidiaries; and (iii) contemporaneously with the making available or giving to the shareholders of the Company, copies of any notices or other information the Company makes available or gives to such shareholders.  For the avoidance of doubt, filing the documents required in (i) above via EDGAR or releasing any documents set forth in (ii) above via a recognized wire service shall satisfy the delivery requirements of this Section 4(f).

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g.      Listing.  The Company shall promptly secure the listing of the Conversion Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and, so long as the Buyer owns any of the Securities, shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable upon conversion of the Note.  The Company will obtain and, so long as the Buyer owns any of the Securities, maintain the listing and trading of its Common Stock on the OTCBB, OTCQB or any equivalent replacement exchange, the Nasdaq National Market (“Nasdaq”), the Nasdaq SmallCap Market (“Nasdaq SmallCap”), the New York Stock Exchange (“NYSE”), or the NYSE MKT and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Financial Industry Regulatory Authority (“FINRA”) and such exchanges, as applicable.  The Company shall promptly provide to the Buyer copies of any material notices it receives from the OTCBB, OTCQB and any other exchanges or quotation systems on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems.

h.      Corporate Existence.  So long as the Buyer beneficially owns any Note, the Company shall maintain its corporate existence and shall not sell all or substantially all of the Company’s assets, except in the event of a merger or consolidation or sale of all or substantially all of the Company’s assets, where the surviving or successor entity in such transaction (i) assumes the Company’s obligations hereunder and under the agreements and instruments entered into in connection herewith and (ii) is a publicly traded corporation whose Common Stock is listed for trading on the OTCBB, OTCQB, Nasdaq, NasdaqSmallCap, NYSE or AMEX.

i.      No Integration.  The Company shall not make any offers or sales of any security (other than the Securities) under circumstances that would require registration of the Securities being offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be integrated with any other offering of securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities.

j.      Failure to Comply with the 1934 Act.  So long as the Buyer beneficially owns the Note, the Company shall comply with the reporting requirements of the 1934 Act; and the Company shall continue to be subject to the reporting requirements of the 1934 Act.

k.      Trading Activities.  Neither the Buyer nor its affiliates has an open short position (or other hedging or similar transactions) in the common stock of the Company and the Buyer agree that it shall not, and that it will cause its affiliates not to, engage in any short sales of or hedging transactions with respect to the common stock of the Company.

l.      Breach of Covenants.  If the Company breaches any of the covenants set forth in this Section 4, and in addition to any other remedies available to the Buyer pursuant to this Agreement, it will be considered an Event of Default under Section 3.4 of the Note.

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  5.           Advance Fee.  Upon Closing, the Company shall pay Two Thousand Five Hundred and No/100 United States Dollars (US$2,500) to Auctus Private Equity Management, Inc. (“Auctus Management”), as a fee for services rendered in connection herewith (the “Advance Fee”).  The Advance Fee shall be offset against the purchase price of the Note and shall be paid to Auctus Management upon the execution hereof.  The Buyer acknowledges that this is a one-time fee which shall not be imposed in connection with future transactions between the parties.

  6.           Transfer Agent Instructions.  In the event that the Borrower proposes to replace its transfer agent, and provided the successor transfer agent policies permit it to honor irrevocable instructions from issuers it represents, the Borrower shall provide, prior to the effective date of such replacement, fully executed irrevocable instructions to its transfer agent to issue certificates, registered in the name of the Buyer or its nominee, for the Conversion Shares in such amounts as specified from time to time by the Buyer to the Company upon conversion of the Note in accordance with the terms thereof (the “Irrevocable Transfer Agent Instructions”)in a form agreed upon by the parties signed, by the successor transfer agent to Borrower and the Borrower. Prior to registration of the Conversion Shares under the 1933 Act or the date on which the Conversion Shares may be sold pursuant to Rule 144 without any restriction as to the number of Securities as of a particular date that can then be immediately sold, all such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement.  The Company warrants that: (i) no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Conversion Shares, prior to registration of the Conversion Shares under the 1933 Act or the date on which the Conversion Shares may be sold pursuant to Rule 144 without any restriction as to the number of Securities as of a particular date that can then be immediately sold), will be given by the Company to its successor transfer agent, if applicable, and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Note; (ii) it will not direct its transfer agent not to transfer or delay, impair, and/or hinder its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for Conversion Shares to be issued to the Buyer upon conversion of or otherwise pursuant to the Note as and when required by the Note and this Agreement; and (iii) it will not fail to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any Conversion Shares issued to the Buyer upon conversion of or otherwise pursuant to the Note as and when required by the Note and this Agreement.  Nothing in this Section shall affect in any way the Buyer’s obligations and agreement set forth in Section 2(g) hereof to comply with all applicable prospectus delivery requirements, if any, upon re-sale of the Securities.  If the Buyer provides the Company, at the cost of the Buyer, with (i) an opinion of counsel in form, substance and scope customary for opinions in comparable transactions, to the effect that a public sale or transfer of such Securities may be made without registration under the 1933 Act and such sale or transfer is effected or (ii) the Buyer provides reasonable assurances that the Securities can be sold pursuant to Rule 144, the Company shall permit the transfer, and, in the case of the Conversion Shares, promptly instruct its transfer agent to issue one or more certificates, free from restrictive legend, in such name and in such denominations as specified by the Buyer.  The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer, by vitiating the intent and purpose of the transactions contemplated hereby.  Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section may be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section, that the Buyer shall be entitled, in addition to all other available remedies, to an injunction restraining any breach and requiring immediate transfer, without the necessity of showing economic loss and without any bond or other security being required.

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  7.           CONDITIONS PRECEDENT TO THE COMPANY’S OBLIGATIONS TO SELL.  The obligation of the Company hereunder to issue and sell the Note to the Buyer at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions thereto, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion:

a.      The Buyer shall have executed this Agreement and delivered the same to the Company.

b.      The Buyer shall have delivered the Purchase Price in accordance with Section 1(b) above.

c.      The representations and warranties of the Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Buyer at or prior to the Closing Date.

d.      No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

  8.           CONDITIONS PRECEDENT TO THE BUYER’S OBLIGATION TO PURCHASE.  The obligation of the Buyer hereunder to purchase the Note at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions, provided that these conditions are for the Buyer’s sole benefit and may be waived by the Buyer at any time in its sole discretion:

a.      The Company shall have executed this Agreement and delivered the same to the Buyer.

b.      The Company shall have delivered to the Buyer duly executed Note (in such denominations as the Buyer shall request) in accordance with Section 1(b) above.

c.      The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a majority-in-interest of the Buyer, shall have been delivered to and acknowledged in writing by the Company’s Transfer Agent.

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d.      The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date.  The Buyer shall have received a certificate or certificates, executed by the chief executive officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Buyer including, but not limited to certificates with respect to the Company’s Certificate of Incorporation, By-laws and Board of Directors’ resolutions relating to the transactions contemplated hereby.

e.      No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

f.      No event shall have occurred which could reasonably be expected to have a Material Adverse Effect on the Company including but not limited to a change in the 1934 Act reporting status of the Company or the failure of the Company to be timely in its 1934 Act reporting obligations.

g.      The Conversion Shares shall have been authorized for quotation on the OTCBB, OTCQB or any similar quotation system and trading in the Common Stock on the OTCBB, OTCQB or any similar quotation system shall not have been suspended by the SEC or the OTCBB, OTCQB or any similar quotation system.

h.      The Buyer shall have received an officer’s certificate described in Section 3(c) above, dated as of the Closing Date.

  9.           GOVERNING LAW; MISCELLANEOUS.

a.      Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws.  Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of Massachusetts or in the federal courts located in the state of Massachusetts.  The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens.  The Company and Buyer waive trial by jury.  The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs.  In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law.  Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement.   Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.

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b.      Counterparts; Signatures by Facsimile.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party.  This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

c.      Headings.  The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.

d.      Severability.  In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law.  Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.

e.      Entire Agreement; Amendments.  This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters.  No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the majority in interest of the Buyer and the Company.

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f.      Notices.  All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice.  Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be:

If to the Company, to:

Coates International Ltd.

Highway 34 & Ridgewood Road

Wall Township, NJ 07719

Attn: Barry C. Kaye; Chief Financial Officer

Facsimile: (732) 449-0764

If to the Buyer:

Auctus Private Equity Fund, LLC

101 Arch Street, 20th Floor

Boston, MA 02110

Attn:Lou Posner

Facsimile: (617) 532-6420

With a copy by fax only to (which copy shall not constitute notice):

Lucosky Brookman LLP

101 Wood Avenue South, 5th Floor

Woodbridge, NJ 08830

Attn: Joseph M. Lucosky, Esq.

Facsimile: (732) 395-4401

Each party shall provide notice to the other party of any change in address.

g.      Successors and Assigns.  This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.  Neither the Company nor the Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other.  Notwithstanding the foregoing, subject to Section 2(f), the Buyer may assign its rights hereunder to any person that purchases Securities in a private transaction from the Buyer or to any of its “affiliates,” as that term is defined under the 1934 Act, with the prior written consent of the Company, which consent shall not be unreasonably withheld.

h.      Third Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

i.      Survival.  The representations and warranties of the Company and the agreements and covenants set forth in this Agreement shall survive the closing hereunder not withstanding any due diligence investigation conducted by or on behalf of the Buyer.  The Company agrees to indemnify and hold harmless the Buyer and all their officers, directors, employees and agents for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in this Agreement or any of its covenants and obligations under this Agreement, including advancement of expenses as they are incurred.

18

j.      Further Assurances.  Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

k.      No Strict Construction.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

l.      Remedies.  The Company acknowledges that a breach by it of its obligations hereunder may cause irreparable harm to the Buyer by vitiating the intent and purpose of the transaction contemplated hereby.  Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, regardless of whether the breach has, in fact, caused irreparable harm to the Buyer, that the Buyer shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.

m.      Publicity. The Company, and the Buyer shall have the right to review a reasonable period of time before issuance of any press releases, SEC, OTCQB or FINRA filings, or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of the Buyer, to make any press release or SEC, OTCQB (or other applicable trading market) or FINRA filings with respect to such transactions as is required by applicable law and regulations (although the Buyer shall be consulted by the Company in connection with any such press release prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon).  The Buyer hereby acknowledges that it understands that Company is required to disclose the material provisions of the transaction contemplated hereby in the notes to its financial statements for any period being reported on, in which as there is, or was, any remaining unpaid balance due to the Buyer and that the Company is also required to file a conformed copy of the Promissory Note and/or Securities Purchase Agreement as exhibits to its next quarterly report on Form 10-Q to be filed with the Securities and Exchange Commission. The required disclosures in the notes to its financial statements as discussed in this preceding sentence shall not be required to be discussed with, or approved by, the Buyer.

19

IN WITNESS WHEREOF, the undersigned Buyer and the Company have caused this Agreement to be duly executed as of the date first above written.

COATES INTERNATIONAL, LTD.
By:	/s/ Barry C. Kaye
Name:	Barry C. Kaye
Title:	Chief Financial Officer

AUCTUS PRIVATE EQUITY FUND, LLC
By:	/s/ Lou Posner
Name:	Lou Posner
Title:	Managing Director

AGGREGATE SUBSCRIPTION AMOUNT:

Aggregate Principal Amount of Note:	US $40,000
Aggregate Purchase Price:	US $40,000

20 

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, George J. Coates, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Coates International, Ltd. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)           Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2014	/s/ George J. Coates
	George J. Coates
	President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED

 PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Barry C. Kaye, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Coates International, Ltd. (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)           Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2014	/s/ Barry C. Kaye
	Barry C. Kaye
	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Coates International, Ltd. (the “Company”) on Form 10-Q for the period ended March 31, 2014 (the “Report”), I, George J. Coates, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

1.           The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2.           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 14, 2014	/s/ George J. Coates
	George J. Coates
	President and Chief Executive Officer (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Coates International, Ltd. (the “Company”) on Form 10-Q for the period ended March 31, 2014 (the “Report”), I, Barry C. Kaye, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

1.           The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

2.           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 14, 2014	/s/Barry C. Kaye
	Barry C. Kaye
	Treasurer and Chief Financial Officer (Principal Accounting Officer)

XML

Stock Options (Tables)

3 Months Ended

Mar. 31, 2014

Stock Options [Abstract]

Summary of activity in company's stock option plan

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, 3/31/14	$	0.06 -1.00		11,797,000		14		11,697,000		$	0.019		$	0.180

Summary of assumptions used to determine weighted average fair value

●	Historical stock price volatility	139-325%
●	Risk-free interest rate	0.21%-4.64%
●	Expected life (in years)	4
●	Dividend yield	0.00%

XML

10% Convertible Note to Related Party (Details) (director [Member], 10% Convertible Note [Member], USD $)	3 Months Ended
	Mar. 31, 2014
director [Member] | 10% Convertible Note [Member]
Convertible Note To Related Party Textual [Abstract]
Interest Rate	10.00%
Conversion price	$ 0.45
Shares of common stock issued upon conversion of notes	22,222
Accrued interest	$ 7,000

XML

Accounts Payable and Accrued Liabilities (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Summary of accounts payable and accrued liabilities
Legal and professional fees	$ 1,391,000	$ 1,388,000
General and administrative expenses	343,000	301,000
Accrued interest expense	297,000	264,000
Research and development costs	115,000	115,000
Accrued compensation	60,000	196,000
Total	$ 2,206,000	$ 2,264,000

XML

Subsequent Events (Details) (USD $)	3 Months Ended		0 Months Ended	1 Months Ended	0 Months Ended		1 Months Ended	0 Months Ended		1 Months Ended			1 Months Ended		0 Months Ended			1 Months Ended			1 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	May 09, 2014 Subsequent Event [Member] Barry C. Kaye [Member]	Apr. 30, 2014 Subsequent Event [Member] Barry C. Kaye [Member]	May 09, 2014 Subsequent Event [Member] George J. Coates [Member]	Apr. 28, 2014 Subsequent Event [Member] George J. Coates [Member]	Apr. 30, 2014 Subsequent Event [Member] George J. Coates [Member] Series A Preferred Stock [Member]	May 09, 2014 Subsequent Event [Member] Bernadette Coates [Member]	May 13, 2014 Subsequent Event [Member] Gregory G. Coates [Member]	Apr. 30, 2014 Subsequent Event [Member] Gregory G. Coates [Member]	Apr. 29, 2014 Subsequent Event [Member] Gregory G. Coates [Member]	Apr. 28, 2014 Subsequent Event [Member] Gregory G. Coates [Member]	Apr. 30, 2014 Subsequent Event [Member] Dutchess Opportunity Fund II, LP [Member]	Apr. 30, 2014 Subsequent Event [Member] Michael J Suchar [Member]	Apr. 29, 2014 Subsequent Event [Member] Promissory Note [Member]	Apr. 29, 2014 Subsequent Event [Member] Promissory Note [Member] Maximum [Member]	Apr. 29, 2014 Subsequent Event [Member] Promissory Note [Member] Minimum [Member]	Apr. 30, 2014 Subsequent Event [Member] 8 % Convertible Note [Member]	Apr. 30, 2014 Subsequent Event [Member] 17% Promissory Note [Member] George J. Coates [Member]	May 09, 2014 Subsequent Event [Member] 17% Promissory Note [Member] George J. Coates [Member]	Apr. 30, 2014 Subsequent Event [Member] 17% Promissory Note [Member] Bernadette Coates [Member]	Apr. 30, 2014 Subsequent Event [Member] 9.75 % Convertible Note [Member]	Apr. 30, 2014 Subsequent Event [Member] 12% Convertible Notes with 10.5% discount [Member]	Apr. 30, 2014 Subsequent Event [Member] 12% Convertible Note with 5% discount [Member]
Subsequent Events (Textual)
Principal Amount														$ 10,000				$ 40,000		$ 425,000		$ 107,000	$ 67,000	$ 35,000
Maturity date, description																		August 2015				August 2015	August 2015	August 2015
Proceeds from issuance of promissory note																		35,000,000				100,000	60,000	33,333
Debt Instrument, Payment Terms																		The Company may prepay the convertible note during the first 180 days the note is outstanding by paying 130% during the first 60 days, increasing in 5% increments each month to a maximum of 150% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default.
Shares of common stock issued upon conversion of notes																		2,059,138					3,050,000
Additional deferred compensation			16,000		29,000			8,000
Total deferred compensation			123,000		322,000			81,000
Principal amount of debt, converted into shares of common stock									50,000									55,000					58,000
Repayment of promissory notes																			25,000		15,000
Registered shares of common stock issued under equity line of credit													2,561,713
Proceeds from common stock issued under equity line of credit													104,000
Demand Loans						950,000						1,462,000
Decrease in Additional Capital												1,462,000
Other current Liabilities											1,462,000				50,000
Interest bearing Promisorry note converted to common stock															50,000
Promissory notes, interest rate									17.00%					10.00%	17.00%								12.00%	12.00%
Conversion price of debt instrument															$ 0.0252
Increase in stockholders deficiency									425,000
Increase in current liabilities	117,016								425,000
Share-based Compensation expense									1,425,000
Shares of common stock issued upon conversion of notes to George J. Coates															39,682,540
Percentage of non - affiliate shareholders before issuance of shares of common stock to George J. Coates																32.90%
Percentage of non - affiliate shareholders afterre issuance of shares of common stock to George J. Coates																	29.50%
Convertible Note Agreement Description																						The Agreement provides that the investor will fund up to $317,000, including an initial tranche of $107,000, which was funded at the closing of the Agreement and four additional tranches of $52,500 each. The investor may convert the convertible notes at any time beginning six months after funding, into shares of the Company's common stock at a fixed rate of $0.055 per share.
Debt conversion description																		The lender may convert the promissory notes into shares of the Company's common stock at any time beginning 180 days after the date of funding. The conversion rate is equal to 67.5% of the average of the two lowest trading prices of the Company's common stock during the 25 trading day period prior to the date of conversion.					The terms and conditions of the 12% convertible notes with a 58% conversion rate are discussed in more detail in Note 13.	The terms and conditions of these 12% convertible notes with a 70% conversion rate are discussed in more detail in Note 13.
Common stock reserved for convertible note																		7,750,000
Remaining balance that can be funded under convertible note facility agreement																							335,000	100,000
Remaining balance for promissory note																						206,000	117,000	30,000
Description of voting rights of peferred stockholder							The additional shares of Series A Preferred Stock entitle Mr. Coates to 70,700,000 additional votes on all matters brought before the shareholder for a vote.
Stock option, granted				351,500						351,500
Option exercise price				$ 0.028						$ 0.028
Option expire date				Dec. 31, 2029						Dec. 31, 2029
Loss on conversion of convertible notes	$ (36,624)

XML

Unearned Revenue (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Unearned Revenue [Abstract]
Non-refundable deposits	$ 19,000	$ 19,000

XML

Property, Plant and Equipment (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Summary of Property, plant and equipment
Property, plant and equipment, Gross	$ 2,979,000	$ 2,979,000
Less: Accumulated depreciation	(815,000)	(799,000)
Total	2,164,000	2,180,000
Land [Member]
Summary of Property, plant and equipment
Property, plant and equipment, Gross	1,235,000	1,235,000
Building [Member]
Summary of Property, plant and equipment
Property, plant and equipment, Gross	964,000	964,000
Building Improvements [Member]
Summary of Property, plant and equipment
Property, plant and equipment, Gross	83,000	83,000
Machinery and Equipment [Member]
Summary of Property, plant and equipment
Property, plant and equipment, Gross	658,000	658,000
Furniture and Fixtures [Member]
Summary of Property, plant and equipment
Property, plant and equipment, Gross	$ 39,000	$ 39,000

XML

Inventory (Tables)

3 Months Ended

Mar. 31, 2014

Inventory [Abstract]

Summary of inventory

	March 31, 2014			December 31, 2013
Raw materials	$	440,000		$	440,000
Work-in-process		59,000			59,000
Finished goods		-			-
Reserve for obsolescence		(387,000	)		(387,000	)
Total	$	112,000		$	112,000

XML

Contractual Obligations (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2014
Contractual Obligations And Commitments [Line Items]
Compensation cost related to nonvested stock options	$ 3,000
Recognition period for compensation expense	8 months

XML

Sublicensing Fee Revenue

3 Months Ended

Mar. 31, 2014

Sublicensing Fee Revenue [Abstract]

SUBLICENSING FEE REVENUE

20.   SUBLICENSING FEE REVENUE

Sublicensing fee revenue for the three months ended March 31, 2014 and 2013 amounted to $5,000 and 5,000, respectively. The Company is recognizing the license deposit of $300,000 on the Canadian License as revenue on a straight-line basis over the remaining life until 2027 of the last CSRV® technology patent in force at that date.

XML

Finance Lease Obligation (Details) (Finance Lease Obligations [Member], USD $)	1 Months Ended	3 Months Ended
	Aug. 31, 2013	Mar. 31, 2014
Finance Lease Obligation Textual [Abstract]
Deposits on lease	$ 15,000
Transaction costs	5,000
Equipment, lease back period		Over a 24-month period, with an option to extend the lease for an additional six months.
Monthly lease payment	8,000
Interest rate on lease	36.60%
Unamortized discount on finance lease obligation	20,000
Amortized period of interest expense		Over the 30-month term of the lease.
Financial lease, interest expense		14,000
Paradigm Commercial Capital Group Corp [Member]
Finance Lease Obligation Textual [Abstract]
Cash proceeds for research and development and manufacturing equipment	$ 133,000

XML

Licensing Agreement and Deferred Licensing Costs (Details) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Licensing Agreement and Deferred Licensing Costs (Textual)
Deferred licensing costs	$ 50,000
Amortization expense	$ 1,000	$ 1,000

XML

Contractual Obligations (Tables)

3 Months Ended

Mar. 31, 2014

Contractual Obligations [Abstract]

Contractual obligations and commitments

			Due Within
	Total		2014		2015		2016
Mortgage loan payable	$	1,498,000	$	1,498,000	$	-	$	-
Promissory notes to related parties		558,000		558,000		-		-
Convertible promissory notes		208,000		173,000		35,000		-
Finance lease obligation		133,000		39,000		72,000		22,000
Settlement of litigation		60,000		50,000		10,000		-
10% promissory note		10,000		10,000		-		-
Total	$	2,467,000	$	2,328,000	$	117,000	$	22,000

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Convertible Promissory Notes and Embedded Derivative Liability (Details) (USD $)	3 Months Ended
	Mar. 31, 2014		Dec. 31, 2013
Debt Instrument [Line Items]
Principal Amount	$ 207,000		$ 272,000
Embedded Derivative Liability	254,000		367,000
Convertible Promissory Notes [Member]
Debt Instrument [Line Items]
Unamortized Discount	72,000		147,000
1/21/14 [Member]
Debt Instrument [Line Items]
Date Issued	Jan. 21, 2014
Principal Amount	35,000		0
Nominal Interest Rate	12.00%
Effective Interest Rate(1)	147.00%	[1]
Unamortized Discount	26,000		0
Embedded Derivative Liability	41,000		0
12/11/13 [Member]
Debt Instrument [Line Items]
Date Issued	Dec. 11, 2013
Principal Amount	28,000		28,000
Nominal Interest Rate	10.00%
Effective Interest Rate(1)	134.00%	[1]
Unamortized Discount	11,000		22,000
Embedded Derivative Liability	37,000		43,000
12/10/13 [Member]
Debt Instrument [Line Items]
Date Issued	Dec. 10, 2013
Principal Amount	28,000		28,000
Nominal Interest Rate	12.00%
Effective Interest Rate(1)	117.00%	[1]
Unamortized Discount	9,000		19,000
Embedded Derivative Liability	44,000		45,000
12/9/13 [Member]
Debt Instrument [Line Items]
Date Issued	Dec. 09, 2013
Principal Amount	28,000		28,000
Nominal Interest Rate	10.00%
Effective Interest Rate(1)	134.00%	[1]
Unamortized Discount	11,000		22,000
Embedded Derivative Liability	37,000		43,000
11/27/13 [Member]
Debt Instrument [Line Items]
Date Issued	Nov. 27, 2013
Principal Amount	32,000		32,000
Nominal Interest Rate	8.00%
Effective Interest Rate(1)	133.00%	[1]
Unamortized Discount	11,000		25,000
Embedded Derivative Liability	33,000		33,000
10/11/13 [Member]
Debt Instrument [Line Items]
Date Issued	Oct. 11, 2013
Principal Amount	47,000		47,000
Nominal Interest Rate	8.00%
Effective Interest Rate(1)	147.00%	[1]
Unamortized Discount	4,000		31,000
Embedded Derivative Liability	49,000		48,000
8/14/13 [Member]
Debt Instrument [Line Items]
Date Issued	Aug. 14, 2013
Principal Amount	9,000		28,000
Nominal Interest Rate	12.00%
Effective Interest Rate(1)	147.00%	[1]
Unamortized Discount			14,000
Embedded Derivative Liability	13,000		45,000
8/8/13 [Member]
Debt Instrument [Line Items]
Date Issued	Aug. 08, 2013
Principal Amount			53,000
Nominal Interest Rate	8.00%
Effective Interest Rate(1)	147.00%	[1]
Unamortized Discount			14,000
Embedded Derivative Liability			53,000
6/4/13 [Member]
Debt Instrument [Line Items]
Date Issued	Mar. 21, 2013
Principal Amount			28,000
Nominal Interest Rate	12.00%
Effective Interest Rate(1)	92.00%	[1]
Unamortized Discount
Embedded Derivative Liability			45,000
3/21/13 [Member]
Debt Instrument [Line Items]
Date Issued	Mar. 21, 2013
Principal Amount
Nominal Interest Rate	12.00%
Effective Interest Rate(1)	76.00%	[1]
Unamortized Discount
Embedded Derivative Liability			$ 12,000

[1] (1) The effective interest rate reflects the rate required to fully amortize the unamortized discount over the six-month period until the Notes become convertible.

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Related Party Transactions (Details) (USD $)	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013
George J Coates [Member]
Summary of approximate amount of base compensation and benefits
Base compensation and benefits	$ 4,000	[1],[2],[3],[4],[5]	$ 29,000	[1],[2],[3],[4],[5]
Gregory Coates [Member]
Summary of approximate amount of base compensation and benefits
Base compensation and benefits	44,000		45,000
Bernadette Coates [Member]
Summary of approximate amount of base compensation and benefits
Base compensation and benefits	$ 1,000	[6]	$ 13,000	[6]

[1] For the three months ended March 31, 2014 and 2013, George J. Coates earned additional base compensation of $63,000 and $43,000, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

[2] For the three months ended March 31, 2014, George J. Coates was awarded 20,708 shares of Series A Preferred Stock for anti-dilution protection related to new shares of common stock issued in 2014. The estimated fair market value of these shares amounted to $52,000.

[3] George J. Coates was awarded 6,705,446 unregistered shares of the Company's common stock for anti-dilution protection related to new shares of common stock issued in 2013. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

[4] In January 2013, the Company issued 20,895,046 unregistered shares of its common stock to George J. Coates in satisfaction of a deferred compensation liability consisting of 20,275,046 shares for anti-dilution protection for the year ended December 31, 2012 and a 620,000 share stock award originally granted in 2011. The value of these shares, based on the closing trading price on the dates of the anti-dilution or the date of the stock award was $1,761,000, of which $1,674,000 and $87,000 was charged to stock compensation expense during the years ended December 31, 2012 and 2011, respectively. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

[5] During the three months ended March 31, 2013, the Company recorded stock-based compensation expense amounting to $29,000 in connection with employee stock options granted to George J. Coates during 2012.

[6] For the three months ended March 31, 2014 and 2013, Bernadette Coates earned additional base compensation of $17,000 and $6,000, respectively, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

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Loss Per Share (Details Textual) (USD $)	Mar. 31, 2014
Income (Loss) Per Share (Textual)
Convertible promissory notes outstanding eligible for conversion	$ 207,000
10,000, 10% Convertible promissory note
Income (Loss) Per Share (Textual)
Promissory notes, interest rate	10.00%
Convertible promissory notes outstanding eligible for conversion	$ 10,000
8% Convertible promissory notes with 61% conversion discount
Income (Loss) Per Share (Textual)
Promissory notes, interest rate	8.00%
Conversion discount	61.00%
8% Convertible promissory notes with 70% conversion discount
Income (Loss) Per Share (Textual)
Promissory notes, interest rate	8.00%
Conversion discount	70.00%
10% Convertible promissory notes
Income (Loss) Per Share (Textual)
Promissory notes, interest rate	10.00%
12% Convertible promissory notes
Income (Loss) Per Share (Textual)
Promissory notes, interest rate	12.00%

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Property, Plant and Equipment (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Property, Plant and Equipment (Textual)
Depreciation expense	$ 16,000	$ 16,000

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Licensing Agreement and Deferred Licensing Costs

3 Months Ended

Mar. 31, 2014

Licensing Agreement and Deferred Licensing Costs [Abstract]

LICENSING AGREEMENT AND DEFERRED LICENSING COSTS

4.   LICENSING AGREEMENT AND DEFERRED LICENSING COSTS

The Company holds a manufacturing, use, lease and sale license from George J. Coates and Gregory 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 Coates granted to the Company an exclusive, perpetual, royalty-free, fully paid-up license to the 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 Coates.

Under the License Agreement, George J. Coates and Gregory Coates agreed that they will not grant any licenses to any other party with respect to the CSRV® Intellectual Property.

At March 31, 2014, deferred licensing costs, comprised of expenditures for patent costs incurred pursuant to the CSRV® licensing agreement, net of accumulated amortization, amounted to $50,000. Amortization expense for the three months ended March 31, 2014 and 2013 amounted to $1,000 and $1,000, respectively.

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Sublicensing Fee Revenue (Details) (Sublicensing Fee Revenue [Member], USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Sublicensing Fee Revenue [Member]
Sublicensing Fee Revenue [Line Items]
Sublicensing fee revenue	$ 5,000	$ 5,000
Sublicense deposit received as down payment on Canadian License	$ 300,000	$ 300,000
Amortization Method, Description	Straight-line basis over the remaining life until 2027	Straight-line basis over the remaining life until 2027

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Agreements Assigned to Almont Energy Inc. (Details) (USD $)	3 Months Ended
	Mar. 31, 2014 Generators
Agreements Assigned to Almont Energy, Inc. (Textual)
Additional fee under R&D Agreement	$ 5,000,000
License fee received under Canadian License	5,000,000
Licensing fee under US License	50,000,000
Down payment on US License to be paid by Almont Energy	1,000,000
Remaining balance of release payment	5,847,000
Percentage of money raised required to remit from future equity or debt transactions by Almont Energy	60.00%
Obligation under US license fee	49,000,000
Percentage of quarterly net profits payable	5.00%
US License Payment due date	Feb. 19, 2016
Units projected to be purchased per year over next 5 years	11,000
Canadian License [Member]
Agreements Assigned to Almont Energy, Inc. (Textual)
Percentage of modified gross profit to be paid	5.00%
Amount to be added to gross profit to arrive at modified gross profit	400,000
Minimum annual number of generators to be purchased	120
Price per generator	159,000
Us License [Member]
Agreements Assigned to Almont Energy, Inc. (Textual)
Percentage of modified gross profit to be paid	2.50%
Amount to be added to gross profit to arrive at modified gross profit	$ 400,000
Minimum annual number of internal combustion engines	120

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Litigation and Contingencies

3 Months Ended

Mar. 31, 2014

Contractual Obligations [Abstract]

LITIGATION AND CONTINGENCIES

24.   LITIGATION AND CONTINGENCIES

Mark D. Goldsmith, a former executive of the Company, filed a lawsuit against the Company in January 2008 in which he asserted that the Company was liable to him for breach of an employment contract. On August 30, 2013, the parties executed a settlement agreement. The settlement provides that the Company pay the plaintiff $125,000 in five installments of $40,000, $25,000, $25,000, $25,000 and $10,000 due on November 28, 2013 and the 15th day of March 2014, June 2014, September 2014 and February 2015, respectively. The parties also executed mutual releases. The remaining unpaid balance of the settlement of $60,000 is included in accounts payable and accrued liabilities on the accompanying balance sheet at March 31, 2014. In the event that the Company is delinquent in the payment of any installment, the total amount of the judgment may be increased up to $200,000.

The Company is not a party to any other litigation that is material to its business.

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Related Party Transactions

3 Months Ended

Mar. 31, 2014

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

23.   RELATED PARTY TRANSACTIONS

Compensation and Benefits Paid

The approximate amount of base compensation and benefits earned by George J. Coates, Gregory Coates and Bernadette Coates is summarized as follows:

	For the Three Months Ended March 31,
	2014		2013
George J. Coates (a), (b), (c), (d), (e)	$	4,000	$	29,000
Gregory Coates		44,000		45,000
Bernadette Coates (f)		1,000		13,000

(a)   For the three months ended March 31, 2014 and 2013, George J. Coates earned additional base compensation of $63,000 and $43,000, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

(b)   For the three months ended March 31, 2014, George J. Coates was awarded 20,708 shares of Series A Preferred Stock for anti-dilution protection related to new shares of common stock issued in 2014. The estimated fair market value of these shares amounted to $52,000.

(c)   George J. Coates was awarded 6,705,446 unregistered shares of the Company’s common stock for anti-dilution protection related to new shares of common stock issued in 2013. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

(d)   In January 2013, the Company issued 20,895,046 unregistered shares of its common stock to George J. Coates in satisfaction of a deferred compensation liability consisting of 20,275,046 shares for anti-dilution protection for the year ended December 31, 2012 and a 620,000 share stock award originally granted in 2011. The value of these shares, based on the closing trading price on the dates of the anti-dilution or the date of the stock award was $1,761,000, of which $1,674,000 and $87,000 was charged to stock compensation expense during the years ended December 31, 2012 and 2011, respectively. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

(e)   During the three months ended March 31, 2013, the Company recorded stock-based compensation expense amounting to $29,000 in connection with employee stock options granted to George J. Coates during 2012.

(f)   For the three months ended March 31, 2014 and 2013, Bernadette Coates earned additional base compensation of $17,000 and $6,000, respectively, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

Promissory Notes to Related Parties

The Company issued promissory notes to related parties during the three months ended March 31, 2013 and repaid certain of the promissory notes during the three months ended March 31, 2014 and 2013. These transactions are discussed in detail in Note 12. The promissory notes to related parties are payable on demand and bear interest at the rate of 17% per annum, compounded monthly.

Issuances of Common Stock and Warrants

Issuances of common stock and common stock warrants to related parties during the three months ended March 31, 2014 and 2013 are discussed in detail in Note 17.

These transactions were private sales of unregistered, restricted securities pursuant to stock purchase agreements.

Personal Guaranty and Stock Pledge

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 for a mortgage loan on the Company’s headquarters facility.

Other

During the three months ended March 31, 2014 and 2013, Barry C. Kaye, Treasurer and Chief Financial Officer was paid compensation of $30,000 and $-0-, respectively. For the three months ended March 31, 2014 and 2013, Mr. Kaye earned compensation of $42,000 and $29,000. Commencing in the fourth quarter of 2012, the Company began deferring payment of Mr. Kaye’s compensation in order to preserve its working capital. As additional working capital is made available, a portion of this deferred compensation is being paid to Mr. Kaye. At March 31, 2014 and 2013, the remaining deferred balance of his compensation amounted to $132,000 and $71,000, respectively. These amounts are included in accounts payable and accrued liabilities in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

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Contractual Obligations (Details) (USD $)	Mar. 31, 2014
Summary of Company's contractual obligations
Due Within 2014	$ 2,328,000
Due Within 2015	117,000
Due Within 2016	22,000
Total	2,467,000
Mortgage loan payable [Member]
Summary of Company's contractual obligations
Due Within 2014	1,498,000
Due Within 2015
Due Within 2016
Total	1,498,000
Promissory notes to related parties [Member]
Summary of Company's contractual obligations
Due Within 2014	558,000
Due Within 2015
Due Within 2016
Total	558,000
Convertible promissory notes [Member]
Summary of Company's contractual obligations
Due Within 2014	173,000
Due Within 2015	35,000
Due Within 2016
Total	208,000
Finance lease obligation [Member]
Summary of Company's contractual obligations
Due Within 2014	39,000
Due Within 2015	72,000
Due Within 2016	22,000
Total	133,000
Settlement of litigation [Member]
Summary of Company's contractual obligations
Due Within 2014	50,000
Due Within 2015	10,000
Due Within 2016
Total	60,000
10% promissory note [Member]
Summary of Company's contractual obligations
Due Within 2014	10,000
Due Within 2015
Due Within 2016
Total	$ 10,000

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Inventory (Details) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Summary of inventory
Raw materials	$ 440,000	$ 440,000
Work-in-process	59,000	59,000
Finished goods
Reserve for obsolescence	(387,000)	(387,000)
Total	$ 112,000	$ 112,000

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Recently Issued Accounting Standard

3 Months Ended

Mar. 31, 2014

Recently Issued Accounting Standard [Abstract]

RECENTLY ISSUED ACCOUNTING STANDARD

25.   RECENTLY ISSUED ACCOUNTING STANDARD

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless the net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under applicable tax law or if the company does not intend to use the tax benefit towards the settlement of a disallowed tax position, if any. Adoption of this standard did not have a material effect on the Company’s financial statements.

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Subsequent Events

3 Months Ended

Mar. 31, 2014

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

26.   SUBSEQUENT EVENTS

The following events occurred subsequent to March 31, 2014:

Stock-based Common Stock Award to George J. Coates

On April 28, 2014, pursuant to a board resolution, $950,000 of additional paid-in capital was converted into a non-interest bearing promissory note due to George J. Coates. Initially, this conversion was characterized as repayment to Mr. Coates of cash outlays from his own personal funds to acquire the Company's headquarters, research and development and warehouse facility. Mr. Coates contributed this property to the Company and did not receive any consideration for this contribution.

On April 29, 2014, Mr. Coates and the Company mutually agreed to convert this $950,000 promissory note together with $50,000 principal amount of 17% promissory notes due to Mr. Coates into shares of common stock of the Company at the closing price per share of $0.0252 per share on April 29, 2014. As a result, 39,682,540 shares of common stock were issued to Mr. Coates.

After due consideration, on May 13, 2014, pursuant to a board resolution and the mutual agreement of the Company and Mr. Coates  the treatment of this transaction was revised to reflect it as a payment due to Mr. Coates to cover his losses in relation to the transfer of title to the headquarters, research and development and warehouse facility to the Company. The Company has also agreed to be responsible for any of Mr. Coates' incremental personal income taxes attributable to this transaction. As a result of this transaction, the Company recorded stock-based compensation expense of $1,425,000, which includes the estimated liability for Mr. Coates' income taxes. Although the estimated lost benefits of ownership to Mr. Coates exceeded the value of the award, including the income taxes to be paid by the Company, the parties mutually agreed not to increase the award amount and Mr. Coates did not request that any interest be paid to him. The net effect on the Company's balance sheet of this stock-based common stock award and the conversion of $50,000 principal amount of 17% promissory notes due to Mr. Coates was to increase current liabilities by $425,000 and increase the stockholders' deficiency by $425,000.

Conversion of Paid-in Capital to a Non-interest Bearing Promissory Note to Gregory Coates

On April 28, 2014, the board of directors authorized the conversion of $1,462,000 of paid-in capital originally contributed to the Company by Gregory G. Coates into a non-interest bearing promissory note, payable on demand. During the period from August 21, 1995 to February 14, 1996, Gregory G. Coates made cash outlays from his own personal funds in a series of payments on behalf of the Company, in an amount which aggregated $1,462,000 to provide needed working capital to the Company in order for it to continue its operations. Gregory Coates contributed these funds to the Corporation and did not receive any consideration for this contribution. At that time, the $1,462,000 of cash outlays was added to the Company’s additional paid-in capital. The net effect on the Company’s balance sheet was to increase current liabilities by $1,462,000 and increase the stockholders’ deficiency by the same amount.

Partial Repayment of 17% Promissory Notes Issued to Related Parties

Subsequent to year-end, the Company partially repaid 17% promissory notes due to George J. Coates and Bernadette Coates amounting $25,000 and $15,000, respectively. When coupled with the conversion of promissory notes to George J. Coates discussed in the prior paragraph, the remaining balance of the promissory notes due to George J. Coates as of May 9, 2014, was reduced to $425,000.

9.75% Convertible Note Facility

In April, 2014, the Company entered into a 9.75% convertible note facility agreement (the “Agreement” with an investor. The Agreement provides that the investor will fund up to $317,000, including an initial tranche of $107,000, which was funded at the closing of the Agreement and four additional tranches of $52,500 each. The investor may convert the convertible notes at any time beginning six months after funding, into shares of the Company’s common stock at a fixed rate of $0.055 per share. In addition, there are mandatory monthly conversions beginning 180 days after funding. Each monthly conversion amount shall generally be equal to one-twelfth of the original amount funded, plus accrued interest and any other fees or penalties assessed in accordance with the Agreement. The Corporation may, at its option, pay all or any portion of a mandatory note conversion in cash, or a combination of cash and conversion shares, without penalty, provided it makes a timely election to do so. The number of shares of common stock to be initially delivered upon conversion shall be equal to the dollar amount being converted divided by the variable conversion price. The variable conversion price is the lesser of $0.055 per share, or 70% of the average of the three lowest volume weighted average trading prices over the 15 day trading period prior to the date of conversion. The number of shares of the Company’s common stock required to be issued to the investor upon any mandatory conversion may be subsequently adjusted upward in the event that the recalculated variable conversion price on the 23rd trading day following the date of conversion is lower than the calculated variable conversion price on the date of conversion. In such case, the Company would be required to deliver the incremental number of shares to the investor, determined based on the recalculated variable conversion price.

Issuance of 8% Convertible Note

The Company issued a $40,000, 8% convertible note which matures in January 2015, if not converted prior thereto, and received proceeds of $35,000, which were net of transaction costs. The Company may prepay the convertible note during the first 180 days the note is outstanding by paying 130% during the first 60 days, increasing in 5% increments each month to a maximum of 150% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default. The lender may convert the promissory notes into shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate is equal to 67.5% of the average of the two lowest trading prices of the Company’s common stock during the 25 trading day period prior to the date of conversion. The Company has reserved 7,750,000 shares of its unissued common stock for potential conversion of the convertible note.

Funding of additional tranches of Convertible Notes

In April 2014, the Company issued a $67,000, 12% convertible note, which represented an additional tranche of funding provided for in its $335,000 convertible note facility. The Company received cash proceeds of $60,000, which was net of an approximately 10.5% original issue discount. The terms and conditions of the 12% convertible notes with a 58% conversion rate are discussed in more detail in Note 13. This note matures in August 2014, if not converted prior thereto. The remaining balance of this facility available for future funding in one or more additional tranches is $117,000.

In April 2014, the Company issued a $35,000, 12% convertible note, which represented an additional tranche of funding provided for in its $100,000 convertible note facility. The Company received cash proceeds of $33,333, which was net of a 5% original issue discount. The terms and conditions of these 12% convertible notes with a 70% conversion rate are discussed in more detail in Note 13. This note matures in August 2014, if not converted prior thereto. The remaining balance of this facility available for future funding in one or more additional tranches is $30,000.

Conversion of Convertible Promissory Notes

Subsequent to year-end, $55,000 principal amount of the 8% convertible promissory notes, including accrued interest thereon, was converted by the holder into 2,059,138, unregistered shares of the Company’s common stock.

Subsequent to year-end, $58,000 principal amount of the 12% convertible promissory notes, including accrued interest thereon, was converted by the holder into 3,050,000, unregistered shares of the Company’s common stock.

Shares of Common Stock Sold to Dutchess Opportunity Fund II, LP

Subsequent to year-end, the Company sold 2,561,713 registered shares of its common stock to Dutchess under its equity line of credit and received cash of $104,000 which was used for working capital purposes.

Issuance of Anti-dilution shares to George J. Coates

Subsequent to year end, the Company issued 7,070 shares of Series A Preferred Stock to Mr. Coates representing anti-dilution shares related to newly issued shares of common stock. The estimated fair value of these shares was $18,000. The additional shares of Series A Preferred Stock entitle Mr. Coates to 70,700,000 additional votes on all matters brought before the shareholder for a vote.

Grant of Stock Options

On April 30, 2014, Gregory Coates and Barry C. Kaye were each granted 351,500 stock options with an exercise price of $0.028 per share which vest on the one year anniversary date of the grant and expire in 2029.

Modification of 10% Convertible Note

On April 30, 2014, by mutual consent between Dr. Michael J. Suchar, director and the Company, the terms of the $10,000, 10% convertible note due to him, were modified to eliminate the conversion provisions of the note.

Deferred Compensation

Through May 9, 2014, George J. Coates, Bernadette Coates and Barry C. Kaye agreed to additional deferral of their compensation amounting to $29,000, $8,000 and $16,000, respectively, and Mr. Kaye was paid $25,000 of his deferred compensation, bringing the net balanced of their total deferred compensation to $322,000, $81,000 and $123,000, respectively.

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Concentrations of Credit and Business Risk

3 Months Ended

Mar. 31, 2014

Concentrations of Credit and Business Risk [Abstract]

CONCENTRATIONS OF CREDIT AND BUSINESS RISK

3.   CONCENTRATIONS OF CREDIT AND BUSINESS RISK

The Company maintains cash balances with one financial institution. Accounts at this institution are currently fully insured by the Federal Deposit Insurance Corporation.

The Company’s operations are devoted to the development, application 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.

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Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2014

Accounting Policies [Abstract]

Loss per Share

Loss per Share

Basic net loss per share is based on the weighted average number of common shares outstanding without consideration of potentially dilutive shares of common stock. There were no shares of preferred stock outstanding with rights to share in the Company’s net income during the three-month periods ended March 31, 2014 and 2013. Diluted net income per share is based on the weighted average number of common and potentially dilutive common shares outstanding, when applicable.

Use of Estimates

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 Series A Preferred Stock issued and certain limited anti-dilution rights granted to George J. Coates as more fully described in Note 17, 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.

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Related Party Transactions (Tables)

3 Months Ended

Mar. 31, 2014

Related Party Transactions [Abstract]

Summary of approximate amount of base compensation and benefits

	For the Three Months Ended March 31,
	2014		2013
George J. Coates (a), (b), (c), (d), (e)	$	4,000	$	29,000
Gregory Coates		44,000		45,000
Bernadette Coates (f)		1,000		13,000

(a)   For the three months ended March 31, 2014 and 2013, George J. Coates earned additional base compensation of $63,000 and $43,000, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

(b)   For the three months ended March 31, 2014, George J. Coates was awarded 20,708 shares of Series A Preferred Stock for anti-dilution protection related to new shares of common stock issued in 2014. The estimated fair market value of these shares amounted to $52,000.

(c)   George J. Coates was awarded 6,705,446 unregistered shares of the Company’s common stock for anti-dilution protection related to new shares of common stock issued in 2013. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

(d)   In January 2013, the Company issued 20,895,046 unregistered shares of its common stock to George J. Coates in satisfaction of a deferred compensation liability consisting of 20,275,046 shares for anti-dilution protection for the year ended December 31, 2012 and a 620,000 share stock award originally granted in 2011. The value of these shares, based on the closing trading price on the dates of the anti-dilution or the date of the stock award was $1,761,000, of which $1,674,000 and $87,000 was charged to stock compensation expense during the years ended December 31, 2012 and 2011, respectively. In August 2013, these shares were voluntarily returned to the Company for cancellation and restored to authorized, unissued status.

(e)   During the three months ended March 31, 2013, the Company recorded stock-based compensation expense amounting to $29,000 in connection with employee stock options granted to George J. Coates during 2012.

(f)   For the three months ended March 31, 2014 and 2013, Bernadette Coates earned additional base compensation of $17,000 and $6,000, respectively, payment of which is being deferred until the Company has sufficient working capital. These amounts are included in deferred compensation in the accompanying balance sheets at March 31, 2014 and 2013, respectively.

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Convertible Promissory Notes And Embedded Derivative Liability (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2014 Promissory_Note	Mar. 31, 2013	Dec. 31, 2013
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Estimated fair value of embedded derivative liabilities related to promissory notes outstanding, Description	The estimated fair value of the embedded derivative liabilities related to convertible notes outstanding was measured as the aggregate estimated fair value, based on Level 2 inputs, which included the average of the quoted daily yield curve rates on six-month and one-year treasury securities and the calculated 12-month historical volatility rate on the Company's common stock.
Debt Instrument, Face Amount	$ 207,000		$ 272,000
Common stock , par value	$ 0.0001		$ 0.0001
Number of convertible promissory notes	7
Other (expense) income resulting from the change in the estimated fair value of the embedded derivative liabilities	80,000	(70,000)
Interest expense resulting from accretion of the unamortized discount	111,000	38,000
8% Convertible Promissory Notes with a 70% Conversion Rate [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Maturity date, description	January 2015
Conversion price, description	The conversion price shall be equal to 70% multiplied by the Variable Conversion Rate which is equal to the lowest closing trading price of the common stock during the 25 day trading period prior to the date of conversion.
Prepayment option, description	The 8% Note may be prepaid during the first six months the note is outstanding by paying 130% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default.
8% Convertible Promissory Notes One [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Promissory notes, interest rate	8.00%
Conversion Price Discount	61.00%
Debt Instrument, Face Amount	47,000
Maturity date, description	July 2014
Common stock , par value	$ 0.0001
Period after which conversion can exercise	180 days
Conversion price, description	The conversion price shall be equal to 61% multiplied by the Variable Conversion Rate which is equal to the average of the three (3) lowest closing bid prices of the common stock during the 10 trading day period prior to the date of conversion.
Prepayment option, description	These notes may be prepaid during the six months the notes are outstanding by paying 130% during the first 60 days, increasing in 5% increments each month to a maximum of 150% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default.
Shares reserved for debt conversion	46,750,000
Number of convertible promissory notes	1
Common shares issued upon conversion of debt	2,059,138
Principal amount of debt, including accrued interest converted into shares of common stock	55,000
8% Convertible Promissory Notes Two [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Promissory notes, interest rate	8.00%
Conversion Price Discount	61.00%
Debt Instrument, Face Amount	33,000
Maturity date, description	August 2014
Common stock , par value	$ 0.0001
Period after which conversion can exercise	180 days
Conversion price, description	The conversion price shall be equal to 61% multiplied by the Variable Conversion Rate which is equal to the average of the three (3) lowest closing bid prices of the common stock during the 10 trading day period prior to the date of conversion.
Prepayment option, description	These notes may be prepaid during the six months the notes are outstanding by paying 130% during the first 60 days, increasing in 5% increments each month to a maximum of 150% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default.
10% Convertible Promissory Notes One [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Promissory notes, interest rate	10.00%
Debt Instrument, Face Amount	28,000
Maturity date, description	December 2014
Common stock , par value	$ 0.0001
Period after which conversion can exercise	180 days
Conversion price, description	The conversion rate shall be equal to 58% of the lowest daily volume weighted average price ("VWAP") of the Company's common stock over the 18 trading day period ending on the date of conversion.
Shares reserved for debt conversion	7,800,000
10% Convertible Promissory Notes Two [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Promissory notes, interest rate	10.00%
Debt Instrument, Face Amount	28,000
Maturity date, description	December 2014
Common stock , par value	$ 0.0001
Period after which conversion can exercise	180 days
Conversion price, description	The conversion rate shall be equal to 58% of the lowest daily volume weighted average price ("VWAP") of the Company's common stock over the 18 trading day period ending on the date of conversion.
12% Convertible Promissory Notes with a 60% Conversion Rate One [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Promissory notes, interest rate	12.00%	12.00%
Conversion Price Discount	60.00%	60.00%
Debt Instrument, Face Amount	37,000	67,000
Maturity date, description	August 2014	March 2014
Common stock , par value	$ 0.0001	$ 0.0001
Period after which conversion can exercise	180 days	180 days
Conversion price, description	The conversion rate shall be equal to the lesser of $0.035 per share or 60% of the lowest trade price of the Company's common stock in the 25 trading day period prior to the date of conversion.	The conversion rate shall be equal to the lesser of $0.035 per share or 60% of the lowest trade price of the Company's common stock in the 25 trading day period prior to the date of conversion.
Shares reserved for debt conversion	35,000,000
Maximum amount that can be borrowed	335,000	335,000
Original issue discount on principal amount	10.50%	10.50%
Common shares issued upon conversion of debt	3,050,000
Principal amount of debt, including accrued interest converted into shares of common stock	58,000
Unused portion of convertible note facility	184,000	268,000
12% Convertible Promissory Notes with a 60% Conversion Rate Two [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Promissory notes, interest rate	12.00%
Conversion Price Discount	60.00%
Debt Instrument, Face Amount	37,000
Maturity date, description	September 2014
Period after which conversion can exercise	180 days
Conversion price, description	The conversion rate shall be equal to the lesser of $0.035 per share or 60% of the lowest trade price of the Company's common stock in the 25 trading day period prior to the date of conversion.
12% Convertible Promissory Notes with a 70% Conversion Rate [Member]
Convertible Promissory Notes and Embedded Derivative Liabilities (Textual)
Promissory notes, interest rate	12.00%
Conversion Price Discount	70.00%
Period after which conversion can exercise	180 days
Conversion price, description	The conversion rate shall be equal to the lesser of $0.05 per share, or 70% of the lowest trading price of the Company's common stock in the 20 trading day period prior to the date of conversion.
Prepayment option, description	The convertible note, including accrued interest thereon, may be prepaid during the first six months after funding, along with a 30% prepayment penalty.
Maximum amount that can be borrowed	100,000
Original issue discount on principal amount	5.00%
Unused portion of convertible note facility	65,000
Initial funding upon facility, Amount	$ 33,333

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Balance Sheets (USD $)	Mar. 31, 2014	Dec. 31, 2013
Current Assets
Cash	$ 28,527	$ 49,274
Inventory, net	111,752	111,752
Deferred offering costs and other assets	10,559	12,423
Total Current Assets	150,838	173,449
Property, plant and equipment, net	2,164,095	2,179,646
Deferred licensing costs, net	49,945	51,016
Total Assets	2,364,878	2,404,111
Current Liabilities
Accounts payable and accrued liabilities	2,206,428	2,263,947
Mortgage loan payable	1,498,284	1,513,284
Promissory notes to related parties	558,138	603,138
Deferred compensation payable	366,974	287,664
Derivative liability related to convertible promissory notes	254,263	366,590
Convertible promissory notes	135,062	125,018
Current portion of finance lease obligation	47,394	43,311
Current portion of license deposits	19,200	19,200
Unearned revenue	19,124	19,124
10% convertible note	10,000	10,000
Total Current Liabilities	5,114,867	5,251,276
Non-current portion of finance lease obligation	67,958	81,452
Non-current portion of license deposits	298,200	303,000
Total Liabilities	5,481,025	5,635,728
Commitments and Contingencies
Stockholders' Deficiency
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 162,181 and 141,473 shares of Series A Preferred Stock issued and outstanding at March 31, 2014 and December 31, 2013, respectively	162	141
Common stock, $0.0001 par value, 1,000,000,000 shares authorized, 342,759,313 and 327,749,176 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively	34,276	32,775
Additional paid-in capital	31,337,945	30,712,778
Accumulated deficit	(34,488,530)	(33,977,311)
Total Stockholders' Deficiency	(3,116,147)	(3,231,617)
Total Liabilities and Stockholders' Deficiency	$ 2,364,878	$ 2,404,111

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License Deposits (Details) (License Deposits [Member], USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
License Deposits [Member]
License Deposits (Textual)
Sublicense deposit received as down payment on Canadian License	$ 300,000
License deposit recognition term	straight-line basis over the remaining life until 2027
Sublicensing fee revenue	$ 5,000	$ 5,000

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The Company and Basis of Presentation

3 Months Ended

Mar. 31, 2014

The Company and Basis of Presentation [Abstract]

THE COMPANY AND BASIS OF PRESENTATION

1.   THE COMPANY AND BASIS OF PRESENTATION

Nature of Organization

Coates International, Ltd. (the “Company”, or “CIL”), is a Delaware corporation organized in October 1991 as successor-in-interest to a Delaware corporation of the same name incorporated in August 1988.  Coates International, Ltd. operates in Wall Township, New Jersey.

The Company has acquired the exclusive licensing rights for the 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 and his son, Gregory 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 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 cylinder, 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 (“Coates 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 higher RPM’s, greater volumetric efficiency and thermal efficiency can be achieved with the CSRV® system technology, is a function of the engine design and application.

Management believes that internal combustion engines incorporating the CSRV® system technology can deliver better fuel efficiency, reduced harmful emissions, longer intervals between engine servicing and longer engine life than conventional internal combustion engines.

Hydrogen Reactor Technology Owned by George J. Coates

George J. Coates, President and Chief Executive Officer, has developed a hydrogen reactor, which rearranges H2O water molecules into HOH molecules also known as Hydroxy-Gas. The Hydroxy-Gas produced by the hydrogen reactor is then harvested for use as a type of fuel. Mr. Coates is continuing with development of this technology to enable the harvested Hydroxy-Gas to be utilized as the fuel source to power the Company’s patented CSRV® engines. Mr. Coates is continuing with research and development of the next application of this technology in an attempt to power larger, industrial engines. If successful, this application will only require a ready supply of water and would be suitable for stationary engines and generators. Conventional internal combustion engines employing poppet valve assemblies require lubrication and would experience excessive heat and friction if powered with Hydroxy-Gas. This, in turn, would cause the engines to burn out in a rather short period of time. The materials and components of the CSRV® engines do not require such lubrication and are designed to operate relatively trouble-free on various alternative fuels, which would also include Hydroxy-Gas. There can be no assurance that this technology can be developed successfully, or that if developed, it will be feasible to penetrate the internal combustion engine market with this technology. Applications for patent protection of this technology will be filed upon completion of the research and development. At this time, no arrangements have been made between the Company and George J. Coates, owner of the technology, regarding licensing of the hydrogen reactor. Accordingly, the Company does not have any rights to manufacture, use, sell and distribute the Hydrogen Reactor technology, should it become commercially feasible to manufacture and distribute products powered by the Hydroxy-Gas fuel. The Company has been and continues to be responsible for all costs incurred related to the development of this technology.

The accompanying unaudited financial statements of Coates International, Ltd. (the “Company”, or “CIL”) have been prepared in accordance with accounting principles generally accepted for interim financial information and rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2014 and 2013 are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

Going Concern

As shown in the accompanying financial statements, the Company has incurred recurring losses from operations of ($34,489,000), primarily in connection with research and development activities; and, as of March 31, 2014 had a stockholders’ deficiency of ($3,116,000). The Company will be required to renegotiate the terms of an extension of a $1,498,000 mortgage loan which matures in July 2014, 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 current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest their funds and low investor confidence, has introduced additional risk and 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. The financial statements do not include any adjustments that might be necessary should the Company become unable 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 carry out the Company’s activities related to research and development activities, entering the production phase of operations, developing additional commercially feasible applications of the CSRV® system technology, seeking additional sources of working capital and covering general and administrative costs in support of such activities. The Company continues to actively undertake efforts to secure new sources of working capital. At March 31, 2014, the Company had negative working capital of ($4,964,000) compared with negative working capital of ($5,078,000) at December 31, 2013.

Majority-Owned Subsidiary

CIL is currently the majority shareholder of Coates Hi-Tech Engines, Ltd. (“Coates Hi-Tech”), a Delaware corporation which was formed in July 2012. It has not commenced operations and has no assets.

For the three months ended March 31, 2013, the financial statements of CIL were consolidated with the accounts of Coates Oklahoma Engine Manufacturing, Ltd. (“Coates Oklahoma”). In May 2013, Coates Oklahoma was shuttered and has since been formally dissolved. There were no outstanding obligations or expenses in dissolving this company. 

Reclassifications

Certain amounts included in the accompanying financial statements for the three months ended March 31, 2013 have been reclassified in order to make them comparable to the amounts presented for the three months ended March 31, 2014.

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Investment Agreement with Dutchess Opportunity Fund II, LP (Details) (USD $)	1 Months Ended	3 Months Ended
	Jun. 30, 2011	Mar. 31, 2014	Mar. 31, 2013
Investment Agreement with Dutchess Opportunity Fund II, LP (Textual)
Purchase commitment terms	36 months
Number of shares of common stock registered for resale	17,500,000
Investment agreement terms	The Company entered into an investment agreement (the "Investment Agreement") with Dutchess Opportunity Fund II, LP, a Delaware limited partnership ("Dutchess"). Pursuant to the terms of the Investment Agreement, Dutchess committed to purchase, in a series of purchase transactions ("Puts") up to Twenty Million ($20,000,000) Dollars of the Company's common stock over a period.
Formula for amount of each Put		Equal to, at its option, either (i) two hundred percent (200%) of the average daily volume (U.S. market only) of its common stock for the three (3) Trading Days prior to the applicable Put Notice Date, multiplied by the average of the three (3) daily closing prices immediately preceding the Put Date or (ii) the lesser of the market value of the remaining unsold registered shares or five hundred thousand dollars ($500,000).
Description of put option purchase price		Equal to ninety-four percent (94%) of the lowest daily volume weighted average prices of the common stock during the five day trading period beginning on the effective date of the Put.
Proceeds from common stock sold under equity line of credit		$ 104,000	$ 3,000
Number of shares of common stock sold		2,561,713	86,128
Number of unsold registered shares of common stock		8,927,934

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Accounts Payable and Accrued Liabilities (Tables)

3 Months Ended

Mar. 31, 2014

Accounts Payable and Accrued Liabilities [Abstract]

Summary of accounts payable and accrued liabilities

	March 31, 2014		December 31, 2013
Legal and professional fees	$	1,391,000	$	1,388,000
General and administrative expenses		343,000		301,000
Accrued interest expense		297,000		264,000
Research and development costs		115,000		115,000
Accrued compensation		60,000		196,000
Total	$	2,206,000	$	2,264,000

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Stock Options (Details Textual) (2006 Stock Option and Incentive Plan [Member], USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
2006 Stock Option and Incentive Plan [Member]
Stock Options (Textual)
Common stock available for stock options or awards under the Stock Plan	703,000
Maximum percentage of shares issuable in one year to one employee	25.00%
Unvested stock options	100,000
Unvested stock options, exercise price	$ 0.042
Maximum number of shares of common stock authorized for issue under plan	12,500,000
Stock options granted during period
Stock options vested during period
Non-cash stock-based compensation expense related to employee stock options	$ 1,000	$ 90,000
Stock options were exercised, forfeited or expired

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Capital Stock

3 Months Ended

Mar. 31, 2014

Capital Stock [Abstract]

CAPITAL STOCK

17.   CAPITAL STOCK

Common Stock

The Company’s common stock is traded on OTCQB; an OTC market tier for companies that report to the SEC. Investors can find quotes and market information for the Company at www.otcmarkets.com under the ticker symbol COTE. The Company is authorized to issue up to 1,000,000,000 shares of common stock, par value, $0.0001 per share.

Pursuant to anti-dilution provisions which became effective in January 2012, Mr. Coates was awarded one share of restricted common stock for each new share of stock issued to any individual or entity that was not a member of, or controlled by, the Coates Family. On August 30, 2013, these anti-dilution provisions were canceled and Mr. Coates voluntarily returned all shares of common stock awarded to him under these provisions.

The following common stock transactions occurred during the three months ended March 31, 2014:
 

● In a series of transactions, the Company made private sales, pursuant to stock purchase agreements of 7,339,286 unregistered shares of its common stock and 7,339,286 common stock warrants to purchase one share of common stock at an exercise prices ranging from $0.035 to of $0.04 per share in consideration for $290,000 received from the son of Richard W. Evans, a director.

● In a series of transactions, the Company issued 2,561,713 registered shares of its common stock to Dutchess Opportunity Fund II, LP under an equity line of credit in consideration for $104,000.

● The Company issued a 12% convertible promissory note and received cash proceeds of $35,000. The lender may convert the promissory note into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to 70% of the lowest trading price of the common stock in the 20 trading day period ending on the date of conversion.

● An 8% convertible promissory note with an aggregate principal balance of $55,000, including accrued interest was converted into 2,059,138 unregistered shares of common stock.

● In a series of transactions, 12% convertible promissory notes with an aggregate principal balance of $58,000, including accrued interest were converted into 3,050,000 unregistered shares of common stock.

The following common stock transactions occurred during the three months ended March 31, 2013:

● In a series of transactions, the Company made private sales, pursuant to stock purchase agreements of 999,999 unregistered shares of its common stock and 2,000,001 common stock warrants to purchase one share of its common stock at an exercise price of $0.035 per share in consideration for $35,000 received from the son of Richard W. Evans, a director.

● In connection with an agreement to issue up to $335,000 convertible promissory notes, in March 2013, the Company issued a $67,000 principal amount convertible promissory note and received cash proceeds of $60,000.

● In a series of transactions during 2013, 8% convertible promissory notes with an aggregate principal balance of $88,000, plus accrued interest of $4,000 were converted into 5,705,447 unregistered shares of common stock.

● In a series of transactions, the Company issued 6,705,446 unregistered shares of its common stock to George J. Coates for anti-dilution protection related to new shares of common stock issued in 2013. The estimated value of these shares, based on the closing trading price of the stock on the dates of the issuances was $203,000. In January 2013, the Company issued 20,895,046 unregistered shares of its common stock to George J. Coates in satisfaction of a deferred compensation liability consisting of 20,275,046 shares for anti-dilution protection for the year ended December 31, 2012 and a 620,000 share stock award originally granted in 2011. The value of these shares, based on the closing trading price on the dates of the anti-dilution or the date of the stock award was $1,761,000, of which $1,674,000 and $87,000 was charged to stock compensation expense during the years ended December 31, 2012 and 2011, respectively. All of the shares issued to George J. Coates during the three months ended March 31, 2013 were subsequently voluntarily returned to the Company and restored to authorized, unissued status in August 2013.

At March 31, 2014, the Company had reserved 134,597,343 shares of its common stock to cover the potential conversion of convertible securities and exercise of stock options and warrants.

Preferred Stock and anti-dilution rights

The Company is authorized to issue 100,000,000 new 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 shall have authority 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, 1,000,000 designated, 162,181 and 141,473 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively. Series A Preferred Stock entitles 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 Preferred Stock are owned by George. J. Coates.

· Series B Preferred Stock, 1,000,000 designated in January 2014, no shares issued and outstanding as of March 31, 2014. The Series B Convertible Preferred Stock does 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 One Thousand restricted shares of the Corporation's common stock. Holders of the Series B Preferred Stock are entitled to one thousand votes per share of Series B Preferred Stock 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 Preferred Stock may be immediately converted at the option of the holder into one thousand restricted shares of the Company's common stock.

In order to enable the Company to raise needed working capital, an anti-dilution arrangement was established which authorized the issuance of shares of Series A Preferred Stock to George J. Coates to restore the Coates Family’s voting percentage upon any future issuance of new shares of the Company’s common stock as a result of a sale or conversion of securities into common stock, provided, however, that no anti-dilution protection shall be available in connection with public offerings of the Company’s securities.

During the three months ended March 31, 2014, 20,708 shares of Series A Preferred Stock were granted and issued to George J. Coates pursuant to this anti-dilution agreement, resulting in the right to 207,080,000 aggregate additional votes. No shares of Series A Preferred Stock were granted or issued during the three months ended March 31, 2013. At March 31, 2014, Mr. Coates held 162,181 shares of Series A Preferred Stock which entitles him to 1,621,810,000 votes in addition to his voting rights from the shares of common stock he holds.

Each issuance of shares of Series A Preferred Stock to George J. Coates did 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.

In 2010, the Company arranged for an independent professional services firm to determine the estimated fair value of the shares of Series A Preferred Stock provided to Mr. Coates. Based on this estimated valuation, the aggregate estimated fair value of the Series A Preferred Stock issued to Mr. Coates during the three months ended March 31, 2014 amounted to $52,000. This amount, which did not require any outlay of cash, was recorded as stock-based compensation expense in the accompanying statement of operations for the three months ended March 31, 2014.

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Convertible Promissory Notes and Embedded Derivative Liability (Tables)

3 Months Ended

Mar. 31, 2014

Convertible Promissory Notes and Embedded Derivative Liabilites [Abstract]

Convertible promissory notes and embedded derivative liabilites

	Principal Amount										Unamortized Discount				Embedded  Derivative Liability
Date Issued	March 31, 2014		December 31, 2013		Nominal Interest Rate			Effective Interest Rate(1)			March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
1/21/14	$	35,000		N/A		12	%		147	%	$	26,000		N/A		41,000		N/A
12/11/13		28,000	$	28,000		10	%		134	%		11,000	$	22,000		37,000	$	43,000
12/10/13		28,000		28,000		12	%		117	%		9,000		19,000		44,000		45,000
12/9/13		28,000		28,000		10	%		134	%		11,000		22,000		37,000		43,000
11/27/13		32,000		32,000		8	%		133	%		11,000		25,000		33,000		33,000
10/11/13		47,000		47,000		8	%		147	%		4,000		31,000		49,000		48,000
8/14/13		9,000		28,000		12	%		147	%		-		14,000		13,000		45,000
8/8/13		-		53,000		8	%		147	%		-		14,000		-		53,000
6/4/13		-		28,000		12	%		92	%		-		-		-		45,000
3/21/13		-		-		12	%		76	%		-		-		-		12,000
	$	207,000	$	272,000							$	72,000	$	147,000	$	254,000	$	367,000

(1) The effective interest rate reflects the rate required to fully amortize the unamortized discount over the six-month period until the Notes become convertible.

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Loss Per Share

3 Months Ended

Mar. 31, 2014

Loss Per Share [Abstract]

LOSS PER SHARE

19.   LOSS PER SHARE

For the three months ended March 31, 2014 and 2013, diluted net loss per share was based on the weighted average number of common shares outstanding without consideration of potentially dilutive shares of common stock because the Company incurred a net loss in those periods and the effect of including any of the potentially dilutive shares of common stock in the calculation would have been anti-dilutive.

The following presents the potentially issuable shares of common stock upon assumed conversion of:

Description	Number of Underlying Shares of Common Stock		Exercise Price			Number Vested		Number Non-Vested
Common stock options		100,000	$	0.0420			-		100,000
Common stock options		5,607,000		0.0600			5,607,000		-
Common stock options		1,800,000		0.2400			1,800,000		-
Common stock options		2,000,000		0.2500			2,000,000		-
Common stock options		50,000		0.3900			50,000		-
Common stock options		360,000		0.4000			360,000		-
Common stock options		100,000		0.4300			100,000		-
Common stock options		1,750,000		0.4400			1,750,000		-
Common stock options		30,000		1.0000			30,000		-
Common stock warrants		500,000		0.0200			N/A		N/A
Common stock warrants		666,667		0.0225			N/A		N/A
Common stock warrants		1,000,000		0.0250			N/A		N/A
Common stock warrants		333,333		0.0300			N/A		N/A
Common stock warrants		2,714,287		0.0350			N/A		N/A
Common stock warrants		7,125,000		0.0400			N/A		N/A
Common stock warrants		333,333		0.0450			N/A		N/A
Common stock warrants		400,000		0.0500			N/A		N/A
Common stock warrants		2,181,819		0.0550			N/A		N/A
Common stock warrants		2,000,000		0.0600			N/A		N/A
Common stock warrants		4,269,838		0.0625			N/A		N/A
Common stock warrants		571,429		0.0700			N/A		N/A
Common stock warrants		666,666		0.0900			N/A		N/A
Common stock warrants		416,667		0.1200			N/A		N/A
Common stock warrants		1,200,000		0.2500			N/A		N/A
Common stock warrants		833,333		0.2700			N/A		N/A
Common stock warrants		333,333		0.3000			N/A		N/A
Common stock warrants		153,846		0.3250			N/A		N/A
Common stock warrants		1,028,570		0.3500			N/A		N/A
$10,000, 10% Convertible promissory note		22,222		0.4500			N/A		N/A
8% Convertible promissory notes with 61% conversion discount		3,561,164		(1	)		N/A		N/A
8% Convertible promissory notes with 70% conversion discount		1,382,896		(1	)		N/A		N/A
10% Convertible promissory notes		2,817,427		(1	)		N/A		N/A
12% Convertible promissory notes		2,221,904		(1	)		N/A		N/A
Total		48,530,734

(1)   The principal amount of convertible promissory notes outstanding at March 31, 2014 was $207,000. Under the convertible terms of these notes, the number of shares of common stock into which these notes are convertible is variable because the conversion rates of the notes are based on the trading price of the common stock over a defined number of trading days leading up to the conversion date during a defined conversion rate pricing period. The actual number of shares underlying these convertible instruments will likely vary from the number assumed above. The number of shares underlying these convertible notes was determined based on the defined conversion rates of the various convertible notes, assuming conversion had occurred as of March 31, 2014.

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Related Party Transactions (Details Textual) (USD $)				1 Months Ended	3 Months Ended	12 Months Ended				3 Months Ended				3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Jan. 31, 2013 George J. Coates [Member]	Mar. 31, 2013 George J. Coates [Member]	Dec. 31, 2012 George J. Coates [Member]	Dec. 31, 2011 George J. Coates [Member]	May 09, 2014 George J. Coates [Member]	Mar. 31, 2014 George J. Coates [Member]	Mar. 31, 2014 George J. Coates [Member] Series A Preferred Stock [Member]	May 09, 2014 Bernadette Coates [Member]	Mar. 31, 2014 Bernadette Coates [Member]	Mar. 31, 2013 Bernadette Coates [Member]	Mar. 31, 2014 Barry C. Kaye [Member]	Mar. 31, 2013 Barry C. Kaye [Member]	May 09, 2014 Barry C. Kaye [Member]	Mar. 31, 2014 Related Party [Member]
Related Party Transactions (Textual)
Shares of common stock issued				20,895,046	6,705,446
Fair value of common stock issued				$ 1,761,000	$ 203,000
Number of shares of common stock granted						20,275,046	620,000
Fair value of common stock granted						1,674,000	87,000
Deferred compensation liability	132,000		71,000		43,000	1,674,000	87,000	29,000	63,000		16,000	17,000	6,000	42,000	29,000	8,000
Shares of Series A Preferred Stock issued										20,708
Fair value of Series A Preferred Stock issued										52,000
Rate of interest on promissory notes to related parties, compounded monthly																	17.00%
Compensation paid														30,000	0
Stock compensation expense					$ 29,000									$ 1,000
Common stock, outstanding shares	342,759,313	327,749,176

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Accounting Policies

3 Months Ended

Mar. 31, 2014

Accounting Policies [Abstract]

ACCOUNTING POLICIES

2.   ACCOUNTING POLICIES

Loss per Share

Basic net loss per share is based on the weighted average number of common shares outstanding without consideration of potentially dilutive shares of common stock. There were no shares of preferred stock outstanding with rights to share in the Company’s net income during the three-month periods ended March 31, 2014 and 2013. Diluted net income per share is based on the weighted average number of common and potentially dilutive common shares outstanding, when applicable.

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 Series A Preferred Stock issued and certain limited anti-dilution rights granted to George J. Coates as more fully described in Note 17, 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.

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Balance Sheets (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
Balance Sheets [Abstract]
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized shares	100,000,000	100,000,000
Preferred stock, issued shares	162,181	141,473
Preferred stock, outstanding shares	162,181	141,473
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, authorized shares	1,000,000,000	1,000,000,000
Common stock, issued shares	342,759,313	327,749,176
Common stock, outstanding shares	342,759,313	327,749,176

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Promissory Notes to Related Parties

3 Months Ended

Mar. 31, 2014

Promissory Notes To Related Parties [Abstract]

PROMISSORY NOTES TO RELATED PARTIES

12.   PROMISSORY NOTES TO RELATED PARTIES

During the three months ended March 31, 2014 and 2013, the Company issued, in a series of transactions, promissory notes to George J. Coates and received cash proceeds of $-0- and $82,000, respectively, and repaid promissory notes in the aggregate principal amount of $30,000 and 17,000, respectively, bringing the outstanding principal balance at March 31, 2014 to $450,000. The promissory notes are payable on demand and provide for interest at the rate of 17% per annum, compounded monthly.

During the three months ended March 31, 2014 and 2013, the Company issued, in a series of transactions, promissory notes to Bernadette Coates, spouse of George J. Coates and received cash proceeds of $-0- and $43,000, respectively, and repaid promissory notes in the aggregate principal amount of $15,000 and $7,000, respectively, bringing the outstanding balance at March 31, 2014 to $108,000. The promissory notes are payable on demand and provide for interest at the rate of 17% per annum, compounded monthly.

For the three months ended March 31, 2014 and 2013, aggregate interest expense on all promissory notes to related parties amounted to $40,000 and $30,000, respectively. Unpaid accrued interest on these promissory notes amounting to $270,000 is included in accounts payable and accrued liabilities in the accompanying balance sheet at March 31, 2014.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2014	May 09, 2014
Document And Entity Information [Abstract]
Entity Registrant Name	COATES INTERNATIONAL LTD \DE\
Entity Central Index Key	0000948426
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		385,431,636

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Convertible Promissory Notes and Embedded Derivative Liability

3 Months Ended

Mar. 31, 2014

Convertible Promissory Notes and Embedded Derivative Liabilites [Abstract]

CONVERTIBLE PROMISSORY NOTES AND EMBEDDED DERIVATIVE LIABILITY

13.   CONVERTIBLE PROMISSORY NOTES AND EMBEDDED DERIVATIVE LIABILITIES

From time to time, the Company issues convertible promissory notes. The net proceeds from these transactions are used for general working capital purposes. The notes may be converted into shares of the Company’s common stock at a defined discount from the trading price of the common stock on 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 unregistered shares of common stock is permitted. The holder of the unregistered shares of common stock can generally sell the conversion shares immediately by relying on an exemption from registration under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”). In addition, the conversion formula meets the conditions that require accounting for them as derivative liability instruments.

8% Convertible Promissory Notes

At March 31, 2014, there were two 8% convertible promissory notes with a conversion rate of 61%, outstanding (the “8% Notes”) in the principal amounts of $47,000 and $33,000 which mature in July 2014 and August 2014, respectively, if not converted prior thereto. The 8% Notes may be converted into unregistered shares of the Company’s common stock, par value $0.0001 per share, at the conversion price, as defined below, in whole, or in part, at any time beginning 180 days after the date of issuance of the Notes, at the option of the holder. The conversion price shall be equal to 61% multiplied by the Variable Conversion Rate which is equal to the average of the three (3) lowest closing bid prices of the common stock during the 10 trading day period prior to the date of conversion. These notes may be prepaid during the six months the notes are outstanding by paying 130% during the first 60 days, increasing in 5% increments each month to a maximum of 150% of the then outstanding unpaid principal, interest and any other amounts that might be due for penalties or any event of a default.

In a series of transactions during the three months ended March 31, 2014, an 8% convertible promissory note with an aggregate principal balance, including accrued interest of $55,000 was converted into 2,059,138 unregistered shares of common stock.

The Company has reserved 46,750,000 shares of its unissued common stock for potential conversion of these 8% Notes.
 

10% Convertible Promissory Notes

The Company has entered into two agreements with different investors, whereby, under each agreement, it is permitted to issue two $28,000 tranches of convertible promissory notes which bear interest at 10% per annum and mature on the one-year anniversary date of the funding (“10% Notes”). At March 31, 2014, there was one $28,000 convertible note outstanding under each agreement. These notes mature in December 2014, if not converted prior thereto. The convertible notes provide for a 5% original issue discount on the principal amount of each tranche, which was netted against the amount funded to the Company. Each drawdown of the promissory note may be prepaid at any time within the first 90 days after funding. The holder may convert the 10% Notes into restricted shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to 58% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock over the 18 trading day period ending on the date of conversion. The Company has reserved 7.8 million shares of its unissued common stock for potential conversion of these two 10% convertible notes.

12% Convertible Promissory Notes with a 60% Conversion Rate

The Company has also entered into an agreement whereby it is permitted to issue in a series of tranches up to $335,000 of convertible promissory notes which bear interest at 12% per annum and mature on the one-year anniversary date of the funding (“12% Notes”). At March 31, 2014, there were two 12% Notes with an outstanding balance totaling $37,000, which mature in August 2014 and September 2014, respectively, if not converted prior thereto. The arrangement provides for an approximately 10.5% original issue discount on the principal amount of each tranche, which is netted against the amount funded to the Company. Each drawdown of the promissory note may be prepaid at any time within the first 90 days after funding, upon which the interest for the outstanding period will be forgiven. The holder may convert the 12% Notes into unregistered shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to the lesser of $0.035 per share or 60% of the lowest trade price of the Company’s common stock in the 25 trading day period prior to the date of conversion. The Company has reserved 35 million shares of its unissued common stock for potential conversion of this 12% Note agreement.

During the three months ended March 31, 2014, 12% convertible promissory notes with a 60% conversion rate, having a principal balance of $58,000, including accrued interest, were converted into 3,050,000 unregistered shares of common stock. At March 31, 2014, the unused portion of this convertible note facility was $184,000.

12% Convertible Promissory Notes with a 70% Conversion Rate

In January 2014, the Company has entered into an agreement whereby it is permitted to issue in a series of tranches up to $100,000 of convertible promissory notes which bear interest at 12% per annum and mature on the one-year anniversary date of the funding, if not converted prior thereto. The initial funding upon closing of this facility was in the amount of $33,333, net of 5% original issue discount. The convertible note, including accrued interest thereon, may be prepaid during the first six months after funding, along with a 30% prepayment penalty. The holder may convert the notes into restricted shares of the Company’s common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to the lesser of $0.05 per share, or 70% of the lowest trading price of the Company’s common stock in the 20 trading day period prior to the date of conversion. The Company has reserved 6.5 million shares of its unissued common stock for potential conversion of this convertible note agreement. At March 31, 2014, the unused portion of this convertible note facility was $65,000.

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 estimated fair value of the embedded derivative liabilities related to convertible notes outstanding was measured as the aggregate estimated fair value, based on Level 2 inputs, which included the average of the quoted daily yield curve rates on six-month and one-year treasury securities and the calculated 12-month historical volatility rate on the Company’s common stock.

The embedded derivative liability arises because, based on historical trading patterns of the Company’s stock, the formula for determining the defined 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 details of the outstanding convertible notes at March 31, 2014 and December 31, 2013, including the balance of the unamortized discount and the amount of the embedded derivative liability, where applicable:

	Principal Amount										Unamortized Discount				Embedded  Derivative Liability
Date Issued	March 31, 2014		December 31, 2013		Nominal Interest Rate			Effective Interest Rate(1)			March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
1/21/14	$	35,000		N/A		12	%		147	%	$	26,000		N/A		41,000		N/A
12/11/13		28,000	$	28,000		10	%		134	%		11,000	$	22,000		37,000	$	43,000
12/10/13		28,000		28,000		12	%		117	%		9,000		19,000		44,000		45,000
12/9/13		28,000		28,000		10	%		134	%		11,000		22,000		37,000		43,000
11/27/13		32,000		32,000		8	%		133	%		11,000		25,000		33,000		33,000
10/11/13		47,000		47,000		8	%		147	%		4,000		31,000		49,000		48,000
8/14/13		9,000		28,000		12	%		147	%		-		14,000		13,000		45,000
8/8/13		-		53,000		8	%		147	%		-		14,000		-		53,000
6/4/13		-		28,000		12	%		92	%		-		-		-		45,000
3/21/13		-		-		12	%		76	%		-		-		-		12,000
	$	207,000	$	272,000							$	72,000	$	147,000	$	254,000	$	367,000

(1) The effective interest rate reflects the rate required to fully amortize the unamortized discount over the six-month period until the Notes become convertible.

Other income (expense) resulting from the change in the estimated fair value of the embedded derivative liabilities amounted to $80,000 and ($70,000) for the three months ended March 31, 2014 and 2013, respectively. These amounts are included in the accompanying statements of operations as Decrease (increase) in estimated fair value of embedded derivative liabilities. Interest expense resulting from accretion of the unamortized discount for the three months ended March 31, 2014 and 2013 amounted to $111,000 and $38,000, respectively.

The Company made the private placement of these securities in reliance upon Section 4(2) of the Securities 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 Securities Act, as applicable.

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Statements of Operations (Unaudited) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Statements of Operations [Abstract]
Sublicensing fee revenue	$ 4,800	$ 4,800
Total Revenues	4,800	4,800
Expenses:
Research and development costs	114,170
General and administrative expenses	265,085	623,612
Depreciation and amortization	16,621	16,621
Total Expenses	395,876	640,233
Loss from Operations	(391,076)	(635,433)
Other Income (Expense):
Decrease (increase) in estimated fair value of embedded derivative liabilities	117,016	(70,414)
Loss on conversion of convertible notes	(36,624)
Interest expense	(200,535)	(100,001)
Loss Before Income Taxes	(511,219)	(805,848)
Provision for income taxes
Net Loss	$ (511,219)	$ (805,848)
Basic net loss per share	$ 0.00	$ 0.00
Basic weighted average shares outstanding	336,256,678	328,516,041
Diluted net loss per share	$ 0.00	$ 0.00
Diluted weighted average shares outstanding	336,256,678	328,516,041

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License Deposits

3 Months Ended

Mar. 31, 2014

License Deposits [Abstract]

LICENSE DEPOSITS

7.   LICENSE DEPOSITS

License deposits, which are non-refundable, primarily relate to a $300,000 sublicense deposit received in prior years as a down payment on the Canadian License. This sublicense deposit is being recognized as revenue on a straight-line basis over the remaining life of the last CSRV® technology patent in force through 2027. Sublicensing fee revenue for the three months ended March 31, 2014 and 2013 amounted to $5,000 and $5,000, respectively.

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Inventory

3 Months Ended

Mar. 31, 2014

Inventory [Abstract]

INVENTORY

6.   INVENTORY

Inventory was comprised of the following:

	March 31, 2014			December 31, 2013
Raw materials	$	440,000		$	440,000
Work-in-process		59,000			59,000
Finished goods		-			-
Reserve for obsolescence		(387,000	)		(387,000	)
Total	$	112,000		$	112,000

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Investment Agreement with Dutchess Opportunity Fund II, LP

3 Months Ended

Mar. 31, 2014

Investment Agreement with Dutchess Opportunity Fund II, LP [Abstract]

INVESTMENT AGREEMENT WITH DUTCHESS OPPORTUNITY FUND II, LP

18.   INVESTMENT AGREEMENT WITH DUTCHESS OPPORTUNITY FUND II, LP

In June 2011, the Company entered into an investment agreement (the “Investment Agreement”) with Dutchess Opportunity Fund II, LP, a Delaware limited partnership (“Dutchess”). Pursuant to the terms of the Investment Agreement, Dutchess committed to purchase, in a series of purchase transactions (“Puts”) up to Twenty Million ($20,000,000) Dollars of the Company’s common stock over a period of up to thirty-six (36) months.

The amount that the Company is entitled to request with each Put delivered to Dutchess is equal to, at its option, either (i) two hundred percent (200%) of the average daily volume (U.S. market only) of its common stock for the three (3) Trading Days prior to the applicable Put Notice Date, multiplied by the average of the three (3) daily closing prices immediately preceding the Put Date or (ii) the lesser of the market value of the remaining unsold registered shares or five hundred thousand dollars ($500,000). The purchase price to be paid by Dutchess for the shares of common stock covered by each Put will be equal to ninety-four percent (94%) of the lowest daily volume weighted average prices of the common stock during the five day trading period beginning on the effective date of the Put.

In connection with the Investment Agreement, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”), covering 17,500,000 shares of the common stock underlying the Investment Agreement. In addition, during the term of the Investment Agreement, the Company is obligated to maintain the effectiveness of such registration statement.

During the three months ended March 31, 2014 and 2013, the Company sold 2,561,713 and 86,128 registered shares of its common stock, respectively, under this equity line of credit with Dutchess and received proceeds of $104,000 and $3,000, respectively, which were used for general working capital purposes. There were no offering costs related to the sales of these shares. At March 31, 2014, there remained 8,927,934 registered shares underlying the Investment Agreement.

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10% Convertible Note to Related Party

3 Months Ended

Mar. 31, 2014

10% Convertible Note to Related Party [Abstract]

10% CONVERTIBLE NOTE TO RELATED PARTY

14.   10% CONVERTIBLE NOTE TO RELATED PARTY

The 10% Convertible Note, which is held by Dr. Michael J. Suchar, director, is convertible at the option of the holder, into shares of the Company’s common stock at an initial conversion rate that is determined by dividing the principal amount of the note being converted by $0.45. This convertible note is payable on demand. Interest shall accrue at the rate of 10% per annum and shall be payable at the time of repayment of principal. All interest shall be forfeited upon conversion, in which case the holder would be entitled to dividends declared, if any, on the Company’s common stock during the time the convertible note was outstanding. The Company has reserved 22,222 shares of its common stock for conversion of this note. At March 31, 2014, accrued interest on this convertible note amounted to $7,000.

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Mortgage Loan Payable

3 Months Ended

Mar. 31, 2014

Mortgage Loan Payable [Abstract]

MORTGAGE LOAN PAYABLE

10.   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 which matures in July 2014. Interest expense for the three months ended March 31, 2014 and 2013 on this mortgage amounted to $28,000 and $30,000, 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, 2014 was $1,498,000. 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 five million 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. Up to $500,000 of the principal balance of the mortgage loan may be prepaid each year without penalty. A prepayment penalty of 2% of the outstanding loan amount would be imposed if the loan is repaid in full at or before maturity unless such prepayment funds are obtained from a permanent mortgage loan with the lender.

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Loss Per Share (Details) (USD $)	3 Months Ended
	Mar. 31, 2014
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	48,530,734
Common stock options 1
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	100,000
Exercise Price	$ 0.0420
Number of Vested Shares
Number of Non - Vested Shares	100,000
Common stock options 2
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	5,607,000
Exercise Price	$ 0.0600
Number of Vested Shares	5,607,000
Number of Non - Vested Shares
Common stock options 3
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	1,800,000
Exercise Price	$ 0.2400
Number of Vested Shares	1,800,000
Number of Non - Vested Shares
Common stock options 4
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	2,000,000
Exercise Price	$ 0.2500
Number of Vested Shares	2,000,000
Number of Non - Vested Shares
Common stock options 5
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	50,000
Exercise Price	$ 0.3900
Number of Vested Shares	50,000
Number of Non - Vested Shares
Common stock options 6
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	360,000
Exercise Price	$ 0.4000
Number of Vested Shares	360,000
Number of Non - Vested Shares
Common stock options 7
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	100,000
Exercise Price	$ 0.4300
Number of Vested Shares	100,000
Number of Non - Vested Shares
Common stock options 8
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	1,750,000
Exercise Price	$ 0.4400
Number of Vested Shares	1,750,000
Number of Non - Vested Shares
Common stock options 9
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	30,000
Exercise Price	$ 1.0000
Number of Vested Shares	30,000
Number of Non - Vested Shares
Common stock warrants 1
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	500,000
Exercise Price	$ 0.0200
Common stock warrants 2
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	666,667
Exercise Price	$ 0.0225
Common stock warrants 3
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	1,000,000
Exercise Price	$ 0.0250
Common stock warrants 4
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	333,333
Exercise Price	$ 0.0300
Common stock warrants 5
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	2,714,287
Exercise Price	$ 0.0350
Common stock warrants 6
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	7,125,000
Exercise Price	$ 0.0400
Common stock warrants 7
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	333,333
Exercise Price	$ 0.0450
Common stock warrants 8
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	400,000
Exercise Price	$ 0.0500
Common stock warrants 9
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	2,181,819
Exercise Price	$ 0.0550
Common stock warrants 10
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	2,000,000
Exercise Price	$ 0.0600
Common stock warrants 11
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	4,269,838
Exercise Price	$ 0.0625
Common stock warrants 12
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	571,429
Exercise Price	$ 0.0700
Common stock warrants 13
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	666,666
Exercise Price	$ 0.0900
Common stock warrants 14
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	416,667
Exercise Price	$ 0.1200
Common stock warrants 15
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	1,200,000
Exercise Price	$ 0.2500
Common stock warrants 16
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	833,333
Exercise Price	$ 0.2700
Common stock warrants 17
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	333,333
Exercise Price	$ 0.3000
Common stock warrants 18
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	153,846
Exercise Price	$ 0.3250
Common stock warrants 19
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	1,028,570
Exercise Price	$ 0.3500
10,000, 10% Convertible promissory note
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	22,222
Exercise Price	$ 0.4500
8% Convertible promissory notes with 61% conversion discount
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	3,561,164
Exercise Price		[1]
8% Convertible promissory notes with 70% conversion discount
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	1,382,896
Exercise Price		[1]
10% Convertible promissory notes
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	2,817,427
Exercise Price		[1]
12% Convertible promissory notes
Trading Securities [Abstract]
Number of Underlying Shares of Common Stock	2,221,904
Exercise Price		[1]

[1] The principal amount of convertible promissory notes outstanding at March 31, 2014 was $207,000. Under the convertible terms of these notes, the number of shares of common stock into which these notes are convertible is variable because the conversion rates of the notes are based on the trading price of the common stock over a defined number of trading days leading up to the conversion date during a defined conversion rate pricing period. The actual number of shares underlying these convertible instruments will likely vary from the number assumed above. The number of shares underlying these convertible notes was determined based on the defined conversion rates of the various convertible notes, assuming conversion had occurred as of March 31, 2014.

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Property, Plant and Equipment

3 Months Ended

Mar. 31, 2014

Property, Plant and Equipment [Abstract]

PROPERTY, PLANT AND EQUIPMENT

8.   PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment were comprised of the following:

	March 31, 2014			December 31, 2013
Land	$	1,235,000		$	1,235,000
Building		964,000			964,000
Building improvements		83,000			83,000
Machinery and equipment		658,000			658,000
Furniture and fixtures		39,000			39,000
		2,979,000			2,979,000
Less: Accumulated depreciation		(815,000	)		(799,000	)
Total	$	2,164,000		$	2,180,000

Depreciation expense for the three months ended March 31, 2014 and 2013 was $16,000 and $16,000, respectively.

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Accounts Payable and Accrued Liabilities

3 Months Ended

Mar. 31, 2014

Accounts Payable and Accrued Liabilities [Abstract]

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

9.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

	March 31, 2014		December 31, 2013
Legal and professional fees	$	1,391,000	$	1,388,000
General and administrative expenses		343,000		301,000
Accrued interest expense		297,000		264,000
Research and development costs		115,000		115,000
Accrued compensation		60,000		196,000
Total	$	2,206,000	$	2,264,000

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Finance Lease Obligation

3 Months Ended

Mar. 31, 2014

Finance Lease Obligation [Abstract]

FINANCE LEASE OBLIGATION

11.   FINANCE LEASE OBLIGATION

In August 2013, the Company entered into a sale/leaseback financing arrangement with Paradigm Commercial Capital Group Corp. (“Paradigm”) pursuant to which it sold its research and development and manufacturing equipment in consideration for net cash proceeds of $133,000. These cash proceeds were net of a deposit on the lease of $15,000 and transaction costs of $5,000. Under this arrangement, the Company is leasing back the equipment over a 24-month period, with an option to extend the lease for an additional six months. The fixed recurring monthly lease payment amount is $8,000. If the Company does not exercise the six-month extension option, then the parties will negotiate a repurchase price to be paid by the Company for the equipment. If the Company does exercise its option to extend, then ownership of the equipment will automatically revert back to the Company at the end of the option period. The effective interest rate on this lease is 36.6%.

In accordance with generally accepted accounting principles, this sale/leaseback is required to be accounted for as a financing lease. Under this accounting method, the equipment and accumulated depreciation remains on the Company’s books and records as if the Company still owned the equipment. This accounting treatment is in accordance with ASC 840-40-25-4, Accounting for Sale-Leaseback Transactions. In addition, the discounted present value of the lease payments is recorded as a lease finance obligation. The difference between the gross sales price for the equipment and the net proceeds received amounted to $20,000, which has been recorded as unamortized discount on finance lease obligation. This amount is being amortized to interest expense using the interest method over the 30-month term of the lease, including the option period. The finance lease obligation is secured by all of the equipment included in the sale/leaseback transaction.

For the three months ended March 31, 2014, the interest expense on this lease amounted to $14,000 which is included in interest expense in the accompanying statements of operations.

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Stock Options (Details 1)	3 Months Ended
	Mar. 31, 2014
Summary of assumptions used to determine weighted average fair value
Historical stock price volatility, minimum	139.00%
Historical stock price volatility, maximum	325.00%
Risk-free interest rate, minimum	0.21%
Risk-free interest rate, maximum	4.64%
Expected life (in years)	4 years
Dividend yield	0.00%

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Income Taxes (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Income Taxes (Textual)
Increase in deferred tax assets	$ 59,000	$ 255,000
Unrecognized tax benefits liability
Income tax examination, Description	2010 through 2013
Penalties or interest related to income tax returns

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Stock Options (Details) (Stock Option [Member], USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Stock Option [Member]
Summary of common stock options outstanding under Stock Option Plan
Exercise Price Per Share, Minimum	$ 0.06
Exercise Price Per Share, Maximum	$ 1.00
Number of Stock Options Outstanding	11,697,000	11,697,000
Weighted Average Remaining Contractual Life	14 years
Number of Stock Options Exercisable	11,697,000	11,697,000
Weighted Average Exercise Price	$ 0.019	$ 0.019
Weighted Average Fair Value Per Stock Option at Date of Grant	$ 0.180

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Property, Plant and Equipment (Tables)

3 Months Ended

Mar. 31, 2014

Property, Plant and Equipment [Abstract]

Summary of Property, plant and equipment

	March 31, 2014			December 31, 2013
Land	$	1,235,000		$	1,235,000
Building		964,000			964,000
Building improvements		83,000			83,000
Machinery and equipment		658,000			658,000
Furniture and fixtures		39,000			39,000
		2,979,000			2,979,000
Less: Accumulated depreciation		(815,000	)		(799,000	)
Total	$	2,164,000		$	2,180,000

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Promissory Notes to Related Parties (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Promissory Notes to Related Parties (Textual)
Promissory notes interest expense	$ 40,000	$ 30,000
George J. Coates [Member]
Promissory Notes to Related Parties (Textual)
Cash proceeds from related party promissory notes	0	82,000
Promissory notes principal repayment	30,000	17,000
Promissory notes, principal outstanding	450,000
Promissory notes, interest rate	17.00%	17.00%
Bernadette Coates [Member]
Promissory Notes to Related Parties (Textual)
Cash proceeds from related party promissory notes	0	43,000
Promissory notes principal repayment	15,000	7,000
Promissory notes, principal outstanding	$ 108,000
Promissory notes, interest rate	17.00%	17.00%

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Contractual Obligations

3 Months Ended

Mar. 31, 2014

Contractual Obligations [Abstract]

CONTRACTUAL OBLIGATIONS

16.   CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations and commitments at March 31, 2014:

			Due Within
	Total		2014		2015		2016
Mortgage loan payable	$	1,498,000	$	1,498,000	$	-	$	-
Promissory notes to related parties		558,000		558,000		-		-
Convertible promissory notes		208,000		173,000		35,000		-
Finance lease obligation		133,000		39,000		72,000		22,000
Settlement of litigation		60,000		50,000		10,000		-
10% promissory note		10,000		10,000		-		-
Total	$	2,467,000	$	2,328,000	$	117,000	$	22,000

Total non-cash compensation cost related to nonvested stock options at March 31, 2014 that has not been recognized was $3,000. This compensation expense will be recognized in the future over a remaining weighted average period of approximately 8 months.

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Stock Options

3 Months Ended

Mar. 31, 2014

Stock Options [Abstract]

STOCK OPTIONS

21.   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 (“incentive stock options”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, options not intended to qualify as incentive stock options (“non-statutory options”), restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of the Company. A total of 12,500,000 shares of common stock may be issued upon the exercise of options or other awards granted under the Stock Plan. The maximum number of shares with respect to which awards may be granted during any one year to any employee under the Stock Plan shall not exceed 25% of the 12,500,000 shares of common stock covered by the Stock Plan. At March 31, 2014, there remained 703,000 shares of common stock available for stock options or awards under the Stock Plan.

The Stock Plan is administered by the board and the Compensation Committee.  Subject to the provisions of the Stock Plan, 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, 2014 and 2013, no employee stock options were granted and no stock options became vested. There were 100,000 unvested stock options with an exercise price of $0.042 per share outstanding at March 31, 2014.

During the three months ended March 31, 2014 and 2013, the Company recorded non-cash stock-based compensation expense related to employee stock options amounting to $1,000 and $90,000, respectively, which is included in general and administrative expenses in the accompanying statements of operations.

Details of the common stock options outstanding under the Company’s Stock Option Plan 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, 3/31/14	$	0.06 -1.00		11,797,000		14		11,697,000	$	0.019	$	0.180

No stock options were exercised, forfeited or expired during the three months ended March 31, 2014 and 2013.

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 initially obtained the volatility factor of other publicly traded engine manufacturers that were also in the research and development stage. Subsequently, once sufficient trading history became available, the volatility factor was calculated based on the historical daily closing prices of the Company’s common stock on the OTCQB.

● 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 black-out 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.

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Mortgage Loan Payable (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Mortgage Loan Payable (Textual)
Mortgage loan payable, interest rate	7.50%
Mortgage loan payable	$ 1,498,000
Mortgage loan payment terms	Monthly payments of interest, plus $5,000 which is being applied to the principal balance.
Interest expense	28,000	30,000
Maximum limit for prepayment of principal balance each year without penalty	$ 500,000
Percentage of prepayment penalty on outstanding loan amount	2.00%
Shares collateral for borrowed fund	5,000,000

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The Company and Basis of Presentation (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
The Company and Basis of Presentation (Textual)
Stockholder's deficiency	$ (3,116,147)	$ (3,231,617)	$ (3,937,287)	$ (1,751,291)
Mortgage loan payable	1,498,284	1,513,284
Negative working capital	(4,964,000)	(5,078,000)
Mortgage loan maturity date	Jul. 31, 2014
Recurring net losses from operations	$ (34,489,000)

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Condensed Statements of Cash Flows (Unaudited) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Net Cash Flows Used in Operating Activities
Net Cash (Used in) Operating Activities	$ (377,394)	$ (188,601)
Net Cash Provided by (Used in) Investing Activities
Cash Flows Provided by (Used in) Financing Activities:
Issuance of common stock and warrants to related party	290,000	35,000
Issuance of common stock under equity line of credit	104,138	3,041
Issuance of convertible promissory notes	33,333	67,000
Issuance of promissory notes to related parties		125,329
Repayment of promissory notes to related party	(45,000)	(23,000)
Repayment of mortgage loan	(15,000)	(15,000)
Payments of finance lease obligation	(10,824)
Net Cash Provided by Financing Activities	356,647	192,370
Net Increasee (Decrease) in Cash	(20,747)	3,769
Cash, beginning of period	49,274	13,303
Cash, end of period	28,527	17,072
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	41,394	29,452
Supplemental Disclosure of Non-cash Financing Activities:
Conversion of convertible promissory notes	112,810	92,200
Deferred compensation payable paid with common stock		1,761,175
TOTAL	$ 112,810	$ 1,853,375

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Agreements Assigned to Almont Energy Inc.

3 Months Ended

Mar. 31, 2014

Agreements Assigned to Almont Energy Inc [Abstract]

AGREEMENTS ASSIGNED TO ALMONT ENERGY, INC.

5.   AGREEMENTS ASSIGNED TO ALMONT ENERGY INC.

Almont Energy Inc. (“Almont”), a privately held, independent third-party entity based in Alberta, Canada is the assignee of a sublicense which provides for a $5,000,000 license fee to be paid to the Company and covers the use of the CSRV® system technology in the territory of Canada in the oil and gas industry (the “Canadian License”). Almont is also the assignee of a separate research and development agreement (“R&D Agreement”) which requires that Almont pay the remaining balance of an additional $5,000,000 fee to the Company in consideration for the development and delivery of certain prototype engines. The Company completed development of the prototypes in accordance with this agreement at the end of 2007. The R&D Agreement had not been reduced to the form of a signed, written agreement.

Almont is also the assignee of an escrow agreement (the “Escrow Agreement”) that provides conditional rights to a second sublicense agreement from the Company for the territory of the United States (the “US License”). The US License has been deposited into an escrow account and the grant of the license will not become effective until the conditions for release from escrow are satisfied. The US License provides for a license fee of $50 million. 

The Escrow Agreement requires that Almont, as the assignee, make a payment (“Release Payment”) to the Company equal to the then remaining unpaid balance of the Canadian License licensing fee, the R&D Agreement fee and the down payment of $1,000,000 required under the US License. It is not likely that Almont will be able to make additional payments of the Release Payment until the Company can raise sufficient new working capital to commence production and shipment of Gen Sets to Almont. At March 31, 2014, the remaining balance of the Release Payment due to the Company was $5,847,000.

In connection with the assignment of the Canadian License and the rights to the US License, Almont has also assumed all of the obligations set forth in the Escrow Agreement, with the following modifications:

● The Release Payment Date, as defined in the Escrow Agreement had been extended to March 19, 2014. In order to compensate for the delay caused by the delay in our ability to deliver Gen Sets, the Release Payment due date will be reset as appropriate, once the Company commences its production phase of operations. Provided that Almont remits this entire unpaid balance to the Company of the Release Payment Date, the US License will be released from escrow and granted to Almont. Almont is required to remit to the Company 60% of all monies it raises from future equity or debt transactions, exclusive of proceeds from equipment purchase financing transactions, until the Release Payment is paid in full.

● Almont also became obligated to pay the $49 million balance of the US License Fee to the Company. Payment shall be made quarterly in an amount equal to 5% of Almont’s quarterly net profits. In addition, Almont is required to remit a portion of the proceeds it receives from equity or debt transactions, exclusive of equipment financing transactions to the Company until the entire balance of the US License fee is paid in full. However, the entire $49 million licensing fee is required to be paid on or before February 19, 2016.

The Canadian License

The Canadian License exclusively sublicenses within Canada the use of the CSRV® system technology for industrial engines designed to generate electrical power. Additional provisions of the Canadian License agreement are as follows:

● Sublicensee shall have the exclusive right to use, lease and sell electric power generators designed with the CSRV® system technology within Canada.

● Sublicensee will have a specified right of first refusal to market the electric power generators worldwide.

● Upon commencement of the production and distribution of the electric power generators, the minimum annual number of generators to be purchased by Sublicensee in order to maintain exclusivity is 120. The Company has temporarily waived this provision due to the delay in delivery of Gen Sets.  In the event Sublicensee fails to purchase the minimum 120 CSRV® generator engines during any year, Sublicensee will automatically lose its exclusivity. In such a case, Sublicensee would retain non-exclusive rights to continue to use and sell the CSRV® generator engines in the territory of Canada. Until otherwise agreed between the parties, the price per generator shall be $159,000.

● Sublicensee is required to pay a royalty to the Company equal to 5% of its annual modified gross profit (which has been defined as sales, less cost of sales, plus $400,000).

● All licensed rights under this license agreement related to the CSRV® system technology will remain with the Company.

The US License

The US License will, upon Almont satisfying the Release Payment, grant to Almont the right to use, sell and lease within the defined territory, Licensed Products manufactured by the Company which are designed to generate electrical power.  Licensed Products consist of CSRV® Valve Systems, CSRV® Valve Seals, CSRV® Rotary Valve Spheres, CSRV® Valve Components and CSRV® Engines. Almont is also obligated to pay a royalty to the Company equal to 2.5% of its annual modified gross profit (which has been defined as sales, less cost of sales, plus $400,000).

The manufacture of any Licensed Products by Sublicensee is prohibited.  Sublicensee is required to procure all internal combustion engines incorporating the CSRV® Valve System from the Company or its designee. The license granted to Sublicensee is exclusive within the Territory, provided that Sublicensee satisfies the minimum annual purchase commitment of 120 internal combustion engines incorporating the CSRV® system technology, the Coates Engines and all component parts. The agreement also grants Sublicensee a right of first refusal in the event that the Company negotiates an offer with another third party for a worldwide license to use the Licensed Products for the generation of electrical power.

The business plan of Almont, which is highly dependent on its ability to raise sufficient additional working capital, is based on its projected assessment of the marketplace demand for industrial generators and projects Gen Set purchases of up to 11,000 CSRV® Units per year over the first 5 years. The Company would not be able to accommodate that demand until it ramps up its production capacity, which would likely require several years, once it enters into large scale production. Almont intends to issue standard purchase orders, issued based on market and customer demand. The Company is unable to confirm any orders until it has sufficient working capital in place to manufacture generators on a larger scale. Almont plans to finance its purchases from cash flow and by way of project and/or equipment financing, proceeds from issuance of equity or corporate debt instruments and conventional bank financing.

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Capital Stock (Details) (USD $)	3 Months Ended		12 Months Ended					3 Months Ended				1 Months Ended	3 Months Ended		12 Months Ended		3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2011	Dec. 31, 2013	Mar. 31, 2014 Series A Preferred Stock [Member]	Dec. 31, 2013 Series A Preferred Stock [Member]	Mar. 31, 2014 Series B Preferred Stock [Member]	Mar. 31, 2014 12% Convertible Promissory Notes with a 60% Conversion Rate One [Member]	Mar. 31, 2013 12% Convertible Promissory Notes with a 60% Conversion Rate One [Member]	Mar. 31, 2014 8% convertible promissory note [Member]	Mar. 31, 2013 8% convertible promissory note [Member]	Jan. 31, 2013 George J. Coates [Member]	Mar. 31, 2014 George J. Coates [Member] Votes	Mar. 31, 2013 George J. Coates [Member]	Dec. 31, 2012 George J. Coates [Member]	Dec. 31, 2011 George J. Coates [Member]	Mar. 31, 2014 George J. Coates [Member] Series A Preferred Stock [Member] Votes	Mar. 31, 2014 Son Of Director [Member]	Mar. 31, 2013 Son Of Director [Member]	Mar. 31, 2014 Dutchess [Member]	Mar. 31, 2014 Minimum [Member] Son Of Director [Member]	Mar. 31, 2014 Maximum [Member] Son Of Director [Member]
Capital Stock (Textual)
Common stock, authorized shares	1,000,000,000			1,000,000,000
Common stock , par value	$ 0.0001			$ 0.0001
Shares of common stock issued												20,895,046		6,705,446				7,339,286	999,999	2,561,713
Common Stock Granted															20,275,046	620,000
Warrants sold to purchase one share of common stock																		7,339,286	2,000,001
Exercise price of warrants																			0.035		0.035	0.04
Proceeds from issuance of common stock																		$ 290,000	$ 35,000	$ 104,000
Fair value of common stock issued												1,761,000		203,000
Fair value of common stock granted															1,674,000	87,000
Amount of convertible promissory notes to be issued pursuant to convertible note agreement								335,000	335,000
Principal amount of 12% debt issued one								67,000	67,000
Proceeds from issuance of convertible debt	33,333	67,000							60,000
Description of debt conversion								The lender may convert the promissory note into unregistered shares of the Company's common stock at any time beginning 180 days after the date of funding. The conversion rate shall be equal to 70% of the lowest trading price of the common stock in the 20 trading day period ending on the date of conversion.
Common shares issued upon conversion of debt								3,050,000		2,059,138	5,705,447			6,705,446
Principal amount of debt, converted into shares of common stock								58,000		55,000	88,000
Number of votes from Series A Preferred Stock granted and issued																	207,800,000
Number of votes from Series A Preferred Stock held at end of period													1,621,810,000
Shares of Series A Preferred Stock issued																	20,708
Common stock shares, Reserved	134,597,343
Common stock, outstanding shares	342,759,313			327,749,176
Shares of common stock awarded			620,000
Stock compensation expense														$ 29,000			$ 52,000
Preferred stock, authorized shares	100,000,000			100,000,000	1,000,000	1,000,000	1,000,000
Preferred stock, issued shares	162,181			141,473	162,181	141,473											162,181
Preferred stock, outstanding shares	162,181			141,473	162,181	141,473
Preferred stock, par value	$ 0.001			$ 0.001
Preferred stock conversion basis	(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 Preferred Stock may be immediately converted at the option of the holder into one thousand restricted shares of the Company's common stock.

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Litigation and Contingencies (Details) (USD $)	3 Months Ended
	Mar. 31, 2014
Litigation And Contingencies Textual [Abstract]
Litigation settlement first installment amount, due on November 28, 2013	$ 40,000
Litigation settlement second installment amount, due on the 15th day of March 2014	25,000
Litigation settlement third installment amount, due on the 15th day of June 2014	25,000
Litigation settlement fourth installment amount, due on the 15th day of September 2014	25,000
Litigation settlement fifth installment amount, due on the 15th day of February 2015	10,000
Litigation settlement total amount	125,000
Accrued compensation included in accounts payable and accrued liabilities	60,000
Total amount to be paid in the event of default	$ 200,000

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Income Taxes

3 Months Ended

Mar. 31, 2014

Income Taxes [Abstract]

INCOME TAXES

22.   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 $59,000 and $255,000 for the three months ended March 31, 2014 and 2013, 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 the periods.

No liability for unrecognized tax benefits was required to be reported at March 31, 2014 and 2013.  Based on the management's evaluation, it was concluded that there are no significant uncertain tax positions requiring recognition in the Company's financial statements.  Management's evaluation was performed for tax years ended 2010 through 2013, 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, 2014 and 2013, there were no penalties or interest related to the Company’s income tax returns.

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Loss Per Share (Tables)

3 Months Ended

Mar. 31, 2014

Loss Per Share [Abstract]

Schedule of potentially issuable shares of common stock

Description	Number of Underlying Shares of Common Stock		Exercise Price			Number Vested		Number Non-Vested
Common stock options		100,000	$	0.0420			-		100,000
Common stock options		5,607,000		0.0600			5,607,000		-
Common stock options		1,800,000		0.2400			1,800,000		-
Common stock options		2,000,000		0.2500			2,000,000		-
Common stock options		50,000		0.3900			50,000		-
Common stock options		360,000		0.4000			360,000		-
Common stock options		100,000		0.4300			100,000		-
Common stock options		1,750,000		0.4400			1,750,000		-
Common stock options		30,000		1.0000			30,000		-
Common stock warrants		500,000		0.0200			N/A		N/A
Common stock warrants		666,667		0.0225			N/A		N/A
Common stock warrants		1,000,000		0.0250			N/A		N/A
Common stock warrants		333,333		0.0300			N/A		N/A
Common stock warrants		2,714,287		0.0350			N/A		N/A
Common stock warrants		7,125,000		0.0400			N/A		N/A
Common stock warrants		333,333		0.0450			N/A		N/A
Common stock warrants		400,000		0.0500			N/A		N/A
Common stock warrants		2,181,819		0.0550			N/A		N/A
Common stock warrants		2,000,000		0.0600			N/A		N/A
Common stock warrants		4,269,838		0.0625			N/A		N/A
Common stock warrants		571,429		0.0700			N/A		N/A
Common stock warrants		666,666		0.0900			N/A		N/A
Common stock warrants		416,667		0.1200			N/A		N/A
Common stock warrants		1,200,000		0.2500			N/A		N/A
Common stock warrants		833,333		0.2700			N/A		N/A
Common stock warrants		333,333		0.3000			N/A		N/A
Common stock warrants		153,846		0.3250			N/A		N/A
Common stock warrants		1,028,570		0.3500			N/A		N/A
$10,000, 10% Convertible promissory note		22,222		0.4500			N/A		N/A
8% Convertible promissory notes with 61% conversion discount		3,561,164		(1	)		N/A		N/A
8% Convertible promissory notes with 70% conversion discount		1,382,896		(1	)		N/A		N/A
10% Convertible promissory notes		2,817,427		(1	)		N/A		N/A
12% Convertible promissory notes		2,221,904		(1	)		N/A		N/A
Total		48,530,734

(1)   The principal amount of convertible promissory notes outstanding at March 31, 2014 was $207,000. Under the convertible terms of these notes, the number of shares of common stock into which these notes are convertible is variable because the conversion rates of the notes are based on the trading price of the common stock over a defined number of trading days leading up to the conversion date during a defined conversion rate pricing period. The actual number of shares underlying these convertible instruments will likely vary from the number assumed above. The number of shares underlying these convertible notes was determined based on the defined conversion rates of the various convertible notes, assuming conversion had occurred as of March 31, 2014.

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Unearned Revenue

3 Months Ended

Mar. 31, 2014

Unearned Revenue [Abstract]

UNEARNED REVENUE

15.   UNEARNED REVENUE

The Company has a remaining balance of a non-refundable deposit of $19,000 received from Almont in connection with its order for a natural gas fueled electric power CSRV® engine generator, which is included in unearned revenue in the accompanying balance sheets at March 31, 2014 and December 31, 2013.