Securities registered under Section 12(g) of the Exchange Act: Common
Stock, $0.001 par value
Indicate by check mark whether the issuer (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.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to Form
10-KSB.
The aggregate market value of the Common Stock
held by non-affiliates (as affiliates are defined in Rule 12b-2 of the Exchange Act) of the registrant, computed by reference
to the closing price on June 30, 2007, was $1,116,063.
As of September 13, 2013 there were 5,970,827,673 shares of issuer’s
common stock outstanding.
PART I
FORWARD-LOOKING INFORMATION
This Annual Report of SaviCorp on Form 10-KSB
contains forward-looking statements, particularly those identified with the words "anticipates," "believes,"
"expects," "plans," “intends”, “objectives” and similar expressions. These statements
reflect management's best judgment based on factors known at the time of such statements. The reader may find discussions containing
such forward-looking statements in the material set forth under "Legal Proceedings" and "Management's Discussion
and Analysis and Plan of Operations," generally, and specifically therein under the captions "Liquidity and Capital Resources"
as well as elsewhere in this Annual Report on Form 10-KSB. Actual events or results may differ materially from those discussed
herein.
ITEM 1. DESCRIPTION OF BUSINESS.
Overview
In 2007, we were considered a development stage
enterprise because we then had no significant operations, had not yet generated revenue from new business activities and were devoting
substantially all of our efforts to business planning and the search for sources of capital to fund our efforts. We have acquired
all rights to certain technology for the production of a gasoline and diesel engine emission reduction device which we believe
delivers superior emission reduction technology and operating performance. This technology is an emission reduction device believed
to reduce harmful exhaust emissions in gasoline and diesel engines, and increase fuel efficiency. As of 2011, the Company began
selling its products.
History
We were originally incorporated as Energy Resource
Management, Inc. on August 13, 2002 and subsequently adopted name changes to Redwood Energy Group, Inc. and Redwood Entertainment
Group, Inc., upon completion of a recapitalization on August 26, 2002. The re-capitalization occurred when we acquired the non-operating
public shell of Gene-Cell, Inc., a public company. Gene-Cell had no significant assets or operations at the date of acquisition
and we assumed all liabilities that remained from its prior discontinued operation as a biopharmaceutical research company. The
historical financial statements presented herein are those of Redwood Entertainment Group, Inc. and its predecessors, Redwood Energy
Group, Inc. and Energy Resource Management, Inc.
The public entity used to recapitalize the
Company was originally incorporated as Becniel and subsequently adopted name changes to Tzaar Corporation, Gene-Cell, Inc., Redwood
Energy Group, Inc., Redwood Entertainment Group, Inc., and finally its current name, Savi Media Group, Inc. In 2012, Savi Media
Group, Inc. changed its name to SaviCorp.
Automotive Ventilation Systems
During a normal compression in an automotive
engine, a small amount of gases in the combustion chamber escape past the pistons. Approximately 70% of these gases, known as
blow-by gases, are unburned fuel that can dilute and contaminate the engine oil, causing corrosion to critical engine parts, and
cause a build-up on sludge. As the engine speed increases, the pressure in the crankcase increases as a result of the blow-by
gases. When the pressure gets too great in the crankcase, it can cause oil to leak past seals and gaskets, causing oil leaks.
If the pressure is not relieved, it would cause all of the oil to blow out of the engine. Prior to 1963, cars used road draft
tubes that just let the hydrocarbon emissions from the crankcase out into the open air. In 1963, automobiles created a positive
crankcase ventilation, which consists of a valve, called the PCV valve, which creates a metered opening, and a hose that runs
to the car’s intake manifold. The intake manifold has a vacuum effect that sucks the blow-by gases from the crankcase into
the intake manifold, where the gases are burned. This process reduces the emissions produced by the engine as only the results
of the burned gases are emitted.
Our Product
SaviCorp’s primary business is the sale
of two inventions: the DynoValve & DynoValve Pro. The DynoValve is an OEM replacement for the present Positive Crankcase Ventilation
(“PCV”) valve installed on most gasoline engines in the United States and in most other countries of the world. After
exhaustive research and patent pending applications, on September 10, 2010, the Air Resources Board of the California Environmental
Protection Agency issued Executive Order D-677, permitting the advertisement, sales and installation of the DynoValve on certain
gas-powered vehicles in California. The savings, in both fuel economy and emissions, have surpassed the Company's expectation and
our products are available now on the market. The Company believes this is "Green Technology" and substantially reduces
automobiles’ "carbon footprint".
DynoValve & DynoValve Pro have the following
positive features:
|
-
|
Addresses carbon footprint (substantially reduces carbon monoxide emissions through smog emission
tacking);
|
|
-
|
Improves fuel use and mileage;
|
|
-
|
Increases engine performance (Dynamometer readings show a dramatic increase in overall engine performance);
|
|
-
|
Fuel use and oil consumption is substantially reduced;
|
|
o
|
The savings in over-all fuel, oil and engine service requirements are significant;
|
|
o
|
Carbon Credits are generated by the use of the DynoValve & DynoValve Pro;
|
|
o
|
The expense of fitting DynoValve is recaptured with short use and dependant on mileage use (within
6 to 12 months for passenger cars but 2 months with a taxi);
|
|
o
|
Useable with marine engines as well;
|
|
o
|
The Company hopes to have the DynoValve Pro (diesel) available in 2013, which should be used by
large fleet owners, locomotive, heavy equipment, stationary engines and marine engines as well as ocean liners.
|
|
-
|
Suitable for original factory applications on new engines as well as retrofitting used vehicles.
|
The Company’s mission is to become a
leading provider of multiple fuel efficiency and emission reduction technologies and related systems that solve practical emission
reduction and engine combustion system problems. The Company’s strategy is to have a broad and highly competitive product
line, skilled professional management and attain international brand recognition and market acceptance. Our main objective is to
design, develop, manufacture and distribute exhaust emission and fuel efficiency technologies to world markets to significantly
increase fuel efficiency and reduce emissions around the globe.
SaviCorp’s management team has over 80
years of combined experience in entrepreneurial ventures, technology development companies, venture financing, management, product
development & marketing and administration. In addition, the Company’s strategic plan is structured to attract the best
management for directing the development and growth of its organization in order to fulfill the Company’s aggressive market
penetration mission.
Market Opportunities: SaviCorp is evolving
from an aftermarket fuel-saving and emission-reduction product development company into a market-driven company. Our Management
has comprehensive experience in introducing new products and technologies and is seeking to capitalize on our capabilities within
our chosen market. The company is developing dynamic internal/external sales and marketing staff that will be charged with expanding
distribution channels and penetrating high-value markets. Brand name recognition and broad market acceptance are the primary objectives
of SaviCorp’s business development efforts.
Overall, there are numerous competing products
on the market for consumers. It is no secret that fuel prices will remain high for the foreseeable future and, as a result, there
are many fuel-saving devices under development by entrepreneurs and assorted technology companies. In this economic environment,
most consumers are looking for products that will reduce their overall fuel and vehicle operating costs, allowing them to stay
within their current household budgets. Most fuel-saving devices currently in the marketplace are variants of magnetic control
devices, purporting to improve fuel economy by realigning fuel molecules as they pass through a magnetic field. Gasoline is a mixture
of hydrocarbon molecules that vary in size and shape. Longer molecules tend to burn slower and incompletely while leaving unburned
hydrocarbons that eventually form various exhaust pollutants. The magnetic devices on the market seek to delay the burning of short
hydrocarbons and hasten the burning of the longer hydrocarbons (by reducing long molecules to short molecules). The general theory
regarding a magnetic field’s possible effect on fuel may have some merit; however, in practice it has been found that any
effect that the magnets may have with respect to changing the molecular composition of gasoline is minor and vanishes well before
gasoline actually enters a vehicle’s engine because the molecules do not stay aligned after leaving the magnetic field. The
EPA, Popular Mechanics, and even the Discovery Channel’s “Mythbusters” program have undertaken independent tests
of such products. None of the tests conducted by these organizations showed any benefit from magnetic field devices.
Aside from the magnetic field devices described
above there are many other types of “fad” or pseudo-scientific fuel-saving devices currently on the market that have
been shown not to work; this has produced significant skepticism that taints legitimate devices that are under development. There
are, however, some good products that have demonstrated their efficacy through rigorous independent and verifiable laboratory testing.
SaviCorp’s DynoValve® product is
an example of a product that is grounded in solid science and engineering know-how that has demonstrated its efficacy in both laboratory
and field tests.
In October 2010, a 24-month field test was
concluded with the Los Angeles County Fire Department (LACoFD). LACoFD retrofitted 10 gasoline-powered vehicles with the DynoValve®.
During the test, three vehicles were removed from service for various reasons unrelated to the beta field test. The remaining
seven vehicles, after installation and adjustments to fine-tune and optimize the DynoValve® to each particular vehicle, successfully
completed field-testing without any adverse impact on vehicle performance and/or maintainability. Overall, the vehicles achieved
a significant reduction in emissions during the 24 months of testing.
The test vehicles exhibited substantial reductions
in the following pollutants: hydrocarbons (HC), carbon monoxide (CO), and oxides of nitrogen (NOx). The LACoFD has expressed interest
in testing the DynoValvePro®, a product that is intended for use on diesel engines, as soon as the Company is ready to release
the product for testing and evaluation. The opportunity with the Los Angeles County Fire Department (LACoFD) is potentially very
large; the agency has 190 stations with 22 battalions covering 2,200 square miles and 58 cities.
On December 9, 2010, SaviCorp announced that
McCarthy Construction Company (St Louis, MO) had completed six weeks of testing on five randomly chosen vehicles from within its
fleet. The results for each vehicle were significant emissions reduction, improved engine performance, and reduced fuel consumption.
Following these initial results, McCarthy Construction Company decided to test an additional five vehicles at another facility.
These additional tests went well, and we proceeded with the installation of our DynoValve® on some 250 vehicles that service
its Newport Beach, California facility. McCarthy Construction Company believes that the device has the potential to extend the
useful life of its vehicles by one or two years while also reducing the company’s fuel costs. McCarthy Construction Company
employs 2,000 people and operates in all 50 states. McCarthy is headquartered in St. Louis, Missouri with regional offices in
Phoenix, Arizona; Las Vegas, Nevada; Seattle, Washington; Portland, Oregon; Dallas, Texas; Sacramento, San Francisco and Newport
Beach, California. The 136-year-old company is involved in large projects, having constructed airports, bridges, highways, hospitals,
office buildings, retail/industrial centers, universities and research centers throughout the US. Here’s a link to a press
release about McCarthy: (http://www.savicorp.com/news/23-mccarthy-construction-leaving-green-footprints-with-savicorps-dynovalve.aspx).
North Carolina’s Stallings Police Dept’s
25 Ford Crown Victoria (2011) fleet experienced a MPG increase of 31.58% after the installation of DynoValve. This is the type
of success we hope to translate into contracts with larger public service entities nationwide.
We believe our business opportunities within
the State of California alone are enormous. The state has 36 cities with over 100,000 residents and 217 cities with 25,000 to
100,000 residents—each of these cities has numerous municipal, corporate and small business fleets of vehicles that are
potential customers for SaviCorp. SaviCorp management believes that this is a viable market for blow-by gases related crankcase
ventilation system and emission reduction products.
Although SaviCorp believes that we have no
direct competition in the marketplace, retail pricing may be dictated by the average consumer’s disposable income. In order
for the DynoValve® to attain a leadership role in the industry, SaviCorp will need to price the product to reflect the value
brought to end-users. As the market expands, future products should be priced more aggressively to increase market penetration
and achieve a position of planned-for market dominance. SaviCorp’s goal of establishing sales and marketing partnerships
and/or alliances will further our market penetration.
Car dealerships sell used and new vehicles
and are also a viable market for SaviCorp. Used cars are normally identified as certified pre-owned vehicles, age ranging from
one to 5 years old. A common car dealership sales tactic is to offer aftermarket products to buyers during the loan application
process. In recent years, the sale of used cars has become a major source of profits for car dealerships in the wake of shrinking
margins on new cars. To make them acceptable to more customers, most dealerships promote certified pre-owned vehicles to customers
who want a warranty on their used car. This often raises the price, but in return provides customers with peace of mind. In the
current economic environment, the relative demand for used cars has increased as sales of new cars have declined. Due to the fact
that the product has the potential to lower operating costs as well as extend the useful life of a vehicle—a proposition
that is very appealing to consumers—the DynoValve is targeted to the used car market.
As the year 2012 progressed, our customer base
expanded. A major key to our longer-term success is our ability to arrange for sales and installations with customers operating
large numbers of vehicles, commonly referred to as “fleets.” For our purposes, fleets can vary in size from 25 to 15,000
vehicles. Fleets can be located in specific geographical areas, such as within a city, within a county or two, part of a state,
within a state or multiple states in a region of the US, or nationwide. For now, the Company is focused on fleets within the US.
There are few product sales in Canada. We have patents pending in many “industrial” countries, including Mexico and
Canada.
Typically, in the early stage, our relationship
with a fleet size customer involves “proving” our technology on a test basis with a few vehicles operating as part
of the customer’s fleet. We guarantee a 10% improvement in fuel efficiency. Once a customer has experienced “real time”
results out in the field, our products gain acceptance and the rate of sales and installations take off at a faster pace. In almost
all cases to date, we have exceeded the 10% guarantee. Generally, the longer vehicles are driven with our product in place, the
more performance improves with the passage of time. Our results to date have varied from an 8% to 100% improvement. Currently,
we have no fleets with less than a 15% rate of improvement. Fleets with Ford F-150s (4.6 litre engines) and Chevy light trucks
(4.7 litres) are getting between 30% and 49% fuel savings.
In 2013, we have made major inroads in the
Middle Eastern country of Dubai and others. We have a 5 year licensing agreement with them that we entered into this quarter. Regarding
our progress, our original commitment for 2,000 DynoValves (sold at $250 each) equate to $500,000. In order for them to fulfill
and maintain this 5 year licensing agreement, they are required to purchase 500 additional DynoValves per quarter (an additional
2,000 DynoValves / $500,000 per year) for a total of $2,500,000 over a 5 year span. With the initial investment of $500,000, this
totals $3,000,000 for their 5 year licensing agreement. We have already delivered 2,000 of those DynoValves. The areas that are
included in this agreement are UAE, Dubai, Malaysia, India, and Africa.
We sent a mechanic to Dubai to convince the
Dubai Department of Standardization to mandate the DynoValve on all government vehicles and eventually to the general population
(“the mandate”). When any country attempts to mandate a new individual product, there are usually issues. Understandably,
there should not be certain vehicle exclusions for this particular mandate, therefore the DynoValve needs to be installable on
all makes and models.
In our case, one issue is that many vehicles
in these Middle Eastern countries are not compatible with the DynoValve or it simply does not fit. In order to resolve this compatibility
issue, we’ve created a new product called the “DynoCap.” The DynoCap is an oil cap that has a fitting which fits
directly on top of the oil cap allowing the DynoValve to sit either horizontally or vertically thus making it adaptable to virtually
any gas driven engine that has a place to add oil, not limited to automobiles.
The new cap is now being tested at our corporate
headquarters in Santa Ana, CA. We have vehicles travelling all over California to ensure performance is as effective as our standard
DynoValve, when connected directly to the vehicle’s crankcase ventilation system. We have provided a few DynoCaps to Dubai
to demonstrate how the compatibility issue has been resolved, and provided samples for their own testing with the device in their
own countries. A provisionary patent and trademarks for the name have been filed with the US Trade and Patent Office and a PCT
will be filed for the whole world.
The second issue is the wiring harness, which
was originally created for the USA and met compliance regulations according to American standards. The Department of Standardization
and the UAE affiliates did not approve of the exposed colored wires. As a result, we modified the wiring harness and completely
molded all the connectors, improving the appearance which is actually beneficial for us. This brand new wiring harness was delivered
to Dubai for their approval. The group loved it and guaranteed 100% that SavvyGreen (our associate company in Dubai) would be given
confirmation and status on the mandate (Preferred Vendor Status).
If SaviCorp gets this mandate, we may increase
sales by possibly 50,000 units every 90 days or less. If this works as well as the DynoValve, it will cut installation time by
at least 50%. Once tested, we will continue the process of obtaining an executive order for the DynoCap. We will also have quick
release hoses as well as the vertical and horizontal versions. We hope it will also work on other fuels as well, and will expand
our testing regarding this as soon as we can.
In mid-September of 2013, we are set to demonstrate
in New Mexico. We will be training Ford dealerships in Albuquerque, which we believe is home to one of the biggest Ford dealers
in the US. We will be training their mechanics for installation and their sales team for distribution and sales of the DynoValve.
During training, there will be radio commercials airing on their local radio stations.
We have a 60 second spot on a local Los Angeles
area television network, KABC, for 16 weeks beginning late August until November 23rd, hopefully generating more business.
Additionally, there are two other AM radio
stations and another FM station that will be playing one minute commercials for DynoValve in the local areas where we will be training
at these Ford dealerships. Most of these trainings will be in New Mexico, Lake Tahoe, and, perhaps, in Reno, Nevada. These will
be the test beds, so if our campaigning is successful, we will then mimic this endeavor and move forward in other cities within
the United States.
Besides Ford training, we are also bringing
in two vehicles from the Los Angeles Police Department (“LAPD”). An appointment has already been scheduled with the
City of Los Angeles. To our knowledge, they have around 150,000 vehicles. We believe they will introduce their Class 1 and 2 trucks
which are their pickups and vans, to begin a pilot program.
There is also a police event in Fontana, CA
where they test drive vehicles. Some police departments have actually chosen the Ford Interceptor which is going to be their brand
new Ford Explorer, which the DynoValve does quite well on. We will receive two of these vehicles in the lab for DynoValve conversion.
They will run these at the Fontana event track to see what the results are in comparison to their stock models. We are hoping this
generates enough business to begin working with municipalities, and targeting the west coast police departments.
We are still currently doing installations
for Con Edison in New York and New Jersey, as well as working with the EMTA. As a result of Hurricane Sandra, our efforts since
the beginning of this year have declined due to damage and recovery efforts. However, it appears we are increasing speed and hopefully
we’ll be back on track with Con Edison, which is a huge fleet as well as other large fleets on the east coast.
Our Company spokesperson, Lauren Fix AKA “The
Car Coach,” has appeared on several local TV shows. With her recent appearance with John Stossel on Fox Business Channel,
we received many calls as well as made several sales. Hopefully with her connections and her network of followers, we can obtain
more sales.
“The DynoValve Pro Lite” is ready
to go. This unit is very similar to the standard DynoValve Pro, with the exception of the oil separator, making it a much smaller
unit since natural gas is much cleaner than diesel fuel. We are able to convert these, and we have some testing scheduled for Fullerton,
CA School District for their co-generation plant as well as their school buses, which run on CNG (Compressed Natural Gas). This
product is now being manufactured. We hope to take some of these test samples and begin installations and testing for results so
we can introduce this to all CNG fleets out there. Most trucks and buses in California are now being converted to CNG. Hopefully,
we will be able to hit that market and be able to offer the DynoValve Pro Lite CNG version. We also have a very large food supplier
that is willing to lend some of their vehicles for testing.
If all goes well in the Middle East, it appears
that Dyno Green Tech, LLC
(“DGT “) as well as SavvyGreen would like to have an exclusive
distribution agreement to supply to all of Africa, Russia, and Europe. We believe it is too premature to make a commitment at
this time without seeing their success with the existing countries they are currently licensed for. Although, they’ve been
extremely successful in a short period of time, so we are hopeful and looking forward to revisiting this again.
The goal of the Company is to try to spread
ourselves with the DynoValve Pro Lite and DynoCap right now. Hopefully we will increase business in the US and be able to branch
out completely in the Middle East as well as eventually promote in Europe and other countries. We are speaking with the Philippines
on some potential agreements.
The DynoCap looks very promising because it
reduces installation time and it becomes more compatible to 2 stroke engines, motorcycles, small bikes, or large polluting 2 stroke
and diesel engines. It will be less expensive to introduce without worries of having to separate the oil or clean the oil because
all we are doing is capturing the vapor and recycling it. We are hoping to make the DynoCap in a smaller version to fit 2 stroke
vehicles.
It is estimated there were 248 million vehicles
on the road in the US alone at the end of 2010. The average age of these vehicles is estimated by the National Automobile Dealers
Association to be ten and a half years. The United States has been the biggest producer of CO2 emissions on the planet; producing
22% of the World’s emissions in 1995, expecting to total 15% by 2035, topped at that point by China’s 17% and Eastern
Europe/former Soviet Unions’ 19%.
We at SaviCorp are doing everything we can
to build our capabilities to service an expanding customer base and help clean up the planet one vehicle at a time.
DynoValve Overview
Dyno: an instrument designed to measure power, exhaust emissions,
and fuel economy.
Valves: devices that regulate the flow of gases through apertures
by opening and closing.
In the 1960's, the PCV system appeared on new
American domestic cars. The PCV system allows gases to escape in a controlled manner from the crankcase of an internal combustion
engine. We believe that our DynoValve products are the most significant advances in PCV valve technology since the first engine
exhaust emission control system.
We also believe the DynoValve (gasoline) &
DynoValve Pro (diesel) are the first and only electronically controlled PCV/Crankcase Oil Recovery Emission Control Systems available.
DynoValve
The DynoValve products are electronically controlled
PCV/ Crankcase Oil Recovery Emission Control Systems (“COREC”). Independent test results by Environmental Testing Corporation,
CEE, of California show that with DynoValve products, there is a reduction of all exhaust emissions, especially in nitrogen oxide
(“NOx”) while simultaneously reducing fuel and oil consumption. There are currently two types of DynoValve products
– DynoValve and DynoValve Pro.
DynoValve is a patented PCV valve and designed
for use in automotive gasoline powered vehicles. The DynoValve replaces Original Equipment Manufacturer (“OEM”) PCV
valves. DynoValve eliminates the vacuum problems associated with today’s standard PCV valves by optimally regulating the
flow of engine blow-by-gases. This ventilation is accomplished with the use of an electronically controlled reprogrammable microprocessor.
The electronically-controlled DynoValve regulates the flow of blow-by gases returning to the engine intake system, thereby improving
fuel mileage and reducing hydrocarbons (HC), carbon monoxide (CO) and oxides of nitrogen (NOx) exhaust emissions.
DynoValve Pro
DynoValve Pro is a closed crankcase emission
control and oil recovery system designed for diesel engines. It filters particles and oil droplets from the blow-by gases. The
filtered gas is then returned to the air intake system of the crankcase and the filtered oil is returned to the engine crankcase.
By recycling the crankcase emissions through DynoValve Pro, harmful gases and oil film that causes engine and environmental problems
is filtered. Maintenance costs may be lowered with the reduction of oily residue that coats the engine and its components or the
prevention of clogged radiators and air cleaners. DynoValve Pro helps engines operate at full efficiency while improving performance
and lowering the costs of operation. We currently are seeking the required approvals from the Air Resources Board of the California
Environmental Protection Agency to advertise, sell and install DynoValve Pro in California.
Both DynoValve and DynoValve Pro can regulate
the flow of gases depending on engine speed. This is accomplished by designing the DynoValve products & IP to be electronically
activated by using a reprogrammable microprocessor that processes data from the engines' revolutions per minute (RPM).
Both DynoValve and DynoValve Pro are available
in various sizes and versions and can be installed by a mechanic in approximately 1 to 2 ½ hours.
The DynoValve products are an improvement on
the current pollution positive crankcase ventilation reduction controls, including the implementation of cleaner fuels and
related hardware. While these measures have had the intended effect of reducing pollution causing emissions, they have not eliminated
the emissions to an acceptable level. Our technology is more effective than passive systems currently in use, provides excellent
fuel efficiency and virtually eliminates fugitive crankcase emissions. The goal of the Crankcase Ventilation System technology
is to provide a more aggressive method of emission reduction that is not possible by
passive means and improves fuel efficiency.
Independent Testing
We have sought out and have received independent
testing results, which to-date have been very encouraging and validated our claims. At our request, tests were conducted by California
Environmental Engineering, a greater Los Angeles area based leading independent environmental testing firm, over the last eight
years. Overall, California Environmental Engineering is a consulting firm specializing in the testing of environmental and engine
instrumentation. California Environmental Engineering provided a written conclusion after testing that provides, in part: “We
have evaluated the data from the test runs in the demonstration of the Crankcase Ventilation System. We can attest to the positive
effect of the Crankcase Ventilation System. In conclusion, the technology has demonstrated that it has both economic and
environmental benefits". Additional testing has been done by KLD Environmental Consultations also with similar positive results.
Pricing
We have been selling DynoValves on a retail
basis for $399, with some discounts given to early adopters and test clients. Installation fees typically run around $100. Wholesale
prices have been in the $200 to $300 range.
Marketing Strategy
Our initial market segment focuses on developing
and maintaining strategic partnering and marketing relationships with high profile, name-brand organizations. Initially, we will
market through a select group of commercial retailers and focus to sign agreements with strategic partners or major commercialization
partners. This will allow us to rapidly access our market through pre-existing relationships and to minimize overhead during the
development of a sustainable revenue base.
In order to widen our market channels, we
have and continue to implement an ongoing marketing campaign in parallel to our negotiation with major retail distributors and
strategic partners so that we can respond effectively to the needs of the market while creating a direct access to its potential
clients/and/or customers and insuring prompt delivery of our products. The target market will be local cities across the nation
and major cities worldwide. As disclosed, we are also marketing our products directly to corporate fleets, municipalities, government
entities and OEM’s.
We sell directly to retail customers
and distributors.
The targeted channels for this would be:
The goal will be to establish strategic
partnerships and marketing relationships with high profile, name brand organizations. We could private label, co-label or customize
our products, allowing partners to rapidly penetrate their customer base by using their name and reputation.
|
2.
|
Catalog, Retail & OEM.
|
The goal will be to establish sales
and marketing partnerships with compatible companies that directly sell and ship goods to consumers through catalog sales. This
will be a further means of market penetration. Catalogs increase overall outreach into the marketplace, providing a venue in which
products can be directly positioned against competition, and influence buyer awareness and acceptance on an extremely broad scale.
We will work with catalog partners to stretch marketing and advertising budgets through co-op marketing means, including direct
mail efforts.
Ongoing direct mail will also be
an important sales technique to further penetrate the consumer market once our product lines are established. By concentrating
on magazine circulation research and mailing list data, we will be able to quickly pinpoint buyers, fine tune our message for
specific demographic segments and maximize sales through advertising and direct mail. Also, using a third party order entry provider
will ensure timely response and turnaround of prospect queries and orders and give the Company the flexibility to further increase
sales.
Much of the work accomplished for
direct mail and information distribution can be directly applied to the Company’s Web Site. This will make the products,
Company, and technical information more cost effective and accessible in a timely fashion. It will also enable a more timely distribution
of product information updates and potentially increase sales of our products. We plan to use social networking (i.e. Twitter,
Facebook, etc.) as a way to further market our products. Currently we do have a small number of product sales generated from our
website. See
www.savicorp.com
.
Suppliers
We currently have all of the production completed
by His Divine Vehicle, a related entity owned by our CEO Serge Monros as determined by our licensing agreement with HDV.
Intellectual Property
We also own certain trademarks associated with
the marketing of our products. DynoValve and DynoValve Pro have been registered with the US Patent and Trademark Office. We also
claim copyright to certain white papers and marketing pieces. Due to our inability to generate commercial sales of our products,
all patent costs were fully impaired in 2006.
The DynoValve products are the subject of
several pending U.S. patent applications (US-2010/0076664-A1 and US-2010/0180872-A1) held by Serge V. Monros, Chief Executive
Officer and Chairman of the Board of the Company. There are corresponding applications that have been filed in a number of foreign
countries. HDV, an affiliate of Mr. Monros, manufactures the “DynoValve” and “DynoValve Pro” products
based on these patent applications and then sells them to the Company for resale pursuant to the Product Licensing Agreement dated
December 15, 2008, as amended on December 16, 2009. Under the Product Licensing Agreement, the price at which HDV sells the products
to the Company is subject to change at any time upon written notice. The Company may determine the prices that it charges to its
customers. The Product Licensing Agreement is non-exclusive and automatically renews on an annual basis provided certain sales
volumes are achieved and the Company is otherwise not in breach. HDV may, after an applicable cure period, terminate the Product
Licensing Agreement earlier if it believes that the Company is deficient in meeting its responsibilities. HDV may amend the Product
Licensing Agreement at any time by giving notice to the Company, unless the Company objects within ten days of such notice.
As consideration for HDV entering into the
Product Licensing Agreement, the Company agreed to issue to Mr. Monros and HDV, if and when available, an aggregate of 500 Million
shares of Common Stock, 5 Million shares of Series A Preferred Stock and 5 Million shares of Series C Preferred Stock. In July,
2011, HDV and Mr. Monros entered into a revised licensing agreement which modified the prior consideration paid to an aggregate
of 600 Million shares of Common Stock, 6.5 Million shares of Series A Preferred Stock and 2.5 Million shares of Series C Preferred
Stock. In connection with this transaction, Mr. Monros waived $350,000 in accrued salary owed to him by the Company, and HDV waived
$372,000 owed to it by the Company.
Mr. Monros has continued the process of preparing
patent applications for the other versions of the DynoValve products & related IP. In March, 2013, the Company entered into
a five (5) year Master Distribution Agreement with His Divine Vehicle to sell the DynoValve and DynoValve Pro in various international
territories. The consideration for the agreement was guaranteeing a minimum annual volume, payment for the DynoValves acquired
and a three percent (3%) royalty payment. The Company has entered into an agreement with Dyno Green Tech, LLC ("DGT")
to sell the DynoValve products in the licensed territories. DGT had ordered 2,000 DynoValves as of 6/30/13. The DynoValves were
shipped in the third quarter of 2013.
Competition
The industry is marked by competition in two
industry segments: emission reduction and fuel efficiency. Our product is designed to compete within both segments. We face competition
from numerous foreign and domestic companies of various sizes, most of which are larger and have greater capital resources. Competition
in these areas is further complicated by possible shifts in market share due to technological innovation, changes in product emphasis
and applications and new entrants with greater capabilities or better prospects.
Passive crankcase ventilation systems have
been available for many years and have been, in fact, a required emission-control system on certain vehicles. In addition, the
Environmental Protection Agency is responsible for setting emissions standards that all vehicles must meet. These emissions standards
must be met by all new vehicles produced, resulting in all car manufacturers developing technology to lower emissions and raise
fuel efficiency.
In addition to car manufacturers, we compete
against other companies that develop after-market products that lower emissions and/or increase fuel efficiency. Some of these
competitors’ products include Racor’s CCV, Majestic SAFE-T-PRODUCTS Refilter™, Save the World Air, Inc’s
Mark I ZEFS device and Indigo Electronics CVS for boats. We are aware of no direct competition with our DynoValve. There is competition
indirectly with fuel saving products, from fuel additives to cigarette lighter plug devices. Here are some examples of competitors’
products:
|
1.
|
Racor Crankcase Ventilation Device: list price: $368.00; Parker Hannifin Corporation, Racor Division,
Cleveland, Ohio 44124. Racor states: Racor CCV systems offer superior protection against contaminated crankcase blow-by and provide
engine operators a highly effective solution. SaviCorp comment: no test results to compare with the DynoValve and our patented
system provide superior oil coalescence and crankcase pressure control under the most severe conditions.
|
|
2.
|
Refilters™ device: Majestic Companies, Ltd. incorporated in Maryland. No data on the device
exists online. According to EDGAR online, Refilters™ could be retrofitted to existing heavy-duty diesel engines. http://sec.edgar-online.com/majestic-safe-t-products-ltd/sb-2-securities-registration-small-business/2002/11
/12/section21.aspx
|
|
3.
|
Mark I ZEFS device: Save the World Air, Inc. Price: unknown. According to its manufacturer, the
ZEFS devices create magnetic fields to reduce the size of the fuel molecules passing from the carburetor or center point fuel injector
of the vehicle to the inlet manifold prior to combustion. This creates an atomization process that enhances the efficiency of combustion,
which reduces harmful toxic emissions and
increases fuel economy
.
ZEFS device has been granted a patent see United States Patent Application No. 10/275946. SaviCorp comment: Save the World Air
Inc. makes Zero Emission Fuel Saver (ZEFS) technology that is intended to reduce tailpipe pollutants and increase fuel efficiency
in gasoline and diesel-powered vehicles.
|
|
4.
|
RAND Corporation has conducted independent tests and cannot confirm the benefits of ZEFS. "RAND's analysis
of laboratory testing data provided by Save the World Air that deals with the performance of the ZEFS device installed in vehicles
found at best mixed results from the tests and therefore could not confirm the effectiveness of the technology in actual use,"
said Michael Toman, director of the Environment Energy and Economic Development program at RAND, which carried out the study.
|
|
5.
|
Atomic 4 AT-4CVS Crankcase Ventilation system device: Listed Price: Complete Retrofit Kit is $240.00
to $265.00 (Indigo Electronics, Williamsburg, VA 23185). The product (according to Indigo Electronics): eliminates Crankcase smoke
completely with the system that Universal forgot!; easy one hour, "bolt on" installation, all necessary components included;
eliminates fouling of carburetor air passages; and improves performance. SaviCorp comment: no test data to compare with DynoValve.
|
Government Regulations
We believe that we are in compliance with all
applicable regulations that apply to our business as it is presently conducted. Our individual manufactured products, as such,
are not subject to certification or approval by the U.S. Environmental Protection Agency or other governmental agencies domestically
or internationally before they are sold. However, such agencies may test and certify a sample engine fitted with our devices before
we are allowed to engage in certain activities, like selling or marketing our products in certain jurisdictions. For example, on
September 10, 2010, the Air Resources Board of the California Environmental Protection Agency issued Executive Order D-677, permitting
the advertisement, sales and installation of the DynoValve on certain gas-powered vehicles based on emissions test data generated
on two vehicles. We intend to seek a similar order for DynoValve Pro. Our sales and marketing activities may be limited until we
receive the necessary authorizations from the applicable environmental regulations.
Depending upon whether we manufacture or license
our devices in the future and in which countries such devices are manufactured or sold, we may be subject to regulations, including
environmental regulations at such time. However, we are not aware of any existing or probable governmental regulations that may
have a material effect on the normal operations of our business. There also are no relevant environmental laws that require compliance
by us that we have not complied with that may have a material effect on the normal operations of the business.
Employees
During 2007, we had consulting agreements with
all management and staff members. We regularly utilize the services of consultants on an as-needed basis. As of December 31, 2012,
the Company had 6 full time employees. In addition, we hire independent contractor labor on an as needed basis. Historically none
of our employees belonged to a collective bargaining union. We have not experienced a work stoppage and historically our employee
relations have been good.
RISKS RELATED TO BUSINESS
You should carefully consider the following
risk factors and all other information contained herein as well as the information included in this Annual Report in evaluating
our business and prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties,
other than those we describe below, that are not presently known to us or that we currently believe are immaterial, may also impair
our business operations. If any of the following risks occur, our business and financial results could be harmed. You should refer
to the other information contained in this Annual Report, including our financial statements and the related notes.
Risks Relating to Our Business
:
We Have a Limited Operating History Upon Which You Can Base An
Investment Decision.
Our company was formed on August 13, 2002,
and through December 31, 2007 we had not sold any products and did not have any agreements for the sale of our products or licensing
of our technology. Therefore we have a limited operating history upon which you can make an investment decision, or upon which
we can accurately forecast future sales, if any. Furthermore, once we begin producing products for sale we may not be able to market
our technology and products sufficiently to generate public interest in our goods.
If only a small portion
of the population decides to use our products, we will experience limits on our revenues and our ability to achieve profitability.
You should, therefore, consider us subject to the business risks associated with a new business. The likelihood of our success
must be considered in light of the expenses, difficulties and delays frequently encountered in connection with the formation and
initial operations of a new business.
We Have a History Of Losses Which
May Continue, Which May Negatively Impact Our Ability to Achieve Our Business Objectives.
We incurred net operating losses of $3,840,851
for the year ended December 31, 2006 and $2,783,768 for the year ended December 31, 2007. We cannot assure you that we can achieve
or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition
inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues
and profits, if any, will depend upon various factors, including whether we will be able to generate revenue. To date we have
not generated any revenues from our business activities. As a result of continuing losses, we may exhaust all of our resources
prior to completing the development of our products. Additionally, as we continue to incur losses, our accumulated deficit will
continue to increase, which might make it harder for us to obtain financing in the future. We may not achieve our business objectives
and the failure to achieve such goals would have an adverse impact on us, which could result in reducing or terminating our operations.
If We Are Unable to Obtain Additional Funding
Our Business Operations Will be Harmed.
We will require additional funds to sustain
and expand our research and development activities. We anticipate that we will require up to approximately $5,000,000 to fund our
anticipated research and development operations for the next twelve months, depending on revenue from operations. Additional capital
will be required to effectively support the operations and to otherwise implement our overall business strategy. Even if we do
receive additional financing, it may not be sufficient to sustain or expand our research and development operations or continue
our business operations. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if
at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our research
and development plans.
If We Do Obtain Additional Financing Our
Then Existing Shareholders May Suffer Substantial Dilution.
In the event we are able to find addition financing,
such additional funds will likely be obtained through additional equity financing. If we raise additional funds by issuing equity
securities, existing stockholders may experience a dilution in their ownership. In addition, as a condition to giving additional
funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders.
Our Independent Auditors Have Expressed
Substantial Doubt About Our Ability to Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future Financing.
In their report dated September 13, 2013, our
independent auditors stated that our financial statements for the year ended December 31, 2007 were prepared assuming that we would
continue as a going concern. Our ability to continue as a going concern is an issue raised due to our incurring net losses of $259,231,178
during the period from inception, August 13, 2002, to December 31, 2007. In addition, at December 31, 2007, we were in a negative
working capital position of $6,906,703 and had a stockholders' deficit of $6,876,585. Our ability to continue as a going concern
is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional
funding from the sale of our securities, generating sales or obtaining loans and grants from various financial institutions where
possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that
such methods will prove successful.
Many of Our Competitors are Larger and Have
Greater Financial and Other Resources than We do and Those Advantages Could Make it Difficult for Us to Compete With Them.
The general market for our products and services
is extremely competitive and includes several companies which have achieved substantially greater market shares than we have,
have longer operating histories, have larger customer bases, and have substantially greater financial, development and marketing
resources than we do. If overall demand for our products should decrease it could have a materially adverse affect on our operating
results.
Competition in the US Market is Fierce,
With Significant Technical Developments Occurring Within the Past Several Years.
The market place is becoming more competitive
with other product offerings including fuel additives, fuel line magnetic devices, inline catalytic converters, liquid injection
systems and oil additives. While none appear to be offering the type of emission reduction technology and quality solution that
we are producing, this may change as new emission type technology and related approaches emerge.
We Acquired Rights to Our Technology from
One of the Founding Investors Without a Valuation Opinion or Arm’s Length Negotiations.
We acquired rights to our technology from one
of the founding investors for a price and consideration which we believe to be reasonable but this price was not negotiated on
an arm’s length basis nor was the transaction based upon a valuation opinion supporting that price. As a result, there is
no assurance that price paid nor terms are reasonable. If the price paid was not reasonable or the terms of such transaction were
not reasonable, we may have incurred costs which do not reflect the true value of the assets acquired and such costs may have unreasonably
limited our likelihood of achieving our financial goals.
A Manufacturer's Inability to Produce Our
Goods on Time and to Our Specifications Could Result in Lost Revenue and Net Losses.
While our new facility has limited manufacturing
abilities, we will depend upon independent third parties, including His Diving Vehicle, an entity owned by our CEO, for the manufacture
of substantially all of our products. Our products will be manufactured to our specifications by domestic or foreign manufacturers.
The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause
us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal
to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect as our revenues would
decrease and we would incur net losses as a result of loss of sales of the product, if any sales could be made. Further, because
quality is a leading factor when customers and retailers accept or reject goods, any decline in quality by our third-party manufacturers
could be detrimental not only to a particular order, but also to our future relationship with that particular customer.
As a Result of Our Industry, We Need to
Maintain Substantial Insurance Coverage, Which Could Become Very Expensive or Have Limited Availability.
Our marketing and sale of products and services
creates an inherent risk of claims for liability. As a result, we have secured and will continue to maintain insurance in amounts
we consider adequate to protect us from claims. We cannot, however, be assured to have resources sufficient to satisfy liability
claims in excess of policy limits if required to do so. Also, there is no assurance that our insurance provider will not drop our
insurance or that our insurance rates will not substantially rise in the future, resulting in increased costs to us or forcing
us to either pay higher premiums or reduce our coverage amounts which would result in increased liability to claims.
Any Inability to Adequately Protect Our
Proprietary Technology Could Harm Our Ability to Compete.
Our future success and ability to compete depends
in part upon our proprietary technology, patents and trademarks, which we attempt to protect with a combination of patent, copyright,
trademark and trade secret laws, as well as with our confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and are time-consuming and expensive to obtain and/or maintain. Further, despite our efforts, we
may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.
Any patents that are issued to us could be
invalidated, circumvented or challenged. If challenged, our patents might not be upheld or their claims could be narrowed. Our
intellectual property may not be adequate to provide us with competitive advantage or to prevent competitors from entering the
markets for our products. Additionally, our competitors could independently develop non-infringing technologies that are competitive
with, equivalent to, and/or superior to our technology. Monitoring infringement and/or misappropriation of intellectual property
can be difficult, and there is no guarantee that we would detect any infringement or misappropriation of our proprietary rights.
Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause
us to divert financial and other resources away from our business operations.
Our Products may Infringe Upon the Intellectual
Property Rights of Others and Resulting Claims Against Us Could be Costly and Require Us to Enter Into Disadvantageous License
or Royalty Arrangements.
The automotive parts industry is characterized
by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation
of intellectual property rights. Although we attempt to avoid infringing upon known proprietary rights of third parties, we may
be subject to legal proceedings and claims for alleged infringement by us or our licensees of third-party proprietary rights, such
as patents, trade secrets, trademarks or copyrights, from time to time in the ordinary course of business. Any claims relating
to the infringement of third-party proprietary rights, even if not successful or meritorious, could result in costly litigation,
divert resources and our attention or require us to enter into royalty or license agreements which are not advantageous to us.
In addition, parties making these claims may be able to obtain injunctions, which could prevent us from selling our products. Furthermore,
former employers of our employees may assert that these employees have improperly disclosed confidential or proprietary information
to us. Any of these results could harm our business. We may be increasingly subject to infringement claims as the number of products
and the numbers of features grow.
If We Are Unable to Retain the Services
of Mr. Monros or If We Are Unable to Successfully Recruit Qualified Personnel, We May Not Be Able to Continue Our Operations.
Our success depends to a significant extent
upon the continued service of Mr. Serge Monros, our Chief Executive Officer, Chief Financial Officer and Chief Technology Officer.
Loss of the services of Mr. Monros could have a material adverse effect on our growth, revenues, and prospective business. We do
not maintain key-man insurance on the life of Mr. Monros. In addition, in order to successfully implement and manage our business
plan, we will be dependent upon, among other things, successfully recruiting qualified personnel. Competition for qualified individuals
is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able
to find, attract and retain qualified personnel on acceptable terms.
If We Become Subject to Additional Laws
or Regulations Related to Our Products, We May Not Be Able to Continue Our Operations.
We are or may be subject to numerous federal,
state, local and foreign laws and regulations governing our operations, including the handling, transportation and disposal of
our products and our non-hazardous and hazardous substances and wastes, as well as emissions and discharges into the environment,
including discharges to air, surface water and groundwater. Failure to comply with such laws and regulations could result in costs
for corrective action, penalties or the imposition of other liabilities. Changes in environmental laws or the interpretation thereof
or the development of new facts could also cause us to incur additional capital and operation expenditures to maintain compliance
with environmental laws and regulations. We also may be subject to laws and regulations that impose liability and cleanup responsibility
for releases of hazardous substances into the environment without regard to fault or knowledge about the condition or action causing
the liability. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or
operated properties. The presence of contamination from such substances or wastes could also adversely affect our ability to utilize
our leased properties. Compliance with environmental laws and regulations has not had a material effect upon our earnings or financial
position; however, if we violate any environmental obligation, it could have a material adverse effect on our business or financial
performance.
Risks Relating to the Cornell Financing
Arrangement
:
There Are a Large Number of Shares Underlying
Our Convertible Debentures and Warrants That May be Available for Future Sale and the Sale of These Shares May Depress the Market
Price of Our Common Stock.
As of December 31, 2007, we had 1,045,456,564
shares of common stock issued and outstanding, secured convertible debentures issued in July, August and September 2006 outstanding
that may be converted into a maximum of 823,333,333 shares of common stock and outstanding warrants to purchase 2,900,000,000
shares of common stock. In addition, we have an obligation pursuant to our securities purchase agreement entered into in July
2006, as amended, to issue additional debentures that may be converted into a maximum of 166,666,667 shares of our common stock
based on then current market prices. All of the shares, including all of the shares issuable upon conversion of the secured convertible
debentures and upon exercise of our warrants, may be sold without restriction, upon the effectiveness of a registration statement
that the Company has contractual obligations to complete. The sale of these shares may adversely affect the market price of our
common stock.
The Issuance of Shares Upon Conversion of
the Secured Convertible Debentures and Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to Our Existing
Stockholders.
The issuance of shares upon conversion of the
secured convertible debentures and exercise of warrants may result in substantial dilution to the interests of other stockholders
since Cornell Capital Partners LP may ultimately convert and sell the full amount issuable on conversion. Although Cornell Capital
Partners LP may not convert their secured convertible notes if such conversion would cause them to own more than 4.99% of our outstanding
common stock, this restriction does not prevent Cornell Capital Partners LP from converting and/or exercising some of their holdings
and then converting the rest of their holdings. In this way, Cornell Capital Partners LP could sell more than their limit while
never holding more than this limit.
If Our Stock Price Falls Below $.003 Per
Share We Will Be Required To Make Monthly Payments In Cash And If We Are Required for Any Other Reason to Repay Our Outstanding
Secured Convertible Debentures, We Would Be Required to Deplete Our Working Capital, If Available, Or Raise Additional Funds.
Our Failure to Repay the Secured Convertible Debentures, If Required, Could Result in Legal Action Against Us, Which Could Require
the Sale of Substantial Assets.
In July 2006, we entered into a securities
purchase agreement for the sale of an aggregate of $2,970,000 principal amount of secured convertible debentures. Beginning the
earlier of (i) the first business day of the month immediately following the month in which a registration statement is first
declared effective or (ii) November 1, 2006, and continuing on the first business day of each calendar month thereafter, we are
required to make a mandatory redemption payment of $225,000 and accrued and unpaid interest, which payment can be made in cash
or in restricted shares of our common stock. We anticipate that we will make the monthly payments in shares of common stock, whenever
possible. However, in the event that our stock price should fall below $0.003, we will be required to make such monthly payments
in cash. In addition, any event of default such as our failure to repay the principal or interest when due, our failure to issue
shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty in the securities purchase agreement or related
secured convertible debentures, the assignment or appointment of a receiver to control a substantial part of our property or business,
the filing of a money judgment, writ or similar process against our company in excess of $50,000, the commencement of a bankruptcy,
insolvency, reorganization or liquidation proceeding against our company and the delisting of our common stock could require the
early repayment of the secured convertible debentures, including default interest rate on the outstanding principal balance of
the debentures if the default is not cured within the specified grace period. If we were required to repay the secured convertible
debentures, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the
secured convertible debentures when required, the debenture holders could commence legal action against us and foreclose on all
of our assets to recover the amounts due. Any such action would require us to curtail or cease operations.
If an Event of Default Occurs under the
Securities Purchase Agreement dated July 10, 2006, as Amended, Secured Convertible Debentures or Security Agreement, the Investors
Could Take Possession of all Our Goods, Inventory, Contractual Rights and General Intangibles, Receivables, Documents, Instruments,
Chattel Paper, and Intellectual Property.
In connection with the Securities Purchase
Agreement dated July 10, 2006, as amended, we executed a security agreement in favor of the investor granting it a first priority
security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments,
chattel paper, and intellectual property. The Security Agreements state that if an event of default occurs under the securities
purchase agreement, secured convertible debentures or security agreement, the investor has the right to take possession of the
collateral, to operate our business using the collateral, and has the right to assign, sell, lease or otherwise dispose of and
deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.
Risks Relating to Our Common Stock
:
There Are a Large Number of Shares Underlying
Our Series A and C Convertible Preferred Stock and the Issuance of Shares Upon Conversion of the Series A and C Convertible Preferred
Stock Would Cause Immediate and Substantial Dilution to Our Existing Stockholders.
As of December 31, 2007, we had 1,045,456,564
shares of common stock issued and outstanding and series A and C convertible preferred stock that may be converted into 1,491,527,500
shares of our common stock. The issuance of shares upon conversion of the series A and C convertible preferred stock would result
in substantial dilution to the interests of other stockholders.
Our Officers And Directors Owned a Controlling
Interest in Our Voting Stock And Investors Did Not Have Any Voice in Our Management.
As a result of ownership of stock options and
convertible preferred stock, our officers and directors, in the aggregate, beneficially own approximately 53.9% of our outstanding
common stock as of December 31, 2007. As a result, these stockholders, acting together, had the ability to control substantially
all matters submitted to our stockholders for approval, including:
●
|
|
election of our board of directors;
|
●
|
|
removal of any of our directors;
|
●
|
|
amendment of our certificate of incorporation or bylaws; and
|
●
|
|
adoption of measures that could delay or prevent a change in control or impede a merger,
takeover or other business combination involving us.
|
As a result of their ownership and positions,
our directors and executive officers collectively are able to influence all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common
stock. Management's stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain
control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
If We Fail to Remain Current in Our Reporting
Requirements, We Could be Removed From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to Sell Our Securities
and the Ability of Stockholders to Sell Their Securities in the Secondary Market.
Companies trading on the OTC Bulletin Board,
such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current
in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain
current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our
securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability
of stockholders to sell their securities in the secondary market.
Our Common Stock is Subject to the "Penny
Stock" Rules of the SEC and the Trading Market in Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome
and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has
adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
●
|
|
that a broker or dealer approve a person's account for transactions in penny stocks;
and
|
●
|
|
the broker or dealer receive from the investor a written agreement to the transaction,
setting forth the identity and quantity of the penny stock to be purchased.
|
In order to approve a person's account for
transactions in penny stocks, the broker or dealer must:
●
|
|
obtain financial information and investment experience objectives of the person; and
|
●
|
|
make a reasonable determination that the transactions in penny stocks are suitable
for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks
of transactions in penny stocks.
|
The broker or dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which,
in highlight form:
●
|
|
sets forth the basis on which the broker or dealer made the suitability determination;
and
|
●
|
|
that the broker or dealer received a signed, written agreement from the investor prior
to the transaction.
|
Generally, brokers may be less willing to execute
transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose
of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks
of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the rights and remedies available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
ITEM 2. DESCRIPTION OF PROPERTY.
We do not own any real property. We currently
lease our 40,000 square foot corporate headquarters located at 2530 South Birch Street, Santa Ana, CA 92707. Our telephone number
at that office is (877) 611-7284 and our facsimile number is (714) 641-7113. The lease is for a one-year period with an annual
lease payment of $110,000 and an annual extension option. We believe that these properties are adequate for our current and immediately
foreseeable operating needs.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become party to litigation
or other legal proceedings that we consider to be a part of the ordinary course of our business.
On January 16, 2007, Serge Monros, the Company’s
then chief technology officer, filed a derivative suit on behalf of the Company naming the Company, Mario Procopio, and Kathy Procopio
as defendants in the Superior Court of the State of California for the County of San Diego. Mr. Monros’ derivative suit alleged
the following causes of action: (i) breach of fiduciary duty of loyalty; (ii) breach of fiduciary duty of care; (iii) unjust enrichment;
(iv) conversion; (v) waste of corporate assets; and (vi) trade libel. This case was settled on 02/25/2008.
On January 25, 2007, Mario Procopio
filed a derivative suit on behalf of the Company against the Company and Serge Monros in the Superior Court of the State of
California for the County of Orange. Mr. Procopio’s derivative suit alleged the following causes of action: (i) breach
of contract; (ii) promise without intent to perform; (iii) breach of fiduciary duty; (iv) rescission; (v) intentional
misrepresentation; (vi) negligent misrepresentation; and (vii) conversion.
These two suits were settled on February 25,
2008. In reaching the settlement, no parties have made any admission of liability or wrongdoing. As part of the settlement, Mario
Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have voluntarily waived accrued unpaid compensation
and returned the following securities to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares, 7,102,300 common
shares, and 125,000,000 options. As consideration, the Company has agreed to a limited indemnification of the Procopios for certain
transactions agreed-upon by the Procopios and the Company. The Procopios also waive any rights to the 4,000,000 Preferred A shares
they previously pledged to Cornell Capital and the parties understand that Cornell Capital retains control of this stock.
In January 2007, Herrera Partners filed an
arbitration claim against the Company in Harris County, Texas. Herrera Partners claim was for $63,700 for non-payment for services
rendered. The suit was settled in January, 2009 and a payment schedule was agreed upon and paid.
On March 14, 2007, United Rentals filed a suit
against the Company, Greg Sweeney, and Mario Procopio in Orange County Superior Court. United Rentals claim is for non-payment
for services rendered. A judgment was entered in favor of United Rentals Northwest, Inc. and has been subsequently paid.
On or about July 28, 2011, SaviCorp, a Nevada
corporation, formerly known as Savi Media Group, Inc. (the “Company”) entered into a Repayment Agreement (the “Repayment
Agreement”) with YA Global Investments, L.P., a Cayman Islands exempt limited partnership formerly known as Cornell Capital
Partners, L.P. (“YA Global”).
On or about July 10, 2006, the Company and
YA Global, then known as Cornell Capital Partners, L.P., entered into a Securities Purchase Agreement which was subsequently amended
and restated on August 17, 2006 (collectively the “SPA”) wherein the Company issued and sold to YA Global secured convertible
debentures in the aggregate amount of approximately US$2,485,000 (collectively, the “Debentures”) and certain warrants
(collectively the “Prior Warrants” and with the Debentures, the “Securities”) to purchase an aggregate
of 2,900,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”).
In connection with the SPA, the Company and
YA Global entered into ancillary agreements, including a Security Agreement, an Insider Pledge and Escrow Agreement, a Registration
Rights Agreement, and other related documents (the SPA and such ancillary agreements are collectively referred to hereinafter as
“Financing Documents”). Copies of the Financing Documents have been attached to the Company’s prior filings with
the United States Securities and Exchange Commission (the “SEC”) and are hereby incorporated in their entirety by reference.
Pursuant to the terms of the Repayment Agreement,
all of the Company’s obligations under the Financing Documents have been terminated in full. Without limitation, all
amounts otherwise due under the Debentures are deemed satisfied in full, the Prior Warrants are deemed cancelled, and any and all
security interests granted by the Company in favor of YA Global pursuant to the Financing Documents have been extinguished, including
the release of 4,000,000 shares of Series A Preferred Stock held in escrow. In exchange for the foregoing, the Company delivered
to YA Global: (i) a one-time cash payment of US$550,000; and (ii) new warrants to purchase up to 25,000,000 shares of Common Stock
at an exercise price of $0.0119 (the “Current Warrants”). The Current Warrants expire on or about July 28, 2014. A
copy of the Repayment Agreement and Current Warrants have been attached as exhibits to the Form 8-K filed August 2, 2011 and are
hereby incorporated in their entirety by reference.
The Company received a letter from the Securities
and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a
“formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena Duces
Tecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information contained
in the subpoena. An index of the source of all such produced information and an authentication declaration were also to be supplied.
The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the Company has violated
federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the investigation.
We initially hired the Los Angeles law firm
of Troy Gould to represent us in the matter of this investigation. Pete Wilke, Esq. is currently handling this matter. As of the
date of this filing, we believe we have provided all requested material to the SEC. Updates on the investigation will be supplied
by supplemental filings hereto.
Status of prior private investment; $0 in
2007 (although HDV sold $13,000 of its shares), $1,000 in 2008 (although HDV sold $453,750 of its shares), $442,000 in 2009, $879,550
in 2010, $1,930,828 in 2011, $342,000 in the first calendar quarter of 2012 and $100,000 in the 2nd quarter of 2012. There is
concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure
and/or failure to file securities sales notices as required by federal law).
In 2006, the Company issued shares for services
valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $7,875 in
2008 and shares for services valued at $74,400 in 2009. We have no plans to offer rescission for these share issuances.
We offered rescission to many of the 2011 investors
in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at
by Counsel. The results of our 2011 rescission offer, in terms of rescission offers accepted by shareholders, were very encouraging.
We had one rescission offer acceptance and refunded $1,000.
Generally, we believe we have good relationships
with our shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered shares from us since January
1, 2007 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any accepted rescission offer.
However, there is no assurance that rescission offer acceptances will not have a material effect on our finances or that we will
be able to re-pay those electing to rescind in a complete and timely manner.
The Company received a letter dated June 7,
2013 with a Civil Complaint titled Arnold Lamarr Weese, et al v. SaviCorp filed in the Northern District of West Virginia. In addition
to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's counsel
began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants have sued
for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts to hold the
Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company has filed for dismissal and intends on vigorously
defending its rights or reaching a settlement to release the Company and Mr. Monros of any liability.
We may become involved in material legal proceedings
in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.
Pursuant to a written consent of a majority
of stockholders dated August 19, 2005, in lieu of a special meeting of the stockholders, the majority of stockholders approved
the following actions:
1.
|
|
To elect five directors to the Company's Board of Directors, to hold office until
their successors are elected and qualified or until their earlier resignation or removal;
|
2.
|
|
To ratify certain financing transactions requiring potential stock issuances in excess
of currently authorized capital stock;
|
3.
|
|
To amend the Company's Articles of Incorporation, as amended, to:
|
(a)
|
|
increase the number of authorized shares of common stock, par value $.001 per share
(the “Common Stock”), of the Company from 1,000,000,000 shares to 6,000,000,000 shares;
|
(b)
|
|
increase the number of authorized shares of preferred stock, par value $.001 per share
(the “Preferred Stock”), of the Company from 30,000,000 shares to 40,000,000 shares;
|
4.
|
|
To ratify the selection of Ham, Langston & Brezina, L.L.P. as independent registered
public accounting firm of the Company for the year ending December 31, 2005; and
|
5.
|
|
To adopt the Company’s 2005 Incentive Stock Plan.
|
There have been no stockholders meeting since
August 19, 2005.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2007 and 2006 and for the Period
From Inception, August 13, 2002 to December 31, 2007
|
1.
|
Organization and Significant Accounting Policies
|
SaviCorp (the "Company")
is a Nevada Corporation that has acquired rights to "blow-by gas and crankcase engine emission reduction technology"
which it intends to develop and market on a commercial basis. The technology is a relatively simple gasoline and diesel engine
emission reduction device that the Company intends to sell to its customers for effective and efficient emission reduction and
engine efficiency for implementation in both new and presently operating automobiles. The Company is considered a development stage
enterprise because it currently has no significant operations, has not yet generated revenue from new business activities and is
devoting substantially all of its efforts to business planning and the search for sources of capital to fund its efforts.
The Company was originally incorporated
as Energy Resource Management, Inc. on August 13, 2002 and subsequently adopted name changes to Redwood Energy Group, Inc. and
SaVi Media Group, Inc., upon completion of a recapitalization on August 26, 2002. The re-capitalization occurred when the Company
acquired the non-operating public shell of Gene-Cell, Inc. Gene-Cell Inc. had no significant assets or operations at the date of
acquisition and the Company assumed all liabilities that remained from its prior discontinued operation as a biopharmaceutical
research company. The historical financial statements presented herein are those of SaVi Media Group, Inc. and its predecessors,
Redwood Energy Group, Inc. and Energy Resource Management, Inc.
The non-operating public shell used
to recapitalize the Company was originally incorporated as Becniel and subsequently adopted name changes to Tzaar Corporation,
Gene-Cell, Inc., Redwood Energy Group, Inc., Redwood Entertainment Group, Inc., SaVi Media Group, Inc., and finally its current
name SaviCorp.
Significant Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results
could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.
Cash and Cash Equivalents
The Company considers all highly
liquid short-term investments with an original maturity of three months or less when purchased, to be cash equivalents. The Company
had no cash equivalents as of December 31, 2007 and $1,088 as of December 31, 2006.
Concentration of Credit
Risk
Cash and cash equivalents are the
primary financial instruments that subject the Company to concentrations of credit risk. The Company maintains its cash deposits
with major financial institutions selected based upon management’s assessment of the financial stability. Balances periodically
exceed the $100,000 federal depository insurance limit; however, the Company has not experienced any losses on deposits.
Furniture and Equipment
Furniture and equipment is recorded
at cost. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective
accounts, and any resulting gains or losses are included in the results of operations. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets. Repairs and maintenance costs are expensed as incurred.
Impairment Of Long-Lived Assets
The Company evaluates the recoverability
of long-lived assets when events and circumstances indicate that such assets might be impaired and determines impairment by comparing
the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Impairments
are charged to operations in the period to which events and circumstances indicate that such assets might be impaired. During
2006 we evaluated furniture and equipment and patent rights and recorded impairment allowances totaling $273,799.
Intangible Assets
Intangible assets are amortized
using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically
and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
Income Taxes
The Company uses the liability method
of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future
years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company
provides a valuation allowance to reduce deferred tax assets to their net realizable value.
Stock-Based Compensation
Effective January 1, 2006,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment
(SFAS 123R), and began expensing at fair value on a straight-line basis the costs resulting from share-based payment transactions.
Prior to 2006, the Company
elected to follow Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25)
and related interpretations in accounting for stock options granted to employees as permitted by SFAS No. 123,
Accounting
for Stock-Based Compensation
(SFAS 123), as amended by SFAS No. 148,
Accounting for Stock-Based
Compensation—Transition and Disclosure
. Under APB 25, the Company did not recognize share-based payment expense in
its financial statements because the stock option awards qualified as fixed awards and the exercise price of the
Company’s employee stock options equaled the market price of the underlying stock on the date of grant.
Valuation of Derivatives
Financial Accounting Standard No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) established financial
accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts,
and for hedging activities. The convertible debentures issued to Golden Gate Investors on May 5, 2005 and to Cornell Partners
in 2006 are subject to derivative accounting under SFAS 133 and EITF No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock
."
A model was developed that values the compound embedded derivatives within the convertible notes and associated freestanding
warrants. The embedded derivatives are valued using a lattice model which incorporates a probability weighted discounted cash
flow methodology. This model is based on future projections of the various potential outcomes. The model analyzed the underlying
economic factors that influenced which likely events would occur, when they were likely to occur, and the specific terms that
would be in effect at the time (i.e. interest rates, stock price, conversion price, etc.). The primary factors driving the economic
value of the embedded derivatives are stock price, stock volatility, whether the
C
ompany
has obtained a timely registration, an event of default, and the likelihood of obtaining alternative financing. The warrants issued
with the convertible debt are a freestanding derivative financial instrument. Using a lattice model with a probability weighted
exercise price, the fair value of the derivative was computed at inception and at each reporting period and are recorded as a
derivative liability.
The derivative liabilities result
in a reduction of the initial carrying amount (as unamortized discount) of the Convertible Note. This derivative liability is marked-to-market
each quarter with the change in fair value recorded in the income statement. Unamortized discount is amortized to interest expense
using the effective interest method over the life of the Convertible Note. If the Note is converted or the warrants are exercised,
the derivative liability is released and recorded as additional paid in capital.
Profit/Loss Per Share
Basic and diluted net profit or
loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period.
Potentially dilutive options, warrants and convertible preferred stock that were outstanding during 2006 were not considered in
the calculation of diluted earnings per share because the Company's net loss rendered their impact anti-dilutive. Accordingly,
basic and diluted loss per share is identical for the year ended December 31, 2006. See Note 12 for a discussion of potentially
dilutive instruments.
Fair Value of Financial Instruments
The Company includes fair value
information in the notes to financial statements when the fair value of its financial instruments is different from
the book value. When the book value approximates fair value, no additional disclosure is made.
New Accounting Pronouncements
In February 2006, the FASB issued
SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(SFAS 155). SFAS 155 amends SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133), and SFAS 140. SFAS 155 also resolves issues addressed in SFAS
133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized Financial Assets
. In
summary, SFAS 155: (1) permits an entity to make an irrevocable election to measure any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation at fair value in its entirety, with changes in fair value recognized
in earnings; (2 )clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133;
(3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (4) clarifies that
concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) amends SFAS 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
SFAS 155 is effective for all financial
instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.
Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial
statements, including financial statements for any interim period for that fiscal year. Provisions of SFAS 155 may be applied to
instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. SFAS 155 is not expected to have
a material impact on the Company’s financial position or results of operations upon adoption.
In June 2006, the FASB issued FASB
Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting
for Income Taxes
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company
plans to adopt FIN 48 effective January 1, 2007. FIN 48 is not expected to have a material impact on the Company’s financial
position or results of operations upon adoption.
In September 2006, the FASB issued
SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB
Statements No .87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet
and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also
requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet, with limited exceptions.
An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement
plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to
measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end balance sheet is effective for
fiscal years ending after December 15, 2008. If in the last quarter of the preceding fiscal year an employer enters into a transaction
that results in a settlement or experiences an event that causes a curtailment of the plan, the related gain or loss pursuant to
Statement 88 or 106 is required to be recognized in earnings that quarter. The adoption of SFAS 158 will not have a material impact
on the Company’s financial position or results of operations.
In September 2006, the FASB issued
SFAS 157. SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157 also provides guidance
regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value,
and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted.
SFAS 157 is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.
In September 2006, the United States
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 (SAB 108). SAB 108 addresses how the effects
of prior year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements.
SAB 108 requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate
whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors.
SAB 108 does not change the SEC’s
previous guidance in SAB No. 99 on evaluating the materiality of misstatements. A registrant applying the new guidance for the
first time that identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006,
may correct those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The cumulative
effect alternative is available only if the application of the new guidance results in a conclusion that a material error exists
as of the beginning of the first fiscal year ending after November 15, 2006, and those misstatements were determined to be immaterial
based on a proper application of the registrant’s previous method for quantifying misstatements. Because of the beginning-of-year
recognition of the cumulative effect adjustment, misstatements occurring in the year of adoption cannot be included in that adjustment.
SAB 108 requires the following disclosures if a cumulative effect adjustment is recorded: the nature and amount of each individual
error included in the cumulative effect adjustment; when and how each error arose; and the fact that the errors had previously
been considered immaterial. The cumulative effect adjustment is available only for prior-year uncorrected misstatements. The adjustment
should not include amounts related to changes in accounting estimates. SAB 108 did not have a material impact on the Company’s
financial position or results of operations upon adoption.
In October 2006, the FASB issued
FSP FAS 123R-6,
Technical Corrections of FASB Statement No. 123R
(FSP FAS 123R-6). This FSP addresses certain technical
corrections of SFAS 123R. The Company will apply the provisions in this FSP beginning January 1, 2007. FSP FAS 123R-6 is not expected
to have a material impact on the Company’s financial position or results of operations upon adoption.
In October 2006, the FASB issued
FSP FAS 123R-5,
An Amendment of FSP FAS 123R-1
(FSP FAS 123R-5). This FSP addresses whether a modification of an instrument
in connection with an equity restructuring should be considered a modification for purposes of applying FSP FAS 123R-1,
Classification
and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement
No. 123R.
The Company will apply the provisions in this FSP beginning January 1, 2007. FSP FAS 123R-5 is not expected to have
a material impact on the Company’s financial position or results of operations upon adoption.
Change in Accounting Principle for
Registration Payment Arrangements. In December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position on No. EITF 00-19-2, Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”). FSP EITF
00-19-2 provides that the contingent obligation to make future payments or otherwise transfer consideration under a registration
payment arrangement should be separately recognized and measured in accordance with Statement of Financial Accounting Standards
(“FAS”) No. 5, Accounting for Contingencies , which provides that loss contingencies should be recognized as liabilities
if they are probable and reasonably estimable. Subsequent to the adoption of FSP EITF 00-19-2, any changes in the carrying amount
of the contingent liability will result in a gain or loss that will be recognized in the statement of operations in the period
the changes occur. The guidance in FSP EITF 00-19-2 is effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of FSP EITF 00-19-2.
For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the
issuance of FSP EITF 00-19-2, this guidance is effective for our financial statements issued for the year beginning January 1,
2007, and interim periods within that year.
On January 1, 2007, we adopted the
provisions of FSP EITF 00-19-2 to account for the registration payment arrangement associated with our July 2006 financing (the
“July 2006 Registration Payment Arrangement”). As of January 1, 2007 and December 31, 2007, management determined that
it was probable that we would have payment obligation under the July 2006 Registration Payment Arrangement; therefore, the Company
accrued a contingent obligation of $340,860 as required under the provisions of FSP EITF 00-19-2. In addition, the compound embedded
derivative liability associated with the July 2006 Financing was adjusted to eliminate the registration payment arrangement and
the comparative financial statements of prior periods and as of December 31, 2006 have been adjusted to apply the new method retrospectively.
The cumulative effect of this change in accounting principle adjusted retained earnings as of December 31, 2006 by $658,129. The
following financial statement line items for the twelve months ended December 31, 2006 were affected by the change in accounting
principle. In addition, under EITF 00-19, the Company would not book the contingent registration rights payment payable.
|
|
As of
|
|
|
|
December 31,
2006
|
|
Under EITF 00-19
|
|
|
|
Income Statement Impacts
|
|
|
|
|
Change in value of CED
|
|
|
2,871,934
|
|
Amortization of Discount
|
|
|
117,504
|
|
Balance Sheet Impacts
|
|
|
|
|
Discount on Note
|
|
|
1,764,136
|
|
Derivative Liability
|
|
|
3,459,979
|
|
|
|
|
|
|
Under EITF 00-19-02
|
|
|
|
|
Income Statement Impacts
|
|
|
|
|
Change in value of CED
|
|
|
2,302,219
|
|
Amortization of Discount
|
|
|
112,211
|
|
Balance Sheet Impacts
|
|
|
|
|
Discount on Note
|
|
|
1,730,720
|
|
Derivative Liability
|
|
|
2,768,435
|
|
In February 2007, the FASB issued
SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statements
No. 115
(SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement,
which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 also
establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities.
SFAS 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be carried at fair value. In addition, SFAS 159 does not
establish requirements for recognizing and measuring dividend income, interest income or interest expense, nor does it eliminate
disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements
included in SFAS No. 157,
Fair Value Measurements
(SFAS 157), and SFAS No. 107,
Disclosures about Fair Value of Financial
Instruments
. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15,
2007. The Company currently is evaluating the impact of adopting SFAS 159.
|
2.
|
Going Concern Considerations
|
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. In 2007, the Company had limited operations and
resources. The Company has accumulated net losses in the development stage of $259,231,178 for the period from inception, August
13, 2002, to December 31, 2007. At December 31, 2007, the Company is in a negative working capital position of $6,906,703 and has
a stockholders' deficit of $6,876,585. Additionally, as of December 31, 2007 the Company faced substantial challenges to future
success as follows:
|
·
|
The Company is delinquent on critical liabilities such as payments to key consultants.
|
|
·
|
The Company failed to comply with the terms of the agreement under which it obtained the rights
to certain technology that was expected to become the basis for the Company’s future success and is subject to losing rights
to such technology.
|
|
·
|
The Company was in default of its registration rights agreement with the investor in its long-term
debt. Such default and the Company’s inability to fund its ongoing operations increase the likelihood that the investor could
seize its assets to partially satisfy the debt or find another operator of those assets.
|
Such matters raise substantial doubt
about the Company's ability to continue as a going concern. These financial statements do not include any adjustment that might
result from the outcome of this uncertainty.
The goals of the Company will require
a significant amount of capital and there can be no assurances that the Company will be able to raise adequate short-term capital
to sustain its current operations in the development stage, or that the Company can raise adequate long-term capital from private
placement of its common stock or private debt to emerge from the development stage. There can also be no assurances that the Company
will ever attain profitability. The Company's long-term viability as a going concern is dependent upon certain key factors, including:
|
•
|
The Company's ability to obtain adequate sources of funding to sustain it during the development
stage.
|
|
•
|
The ability of the Company to successfully produce and market its gasoline and diesel engine emission
reduction device in a manner that will allow it to ultimately achieve adequate profitability and positive cash flows to sustain
its operations.
|
In order to address its ability
to continue as a going concern, implement its business plan and fulfill commitments made in connection with its agreement for acquisition
of patent rights (See Note 3), the Company hopes to raise additional capital from sale of its common stock. Sources of funding
may not be available on terms that are acceptable to the Company and its stockholders, or may include terms that will result in
substantial dilution to existing stockholders.
|
3.
|
Agreement for Acquisition of Patent Rights
|
On March 31, 2003, the Company entered
into a letter of intent to acquire 20% of SaVi Group, the name under which Serge Monros was conducting business in the ownership
of numerous patents he had developed. The acquisition of 20% of SaVi Group was completed in the second quarter of 2004 upon the
Company's payment of $38,500 in cash and the issuance of 4,000 shares of the Company's common stock to Serge Monros.
Subsequent to the acquisition, the
Company changed its name from Redwood Entertainment Group, Inc. to SaVi Media Group, Inc. Serge Monros changed the name of the
entity in which he holds the patents to His Divine Vehicle, Inc. (“HDVI”). Further discussions between the Company
and Serge Monros led to a September 1, 2004 agreement (the "Agreement") under which the Company acquired 100% of the
rights to various patents (the "Patents") owned by Serge Monros. The Agreement was amended and modified on December 30,
2004 and again on April 6, 2005. The most important patented technology, for which the Company acquired rights, was technology
to produce a relatively simple gasoline and diesel engine emission reduction device that the Company intends to sell to manufacturers
of new vehicles and owners of presently operating automobiles.
The Company does not have the records
of the amounts spent in the development of the Patents and is unaware of the amounts expended.
Under the terms of the Agreement
as amended, the Company acquired the Patents rights for the following consideration:
|
·
|
5,000,000 shares of Series A preferred stock to both Serge Monros, who owned the patents, and Mario
Procopio, the Company's founder and Chief Executive Officer. The Series A preferred stock is convertible to and holds voting rights
of 100 to 1 of those attributable to common stock. These shares are to remain in escrow for three years, and, accordingly, they
will not be converted to common stock during that period.
|
|
·
|
5,000,000 shares of common stock to both Serge Monros and Mario Procopio.
|
|
·
|
Three-year stock options to acquire 125,000,000 shares of the Company's common stock at $0.00025
per share to both Serge Monros and Mario Procopio. This provision of the agreement was reached in April 2005. The options to Serge
Monros are considered part of the cost of the patent rights under the Agreement. The Options to Mario Procopio will be recognized
as compensation expense of $31,250,000 in the second quarter of 2005.
|
The Agreement represents a three
year relationship that may be renegotiated or rescinded at the end of that term if the use of the Patents does not produce revenue
equal to costs associated with the Agreement or modified annual cost, whichever is less. The Agreement does not define the terms
"Costs associated with the Agreement" or "Modified Annual Costs". Regardless of performance, the Agreement
is eligible for renewal and/or modification on September 1, 2007.
In the event the Agreement is rescinded,
the Patents and related technology will be returned to Serge Monros. Further, under the terms of the Agreement, the Company is
required to build a $5,000,000 research and development lab and a manufacturing plant and Serge Monros will also own those assets,
free and clear, in the event the Agreement is rescinded or the Company dissolved.
The Agreement contains two commitments
by the Company as follows:
|
·
|
Serge Monros and Mario Procopio each are to receive monthly compensation of $10,000 per month,
depending on revenues and the raising of capital, but not less than $3,000 per month.
|
|
·
|
Contingent consideration to Serge Monros of $75,000,000 in cash or in the form of stock options
the exercise of which will provide net proceeds to Serge Monros of $75,000,000 over the next ten years. If options are issued,
they will bear an exercise price of $0.00025 per share. This provision of the agreement is specifically tied to the performance
of the Company and its ability to pay either in cash or stock options.
|
The Company recorded Patents at
cost to Serge Monros because the Agreement resulted in the control of the Company by Serge Monros and Mario Procopio. Further,
due to the fact that most costs incurred by Serge Monros in developing the patents represented research and development costs that
were immediately expensed, the basis of the Patents has been limited to $38,500, the actual cash paid to Serge Monros under the
initial agreement to acquire 20% of SaVi Group. In 2006, The Company recorded a $38,500 impairment allowance that reduced the patents
to a zero carrying value since it is clear the Company will not meet the requirements of the Agreement, and will likely lose any
rights it has to such patents.
The Series A convertible preferred
stock and the stock options issued under the Agreement could have a very significant future dilutive effect on stockholders.
|
4.
|
Property and Equipment
|
Property and equipment
at December 31, 2007 and 2006, consisted of the following:
|
|
Life
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
3-5 years
|
|
$
|
–
|
|
|
$
|
17,503
|
|
Machinery and equipment
|
|
5 years
|
|
|
–
|
|
|
|
235,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
252,595
|
|
Less accumulated depreciation
|
|
|
|
|
–
|
|
|
|
(50,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
–
|
|
|
$
|
202,401
|
|
Depreciation expense, for the years
ended December 31, 2007 and 2006, was $625 and $49,152, respectively. At December 31, 2006, the Company reviewed the carrying value
of property and equipment and recognized a impairment write-down of $235,299. Management’s belief that certain equipment
would have to be sold to support operations and the Company’s inability to demonstrate future positive cash flows from operations
were the basis for the write-down.
During 2007, the Company was in
violation of its licensing agreement and forfeited the remaining machinery and equipment to His Divine Vehicle. The Company was
also in default under its lease agreement and forfeited its furniture and fixtures to their landlord as payment in full. The Company
recorded a gain on settlement of $348,881.
|
5.
|
Accounts Payable and Accrued Liabilities
|
Accounts Payable
and Accrued Liabilities
,
at December 31, 2007 and 2006, consisted of the following:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
174,853
|
|
|
$
|
330,957
|
|
Related party accounts payable
|
|
|
332,786
|
|
|
|
59,935
|
|
Accrued professional fees
|
|
|
–
|
|
|
|
50,000
|
|
Accrued wages payable
|
|
|
1,028,986
|
|
|
|
232,350
|
|
Accrued registration rights penalties
|
|
|
933,660
|
|
|
|
–
|
|
Accrued interest expense
|
|
|
381,889
|
|
|
|
149,040
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,852,174
|
|
|
$
|
822,282
|
|
|
6.
|
Accounts Payable and Accrued Liabilities – Related Party
|
|
|
Accounts payable and accrued liabilities to a related party of $59,935, at December 31, 2006 represents amounts due to His Divine Vehicle, Inc, ("HDV", a company owned by the Company’s chief technology officer who is also a major stockholder). The amounts due HDV are primarily related to actual and estimated research and development activities that were paid by HDV on behalf of the Company. The amounts due at December 31, 2007 is $332,786 to HDV.
|
|
7.
|
Accounts Payable Assumed in Recapitalization
|
Accounts payable assumed in recapitalization,
represents the liabilities of the public shell, at the time, Gene-Cell, Inc. that the Company assumed as part of the recapitalization.
This balance is comprised of liabilities for legal fees and trade payables incurred by Gene-Cell, Inc. (See Note 1).
On July 10, 2006, we entered into
a Securities Purchase Agreement with Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10% secured
convertible debentures in the aggregate principal amount of $2,970,000 of which $1,670,000 was advanced immediately. We entered
into an amended and restated securities purchase agreement with Cornell on August 17, 2006. The second installment of $200,000
was advanced on August 17, 2006. The third installment of $600,000 was advanced on September 1, 2006. The last installment of
$500,000 would be advanced two business days prior to a registration statement being declared effective by the SEC. A portion
of the funds advanced were used to pay off the existing convertible debenture and other advances made by Golden Gate Investors
totaling $1,016,942. Following is an analysis of the proceed received and related fees and expenses paid with such proceeds.
Gross amount received – contractual balance
|
|
$
|
2,470,000
|
|
Less commissions paid
|
|
|
(247,000
|
)
|
Less legal fees
|
|
|
(108,960
|
)
|
Less structuring fee
|
|
|
(10,000
|
)
|
|
|
|
|
|
Net proceeds
|
|
$
|
2,104,040
|
|
Following is an analysis of long-term
debt at December 31, 2007:
Contractual balance
|
|
$
|
2,470,000
|
|
Less unamortized discount
|
|
|
(920,033
|
)
|
|
|
|
|
|
Convertible debt
|
|
$
|
1,549,967
|
|
The secured convertible debentures
bear interest at 10% and mature two years from the date of issuance. Holders may convert, at any time, any amount outstanding
under the secured convertible debentures into shares of the Company’s common stock at a conversion price per share equal
to $0.013 beginning the earlier of (i) the first business day of the month immediately following the month in which
a
registration statement is first declared effective or (ii) November 1, 2006, and continuing on the first business day of
each calendar month thereafter, we are required to make a mandatory redemption payment of $225,000 and accrued and unpaid interest,
which payment can be made in cash or in restricted shares of our common stock.
The Company has the option, at its
sole discretion, to settle the monthly mandatory redemption amount by (i) paying the investor cash in an amount equal to 115% of
the monthly mandatory redemption amount, or (ii) issuing to the investor the number of shares of the Company’s common stock
equal to the monthly mandatory redemption amount divided by $0.007, which is known as the redemption conversion price, provided,
however, that in order the Company to issue shares upon payment of the monthly mandatory redemption amount (A) this registration
statement is effective, (B) no event of default shall have occurred, and (C) the closing bid price for our common stock shall be
greater than the redemption conversion price as of the trading day immediately prior to the redemption date.
However, in
the event that (A) this registration statement is effective, (B) no event of default shall have occurred, and (C) the closing bid
price for our common stock is less than the redemption conversion price but is greater than $0.003, which is known as the default
conversion price, we shall have the option to settle the monthly mandatory redemption amount by issuing to the investor the number
of shares of common stock equal to the monthly mandatory redemption amount divided by the default conversion price. Accordingly,
the secured convertible debentures may be converted into a maximum of 990,000,000 shares of our common stock.
In the event that certain events
of default, such as failure to pay principal or interest when due, failure to issue common stock upon conversion or the delisting
or lack of quotation of our common stock, the redemption conversion price will be reduced to the default conversion price. The
investor has contractually agreed to restrict its ability to convert the debentures and receive shares of the Company’s
common stock such that the number of shares of common stock held by it and its affiliates after such conversion does not exceed
4.9% of the then issued and outstanding shares of common stock.
The
Company has the right, at its option, with three business days advance written notice, to redeem a portion or all amounts outstanding
under the secured convertible debentures prior to the maturity date provided that the closing bid price of the Company’s
common stock, is less than $0.013 at the time of the redemption. In the event of a redemption, the Company is obligated to pay
an amount equal to the principal amount being redeemed plus a 15% redemption premium, and accrued interest.
In connection with the securities
purchase agreement dated July 10, 2006, as amended, the Company granted the investor registration rights. Under the terms of the
registration rights the Company was obligated to use its best efforts to cause the registration statement to be declared effective
no later than December 7, 2006 and to insure that the registration statement remains in effect until the earlier of (i) all of
the shares of common stock issuable upon conversion of the Debentures have been sold or (ii) July 10, 2008.
The Company defaulted on its obligations
under the registration rights agreement because the Registration Statement was not declared effective by December 7, 2006. Accordingly,
we are required to pay to Cornell, as liquidated damages, for each month that the registration statement has not been filed or
declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value
of the secured convertible debentures. In 2006, the registration rights agreement constitutes a derivative financial instrument
that has been incorporated in the derivative liability valued at $3,459,980 in the accompanying balance sheet. Under FASB EITF
00-19-02, the registration rights liability is separated from the derivative liability and shown on the balance sheet at December
31, 2007 at $933,660.
In
connection with the securities purchase agreement dated July 10, 2006, the Company executed a security agreement in favor of the
investor granting them a first priority security interest in all of the Company’s goods, inventory, contractual rights and
general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The security agreement states
that if an event of default occurs under the secured convertible debentures or security agreement, the investors have the right
to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or
otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations
under these agreements. Based on the Company’s current default of the registration rights agreement, the investor could take
possession of substantially all assets of the Company.
Convertible debt outstanding at
December 31, 2005 was converted or extinguished during the year ended December 31, 2006.
On April 15, 2005, the Company entered
into a $150,000 long-term debt agreement, bearing interest at 4% per year and due in April 2007. The Company paid origination fees
of $7,500 in connection with the long-term debt and those fees are being amortized to interest expense over the term of the debt
using the effective yield method.
Following is an analysis of the
note payable at December 31, 2005:
Contractual balance
|
|
$
|
150,000
|
|
Less origination fee
|
|
|
(7,500
|
)
|
|
|
|
|
|
Net proceeds
|
|
$
|
142,500
|
|
During the year ended December 31,
2006, the Company issued 395,275 shares of Series C Preferred Stock to satisfy this note and raised additional cash proceeds of
$381,730.
The Company files a U.S. Federal
income tax return. The components of the net loss before income tax benefit for the years ended December 31, 2007 and 2006 are
as follows:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) before income taxes
|
|
$
|
12,039,146
|
|
|
$
|
(22,870,501)
|
|
The components of the Company's
deferred tax assets at December 31, 2007 and 2006 are as follows:
|
|
2007
|
|
|
2006
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Loss carry-forwards
|
|
$
|
1,781,724
|
|
|
$
|
2,690,919
|
|
Valuation allowance
|
|
|
(1,781,724
|
)
|
|
|
(2,690,919
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The difference between the income tax
benefit in the accompanying statement of operations and the amount that would result if the U.S. federal statutory rate of 34%
were applied to pre-tax loss, for the years ended June 30, 2007 and 2006, is as follows:
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income tax at federal statutory rate
|
|
$
|
5,240,364
|
|
|
|
34.0%
|
|
|
$
|
7,775,970
|
|
|
|
34.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non deductible interest expense and change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of derivative financial instruments
|
|
|
15,708,772
|
|
|
|
101.9
|
|
|
|
(6,180,290
|
)
|
|
|
(27.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible stock based compensation
|
|
|
(1,416,060
|
)
|
|
|
(9.2
|
)
|
|
|
(208,001
|
)
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible gain/loss on debt extinguishment
|
|
|
630,881
|
|
|
|
4.1
|
|
|
|
(167,468
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of Fixed Assets
|
|
|
(185,657
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(19,978,250
|
)
|
|
|
(129.6
|
)
|
|
|
(1,220,192
|
)
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
At December 31, 2007, for Company
had generated US net operating loss carry-forwards of approximately $5,240,364 which will expire in various years between 2011
and 2026. The benefit from utilization of net operating loss carry forwards incurred prior to December 30, 2004 is significantly
limited in connection with a change in control of the Company (See Note 3). Such benefit could be subject to further limitations
if significant future ownership changes occur in the Company. The Company believes that a significant portion of its unused net
operating loss carry forwards will never be utilized due to expiration or limitations on use due to ownership changes.
At December 31, 2007 and December
31, 2006, the Company has no uncertain tax positions.
|
11
.
|
Commitments and Contingencies
|
Legal Proceedings
From time to time, we may become
party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
On January 16, 2007, Serge Monros,
the Company’s then chief technology officer, filed a derivative suit on behalf of the Company naming the Company, Mario Procopio,
and Kathy Procopio as defendants in the Superior Court of the State of California for the County of San Diego. Mr. Monros’
derivative suit alleged the following causes of action: (i) breach of fiduciary duty of loyalty; (ii) breach of fiduciary duty
of care; (iii) unjust enrichment; (iv) conversion; (v) waste of corporate assets; and (vi) trade libel.
On January 25, 2007, Mario Procopio
filed a derivative suit on behalf of the Company naming the Company and Serge Monros in the Superior Court of the State of California
for the County of Orange. Mr. Procopio’s derivative suit alleged the following causes of action: (i) breach of contract;
(ii) promise without intent to perform; (iii) breach of fiduciary duty; (iv) rescission; (v) intentional misrepresentation; (vi)
negligent misrepresentation; and (vii) conversion.
These two suits were settled on
February 25, 2008. In reaching the settlement, no parties have made any admission of liability or wrongdoing. As part of the settlement,
Mario Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have voluntarily waived accrued unpaid
compensation and returned the following securities to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares,
7,102,300 common shares, and 125,000,000 options. As consideration, the Company has agreed to a limited indemnification of the
Procopios for certain transactions agreed-upon by the Procopios and the Company. The Procopios also waive any rights to the 4,000,000
Preferred A shares they previously pledged to Cornell Capital and the parties understand that Cornell Capital retains control of
this stock.
In January 2007, Herrera Partners
filed an arbitration claim against the Company in Harris County, Texas. Herrera Partners claim was for $63,700 for non-payment
for services rendered. The suit was settled in January, 2009 and a payment schedule was agreed upon and paid.
On March 14, 2007, United Rentals
filed a suit against the Company, Greg Sweeney, and Mario Procopio in Orange County Superior Court. United Rentals claim is for
non-payment for services rendered. A judgment was entered in favor of United Rentals Northwest, Inc. and subsequently paid.
On or about July 28, 2011, SaviCorp,
a Nevada corporation, formerly known as Savi Media Group, Inc. (the “Company”) entered into a Repayment Agreement (the
“Repayment Agreement”) with YA Global Investments, L.P., a Cayman Islands exempt limited partnership formerly known
as Cornell Capital Partners, L.P. (“YA Global”).
On or about July 10, 2006, the Company
and YA Global, then known as Cornell Capital Partners, L.P., entered into a Securities Purchase Agreement which was subsequently
amended and restated on August 17, 2006 (collectively the “SPA”) wherein the Company issued and sold to YA Global secured
convertible debentures in the aggregate amount of approximately US$2,485,000 (collectively, the “Debentures”) and certain
warrants (collectively the “Prior Warrants” and with the Debentures, the “Securities”) to purchase an aggregate
of 2,900,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”).
In connection with the SPA, the
Company and YA Global entered into ancillary agreements, including a Security Agreement, an Insider Pledge and Escrow Agreement,
a Registration Rights Agreement, and other related documents (the SPA and such ancillary agreements are collectively referred to
hereinafter as “Financing Documents”). Copies of the Financing Documents have been attached to the Company’s
prior filings with the United States Securities and Exchange Commission (the “SEC”) and are hereby incorporated in
their entirety by reference.
Pursuant to the terms of the Repayment
Agreement, all of the Company’s obligations under the Financing Documents have been terminated in full. Without limitation,
all amounts otherwise due under the Debentures are deemed satisfied in full, the Prior Warrants are deemed cancelled, and any and
all security interests granted by the Company in favor of YA Global pursuant to the Financing Documents have been extinguished,
including the release of 4,000,000 shares of Series A Preferred Stock held in escrow. In exchange for the foregoing, the
Company delivered to YA Global: (i) a one-time cash payment of US$550,000; and (ii) new warrants to purchase up to 25,000,000 shares
of Common Stock at an exercise price of $0.0119 (the “Current Warrants”). The Current Warrants expire on or about July
28, 2014. A copy of the Repayment Agreement and Current Warrants have been attached as exhibits to the Form 8-K filed August 2,
2011 and are hereby incorporated in their entirety by reference.
The Company received a letter from
the Securities and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had
entered into a “formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena
Duces Tecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information
contained in the subpoena. An index of the source of all such produced information and an authentication declaration were also
to be supplied. The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the
Company has violated federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the
investigation.
The Company initially hired
the Los Angeles law firm of Troy Gould to represent us in the matter of this investigation. Pete Wilke, Esq. is currently handling
this matter. As of the date of this filing, the Company believes it has provided all requested material to the SEC. Updates on
the investigation will be supplied by supplemental filings hereto.
Status of prior private investment;
$530,232 was raised privately in 2006 (cash for shares), $0 in 2007 (although HDV sold $13,000 of its shares), $1,000 in 2008
(although HDV sold $453,750 of its shares), $442,000 in 2009, $879,550 in 2010, $1,930,828 in 2011, $342,000 in the first calendar
quarter of 2012 and $100,000 in the 2nd quarter of 2012. There is concern that these private placement securities sales were not
made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required
by federal law). The Company is planning to offer rescission to many private placement investors shortly after the posting of
this Annual Report on OTC Markets.
In 2006, the Company issued shares
for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued
at $7,875 in 2008 and shares for services valued at $74,400 in 2009. We have no plans to offer rescission for these share issuances.
The
Company offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability
of these rescission offers is also being looked at by Counsel. The results of our 2011 rescission offer, in terms of rescission
offers accepted by shareholders, were very encouraging. The Company had one rescission offer acceptance and refunded $1,000.
Generally, the Company believes
it has good relationships with their shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered
shares from us since January 1, 2006 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any
accepted rescission offer. However, there is no assurance that rescission offer acceptances will not have a material effect on
our finances or that we will be able to re-pay those electing to rescind in a complete and timely manner.
The Company received a letter dated
June 7, 2013 with a Civil Complaint titled Arnold Lamarr Weese, et al v. SaviCorp filed in the Northern District of West Virginia.
In addition to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's
counsel began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants
have sued for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts
to hold the Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company has filed for dismissal and intends
on vigorously defending its rights or reaching a settlement to release the Company and Mr. Monros of any liability.
Lease Commitments
The Company is currently leasing
office space and adjacent research and development space on an annual basis from CEE, LLC, for $110,000 per year.
12
.
|
|
Stockholders' Equity
|
Common Stock
Following is a description of transactions
affecting common stock.
Inception to December 31, 2002
On August 26, 2002 the Company
entered into the recapitalization transaction under which the Company agreed to acquire all of the issued and outstanding common
stock of Energy Resource Management, Inc. ("ERM") in exchange for 4,000,000 shares of the Company's common stock.
On August 26, 2002 and September
30, 2002 the Company entered into consulting agreements with five consultants for services related to business strategy and business
development. The consulting agreements had a term of two to three months and required the Company to issue 905,000 shares of common
stock valued at $2,232,150 based on the quoted market price on the dates of the transactions. The transactions resulted in a charge
to consulting expense of $1,202,233 for the period from inception, August 13, 2002, to December 31, 2002 and deferred compensation,
presented as an increase in stockholders' deficit of $1,030,917, at December 31, 2002.
Year ended December 31, 2003
Effective March 3, 2003 the Company
adopted a 3 to 1 forward stock split. This stock split has been reflected in the accompanying financial statements on a retroactive
basis and all references to shares outstanding, weighted average shares and earnings per share have been restated to reflect the
split as if it had occurred at inception.
In April 2003, the Company demanded
return of 1,050,000 shares of common stock, issued under the consulting agreements in 2002, as a result of nonperformance of services
and failure by specific members of the Company's business development consulting team to fulfill specific contractual obligations
to the Company.
In June 2003, the Company negotiated
an extension to its DreamCity acquisition agreement in exchange for 275,000 shares of restricted common stock. This acquisition
was completed in October 2003, upon issuance of an additional 20,000,000 shares.
In September 2003 the Company issued
5,700,000 shares of common stock to New Creation Outreach, Inc., as a donation to support its ministries. New Creation Outreach
is a related party because at the time, certain members of Company management and the board of directors are also officers in
New Creation Outreach, Inc.
At various dates in 2003, the Company
sold 10,450,000 shares of its common stock at prices ranging from $0.01 to $0.02 per share and received total proceeds of $155,000.
These shares were sold under private placements exempt from registration.
Year Ended December 31, 2004
Effective September 2, 2004 and
November 19, 2004, the Company's board of directors declared a 1 for 25 reverse stock split and a 1 for 100 reverse stock split,
respectively. The reverse stock splits, with a total impact of 1 for 2500, have been reflected in the accompanying financial statements
and all references to common stock outstanding, additional paid in capital, weighted average shares outstanding and per share
amounts prior to the record dates of the reverse stock splits have been restated to reflect the stock splits on a retroactive
basis. Subsequently to the stock splits, the Company awarded a total of 5,000,000 post-split shares to certain early investors
and key stockholders in Gene-Cell, Inc. This stock issuance has been shown as a special dividend in the accompanying statement
of stockholders' deficit.
During 2004, the Company
amended its Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to 1,000,000,000 shares.
The Company issued 5,002,000 shares
of common stock to the owner of Energy Resource Management, Inc. to rescind a re-capitalization transaction that occurred in 2002.
The Company issued 4,000 shares
of common stock in payment of the acquisition price of 20% of SaVi Group (See Note 3). The Company subsequently issued 5,000,000
shares of common stock, 5,000,000 shares of Series A preferred stock and 125,000,000 three-year stock options (to acquire shares
of the Company's common stock at $0.00025 per share) to complete the acquisition of the rights to the patents. The patents came
over at Serge Monros's basis, which was zero, because the development of the patents was a research and development effort. Serge
Monros also received 100,000 shares of common stock, valued at $20,000, as compensation for his role of chief technology officer
of the Company.
The Company issued 17,560,000 shares
of common stock to associates of Serge Monros that were involved in the initial development of the patents that he owns, or are
now assisting the Company. These issuances were considered compensation and a cost of the transaction and valued at $3,160,800.
The Company subsequently issued
5,100,000 shares of common stock, 5,000,000 shares of Series A preferred stock and 125,000,000 three-year stock options to acquire
shares of the Company's common stock at $0.00025 per share to Mario Procopio, the Company's Chief Executive Officer, for compensation
and for his efforts in arranging the acquisition of the rights to the patents owned by Serge Monros. The stock issuances to Mario
Procopio were valued at $101,020,000.
The Company issued 252,000 shares
of common stock to its former legal counsel for approximately $50,000 of services provided.
The Company issued 2,000,000 shares
of common stock to Kathleen Procopio for services she provided as chief financial officer of the Company. These services were
valued at $460,000, based on the quoted market price of the common stock. Kathleen Procopio is the spouse of the Company's chief
executive officer, Mario Procopio.
The Company issued 7,166,240 shares
of common stock as compensation to various individuals that provided services to the Company. These shares were valued at $1,572,215.
The company sold 39,600,000 shares
of common stock to qualified investors and received cash proceeds of $442,725
Year Ended December 31, 2005
During 2005, the Company amended
its Articles of Incorporation to increase its authorized shares of common stock from 1,000,000,000 to 6,000,000,000 shares.
The Company issued 42,828,835 shares
of common stock to various individual that provided consulting and other services to the Company and recognized compensation expense
of $5,337,218 related to those issuances.
The Company issued 22,150,950 shares
of common stock to under private placements of its common stock and received cash proceeds of $396,360.
The Company cancelled 6,466,700
shares previously issued to consultants.
The Company issued 244,763 shares
of common stock to the Investor upon exercise of stock warrants.
The company issued 42,215,361 shares
of common stock to the Investor upon conversion of $2,448 of convertible debt.
The Company issued 42,828,835 shares
of common stock to various individual that provided consulting and other services to the Company and recognized compensation expense
of $5,337,218 related to those issuances.
The Company issued 22,150,950 shares
of common stock to under private placements of its common stock and received cash proceeds of $396,360.
The Company cancelled 6,466,700
shares previously issued to consultants.
The Company issued 244,763 shares
of common stock to the Investor upon exercise of stock warrants.
The company issued 42,215,361 shares
of common stock to the Investor upon conversion of $2,448 of convertible debt.
Year Ended December 31, 2006
The Company issued 7,125,000 shares
of common stock to various individual that provided consulting and other services to the Company and recognized compensation expense
of $121,768 related to those issuances.
The Company issued 600,000 shares
of common stock to under private placements of its common stock and received cash proceeds of $6,000.
The Company issued 389,540 shares
of common stock to the holder of its convertible debt upon exercise of stock warrants and received proceeds of $425,966.
The Company issued 162,048,548 shares
of common stock to the holder of its convertible debt upon conversion of $3,903 of debt.
The Company issued 60,000,000 shares
of common stock to Golden Gate Investors in connection with an agreement to retire the outstanding debt owed to Golden Gate Investors.
The Company issued 30,000,000 shares
of common stock to Cornell Capital in connection with the agreement to issue Cornell Capital a Senior Secured Convertible Debt
instrument.
The Company exchanged 1,540,000
Preferred C shares for 154,000,000 shares of common stock.
Year Ended December 31, 2007
The Company issued 393,350,000
shares of common stock to twenty-two individuals that provided consulting and other services to the Company and recognized compensation
expense of $1,416,060 related to those issuances based on the market value of the shares on the date of grant.
Stock Options
Gene-Cell, Inc., the company, used
in the recapitalization (See Note 1) periodically issued incentive stock options to key employees, officers, and directors to
provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain
the services of qualified persons. The Board of Directors approved the issuance of all stock options. The exercise price of an
option granted was determined by the fair market value of the stock on the date of grant. Reverse stock splits by the Company
resulted in the reduction of outstanding options to less than 150 shares with exercise prices that are so high that the exercise
of the options will never be practical. Expiration dates range from March, 2008 through July, 2012.
During April 2005, the Company
granted a total of 250,000,000 options to Mario Procopio and Serge Monros as additional consideration for the assignment of the
patent and services provided to us. The options were granted on April 6, 2005, are exercisable starting July 6, 2005, and expire
on April 6, 2008. The options are exercisable at the rate of $250 for every one million shares of common stock ($0.00025 per share).
These options represent all outstanding options of the Company at December 31, 2006 and 2005. The options to Serge Monros were
considered as part of the acquisition of patent rights. The options issued to Mario Procopio were valued at estimated market value
of $31,250,000 and charged to compensation expense. On August 24, 2007, Serge Monros exercised 50,000,000 options for total consideration
of $12,500. No proceeds were actually received as the consideration received was a credit to amounts owed to Serge Monros.
Incentive Stock Plan
During the year ended December 31,
2005 the 2005 Incentive Stock Plan was adopted by the Company’s Board of Directors and approved by the stockholders in August
2005. The 2005 Plan provides for the issuance of up to 25,000,000 shares and/or options. The primary purpose of the 2005 Incentive
Stock Plan is to attract and retain the best available personnel for us in order to promote the success of our business and to
facilitate the ownership of our stock by employees. The 2005 Incentive Stock Plan is administered by our Board of Directors. Under
the 2005 Incentive Stock Plan, key employees, officers, directors and consultants are entitled to receive awards. The 2005 Incentive
Stock Plan permits the granting of incentive stock options, non-qualified stock options and shares of common stock with the purchase
price, vesting and expiration terms set by the Board of Directors. No options have been issued under the Plan at December 31, 2005.
Stock Warrants
In connection with the securities
purchase agreement (See Note 7), we agreed to issue Cornell warrants to purchase an aggregate 2,900,000,000 shares of common stock,
exercisable for a period of five years as follows:
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
|
Life
|
|
|
Number of Warrants
|
|
|
|
Price
|
|
|
|
Years
|
|
|
1,000,000,000
|
|
|
$
|
0.0030
|
|
|
|
4.5
|
|
|
1,000,000,000
|
|
|
|
0.0060
|
|
|
|
4.5
|
|
|
300,000,000
|
|
|
|
0.0100
|
|
|
|
4.5
|
|
|
200,000,000
|
|
|
|
0.0150
|
|
|
|
4.5
|
|
|
150,000,000
|
|
|
|
0.0200
|
|
|
|
4.5
|
|
|
100,000,000
|
|
|
|
0.0300
|
|
|
|
4.5
|
|
|
60,000,000
|
|
|
|
0.0500
|
|
|
|
4.5
|
|
|
40,000,000
|
|
|
|
0.0750
|
|
|
|
4.5
|
|
|
30,000,000
|
|
|
|
0.1000
|
|
|
|
4.5
|
|
|
20,000,000
|
|
|
|
0.1500
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,900,000,000
|
|
|
$
|
0.0114
|
|
|
|
|
|
All warrants issued to Cornell are currently exercisable
and have a weighted average exercise price of $0.0114.
Gene Cell, Inc. and Redwood Entertainment
Group, Inc. periodically issued incentive stock options to key employees, officers, and directors to provide additional incentives
to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons.
The Board of Directors approved the issuance of all stock options. The exercise price of an option granted was determined by the
fair market value of the stock on the date of grant. Reverse stock splits by the Company resulted in the reduction of outstanding
options to less than 150 shares with exercise prices that are so high that the exercise of the options will never be practical.
The options expire from March 2008 to July 2012.
Preferred Stock
During the year ended December 31,
2005, the Company set preferences for its Series A, B and C preferred stock. The Company is authorized to issue 40,000,000 shares
of preferred stock, $0.01 par value per share. At December 31, 2006 the Company had 10,000,000 shares of series A preferred stock
issued and outstanding and 4,915,275 shares of series C preferred stock issued and outstanding. The Company’s preferred stock
may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall
be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by
the board of directors.
The Series A and Series C preferred
stock provides for conversion on the basis of 100 shares of common stock for each share of preferred stock converted, with conversion
at the option of the holder or mandatory conversion upon restructure of the common stock and holders of the series A preferred
stock vote their shares on an as-converted basis. Holders of the series A preferred stock participates on distribution and liquidation
on an equal basis with the holders of common stock.
The series B preferred stock provides
for conversion on the basis of 10 shares of common stock for each share of preferred stock converted, with conversion at the option
of the holder or mandatory conversion upon restructure of the common stock and holders of the series A preferred stock vote their
shares on an as-converted basis. Holders of the series B preferred stock participates on distribution and liquidation on an equal
basis with the holders of common stock.
Following is a description of transactions
affecting preferred stock.
Inception to December 31, 2002
None
Year Ended December 31, 2003
None
Year Ended December 31, 2004
The Company issued 5,000,000 shares
of Series A Preferred Stock for the acquisition of patent rights as described in Note x.
The Company issued 5,000,000 shares
of Series A Preferred Stock for compensation to Mario Procopio, the then current CEO. The Company incurred in compensation expense
based on the market value of the equivalent common shares that the preferred shares could convert into.
Year Ended December 31, 2005
The Company issued 6,060,000 shares
of Series C Preferred Stock to various individuals for consulting services and employee compensation. The Company expensed $105,540,718
in compensation expense based on the market value of the equivalent common shares that the preferred shares could convert into.
Year Ended December 31, 2006
The Company issued 395,275 shares
of Series C Preferred Stock for cash of $381,730 and extinguishment of debt of $142,500.
The Company issued 1,000,000 shares
of Series C Preferred Stock to a vendor for lease facilities and services provided valued at $490,000.
1,000,000 shares of Series C Preferred
Stock was returned to the Company by two officers/primary stockholders of the Company.
Year Ended December 31, 2007
None.
Potentially Dilutive Equity
Instruments
An analysis of potentially dilutive
equity instruments at December 31, 2007
Warrants issued in connection with Cornell financing
|
|
|
2,900,000,000
|
|
Stock options issued at for patent rights and
Compensation
|
|
|
200,000,000
|
|
Series A Preferred Stock convertible to common stock on a 100 for 1 basis
|
|
|
1,000,000,000
|
|
Series C Preferred Stock convertible to common stock on a 100
for 1 basis
|
|
|
491,527,500
|
|
|
|
|
|
|
Total
|
|
|
4,591,527,500
|
|
13
.
|
|
Related Party Transactions
|
The Company engaged in various
related party transactions involving the issuance of shares of the Company's common stock during the years ended December 31,
2007 and 2006. Those transactions included the exercise of options by Serge Monros and are described in Note 12.
As discussed in Note 11, Serge
Monros, the Company’s current chief technology officer, filed a derivative suit on behalf of the Company naming the Company,
Mario Procopio, and Kathy Procopio as defendants in the Superior Court of the State of California for the County of San Diego.
As also discussed in Note 11, Mario
Procopio filed a derivative suit on behalf of the Company naming the Company and Serge Monros in the Superior Court of the State
of California for the County of Orange.
The 5,000,000 shares of common
stock issued to Mario Procopio and 5,000,000 shares issued to Serge Monros in the agreement for acquisition of patents described
in Note 3, were actually issued to New Creation Outreach, Inc. and His Divine Vehicle, Inc. in 2004. These are companies for which
Mario Procopio previously acted as a director. Mario Procopio no longer serves as a director of either of those organizations;
however, his spouse, Kathleen Procopio continues to serve on the board of New Creation Outreach, Inc.
During 2006, New Creation Outreach,
Inc. and His Divine Vehicle, Inc. each returned 500,000 shares of Series C Preferred stock to the Company for cancellation.
During 2006 His Divine Vehicle,
Inc. acquired property and equipment and incurred costs on behalf of the Company totaling $382,842. At December 31, 2006, the Company
owes His Divine Vehicle, Inc. approximately $59,935 for such purchases. As of December 31, 2007, the Company owes His Divine Vehicle
$332,786 and Serge Monros $588,000 in accrued wages.
14.
|
|
Non-Cash Investing and Financing Transactions and Supplemental Disclosure of
Cash Flow Information
|
During the years ended December
31, 2007 and 2006, the Company engaged in various non-cash investing and financing activities as follows:
|
|
2007
|
|
|
2006
|
|
Common stock issued in conversion of convertible debt and debt extinguishment
|
|
$
|
–
|
|
|
$
|
364,171
|
|
Common stock issued to convert note payable
|
|
$
|
–
|
|
|
$
|
142,500
|
|
Common stock issued for financing costs
|
|
$
|
–
|
|
|
$
|
450,000
|
|
Common stock issued for exercise of stock options for debt due option holder
|
|
$
|
12,500
|
|
|
$
|
–
|
|
Change in accounting principle
|
|
$
|
691,544
|
|
|
$
|
–
|
|
Settlement of AP with fixtures & furniture
|
|
$
|
16,119
|
|
|
$
|
–
|
|
During the year ended December 31,
2006, the Company issued 162,049,548 shares of common stock to convert $46,635 of convertible notes payable to equity. The Company
also issued 60,000,000 shares of common stock to extinguish debt. The stock was valued at $810,000 and the Company recognized a
loss on debt conversion of $492,464.
During the years ended December
31, 2007 and 2006, the Company made no cash interest payments or income tax payments.
|
15.
|
Change in Accounting Principle for Registration Payment Arrangements.
|
In December 2006, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position on No. EITF 00-19-2, Accounting for Registration Payment
Arrangements (“FSP EITF 00-19-2”). FSP EITF 00-19-2 provides that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance
with Statement of Financial Accounting Standards (“FAS”) No. 5, Accounting for Contingencies , which provides that
loss contingencies should be recognized as liabilities if they are probable and reasonably estimable. Subsequent to the adoption
of FSP EITF 00-19-2, any changes in the carrying amount of the contingent liability will result in a gain or loss that will be
recognized in the statement of operations in the period the changes occur. The guidance in FSP EITF 00-19-2 is effective immediately
for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified
subsequent to the date of issuance of FSP EITF 00-19-2. For registration payment arrangements and financial instruments subject
to those arrangements that were entered into prior to the issuance of FSP EITF 00-19-2, this guidance is effective for our financial
statements issued for the year beginning January 1, 2007, and interim periods within that year.
On January 1, 2007, we adopted
the provisions of FSP EITF 00-19-2 to account for the registration payment arrangement associated with our July 2006 financing
(the “July 2006 Registration Payment Arrangement”). As of January 1, 2007 and December 31, 2007, management determined
that it was probable that we would have payment obligation under the July 2006 Registration Payment Arrangement; therefore, the
Company accrued a contingent obligation of $340,860 as required under the provisions of FSP EITF 00-19-2. In addition, the compound
embedded derivative liability associated with the July 2006 Financing was adjusted to eliminate the registration payment arrangement
and the comparative financial statements of prior periods and as of December 31, 2006 have been adjusted to apply the new method
retrospectively. The cumulative effect of this change in accounting principle adjusted retained earnings as of December 31, 2006
by $658,129. The following financial statement line items for the twelve months ended December 31, 2006 were affected by the change
in accounting principle. In addition, under EITF 00-19, the Company would not book the contingent registration rights payment
payable.
|
|
As of
|
|
|
|
December 31,
2006
|
|
Under EITF 00-19
|
|
|
|
Income Statement Impacts
|
|
|
|
|
Change in value of CED
|
|
|
2,871,934
|
|
Amortization of Discount
|
|
|
117,504
|
|
Balance Sheet Impacts
|
|
|
|
|
Discount on Note
|
|
|
1,764,136
|
|
Derivative Liability
|
|
|
3,459,979
|
|
|
|
|
|
|
Under EITF 00-19-02
|
|
|
|
|
Income Statement Impacts
|
|
|
|
|
Change in value of CED
|
|
|
2,302,219
|
|
Amortization of Discount
|
|
|
112,211
|
|
Balance Sheet Impacts
|
|
|
|
|
Discount on Note
|
|
|
1,730,720
|
|
Derivative Liability
|
|
|
2,768,435
|
|
The net impact to
the balance sheet is $658,128 and shows in the equity section of the balance sheets.
16.
Fair
Value of Financial Instruments.
The Company’s financial instruments
consist of cash and cash equivalents, accounts payable, accrued liabilities and convertible debt. The estimated fair value of cash,
accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments.
The Company utilizes various types
of financing to fund its business needs, including convertible debt with warrants attached. The Company reviews its warrants and
conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and, if so, whether
they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes
in fair value recognized in current earnings. At December 31, 2007, the Company had convertible debt and warrants to purchase common
stock, the fair values of which are classified as a liability. Some of these units have embedded conversion features that are treated
as a discount on the notes. Such financial instruments are initially recorded at fair value and amortized to interest expense over
the life of the debt using the effective interest method.
Inputs used in the valuation to derive
fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable
inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level one — Quoted market
prices in active markets for identical assets or liabilities;
Level two — Inputs other than
level one inputs that are either directly or indirectly observable; and
Level three — Unobservable
inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that
a market participant would use.
Determining which category an asset
or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.
The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated
with the convertible debt and warrants to purchase common stock (discussed above). The Company classifies the fair value of these
convertible notes and warrants under level three.
Based on the guidance in FASB No.
133 and related guidance, the Company concluded the convertible notes and common stock purchase warrants are required to be accounted
for as derivatives as of the issue date due to a reset feature on the conversion/exercise price. At the date of issuance the convertible
subordinated financing, warrant derivative liabilities were measured at fair value using either quoted market prices of financial
instruments with similar characteristics or other valuation techniques. The Company records the fair value of these derivatives
on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statements of
operations as “Gain (loss) on derivative liabilities.” These derivative instruments are not designated as hedging instruments
under ASC 815-10 and are disclosed on the balance sheet under Derivative Liabilities.
The following table summarizes the
convertible debt and warrant liabilities activity for the period December 31, 2006 to December 31, 2007:
Description
|
|
Convertible Notes
|
|
|
Warrant Liabilities
|
|
|
Total
|
|
Fair value at December 31, 2006
|
|
$
|
3,459,980
|
|
|
$
|
16,101,795
|
|
|
$
|
19,561,775
|
|
Change due to Accounting Principles
|
|
$
|
(691,544
|
)
|
|
$
|
–
|
|
|
$
|
(691,544
|
)
|
Change in Fair Value
|
|
$
|
(2,685,065
|
)
|
|
$
|
(13,854,899
|
)
|
|
$
|
(16,539,964
|
)
|
Fair value at December 31, 2017
|
|
$
|
83,371
|
|
|
$
|
2,246,896
|
|
|
$
|
2,330,267
|
|
For the year ended December 31, 2007,
net derivative income was $16,539,964.
The lattice methodology was used
to value the convertible notes and warrants issued, with the following assumptions.
|
|
Assumptions
|
|
2007
|
|
2006
|
|
|
|
Dividend yield
|
0.00%
|
|
0.00%
|
|
|
|
Risk-free rate for term
|
3.07%-3.49%
|
|
4.74%-5.00%
|
|
|
|
Volatility
|
|
225.00%
|
|
283.00%
|
|
|
|
Maturity dates
|
0.0-3.748 years
|
|
0.342-4.523 years
|
|
|
|
Stock Price
|
|
0.0008
|
|
0.0056
|
|
|
|
|
|
|
|
|
|
|
The Golden Gate Warrants (102,125
warrants) had a term remaining of 0.342 years (expired on 05/05/07) with the risk free rate of 5.02% at 12/31/06. The Cornell 7-10-06
convertible note ($1,670,000 balance) had a term remaining of 1.525 years (expired on 7/10/08) with the risk free rate of 5.00%
at 12/31/06 and at 12/31/07 had a term remaining of 0.526 years with the risk free rate of 3.49%. The Cornell 9-30-06 convertible
note ($800,000 balance) had a term remaining of 1.749 years (expired on 09/30/08) with the risk free rate of 5.00% at 12/31/06
and at 12/31/07 had a term remaining of 0.75 years with the risk free rate of 3.49%. The Cornell 4-2-07 promissory note ($15,000
balance) convertible at default at 12/31/07 projected a term remaining of 3.748 years (in default projected to 9/30/11) with the
risk free rate of 3.07%. The Cornell 7-10-06 warrants (2,900,000,000 warrants with exercise prices ranging from $0.003 to $0.150
and an expiration date of 7/10/11) had a term remaining of 4.523 years with the risk free rate of 4.74% at 12/31/06 and a term
remaining of 3.524 years with the risk free rate of 3.07% at 12/31/07.
17.
Subsequent Events.
Stock Issuances
:
Since 2007, the Board of Directors authorized
the issuance of an aggregate of 1,885,018,272 shares of its common stock, 1,525,000 shares of its Preferred A shares and 10,355,500
of its Preferred C shares to accredited and non-accredited investors for total proceeds of $4,772,843. In addition, the Board of
Directors has authorized the issuance of an aggregate of 1,562,918,387 shares of its common stock, 2,406,667 shares of its Preferred
A shares and 568,500 of its Preferred C shares to accredited and non-accredited investors for services rendered valued at an aggregate
of $6,261,214. No sales commissions were paid in connection with these issuances and all investors reviewed or had access to all
of the Company’s filing pursuant to the Securities Exchange Act of 1934, as amended.
Legal Proceedings
:
On January 16, 2007, Serge Monros, the Company’s
then chief technology officer, filed a derivative suit on behalf of the Company naming the Company, Mario Procopio, and Kathy Procopio
as defendants in the Superior Court of the State of California for the County of San Diego. Mr. Monros’ derivative suit alleged
the following causes of action: (i) breach of fiduciary duty of loyalty; (ii) breach of fiduciary duty of care; (iii) unjust enrichment;
(iv) conversion; (v) waste of corporate assets; and (vi) trade libel. This case was settled on 02/25/2008.
On January 25, 2007, Mario Procopio filed a
derivative suit on behalf of the Company against the Company and Serge Monros in the Superior Court of the State of California
for the County of Orange. Mr. Procopio’s derivative suit alleged the following causes of action: (i) breach of contract;
(ii) promise without intent to perform; (iii) breach of fiduciary duty; (iv)rescission; (v) intentional misrepresentation; (vi)
negligent misrepresentation; and (vii) conversion.
These two suits were settled on February 25,
2008. In reaching the settlement, no parties have made any admission of liability or wrongdoing. As part of the settlement, Mario
Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have voluntarily waived accrued unpaid compensation
and returned the following securities to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares, 7,102,300 common
shares, and 125,000,000 options. As consideration, the Company has agreed to a limited indemnification of the Procopios for certain
transactions agreed-upon by the Procopios and the Company. The Procopios also waive any rights to the 4,000,000 Preferred A shares
they previously pledged to Cornell Capital and the parties understand that Cornell Capital retains control of this stock.
On or about July 10, 2006, the Company and
YA Global, then known as Cornell Capital Partners, L.P., entered into a Securities Purchase Agreement which was subsequently amended
and restated on August 17, 2006 (collectively the “SPA”) wherein the Company issued and sold to YA Global secured convertible
debentures in the aggregate amount of approximately US$2,485,000 (collectively, the “Debentures”) and certain warrants
(collectively the “Prior Warrants” and with the Debentures, the “Securities”) to purchase an aggregate
of 2,900,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”).
In connection with the SPA, the Company and
YA Global entered into ancillary agreements, including a Security Agreement, an Insider Pledge and Escrow Agreement, a Registration
Rights Agreement, and other related documents (the SPA and such ancillary agreements are collectively referred to hereinafter as
“Financing Documents”). Copies of the Financing Documents have been attached to the Company’s prior filings with
the United States Securities and Exchange Commission (the “SEC”) and are hereby incorporated in their entirety by reference.
On July 28, 2011, the Company and Cornell reached
a settlement for this debt under the terms of a Repayment Agreement. Pursuant to the terms of the Repayment Agreement, all of the
Company’s obligations under the Financing Documents have been terminated in full. Without limitation, all amounts otherwise
due under the Debentures are deemed satisfied in full, the Prior Warrants are deemed cancelled, and any and all security interests
granted by the Company in favor of YA Global pursuant to the Financing Documents have been extinguished, including the release
of 4,000,000 shares of Series A Preferred Stock held in escrow. In exchange for the foregoing, the Company delivered to YA Global:
(i) a one-time cash payment of US$550,000; and (ii) new warrants to purchase up to 25,000,000 shares of Common Stock at an exercise
price of $0.0119 (the “Current Warrants”). The Current Warrants expire on or about July 28, 2014. A copy of the Repayment
Agreement and Current Warrants have been attached as exhibits to the Form 8-K filed August 2, 2011 and are hereby incorporated
in their entirety by reference.
The Company received a letter from the Securities
and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a
“formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena Duces
Tecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information contained
in the subpoena. An index of the source of all such produced information and an authentication declaration were also to be supplied.
The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the Company has violated
federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the investigation.
We initially hired the Los Angeles law firm
of Troy Gould to represent us in the matter of this investigation. Pete Wilke, Esq. is currently handling this matter. As of the
date of this filing, we believe we have provided all requested material to the SEC.
Status of prior private investment; $0 in 2007
(although HDV sold $13,000 of its shares), $1,000 in 2008 (although HDV sold $453,750 of its shares), $442,000 in 2009, $879,550
in 2010, $1,930,828 in 2011, $342,000 in the first calendar quarter of 2012 and $100,000 in the 2nd quarter of 2012. There is concern
that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or
failure to file securities sales notices as required by federal law).
In 2006, the Company issued shares for services
valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $7,875 in
2008 and shares for services valued at $74,400 in 2009. We have no plans to offer rescission for these share issuances.
We offered rescission to many of the 2011 investors
in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at
by Counsel. The results of our 2011 rescission offer, in terms of rescission offers accepted by shareholders, were very encouraging.
We had one rescission offer acceptance and refunded $1,000.
Licensing Events
:
HDV, an affiliate of Mr. Monros, manufactures
the “DynoValve” and “DynoValve Pro” products and then sells them to the Company for resale pursuant to
the Product Licensing Agreement entered into on December 15, 2008, as amended on December 16, 2009. Under the Product Licensing
Agreement, the price at which HDV sells the products to the Company is subject to change at any time upon written notice. The Company
may determine the prices that it charges to its customers. The Product Licensing Agreement is non-exclusive and automatically renews
on an annual basis provided certain sales volumes are achieved and the Company is otherwise not in breach. HDV may, after an applicable
cure period, terminate the Product Licensing Agreement earlier if it believes that the Company is deficient in meeting its responsibilities.
HDV may amend the Product Licensing Agreement at any time by giving notice to the Company, unless the Company objects within ten
days of such notice.
As consideration for HDV entering into the
Product Licensing Agreement, the Company agreed to issue to Mr. Monros and HDV, if and when available, an aggregate of 500 Million
shares of Common Stock, 5 Million shares of Series A Preferred Stock and 5 Million shares of Series C Preferred Stock. In July,
2011, HDV and Mr. Monros entered into a revised licensing agreement which modified the prior consideration paid to an aggregate
of 600 Million shares of Common Stock, 6.5 Million shares of Series A Preferred Stock and 2.5 Million shares of Series C Preferred
Stock. In connection with this transaction, Mr. Monros waived $350,000 in accrued salary owed to him by the Company, and HDV waived
$372,000 owed to it by the Company.
Mr. Monros has continued the process of preparing
patent applications for the other versions of the DynoValve products & related IP. In March, 2013, the Company entered into
a five (5) year Master Distribution Agreement with His Divine Vehicle to sell the DynoValve and DynoValve Pro in various international
territories. The consideration for the agreement was guaranteeing a minimum annual volume, payment for the DynoValves acquired
and a three percent (3%) royalty payment.
Major Contracts
:
In 2013, the Company has entered into a 5 year
licensing agreement with Dyno Green Tech, LLC ("DGT") to sell the DynoValve products in the licensed territories (UAE,
Dubai, Malaysia, India, and Africa). DGT has ordered 2,000 DynoValves as of 6/30/13. The DynoValves were shipped in the third quarter
of 2013. In order for them to fulfill and maintain this 5 year licensing agreement, they are required to purchase 500 additional
DynoValves per quarter for a total of $3,000,000 over a 5 year span.