As
filed with the Securities and Exchange Commission on October 6, 2006
Reg. No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Save the World Air, Inc.
(Name of Small Business Issuer in its Charter)
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Nevada
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5013
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52-2088326
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(State or Other Jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer
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Incorporation or Organization)
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Classification Code Number)
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Identification No.)
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5125 Lankershim Boulevard
North Hollywood, California 91601
(818) 487-8000
(Address and Telephone Number of Principal Executive Offices and Principal Place of Business)
Eugene E. Eichler
Chief Executive Officer
5125 Lankershim Boulevard
North Hollywood, California 91601
(818) 487-8000
(Name, Address and Telephone Number of Agent For Service)
Copy to:
Lance Jon Kimmel, Esq.
SEC Law Firm
11693 San Vicente Boulevard, Suite 357
Los Angeles, California 90049
(310) 557-3059
Approximate date of proposed sale to the public:
From time to time after the date this
registration statement becomes effective.
If this form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
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If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
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If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following
box.
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering Price
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Aggregate
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Registration
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Securities to be Registered
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Registered
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per Share(1)
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Offering Price(1)
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Fee(1)
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Common Stock, par value $0.001
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7,000,000(2
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$1.60
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$11,200,000
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$1,198.40
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Total
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7,000,000(2
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$1.60
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$11,200,000
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$1,198.40
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(1)
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The price is estimated in accordance with Rule 457(c) under the
Securities Act of 1933, as amended, solely for the purpose of
calculating the registration fee and represents the average of
the high and the low prices of the common stock on October 3,
2006, as reported on the OTC Bulletin Board.
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(2)
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Represents a maximum of 7,000,000 shares which may be issued
to Dutchess Private Equities Fund, L.P. in connection with an
equity line of credit.
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The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with
Section 8(a)
of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said Section
8(a)
, may
determine.
The information in this prospectus is not complete and may be changed. The selling security
holders may not sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION. DATED OCTOBER 6, 2006
PROSPECTUS
SAVE THE WORLD AIR, INC.
7,000,000 Shares of Common Stock
This
prospectus relates to the reoffer and resale, from time to time, of up to 7,000,000
shares of our common stock. The prices at which the selling shareholder may sell these shares will
be determined by the prevailing market price for shares of our common stock or in negotiated
transactions. For a list of selling security holders, please see
Selling Security Holders on page 45 of this prospectus.
We are not selling any shares of common stock in this offering and therefore will not receive
any proceeds from this offering.
We will pay the expenses of registering the shares registered in this prospectus.
Our common stock is traded in the over-the-counter market and is quoted on the OTC Bulletin
Board under the symbol ZERO. On October 3, 2006, the last bid price of our common stock was
$1.55 per share.
The shares included in this prospectus may be reoffered and resold directly by the selling
security holders in accordance with one or more of the methods described in the plan of
distribution, which begins on page 5 of this prospectus. We will not control or determine the
price at which a selling security holder decides to sell its shares. Brokers or dealers effecting
transactions in these shares should confirm that the shares are registered under applicable state
law or that an exemption from registration is available.
Dutchess Private Equities Fund, L.P., or Dutchess, one of the selling security holders, is an
underwriter within the meaning of the Securities Act of 1933, as amended.
We have retained the services of Spencer Clarke LLC to be our placement agent in connection
with the equity line of credit with Dutchess, and we will pay them a commission for each drawdowns
we may make under the equity line of credit. Spencer Clarke LLC is a member of the National
Association of Securities Dealers, or NASD.
Investing in our common stock involves a high degree of risk. You should understand the risks
associated with investing in our common stock. Before making an investment, read the Risk
Factors, which begin on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2006.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We have not authorized
anyone to provide you with information different from that which is contained in this prospectus.
This prospectus may be used only where it is legal to sell these securities. The information in
this prospectus may only be accurate on the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of securities.
(i)
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. This document contains forward-looking statements, which reflect the
views of our management with respect to future events and financial performance. These
forward-looking statements are subject to a number of uncertainties and other factors that could
cause actual results to differ materially from such statements. Forward-looking statements are
identified by words such as anticipates, believes, estimates, expects, intends, plans,
projects, targets and similar expressions. Readers are cautioned not to place undue reliance on
these forward-looking statements, which are based on the information available to management at
this time and which speak only as of this date. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. For
a discussion of some of the factors that may cause actual results to differ materially from those
suggested by the forward-looking statements, please read carefully the information under Risk
Factors beginning on page 3.
The identification in this document of factors that may affect future performance and the
accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All
forward-looking statements should be evaluated with the understanding of their inherent
uncertainty. You may rely only on the information contained in this prospectus.
We have not authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of common stock means that
information contained in this prospectus is correct after the date of this prospectus. This
prospectus is not an offer to sell or solicitation of an offer to buy these securities in any
circumstances under which the offer or solicitation is unlawful.
(ii)
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus; it does not
contain all of the information you should consider before investing in our common stock. You should
read the entire prospectus before making an investment decision.
Throughout this prospectus, the terms we, us, our, and our company refer to Save the
World Air, Inc., a Nevada corporation, and, unless the context indicates otherwise, also includes
our wholly-owned subsidiary, STWA Asia Pte. Ltd. a Singapore corporation.
The Company
We are a development stage company that has not yet generated revenues. Historically, we
devoted the bulk of our efforts to the completion of the design, the development of our production
models and the promotion of our products in the marketplace worldwide. Our products, based on our
ZEFS, MK IV and CAT-MATE technologies, are designed to reduce harmful emissions and/or
improve fuel efficiency and overall performance on equipment and vehicles driven by internal
combustion engines. We have taken actions to secure our intellectual property rights to the ZEFS,
MK IV and CAT-MATE technologies.
During 2005 and continuing in 2006, we began to focus on the initial marketing of our
products. We entered into the first agreements for the distribution of our products in late 2005
and early 2006. Our first two U.S. distributorship agreements with Team Phantom of Alaska and
Motorcycle Products Consulting, or MPC, of California, provides for the sale of products
incorporating our ZEFS technologies in the North American original equipment manufacturer, or OEM,
and after-market for motorcycles through the distributors to certain named prospective purchasers.
In January 2006, we entered into our first international distributorship agreement, with
Golden Allied Enterprises (Group) Co., Ltd., or GAE. The agreement provides that GAE will serve as
our exclusive distributor for products incorporating our ZEFS or CAT-MATE technologies in the
Peoples Republic of China. The agreement with GAE was conditioned upon our ZEFS-based products
achieving EURO2 standards in tests to be conducted in Shanghai. These tests were conducted and
passed in April 2006.
In July 2006, GAE placed its first order under the distributorship agreement, for 100,000
units, to be shipped in installments between now and July 2007. These products are in production
and we anticipate that we will begin delivering products under the agreement to GAE commencing in
October 2006, and will begin generating revenue in late 2006.
In April 2006, we entered into a product development agreement with Kwong Kee (Qing Xin)
Environmental Exhaust Systems Company, Ltd., or Kwong Kee, in China. Kwong Kee, a manufacturer of
mufflers and catalytic converters, will collaborate with us on product development based on our
CAT-MATE technology. As part of our strategic alliance, Kwong Kee will make available its research
and development facilities, testing equipment and product design and development support team.
In July 2006, we entered into an agreement with Quadrant Technology L.P., or Quadrant,
pursuant to which Quadrant will provide product development services for our products. Under this
agreement, Quadrant was also granted a right of first refusal to manufacture products incorporating
our ZEFS or MKIV technologies.
As part of our ongoing product development, we are in the process of launching two new product
lines, ECO ChargR and MAG ChargR, which we differentiate based on their differing magnetic fluxes
and their applications. ECO ChargR products will be more focused toward reduction in emissions and
MAG ChargR products will be more focused toward performance and fuel economy. ECO ChargR products
will tend to incorporate MK IV technology, but may incorporate ZEFS technologies, while MAG ChargR
products will tend to incorporate ZEFS technologies, but may incorporate MK IV technology.
The ECO ChargR product line incorporates our ZEFS or MK IV technologies, and is intended
specifically for the reduction of exhaust emissions in vehicle and small utility motors. These
products will be marketed primarily to OEMs as well as pilot and government-mandated emissions
programs.
The MAG ChargR product line incorporates our ZEFS or MK IV technologies, as well as other
power enhancing features, to exploit the power and mileage improving attributes of our magnetic
technologies. MAG ChargR will be marketed primarily to the consumer aftermarket for many vehicles,
including but not limited to cars, trucks, motorcycles, scooters, all terrain vehicles (ATVs),
snowmobiles, personal watercrafts and small utility motors.
1
Recent Financing Transaction
In September 2006 we entered into what is sometimes termed an equity line of credit
arrangement with Dutchess. Specifically, we entered into an investment agreement, pursuant to
which Dutchess is committed to purchase up to $10,000,000 of our common stock over the 36-month
term of the investment agreement. We are not obligated to request any portion of the $10,000,000.
As of the date of this prospectus, we have not drawn down any portion of this commitment,
leaving the entire $10,000,000 available under the equity line of credit, and for which we are
registering hereunder 7,000,000 shares, or approximately 17.8% of our issued and outstanding stock
before any such issuances. The actual number of shares that we may issue pursuant to the equity
line of credit is not determinable as it is based on the market price of our common stock from time
to time and the number of shares we desire to put to Dutchess.
Under the line of credit we may, but are not obligated to, put shares of our stock to
Dutchess from time to time over a 36-month period, at a purchase price calculated at 97% of the
lowest best closing bid for our common stock for the five trading days following our put notice to
Dutchess. Because the price of our common stock fluctuates and the number of shares of our common
stock, if any, that we may issue, should we exercise our put rights under the equity line of
credit, will vary, we do not know how many shares, if any, we will actually issue under the equity
line of credit. For purposes of this prospectus, we have assumed that we will put $9,913,400, or
all 7,000,000 shares, based on a closing price of our common stock on September 20, 2006 of $1.46
per share, less the 3% discount applicable to the price per share that Dutchess would pay under the
terms of the line of credit. However, this may not in fact be the case. If we put more than the
amount that would require us to issue the 7,000,000 shares being registered hereunder, we would be
required to file a new registration statement with regard to the excess number of shares and have
it declared effective by the Securities and Exchange Commission, or SEC, before we could make
further puts under the equity line of credit.
Under the terms of the equity line of credit, Dutchess may not own more than 4.99% of our
issued and outstanding stock at any one time.
If we draw down on the equity line of credit, more shares will be sold into the market by
Dutchess. These additional shares could cause our stock price to drop. In turn, if the stock price
drops and we make more drawdowns on the equity line of credit, more shares will come into the
market, which could cause a further drop in the stock price. You should be aware that there is an
inverse relationship between our stock price and the number of shares to be issued pursuant to the
equity line of credit. If our stock price declines, we will be required to issue a greater number
of shares under the equity line of credit. We have no obligation to utilize the full amount
available under the equity line of credit.
2
DILUTION
Our net tangible book value, based on our unaudited financial statements for the
fiscal quarter ended June 30, 2006, was $(155,189), or, $(0.0039) per share of common stock.
Net tangible book value per share is determined by dividing our tangible book value (total
tangible assets less total liabilities) by the number of outstanding shares of our common stock,
which was 39,317,619 shares outstanding as of September 20, 2006.
Since this offering is being made solely by the selling securities holders and none of the
proceeds will be paid to us, our net tangible book value will be unaffected by this offering. Our
net tangible book value, however, will be impacted by the common stock to be issued to Dutchess
under the Investment Agreement. The amount of dilution resulting from share issuances to Dutchess
will be determined by our stock price at or near the time of the put of shares to Dutchess by us.
The following example shows the dilution to new investors assuming the issuance of 100%, 50%,
25% and 10% of the 7,000,000 shares of common stock to Dutchess at an assumed offering price of
$
1.4162 per share, which is based on the closing price of our common stock on September 20, 2006
($1.46 per share) that has been adjusted for the 3% discount at which we will issue shares under
our agreement with Dutchess. The discount is defined as 97% of the lowest closing best bid price of
our common stock during the five consecutive trading day period immediately following our notice to
Dutchess of our election to exercise our put rights.
Using the above assumptions, less $50,000 of offering expenses and 8% cash commission to our
investment bankers, our pro forma net tangible book value as of June 30, 2006 would have been as
follows:
Pro Forma Effects of Dilution from Dutchess Transaction
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Assumed percentage of shares issued
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100
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50
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25
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%
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10
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Number of shares issued
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7,000,000
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3.500,000
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1,750,000
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700,000
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Assumed public offering price
per share
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$
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1.4162
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$
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1.4162
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$
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1.4162
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$
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1.4162
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Net tangible book value per
share before this offering
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$
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(0.0039
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$
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(0.0039
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$
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(0.0039
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$
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(0.0039
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Net tangible book value after
this offering
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$
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8,915,139
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$
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4,354,975
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$
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2,074,893
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$
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706,844
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Net tangible book value per
share after this offering
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$
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0.192
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$
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0.102
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$
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0.051
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$
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0.018
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Dilution of net tangible book
value per share to new investors
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$
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(1.224
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$
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(1.314
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$
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(1.366
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$
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(1.399
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Increase in net tangible book
value per share to existing
shareholders
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$
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0.196
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$
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0.106
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$
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0.054
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$
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0.022
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3
The Offering
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Common stock offered by the selling
security holders
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7,000,000 shares
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Common stock currently outstanding as of
September 20, 2006
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39,317,619 shares(1)
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Common stock to be outstanding after the
offering, assuming issuance of all of the
shares covered by this prospectus
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46,317,619 shares(1)
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OTC Bulletin Board Trading Symbol
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ZERO
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Risk Factors
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An investment in our common
stock involves significant
risks. See Risk Factors
beginning on page 5.
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(1)
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Does not include 7,328,299 shares of common stock issuable upon
the exercise of outstanding options (with exercise prices ranging
from $0.10 per share to $2.255 per share) and 21,358,517 shares
of common stock issuable upon the exercise of warrants (with
exercise prices ranging from $0.40 to $2.70 per share).
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RISK FACTORS
Investing in our common stock involves a high degree of risk, and you should be able to bear
the complete loss of your investment. You should carefully consider the risks described below, the
other information in this Prospectus, the documents incorporated by reference herein and the risk
factors discussed in our other filings with the Securities and Exchange Commission, including our
Annual Reported on Form 10-KSB for the year ended December 31, 2005, when evaluating our company
and our business. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known by us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually occur, our business
could be harmed. In such case, the trading price of our common stock could decline and investors
could lose all or a part of the money paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
We have never generated any revenues, have a history of losses, and cannot assure you that we will
ever become or remain profitable. As a result, you may lose your entire investment.
We have not yet generated any revenue from operations and, accordingly, we have incurred net
losses every year since our inception in 1998. For the fiscal years ended December 31, 2005 and
2004, we had net losses of $3,115,186 and $6,803,280, respectively, and for the six-month periods
ended June 30, 2006 and 2005, we had net losses of $5,990,330 and $1,839,573, respectively. To
date, we have dedicated most of our financial resources to research and development, general and
administrative expenses and initial sales and marketing activities. We have funded all of our
activities through sales of our securities. Although we expect to generate revenue beginning in
2006 from sales of products incorporating our ZEFS, MK IV and CAT-MATE technologies, we anticipate
net losses and negative cash flow to continue for the foreseeable future until such time as our
products are brought to market in sufficient amounts to offset operating losses. As planned, we
have significantly expanded both our research and development efforts, and our sales and marketing
efforts, during the past year. Consequently, we will need to generate significant additional
revenue to fund our operations. This has put a proportionate corresponding demand on capital. Our
ability to achieve profitability is dependent upon our continuing research and development, product
development, and sales and marketing efforts, to deliver a viable product and the companys ability
to successfully bring it to market. Although our management is optimistic that we will succeed in
marketing products incorporating our ZEFS, MK IV and CAT-MATE technologies, there can be no
assurance that we will ever generate revenues or that any revenues that may be generated will be
sufficient for us to become profitable or thereafter maintain profitability. If we cannot generate
any revenues or become or remain profitable, we may have to cease our operations and liquidate our
business and you may lose your entire investment.
Our independent auditors have expressed doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.
In their report dated March 22, 2006, our independent auditors stated that our financial
statements for the year ended December 31, 2005 were prepared assuming that we would continue as a
going concern. Our ability to continue as a going concern is an issue raised as a result of our
recurring negative cash flows from operations and accumulated deficit. We had an accumulated
deficit of approximately $20,246,074 and $26,236,404 as of December 31, 2005 and June 30, 2006,
respectively. Our ability to continue as a going concern is subject to our ability to obtain
significant additional capital to fund our operations and to generate revenue from sales, of which
there is no assurance. The going concern qualification in the auditors report could materially
limit our ability to raise additional capital. If we fail to raise sufficient capital, we may have
to liquidate our business and you may lose your investment.
We will need additional capital to meet our operating needs, and we cannot be sure that additional
financing will be available.
As of June 30, 2006 our expenses ran, and are expected to continue to run, at a burn rate of
approximately $400,000 per month. Our current capital resources will be sufficient to fund
operations only through October 2006, and we will require additional capital in order to operate
beyond this date. Management anticipates that at least portion of our cash flow needs will be
satisfied by the exercise of outstanding warrants to purchase our common stock, at variable prices,
which are coming due at various times this year. In addition, management is actively pursuing other
financing alternatives. However, no assurance can be given at this time that any such sources of
capital will be available to us, or available to us on favorable terms. If we cannot obtain needed
capital, when and as we need it, our continuing research and development efforts, sales and
marketing plans, business and financial condition and our ability to reduce losses and generate
profits are likely to be materially and adversely affected.
5
If we obtain additional financing, you may suffer significant dilution.
Any additional issuance of our common stock, or securities convertible into or exercisable for
our common stock, would dilute the percentage ownership of our existing stockholders. This dilution
could also have an adverse impact on our earnings per share, if and when we become profitable, and
reduce the price of our common stock. In addition, the new securities may have rights, preferences
or privileges senior to those of our common stock.
As a company with an unproven business strategy, our limited history of operations makes
evaluation of our business and prospects difficult.
Our business prospects are difficult to predict because of our limited operating history,
early stage of development and unproven business strategy. Since our incorporation in 1998, we have
been and continue to be involved in development of products using our technology, establishing
manufacturing and marketing of these products to consumers and industry partners. Although we
believe our technology and products in development have significant profit potential, we may not
attain profitable operations and our management may not succeed in realizing our business
objectives.
If we are not able to devote adequate resources to product development and commercialization, we
may not be able to develop our products.
Our business strategy is to develop, manufacture and market products incorporating our ZEFS,
MK IV and CAT-MATE technologies. We believe that our revenue growth and profitability, if any, will
substantially depend upon our ability to:
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raise additional needed capital for research and development;
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complete development of our products in development; and
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successfully introduce and commercialize our new products.
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Certain of our products are still under various stages of development. Because we have limited
resources to devote to product development and commercialization, any delay in the development of
one product or reallocation of resources to product development efforts that prove unsuccessful may
delay or jeopardize the development of other product candidates. Although our management believes
that it can finance our product development through private placements and other capital sources,
if we do not develop new products and bring them to market, our ability to generate revenues will
be adversely affected.
As we have not generated positive cash flow from operations, our ability to continue operations
is dependent on our ability to either begin to generate positive cash flow from operations or our
ability to raise capital from outside sources.
We have not generated positive cash flow from operations and have relied on external sources
of capital to fund operations. We had $1,628,517 in cash at June 30, 2006 and negative cash flow
from operations of $2,449,893 for the six-month period ended June 30, 2006.
We currently do not have credit facilities available with financial institutions or other
third parties, and historically have relied upon best efforts third-party funding. Though we have
been successful at raising capital on a best efforts basis in the past, we can provide no assurance
that we will be successful in any future best-efforts financing endeavors. We may need to continue
to rely upon financing from external sources to fund our operations for the foreseeable future. If
we are unable to raise sufficient capital from external sources to fund our operations, we may need
to curtail operations.
The commercial viability of products incorporating our ZEFS, CAT-MATE and MKIV technologies
remains largely unproven and we may not be able to attract customers.
Despite the fact that we have entered into our first distribution agreements, and have
received our first order to ship products, to the best of our knowledge, no consumer, engine,
carburetor or automobile manufacturer has used products incorporating our ZEFS, MK IV or CAT-MATE
technologies to reduce engine emissions, enhanced performance or fuel efficiency to date.
Accordingly, the commercial viability of our products are not known at this time. If commercial
opportunities are not realized from the sale and use of products incorporating our ZEFS, MK IV and
CAT-MATE technologies, our ability to generate revenue would be adversely affected. There can be no
assurances that we will be successful in marketing our products, or that customers will ultimately
purchase our
6
products. Failure to have commercial success from the sale of these products will
significantly and negatively impact our financial condition.
If our products and services do not gain market acceptance, it is unlikely that we will become
profitable.
The market for products that reduce harmful motor vehicle emissions is evolving and we have
many successful competitors. Manufacturers have historically used various technologies, including
catalytic converters, to reduce exhaust emissions caused by their products. At this time, our
technology is unproven, and the use of our technologies by others is limited. The commercial
success of our products will depend upon the adoption of our technologies by manufacturers and
consumers as an approach to reduce motor vehicle emissions. Market acceptance will depend on many
factors, including:
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the willingness and ability of consumers and industry partners to adopt new technologies;
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the willingness of governments to mandate reduction of motor vehicle emissions;
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our ability to convince potential industry partners and consumers that our technologies are an attractive alternative to other
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technologies for reduction of motor vehicle emissions;
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our ability to manufacture products and provide services in sufficient quantities with acceptable quality and at an acceptable cost;
and
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our ability to place and service sufficient quantities of our products.
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If our products do not achieve a significant level of market acceptance, demand for our
products will not develop as expected and it is unlikely that we will become profitable.
We need to outsource and rely on third parties for the manufacture, sales and marketing of our
products, and our future success will be dependent on the timeliness and effectiveness of the
efforts of these third parties.
We do not have the required financial and human resources or capability to manufacture, market
and sell our products. Our business model calls for the outsourcing of the manufacture, and sales
and marketing of our products in order to reduce our capital and infrastructure costs as a means of
potentially improving our financial position and the profitability of our business. Accordingly, we
must enter into agreements with other companies that can assist us and provide certain capabilities
that we do not possess. We have entered into certain distribution agreements, but we may not be
successful in entering into additional such alliances on favorable terms or at all. Even if we do
succeed in securing additional distribution agreements, we may not be able to maintain them.
Furthermore, any delay in entering into agreements could delay the development and
commercialization of our products and reduce their competitiveness even if they reach the market.
Any such delay related to our existing or future agreements could adversely affect our business.
We do not currently have an agreement in place for the manufacture of products incorporating
our ZEFS or MK IV technologies, although Quadrant has a right of first refusal for the manufacture
of such products. Although we presently intend to have products incorporating our CAT-MATE
technology manufactured by Kwong Kee in China , we do not yet have an agreement in place for the
manufacture of products incorporating our CAT-MATE technology.
If any party to which we have outsourced certain functions fails to perform its obligations under
agreements with us, the development and commercialization of our products could be delayed or
curtailed.
To the extent that we rely on other companies to manufacture, sell or market our products, we
will be dependent on the timeliness and effectiveness of their efforts. If any of these parties do
not perform its obligations in a timely and effective manner, the commercialization of our products
could be delayed or curtailed because we may not have sufficient financial resources or
capabilities to continue such development and commercialization on our own.
Any revenues that we may earn in the future are unpredictable, and our operating results are
likely to fluctuate from quarter to quarter.
7
We believe that our future operating results will fluctuate due to a variety of factors,
including:
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delays in product development;
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market acceptance of our new products;
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changes in the demand for, and pricing, of our products;
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competition and pricing pressure from competitive products;
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manufacturing delays; and
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expenses related to, and the results of, proceedings relating to our intellectual property.
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A large portion of our expenses, including expenses for our facilities, equipment and
personnel, is relatively fixed and not subject to significant reduction. In addition, we expect our
operating expenses will continue to increase significantly in 2006, as a result of our continuing
research and development efforts, and increased production, and sales and marketing activities.
Although we expect to generate revenues from sales of our products in the future, revenues may
decline or not grow as anticipated and our operating results could be substantially harmed for a
particular fiscal period. Moreover, our operating results in some quarters may not meet the
expectations of stock market analysts and investors. In that case, our stock price most likely
would decline.
Nondisclosure agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information.
In order to protect our proprietary technology and processes, we rely in part on nondisclosure
agreements with our employees, licensing partners, consultants, agents and other organizations to
which we disclose our proprietary information. These agreements may not effectively prevent
disclosure of confidential information and may not provide an adequate remedy in the event of
unauthorized disclosure of confidential information. In addition, others may independently discover
trade secrets and proprietary information, and in such cases we could not assert any trade secret
rights against such parties. Costly and time-consuming litigation could be necessary to enforce and
determine the scope of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business position. Since we rely on trade secrets
and nondisclosure agreements, in addition to patents, to protect some of our intellectual property,
there is a risk that third parties may obtain and improperly utilize our proprietary information to
our competitive disadvantage. We may not be able to detect unauthorized use or take appropriate and
timely steps to enforce our intellectual property rights.
The manufacture, use or sale of our current and proposed products may infringe on the patent
rights of others, and we may be forced to litigate if an intellectual property dispute arises.
If we infringe or are alleged to have infringed another partys patent rights, we may be
required to seek a license, defend an infringement action or challenge the validity of the patents
in court. Patent litigation is costly and time consuming. We may not have sufficient resources to
bring these actions to a successful conclusion. In addition, if we do not obtain a license, do not
successfully defend an infringement action or are unable to have infringed patents declared
invalid, we may:
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incur substantial monetary damages;
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encounter significant delays in marketing our current and proposed product candidates;
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be unable to conduct or participate in the manufacture, use or sale of product
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candidates or methods of treatment requiring licenses;
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lose patent protection for our inventions and products; or
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find our patents are unenforceable, invalid, or have a reduced scope of protection.
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Parties making such claims may be able to obtain injunctive relief that could effectively
block the companys ability to further develop or commercialize our current and proposed product
candidates in the United States and abroad and could result in the
8
award of substantial damages.
Defense of any lawsuit or failure to obtain any such license could substantially harm the company.
Litigation, regardless of outcome, could result in substantial cost to and a diversion of efforts
by the company.
We may face costly intellectual property disputes.
Our ability to compete effectively will depend in part on our ability to develop and maintain
proprietary aspects of our technologies and either to operate without infringing the proprietary
rights of others or to obtain rights to technology owned by third parties. Our pending patent
applications, specifically patent rights of the MK IV and CAT-MATE technologies, may not result in
the issuance of any patents or any issued patents that will offer protection against competitors
with similar technology. Patents we have received for our ZEFS technologies, and which we may
receive, may be challenged, invalidated or circumvented in the future or the rights created by
those patents may not provide a competitive advantage. We also rely on trade secrets, technical
know-how and continuing invention to develop and maintain our competitive position. Others may
independently develop substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets.
We are involved in a patent infringement suit brought by our former sole director and executive
officer.
In April 2005, Jeffrey A. Muller, the Companys former sole director and executive officer,
filed a complaint against us seeking declaratory and injunctive relief and alleging unfair
competition in connection with a claimed prior patent interest in the ZEFS technologies. Mr. Muller
is seeking to have the patent rights in the ZEFS technologies that were previously transferred to
us by Mr. Mullers bankruptcy trustee declared null and void. This is but one of several claims
that have been litigated over a number of years between Mr. Muller and us. While we believe that we
have valid claims and defenses, there can be no assurance that an adverse result or outcome in the
pending litigation would not have a material adverse effect on our business prospects, financial
position and cash flow.
We may not be able to attract or retain qualified senior personnel.
We believe we are currently able to manage our current business with our existing management
team. However, as we expand the scope of our operations, we will need to obtain the full-time
services of additional senior management and other personnel. Competition for highly-skilled
personnel is intense, and there can be no assurance that we will be able to attract or retain
qualified senior personnel. Our failure to do so could have an adverse effect on our ability to
implement our business plan. As we add full-time senior personnel, our overhead expenses for
salaries and related items will increase from current levels and, depending upon the number of
personnel we hire and their compensation packages, these increases could be substantial.
If we lose our key personnel or are unable to attract and retain additional personnel, we may be
unable to achieve profitability.
Our future success is substantially dependent on the efforts of our senior management,
particularly Eugene E. Eichler, Bruce H. McKinnon and John Richard Bautista III. The loss of the
services of members of our senior management may significantly delay or prevent the achievement of
product development and other business objectives. Because of the scientific nature of our
business, we depend substantially on our ability to attract and retain qualified marketing,
scientific and technical personnel. There is intense competition among specialized automotive
companies for qualified personnel in the areas of our activities. If we lose the services of, or do
not successfully recruit key marketing, scientific and technical personnel, the growth of our
business could be substantially impaired. At present, we maintain key man insurance only for Mr.
McKinnon.
We expect to incur increased costs under the Sarbanes-Oxley Act of 2002.
As a public company, we incur significant legal, accounting and other expenses. In addition,
the Sarbanes-Oxley Act of 2002, as well as related rules adopted by the Securities and Exchange
Commission, have imposed substantial requirements on public companies, including certain corporate
governance practices and requirements relating to internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal
and financial compliance costs and to make some activities more time-consuming and costly.
Although, under proposed rules issued by the SEC in July 2006, we will not be required to evaluate
how to document and test our internal control procedures under Section 404 of the Sarbanes-Oxley
Act and the related rules of the SEC until our Annual Report on Form 10-KSB for the year ended
December 31, 2007, effective disclosure controls and procedures and internal controls are necessary
for us to produce reliable financial reports and are important in
helping prevent financial fraud generally. We must begin to implement proper procedures
significantly in advance of this date and will incur significant up-front expenses to do so. If we
are unable to achieve and maintain adequate disclosure controls and procedures and internal
controls, our business and operating results could be harmed.
9
Changes in stock option accounting rules may adversely affect our reported operating results, our
stock price, and our ability to attract and retain employees.
In December 2004, the Financial Accounting Standards Board published new rules that will
require companies such as us to record all stock-based employee compensation as an expense. The new
rules apply to stock options grants, as well as a wide range of other share-based compensation
arrangements including restricted share plans, performance-based awards, share appreciation rights,
and employee share purchase plans. Large public companies have had to apply the new financial
accounting rules to the first fiscal year that began after June 15, 2005, while small business
issuers such as this company have had to apply the new rules in their first fiscal year beginning
after December 15, 2005. As a small company with limited financial resources, we have depended upon
compensating our officers, directors, employees and consultants with such stock based compensation
awards in the past in order to limit our cash expenditures and to attract and retain officers,
directors, employees and consultants. Accordingly, if we continue to grant stock options or other
stock based compensation awards to our officers, directors, employees, and consultants after the
new rules apply to us, our future earnings, if any, will be reduced (or our future losses will be
increased) by the expenses recorded for those grants. These compensation expenses may be larger
than the compensation expense that we would be required to record were we able to compensate these
persons with cash in lieu of securities. Since we are a small company, the expenses we may have to
record as a result of future options grants may be significant and may materially negatively affect
our reported financial results. The adverse effects that the new accounting rules may have on our
future financial statements should we continue to rely heavily on stock-based compensation may
reduce our stock price and make it more difficult for us to attract new investors. In addition,
reducing our use of stock plans as an incentive for and a reward to our officers, directors and
employees, could result in a competitive disadvantage to us in the employee marketplace.
RISKS RELATED TO THE DUTCHESS TRANSACTION
There are 7,000,000 shares underlying the equity line of credit that are being registered in
this prospectus and the sale of these shares could depress the market price of our common stock.
The sale by Dutchess into the public market of the shares being registered under the
equity line of credit could depress the market price of our common stock. As of September 20, 2006,
we had 39,317,619 shares of common stock issued and outstanding. We are registering 7,000,000
shares of common stock pursuant to this registration statement for issuance pursuant to the equity
line of credit.
Assuming we utilize the maximum amount available under the equity line of credit, existing
shareholders could experience substantial dilution upon the issuance of the shares.
Our equity line of credit with Dutchess contemplates the potential future issuance and
sale of up to $10,000,000 of our common stock to Dutchess subject to certain restrictions and
obligations. The following is an example of the number of shares that could be issued at various
prices assuming we utilize the maximum amount available under the equity line of credit. These
examples assume issuance at a market price of $1.46 per share and at 10%, 25% and 50% below $1.46
per share.
The following table should be read in conjunction with the footnotes immediately
following the table:
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Percent below
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Percent of
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current market
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Price per share
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Number of shares
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Shares
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outstanding
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price
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(1)
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issuable (2)
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outstanding (3)
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shares (4)
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0
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%
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$
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1.4162
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7,061,150
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46,378,769
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15.22
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%
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10
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%
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$
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1.2746
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7,845,599
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47,163,218
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16.63
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%
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25
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%
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$
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1.0622
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9,414,423
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48,732,042
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19.32
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%
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50
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%
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$
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0.7081
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14,122,299
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53,439,918
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26.43
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%
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(1)
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Represents purchase prices equal to 97% of $1.46 and potential reductions of 10%, 25% and 50%.
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(2)
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Represents the number of shares issuable if the entire
$10,000,000 remaining commitment under the equity line of credit
was drawn down at the indicated purchase prices
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Since only
7,000,000 shares of our common stock are
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being registered
hereunder, we would have to file another registration statement
and have it declared effective by the SEC in order to make
additional drawdowns resulting in the issuance of more than the
7,000,000 shares of common stock being registered hereunder.
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(3)
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Based on 39,317,619 shares of common stock issued and outstanding as of September 20, 2006.
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(4)
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Percentage of the total outstanding common stock after the
issuance of the shares indicated, without considering the 4.99%
contractual restriction on the number of shares that Dutchess may
own at any point in time or other restrictions on the number of
shares we may issue.
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The lower the stock price, the greater the number of shares issuable under the equity line
of credit, which could contribute to the future decline of our stock price and dilute existing
shareholders equity and voting rights.
The number of shares that Dutchess will receive under its agreement with us is calculated
based upon the market price of our common stock prevailing at the time of each drawdown request, or
put. The lower the market price, the greater the number of shares issuable under the agreement.
Upon issuance of the shares, to the extent that Dutchess will attempt to sell the shares into the
market, these sales could further reduce the market price of our common stock. This in turn will
increase the number of shares issuable under the agreement. This could lead to lower market prices
and a greater number of shares to be issued. A larger number of shares issuable at a discount in a
declining market could expose our shareholders to greater dilution and a reduction of the value of
their investment.
If we issue more than 7,000,000 shares underlying the equity line of credit, we will be
obligated to file an additional registration statement at additional cost and expenditure of
time.
Depending upon the total amount of the equity line of credit that we may wish to draw
over the 36-month of the facility, and the price of our stock over such period of time, we may
issue more than the 7,000,000 shares being registered pursuant to this registration statement, as
shown in the table above (based on certain arbitrary prices of our stock). In such event, we would
be obligated to suspend drawdowns under the equity line of credit while we prepare, file and seek
to have declared effective a new registration statement covering the additional number of shares
above the 7,000,000 shares being registered hereunder. During such period, we could experience
delays in our ability to continue to develop our business unless at such time we had sufficient
cash flow from operations or other sources of funds available. Any such delays could have a
material adverse effect on our business and results of operations.
RISKS RELATED TO OUR COMMON STOCK
Currently, there is only very limited trading in our stock, so you may be unable to sell your
shares at or near the quoted bid prices if you need to sell your shares.
The shares of our common stock are thinly-traded on the OTC Bulletin Board, meaning that the
number of persons interested in purchasing our common shares at or near bid prices at any given
time may be relatively small or non-existent. This situation is attributable to a number of
factors, including the fact that we are a small company engaged in a high risk business which is
relatively unknown to stock analysts, stock brokers, institutional investors and others in the
investment community that can generate or influence daily trading volume and valuation. Should we
even come to the attention of such persons, they tend to be risk-averse and would be reluctant to
follow an unproven, early stage company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence, there may be
periods of several days or more when trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer which has a large and steady volume of trading activity that will
generally support continuous trading without negatively impacting our share price. We cannot give
you any assurance that a broader or more active public trading market for our common shares will
develop or be sustained. Due to these conditions, we can give you no assurance that you will be
able to sell your shares at or near bid prices or at all. As a result, you could lose all or part
of your investment.
The market price of our stock is volatile.
The market price for our common stock has been volatile in recent months, ranging from a
closing price of $0.65 on January 10, 2006 to a closing price of $4.74 on March 13, 2006, and a
closing price of $1.46 on September 20, 2006. Additionally, the
11
price of our stock has been both
higher and lower than those amounts on an intra-day basis in recent months. Because our stock is
thinly traded, its price can change dramatically over short periods, even in a single day. An
investment in our stock is subject to such volatility and, consequently, is subject to significant
risk. The market price of our common stock could fluctuate widely in response to many factors,
including:
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developments with respect to patents or proprietary rights;
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announcements of technological innovations by us or our competitors;
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announcements of new products or new contracts by us or our competitors;
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actual or anticipated variations in our operating results due to the level of development expenses and other factors;
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changes in financial estimates by securities analysts and whether any future earnings of ours meet or exceed such estimates;
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conditions and trends in our industry;
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new accounting standards;
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general economic, political and market conditions and other factors; and
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the occurrence of any of the risks described in this prospectus.
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Substantial sales of common stock could cause our stock price to fall.
As of September 20, 2006, we had 39,317,619 shares of common stock outstanding. In the past
year, there have been times when average daily trading volume of our common stock has been
extremely low, and there have been many days in which no shares were traded at all. At other times,
the average daily trading volume of our common stock has been high. As a result of the registration
of the shares included in this prospectus, an additional 7,000,000 shares of our common stock will
be able to be freely sold on the market, assuming all shares of common stock subject to options
under the Plan are granted, vest and are exercised. Because of the limited trading volume, the
sudden release of up to 7,000,000 additional freely trading shares included in this prospectus onto
the market, or the perception that such shares will or could come onto the market, could have an
adverse affect on the trading price of our stock. No prediction can be made as to the effect, if
any, that sales of the shares included in this prospectus, or the availability of such shares for
sale, will have on the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of common stock may be sold in the public market may adversely affect
prevailing market prices for our common stock and could impair our ability to raise capital through
the sale of our equity securities.
You may have difficulty selling our shares because they are deemed penny stocks.
Because our common stock is not quoted on the Nasdaq National Market or Nasdaq Capital Market
or listed on a national securities exchange, if the trading price of our common stock remains below
$5.00 per share, trading in our common stock will be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), which
require additional disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less
than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks
associated therewith and impose various sales practice requirements on broker-dealers who sell
penny stocks to persons other than established customers and accredited investors (generally
defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000
individually or $300,000 together with a spouse). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchaser and have received the
purchasers written consent to the transaction
prior to the sale. The broker-dealer also must disclose the commissions payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is
the sole market-maker, the broker-dealer must disclose this fact and the broker-dealers presumed
control over the market. Such information must be provided to the customer orally or in writing
before or with the written confirmation of trade sent to the customer. Monthly statements must be
sent disclosing recent price information for the penny stock held in the account and information on
the limited market in penny stocks. The additional burdens imposed upon broker-dealers by
12
such
requirements could discourage broker-dealers from effecting transactions in our common stock, which
could severely limit the market liquidity of the common stock and the ability of holders of the
common stock to sell their shares.
Potential issuance of additional shares of our common stock could dilute existing stockholders.
We are authorized to issue up to 200,000,000 shares of common stock. To the extent of such
authorization, our Board of Directors has the ability, without seeking stockholder approval, to
issue additional shares of common stock in the future for such consideration as the Board of
Directors may consider sufficient. The issuance of additional common stock in the future will
reduce the proportionate ownership and voting power of the common stock offered hereby. Risks
relating to the potential dilutive effect of the shares issuable to Dutchess under the equity line
of credit are discussed separately above under Risks Related to the Dutchess Transaction.
USE OF PROCEEDS
We will not receive any proceeds from the sale of any of the common stock by the selling
security holders pursuant to this prospectus. All proceeds from the sale of the shares will be for
the account of the selling security holders. We will pay the expenses of registration of these
shares, including legal and accounting fees.
BUSINESS
Overview
We are a development stage company that has not yet generated revenues. Historically, we
devoted the bulk of our efforts to the completion of the design, the development of our production
models and the promotion of our products in the marketplace worldwide. Our products, based on our
ZEFS, MK IV and CAT-MATE technologies, are designed to reduce harmful emissions, and/or
improve fuel efficiency and overall performance on equipment and vehicles driven by internal
combustion engines. The ZEFS, MK IV and CAT-MATE technologies reduce carbon monoxide, hydrocarbon
and oxides of nitrogen emissions in 2- and 4-stroke motorcycles, fuel-injection engines, generators
and small engines. In addition, the ZEFS and MK IV technologies improve fuel efficiency and overall
performance on equipment and vehicles driven by internal combustion engines. We have taken actions
to secure our intellectual property rights to the ZEFS, MK IV and CAT-MATE technologies.
During the past four years, we have acquired the ZEFS and CAT-MATE technologies, developed the
MK IV technology, conducted scientific tests and produced prototype and actual products, and
initiated sales and marketing efforts. In 2002, we acquired worldwide intellectual property,
patent, manufacturing and marketing rights to the ZEFS technologies. In late 2003, we acquired
worldwide intellectual property and patent rights to the CAT-MATE technology. We have taken actions
within the U.S. and internationally to secure our intellectual property rights.
During 2005 and continuing in 2006, we began to focus on the initial marketing of our
products. We entered into the first agreements for the distribution of our products in late 2005
and early 2006. Our first two U.S. distributorship agreements with Team Phantom of Alaska and MPC
of California, provides for the sale of products incorporating our ZEFS technologies in the North
American OEM and after-market for motorcycles through the distributors to certain named prospective
purchasers. We anticipate that we will begin delivering some products under the agreement with MPC
commencing in the fourth quarter of 2006 and we currently believe that we will begin generating
revenue in late 2006.
In January 2006, we entered into our first international distributorship agreement, with GAE.
The agreement provides that GAE will serve as our exclusive distributor for products incorporating
our ZEFS or CAT-MATE technologies in the Peoples Republic of China. The agreement with GAE was
conditioned upon our ZEFS-based products achieving EURO2 standards in tests to be conducted in
Shanghai. These tests were conducted and passed in April 2006.
In July 2006, GAE placed its first order under the distributorship agreement, for 100,000
units, to be shipped in installments between now and July 2007. These products are in production
and we anticipate that we will begin delivering products under the agreement to GAE commencing in
October 2006, and will begin generating revenue in late 2006.
In April 2006, we entered into a product development agreement with Kwong Kee in China. Kwong
Kee, a manufacturer of mufflers and catalytic converters, will collaborate with us on product
development based on our CAT-MATE technology. As part of our strategic alliance, Kwong Kee will
make available its research and development facilities, testing equipment and product design and
development support team.
13
In July 2006, we entered into an agreement with Quadrant, pursuant to which Quadrant will
provide product development services for our products. Under this agreement, Quadrant was also
granted a right of first refusal to manufacture our ZEFS-based and other magnetic products.
Also in July 2006, we entered into an agreement with Marketing Matters, Inc. to provide
exclusive agency services in the United States for advertising, marketing, industry and trade show
promotion, as well as packaging design services. We entered into a separate agreement with SS Sales
and Marketing Group, to provide marketing and promotional services in the western United States and
western Canada for our products.
In addition, we are continuing our marketing efforts to international governmental entities in
cooperation with the United Nations Environmental Programme, or UNEP, and various OEMs and the
aftermarket to sell or license products using our ZEFS, MK IV and CAT-MATE technologies. We
anticipate that these efforts will continue during the remainder of 2006 and for the foreseeable
future.
As part of our ongoing product development, we are in the process of launching two new product
lines, ECO ChargR and MAG ChargR, which we differentiate based on their differing magnetic fluxes
and their applications. ECO ChargR products will be more focused toward reduction in emissions and
MAG ChargR products will be more focused toward performance and fuel economy. ECO ChargR products
will tend to incorporate MK IV technology, but may incorporate ZEFS technologies, while MAG ChargR
products will tend to incorporate ZEFS technologies, but may incorporate MK IV technology.
The ECO ChargR product line incorporates our ZEFS or MK IV technologies, and is intended
specifically for the reduction of exhaust emissions in vehicle and small utility motors. These
products will be marketed primarily to OEMs as well as pilot and government-mandated emissions
programs.
The MAG ChargR product line incorporates our ZEFS or MK IV technologies, as well as other
power enhancing features, to exploit the power and mileage improving attributes of our magnetic
technologies. MAG ChargR will be marketed primarily to the consumer aftermarket for many vehicles,
including but not limited to cars, trucks, motorcycles, scooters, all terrain vehicles (ATVs),
snowmobiles, personal watercrafts and small utility motors.
In July 2004, we entered into a license agreement with Temple University, for a research
project with Dr. Rongjia Tao as principal investigator. That project and the related products
involve the development and commercialization of underwater and cold temperature applications for
improving oil flow under different temperature and pressure conditions. Under the license
agreement, we hold the worldwide exclusive rights to this technology. On May 14, 2004, we had
filed a patent application in Australia (Method and Apparatus for a Treatment of Fuel), which was
subsequently assigned by us to Temple University as part of the license agreement. An additional
patent application was recently filed covering several of the Gulf states. As a result of Dr.
Taos recent publicly-reported progress in reducing viscosity of crude oil with magnetic pulses, we
believe that this technology may have commercial viability and we are pursuing partners,
distributors and licensees in the United States, Gulf states region
and Eastern Europe for products
incorporating this technology.
Our expenses to date have been funded primarily through the sale of stock and convertible
debt. We have raised capital in 2006 and will need to raise additional capital in 2006, and
possibly beyond, to fund our sales and marketing efforts, continuing research and development, and
certain other expenses, until our revenue base grows sufficiently.
Our company was incorporated on February 18, 1998, as a Nevada corporation under the name
Mandalay Capital Corporation. We changed our name to Save the World Air, Inc. on February 11, 1999
following the acquisition of marketing and manufacturing rights of the ZEFS technologies. Our
mailing address and executive offices are located at 5125 Lankershim Boulevard, North Hollywood,
California, 91601. Our telephone number is (818) 487-8000. Our corporate website is www.stwa.com.
Information contained on the website is not deemed part of this prospectus.
Since February 2, 2006, our common stock has been quoted on the Over-the-Counter Bulletin
Board under the symbol ZERO.
Governmental Mandates to Reduce Air Pollution
The incomplete and inefficient burning of fossil fuel in internal combustion engines results
in unburned gases, such as hydrocarbons, carbon monoxide and oxides of nitrogen being expelled as
harmful emission as a by-product of the engines exhaust.
These emissions have contributed to significant air pollution and depletion of the ozone layer
that protects the worlds atmosphere from harmful ultraviolet radiation. As a result, the world has
experienced significant deterioration to its air quality since the beginning of the 20th century
and the problem has gotten progressively worse with each passing year. Forecasts published by the
World Resources Institute indicate that this trend will continue to accelerate.
14
Governments internationally recognize the serious effects caused by air pollution and have
enacted legislation to mandate that engine manufacturers be required to reduce exhaust emissions
caused by their products. As evidenced by the overwhelming participation in the establishment of
the Kyoto Accord, most nations are moving towards tighter emissions control. The EU currently
requires all member nations to adopt EURO3 emissions standards, and many Asian and Eastern European
countries have also announced gradual phase-in of this standard. The cost of adding emissions
control devices has always been a mitigating factor, shifting the cost burden to the consumer. In
developing nations, where incomes are extremely low, economics and the lack of government resources
have hampered progress. Nonetheless, we anticipate that the social and political realities of
protecting our environment may result in further government mandates that manufacturers adopt
better cost effective solutions, such as products incorporating our ZEFS, MK IV and CAT-MATE
technologies, for reducing motor emissions.
Absent governmental mandates for emission controls, the primary appeal of our products is
likely to be related to fuel efficiency and performance enhancement.
Our Business Strategy
Our Technologies and Products
Our principal business focus currently rests with development and distribution of products
designed to solve the complex problems caused by pollution from motorcycles, automobiles and other
equipment driven by internal combustion engines and to improve the performance of those engines. We
have designed and tested multiple versions of products incorporating our ZEFS, MK IV or CAT-MATE
technologies for use on 2- and 4-stroke carbureted and fuel injection gasoline engines and are
currently in the process of adapting this technology to work on engines that use diesel fuels.
Historically, manufacturers of vehicles, motorcycles, power sports equipment, boats and small
utility motors have had very few technological options to reduce emissions to the strictest levels
of current and future government standards. The approach used by engine manufacturers to address
this mandate has thus far generally taken the form of installing catalytic converters, which work
on the principle of super heating gases within the exhaust manifold after the damaging gases have
been created through internal combustion.
These traditional devices are expensive, and sensitive to the poor quality and adulterated
fuel that is commonly found in developing nations. Bad fuel can permanently damage a catalytic
converter with the first tank full, whereas products incorporating our ZEFS or MK IV technologies
are unaffected by the problem of bad fuel. Catalytic converters also do not share the benefits of
our ZEFS or MK IV technologies of increased fuel efficiency and performance. In fact, in many cases
catalytic converters are detrimental to mileage and power.
Products incorporating our ZEFS or MK IV technologies contain permanent rare-earth magnets,
which produce a very strong magnetic field. This field, when arranged in specific manner of shape
and strength, causes a molecular change in the fuel as it passes through the field. As
gasoline/diesel passes through the magnetic field, a molecular change in the fuel occurs
facilitating a decline in both viscosity and surface tension. This allows for finer atomization,
resulting in a more optimized mixture and therefore more efficient combustion, lower emissions,
more horsepower and torque and improved fuel economy. Reductions have been recorded in the scale
from 760 microns down to 140 microns in carburetion fuel systems and as low as 3 microns in fuel
injection systems. The scientific theory behind the technology is explained in detail in the draft
final report from the RAND Corporation, or RAND, which oversaw our testing.
Products incorporating our ZEFS or MK IV technologies have been developed for one-, two- and
four- barrel carbureted and fuel injection engines. These products are easily fitted to the base
plates of carburetors and fuel injection systems; the devices are compact, there are no moving
parts. They are also inexpensive to produce, extremely durable and unaffected by poor quality fuel.
Products incorporating our CAT-MATE technology are specifically designed to work in
conjunction with, and enhance the function of, common catalytic converters, when incorporated into
their design. These products consist of a series of specifically shaped steel rings that, when
placed in line with the exhaust flow before and/or after the catalytic substrate, facilitate
acceleration in
heat rise in the converter. This allows the converter to ignite quicker and easier on small
displacement motors, which build heat much slower than do large displacement models. Our CAT-MATE
technology also helps retain heat in the converter, allowing it to stay lit under idling and low
RPM operation. Small motors, especially 2-stroke versions, are subject to low exhaust velocity and
heat during
15
idling, which causes most converters to extinguish and then become fouled with oil and
contaminants eventually rendering them difficult to relight or useless.
Products incorporating our CAT-MATE technology are not only designed to perform the functions
stated above on both 2- and 4-stroke gasoline engines, along with diesel motors, but also perform
as well as or better than an OEM catalytic converter, at a fraction of their cost. Specifically,
our CAT-MATE technology is designed for use on 2- and 4-stroke motorcycles, off-road and marine
vehicles, generators, lawnmowers, on stationary implements and on carbureted and fuel injection
motor vehicles.
As part of our ongoing product development, we are in the process of launching two new product
lines, ECO ChargR and MAG ChargR, which we differentiate products based on their differing magnetic
fluxes and their applications. ECO ChargR products will be more focused toward reduction in
emissions and MAG ChargR will be more focused toward performance and fuel economy. ECO ChargR
products will tend to incorporate MK IV technology, but may incorporate ZEFS technologies, while
MAG ChargR products will tend to incorporate ZEFS technologies, but may incorporate MK IV
technology.
The ECO ChargR product line employs our ZEFS or MK IV technologies, and is intended
specifically for the reduction of exhaust emissions in vehicle and small utility motors. These
products will be marketed primarily to OEMs as well as pilot and government-mandated emissions
programs.
The MAG ChargR product line employs our ZEFS or MK IV technologies, as well as other power
enhancing features, to exploit the power and mileage improving attributes of our magnetic
technologies. MAG ChargR will be marketed primarily to the consumer aftermarket for many vehicles,
including but not limited to cars, trucks, motorcycles, scooters, ATVs, snowmobiles, personal
watercrafts and small utility motors.
Testing by the Companys own research and development efforts, as well as by US EPA, CARB and
VCA certified independent laboratories, has demonstrated that the use of products incorporating our
ZEFS and CAT-MATE technologies generate significant reductions in hydrocarbon, oxides of nitrogen
and carbon monoxide emissions and, in the case of products incorporating our ZEFS technologies,
also improves fuel efficiency by lowering gas consumption and increases engine performance. Testing
by the Companys own research and development efforts, as well as by an independent source, has
demonstrated that the use of products incorporating our MK IV technology improves fuel efficiency
by lowering gas consumption and increases engine performance.
Research and Development
We are actively continuing our development of products incorporating our ZEFS, MK IV and
CAT-MATE technologies for use on gasoline and diesel powered engines and have taken steps to
finalize devices to fit on carbureted, throttle body and multi-port fuel injection systems. We have
used these prototype devices as demonstration units, during presentations, before manufacturers. It
is our objective to facilitate the adoption of this technology by engine, carburetor, muffler and
exhaust manufacturers.
Previously, we successfully developed multiple products incorporating our ZEFS technologies
for use on 1-, 2- and 4-barrel carbureted engines and created production CAD drawings for these
devices and produced multiple samples using aluminum housings and pre-production prototypes made of
high temperature polymers. We have also created several prototype devices for use on fuel injection
engines.
Because of the complexity and enormity of the task of designing variants of products
incorporating our ZEFS, MK IV and CAT-MATE technologies to fit every make and model, we rely on the
cooperation of manufacturers to support this function, including engineering, marketing, and
installation of the devices. Additionally, we are cognizant that in order to preserve the integrity
of the warranties provided by manufacturers, they must be involved in the process of designing and
installing products incorporating our ZEFS, MK IV and CAT-MATE technologies on legacy vehicles.
We are also engaged in limited research and development of products incorporating our ZEFS, MK
IV and CAT-MATE technologies for use on diesel engines, such as those used on trucks, buses, heavy
equipment and generators. Because these types of vehicles use engines provided from Cummins,
Caterpillar, or Detroit Diesel almost exclusively, the number of variants utilizing our ZEFS, MK IV
and CAT-MATE technologies needed to service these fleets is considerably less than the number
required to satisfy other markets. This fact alone makes entry into the diesel engine market
potentially attractive for our business, offering potential customers with a minimum of expense for
research and development of product variants.
In late 2005, we established a state-of-the-art research and product development facility in
Morgan Hill, California, to complement our research and development center in Queensland,
Australia. We have tested products incorporating our ZEFS, MK IV
16
and CAT-MATE technologies for
multiple automobiles, trucks, motorcycles, off-road vehicles and stationary engines, and the
results of tests of products incorporating our ZEFS and CAT-MATE technologies were provided to RAND
for evaluation. RAND was responsible for overseeing our research and development when that effort
was based in Queensland. In connection with the establishment of our Morgan Hill facility, we
transitioned the major focus of our R&D from Queensland to Morgan Hill. RAND assisted us in setting
up our testing protocols at Morgan Hill. In addition, we are engaged in research and development of
additional products, including other magnetic devices, at our Morgan Hill facility.
Our Queensland, Australia facility now focuses on novel technology research under the
direction of our senior engineer and consultant, Adrian Menzell. RAND has now completed the
majority of its work for us and is focusing on finalizing its report to us on the theoretical and
technical issues relating to magnetism and fuels, which we expect will be made publicly available
by the end of 2006. In early 2005, we phased out the use of our third party R&D and testing
facility in Los Angeles, California.
Testing of ECO ChargR, MAG ChargR and products incorporating our Cat-MATE technology is
ongoing at our facilities in the United States and Queensland, Australia, as well as at Kwong Kees
facilities in China.
In April 2006, we entered into a product development agreement with Kwong Kee in China. Kwong
Kee, a manufacturer of mufflers and catalytic converters, will collaborate with us on product
development of our CAT-MATE technology. As part of our strategic alliance, Kwong Kee will make
available its research and development facilities, testing equipment and product design and
development support team.
We spent $1,873,464 in fiscal year 2004 and $1,150,361 in fiscal 2005 on research and
development. Please see Managements Discussion and Analysis of Financial Condition and Results of
Operation Results of Operations and Note 9 to Notes to Financial Statements for a more complete
understanding of our research and development expense in 2005.
Independent Laboratory and Scientific Testing
The four internationally recognized emissions standards testing agencies for the certification
of motor vehicles, parts, systems and aftermarket devices are the United States Environmental
Protection Agency (EPA), California Air Resources Board (CARB), United Kingdom Vehicle
Certification Agency (VCA) and TUF (Germany/EU).
We have performed independent laboratory testing of devices incorporating our ZEFS, MK IV and
CAT-MATE technologies in order to gain better market acceptance by manufacturers and governmental
regulatory officials. Research and testing using government standard test equipment in the United
States, Thailand, China and Hong Kong has demonstrated that the tested devices incorporating our
ZEFS technologies reduce engine emissions, such as carbon monoxide, oxides of nitrogen and
hydrocarbons, while also improving fuel consumption and performance. Research and testing using
government standard test equipment in Thailand has demonstrated that the tested devices
incorporating our MK IV technology improves performance. Research and testing using government
standard test equipment in the United States and Hong Kong has demonstrated that the tested devices
incorporating our CAT-MATE technology reduce engine emissions, such as carbon monoxide, oxides of
nitrogen and hydrocarbons.
In December 2002, we retained RAND to study the validity and market potential of our ZEFS
technologies. In early 2003, RAND determined that sufficient theoretical basis exists to warrant
entry into a comprehensive product-testing program. As a result, in May 2003, we entered into an
arrangement in which RAND would coordinate and supervise both a theoretical scientific study of the
concepts underlying our ZEFS technologies, as well as an empirical study. In response to a request
for proposal (RFP) that RAND sent to 14 universities in the United States, Temple University in
Philadelphia, Pennsylvania was chosen to research our technology. Draft reports have been provided
by RAND; their final report is undergoing rigorous peer review and is expected to be publicly
available by the end of 2006. RANDs other activities on our behalf concluded in December 2005.
Tests of our devices using our CAT-MATE technology on a Honda 2-stroke NSR 150 motorcycle and
a Warrior 2-stroke 63cc generator conducted by Hong Kong Exhaust Emissions Laboratory (HKEEL) in
July and August 2004 showed that the tested devices incorporating our CAT-MATE technology
significantly reduce emissions of carbon monoxide (CO), hydrocarbons (THC) and oxides of nitrogen
(NOX). These results were certified by United Kingdoms VCA in January 2005.
Emissions and fuel economy tests conducted in 2004 and 2005 at Automotive Testing and
Development Services, Inc. in Ontario California and in 2005 at Northern California Diagnostics
Laboratory in Napa, California, both EPA and CARB approved testing laboratories, on a devices
incorporating our CAT-MATE technology within the OEM exhaust system of a 1995 Mexican fuel injected
Volkswagen Beetle taxi, showed significant reductions of CO, NOX and THC emissions, compared to the
in-place original
17
OEM exhaust system. In 2006, testing on a device incorporating our MK IV
technology for Harley-Davidson style motors was conducted at the EPA and CARB certified testing
facility Olson Ecologic Laboratories in Fullerton, California. These tests yielded results that
would allow these motors to meet current and future EPA and CARB emissions standards without
expensive fuel injection and catalytic converters.
Further testing on a used 4-stroke motorcycle incorporating our ZEFS technologies was
conducted in December 2005 in Bangkok, Thailand at Automotive Emission Laboratory, Pollution
Control Department, Ministry of Natural Resources and Environment of Thailand, and was performed
jointly with S.P. Suzuki of Thailand, the authorized distributor of Suzuki products in Thailand.
These certified test results surpassed hot start EURO 2 standards in all three of the harmful
exhaust emissions, CO, NOX and THC, by the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THC
|
|
NOx
|
|
CO
|
EURO2 Standard
|
|
1.20
|
g/km
|
|
0.30
|
g/km
|
|
5.50
|
g/km
|
With ZEFS Device
|
|
0.52
|
g/km
|
|
0.10
|
g/km
|
|
1.42
|
g/km
|
% Below EURO2
|
|
|
56
|
%
|
|
|
65
|
%
|
|
|
74
|
%
|
In addition, during the testing horsepower increased at all ranges, peaking at 18.8% at 50km/h
and fuel economy increased 33% over the baseline tests.
Additional testing was conducted in early March 2006 on a new Chinese-manufactured carbureted
4-stroke Suyijia SZK125 motorcycle incorporating our ZEFS technologies at HKEEL, a certified
laboratory of the United Kingdoms VCA. These multiple certified test results surpassed cold
start EURO3 standards for motorcycles of 150cc or less in all three of the harmful exhaust
emissions, CO, NOX and THC, by the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THC
|
|
NOx
|
|
CO
|
EURO3 Standard
|
|
0.80
|
g/km
|
|
0.15
|
g/km
|
|
2.0
|
g/km
|
With ZEFS Device
|
|
0.33
|
g/km
|
|
0.108
|
g/km
|
|
1.86
|
g/km
|
% Below EURO3
|
|
|
59
|
%
|
|
|
28
|
%
|
|
|
7
|
%
|
In addition, during the testing fuel economy increased 7% over the baseline tests.
Of further note of the recent HKEEL testing, is the fact that it is generally difficult for
anyone to meet EURO3 guidelines because the testing includes a cold start phase. The cold start
phase includes exhaust emissions created when a motor is started after an eight-hour cold soak. It
is during this warm-up time that engines produce their highest level of emissions. This is also
where many catalytic converters fail because they must be heated to about 300 degrees (Fahrenheit)
to begin working effectively.
In May 2006, at the request of the office of the Minister of Energy for the Kingdom of
Thailand, we participated in a hot start test at the testing laboratories of the Thai petroleum
company, the PTT Public Company Limited, of products incorporating our MK IV technology for fuel
efficiency. In this test, the Thai distributor for Suzuki Motorcycles, SP Suzuki, supplied a new
125cc 4-stroke Best motor scooter to be tested without our preparing or participating in the
installation of our MK IV device. The results showed an average 5.13% improvement in fuel
efficiency, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Run 1
|
|
Run 2
|
|
Run 3
|
|
|
|
|
(l/km)
|
|
(l/km)
|
|
(l/km)
|
|
Average
|
Baseline FC Test Runs with out MKIV Device
|
|
|
0.0196
|
|
|
|
0.0195
|
|
|
|
0.0193
|
|
|
|
0.0195
|
|
FC Test Runs with MKIV Device
|
|
|
0.0186
|
|
|
|
0.0184
|
|
|
|
0.0185
|
|
|
|
0.0185
|
|
Difference
|
|
|
0.0010
|
|
|
|
0.0011
|
|
|
|
0.0008
|
|
|
|
0.0010
|
|
Improvement
|
|
|
5.10
|
%
|
|
|
5.64
|
%
|
|
|
4.15
|
%
|
|
|
5.13
|
%
|
Marketing
In October 2004, we commenced initial marketing efforts for products incorporating our ZEFS
and CAT-MATE technologies, and these efforts are continuing. Subsequently, we commenced initial
marketing efforts for products incorporating our
18
MK IV technology, and these efforts are also
continuing. We are focused on selling or licensing our technologies and devices domestically and
internationally to motorcycle, automobile, carburetor, fuel-injection and diesel engine
manufacturers as well as, exhaust and muffler original equipment manufacturers (OEMs) and the
after-market. We have made presentations of our ZEFS, MK IV and CAT-MATE technologies to OEMs in
the United States, Asia and Europe.
We entered into our first distribution agreements for our products in late 2005 and early
2006. Our first two U.S. distributorship agreements with Team Phantom of Alaska and Motorcycle
Products Consulting of California, or MPC, provide for the sale of our products incorporating our
ZEFS technologies in the North American OEM and after-market for motorcycles through the
distributors to certain named prospective purchasers.
In January 2006, we entered into our first international distributorship agreement, with GAE.
The agreement provides that GAE will serve as our exclusive distributor for products incorporating
our ZEFS and CAT-MATE technologies in the Peoples Republic of China. The agreement with GAE was
conditioned upon tests of a device incorporating our ZEFS technologies achieving EURO2 standards in
tests to be conducted in Shanghai. These tests were successfully completed in April 2006, during
which tests of a device incorporating our ZEFS technologies achieved EURO2 standards and devices
incorporating a combination of our ZEFS and CAT-MATE technologies achieved EURO3 standards.
We intend to extend the scope of our agreements with Team Phantom, MPC and GAE to include
products incorporating our MK IV technology.
Based on the success of recent testing of devices using our ZEFS technologies meeting EURO3
standards, we now also intend to seek distribution opportunities for products incorporating our
ZEFS technologies in Europe, in addition to our marketing efforts in the United States and Asia.
See Independent Laboratory and Scientific Testing above.
We also intend to pursue marketing of our products in developing nations of the world. Harmful
exhaust emissions from motorcycles and automobiles in developing countries is at the highest levels
because of the continued widespread use of older models with either no or malfunctioning catalytic
converters. We intend to continue to work with governments worldwide at all levels, together with
industry, to capitalize on our technology to achieve what we know to be common global environmental
objectives.
In November 2004, management met with UNEP in New York to enlist its aid with this objective.
By UNEP invitation, we participated in a UNEP-sponsored meeting in Bali, Indonesia in December
2004, which resulted in the initiation of informal negotiations with United Nations and government
officials to explore the possibility of pilot programs using our technology in Indonesia, Kenya,
Mexico, Thailand, Brazil and Sri Lanka.
We also participated in a United Nations sponsored Summit in Lake Toba, North Sumatra,
Indonesia in March 2005. This resulted in an announcement by the Lake Toba Summit Chair, Nico
Barito, endorsed by HRH Sri Sultan Hamengkubowono X of Yogyakarta and the late Governor of North
Sumatra, Razil Nurdin, of two pilot programs intended to minimize carbon monoxide emissions,
hydrocarbons and oxides of nitrogen, by installing devices incorporating our ZEFS technologies on
10,000 student motorcycles at universities in Yogyakarta and Medan in Indonesia. Recently, in
consultation with the program sponsors, we modified the pilot programs, which are now being
conducted in cooperation with the Honda distributor in Medan, C.V. Indako Trading Co., or Indako.
Under the revised program, we fitted 50 Honda motorcycles in Medan to study the impact of products
incorporating our MK IV technology on fuel economy and performance enhancement. Indako recorded 5%
to 15% improvement in fuel efficiency and anecdotal reports of performance enhancement. While this
project is not expected to generate any revenue for us, we believe that it will provide evidence of
the utility of our low-cost, easy-to-install technologies in developing countries for fuel
efficiency and performance enhancement.
In July 2004, we entered into a license agreement with Temple University, for a research
project with Dr. Rongjia Tao as principal investigator. That project and the related products
involve the development and commercialization of underwater and cold temperature applications for
improving oil flow under different temperature and pressure conditions. Under the license
agreement, we hold the worldwide exclusive rights to this technology. On May 14, 2004, we had
filed a patent application in Australia (Method and Apparatus for a Treatment of Fuel), which was
subsequently assigned by us to Temple University as part of the license agreement. An additional
patent application was recently filed covering several of the Gulf states. As a result of Dr.
Taos recent publicly-reported
progress in reducing viscosity of crude oil with magnetic pulses, we believe that this
technology may have commercial viability and we are pursuing partners, distributors and licensees
in the United States, Gulf states region and Eastern Europe for products incorporating this technology.
19
Manufacturing
We outsourced the manufacture of products incorporating our ZEFS and MK IV technologies,
including ECO ChargR and MAG ChargR, to Quadrant in connection with our pilot program in Indonesia.
In addition, at present, we intend to outsource the manufacture of all our products incorporating
our ZEFS technologies to Quadrant. The magnets used in products incorporating our ZEFS or MK IV
technologies will be manufactured by Quadrant in China. ECO ChargR, MAG ChargR and other
magnetic-based products incorporating our ZEFS or MK IV technologies, that we may produce, market
and sell, will be manufactured by Quadrant in the United States. We do not currently have an
agreement in place with Quadrant for the manufacture of products incorporating our ZEFS or MK IV
technologies.
The manufacture of the magnets used in products incorporating our ZEFS or MK IV technologies
requires a rare-earth metal, neodymium. Neodymium is readily available in China, at relatively
stable prices.
We intend to outsource the manufacture of products incorporating our CAT-MATE technology to
Kwong Kee in China, or other contract manufacturers. We do not currently have an agreement in place
with Kwong Kee for the manufacture of products incorporating our CAT-MATE technology. However, if
we are unable to source products from Kwong Kee, we believe that alternative third party
manufacturers are readily available at competitive prices.
Key components in the manufacture of products incorporating our CAT-MATE technology, as is the
case with all catalytic converters manufactured by others, include the precious metals palladium,
platinum and rhodium. The prices for these precious metals are highly volatile. However, supplies
of such precious metals are not restricted.
Competition
The automotive and motor engine industry is highly competitive. We have many competitors in
the United States and throughout the world developing technologies to make engines more
environmentally friendly and fuel efficient. For instance, automobile manufacturers have already
developed catalytic converters on automobiles, in order to reduce emissions.
We are not aware of any products that compete directly with products incorporating our ZEFS or
MK IV technologies. Our ZEFS and MK IV technologies provide the benefits of all of emission
reductions, fuel efficiency and engine performance enhancement. There are competing products which
provide one or more of the beneficial attributes of our ZEFS and MK IV technologies, but not all
three benefits. Additionally, we believe that those competing products that show benefit in more
than one area demonstrate greater benefit in only one area and provide only minimal improvements in
other areas. This contrasts with the testing of devices incorporating our ZEFS or MK IV
technologies. Please see Independent Laboratory and Scientific Testing above.
Competing emissions reduction products are largely comprised of catalytic converters and
alternative fuels. Catalytic converters are much more expensive than products incorporating our
ZEFS and MK IV technologies, and are sensitive and subject to damage caused by the poor quality or
adulteration of fuel commonly used in developing nations. In addition, while catalytic converters
reduce emissions, they do not improve fuel efficiency or engine performance. Domestically, there
are a large number of manufacturers and distributors of catalytic converters, such as Engelhart
Inc., Dow Corning Inc., Delphi Corporation and Car Sound Exhaust System, Inc., among others.
Internationally, most catalytic converters are manufactured and distributed by Engelhart Inc.,
Delphi Corporation and a large number of smaller businesses in a fragmented industry.
Alternative fuels, such as hydrogen, electricity, liquid natural gas and ethanol, generally
require more costly conversions and the fuels are not readily available, if at all, in most of the
world.
We are not aware of any other magnetic fuel treatments or products based on such technology
which have been proven to significantly improve fuel mileage. There are many products currently on
the market that claim to increase fuel efficiency. We believe that the majority of these products
have not undergone or provided independent validation from a recognized third party, such as RAND,
or testing at a certified laboratory. Fuel injection does improve fuel efficiency and performance,
but is extremely expensive from the perspective of the developing nations of the world. Major
domestic and international manufacturers and distributors of fuel
injection systems include Delphi Corporation, Robert Bosch Corporation, Siemens Corporation,
and a large number of smaller businesses in a fragmented industry.
We are not aware of any other magnetic fuel treatments or products based on such technology
which have been proven to significantly improve performance. There are many products which a
consumer can purchase to increase overall performance. All of
20
the most effective such products,
including forced induction, nitrous oxide injection and exotic exhaust, are very expensive,
increase emissions, reduce fuel efficiency and shorter the life of the engine. Major domestic and
international manufacturers and distributors of performance-enhancing systems include Holley
Performance Products, Inc., Nitrous Express Inc., Paxton Automotive Corporation, Eaton Corporation,
Vortec Engineering LLC, Flowermaster, Inc., Hedman Manufacturing, Inc., Gibson Performance, Inc.
and a large number of smaller businesses in a fragmented industry.
Our CAT-MATE technology is an enhancement of the traditional catalytic converter. Therefore,
while there are no products that compete directly with our CAT-MATE technology, products
incorporating our CAT-MATE technology may be regarding as competing with the rest of the catalytic
converter market. Domestically, there are a large number of suppliers of catalytic converters, such
as Engelhart, Inc., Dow Corning Inc., Delphi Corporation and Car Sound Exhaust System, Inc., among
others. Internationally, most catalytic converters are supplied from China by Engelhart, Inc.,
Delphi Corporation and a large number of smaller manufacturers in a fragmented industry.
Nonetheless, many of our competitors have greater financial, research, marketing and staff
resources than we do. While we believe that our technology has greater benefits, it may be unable
to gain market acceptance. Furthermore, research and development throughout the world is constantly
uncovering new technologies. Although we are unaware of any technologies that compete directly with
ours, there can be no assurance that any existing or future technology is or will be superior to
products incorporating our ZEFS, MK IV or CAT-MATE technologies.
Government Regulation and Environmental Matters
Our activities and products to date are not subject to any governmental regulations that would
have a significant impact on our business. We believe that we are in compliance with all applicable
regulations that apply to our business as it is presently conducted. Our products, as such, are not
subject to certification or approval by the U.S. Environmental Protection Agency or other
governmental agencies domestically or internationally. Instead, such agencies test and certify a
sample engine fitted with our devices
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.
Because we do not presently intend to manufacture our own products, we do not believe that we
will have any special requirements to comply with environmental rules and regulations in the United
States or other countries for the foreseeable future.
Intellectual Property
In December 1998, we acquired all of the marketing and manufacturing rights to the ZEFS
technologies from the purported inventor of the technology in exchange for 5,000,000 shares of our
common stock, $500,000 and $10 royalty for each unit sold. In November 2002, under our settlement
with the bankruptcy trustee for the estate of the purported inventor and his wife, the trustee
transferred all ownership and legal rights to an existing international patent application for the
ZEFS MK I technology to us. In exchange for these rights, we issued to the bankruptcy trustee a
warrant to purchase 500,000 shares of our common stock at $1.00 share and granted a $0.20 royalty
on each device we sell. See Legal Proceedings and Note 1 to Notes to Financial Statements.
In May 2002, we settled a dispute with Kevin Pro Hart, who claimed proprietary rights to the
ZEFS technologies. He assigned to us any and all of his rights to the ZEFS technologies in exchange
for an option to purchase 500,000 shares of our common stock at $1.00 share and a $0.20 royalty on
each device we sell. Mr. Hart served as a member of our Advisory Board until his death in March
2006.
The CAT-MATE technology was created by Adrian Menzell, a member of our research team in
Australia. On August 20, 2003, Mr. Menzell filed Australian provisional patent application
#2004900192 for the CAT-FLAP. This technology was enhanced and on June 4, 2004, Mr. Menzell filed
Australian provisional patent application No. 2004903000 for the CAT-MATE. During subsequent
development of the invention, further patent applications were filed in which John Kostic and/or
Patrick Baker, who were, at that time,
21
consultants to our company, may have had inventive input. On September 1,
2003, we entered into an Assignment Agreement with Mr. Menzell, pursuant to which this technology
was assigned to us in exchange for 20,000 shares of our common stock and a royalty of $.25 for each
CAT-MATE sold. On June 26, 2004, we received a deed of assignment from Mr. Menzell and each pending
patent application was transferred to our name. Mr. Menzell currently also serves as our senior
engineer.
Patent Applications for Magnetic-Based Technologies
We obtained the patent application for the ZEFS MK I technology [PCT/AU1/00585] originally
filed in Australia on May 19, 2000. The International Filing Application for our ZEFS MK I
technology was filed on May 21, 2001 (Official No. 10/275946) [PCT/AU1/00585] and modified as ZEFS
MK II on July 9, 2003. On November 4, 2003 we filed for our ZEFS MK III (#2003906094). The United
States Patent and Trademark Office issued United States Patent No. 6901917 on June 7, 2005. The
duration of the patent is 20 years from the date the original application was filed, that is May
21, 2021. Prior to the issuance of such patent, we relied solely on trade secrets, proprietary
know-how and technological innovation to develop our technology and the designs and specifications
for the ZEFS technologies. Overall, we have applied for a patent on an international basis in
approximately 64 countries worldwide.
ZEFS MK I Device For Saving Fuel and Reducing Emissions.
This fuel saving device has a
disk-like nonmagnetic body provided with a central opening and a number of permanent magnets having
opposed polarities positioned about the central opening to provide multidirectional magnetic
fields. The device is positioned in a fuel air mixture to reduce emissions.
The following table summarizes the status of the ZEFS MK I patent application in the following
countries:
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
Australia
|
|
|
2001258057
|
|
|
May 21, 2001
|
|
GRANTED
|
Bosnia & Herzegovina
|
|
BAP 021290A
|
|
May 21, 2001
|
|
Short Term Patent GRANTED. Apply for Standard Patent
filed
|
Brazil
|
|
|
0111365-8
|
|
|
May 21, 2001
|
|
Examination requested September 5, 2003. Report
expected
mid-2007
|
Bulgaria
|
|
|
107391
|
|
|
May 21, 2001
|
|
Awaiting examination
|
Canada (small entity status)
|
|
|
2409195
|
|
|
May 21, 2001
|
|
Examination requested April 2006
|
China
|
|
|
01809802.9
|
|
|
May 21, 2001
|
|
Under examination response filed
|
Colombia
|
|
|
02115018
|
|
|
May 21, 2001
|
|
Examination requested July 23, 2004
|
Croatia
|
|
|
P20020982A
|
|
|
May 21, 2001
|
|
GRANTED
|
Czech Republic
|
|
PV 2002-4092
|
|
May 21, 2001
|
|
Under Examination response filed at IPO
|
Eurasian*
|
|
|
200201237
|
|
|
May 21, 2001
|
|
GRANTED
|
Europe**
|
|
|
019331222.2
|
|
|
May 21, 2001
|
|
Awaiting examination
|
Georgia
|
|
|
4098/01-2002
|
|
|
May 21, 2001
|
|
GRANTED
|
Hong Kong
|
|
|
04100327.0
|
|
|
May 21, 2001
|
|
Automatic grant upon grant of the Chinese application
|
Hungary
|
|
|
P 03 01796
|
|
|
May 21, 2001
|
|
Examination requested April 2006
|
India***
|
|
IN/PCT/2002/01523
|
|
May 21, 2001
|
|
Under examination response filed at IPO
|
Indonesia
|
|
WO0200202844
|
|
May 21, 2001
|
|
Registration Fee Paid awaiting grant
|
Israel
|
|
|
152902
|
|
|
May 21, 2001
|
|
GRANTED
|
Korea [South]
|
|
|
2002-7015531
|
|
|
May 21, 2001
|
|
Examination requested May 2006
|
Japan
|
|
|
586731/2001
|
|
|
May 21, 2001
|
|
Examination to be requested by May 21, 2008
|
Mexico
|
|
PA/A/2002/011365
|
|
May 21, 2001
|
|
GRANTED
|
Morocco
|
|
PV/26.964
|
|
May 21, 2001
|
|
GRANTED
|
New Zealand
|
|
|
523113
|
|
|
May 21, 2001
|
|
GRANTED
|
Norway
|
|
|
20025531
|
|
|
May 21, 2001
|
|
Awaiting examination
|
Poland
|
|
|
P358837
|
|
|
May 21, 2001
|
|
Awaiting examination
|
Serbia/Montenegro
|
|
|
P-870/02
|
|
|
May 21, 2001
|
|
Examination requested December 2002
|
Singapore
|
|
93310 [WO 01/90562]
|
|
May 21, 2001
|
|
GRANTED
|
South Africa
|
|
|
2002/10013
|
|
|
May 21, 2001
|
|
GRANTED
|
Sri Lanka***
|
|
|
12918
|
|
|
May 21, 2001
|
|
Awaiting examination
|
Trinidad & Tobago
|
|
TT/A/2002/00213
|
|
May 21, 2001
|
|
Registration fee paid awaiting grant
|
Ukraine
|
|
|
20021210144
|
|
|
May 21, 2001
|
|
GRANTED
|
United States
|
|
|
10/275946
|
|
|
May 21, 2001
|
|
GRANTED
|
Vietnam
|
|
|
1-2002-01168
|
|
|
May 21, 2001
|
|
GRANTED
|
|
|
|
*
|
|
The Eurasian Patent Convention was signed on September 9, 1994 in
Moscow by the Heads of the Governments of the
|
22
|
|
|
|
|
Republic of
Azerbaijan, the Republic of Armenia, the Republic of Belarus,
Georgia, the Republic of Kazahkstan, the Kyrgyz Republic, the
Republic of Moldova, the Russian Federation, the Republic of
Tajikistan and Ukraine.
|
|
**
|
|
European patent application covers Austria, Belgium,
Switzerland, Liechtenstein, Cyprus, Germany, Denmark, Spain,
Finland, France, Great Britain, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal, Sweden, Turkey, Lithuania,
Latvia, Slovenia, Romania and Macedonia.
|
|
***
|
|
The assignment to the Company has been recorded on these
applications, but the applications will remain in the name of
the original inventor until grant.
|
ZEFS MK II Device for Saving Fuel and Reducing Emissions.
This fuel saving device similar
to that of the MK I except that a central magnet can be provided in the opening and the peripheral
magnets extend only partially through the depth of the body and stop short of the top wall to
provide the option of moving the magnetic field further away from the base of the carburetor to
increase the area of magnetic influence between the point of fuel atomization and the point of
cessation of magnetic influence.
The priority date is July 19, 2003 from Australian patent application 2003903626.
The following table summarizes the status of the ZEFS MK II patent application in the
following countries:
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
Taiwan
|
|
|
1236519
|
|
|
July 19, 2003
|
|
GRANTED
|
China
|
|
|
200480025660.X
|
|
|
July 15, 2004
|
|
Filed, awaiting examination
|
Europe
|
|
|
04737571.2
|
|
|
July 15, 2004
|
|
Filed, awaiting examination
|
India
|
|
300/KOL NP/06
|
|
July 15, 2004
|
|
Filed, awaiting examination
|
Indonesia
|
|
WO0200600441
|
|
July 15, 2004
|
|
Filed
|
Japan
|
|
Awaiting Number
|
|
July 15, 2004
|
|
Filed
|
United States
|
|
|
10/564747
|
|
|
July 15, 2004
|
|
Filed, awaiting examination
|
Approximately 125 countries are covered by the PCT. National Patent Applications were filed on
or before January 15, 2006.
ZEFS MK III Emission Control Devices.
This emission control device is particularly suited
for fuel injection systems and especially for electronic fuel injection having a fuel rail, which
has an elongate body formed with one or more channels and a number of permanent magnets is
positioned in the channels. The device sits on a fuel rail.
The priority date is November 4, 2003 from Australia patent application 2003906094.
The following table summarizes the status of the ZEFS MK III patent application in the
following countries:
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
Thailand
|
|
|
095155
|
|
|
November 3, 2004
|
|
Awaiting examination
|
International
|
|
PCT/AU2004/001518
|
|
November 4, 2004
|
|
Demand for
International
Preliminary
Examination filed
June 8, 2005
awaiting report.
|
China
|
|
|
200480039739.8
|
|
|
November 4, 2004
|
|
|
Japan
|
|
Awaiting Number
|
|
November 4, 2004
|
|
|
United States
|
|
|
10/578311
|
|
|
November 4, 2004
|
|
|
Europe
|
|
|
04796967.0
|
|
|
November 4, 2006
|
|
|
Approximately 125 countries are covered by the PCT. National Patent Applications were filed by
May 4, 2006.
MK IV Device for Saving Fuel and Reducing Emissions.
This device uses stacked magnets.
The priority date is June 21, 2005 from Australian patent application 2005903248.
23
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
Malaysia
|
|
PI 20062013
|
|
May 2, 2006
|
|
Examination due by May 2, 2008
|
Taiwan
|
|
|
95115220
|
|
|
April 28, 2006
|
|
Examination due by April 29, 2009
|
Thailand
|
|
|
0601001997
|
|
|
May 2, 2006
|
|
Awaiting examination
|
PCT
|
|
PCT/AU2006/000861
|
|
June 20, 2006
|
|
Demand for IPE due January 21, 2007
|
The international patent application reserves the patent rights in this invention, including
the right to the priority date of June 12, 2005, in all 132 members of the PCT. The international
patent application will undergo a search and amendments to the claims are anticipated in the course
of the International Search Report stage of the PCT process. At the International Preliminary
Examination stage, the Company intends to make detailed submissions to more clearly distinguish the
invention from those in the prior art. At the conclusion of these two stages, it will be necessary
for the Company to decide in which specific countries it should proceed to National Phase.
Method and Apparatus for Treatment of a Fluid (Temple University).
This is an apparatus for
the magnetic treatment of oils to improve viscosity.
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
GCC*
|
|
GCC/P/2005/5066
|
|
August 22, 2006
|
|
Application filed, awaiting examination.
|
International**
|
|
PCT/AU2005/000688
|
|
May 13, 2005
|
|
Clear ISR received.
|
|
|
|
*
|
|
The GCC application covers Kuwait, Oman, Qatar, Saudi Arabia,
the United Arab Emirates, and Bahrain.
|
|
**
|
|
This application is in the name of Temple University of the
Commonwealth System of Higher Education.
|
The priority date is May 14, 2004 from Australian patent application 2004902563.
Approximately 125 countries are covered by the PCT. National patent applications are due by
November 14, 2006.
CAT-MATE Patent Applications
CAT-FLAP (Afterburner) Improvements in or Relating to Emission Control Systems.
A catalytic
converter is provided in an engine exhaust flow to reduce emissions. A valve is provided downstream
from the catalytic converter. The valve is in a closed position when the exhaust flow volume is low
to keep the hot exhaust gas around the catalytic converter to keep the catalytic converter within
its operational temperatures. When the exhaust flow volume is high (e.g. the engine is revving) the
catalyst is kept at its operational temperature by normal gas flow and valve is opened to not
impede exhaust flow. A simple hinge flap is one method by which this can be achieved.
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
Australia
|
|
|
2004312099
|
|
|
December 23, 2004
|
|
Examination due by December 23, 2009
|
Canada
|
|
|
N/A
|
|
|
|
|
|
China
|
|
|
N/A
|
|
|
|
|
|
Europe
|
|
|
04802122.4
|
|
|
December 23, 2004
|
|
Awaiting examination
|
Indonesia
|
|
WO0200602208
|
|
December 23, 2004
|
|
|
Japan
|
|
|
N/A
|
|
|
|
|
|
Korea
|
|
|
2006-7016017
|
|
|
December 23, 2004
|
|
Examination due by December 23, 2009
|
Mexico
|
|
|
N/A
|
|
|
|
|
|
Malaysia
|
|
PI20050041
|
|
January 6, 2005
|
|
Application filed, awaiting examination.
|
New Zealand
|
|
|
548993
|
|
|
December 23, 2004
|
|
Application filed, awaiting examination.
|
Thailand
|
|
|
096762
|
|
|
January 4, 2005
|
|
Application filed, awaiting examination
|
Taiwan
|
|
|
93140533
|
|
|
24 December 2004
|
|
Application filed. Substantive
examination to be requested by December
24, 2007
|
United States
|
|
|
N/A
|
|
|
|
|
Application filed awaiting examination.
|
The priority date is January 16, 2004 from Australian patent application 2004900192.
24
CAT-MATE Inline Exhaust Device to Improve Efficiency of a Catalytic Converter.
A set of
rings is placed downstream from the catalytic converter to re-radiate heat to the catalytic
converter to keep the converter working at a warmer temperature and therefore greater efficiency.
The priority date is June 4, 2004 from Australian patent application 2004903000.
This invention was incorporated into the specifications filed pursuant to the CAT-FLAP
invention.
Trademarks
We have also filed two applications for trademark protection for CAT-MATE, both in respect of
goods as follows:
Class 7: Devices to reduce noxious exhaust emissions from combustion engines; devices
positioned in the exhaust flow of an exhaust of a combustion engine and to reduce pollutants in
the exhaust; devices to radiate or transmit heat to a catalytic converter in an exhaust system;
devices to radiate or transmit heat to a catalytic converter in an exhaust system and which
absorbs the heat from the exhaust gasses and reradiates the heat to the catalytic converter in
the exhaust system; all the foregoing being for petrol or diesel engines.
|
|
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
|
Renewal
|
Australia
|
|
|
1008291
|
|
|
June 25, 2004
|
|
Registered
|
|
June 25, 2014
|
Madrid*
|
|
|
858359
|
|
|
December 21, 2004
|
|
Registered
|
|
December 21, 2014
|
|
|
|
*
|
|
The Madrid Protocol application designated the following
countries: United States, China, European Union, Japan, Korea
and Singapore.
|
Non-Disclosure Agreements
To further protect our intellectual property, we have entered into agreements with certain
employees and consultants, which limit access to, and disclosure or use of, our technology. There
can be no assurance, however, that the steps we have taken to deter misappropriation of our
intellectual property or third party development of our technology and/or processes will be
adequate, that others will not independently develop similar technologies and/or processes or that
secrecy will not be breached. In addition, although management believes that our technology has
been independently developed and does not infringe on the proprietary rights of others, there can
be no assurance that our technology does not and will not so infringe or that third parties will
not assert infringement claims against us in the future. Management believes that the steps they
have taken to date will provide some degree of protection, however, no assurance can be given that
this will be the case.
Employees
As of September 20, 2006, we had 12 full-time employees and four part-time employees. As of
such date, we also utilized the services of one full-time paid consultant in our R&D facility in
Queensland, Australia and three additional part-time paid consultants to assist us with various
matters, including marketing. We intend to hire additional personnel to provide services when they
are needed on a full-time basis. We recognize that our efficiency largely depends, in part, on our
ability to hire and retain additional qualified personnel as and when needed and we have adopted
procedures to assure our ability to do so.
Properties
Our principal executive offices consist of leased space in North Hollywood, California. We
lease this space from KZ Golf, Inc., or KZG, pursuant to a lease we originally entered into on
October 16, 2003 and which expired on October 16, 2005. We exercised an option to renew the lease,
which renewal term was due to expire on October 15, 2007. Through October 16, 2005, the rent was
$3,400 per month for approximately 1,225 square feet, and for comprehensive office support
services, including reception, parking and conference facilities. During the extended lease term,
the rent was $3,740 per month.
In connection with our need to acquire additional office space and expanded services as our
business activities grow, we entered into a new lease dated as of January 1, 2006 with KZG,
replacing the prior lease and the terms applicable under the extended
25
term thereof. The new lease
is for a term of 19 months, expiring July 31, 2007. The new rent is $6,208 per month for
approximately 1,700 square feet of office space, and for additional common area use, expanded
office support services, including a computer network, and additional parking spaces. We have the
right to renew the lease for an additional term of two years at a 10% increase over the
then-current rent.
Thereafter, in July 2006, we acquired two additional offices comprising approximately 250
square feet, and additional parking spaces. We expect that the increase in the rent we pay to KZG
will be less than $1,000 per month; however, we have not concluded negotiations with KZG as to the
exact amount of the additional rent.
Bruce H. McKinnon, our President, Chief Operating Officer and a director, is an owner of KZG.
Management believes that the terms of the lease with KZG are no less favorable than what we would
have had to pay for equivalent space and comparable services with an unaffiliated party. See
Certain Relationships and Related Transactions.
Our research and development facility located in Queensland, Australia is leased. We entered
into the lease for this facility on November 15, 2003 for a term of two years, and extended the
lease on a month-to-month basis thereafter until March 14, 2006. The rent during this period was
AUD $1,292 (approximately US $973 at September 20, 2006) per month. On March 14, 2006, we entered
into a new lease for this facility for a term of two years commencing March 15, 2006 at a rent of
AUD $1,462 (approximately US $1,101 at September 20, 2006). Upon the termination of the term of the
lease, we have the option to renew the lease up to two times, each for an additional two-year term,
at an increase over the base rent of the greater of 5% or the increase in the annual consumer price
index in Australia. We believe that our present research and development facility is adequate for
our current and planned activities and that suitable additional or replacement facilities in the
Queensland area are readily available on commercially reasonable terms should such facilities be
needed in the future.
Our engineering, production and testing facility is located in Morgan Hill, California. The
lease for this facility was entered into on September 1, 2005 and amended on February 1, 2006. The
term is for two years, expiring on August 31, 2007. The base rent is $4,160 per month for
approximately 5,600 square feet of office and industrial usage space, and is renewable, at our
option, for two additional years at the then prevailing market rate. We believe that this space is
adequate for our current and planned engineering, production and testing activities.
Legal Proceedings
On December 19, 2001, the SEC filed civil charges in the United States Federal District
Court, Southern District of New York, against us, our former President and then sole director
Jeffrey A. Muller, and others, alleging that we and the other defendants were engaged in a
fraudulent scheme to promote our stock. The SEC complaint alleged the existence of a promotional
campaign using press releases, Internet postings, an elaborate website, and televised media events
to disseminate false and materially misleading information as part of a fraudulent scheme to
manipulate the market for stock in our corporation, which was then controlled by Mr. Muller. On
March 22, 2002, we signed a Consent to Final Judgment of Permanent Injunction and Other Relief in
settlement of this action as against the corporation only, which the court approved on July 2,
2002. Under this settlement, we were not required to admit fault and did not pay any fines or
restitution. The SECs charges of fraud and stock manipulation continue against Mr. Muller and
others.
On July 2, 2002, after an investigation by our newly constituted board of directors, we filed
a cross-complaint in the SEC action against Mr. Muller and others seeking injunctive relief,
disgorgement of monies and stock and financial restitution for a variety of acts and omissions in
connection with sales of our stock and other transactions occurring between 1998 and 2002. Among
other things, we alleged that Mr. Muller and certain others sold Company stock without providing
adequate consideration to us; sold insider shares without making proper disclosures and failed to
make necessary filing required under federal securities laws; engaged in self-dealing and entered
into various undisclosed related-party transactions; misappropriated for their own use proceeds
from sales of our stock; and entered into various undisclosed arrangement regarding the control,
voting and disposition of their stock. On July 30, 2002, the U.S. Federal District Court, Southern
District of New York, granted our application for a preliminary injunction against Mr. Muller and
others, which prevented Mr. Muller and other cross-defendants from selling, transferring, or
encumbering any assets and property previously acquired from us, from selling or transferring any
of our stock that they may own or control, or from taking any action to injure us or our business
and from having any direct contact with our shareholders. The injunctive order also prevents Mr.
Muller from engaging in any effort to exercise control over our corporation and from serving as an
officer or director of our
company. While we believe that we have valid claims, there can be no assurance that an adverse
result or settlement would not have a material adverse effect on our financial position or cash
flow.
26
In the course of the litigation, we have obtained ownership control over Mr. Mullers claimed
patent rights to ZEFS. Under a Buy-Sell Agreement between Mr. Muller and dated December 29, 1998,
Mr. Muller, who was listed on the ZEFS patent application as the inventor of ZEFS, purported to
grant us all international marketing, manufacturing and distribution rights to ZEFS. Those rights
were disputed because an original inventor of ZEFS contested Mr. Mullers legal ability to have
conveyed those rights.
In Australia, Mr. Muller entered into a bankruptcy action seeking to overcome our claims for
ownership of ZEFS. In conjunction with these litigation proceedings, a settlement agreement was
reached with the bankruptcy trustee whereby the $10 per unit royalty previously due to Mr. Muller
under his contested Buy-Sell Agreement was terminated and replaced with a $.20 per unit royalty
payable to the bankruptcy trustee. On November 7, 2002, under a settlement agreement executed with
Mr. Mullers bankruptcy trustee, the trustee transferred to us all ownership and legal rights to
this international patent application for ZEFS.
Both the SEC and we filed Motions for Summary Judgment contending that there are no material
issues of fact in contention and as a matter of law, the Court should grant a judgment against Mr.
Muller and the cross-defendants.
Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by us
and moved for summary judgment in their favor. On December 28, 2004, Judge George B. Daniels,
denied the cross-defendants motion to dismiss our cross-complaint, denied the defendants request
to vacate the July 2, 2002 preliminary injunction and denied their request for damages against us.
The court also refused to grant a summary judgment in favor of the cross-defendants and dismissed
Mr. Mullers claims against us for indemnification for his legal costs and for damages resulting
from the litigation. Neither Mr. Muller nor any of the cross-defendants have filed any cross-claims
against us and we are not exposed to any liability as a result of the litigation, except for
possibly incurring legal fees and expenses should we lose the litigation.
On November 16, 2005, the Court granted the SECs motion for summary judgment. In granting the
motion, the Court has barred Mr. Muller from serving as an officer or director of a public company
for a period of 20 years, ordered Mr. Muller to disgorge any shares of our stock that he still owns
and directed the Company to cancel any issued and outstanding shares of our stock still owned by
Mr. Muller. Mr. Muller was also ordered to disgorge to the SEC unlawful profits in the amount of
$7.5 million and a pay a civil penalty in the amount of $100,000. Acting in accordance with the
ruling and decision of the Court, we have canceled (i) 8,047,403 shares of its common stock held by
Mr. Muller and/or his affiliates, (ii) options to acquire an additional 10,000,000 shares of our
common stock held by Mr. Muller personally and (iii) $1,017,208 of debt which Mr. Muller claimed
was owed to him by the Company.
In response to the November 16, 2005 decision by the Court, Muller filed a motion seeking to
set aside the Decision and Order of the Court. On March 31, 2006, the Court issued a Decision and
Order denying Mullers Motion to set aside the Decision on Summary Judgment issued against Muller
on November 16, 2005.
A final decision on the motion for summary judgment filed by us, which potentially would
terminate the ongoing litigation, is still pending. Should the Court not grant summary judgment in
our favor, the case will be scheduled for final disposition in a trial. Although the outcome of
this litigation cannot be predicted with any degree of certainty, we are optimistic that, based
upon previous developments in the litigation and the Courts granting of the SECs motion for
summary judgment, the Courts ruling on our motion for summary judgment will either significantly
narrow the issues for any later trial or will result in a final disposition of the case in a manner
favorable to us.
In April 2005, Jeffrey A. Muller, the Companys former sole director and executive officer,
filed a complaint against us in the Federal District Court for the Central District of California,
seeking declaratory and injunctive relief and alleging unfair competition in connection with a
claimed prior patent interest in ZEFS and stock option rights. In seeking declaratory relief, Mr.
Muller is seeking to have the patent rights in ZEFS that were previously transferred to us by Mr.
Mullers bankruptcy trustee declared null and void.
This lawsuit brought by Mr. Muller arose out of the same claims that are the subject of
ongoing litigation in the Federal District Court for the Southern District of New York, in which we
have previously obtained a preliminary injunction against Mr. Muller barring him from any
involvement with the Company and preventing Mr. Muller, his agents or assigns, from exercising any
claimed rights to our assets or stock. Mr. Muller previously filed the same complaint in the
Federal District Court for the Southern District of New York, which claim is still pending. On
December 28, 2004, Federal District Court Judge George B. Daniels issued a decision dismissing
motions filed by Mr. Muller against our cross-claims. The dismissal of those motions involved
similar causes of
action as those contained in Mr. Mullers recent lawsuit commenced in the Federal District
Court for the Central District of California. Since the case in New York is still pending, we
believe that the filing of the new lawsuit in California is subject to various defenses which
should result in the dismissal of the new lawsuit.
27
On January 25, 2006, Mr. Mullers complaint, filed in the California District Court and
transferred to the Federal Court in the Southern District of New York, was assigned to Judge George
B. Daniels. It is expected that the Court will consolidate that complaint with the already pending
claims encompassed within our Motion for Summary Judgment. While we believe that we have valid
claims and defenses, there can be no assurance that an adverse result or outcome on the pending
motions or a trial of this case would not have a material adverse effect on our financial position
or cash flow.
MARKET PRICE OF COMMON STOCK
AND OTHER STOCKHOLDER MATTERS
Market Information
Through February 1, 2006, our common stock was quoted on the Pink Sheets under the symbol
ZERO Effective February 2, 2006, our common stock is quoted on the Over the Counter Bulletin
Board under the symbol ZERO. The following table sets forth the high and low closing prices of
our common stock for the quarters indicated as quoted on the Pink Sheets through February 1, 2006,
and on the OTC Bulletin Board since February 2, 2006:
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
1.50
|
|
|
$
|
0.95
|
|
Second Quarter
|
|
$
|
2.05
|
|
|
$
|
1.20
|
|
Third Quarter
|
|
$
|
1.95
|
|
|
$
|
1.20
|
|
Fourth Quarter
|
|
$
|
1.90
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
1.49
|
|
|
$
|
0.90
|
|
Second Quarter
|
|
$
|
1.20
|
|
|
$
|
0.90
|
|
Third Quarter
|
|
$
|
1.14
|
|
|
$
|
0.75
|
|
Fourth Quarter
|
|
$
|
1.01
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
4.74
|
|
|
$
|
0.65
|
|
Second Quarter
|
|
$
|
3.09
|
|
|
$
|
1.49
|
|
Holders
According to the records of our transfer agent, we had 1,034 stockholders of record of our
common stock at September 20, 2006. We estimate that we had
approximately 2,977 additional
beneficial owners of our common stock held in street name as of
October 2, 2006.
Dividends
We do not pay a dividend on our common stock and we currently intend to retain future cash
flows to finance our operations and fund the growth of our business. Any payment of future
dividends will be at the discretion of our Board of Directors and will depend upon, among other
things, our earnings, financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that our Board of Directors
deems relevant.
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis contains forward-looking statements. These
forward-looking statements include predictions regarding our future:
28
|
|
revenues and profits;
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|
|
customers;
|
|
|
|
research and development expenses and efforts;
|
|
|
|
scientific test results;
|
|
|
|
sales and marketing expenses and efforts;
|
|
|
|
liquidity and sufficiency of existing cash;
|
|
|
|
pending and future financings;
|
|
|
|
the success of new product development;
|
|
|
|
market acceptance and commercial viability of our existing and new products;
|
|
|
|
the outcome of pending or threatened litigation; and
|
|
|
|
the effect of recent accounting pronouncements on our financial condition and results of operations.
|
You can identify these and other forward-looking statements by the use of words such as may,
will, expects, anticipates, believes, estimates, continues, or the negative of such
terms, or other comparable terminology. Forward-looking statements also include the assumptions
underlying or relating to any of the foregoing statements.
Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under the heading Risk
Factors in our Annual Report on Form 10-KSB for the year ended December 31, 2005. All
forward-looking statements included in this document are based on information available to us on
the date hereof. We assume no obligation to update any forward-looking statements.
Overview
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the Financial Statements and notes thereto included in Part I,
Item 1 of this Form 10-QSB and the Financial Statements and notes thereto contained in our Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2005.
We are a development stage company that has not yet generated revenues. Historically, we
devoted the bulk of our efforts to the completion of the design, the development of our production
models and the promotion of our products in the marketplace worldwide. Our products, based on our
ZEFS, CAT-MATE and MK IV technologies, are designed to reduce harmful emissions, and/or
improve fuel efficiency and overall performance on equipment and vehicles driven by internal
combustion engines. We have taken actions to secure our intellectual property rights to the ZEFS
and CAT-MATE technologies.
During 2005 and continuing in the six-month period ended June 30, 2006, we began to focus on
the initial marketing of our products. We entered into the first agreements for the distribution of
our products in late 2005 and early 2006. Our first two U.S. distributorship agreements with Team
Phantom of Alaska and MPC of California, provides for the sale of our ZEFS-based products in the
North American OEM and after-market for motorcycles through the distributors to certain named
prospective purchasers. We anticipate that we will begin delivering some products under the
agreement with MPC commencing in the fourth quarter of 2006 and we currently believe that we will
begin generating revenue in late 2006.
In January 2006, we entered into our first international distributorship agreement, with GAE.
The agreement provides that GAE will serve as our exclusive distributor for our products using ZEFS
and CAT-MATE technologies in the Peoples Republic of
China. The agreement with GAE was conditioned upon our ZEFS-based products achieving EURO2
standards in tests to be conducted in Shanghai. These tests were conducted and passed in April
2006.
In July 2006, GAE placed its first order under the distributorship agreement, for 100,000
units, to be shipped in installments between now and July 2007. These product are in production and
we anticipate that we will begin delivering products under the agreement to GAE commencing in
October 2006, and will begin generating revenue in late 2006.
29
In April 2006, we entered into a product development agreement with Kwong Kee in China. Kwong
Kee, a manufacturer of mufflers and catalytic converters, will collaborate with us on product
development based on our CAT-MATE technology. As part of our strategic alliance, Kwong Kee will
make available its research and development facilities, testing equipment and product design and
development support team.
In July 2006, we entered into an agreement with Quadrant, pursuant to which Quadrant will
provide product development services for our products. Under this agreement, Quadrant was also
granted a right of first refusal to manufacture our ZEFS and other magnetic products.
Also in July 2006, we entered into an agreement with Marketing Matters, Inc. to provide
exclusive agency services in the United States for advertising, marketing, industry and trade show
promotion, as well as packaging design services. We entered into a separate agreement with SS Sales
and Marketing Group, to provide marketing and promotional services in the western United States and
western Canada for our products.
In addition, we are continuing our marketing efforts to international governmental entities in
cooperation with UNEP and various OEMs and the aftermarket to sell or license products using our
ZEFS, MK IV and CAT-MATE technologies. We anticipate that these efforts will continue during the
remainder of 2006 and for the foreseeable future.
As part of our ongoing product development, we are in the process of launching two new product
lines, ECO ChargR and MAG ChargR, which we differentiate based on their differing magnetic fluxes
and their applications. ECO ChargR products will be more focused toward reduction in emissions and
MAG ChargR will be more focused toward performance and fuel economy.
The ECO ChargR product line incorporates our ZEFS or MK IV technologies, and is intended
specifically for the reduction of exhaust emissions in vehicle and small utility motors. These
products will be marketed primarily to OEMs as well as pilot and government-mandated emissions
programs.
The MAG ChargR products line incorporates our ZEFS or MK IV technologies, as well
as other power enhancing features, to exploit the power and mileage improving attributes of our
magnetic technologies. MAG ChargR will be marketed primarily to the consumer aftermarket for many
vehicles, including but not limited to cars, trucks, motorcycles, scooters, ATVs, snowmobiles,
personal watercrafts and small utility motors.
Expenses have been funded primarily through the sale of stock and convertible debt. We have
raised capital in 2006 and will need to raise additional capital in 2006, and possibly beyond, to
fund our sales and marketing efforts, continuing research and development, and certain other
expenses, until our revenue base grows sufficiently.
Since February 2, 2006, our common stock has been quoted on the Over-the-Counter Bulletin
Board under the symbol ZERO.
Results of Operations
Three-Month and Six-Month Periods Ended June 30, 2006 Compared to Three-Month and Six-Month
Periods Ended June 30, 2005
To date, we have not generated any revenues and our business continues in the development
stage. We have focused our efforts on verifying and developing our technologies and products and
commencing marketing efforts for their sale. We expect to begin generating revenue in late 2006.
General and administrative expenses were $1,852,870 for the three-month period ended June 30,
2006, compared to $583,310 for the three-month period ended June 30, 2005, an increase of
$1,269,560. This increase is primarily attributable to non-cash items in the amount of $761,620.
These non-cash items are made up of revaluation of options and warrants using the Black- Scholes
option pricing model amounting to $729,983, and depreciation of $31,637. Increases in cash expenses
were $507,940 and were made up of salaries, benefits and consulting fees of $193,168; corporate
expenses of $38,226; professional fees of $133,866; travel of $87,668 and rent and utilities and
office expenses of $55,012.
General and administrative expenses were $3,607,840 for the six-month period ended June 30,
2006, compared to $1,244,905 for the six-month period ended June 30, 2005, an increase of
$2,362,935. This increase is primarily attributable to in non-cash items in the amount of
$1,586,215. These non-cash items are made up of revaluation of options and warrants using the
Black- Scholes option pricing model amounting to $1,533,634, and depreciation of $52,681. Increases
in cash expenses were $776,720 and were made up of salaries, benefits and consulting fees of
$370,840; corporate expenses of $56,092; professional fees of $184,116; travel expense of $57,370
and rent and utilities and office expenses of $108,302.
30
Research and development expenses were $121,111 for the three-month period ended June 30,
2006, compared to $190,637 for the three-month period ended June 30, 2005, a decrease of $69,526.
This decrease is primarily attributable to a decrease in research by RAND of $80,691, offset in
part by an increase in product research, testing and prototype expenses of $11,165.
Research and development expenses were $178,873 for the six-month period ended June 30, 2006,
compared to $592,122 for the six-month period ended June 30, 2005, a decrease of $413,249. This
decrease is primarily attributable to a decrease in research by RAND of $460,723, offset in part by
an increase in product research, testing and prototype expenses of $47,474. Other
Other Income (expense) was ($1,018,244) for the three months ended June 30, 2006, compared to
($570) for the three months ended June 30, 2005, an increase of $1,017,674. This increase is
primarily attributed to an increase in non-cash interest expense made up of an accounting valuation
and amortization of warrant values associated with convertible debt financing totaling $974,889 and
actual interest paid of $44,886. Interest and other income increased $7,101.
Other income (expense) was ($2,203,617) for the six months ended June 30, 2006, compared to
($2,546) for the six months ended June 30, 2005, an increase of $2,201,071. This increase is
primarily attributed to an increase in non-cash interest expense made up of accounting valuation
and amortization of warrant values associated with convertible debt financing totaling $2,113,825
and actual interest paid of $95,523. Interest and other income increased $7,101 and provision for
income taxes decreased $1,176.
We expect our operating costs to increase during the balance of fiscal year 2006, primarily as
a result of anticipated increases in product development expenses, general and administrative
expenses and marketing expenses, as we continue production and sales activities during 2006.
We had a net loss of $2,992,225, or $0.09 per share, for the three-month period ended June 30,
2006, compared to a net loss of $774,517, or $0.02 per share for the three-month period ended June
30, 2005. We had a net loss of $5,990,330, or $0.18 per share, for the six-month period ended June
30, 2006, compared to a net loss of $1,839,573, or $0.05 per share for the six-month period ended
June 30, 2005. We expect to incur additional net loss in the fiscal year ending December 31, 2006,
primarily attributable to continued general and administrative expenses and marketing-related
expenditures without the benefit of any significant revenue for the remainder of the year.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
To date, we have not generated any revenues and our business continues in the development
stage. We have focused our efforts on verifying and developing our technologies and devices and
commencing marketing efforts for their distribution and sale. We entered into the first agreements
for the distribution of our devices in late 2005 and early 2006.
General and administrative expenses were $2,631,082 for the fiscal year ended December 31,
2005, compared to $3,319,901 for the fiscal year ended December 31, 2004, a decrease of $688,819.
This decrease is attributable to decreases in non-cash amortization of deferred compensation,
consulting fees, director fees, professional fees and settlement costs $938,935; corporate expenses
$36,695 and travel $34,007, partially offset by increases in salaries and consulting $201,749;
other office expense $43,500; insurance $24,549; professional fees $23,741; rent and utilities
$16,619; and non-cash depreciation $10,660.
Research and development expenses were $1,150,361 for the fiscal year ended December 31, 2005,
compared to $1,873,464 for the fiscal year ended December 31, 2004, a decrease of $723,103. Our
research and development expenses include contractual payments to RAND, consultants fees, capital
expenditures, cost of services and supplies. The decrease in research and development expenses is
primarily attributable to a decrease in non-cash research expense of $1,210,450, as well as actual
R&D expenses for Australia also decreasing by $20,375. These decreases were offset by increases in
actual expenses at our United States R&D facility, which increased by $112,722, and, contractual
payments to RAND, which increased by $395,000.
Patent settlement costs were $-0- in the fiscal year ended December 31, 2005, compared to
$1,610,066 in the fiscal year ended December 31, 2004. The patent settlement costs in the fiscal
year ended December 31, 2004 were attributable to the Black-Scholes valuation placed on 1,000,000
warrants issued in connection with the acquisition of certain of our intellectual property.
Other income and (expense) was $666,256 for the fiscal year ended December 31, 2005, compared
to $151 for the fiscal year ended December 31, 2004, an increase of $666,105. This increase was
primarily attributed to the cancellation of the Muller loan of $1,017,208, offset by increases of
non-cash interest expense relating to convertible debt of $296,692; interest expense of $49,143 and
other income $5,268.
31
We had a net loss of $3,115,186, or $.08 per share, for the year ended December 31, 2005, as
compared to a net loss of $6,803,280, or $.19 per share in the fiscal year ended December 31, 2004.
We expect a decrease in the net loss in the fiscal year ending December 31, 2006 primarily
attributable to sales we currently expect in the fourth quarter of 2006.
Liquidity and Capital Resources
We have incurred negative cash flow from operations in the development stage since our
inception in 1998. As of June 30, 2006, we had cash of $1,628,517 and an accumulated deficit of
$26,236,404. Our negative operating cash flow since inception has been funded primarily through the
sale of common stock, issuance of convertible debt, and, to a lesser degree, by proceeds we
received from the exercise of options and warrants.
The financial statements accompanying this Report have been prepared on a going concern basis,
which contemplates the realization of assets and settlement of liabilities and commitments in the
normal course of our business. As reflected in the accompanying financial statements, we had a net
loss of $2,992,225 and negative cash flow from operations of $1,513,930 for the three-month period
ended June 30, 2006, a net loss of $5,990,330 and negative cash flow from operations of $2,449,893
for the six-month period ended June 30, 2006 and a stockholders deficiency of $155,189 as of June
30, 2006. These factors raise substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent on our ability to raise additional funds
and implement our business plan. The financial statements do not include any adjustments that might
be necessary if we are unable to continue as a going concern.
As of June 30, 2006, our expenses ran, and are expected to continue to run, at a burn rate
of approximately $400,000 per month. Our current capital resources will be sufficient to fund
operations only through October 2006, and we will require additional capital in order to operate
beyond this date. We anticipate that at least a portion of our cash flow needs will be satisfied by
the exercise of outstanding warrants to purchase our common stock, at variable prices, which are
coming due at various times this year. In addition, we are actively pursuing other financing
alternatives, none of which is in place at present.
In 2005, we sold an aggregate of $1,501,378 principal amount of our 9% convertible
subordinated notes (the Investor Notes) due July 31
,
2006, to certain investors. Subsequent to
the end of the three-month period ended June 30, 2006 and prior to the maturity date of the
Investor Notes, $1,127,658 aggregate principal amount of Investor Notes (representing 100% of the
outstanding principal amount of the then-outstanding notes) and $112 of accrued interest, were
converted voluntarily by the holders of the Investor Notes into 1,611,100 shares of our common
stock, at a conversion price of $0.70 per share.
In late 2005 and early 2006, we conducted an offering (the Bridge Offering) and sold an
aggregate $1,075,000 principal amount of our 9% convertible subordinated notes (the Bridge Notes)
and issued warrants (Bridge Warrants) to purchase up to 2,303,568 shares of our common stock at
$1.00 per share, to certain investors. Net proceeds to us from the sale of the Bridge Notes were
$935,250. All of the Bridge Notes were converted voluntarily by the holders of the Bridge Notes
into 1,535,715 shares of our common stock (the Bridge Shares), at a conversion price of $0.70 per
share, on or prior to the maturity date of the Bridge Notes on May 31, 2006.
In 2006, we have raised capital through the sale of our common stock, to provide some of the
funds necessary to continue to execute on our business plan. In April, 2006, we conducted an
offering (the Overseas Offering) and sold 473,000 shares of our common stock at $1.56 per share
and issued warrants to purchase up to 118,250 shares of our common stock at an exercise price of
$2.60 per share, to two overseas investors. We raised $737,881 gross proceeds ($667,803 net
proceeds) in this offering.
In May 2006, we conducted an offering (the PIPE Offering) and sold 873,018 shares of our
common stock (the PIPE Shares) at $1.89 per share and issued warrants (the PIPE Warrants) to
purchase up to 436,511 shares of our common stock at $2.70 per share, through our exclusive
placement agent, Spencer Clarke LLC of New York. We raised $1,650,009 gross proceeds ($1,435,508
net proceeds) in the PIPE Offering.
On June 28, 2006, we filed a registration statement to register the Bridge Shares and the PIPE
Shares, and the shares of our common stock issuable upon exercise of the Bridge Warrants, the PIPE
Warrants and warrants issued to Spencer Clarke LLC for various investment banking and other related
services, including services in connection with the Bridge Offering, the Overseas Offering and the
PIPE Offering. The registration statement was declared effective by the SEC on July 24, 2006.
During the six-month period ended June 30, 2006, we also raised $1,117,625 gross and net
proceeds through the exercises of outstanding warrants. Subsequent to June 30, 2006 and through
September 20, 2006, we raised an additional $400,702 gross and net proceeds through the exercise of
outstanding warrants.
Future minimum commitments for non-cancelable operating leases, convertible notes (if not
converted into common stock prior to maturity) and employment agreements as of June 30, 2006 are as
follows:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006(1)
|
|
2007
|
|
2008
|
|
Total
|
Operating Leases
|
|
$
|
69,000
|
|
|
$
|
94,000
|
|
|
$
|
3,000
|
|
|
$
|
166,000
|
|
Convertible notes(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment Agreements(3)
|
|
|
400,000
|
|
|
|
810,000
|
|
|
|
|
|
|
|
1,210,000
|
|
Total
|
|
$
|
469,000
|
|
|
$
|
904,000
|
|
|
$
|
3,000
|
|
|
$
|
1,376,000
|
|
|
|
|
(1)
|
|
2006 is for the six-month period ending December 31, 2006. 2007
and 2008 reflect the 12-month periods then ending.
|
|
(2)
|
|
Convertible notes above exclude notes totaling $1,128,000 that
were converted into common stock subsequent to June 30, 2006.
|
|
(3)
|
|
Excludes for 2008 employment agreements that expire on December
31, 2007, but which are automatically renewable unless notice of
termination is previously given.
|
We believe that exercises of in-the-money options and warrants, together with sales of our
securities in other financings we have undertaken and may undertake in the future, will provide
most of the proceeds needed to meet our capital requirements on a going forward basis. However,
there can be no assurance that additional equity or debt financing will be available or available
on terms favorable to us. If we are unable to obtain additional financing, we may be required to
delay, reduce the scope of, or eliminate, our ongoing research and development programs, reduce our
marketing and sales activities, or relinquish rights to technologies that we might otherwise seek
to develop or commercialize.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, and we do not engage in trading
activities involving non-exchange traded contracts. In addition, we have no financial guarantees,
debt or lease agreements or other arrangements that could trigger a requirement for an early
payment or that could change the value of our assets.
We do not believe that inflation has had a material impact on our business or operations.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon our
Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these Financial Statements and related
disclosures requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on
an on-going basis, our estimates and judgments, including those related to the useful life of the
assets. We base our estimates on historical experience and assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
The methods, estimates and judgments we use in applying our most critical accounting policies
have a significant impact on the results that we report in our Financial Statements. The SEC
considers an entitys most critical accounting policies to be those policies that are both most
important to the portrayal of a companys financial condition and results of operations and those
that require managements most difficult, subjective or complex judgments, often as a result of the
need to make estimates about matters that are inherently uncertain at the time of estimation. We
believe the following critical accounting policies, among others, require significant judgments and
estimates used in the preparation of our Financial Statements:
The preparation of financial statements in conformity with generally accepted
accounting principles 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 date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Certain significant estimates were made in connection with preparing our
financial statements as described in Note 2 to Notes to Financial Statements. Actual results could
differ from those estimates.
Stock-Based Compensation
On January 1, 2006, we adopted Statements of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, (SFAS 123R), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values. SFAS 123R supersedes our previous accounting under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning
in fiscal
33
2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 (SAB 107) relating to SFAS 123R. We have applied the provisions of SAB 107 in
our adoption of SFAS 123R.
We adopted SFAS 123R using the modified prospective transition method, which requires the
application of the accounting standard as of January 1, 2006, the first day of our 2006 fiscal
year. Stock-based compensation expense recognized under SFAS 123R for employees and directors for
the three and six months ended June 30, 2006 was $736,285 and $1,214,775, respectively. Basic and
diluted loss per share would have been $(0.07) for the quarter ended June 30, 2006 and $(0.15) for
the six months ended June 30, 2006, if we had not adopted SFAS 123R, compared to reported basic and
diluted loss per share of $(0.09) and $(0.18) per share, respectively. As of June 30, 2006 there is
$1,271,649 of unrecognized compensation expense related to unvested options that are expected to
vest through February 2007. The weighted average period over which this expense is to be recognized
is approximately three months.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 151, Inventory Costs. This Statement amends the guidance in
ARB No. 43 Chapter 4 Inventory Pricing, to require items such as idle facility costs, excessive
spoilage, double freight and rehandling costs to be expensed in the current period, regardless if
they are abnormal amounts or not. This Statement will become effective for us in the first quarter
of 2006. The adoption of SFAS No. 151 is not expected to have a material impact on our financial
condition, results of operations, or cash flows.
In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 changes
the requirements for the accounting for and reporting of a change in accounting principle. APB
Opinion 20 previously required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of changing to the new
accounting principle. SFAS No. 154 requires retrospective application to prior periods financial
statements of changes in accounting principle, unless it is impracticable to determine either the
period-specific effects of the cumulative effect of the change. In the event of such
impracticality, SFAS No. 154 provides for other means of application. In the event the Company
changes accounting principles, it will evaluate the impact of SFAS No. 154.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
The following table sets forth the name, age and position held by each of our executive
officers and directors, as of September 20, 2006. Directors are elected for a period of one year and
thereafter serve until the next annual meeting at which their successors are duly elected by the
stockholders.
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|
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Name
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Age
|
|
Position
|
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Director Since
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Eugene E. Eichler, CPA
|
|
|
79
|
|
|
Chief Executive Officer, Chief
Financial Officer and Director
|
|
|
2002
|
|
Bruce H. McKinnon
|
|
|
64
|
|
|
President and Director
|
|
|
2002
|
|
John Bautista
|
|
|
47
|
|
|
Executive Vice President of Operations
|
|
|
|
|
Joseph Helleis(1)(2)
|
|
|
68
|
|
|
Chairman of the Board and Director
|
|
|
2002
|
|
Hon. John J. Brown, AO(2)(3)
|
|
|
74
|
|
|
Director
|
|
|
2002
|
|
John F. Price, Ph.D(1)(2)(3)
|
|
|
63
|
|
|
Director
|
|
|
2002
|
|
Cecil Bond Kyte(1)(3)
|
|
|
35
|
|
|
Director
|
|
|
2006
|
|
|
|
|
(1)
|
|
Member of the Audit Committee.
|
|
(2)
|
|
Member of the Compensation Committee
|
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(3)
|
|
Member of the Nominating and Corporate Governance Committee
|
Biographical Information
Eugene E. Eichler, CPA,
has served as our Chief Executive Officer since October 2005, assuming
the position previously held by our late Chairman and Chief Executive Officer Edward L. Masry, and
has served as our Chief Financial Officer since May 2002. He has also been a director since May
2002. Mr. Eichler served as our President from March 2004 to October 2005 and as our
34
Chief
Operating Officer from October 2001 to March 2004. Mr. Eichler was the Chief Financial Officer and
Firm Administrator of the law firm Masry & Vititoe from 1982 to October 2001. From 1974 to 1982,
Mr. Eichler provided financial consulting services to Foundation for HMOs, Acne Care Medical
Clinics and Earth Foods, Inc. From 1960 to 1974, Mr. Eichler headed financial consulting services
for Milburn Industries and Brown, Eichler & Company. From 1953 to 1960, he held the position of
Chief Budgets and Forecasts at North American Aviation. From 1951 to 1953, Mr. Eichler held various
audit positions at the Atomic Energy Commission. Mr. Eichler received a B.A. from University of
Montana.
Bruce H. McKinnon
has served as our President since October 2005 and our Chief Operating
Officer since August 2006, and has been a director since May 2002. He served as our Executive
Vice-President of Business Development from December 2003 to March 2004 and our Chief Operating
Officer from March 2004 to October 2005. Mr. McKinnon served as Chief Executive Officer and
President of KZ Golf, Inc., an international golf equipment company, from 1994 to December 2003.
From 1990 to 1994, he was President and Chief Executive Officer of TTL Corporation and Novaterra,
Inc., environmental remediation and technology corporations. Prior to 1990, Mr. McKinnon was an
owner, Chairman and Chief Executive Officer of several international trading and manufacturing
corporations.
John Bautista
has served as our Executive Vice President of Operations since February 2006 and
served as our Vice President of Operations from July 2005 through February 2006. He previously
served as a consultant to our company from April 2005 to June 2005. From June 2003 to June 2005,
Mr, Bautista was President and CEO of JDAK Enterprise, Inc., a company engaged in international
importing, distribution and brokerage of motorcycle parts, as well as the production and assembly
of custom motorcycles. From January 1999 through May 2003, Mr. Bautista was Mechanical Service and
Calibration Department Manager for Mechanical Environmental Systems Analysis and Adjustment Agency.
Mr. Bautista has technical knowledge and experience with ISO certified programs under Department of
Defense, Department of Energy and Environmental Protection Agency regulations.
Joseph Helleis
has served as a director since May 2002 and as our Chairman of the Board since
December 2005, succeeding the late Edward L. Masry, who passed away on December 6, 2005. Mr.
Helleis also serves as chairperson of the Audit Committee, and, until June 26, 2006, also served as
chairperson of the Compensation Committee and the Nominating and Corporate Governance Committee.
Since 2002, he has been operating his own financial services consulting firm, Joseph Helleis and
Associates. From 2000 to 2002, he was President/Chief Executive Officer with Bank of Whittier,
California. From 1981 to 2000, he served in senior executive capacities as Chairman/CEO,
President/CEO, and Chief Credit Officer with number of financial institutions in the southern
California region. After his honorable discharge from the United States Navy in 1960, Mr. Helleis
served with Citibank in New York City until 1981 where his last position was Vice President/Senior
Credit Officer for the New York State Business Banking Region.
Hon. John J. Brown, AO,
has served as a director since May 2002. Reflecting the
Companys increased activities and growing corporate governance needs, Mr. Brown also became
chairperson of the Compensation Committee on June 26, 2006. He has served as Chairman of the
Australian Tourism Task Force since 1989 and currently is a professional consultant to Service
Corporation International Australia. Mr. Brown has also served as director of Macquarie Tourism and
Leisure since 1990. From 1983 to 1988, Mr. Brown was Minister for Sport and Tourism for the
Australian government and from 1987 to 1988 he was the Minister for the Environment. He was a
member of the Olympics bid teams for Brisbane (1992), Melbourne (1996) and the successful Sydney
bid (2000). Mr. Brown was Founding Director of the Sydney Olympic Games Organizing Committee in
1992 and the Sydney Paralympic Organizing Committee in 1998.
John F. Price, Ph.D.,
has served as a director since May 2002. Reflecting the Companys
increased activities and growing corporate governance needs, Mr. Price also became chairperson of
the Nominating and Corporate Governance Committee on June 26, 2006. He co-founded and has served as
Chairman of the Board of Conscious Investing Pty Ltd., a software company, since May 2001. In June
1998, Mr. Price founded Price Value, Inc., a software company to market software that he developed.
He has served as Chairman of the Board of Price Value, Inc. since 1998. Since October 1997, Mr.
Price has held various teaching positions in mathematics and physics at University of New South
Wales. From 1990 to 1998, he was professor and head of the Mathematics Department at Maharishi
University of Management. Mr. Price received a B.Sc. and M.Sc. from the University of Melbourne and
a Ph.D. from the Australian National University.
Cecil Bond Kyte
has served as a director on February 21, 2006. Since December 2002, Mr. Kyte
has been an investor in a number of businesses, including those in oil and gas exploration, and
financial services, including SwissGuard International, GmbH, based in Zurich, Switzerland, of
which he is a co-founder. SwissGuard serves the American annuity market with an emphasis on asset
protection and growth. From February 2000 to November 2002, Mr. Kyte was employed by Chautauqua
Airways, a United States regional carrier, in various capacities, including service as an airline
pilot from February 2002 to November 2002. Mr. Kyte received a B. S. Degree in Accounting from Long
Beach State University.
35
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the compensation earned during
the last three fiscal years by the Named Executive Officers:
Summary Compensation Table
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Compensation Awards
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
Restricted Stock
|
|
|
Securities
|
|
|
|
|
|
|
Fiscal
|
|
|
Compensation
|
|
|
Award(s)
|
|
|
Underlying
|
|
|
All Other
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary ($)(4)
|
|
|
($)(5)
|
|
|
Options (#)
|
|
|
Compensation ($)
|
|
Edward L. Masry(1)
|
|
|
2005
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
490,909
|
|
|
$
|
|
|
Chairman and Chief
|
|
|
2004
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
328,740
|
|
|
$
|
|
|
Executive Officer
|
|
|
2003
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Eugene E. Eichler(2)
|
|
|
2005
|
|
|
$
|
240,000
|
|
|
$
|
|
|
|
|
425,000
|
|
|
$
|
|
|
Chief Executive Officer
|
|
|
2004
|
|
|
$
|
234,500
|
|
|
$
|
|
|
|
|
286,956
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|
|
$
|
|
|
and Chief Financial Officer
|
|
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2003
|
|
|
$
|
172,328
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Bruce H. McKinnon(3)
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|
|
2005
|
|
|
$
|
192,000
|
|
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$
|
|
|
|
|
350,000
|
|
|
$
|
|
|
President
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|
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2004
|
|
|
$
|
191,800
|
|
|
$
|
|
|
|
|
236,956
|
|
|
$
|
|
|
|
|
|
2003
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
(1)
|
|
Mr. Masry was appointed President and Chief Executive Officer
in October 2001 at no annual salary. In March 2004, Mr. Masry
relinquished his position as President, but continued to
serve as Chief Executive Officer at a contractual salary of
$1 per year until October 2005, when he resigned that
position. Mr. Masry passed away on December 6, 2005 and the
490,909 shares relating to long-term compensation awards
lapsed upon his death because they had not vested as of such
date. See Employment Agreements below.
|
|
(2)
|
|
Mr. Eichler was appointed Chief Operating Officer, Chief
Financial Officer and Treasurer in October 2001. In March
2004, Mr. Eichler relinquished his position as Chief
Operating Officer, and was appointed President of the
Company, a position he held until October 2005, when he
assumed the position of Chief Executive Officer. Mr. Eichler
continues to serve as Chief Financial Officer. See
Employment Agreements below.
|
|
(3)
|
|
Mr. McKinnon was appointed Executive Vice President of
Business Development in October 2001. In March 2004, Mr.
McKinnon was appointed Chief Operating Officer of the
Company, a position he held until October 2005, when he
assumed the position of President. Mr. McKinnon was also
named Chief Operating Officer on August 8, 2006. See
Employment Agreements below.
|
|
(4)
|
|
The law firm Masry & Vititoe, PC, of which Mr. Masry was a
principal shareholder, paid for Mr. Eichlers salary for 2003
pursuant to an arrangement under which we reimbursed Masry &
Vititoe, PC for a portion of his salary. The portion
reimbursed by us is shown in the table above.
|
|
(5)
|
|
The number and value of vested and unvested restricted stock
based upon the closing market price of the common stock at
December 30, 2005 ($0.72) were as follows: Mr. Eichler,
500,000 vested shares valued at $360,000; and Mr. McKinnon,
400,000 vested shares valued at $288,000. Messrs. Eichlers
and McKinnons shares vested in October 2003.
|
Stock Option Grants
The following table sets forth information concerning the stock option grants made to each of
the Named Executive Officers
during the 2005 fiscal year. No stock appreciation rights were granted to any of the Named
Executive Officers during the 2005 fiscal year.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual Grants
|
|
|
|
|
|
|
Number of
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Total Options
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Granted to
|
|
|
Exercise or
|
|
|
|
|
|
|
Options
|
|
|
Employees in
|
|
|
Base Price
|
|
|
Expiration
|
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Name
|
|
Granted
|
|
|
Fiscal 2005
|
|
|
per Share
|
|
|
Date
|
|
Edward L. Masry (1)
|
|
|
90,909
|
|
|
|
5.6
|
%
|
|
$
|
1.10
|
|
|
|
03/02/09
|
|
Edward L. Masry (1)
|
|
|
400,000
|
|
|
|
24.8
|
%
|
|
$
|
.85
|
|
|
|
03/02/14
|
|
Eugene E. Eichler
|
|
|
100,000
|
|
|
|
6.2
|
%
|
|
$
|
1.10
|
|
|
|
03/02/14
|
|
Eugene E. Eichler
|
|
|
325,000
|
|
|
|
20.2
|
%
|
|
$
|
.85
|
|
|
|
03/02/14
|
|
Bruce H. McKinnon
|
|
|
100,000
|
|
|
|
6.2
|
%
|
|
$
|
1.00
|
|
|
|
03/02/14
|
|
Bruce H. McKinnon
|
|
|
250,000
|
|
|
|
15.5
|
%
|
|
$
|
.85
|
|
|
|
03/02/14
|
|
|
|
|
(1)
|
|
Mr. Masry passed away on December 6, 2005 and the 490,909 shares relating to option grants
in 2005 lapsed upon his death because they had not vested as of such date.
|
Aggregated Option Exercises in Last Fiscal Year
And Year-End Option Values
No options were exercised by any of the Named Executive Officers during the 2005 fiscal year.
No stock appreciation rights were exercised by any of the Named Executive Officers during the 2005
fiscal year. The following table sets forth the number of shares of our common stock subject to
exercisable and unexercisable stock options which the Named Executive Officers held at the end of
the 2005 fiscal year.
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying Unexercised
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Options at
|
|
|
Value of Unexercised
|
|
|
|
Acquired on
|
|
|
Realized
|
|
|
Fiscal Year-End (#)
|
|
|
In-the-Money Options ($)(1)
|
|
Name
|
|
Exercise (#)
|
|
|
($)
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
Edward L. Masry
|
|
|
|
|
|
$
|
|
|
|
|
2,537,208
|
|
|
|
282,441
|
|
|
$
|
2,458,468
|
|
|
$
|
230,137
|
|
Eugene E. Eichler
|
|
|
|
|
|
$
|
|
|
|
|
717,435
|
|
|
|
244,521
|
|
|
$
|
674,970
|
|
|
$
|
186,986
|
|
Bruce H. McKinnon
|
|
|
|
|
|
$
|
|
|
|
|
385,586
|
|
|
|
201,370
|
|
|
$
|
343,120
|
|
|
$
|
143,836
|
|
|
|
|
(1)
|
|
Market value of our common stock at fiscal year-end minus the
exercise price. The closing price of our common stock on
December 30, 2005, the last trading day of the year, was
$0.72 per share.
|
Employment Agreements
Agreement with Eugene E. Eichler.
On December 1, 2003, the Company entered into an employment
agreement, which was subsequently amended, and then later amended and restated on June 26, 2006,
with Eugene E. Eichler, pursuant to which he originally served as our Chief Operating Officer.
Since October 5, 2005, Mr. Eichler has served as our Chief Executive Officer and Chief Financial
Officer. The initial term of the agreement expires on December 31, 2007 and renews automatically
for additional one-year terms unless either party has given notice of non-extension prior to the
end of a term. Under the agreement, as amended, Mr. Eichler was paid base compensation of $192,000
per annum through March 1, 2004, $240,000 per annum from March 2, 2004 through October 4, 2005 and
$300,000 per annum effective October 5, 2005. The base compensation is reviewable by the Board in
subsequent years of the term. Mr. Eichler is also eligible to participate in the Companys
incentive and benefit plans, including eligibility to receive grants of stock options under the
2004 Plan, and an automobile allowance which is presently $822 per month and has been as much as
$960 per month.
If Mr. Eichlers employment is terminated by us without cause or as a result of his disability
or death, he or his estate, as the case may be, will be entitled to receive an amount equal to the
greater of (i) his highest base compensation paid to him with respect to one of the two years
immediately preceding the year in which the termination occurs or (ii) his base compensation in
effect immediately prior to the date of termination, for a period of one year beginning on the date
of termination. In addition, he will be entitled to receive an amount equal to the greater of the
aggregate bonus(es), if any, paid to him with respect to one of the two years immediately preceding
the year in which the termination occurs. Mr. Eichler and his dependents will be entitled to
continue to participate at the same levels in the Companys benefit plans for a period of one year.
If Mr. Eichlers employment is terminated by
him for good reason or as a result of a change of control, he will be entitled to receive all
accrued salary, bonus and benefits for a period of three years from the date of termination. If Mr.
Eichlers employment is terminated by us for cause or by Mr. Eichler without good reason, he will
only be entitled to receive accrued salary and benefits through the date of termination. The
agreement also contains standard confidentiality and non-solicitation provisions.
Agreement with Bruce H. McKinnon.
On December 1, 2003, the Company entered into an employment
agreement, which was subsequently amended and later amended and restated on June 26, 2006, with
Bruce H. McKinnon, pursuant to which he
37
originally served as our Executive Vice President of
Business Development. Since October 5, 2005, Mr. McKinnon has served as our President and since
august 8, 2006, he has also served as our Chief Operating Officer. The initial term of the
agreement expires on December 31, 2007 and renews automatically for additional one-year terms
unless either party has given notice of non-extension prior to the end of a term. Under the
agreement, as amended, Mr. McKinnon was paid base compensation of $153,600 per annum through March
1, 2004, $192,000 per annum from March 2, 2004 through October 4, 2005 and $240,000 per annum
effective October 5, 2005. The base compensation is reviewable by the Board in subsequent years of
the term. Mr. McKinnon is also eligible to participate in the Companys incentive and benefit plans
(except for the Companys group health insurance plan), including eligibility to receive grants of
stock options under the 2004 Plan and an automobile allowance of $900 per month. Mr. McKinnon
participates in the group health plan maintained by KZ Golf, Inc. and the Company reimburses him
for premium amounts he is required to contribute therefor.
If Mr. McKinnons employment is terminated by us without cause or as a result of his
disability or death, he, or his estate as the case may be, will be entitled to receive an amount
equal to the greater of (i) his highest base compensation paid to him with respect to one of the
two years immediately preceding the year in which the termination occurs or (ii) his base
compensation in effect immediately prior to the date of termination, for a period of one year
beginning on the date of termination. In addition, he will be entitled to receive an amount equal
to the greater of the aggregate bonus(es), if any, paid to him with respect to one of the two years
immediately preceding the year in which the termination occurs. Mr. McKinnon and his dependents
will be entitled to continue to participate at the same levels in the Companys benefit plans for a
period of one year. If Mr. McKinnons employment is terminated by him for good reason or as a
result of a change of control, he will be entitled to receive all accrued salary, bonus and
benefits for a period of three years from the date of termination. If Mr. McKinnons employment is
terminated by us for cause or by Mr. McKinnon without good reason, he will only be entitled to
receive accrued salary and benefits through the date of termination. The agreement also contains
standard confidentiality and non-solicitation provisions.
Agreement with John R. Bautista, III.
On July 1, 2005, the Company entered into an employment
agreement, which has since been amended and restated on June 26, 2006, with John R. Bautista, III,
pursuant to which he served as our Vice President of Operations from July 1, 2005 through February
21, 2006 and Executive Vice President of Operations since February 21, 2006, at which time he also
became an executive officer of the Company. The initial term of the agreement expired on December
31, 2005 and renews automatically for additional one-year terms unless either party has given
notice of non-extension prior to the end of a term. Under the agreement, as amended, Mr. Bautista
was paid base compensation of $120,000 per annum from July 1, 2005 through February 28, 2006 and
$150,000 per annum effective March 1, 2006. The base compensation is reviewable by the Board of
Directors in subsequent years of the term. On August 8, 2006, the Compensation Committee of the
Board approved an increase in base annual salary to Mr. Bautista from $150,000 to $200,000,
effective as of such date. Mr. Bautista is eligible to participate in the Companys incentive and
benefit plans (except for the Companys group health insurance plan), including eligibility to
receive grants of stock options under the 2004 Plan and an automobile allowance of $900 per month.
Mr. Bautista participates in the group health insurance plan maintained by his spouses employer
and the Company reimburses him for the premium amounts he is required to contribute therefor.
If Mr. Bautistas employment is terminated by us without cause or as a result of his
disability or death, he, or his estate as the case may be, will be entitled to receive an amount
equal to the greater of (i) his highest base compensation paid to him with respect to one of the
two years immediately preceding the year in which the termination occurs or (ii) his base
compensation in effect immediately prior to the date of termination, for a period of one year
beginning on the date of termination. In addition, he will be entitled to receive an amount equal
to the greater of the aggregate bonus(es), if any, paid to him with respect to one of the two years
immediately preceding the year in which the termination occurs. Mr. Bautista and his dependents
will be entitled to continue to participate at the same levels in the Companys benefit plans for a
period of one year. If Mr. Bautistas employment is terminated by him for good reason or as a
result of a change of control, he will be entitled to receive all accrued salary, bonus and
benefits for a period of three years from the date of termination. If Mr. Bautistas employment is
terminated by us for cause or by Mr. Bautista without good reason, he will only be entitled to
receive accrued salary and benefits through the date of termination. The agreement also contains
standard confidentiality and non-solicitation provisions.
Agreement with the Late Edward L. Masry.
On December 1, 2003, the Company entered into an
employment agreement with Edward L. Masry, pursuant to which he served as our Chief Executive
Officer. The initial term of the agreement was due to
expire on December 31, 2007 and would have renewed automatically for additional one-year terms
unless either party had given notice of non-extension prior to the end of a term. The agreement
provided for a base compensation of $1 per year. Mr. Masry was eligible to participate in the
Companys incentive and benefit plans, including eligibility to receive grants of stock options
under the 2004 Plan.
If Mr. Masrys employment had been terminated by us without cause or was terminated as a
result of his disability or death,
38
he or his estate, as the case may be, will be entitled to
receive an amount equal to the greater of the aggregate bonus(es), if any, paid to him with respect
to one of the two years immediately preceding the year in which the termination occurs. In
addition, Mr. Masry and his dependents would be entitled to continue to participate at the same
levels in the Companys benefit plans for a period of one year. If Mr. Masrys employment had been
terminated by him for good reason or as a result of a change of control, he would have been
entitled to receive all accrued salary, bonus and benefits for a period of three years from the
date of termination. If Mr. Masrys employment had been terminated by us for cause or by Mr. Masry
without good reason, he would only have been entitled to receive accrued salary and benefits
through the date of termination. The agreement also contained standard confidentiality and
non-solicitation provisions.
Mr. Masry passed away on December 6, 2005.
Compensation of Board of Directors
In 2005 and from January 1, 2006 through August 8, 2006, our directors who are not officers or
employees of the Company were each compensated for their services in the amount of $1,000 per
meeting of the Board. In addition, the chairperson of the Audit Committee receivef a retainer of
$3,000 per month and the chairperson of the Compensation, and Nominating and Corporate Governance
Committees each receivef a retainer of $2,000 per month.
In 2005, our directors who were not officers or employees of the Company also each received,
in addition to the foregoing cash compensation, annual grants of options to purchase 100,000 shares
of our common stock, at $.85 per share. In addition, Joseph Helleis received an additional grant of
options to purchase 75,000 shares of our common stock, at $.85 per share, for serving as the
chairperson of the Audit, Compensation, and Nominating and Corporate Governance Committees. All of
the foregoing options vest fully on the first anniversary of the date of grant.
In mid-2006, the Company undertook a comprehensive review of its director compensation policy,
including cash and non-cash components, with the assistance of an outside executive compensation
consulting firm. On August 8, 2006, the Board of Directors, upon the recommendation of the
Nominating and Corporate Governance Committee, approved and authorized a revision to the Companys
non-employee director compensation policy to provide that, effective August 8, 2006, equity
compensation may be granted to non-employee directors pursuant to the Companys then-current equity
incentive plan, or as may otherwise be determined by the Board. In addition, the Board approved a
change in cash compensation to be paid to non-employee directors effective August 8, 2006.
On August 8, 2006, the Board approved the payment of annual cash compensation to non-employee
directors, effective as of such date, as follows:
|
|
|
|
|
Board Member
|
|
$
|
7,500
|
|
Chairman of the Board
|
|
$
|
25,000
|
|
Audit Committee Chair
|
|
$
|
20,000
|
|
Compensation Committee Chair
|
|
$
|
15,000
|
|
Nominating/Corporate Governance Committee Chair
|
|
$
|
15,000
|
|
Additionally, each such Board member will receive $1,000 for each Board meeting he attends,
whether in person or telephonically. Each such Board member, including committee chairs, will also
receive $500 for each committee meeting he attends, whether in person or telephonically.
Also on August 8, 2006, the Board authorized a grant to each non-employee director, and to
former director Robert Sylk, of an option to purchase 30,000 shares of the Companys common stock
at an exercise price of $2.255 per share, being the closing price of the Companys common stock on
August 7, 2006, each such option to vest fully on August 8, 2007 and remain exercisable for five
years from the date of grant, with the exception of Robert Sylk, whose option vests immediately and
is execisable for one year from the date of grant.
Stock Option Plan
Introduction.
On March 2, 2004, the Board approved our 2004 Stock Option Plan (the 2004
Plan), subject to approval from our stockholders, which approval was received at the 2004 Annual
Meeting on May 24, 2004. At the Annual Meeting of Stockholders held on May 24, 2005 (the 2005
Annual Meeting), the Companys stockholders approved an amendment to the 2004 Plan to increase the
maximum number of shares of common stock that could be issued under the 2004 Plan from a total of
39
1,500,000 shares of common stock to 5,000,000 shares of common stock, or an increase of 3,500,000
shares.
On February 21, 2006, the Board approved and recommended to the stockholders for approval an
additional amendment to the 2004 Plan to increase the maximum number of shares of common stock that
can be issued under the 2004 Plan from a total of 5,000,000 shares of common stock to 7,000,000
shares of common stock, or an increase of an additional 2,000,000 shares. This proposal was
approved by the Companys stockholders at the 2006 Annual Meeting of Stockholders held on May 19,
2006.
As of September 20, 2006, we had outstanding options issued under the 2004 Plan to purchase
4,078,299 shares of our common stock and options issued outside the 2004 Plan to purchase an
additional 3,250,000 shares of our common stock. The weighted-average exercise price of all
outstanding options is approximately $0.63 per share.
Purpose of the 2004 Plan.
The 2004 Plan is intended to benefit and strengthen the Company and
its stockholders by:
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|
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encouraging stock ownership by selected key employees, directors, consultants and advisers
|
|
|
|
|
assisting the Company in attracting and retaining key personnel; and
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providing to participating personnel added incentive for high level of performance.
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Administration.
A committee of three or more people selected by the Board administers the
2004 Plan. The Board has designated the Compensation Committee as the administrator of the 2004
Plan.
Shares Available for Grant Under the Plan.
As originally adopted by the stockholders at the
2004 Annual Meeting, the 2004 Plan contained a total of 1,500,000 shares of our common stock,
subject to adjustment in the event of certain changes in our capitalization. At the 2005 Annual
Meeting, the stockholders approved an amendment to the 2004 Plan, increasing the total number of
shares which can be the subject of grants under the 2004 Plan from 1,500,000 to 5,000,000, an
increase of 3,500,000 shares. At the 2006 Annual Meeting, the stockholders approved a further
amendment to the 2004 Plan, increasing the total number of shares which can be the subject of
grants under the 2004 Plan from 5,000,000 to 7,000,000, an increase of an additional 2,000,000
shares. If an option terminates or expires for any reason without having vested and been exercised,
the related shares of common stock will again become available for grant.
Eligibility.
All employees, directors, consultants and advisers of the Company are eligible
to receive option grants under the 2004 Plan. As of September 20, 2006, two Named Executive
Officers, four non-employee directors and 14 other employees were eligible to be selected by the
Compensation Committee to receive grants under the 2004 Plan.
Types and Terms of Stock Options.
The Compensation Committee may grant either incentive stock
options qualified with respect to Internal Revenue Code Section 422 (ISOs) or options not
qualified under any section of the Internal Revenue Code (non-qualified options). All ISOs
granted under the 2004 Plan must have an exercise price that is at least equal to the fair market
value of our common stock on the grant date and, in the case of a person who is a 10% or greater
stockholder, the exercise price must be at least 100% of the fair marketing value of our common
stock on the grant date. The exercise price of a non-qualified option shall be determined by the
Board or the Compensation Committee. As of March 31, 2006, the fair market value of a share of our
common stock, determined by the closing price per share on that date as quoted on the OTC Bulletin
Board, was $2.95. No stock option granted under the 2004 Plan may have a term longer than ten years
and, in the case of a person who is a 10% or greater stockholder, the stock option may not have a
term longer than five years. The exercise price of stock options may be paid in cash, or, if the
Compensation Committee permits, by tendering shares of common stock.
Vesting.
The Compensation Committee has the authority to determine the amounts and period of
time over which a stock option shall become exercisable (vest). However, the fair market value with
respect to which an ISO is exercisable by an optionee during any calendar year may not exceed
$100,000.
Stock Options Granted to Specific Individuals.
The number of options that any individual may
be granted, if any, under the 2004 Plan will be determined, from time to time, in the discretion of
the Compensation Committee or, when appropriate, the Board, and therefore cannot be determined in
advance.
Federal Income Tax Consequences.
The following summary is intended only as a general guide to
the United States federal income tax consequences under current law of incentive stock options and
non-qualified stock options, which are authorized for grant
40
under the 2004 Plan. It does not
attempt to describe all possible federal or other tax consequences of participation in the 2004
Plan or tax consequences based on particular circumstances. The tax consequences may vary if
options are granted outside the United States.
Incentive Stock Options.
An option holder recognizes no taxable income for regular income tax
purposes as a result of the grant or exercise of an incentive stock option qualifying under
Internal Revenue Code Section 422. Option holders who dispose of the shares acquired under an
incentive stock option after two years following the date the option was granted and after one year
following the exercise of the option will normally recognize a capital gain or loss upon a sale of
the shares equal to the difference, if any, between the sale price and the purchase price of the
shares. If an option holder satisfies such holding periods upon a sale of the shares, the Company
will not be entitled to any deduction for federal income tax purposes. If an option holder disposes
of shares within two years after the date of grant or within one year after the date of exercise (a
disqualifying disposition), the difference between the fair market value of the shares on the
exercise date and the option exercise price (not to exceed the gain realized on the sale if the
disposition is a transaction with respect to which a loss, if sustained, would be recognized) will
be taxed as ordinary income at the time of disposition. Any gain in excess of that amount will be a
capital gain. If a loss is recognized, there will be no ordinary income, and such loss will be a
capital loss. Any ordinary income recognized by the option holder upon the disqualifying
disposition of the shares generally will result in a deduction by the Company for federal income
tax purposes.
Non-Qualified Options.
Options not designated or qualifying as incentive stock options will
be non-qualified options having no special tax status. An optionee generally recognizes no taxable
income as the result of the grant of such an option. Upon exercise of a non-qualified option, the
optionee normally recognizes ordinary income in the amount of the difference between the option
exercise price and the fair market value of the shares on the exercise date. If the optionee is an
employee, such ordinary income generally is subject to withholding of income and employment taxes.
Upon the sale of stock acquired by the exercise of a non-qualified option, any gain or loss, based
on the difference between the sale price and the fair market value on the exercise date, will be
taxed as a capital gain or loss. No tax deduction is available to the Company with respect to the
grant of a non-qualified option or the sale of the stock acquired pursuant to such grant. The
Company generally should be entitled to a deduction equal to the amount of ordinary income
recognized by the optionee as a result of the exercise of a non-qualified option.
Other Considerations.
The Internal Revenue Code allows publicly-held corporations to deduct
compensation in excess of $1 million paid to the corporations chief executive officer and its four
other most highly compensated executive officers in office at the end of the tax year if the
compensation is payable solely based on the attainment of one or more performance goals and certain
statutory requirements are satisfied. We intend for compensation arising from grants of awards
under the 2004 Plan, which are based on performance goals, including stock options and stock
appreciation rights granted at fair market value, to be deductible by us as performance-based
compensation not subject to the $1 million limitation on deductibility.
Transferability.
All ISOs are non-transferable other than by will or the laws of descent and
distribution and shall be exercisable during an optionees lifetime only by the optionee. The
Compensation Committee may provide that a non-qualified option may be transferred under certain
terms and conditions.
Extraordinary Events.
In the event of a sale of more than half the fair market value of the
assets of the Company, the acquisition by a group or entity of more than 30% of the voting
securities of the Company, or the dissolution or liquidation of the Company, all stock options not
exercised shall terminate as of the date such transaction or event takes place, unless the stock
options are assumed. The vesting of unvested stock options shall be accelerated in certain
circumstances in connection with the acquisition of the assets or stock of the Company and the
optionee shall be entitled to receive cash equal to the difference between the exercise price of
the stock option and value of the consideration attributable to the transaction.
Amendment and Termination.
The Board or the Compensation Committee may suspend, amend or
terminate the 2004 Plan at any time, but no such action may be taken without stockholder approval
if such approval is required by law or if such action increases the maximum number of shares that
may be issued under the 2004 Plan, reduces the exercise price of an ISO, increases the maximum term
of an ISO or permits stock options to be granted to anyone not eligible to be granted options at
the time of the adoption of the 2004 Plan. The Board may, with the consent of an optionee, make
modifications of the terms and conditions of that persons stock
option, other than as described in the preceding sentence, in which case stockholder approval
is also required.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of our
common stock as of June 23, 2006 by:
41
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|
|
each person, or group of affiliated persons, known by us to be the beneficial owner
of more than 5% of the outstanding shares of our common stock;
|
|
|
|
|
each of our directors;
|
|
|
|
|
our Chief Executive Officer and each of our four other most highly-compensated
executive officers serving as such as of December 31, 2005 whose total annual salary and
bonus exceeded $100,000, for services rendered in all capacities to the Company (such
individuals are hereafter referred to as the Named Executive Officers); and
|
|
|
|
|
all of our directors and executive officers as a group.
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of
|
|
Percentage of
|
|
|
Common Stock
|
|
Shares Beneficially
|
Name and Address of Beneficial Owner(1)
|
|
Beneficially Owned(2)
|
|
Owned(2)
|
Estate of Edward L. Masry(3)
|
|
|
7,328,740
|
|
|
|
17.6
|
%
|
Cecil Kyte(4)
|
|
|
2,317,359
|
|
|
|
5.7
|
%
|
Eugene E. Eichler(5)
|
|
|
1,640,528
|
|
|
|
4.1
|
%
|
Bruce H. McKinnon(6)
|
|
|
1,135,341
|
|
|
|
2.8
|
%
|
Joseph Helleis(7)
|
|
|
525,000
|
|
|
|
1.3
|
%
|
John Price(8)
|
|
|
441,000
|
|
|
|
1.1
|
%
|
John Brown(9)
|
|
|
400,000
|
|
|
|
1.0
|
%
|
All directors and executive officers as a group (8 persons)(10)
|
|
|
14,120,953
|
|
|
|
31.2
|
%
|
|
|
|
(1)
|
|
Unless otherwise indicated, the address of each listed person is
c/o Save the World Air, Inc., 5125 Lankershim Boulevard, North
Hollywood, California 91601.
|
|
(2)
|
|
Percentage of beneficial ownership is based upon 39,317,619
shares of our common stock outstanding as of September 20, 2006.
Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power with
respect to securities. Shares of common stock subject to options
and warrants currently exercisable or convertible, or exercisable
or convertible within 60 days, are deemed outstanding for
determining the number of shares beneficially owned and for
computing the percentage ownership of the person holding such
options, but are not deemed outstanding for computing the
percentage ownership of any other person. Except as indicated by
footnote, and subject to community property laws where
applicable, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown
as beneficially owned by them.
|
|
(3)
|
|
Under the rules of the SEC, Mr. Masry is a Named Executive
Officer of our company for 2005. Mr. Masry passed away on
December 6, 2005. Consists of 1,000,000 shares of our common
stock and options to purchase 2,328,740 shares of our common
stock exercisable either currently or within 60 days after
September 20, 2006 and 2,800,000 shares and warrants to purchase
an aggregate 1,200,000 shares of our common stock held by Masry &
Vititoe, PC. Mr. Masry was a shareholder of Masry & Vititoe, PC,
and may be deemed to have been a beneficial owner of the shares
held by such entity during the period that Mr. Masry served as
our Chairman and Chief Executive Officer. During is lifetime, Mr.
Masry disclaimed beneficial ownership of these shares except to
the extent of his proportional share therein.
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(4)
|
|
Consists of 1,207,359 shares of our common stock and warrants to
purchase 1,110,000 shares of our common stock exercisable either
currently or within 60 days after September 20, 2006.
|
|
(5)
|
|
Consists of 500,000 shares of our common stock and, options to
purchase 961,956 shares of our common stock held by Mr. Eichler
and 71,429 shares of our common stock and, warrants to purchase
107,143 shares of our common stock held by the Eichler/Wise
Family Trust, a revocable trust of which Mr. Eichler is a
Trustee. All of such options and warrants are exercisable or
convertible either currently or within 60 days after September
20, 2006.
|
|
(6)
|
|
Consists of 400,000 shares of our common stock held by Mr.
McKinnon, options to purchase 586,956 shares of our common stock
exercisable either currently or within 60 days of September 20,
2006 and 69,814 shares of our common stock and warrants to
purchase 78,571 shares of our common stock held by the KZ Golf,
Inc. Defined Benefit Pension Plan exercisable or convertible
either currently or within 60 days after September 20, 2006. Mr.
McKinnon is a principal stockholder of KZ
|
42
|
|
|
|
|
Golf, Inc. and a
participant in the KZ Golf Defined Benefit Pension Plan.
|
|
(7)
|
|
Consists of 250,000 shares of our common stock held by M. Helleis
and options to purchase 275,000 shares of our common stock
exercisable either currently or within 60 days after September
20, 2006.
|
|
(8)
|
|
Consists of 291,000 shares of our common stock held by Mr. Price
and options to purchase 150,000 shares of our common stock
exercisable either currently or within 60 days after September
20, 2006.
|
|
(9)
|
|
Consists of 250,000 shares of our common stock held by Mr. Brown
and options to purchase 150,000 shares of our common stock
exercisable either currently or within 60 days after September
20, 2006.
|
|
(10)
|
|
In addition to the securities indicated in the foregoing
footnotes, consists of 154,414 shares of our common stock and
options and warrants to purchase 178,517 shares of our common
stock exercisable within 60 days of September 20, 2006.
|
THE DUTCHESS TRANSACTION
Investment Agreement
The nature of the investment agreement between Dutchess and us is commonly known as an equity
line of credit. The maximum amount we may raise under the equity line is $10,000,000, provided we
register enough shares to raise this amount, although we are not obligated to request any portion
of the $10,000,000. As of the date of this prospectus, we have not drawn down any portion of the
$10,000,000 commitment, leaving the entire $10,000,000 available under the equity line of credit.
Over a period of 36 months, we may periodically deliver new issue shares of our common stock to
Dutchess, which then delivers cash to us based on a price per share tied to the current market
price of our common stock. The actual number of shares that we may issue subject to the investment
agreement is not determinable as it is based on the market price of our common stock from time to
time.
During the 36-month term of the investment agreement, we may request a drawdown on the
equity line of credit by delivering a put notice to Dutchess stating the dollar amount of shares
we intend to sell to Dutchess. The purchase price Dutchess is required to pay for the shares is
equal to 97% of the market price. The market price is equal to the lowest closing best bid
price during the pricing period. The pricing period is the five-trading-day period beginning on the
day Dutchess receives a drawdown request from us, if the request is received by Dutchess before
9:00 a.m. Eastern Time. Otherwise, the pricing period begins on the trading day following the date
Dutchess receives a drawdown request from us. The amount we may request in a given drawdown is, at
our sole election, either (i) 200% of the average daily U.S. market trading volume of our common
stock for the 10 trading days prior to the request multiplied by the average of the three daily
closing best bid prices immediately preceding our request, or (ii) $250,000.
Sample Put Amount and Purchase Price Calculations
The calculation below assumes a put notice date of September 20, 2006. Set forth below
is a trading summary of our common stock for the period September 6, 2006 through September 19,
2006, the 10 trading days immediately prior to the put notice date of September 20, 2006, and the
five trading days immediately following the put notice date of September 20, 2006.
43
|
|
|
|
|
|
|
|
|
|
|
Closing bid
|
|
|
|
|
Date
|
|
price
|
|
|
Volume
|
|
Sept. 6, 2006
|
|
$
|
1.20
|
|
|
|
94,779
|
|
Sept. 7, 2006
|
|
$
|
1.20
|
|
|
|
124,095
|
|
Sept. 8, 2006
|
|
$
|
1.21
|
|
|
|
153,504
|
|
Sept. 11, 2006
|
|
$
|
1.20
|
|
|
|
24,206
|
|
Sept. 12, 2006
|
|
$
|
1.20
|
|
|
|
86,240
|
|
Sept. 13, 2006
|
|
$
|
1.30
|
|
|
|
47,175
|
|
Sept. 14, 2006
|
|
$
|
1.56
|
|
|
|
28,508
|
|
Sept. 15, 2006
|
|
$
|
1.65
|
|
|
|
47,730
|
|
Sept. 18, 2006
|
|
$
|
1.46
|
|
|
|
30,379
|
|
Sept. 19, 2006
|
|
$
|
1.46
|
|
|
|
7,864
|
|
Sept. 20, 2006
|
|
$
|
1.46
|
|
|
|
13,730
|
|
Sept. 21, 2006
|
|
$
|
1.40
|
|
|
|
18,205
|
|
Sept. 22, 2006
|
|
$
|
1.30
|
|
|
|
32,689
|
|
Sept. 25, 2006
|
|
$
|
1.46
|
|
|
|
62,765
|
|
Sept. 26, 2006
|
|
$
|
1.46
|
|
|
|
22,655
|
|
Sept. 27, 2006
|
|
$
|
1.46
|
|
|
|
3,749
|
|
The average daily volume for the 10 trading days prior to September 20, 2006, is 64,448
shares, and 200% of this average is 128,896. The average of the three daily closing bid prices
immediately prior to September 20, 2006 is $1.523, resulting in a put amount of $196,309. Thus, on
September 20, 2006, we could have requested a put amount of either $196,309 or $250,000.
The purchase price Dutchess would pay for the shares would be equal to 97% of the lowest
closing best bid price during the five trading day period following September 20, 2006, which in
this example is $1.30, resulting in a purchase price of $1.261 per share.
Conditions to Dutchesss Obligation to Purchase Shares
We are not entitled to request a drawdown unless each of the following conditions is
satisfied:
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(i)
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a registration statement is and remains effective for the resale of securities in
connection with the equity line of credit;
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(ii)
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at all times during the period between our request for a drawdown and its
subsequent funding, our common stock is listed on its principal market and shall not
have been suspended from trading thereon for a period of two consecutive trading days;
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(iii)
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we have complied with our obligations and are otherwise not in breach or default
of any agreement related to the equity line of credit;
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(iv)
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no injunction shall have been issued and remain in force, or action commenced by a
governmental authority which has not been stayed or abandoned, prohibiting the purchase
or the issuance of securities in connection with the equity line of credit; and
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(v)
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the issuance of the securities in connection with the equity line of credit will
not violate any shareholder approval requirements of the principal market.
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If any of the events described in clauses (i) through (v) above occurs after we make a
drawdown request, then Dutchess shall have no obligation to fund that drawdown.
The equity line of credit will be suspended if (i) the trading of our common stock is
suspended by the SEC, the primary stock exchange or market on which our common stock is listed or
quoted (currently, the OTC Bulletin Board) or the NASD for a period of two consecutive trading
days, or (ii) our common stock ceases to be registered under the Exchange Act of 1934 or listed or
traded on
44
its principal market. The equity line of credit terminates when Dutchess has purchased an
aggregate of $10,000,000 of our common stock or September 15, 2009, whichever occurs first.
Under the investment agreement, we have agreed to file a registration statement, of which
this prospectus is a part, to register 7,000,000 shares of the common stock which could be issued
under the equity line of credit. However, depending upon the total amount of the equity line of
credit that we may wish to draw over the 36-month of the facility, and the price of our stock over
such period of time, we may issue more than the 7,000,000 shares being registered pursuant to this
registration statement. In such event, we would be obligated to suspend puts under the equity line
of credit while we prepare, file and seek to have declared effective a new registration statement
covering the additional number of shares above the 7,000,000 shares being registered hereunder.
Dutchess may not own more than 4.99% of our issued and outstanding stock at any one time.
Equity Line of Credit Registration Rights Agreement
Under the registration rights agreement, we agreed to file a registration statement, of
which this prospectus is a part, to register 7,000,000 shares of the common stock which could be
issued under the equity line of credit. We also agreed not to file any other registration
statement for other securities until 30 days after this registration statement becomes effective.
SELLING SECURITY HOLDERS
Selling Security Holders Table
The table below sets forth information concerning the resale of the shares of common stock by
the selling security holders. We will not receive any proceeds from the resale of the common stock
by the selling security holders.
The shares to be offered by the selling security holders:
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may be acquired in an amount up to an aggregate 7,000,000 shares of our common stock
at an assumed purchase price of $1.4162 per share (based on 97% of the closing price
of our common stock as quoted on the OTC Bulletin Board on September 20, 2006), under
our equity line of credit.
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The shares being registered hereunder and offered pursuant to this prospectus are restricted
securities under applicable federal and state securities laws and are being registered under the
Securities Act of 1933, as amended (the Securities Act), to give the selling security holders the
opportunity to sell these shares publicly. This prospectus is part of a registration statement on
Form SB-2 filed by us with the Securities and Exchange Commission under the Securities Act covering
the resale of such shares of our common stock from time to time by the selling security holders. No
estimate can be given as to the amount or percentage of our common stock that will be held by the
selling security holders after any sales made pursuant to this prospectus because the selling
security holders are not required to sell any of the shares being registered under this prospectus.
The following table assumes that the selling security holders will sell all of the shares listed in
this prospectus.
The following table sets forth the beneficial ownership of the selling security holders. The
term selling security holder or selling security holders includes the stockholders listed below
and their respective transferees, assignees, pledges, donees or other
successors. Beneficial ownership is determined in accordance with Rule 13d-3 of the Securities
and Exchange Act of 1934 and generally includes voting or investment power with respect to
securities. Shares of common stock subject to options, warrants and convertible securities
currently exercisable or convertible, or exercisable or convertible within 60 days are deemed
outstanding, including for purposes of computing the percentage ownership of the person holding the
option, warrant or convertible security, but not for purposes of computing the percentage of any
other holder.
45
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Beneficial Ownership Before Offering
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Beneficial Ownership
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Number of
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After Offering
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Number of
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Shares Being
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Number
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Name of Selling Security Holder
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Shares
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Percent(1)
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Offered
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of Shares
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Percent(1)(2)
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Dutchess
Private Equities Fund, L.P.(2)
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7,000,000
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17.79%
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7,000,000
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0
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*
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less than 1%.
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(1)
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Assumes 39,317,619 shares of common stock are outstanding immediately before and immediately after the offering.
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(2)
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Douglas Leighton and Michael Novelli are the managing members
of Dutchess Capital Management, LLC, which acts as general partner to
Dutchess Private Equities Fund, L.P.
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The information in the above table is as of the date of this prospectus. Information
concerning the selling security holders may change from time to time and any such changed
information will be described in supplements to this prospectus if and when necessary.
Relationships with Selling Security Holders
Spencer Clarke LLC is the Companys investment banker. They have been issued warrants for
investment banking services provided to us from time to time, including in connection with
offerings of our securities, which securities have previously been registered for resale by them
under a registration statement that has been declared effective by the SEC. Spencer Clarke LLC will
receive 8% of the gross proceeds of any drawdown under the equity line of credit with Dutchess,
payable by us in cash.
PLAN OF DISTRIBUTION
Each selling security holder of our common stock and any of their transferees, pledgees,
assignees, donees, and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on the stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or negotiated prices. A selling
security holder may use any one or more of the following methods when selling shares:
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ordinary brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
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block trades in which the broker-dealer will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction;
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purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
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an exchange distribution in accordance with the rules of the applicable exchange;
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privately negotiated transactions;
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broker-dealers may agree with the selling security holders to sell a specified number
of such shares at a stipulated price per share;
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a combination of any such methods of sale; or
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any other method permitted pursuant to applicable law.
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The selling security holders may also sell shares under Rule 144 under the Securities Act, if
available, rather than under this prospectus.
Broker-dealers engaged by the selling security holders may arrange for other brokers-dealers
to participate in sales. Broker-
46
dealers may receive commissions or discounts from the selling
security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the
purchaser) in amounts to be negotiated. Each selling security holder does not expect these
commissions and discounts relating to its sales of shares to exceed what is customary in the types
of transactions involved.
The selling security holders and any broker-dealers or agents that are involved in selling the
shares of common stock may be deemed to be underwriters within the meaning of the Securities Act
in connection with such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. Because selling security holders
may be deemed to be underwriters within the meaning of the Securities Act, they will be subject to
the prospectus delivery requirements of the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of common stock will be paid
by the selling security holder and/or the purchasers. Each selling security holder has represented
and warranted to our company that it acquired the securities subject to this registration statement
in the ordinary course of such selling security holders business and, at the time of its purchase
of such securities such selling security holder had no agreements or understandings, directly or
indirectly, with any person to distribute any such securities.
There is no underwriter or coordinating broker acting in connection with the proposed sale of
the resale shares by the selling security holders. We are required to pay certain fees and expenses
incurred by us incident to the registration of the shares. We have agreed to indemnify the selling
security holders against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
The selling security holders may from time to time pledge or grant a security interest in some
or all of the shares owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell shares of common stock from time to
time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act amending the list of selling security holders to include
the pledgee, transferee or other successors-in-interest as selling security holders under this
prospectus. Upon our company being notified in writing by a selling security holder that any
material arrangement has been entered into with a broker-dealer for the sale of common stock
through a block trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, a supplement to this prospectus will be filed, if required,
pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such selling
security holder and of the participating broker-dealer(s), (ii) the number of shares involved,
(iii) the price at which such the shares of common stock were sold, (iv) the commissions paid or
discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set out or
incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In
addition, upon our company being notified in writing by a selling security holder that a donee or
pledgee intends to sell more than 500 shares of common stock, a supplement to this prospectus will
be filed if then required in accordance with applicable securities law.
Under applicable rules and regulations under the Exchange Act, any person engaged in the
distribution of the resale shares may not simultaneously engage in market making activities with
respect to our common stock for a period of two business days prior to the commencement of the
distribution. In addition, the selling security holders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of our common stock by the selling security holders or
any other person. We will make copies of this prospectus available to the selling security holders
and have informed them of the need to deliver a copy of this prospectus to each purchaser at or
prior to the time of the sale.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our principal executive offices consist of leased space in North Hollywood, California. We
lease this space from KZG,
pursuant to a lease we originally entered into on October 16, 2003 and which expired on
October 16, 2005. We exercised an option to renew the lease, which renewal term was due to expire
on October 15, 2007. Through October 16, 2005, the rent was $3,400 per month for approximately
1,225 square feet, and for comprehensive office support services, including reception, parking and
conference facilities. During the extended lease term, the rent was $3,740 per month.
In connection with our need to acquire additional office space and expanded services as our
business activities grow, we entered into a new lease dated as of January 1, 2006 with KZG,
replacing the prior lease and the terms applicable under the extended term thereof. The new lease
is for a term of 19 months, expiring July 31, 2007. The new rent is $6,208 per month for
approximately 1,700 square feet of office space, and for additional common area use, expanded
office support services, including a computer
47
network, and additional parking spaces. We have the right to renew the lease for an additional
term of two years at a 10% increase over the then-current rent.
Thereafter, in July 2006, we acquired two additional offices comprising approximately 250
square feet, and additional parking spaces. We expect that the increase in the rent we pay to KZG
will be less than $1,000 per month; however, we have not concluded negotiations with KZG as to the
exact amount of the additional rent.
Bruce H. McKinnon, our President, Chief Operating Officer and a director, is an owner of KZG.
Management believes that the terms of the lease with KZG are no less favorable than what we would
have had to pay for equivalent space and comparable services with an unaffiliated party.
In December 2005, Eugene Eichler, the Companys Chief Executive Officer, loaned $45,000 to the
Company for working capital purposes. The loan was unsecured, bore interest at 6% per annum and was
due on demand. In February 2006, Mr. Eichler converted the loan into the Companys Bridge Notes,
which notes themselves were convertible into 64,286 shares of common stock at a conversion price of
$.70 per share, and, in addition, received warrants to purchase 96,429 shares of common stock at an
exercise price of $1.00 per share, as part of a private offering which we were conducting at that
time. Mr. Eichlers Bridge Notes were converted prior to the maturity of the Bridge Notes into
64,286 shares of common stock. The securities that were issued to Mr. Eichler upon both conversions
described above were issued to him on the same terms as the securities we issued to all other
investors during that private offering and upon the conversion of the Bridge Notes into shares of
common stock.
DESCRIPTION OF SECURITIES
We are presently authorized to issue 200,000,000 shares of $.001 par value common stock. As of
September 20, 2006, we had 39,317,619 shares of common stock issued and outstanding.
Common Stock
The holders of our common stock are entitled to equal dividends and distributions per share
with respect to the common stock when, as and if declared by the Board of Directors from funds
legally available therefor. No holder of any shares of common stock has a preemptive right to
subscribe for any of our securities, nor are any common shares subject to redemption or convertible
into other securities. Upon liquidation, dissolution or winding- up of our company, and after
payment of creditors, if any, the assets will be divided pro rata on a share-for-share basis among
the holders of the shares of common stock. All shares of common stock now outstanding are fully
paid, validly issued and non-assessable. Each share of our common stock is entitled to one vote
with respect to the election of any director or any other matter upon which stockholders are
required or permitted to vote.
Stock Purchase Warrants
Bridge Warrants
The Bridge Warrants which may be exercised for shares of our common stock entitle the holder
to purchase the stated number of shares of our common stock at an exercise price of $1.00 per
share, subject to adjustment in the event of stock splits, stock dividends, reclassifications or
other similar transactions. These warrants are exercisable until 5 p.m. Eastern time on the second
anniversary of the date of their issuance.
These Warrants may be exercised by surrendering the warrant certificates evidencing the
warrants to be exercised with the accompanying form of election to purchase, together with payment
of the aggregate exercise price in cash.
The holders of these warrants have no right to vote on matters submitted to our stockholders
and have no right to receive any dividends which may be declared on our Common Stock. The holders
of these warrants will not be entitled to share in our assets in the event of liquidation,
dissolution or the winding up of the Company. If a bankruptcy or reorganization is commenced by or
against the Company, a bankruptcy court may hold that any of these unexercised warrants are
executory contracts which may be subject to rejection by us, and the holders of these warrants may,
even if sufficient funds are available, receive nothing or less than they would have been entitled
to if they had exercised their warrants prior to the commencement of any bankruptcy case.
48
PIPE Warrants
The PIPE Warrants which may be exercised for shares of our common stock entitle the holder to
purchase the stated number of shares of our common stock at an exercise price of $2.70 per share,
subject to adjustment in the event of stock splits, stock dividends, reclassifications or other
similar transactions. These warrants are exercisable until 5 p.m. California time on May 24, 2009.
These warrants may be exercised by surrendering the warrant certificates evidencing the
warrants to be exercised with the accompanying form of election to purchase, together with payment
of the aggregate exercise price in cash.
The holders of these warrants have no right to vote on matters submitted to our stockholders
and have no right to receive any dividends which may be declared on our Common Stock. The holders
of these warrants will not be entitled to share in our assets in the event of liquidation,
dissolution or the winding up of the Company. If a bankruptcy or reorganization is commenced by or
against the Company, a bankruptcy court may hold that any of these unexercised warrants are
executory contracts which may be subject to rejection by us, and the holders of these warrants may,
even if sufficient funds are available, receive nothing or less than they would have been entitled
to if they had exercised their warrants prior to the commencement of any bankruptcy case.
Shares Eligible For Future Sale
As of September 20, 2006, we had 39,317,619 shares of common stock outstanding. That number
does not include (i) 7,328,299 shares that are reserved for issuance under outstanding options and
that may be issued if and when the options are exercised, (ii) 21,358,517 shares that are reserved
for issuance under warrants and that may be issued if and when such warrants are exercised
(3,034,580 of these shares underlying warrants have previously been registered pursuant to a
registration statement that has been declared effective by the SEC) and (iii) 2,921,701 shares that
are reserved for issuance in connection with options that may be granted under the 2004 Plan.
Freely Tradeable Shares After Offering.
As of September 20, 2006, 31,407,874 of our
39,317,619 outstanding shares of common stock were freely trading shares. Upon the sale of all the
shares covered by this prospectus, an additional 7,000,000 shares will be freely tradable without
restriction or limitation under the Securities Act. Assuming the issuance of all the shares to
Dutchess being registered hereunder, after the completion of this
offering there will be 46,317,619
shares of common stock outstanding, of which 38,407,874 shares will be tradable without restriction
under the Securities Act.
Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted securities shares for at least one
year, including persons who may be deemed our affiliates, as that term is defined under the
Securities Act, would be entitled to sell within any three month period a number of shares that
does not exceed the greater of 1% of the then outstanding shares (approximately 393,176 shares if
the currently outstanding warrants and options are not exercised and the Investor Notes are not
converted, or approximately 680,044 shares if all options and warrants are exercised and all
Investor Notes are converted) or the average weekly trading volume of shares during the four
calendar weeks preceding such sale. Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public information about the
company. A person who has not been our affiliate at any time during the three months preceding a
sale, and who has beneficially owned his shares for at least two years, would be entitled under
Rule 144(k) to sell such shares without regard to any volume limitations under Rule 144.
Form S-8 Registration of Options.
On September 1, 2006, we filed a registration statement on
Form S-8 covering the 7,000,000 shares of our common stock that have been reserved for issuance
under our 2004 Plan, which permits the resale of such shares in the public marketplace. None of
such options have been exercised and none of such shares have been issued to date.
Transfer Agent
Our transfer agent is Nevada Agency and Trust Company, in Reno, Nevada.
EXPERTS
The financial statements for the years ended December 31, 2005 and 2004 included in this
prospectus have been audited by Weinberg & Co., P.A. to the extent and for the periods indicated in
their report thereon. Such financial statements have been included in this prospectus and
registration statement in reliance upon the report of Weinberg & Co., P.A. and upon the authority
of such firm as experts in auditing and accounting.
49
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation provide that no officer or director shall be personally liable
to us or our stockholders for monetary damages except as provided pursuant to Nevada Revised
Statutes. Our bylaws and Articles of Incorporation also provide that we will indemnify and hold
harmless each person who serves at any time as a director, officer, employee or agent of us from
and against any and all claims, judgments and liabilities to which such person shall become subject
by reason of the fact that he is or was a director, officer, employee or agent of us, and shall
reimburse such person for all legal and other expenses reasonably incurred by him or her in
connection with any such claim or liability. We also have the power to defend such person from all
suits or claims in accordance with the Nevada Revised Statutes. The rights accruing to any person
under our bylaws and Articles of Incorporation do not exclude any other right to which any such
person may lawfully be entitled, and we may indemnify or reimburse such person in any proper case,
even though not specifically provided for by the bylaws and Articles of Incorporation.
In the employment agreements that we entered into with Messrs. Eichler, McKinnon and Bautista,
we have agreed to indemnify each such employee for all claims arising out of performance of his
duties as CEO, President and Executive Vice President of Operations, respectively, other than those
arising out of each such persons gross negligence, recklessness or willful misconduct, to the
fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to directors, officers and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer for expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
LEGAL MATTERS
SEC Law Firm, Los Angeles, California has rendered an opinion with respect to the validity of
the shares of common stock covered by this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form
SB-2 under the Securities Act for the common stock offered under this prospectus. We are subject to
the informational requirements of the Exchange Act, and file annual and current reports, proxy
statements and other information with the Commission. These reports, proxy statements and other
information filed by Save the World air, Inc. can be read and copied at the Commissions Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission also maintains a website that contains reports,
proxy statements, information statements and other information concerning Save the World Air, Inc.
located at http://www.sec.gov. This prospectus does not contain all the information required to be
in the registration statement (including the exhibits), which we have filed with the Commission
under the Securities Act and to which reference is made in this prospectus.
50
INDEX TO FINANCIAL STATEMENTS
SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Save the World Air, Inc.
We have audited the accompanying balance sheets of Save the World Air, Inc. (a development stage
enterprise) as of December 31, 2005 and 2004 and the related statements of operations, changes in
stockholders deficiency and cash flows for the years then ended and for the period from inception
(February 18, 1998) to December 31, 2005. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Save the World Air, Inc. (a development stage enterprise) as of
December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then
ended and for the period from inception (February 18, 1998) to December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the financial statements, the Company had a net loss of
$3,115,186 and a negative cash flow from operations of $2,567,178 for the year ended December 31,
2005, and had a working capital deficiency of $1,708,049 and a stockholders deficiency of
$1,408,175 as of December 31, 2005. These factors raise substantial doubt about its ability to
continue as a going concern. Managements plans concerning this matter are also described in Note
2. The accompanying financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ WEINBERG & COMPANY, P.A.
WEINBERG & COMPANY, P.A.
March 22, 2006
Los Angeles, California
52
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2005 AND JUNE 30, 2006 (UNAUDITED)
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|
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December 31,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
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(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
84,826
|
|
|
$
|
279,821
|
|
|
$
|
1,628,517
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
3,719
|
|
Other current assets
|
|
|
2,602
|
|
|
|
9,009
|
|
|
|
122,588
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
87,428
|
|
|
|
288,830
|
|
|
|
1,754,824
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net of accumulated depreciation
|
|
|
35,596
|
|
|
|
295,374
|
|
|
|
367,272
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123,024
|
|
|
$
|
588,704
|
|
|
$
|
2,126,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
64,089
|
|
|
$
|
155,456
|
|
|
$
|
117,942
|
|
Accrued expenses
|
|
|
84,420
|
|
|
|
179,461
|
|
|
|
178,582
|
|
Accrued research and development fees
|
|
|
50,000
|
|
|
|
680,000
|
|
|
|
495,000
|
|
Accrued professional fees
|
|
|
876,452
|
|
|
|
450,555
|
|
|
|
501,732
|
|
Payable to shareholder
|
|
|
|
|
|
|
45,000
|
|
|
|
|
|
Payable to related parties
|
|
|
36,478
|
|
|
|
158,732
|
|
|
|
|
|
Finders fees payable
|
|
|
1,521
|
|
|
|
8,916
|
|
|
|
4,666
|
|
Convertible debentures, net
|
|
|
|
|
|
|
318,759
|
|
|
|
983,863
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,112,960
|
|
|
|
1,996,879
|
|
|
|
2,281,785
|
|
|
|
|
|
|
|
|
|
|
|
Advances from founding executive officer
|
|
|
1,017,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value: 200,000,000 shares
authorized, 37,784,821, 31,387,418, and 37,360,368
(unaudited) shares issued and outstanding at December
31, 2004 and 2005 and June 30, 2006, respectively
|
|
|
37,784
|
|
|
|
31,387
|
|
|
|
37,360
|
|
Common stock to be issued
|
|
|
119,000
|
|
|
|
612,521
|
|
|
|
47,722
|
|
Additional paid-in capital
|
|
|
15,043,028
|
|
|
|
18,336,178
|
|
|
|
25,996,133
|
|
Deferred compensation
|
|
|
(76,068
|
)
|
|
|
(142,187
|
)
|
|
|
|
|
Deficit accumulated during the development stage
|
|
|
(17,130,888
|
)
|
|
|
(20,246,074
|
)
|
|
|
(26,236,404
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficiency
|
|
|
(2,007,144
|
)
|
|
|
(1,408,175
|
)
|
|
|
(155,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
123,024
|
|
|
$
|
588,704
|
|
|
$
|
2,126,596
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
53
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2005 AND SIX AND THREE MONTHS
ENDED JUNE 30, 2005 AND 2006 (UNAUDITED) AND FOR THE PERIOD FROM
INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
|
Since
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net sales
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating expenses
|
|
|
3,319,901
|
|
|
|
2,631,082
|
|
|
|
1,244,905
|
|
|
|
3,607,840
|
|
|
|
583,310
|
|
|
|
1,852,870
|
|
|
|
19,098,589
|
|
Research and development expenses
|
|
|
1,873,464
|
|
|
|
1,150,361
|
|
|
|
592,122
|
|
|
|
178,873
|
|
|
|
190,637
|
|
|
|
121,111
|
|
|
|
3,982,460
|
|
Non-cash patent settlement cost
|
|
|
1,610,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,610,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other income
|
|
|
(6,803,431
|
)
|
|
|
(3,781,443
|
)
|
|
|
(1,837,027
|
)
|
|
|
(3,786,713
|
)
|
|
|
(773,947
|
)
|
|
|
(1,973,981
|
)
|
|
|
(24,691,115
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
125
|
|
|
|
125
|
|
Interest income
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
6,976
|
|
|
|
|
|
|
|
6,976
|
|
|
|
7,930
|
|
Interest expense
|
|
|
(3,129
|
)
|
|
|
(348,964
|
)
|
|
|
(570
|
)
|
|
|
(2,209,918
|
)
|
|
|
(570
|
)
|
|
|
(1,025,345
|
)
|
|
|
(2,564,583
|
)
|
Settlement of litigation and debt
|
|
|
|
|
|
|
1,017,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,017,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income
taxes
|
|
|
(6,806,046
|
)
|
|
|
(3,113,199
|
)
|
|
|
(1,837,597
|
)
|
|
|
(5,989,530
|
)
|
|
|
(774,517
|
)
|
|
|
(2,992,225
|
)
|
|
|
(26,230,435
|
)
|
Provision (benefit) for income
taxes
|
|
|
(2,766
|
)
|
|
|
1,987
|
|
|
|
1,976
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
5,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,803,280
|
)
|
|
$
|
(3,115,186
|
)
|
|
$
|
(1,839,573
|
)
|
|
$
|
(5,990,330
|
)
|
|
$
|
(774,517
|
)
|
|
$
|
(2,992,225
|
)
|
|
$
|
(26,236,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding, basic and diluted
|
|
|
35,841,225
|
|
|
|
38,248,575
|
|
|
|
38,283,771
|
|
|
|
32,816,890
|
|
|
|
38,528,563
|
|
|
|
33,661,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
54
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2005
AND SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
Development
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Stage Deficiency
|
|
|
|
(Unaudited)
|
|
Balance, February 18,
1998
(date of inception)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Issuance of common stock
on April 18, 1998
|
|
|
.0015 .01
|
|
|
|
10,030,000
|
|
|
|
10,030
|
|
|
|
|
|
|
|
14,270
|
|
|
|
|
|
|
|
|
|
|
|
24,300
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,307
|
)
|
|
|
(21,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 1998
|
|
|
|
|
|
|
10,030,000
|
|
|
|
10,030
|
|
|
|
|
|
|
|
14,270
|
|
|
|
|
|
|
|
(21,307
|
)
|
|
|
2,993
|
|
Issuance of common stock
on May 18, 1999
|
|
|
1.00 6.40
|
|
|
|
198,003
|
|
|
|
198
|
|
|
|
|
|
|
|
516,738
|
|
|
|
|
|
|
|
|
|
|
|
516,936
|
|
Issuance of common stock
for ZEFS on September 14,
1999
|
|
|
.001
|
|
|
|
5,000,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Stock issued for
professional services on
May 18, 1999
|
|
|
0.88
|
|
|
|
69,122
|
|
|
|
69
|
|
|
|
|
|
|
|
49,444
|
|
|
|
|
|
|
|
|
|
|
|
49,513
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,075,264
|
)
|
|
|
(1,075,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 1999
|
|
|
|
|
|
|
15,297,125
|
|
|
|
15,297
|
|
|
|
|
|
|
|
580,452
|
|
|
|
|
|
|
|
(1,096,571
|
)
|
|
|
(500,822
|
)
|
Stock issued for employee
compensation on February
8, 2000
|
|
|
1.03
|
|
|
|
20,000
|
|
|
|
20
|
|
|
|
|
|
|
|
20,580
|
|
|
|
|
|
|
|
|
|
|
|
20,600
|
|
Stock issued for
consulting services on
February 8, 2000
|
|
|
1.03
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
|
|
|
|
102,900
|
|
|
|
|
|
|
|
|
|
|
|
103,000
|
|
Stock issued for
professional services on
April 18, 2000
|
|
|
3.38
|
|
|
|
27,000
|
|
|
|
27
|
|
|
|
|
|
|
|
91,233
|
|
|
|
|
|
|
|
|
|
|
|
91,260
|
|
Stock issued for
directors fees on April
18, 2000
|
|
|
3.38
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
|
|
|
|
168,950
|
|
|
|
|
|
|
|
|
|
|
|
169,000
|
|
Stock issued for
professional services on
May 19, 2000
|
|
|
4.06
|
|
|
|
5,000
|
|
|
|
5
|
|
|
|
|
|
|
|
20,295
|
|
|
|
|
|
|
|
|
|
|
|
20,300
|
|
Stock issued for
directors fees on June
20, 2000
|
|
|
4.44
|
|
|
|
6,000
|
|
|
|
6
|
|
|
|
|
|
|
|
26,634
|
|
|
|
|
|
|
|
|
|
|
|
26,640
|
|
Stock issued for
professional services on
June 20, 2000
|
|
|
4.44
|
|
|
|
1,633
|
|
|
|
2
|
|
|
|
|
|
|
|
7,249
|
|
|
|
|
|
|
|
|
|
|
|
7,251
|
|
Stock issued for
professional services on
June 26, 2000
|
|
|
5.31
|
|
|
|
1,257
|
|
|
|
1
|
|
|
|
|
|
|
|
6,674
|
|
|
|
|
|
|
|
|
|
|
|
6,675
|
|
Stock issued for employee
compensation on June 26,
2000
|
|
|
5.31
|
|
|
|
22,000
|
|
|
|
22
|
|
|
|
|
|
|
|
116,798
|
|
|
|
|
|
|
|
|
|
|
|
116,820
|
|
Stock issued for
consulting services on
June 26, 2000
|
|
|
5.31
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
52,203
|
|
|
|
|
|
|
|
|
|
|
|
52,213
|
|
Stock issued for
promotional services on
July 28, 2000
|
|
|
4.88
|
|
|
|
9,675
|
|
|
|
9
|
|
|
|
|
|
|
|
47,205
|
|
|
|
|
|
|
|
|
|
|
|
47,214
|
|
Stock issued for
consulting services on
July 28, 2000
|
|
|
4.88
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
47,975
|
|
|
|
|
|
|
|
|
|
|
|
47,985
|
|
Stock issued for
consulting services on
August 4, 2000
|
|
|
2.13
|
|
|
|
35,033
|
|
|
|
35
|
|
|
|
|
|
|
|
74,585
|
|
|
|
|
|
|
|
|
|
|
|
74,620
|
|
Stock issued for
promotional services on
August 16, 2000
|
|
|
2.25
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
56,225
|
|
|
|
|
|
|
|
|
|
|
|
56,250
|
|
Stock issued for
consulting services on
September 5, 2000
|
|
|
2.25
|
|
|
|
12,833
|
|
|
|
13
|
|
|
|
|
|
|
|
28,861
|
|
|
|
|
|
|
|
|
|
|
|
28,874
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
Development
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Stage Deficiency
|
|
|
|
(Unaudited)
|
|
Stock issued for
consulting services on
September 10, 2000
|
|
|
1.50
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
14,740
|
|
|
|
|
|
|
|
|
|
|
|
14,750
|
|
Stock issued for
consulting services on
November 2, 2000
|
|
|
0.88
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
8,643
|
|
|
|
|
|
|
|
|
|
|
|
8,653
|
|
Stock issued for
consulting services on
November 4, 2000
|
|
|
0.88
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
8,643
|
|
|
|
|
|
|
|
|
|
|
|
8,653
|
|
Stock issued for
consulting services on
December 20, 2000
|
|
|
0.50
|
|
|
|
19,082
|
|
|
|
19
|
|
|
|
|
|
|
|
9,522
|
|
|
|
|
|
|
|
|
|
|
|
9,541
|
|
Stock issued for filing
services on December 20,
2000
|
|
|
0.50
|
|
|
|
5,172
|
|
|
|
5
|
|
|
|
|
|
|
|
2,581
|
|
|
|
|
|
|
|
|
|
|
|
2,586
|
|
Stock issued for
professional services on
December 26, 2000
|
|
|
0.38
|
|
|
|
12,960
|
|
|
|
13
|
|
|
|
|
|
|
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
4,925
|
|
Other stock issuance on
August 24, 2000
|
|
|
2.13
|
|
|
|
2,000
|
|
|
|
2
|
|
|
|
|
|
|
|
4,258
|
|
|
|
|
|
|
|
|
|
|
|
4,260
|
|
Common shares cancelled
|
|
|
|
|
|
|
(55,000
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
(64,245
|
)
|
|
|
|
|
|
|
|
|
|
|
(64,300
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,270,762
|
)
|
|
|
(1,270,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2000
|
|
|
|
|
|
|
15,645,935
|
|
|
|
15,646
|
|
|
|
|
|
|
|
1,437,873
|
|
|
|
|
|
|
|
(2,367,333
|
)
|
|
|
(913,814
|
)
|
Stock issued for
consulting services on
January 8, 2001
|
|
|
0.31
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
3,038
|
|
|
|
|
|
|
|
|
|
|
|
3,048
|
|
Stock issued for
consulting services on
February 1, 2001
|
|
|
0.33
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
|
3,245
|
|
Stock issued for
consulting services on
March 1, 2001
|
|
|
0.28
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
2,753
|
|
Stock issued for legal
services on March 13,
2001
|
|
|
0.32
|
|
|
|
150,000
|
|
|
|
150
|
|
|
|
|
|
|
|
47,850
|
|
|
|
|
|
|
|
|
|
|
|
48,000
|
|
Stock issued for
consulting services on
April 3, 2001
|
|
|
0.25
|
|
|
|
9,833
|
|
|
|
10
|
|
|
|
|
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
|
2,458
|
|
Stock issued for legal
services on April 4, 2001
|
|
|
0.25
|
|
|
|
30,918
|
|
|
|
31
|
|
|
|
|
|
|
|
7,699
|
|
|
|
|
|
|
|
|
|
|
|
7,730
|
|
Stock issued for
professional services on
April 4, 2001
|
|
|
0.25
|
|
|
|
7,040
|
|
|
|
7
|
|
|
|
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
1,760
|
|
Stock issued for
consulting services on
April 5, 2001
|
|
|
0.25
|
|
|
|
132,600
|
|
|
|
132
|
|
|
|
|
|
|
|
33,018
|
|
|
|
|
|
|
|
|
|
|
|
33,150
|
|
Stock issued for filing
fees on April 30, 2001
|
|
|
1.65
|
|
|
|
1,233
|
|
|
|
1
|
|
|
|
|
|
|
|
2,033
|
|
|
|
|
|
|
|
|
|
|
|
2,034
|
|
Stock issued for filing
fees on September 19,
2001
|
|
|
0.85
|
|
|
|
2,678
|
|
|
|
2
|
|
|
|
|
|
|
|
2,274
|
|
|
|
|
|
|
|
|
|
|
|
2,276
|
|
Stock issued for
professional services on
September 28, 2001
|
|
|
0.62
|
|
|
|
150,000
|
|
|
|
150
|
|
|
|
|
|
|
|
92,850
|
|
|
|
|
|
|
|
|
|
|
|
93,000
|
|
Stock issued for
directors services on
October 5, 2001
|
|
|
0.60
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
|
|
|
|
59,900
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
Stock issued for legal
services on October 17,
2001
|
|
|
0.60
|
|
|
|
11,111
|
|
|
|
11
|
|
|
|
|
|
|
|
6,655
|
|
|
|
|
|
|
|
|
|
|
|
6,666
|
|
Stock issued for
consulting services on
October 18, 2001
|
|
|
0.95
|
|
|
|
400,000
|
|
|
|
400
|
|
|
|
|
|
|
|
379,600
|
|
|
|
|
|
|
|
|
|
|
|
380,000
|
|
Stock issued for
consulting services on
October 19, 2001
|
|
|
1.25
|
|
|
|
150,000
|
|
|
|
150
|
|
|
|
|
|
|
|
187,350
|
|
|
|
|
|
|
|
|
|
|
|
187,500
|
|
Stock issued for exhibit
fees on October 22, 2001
|
|
|
1.35
|
|
|
|
5,000
|
|
|
|
6
|
|
|
|
|
|
|
|
6,745
|
|
|
|
|
|
|
|
|
|
|
|
6,751
|
|
Stock issued for directors
|
|
|
0.95
|
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
949,000
|
|
|
|
|
|
|
|
|
|
|
|
950,000
|
|
Stock issued for
consulting services on
November 7, 2001
|
|
|
0.85
|
|
|
|
20,000
|
|
|
|
20
|
|
|
|
|
|
|
|
16,980
|
|
|
|
|
|
|
|
|
|
|
|
17,000
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
Development
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Stage Deficiency
|
|
|
|
(Unaudited)
|
|
Stock issued for
consulting services on
November 20, 2001
|
|
|
0.98
|
|
|
|
43,000
|
|
|
|
43
|
|
|
|
|
|
|
|
42,097
|
|
|
|
|
|
|
|
|
|
|
|
42,140
|
|
Stock issued for
consulting services on
November 27, 2001
|
|
|
0.98
|
|
|
|
10,000
|
|
|
|
10
|
|
|
|
|
|
|
|
9,790
|
|
|
|
|
|
|
|
|
|
|
|
9,800
|
|
Stock issued for
consulting services on
November 28, 2001
|
|
|
0.98
|
|
|
|
187,000
|
|
|
|
187
|
|
|
|
|
|
|
|
183,073
|
|
|
|
|
|
|
|
|
|
|
|
183,260
|
|
Intrinsic value of
options issued to
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,600,000
|
|
|
|
(2,600,000
|
)
|
|
|
|
|
|
|
|
|
Fair value of options
issued to non-employees
for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,318
|
|
|
|
|
|
|
|
|
|
|
|
142,318
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,667
|
|
|
|
|
|
|
|
191,667
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,735,013
|
)
|
|
|
(2,735,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2001
|
|
|
|
|
|
|
18,085,847
|
|
|
|
18,086
|
|
|
|
|
|
|
|
6,220,322
|
|
|
|
(2,408,333
|
)
|
|
|
(5,102,346
|
)
|
|
|
(1,272,271
|
)
|
Stock issued for
directors services on
December 10, 2002
|
|
|
0.40
|
|
|
|
2,150,000
|
|
|
|
2,150
|
|
|
|
|
|
|
|
857,850
|
|
|
|
|
|
|
|
|
|
|
|
860,000
|
|
Common stock paid for,
but not issued (2,305,000
shares)
|
|
|
0.15-0.25
|
|
|
|
|
|
|
|
|
|
|
|
389,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389,875
|
|
Fair value of options
issued to non-employees
for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,909
|
|
|
|
(54,909
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
891,182
|
|
|
|
|
|
|
|
891,182
|
|
Net loss for the year
ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,749,199
|
)
|
|
|
(2,749,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
|
|
|
|
20,235,847
|
|
|
|
20,236
|
|
|
|
389,875
|
|
|
|
7,133,081
|
|
|
|
(1,572,060
|
)
|
|
|
(7,851,545
|
)
|
|
|
(1,880,413
|
)
|
Common stock issued,
previously paid for
|
|
|
0.15
|
|
|
|
1,425,000
|
|
|
|
1,425
|
|
|
|
(213,750
|
)
|
|
|
212,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued,
previously paid for
|
|
|
0.25
|
|
|
|
880,000
|
|
|
|
880
|
|
|
|
(220,000
|
)
|
|
|
219,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for cash on
March 20, 2003
|
|
|
0.25
|
|
|
|
670,000
|
|
|
|
670
|
|
|
|
|
|
|
|
166,830
|
|
|
|
|
|
|
|
|
|
|
|
167,500
|
|
Stock issued for cash on
April 4, 2003
|
|
|
0.25
|
|
|
|
900,000
|
|
|
|
900
|
|
|
|
|
|
|
|
224,062
|
|
|
|
|
|
|
|
|
|
|
|
224,962
|
|
Stock issued for cash on
April 8, 2003
|
|
|
0.25
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
|
|
|
|
24,900
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued for cash on
May 8, 2003
|
|
|
0.25
|
|
|
|
1,150,000
|
|
|
|
1,150
|
|
|
|
|
|
|
|
286,330
|
|
|
|
|
|
|
|
|
|
|
|
287,480
|
|
Stock issued for cash on
June 16, 2003
|
|
|
0.25
|
|
|
|
475,000
|
|
|
|
475
|
|
|
|
|
|
|
|
118,275
|
|
|
|
|
|
|
|
|
|
|
|
118,750
|
|
Stock issued for legal
services on June 27, 2003
|
|
|
0.55
|
|
|
|
83,414
|
|
|
|
83
|
|
|
|
|
|
|
|
45,794
|
|
|
|
|
|
|
|
|
|
|
|
45,877
|
|
Debt converted to stock
on June 27, 2003
|
|
|
0.25
|
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
498,000
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Stock and warrants issued
for cash on July 11, 2003
|
|
|
0.25
|
|
|
|
519,000
|
|
|
|
519
|
|
|
|
|
|
|
|
129,231
|
|
|
|
|
|
|
|
|
|
|
|
129,750
|
|
Stock and warrants issued
for cash on September 29,
2003
|
|
|
0.25
|
|
|
|
1,775,000
|
|
|
|
1,775
|
|
|
|
|
|
|
|
441,976
|
|
|
|
|
|
|
|
|
|
|
|
443,751
|
|
Stock and warrants issued
for cash on October 21,
2003
|
|
|
0.25
|
|
|
|
1,845,000
|
|
|
|
1,845
|
|
|
|
|
|
|
|
459,405
|
|
|
|
|
|
|
|
|
|
|
|
461,250
|
|
Stock and warrants issued
for cash on October 28,
2003
|
|
|
0.25
|
|
|
|
1,570,000
|
|
|
|
1,570
|
|
|
|
|
|
|
|
390,930
|
|
|
|
|
|
|
|
|
|
|
|
392,500
|
|
Stock and warrants issued
for cash on November 19,
2003
|
|
|
0.25
|
|
|
|
500,000
|
|
|
|
500
|
|
|
|
|
|
|
|
124,500
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
Development
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Stage Deficiency
|
|
|
|
(Unaudited)
|
|
Finders fees related to
stock issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,875
|
|
|
|
(312,582
|
)
|
|
|
|
|
|
|
|
|
|
|
(268,707
|
)
|
Common stock paid for,
but not issued (25,000
shares)
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
6,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,250
|
|
Amortization of deferred
comp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
863,727
|
|
|
|
|
|
|
|
863,727
|
|
Net loss for year ended
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,476,063
|
)
|
|
|
(2,476,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
|
|
|
|
34,128,261
|
|
|
|
34,128
|
|
|
|
6,250
|
|
|
|
10,162,177
|
|
|
|
(708,333
|
)
|
|
|
(10,327,608
|
)
|
|
|
(833,386
|
)
|
Common stock issued,
previously paid for
|
|
|
0.25
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
(6,250
|
)
|
|
|
6,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for director
services on March 31,
2004
|
|
|
1.50
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
|
|
|
|
74,950
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Stock issued for finders
fees on March 31, 2004
|
|
|
0.15
|
|
|
|
82,500
|
|
|
|
82
|
|
|
|
|
|
|
|
12,293
|
|
|
|
|
|
|
|
|
|
|
|
12,375
|
|
Stock issued for finders
fees on March 31, 2004
|
|
|
0.25
|
|
|
|
406,060
|
|
|
|
407
|
|
|
|
|
|
|
|
101,199
|
|
|
|
|
|
|
|
|
|
|
|
101,606
|
|
Stock issued for services
on April 2, 2004
|
|
|
1.53
|
|
|
|
65,000
|
|
|
|
65
|
|
|
|
|
|
|
|
99,385
|
|
|
|
|
|
|
|
|
|
|
|
99,450
|
|
Debt converted to stock
on April 2, 2004
|
|
|
1.53
|
|
|
|
60,000
|
|
|
|
60
|
|
|
|
|
|
|
|
91,740
|
|
|
|
|
|
|
|
|
|
|
|
91,800
|
|
Stock issued upon
exercise of warrants on
May 21, 2004
|
|
|
0.20
|
|
|
|
950,000
|
|
|
|
950
|
|
|
|
|
|
|
|
189,050
|
|
|
|
|
|
|
|
|
|
|
|
190,000
|
|
Stock issued for
directors services on
June 8, 2004
|
|
|
1.70
|
|
|
|
600,000
|
|
|
|
600
|
|
|
|
|
|
|
|
1,019,400
|
|
|
|
|
|
|
|
|
|
|
|
1,020,000
|
|
Stock issued for cash on
August 25, 2004
|
|
|
1.00
|
|
|
|
550,000
|
|
|
|
550
|
|
|
|
|
|
|
|
549,450
|
|
|
|
|
|
|
|
|
|
|
|
550,000
|
|
Stock issued upon
exercise of options on
August 30, 2004
|
|
|
0.40
|
|
|
|
4,000
|
|
|
|
4
|
|
|
|
|
|
|
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
1,600
|
|
Stock issued for cash on
September 8, 2004
|
|
|
1.00
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
24,975
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued for
consulting services on
September 15, 2004
|
|
|
1.31
|
|
|
|
50,000
|
|
|
|
49
|
|
|
|
|
|
|
|
65,451
|
|
|
|
|
|
|
|
|
|
|
|
65,500
|
|
Stock issued for patent
settlement on September
22, 2004
|
|
|
1.24
|
|
|
|
20,000
|
|
|
|
20
|
|
|
|
|
|
|
|
24,780
|
|
|
|
|
|
|
|
|
|
|
|
24,800
|
|
Stock issued for research
and development on
October 6, 2004
|
|
|
1.40
|
|
|
|
65,000
|
|
|
|
65
|
|
|
|
|
|
|
|
90,935
|
|
|
|
|
|
|
|
|
|
|
|
91,000
|
|
Stock issued for cash on
October 6, 2004
|
|
|
1.00
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
24,975
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued for cash on
October 15, 2004
|
|
|
1.00
|
|
|
|
150,000
|
|
|
|
150
|
|
|
|
|
|
|
|
149,850
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Stock issued upon
exercise of stock options
on October 21, 2004
|
|
|
0.40
|
|
|
|
6,500
|
|
|
|
6
|
|
|
|
|
|
|
|
2,594
|
|
|
|
|
|
|
|
|
|
|
|
2,600
|
|
Stock issued for cash on
November 3, 2004
|
|
|
1.00
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
24,975
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued for cash on
November 18, 2004
|
|
|
1.00
|
|
|
|
172,500
|
|
|
|
173
|
|
|
|
|
|
|
|
172,327
|
|
|
|
|
|
|
|
|
|
|
|
172,500
|
|
Stock issued for cash on
December 9, 2004
|
|
|
1.00
|
|
|
|
75,000
|
|
|
|
75
|
|
|
|
|
|
|
|
74,925
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Stock issued for cash on
December 23, 2004
|
|
|
1.00
|
|
|
|
250,000
|
|
|
|
250
|
|
|
|
|
|
|
|
249,750
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
Finders fees related to
stock issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,384
|
)
|
|
|
|
|
|
|
|
|
|
|
(88,384
|
)
|
Common stock paid for,
but not issued (119,000
shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,000
|
|
Intrinsic value of
options issued to
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248,891
|
|
|
|
(248,891
|
)
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
Development
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Stage Deficiency
|
|
|
|
(Unaudited)
|
|
Fair value of options
issued to non-employees
for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,381
|
|
|
|
(55,381
|
)
|
|
|
|
|
|
|
|
|
Fair value of warrants
issued for settlement
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,585,266
|
|
|
|
|
|
|
|
|
|
|
|
1,585,266
|
|
Fair value of warrants
issued to non-employees
for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,872
|
|
|
|
|
|
|
|
|
|
|
|
28,872
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936,537
|
|
|
|
|
|
|
|
936,537
|
|
Net loss for year ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,803,280
|
)
|
|
|
(6,803,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
|
|
|
|
37,784,821
|
|
|
|
37,784
|
|
|
|
119,000
|
|
|
|
15,043,028
|
|
|
|
(76,068
|
)
|
|
|
(17,130,888
|
)
|
|
|
(2,007,144
|
)
|
Common stock issued,
previously paid for
|
|
|
1.00
|
|
|
|
69,000
|
|
|
|
69
|
|
|
|
(69,000
|
)
|
|
|
68,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon
exercise of warrants,
previously paid for
|
|
|
1.00
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
(50,000
|
)
|
|
|
49,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for cash on
January 20, 2005
|
|
|
1.00
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
24,975
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued upon
exercise of warrants on
January 31, 2005
|
|
|
0.40
|
|
|
|
500
|
|
|
|
1
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Stock issued for cash on
February 17, 2005
|
|
|
1.00
|
|
|
|
325,000
|
|
|
|
325
|
|
|
|
|
|
|
|
324,675
|
|
|
|
|
|
|
|
|
|
|
|
325,000
|
|
Stock issued for cash on
March 31, 2005
|
|
|
1.00
|
|
|
|
215,000
|
|
|
|
215
|
|
|
|
|
|
|
|
214,785
|
|
|
|
|
|
|
|
|
|
|
|
215,000
|
|
Stock issued for cash on
May 17, 2005
|
|
|
1.00
|
|
|
|
5,000
|
|
|
|
5
|
|
|
|
|
|
|
|
4,995
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Stock issued for cash on
June 7, 2005
|
|
|
1.00
|
|
|
|
300,000
|
|
|
|
300
|
|
|
|
|
|
|
|
299,700
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
Stock issued for cash on
August 5, 2005
|
|
|
1.00
|
|
|
|
480,500
|
|
|
|
480
|
|
|
|
|
|
|
|
480,020
|
|
|
|
|
|
|
|
|
|
|
|
480,500
|
|
Stock issued for cash on
August 9, 2005
|
|
|
1.00
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
|
|
|
|
99,900
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Stock issued for cash on
October 27, 2005
|
|
|
1.00
|
|
|
|
80,000
|
|
|
|
80
|
|
|
|
|
|
|
|
79,920
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
Common stock cancelled on
December 7, 2005
|
|
Various
|
|
|
(8,047,403
|
)
|
|
|
(8,047
|
)
|
|
|
|
|
|
|
8,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for
settlement of payables on
December 21, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,092
|
|
Stock issued for
settlement of payables on
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,429
|
|
Finders fees related to
stock issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(109,840
|
)
|
|
|
|
|
|
|
|
|
|
|
(109,840
|
)
|
Intrinsic value of
options issued to
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,750
|
|
|
|
(243,750
|
)
|
|
|
|
|
|
|
|
|
Fair value of options
issued for settlement
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,500
|
|
|
|
|
|
|
|
|
|
|
|
31,500
|
|
Fair value of warrants
issued for settlement
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,957
|
|
|
|
|
|
|
|
|
|
|
|
4,957
|
|
Fair value of warrants
issued to non-employees
for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,505
|
|
|
|
|
|
|
|
|
|
|
|
13,505
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,631
|
|
|
|
|
|
|
|
177,631
|
|
Warrants issued with
convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696,413
|
|
|
|
|
|
|
|
|
|
|
|
696,413
|
|
Intrinsic value of
beneficial conversion
associated with
convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
756,768
|
|
|
|
|
|
|
|
|
|
|
|
756,768
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
Development
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Stage Deficiency
|
|
|
|
(Unaudited)
|
|
Net loss for year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,115,186
|
)
|
|
|
(3,115,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
|
|
|
|
31,387,418
|
|
|
$
|
31,387
|
|
|
$
|
612,521
|
|
|
$
|
18,336,178
|
|
|
$
|
(142,187
|
)
|
|
$
|
(20,246,074
|
)
|
|
$
|
(1,408,175
|
)
|
Stock issued, for
previously settled
payables (unaudited)
|
|
|
|
|
|
|
846,549
|
|
|
|
847
|
|
|
|
(612,521
|
)
|
|
|
611,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon
exercise of warrants on
March 23, 2006
(unaudited)
|
|
|
1.50
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
37,475
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
Stock issued upon
exercise of warrants on
March 27, 2006
(unaudited)
|
|
|
1.50
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
|
|
|
|
74,950
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Stock issued upon
exercise of warrants on
March 27, 2006
(unaudited)
|
|
|
0.50
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
12,475
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
Stock issued upon
exercise of warrants on
March 30, 2006
(unaudited)
|
|
|
1.00
|
|
|
|
10,000
|
|
|
|
10
|
|
|
|
|
|
|
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Stock issued upon
exercise of warrants on
April 10, 2006
(unaudited)
|
|
|
0.50
|
|
|
|
36,250
|
|
|
|
36
|
|
|
|
|
|
|
|
18,089
|
|
|
|
|
|
|
|
|
|
|
|
18,125
|
|
Common stock issued for
convertible debt on April
10, 2006 (unaudited)
|
|
|
0.70
|
|
|
|
269,600
|
|
|
|
270
|
|
|
|
|
|
|
|
188,450
|
|
|
|
|
|
|
|
|
|
|
|
188,720
|
|
Stock issued for cash on
April 24, 2006
(unaudited)
|
|
|
1.56
|
|
|
|
473,000
|
|
|
|
473
|
|
|
|
|
|
|
|
737,408
|
|
|
|
|
|
|
|
|
|
|
|
737,881
|
|
Stock issued upon
exercise of warrants on
April 26, 2006
(unaudited)
|
|
|
0.50
|
|
|
|
125,000
|
|
|
|
125
|
|
|
|
|
|
|
|
62,375
|
|
|
|
|
|
|
|
|
|
|
|
62,500
|
|
Stock issued upon
exercise of warrants on
April 26, 2006
(unaudited)
|
|
|
1.50
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
|
|
|
|
149,900
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Common stock issued for
convertible debt on April
26, 2006 (unaudited)
|
|
|
0.70
|
|
|
|
35,714
|
|
|
|
36
|
|
|
|
|
|
|
|
24,964
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued upon
exercise of warrants on
May 6, 2006 (unaudited)
|
|
|
0.50
|
|
|
|
200,000
|
|
|
|
200
|
|
|
|
|
|
|
|
99,800
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Stock issued upon
exercise of warrants on
May 15, 2006 (unaudited)
|
|
|
1.50
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
37,475
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
Stock issued upon
exercise of warrants on
May 15, 2006 (unaudited)
|
|
|
0.50
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
|
|
|
|
24,950
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued for cash on
June 7, 2006 (unaudited)
|
|
|
1.89
|
|
|
|
873,018
|
|
|
|
872
|
|
|
|
|
|
|
|
1,649,136
|
|
|
|
|
|
|
|
|
|
|
|
1,650,008
|
|
Common stock issued for
convertible debt on June
7, 2006 (unaudited)
|
|
|
0.70
|
|
|
|
1,535,715
|
|
|
|
1,536
|
|
|
|
|
|
|
|
1,073,464
|
|
|
|
|
|
|
|
|
|
|
|
1,075,000
|
|
Stock issued upon
exercise of warrants on
June 8, 2006 (unaudited)
|
|
|
0.50
|
|
|
|
900,000
|
|
|
|
900
|
|
|
|
|
|
|
|
449,100
|
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
Stock issued upon
exercise of warrants on
June 9, 2006 (unaudited)
|
|
|
0.50
|
|
|
|
9,000
|
|
|
|
9
|
|
|
|
|
|
|
|
4,491
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
Stock issued upon
exercise of warrants on
June 23, 2006 (unaudited).
|
|
|
0.50
|
|
|
|
150,000
|
|
|
|
150
|
|
|
|
|
|
|
|
74,850
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Stock issued upon
exercise of warrants on
June 23, 2006 (unaudited).
|
|
|
1.50
|
|
|
|
15,000
|
|
|
|
15
|
|
|
|
|
|
|
|
22,485
|
|
|
|
|
|
|
|
|
|
|
|
22,500
|
|
Common stock issued for
convertible debt on June
30, 2006 (unaudited)
|
|
|
0.70
|
|
|
|
219,104
|
|
|
|
219
|
|
|
|
|
|
|
|
153,155
|
|
|
|
|
|
|
|
|
|
|
|
153,374
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
Development
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Stage Deficiency
|
|
|
|
(Unaudited)
|
|
Common stock paid for,
but not issued
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
Common stock for
convertible notes
converted to stock, but
not issued (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,222
|
|
Fair value of options
issued to employees and
officers (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,214.775
|
|
|
|
|
|
|
|
|
|
|
|
1,214,775
|
|
Fair value of warrants
issued for services
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401,130
|
|
|
|
|
|
|
|
|
|
|
|
401,130
|
|
Write off of deferred
compensation (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,187
|
)
|
|
|
142,187
|
|
|
|
|
|
|
|
|
|
Warrants issued for
consulting services
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,660
|
|
|
|
|
|
|
|
|
|
|
|
43,660
|
|
Warrants issued with
convertible notes
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,248
|
|
|
|
|
|
|
|
|
|
|
|
290,248
|
|
Intrinsic value of
beneficial conversion
associated with
convertible notes
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
620,252
|
|
|
|
|
|
|
|
|
|
|
|
620,252
|
|
Finders fees related to
stock issuances
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(284,579
|
)
|
|
|
|
|
|
|
|
|
|
|
(284,579
|
)
|
Net loss for six months
ended June 30, 2006
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,990,330
|
)
|
|
|
(5,990,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2006
(unaudited)
|
|
|
|
|
|
|
37,360,368
|
|
|
$
|
37,360
|
|
|
$
|
47,722
|
|
|
$
|
25,996,133
|
|
|
$
|
|
|
|
$
|
(26,236,404
|
)
|
|
$
|
(155,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
61
SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2005 AND SIX MONTHS ENDED
JUNE 30, 2005 AND 2006 (UNAUDITED) AND FOR THE PERIOD FROM
INCEPTION (FEBRUARY 18, 1998) TO JUNE 30, 2006 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
Since
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,803,280
|
)
|
|
$
|
(3,115,186
|
)
|
|
$
|
(1,839,573
|
)
|
|
$
|
(5,990,330
|
)
|
|
$
|
(26,236,404
|
)
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write off of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505,000
|
|
Settlement of litigation and debt
|
|
|
|
|
|
|
(1,017,208
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,017,208
|
)
|
Fair value of options and warrants issued for
services
|
|
|
28,872
|
|
|
|
13,505
|
|
|
|
13,505
|
|
|
|
1,659,565
|
|
|
|
1,844,260
|
|
Issuance of common stock for services
|
|
|
1,427,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,668,102
|
|
Issuance of options for legal settlement
|
|
|
|
|
|
|
31,500
|
|
|
|
31,500
|
|
|
|
|
|
|
|
31,500
|
|
Issuance of warrants for legal settlement
|
|
|
|
|
|
|
4,957
|
|
|
|
4,957
|
|
|
|
|
|
|
|
4,957
|
|
Patent acquisition cost
|
|
|
1,610,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,610,066
|
|
Amortization of issuance costs
|
|
|
|
|
|
|
318,759
|
|
|
|
|
|
|
|
2,113,825
|
|
|
|
2,432,583
|
|
Amortization of deferred compensation
|
|
|
936,537
|
|
|
|
177,631
|
|
|
|
76,068
|
|
|
|
|
|
|
|
3,060,744
|
|
Depreciation
|
|
|
8,685
|
|
|
|
19,345
|
|
|
|
4,536
|
|
|
|
57,217
|
|
|
|
90,979
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,719
|
)
|
|
|
(3,719
|
)
|
Prepaid expenses and other
|
|
|
(2,602
|
)
|
|
|
(10,907
|
)
|
|
|
(550
|
)
|
|
|
(113,579
|
)
|
|
|
(122,588
|
)
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,500
|
)
|
Income taxes payable
|
|
|
(5,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
388,499
|
|
|
|
1,010,426
|
|
|
|
363,261
|
|
|
|
(172,872
|
)
|
|
|
2,137,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,411,464
|
)
|
|
|
(2,567,178
|
)
|
|
|
(1,346,296
|
)
|
|
|
(2,449,893
|
)
|
|
|
(10,998,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(9,037
|
)
|
|
|
(279,123
|
)
|
|
|
|
|
|
|
(129,115
|
)
|
|
|
(454,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,037
|
)
|
|
|
(279,123
|
)
|
|
|
|
|
|
|
(129,115
|
)
|
|
|
(454,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in payables to related
parties and stockholder
|
|
|
(6,425
|
)
|
|
|
167,255
|
|
|
|
122,255
|
|
|
|
(158,732
|
)
|
|
|
517,208
|
|
Advances from founding executive officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556,450
|
|
Net proceeds from issuance of convertible notes
|
|
|
|
|
|
|
1,453,182
|
|
|
|
|
|
|
|
865,500
|
|
|
|
2,318,683
|
|
Net proceeds from issuance of common stock and
common stock issuable
|
|
|
1,585,700
|
|
|
|
1,420,859
|
|
|
|
1,351,200
|
|
|
|
3,220,936
|
|
|
|
9,689,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,579,275
|
|
|
|
3,041,296
|
|
|
|
1,473,455
|
|
|
|
3,927,704
|
|
|
|
13,081,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(841,226
|
)
|
|
|
194,995
|
|
|
|
127,159
|
|
|
|
1,348,696
|
|
|
|
1,628,517
|
|
Cash
, beginning of period
|
|
|
926,052
|
|
|
|
84,826
|
|
|
|
84,826
|
|
|
|
279,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
, end of period
|
|
$
|
84,826
|
|
|
$
|
279,821
|
|
|
$
|
211,985
|
|
|
$
|
1,628,517
|
|
|
$
|
1,628,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
93,688
|
|
|
$
|
109,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,400
|
|
|
$
|
1,987
|
|
|
$
|
1,976
|
|
|
$
|
800
|
|
|
$
|
5,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible asset through advance
from related party and issuance of common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
505,000
|
|
Deferred compensation for stock options issued
for services
|
|
|
304,272
|
|
|
|
243,750
|
|
|
|
|
|
|
|
|
|
|
|
3,202,931
|
|
Purchase of property and equipment financed by
advance from related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,550
|
|
Conversion of related party debt to equity
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
515,000
|
|
Issuance of common stock in settlement of payable
|
|
|
113,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,981
|
|
Value of warrants and beneficial conversion
feature of convertible notes
|
|
|
|
|
|
|
1,453,182
|
|
|
|
|
|
|
|
865,500
|
|
|
|
2,318,683
|
|
Cancellation of stock
|
|
|
|
|
|
|
8,047
|
|
|
|
|
|
|
|
|
|
|
|
8,047
|
|
Conversion of accounts payable and accrued
expenses to common stock
|
|
|
|
|
|
|
612,521
|
|
|
|
|
|
|
|
612,521
|
|
|
|
612,521
|
|
Conversion of related party debt to convertible
debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000
|
|
|
|
45,000
|
|
Conversion of convertible debentures to common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,452,319
|
|
|
|
206,720
|
|
Write off of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,187
|
|
|
|
142,187
|
|
See notes to consolidated financial statements.
62
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business
Description of business
Save the World Air, Inc. (the Company) was incorporated in Nevada on February 18, 1998 under
the name Mandalay Capital Corp. The Company changed its name to Save the World Air, Inc. on
February 11, 1999 following the purchase of the worldwide exclusive manufacturing, marketing and
distribution rights for the ZEFS technologies. Products incorporating the ZEFS technologies, when
fitted to an internal combustion engine, is expected to reduce carbon monoxide hydrocarbons and
nitrous oxide emissions. During the past three years, the Company has been acquiring new
technologies, developing prototype products using the Companys technologies and conducting
scientific tests regarding the technologies and prototype products. In 2003, the Company acquired
worldwide intellectual property and patent rights to technologies which reduce carbon monoxide,
hydrocarbons and nitrous oxide emissions in two- and four-stroke motorcycles, fuel-injection
engines, generators and small engines. The Company has also developed prototype products
incorporating the CAT-MATE technology.
Consolidation policy
The accompanying consolidated financial statements of Save the World Air, Inc. and Subsidiary
include the accounts of Save the World Air, Inc. (the Parent) and its wholly owned subsidiary STWA
Asia Pte. Limited, incorporated on January 17, 2006. To date, STWA Asia Pte. Limited has had no
operating activity. Currently the subsidiary holds $5,000 in cash. Intercompany transactions and
balances have been eliminated in consolidation.
2. Summary of significant accounting policies
Unaudited financial information
The accompanying unaudited interim balance sheet at June 30, 2006, the statements of
operations and cash flows for the three and six months ended June 30, 2005 and 2006 and the
statement of stockholders deficit for the six months ended June 30, 2006 are unaudited. These
unaudited interim financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. In the opinion of the Companys management, the unaudited interim
financial statements have been prepared on the same basis as the audited financial statements and
include all adjustments, which include only normal recurring adjustments, necessary for the fair
presentation of the Companys statement of financial position at June 30, 2006 and its results of
operations and its cash flows for the three and six months ended June 30, 2005 and 2006. The
results for the three and six months ended June 30, 2006 are not necessarily indicative of the
results to be expected for the year ending December 31, 2006.
Development stage enterprise
The Company is a development stage enterprise as defined by Statement of Financial Accounting
Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. All losses
accumulated since the inception of the Company have been considered as part of the Companys
development stage activities.
The Companys focus is currently on the development and distribution of proprietary devices
that are designed to reduce harmful emissions, and improve fuel efficiency and engine performance
on equipment and vehicles driven by internal combustion engines and has not yet generated any
revenues. The technologies are called ZEFS, MK IV and CAT-MATE. The Company has completed the
design, the development of production models and is currently marketing its products worldwide.
Expenses have been funded through the sale of company stock and convertible notes. The Company has
taken actions to secure the intellectual property rights to the ZEFS, MK IV and CAT-MATE
technologies. In addition, the Company has initiated marketing efforts to international
governmental entities in cooperation with the United Nations Environmental Programme (UNEP) and
various original equipment manufacturers (OEMs), to eventually sell or license products
incorporating the ZEFS, MK IV and CAT-MATE technologies.
63
Liquidity
The Company is subject to the usual risks associated with a development stage enterprise.
These risks include, among others, those associated with product development, acceptance of the
product by users and the ability to raise the capital necessary to sustain operations. Since its
inception, the Company has incurred significant losses. The Company anticipates increasing
expenditures over at least the next year as the Company continues its product development and
evaluation efforts, and begins its marketing activities. Without significant revenue, these
expenditures will likely result in additional losses.
Going concern
The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. As reflected in the accompanying financial statements, the Company had a
net loss of $5,990,330 and a negative cash flow from operations of $2,449,893 for the six months
ended June 30, 2006, and had a working capital deficiency of $526,961 and a stockholders
deficiency of $155,189 at June 30, 2006. For the year ended December 31, 2005, the Company incurred
net losses of $3,115,186 and a negative cash flow from operations of $2,567,178. These factors
raise substantial doubt about its ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon the Companys ability to raise additional
funds and implement its business plan. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Subsequent to June 30, 2006, the Company has raised $400,702 upon conversion of 373,202
warrants and has converted $1,127,658 of debt into common stock (see Note 11).
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation is computed using the straight-line
method based on the estimated useful lives of the assets, generally ranging from three to ten
years. Expenditures for major renewals and improvements that extend the useful lives of property
and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as
incurred. Leasehold improvements are amortized using the straight-line method over the shorter of
the estimated useful life of the asset or the lease term.
Long-lived assets
The Company accounts for the impairment and disposition of long-lived assets in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance
with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances
that indicate that their carrying value may not be recoverable. The Company periodically reviews
the carrying values of long-lived assets to determine whether or not an impairment to such value
has occurred. No impairments were recorded during the period from inception (February 18, 1998)
through June 30, 2006.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution, using the treasury stock method, that could
occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the
Company. In computing diluted earnings per share, the treasury stock method assumes that
outstanding options and warrants are exercised and the proceeds are used to purchase common stock
at the average market price during the period. Options and warrants may have a dilutive effect
under the treasury stock method only when the average market price of the common stock during the
period exceeds the exercise price of the options and warrants. For the years ended December 31,
2004 and 2005 and the six months ended June 30, 2005 and 2006, the dilutive impact of outstanding
stock options of 14,422,652, 6,508,561, 14,452,652 and 7,181,257, respectively, and outstanding
warrants of 15,664,414, 20,792,492, 16,568,910 and 22,185,054 have been excluded because their
impact on the loss per share is antidilutive.
Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, income taxes are recognized for the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets are recognized for the
future tax consequences of transactions that have been recognized in the Companys financial
statements or tax returns. A valuation allowance is provided when it is more likely than not that
some portion or all of the
64
deferred tax asset will not be realized.
Stock-based compensation
Through December 31, 2005, the Company accounted for stock-based compensation to employees and
directors using the intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and elected to provided the pro-forma
disclosure requirements of Statements of Financial Accounting Standards No. 123, Share-Based
Payment, (SFAS 123).
Under the intrinsic value method, the Company recognized share-based compensation equal to the
awards intrinsic value at the time of grant over the requisite service periods using the
straight-line method. Forfeitures were recognized as incurred. The fair values of the awards were
not expensed over the requisite service period. Had the Company recognized such fair value expense
under SFAS 123 for the years ended 2004 and 2005 and the six and three months ended June 30, 2005,
the Company would have recorded additional compensation expense of $784,685, $861,637, $247,637,
and $0, respectively.
The following table illustrates the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based awards granted under the
Companys stock option plans for the years ended December 31, 2004 and 2005, for the six and three
months ended June 30, 2005 and for the period from inception (February 18, 1998) to June 30, 2006.
For purposes of this pro-forma disclosure, the fair value of the options is estimated using the
Black-Scholes-Merton option-pricing formula (Black-Scholes model) and amortized to expense over
the options requisite service periods (vesting periods).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Three Months
|
|
|
Cumulative
|
|
|
|
December 31,
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
Since
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net loss, as reported
|
|
$
|
(6,803,280
|
)
|
|
$
|
(3,115,186
|
)
|
|
$
|
(1,839,573
|
)
|
|
$
|
(774,517
|
)
|
|
$
|
(26,236,404
|
)
|
Add: total fair value method
stock-based employee
compensation expense
|
|
|
(1,721,222
|
)
|
|
|
(1,039,268
|
)
|
|
|
(323,705
|
)
|
|
|
|
|
|
|
(5,010,310
|
)
|
Less: deferred compensation
amortization for below market
employee options
|
|
|
936,537
|
|
|
|
177,631
|
|
|
|
76,068
|
|
|
|
|
|
|
|
3,060,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(7,587,965
|
)
|
|
$
|
(3,976,823
|
)
|
|
$
|
(2,087,210
|
)
|
|
$
|
(774,517
|
)
|
|
$
|
(28,509,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006, the Company adopted Statements of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, (SFAS 123(R)) which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values. SFAS 123(R) supersedes the Companys previous accounting
under APB 25 for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the first day of the
Companys fiscal year 2006. The Companys financial statements as of and for the six and three
months ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, the Companys financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation
expense recognized under SFAS 123(R) for employee and directors for the six and three months ended
June 30, 2006 was $1,214,775 and $736,285, respectively. Basic and diluted loss per share for the
six months ended June 30, 2006 would have been ($0.15) per share, if the Company had not adopted
SFAS 123(R), compared to reported basic and diluted loss per share of ($0.18) per share. Basic and
diluted loss per share for the three months ended June 30, 2006 would have been ($0.07) per share,
if the Company had not adopted SFAS 123(R), compared to reported basic and diluted loss per share
of ($0.09) per share.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards to
employees and directors on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the
requisite service periods in the Companys Statements of Operations. Stock-based compensation
expense recognized in the Statements of Operations for the second quarter of fiscal 2006 included
compensation expense for share-based payment awards granted prior to, but not yet vested as of
January 1, 2006 based on the grant date fair value estimated in accordance with the pro-forma
65
provisions of SFAS 123 and compensation expense for the share-based payment awards granted
subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). For stock-based awards issued to employees and directors, stock-based
compensation is attributed to expense using the straight-line single option method, which is
consistent with how the prior-period pro formas were provided. As stock-based compensation expense
recognized in the Statements of Operations for the second quarter of fiscal 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. In our pro-forma information required under SFAS
123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.
The Companys determination of fair value of share-based payment awards to employees and
directors on the date of grant using the Black-Scholes model, which is affected by the Companys
stock price as well as assumptions regarding a number of highly complex and subjective variables.
These variables include, but are not limited to our expected stock price volatility over the term
of the awards, and actual and projected employee stock option exercise behaviors.
The Company has elected to adopt the detailed method provided in SFAS 123(R) for calculating
the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax
effects of employee stock-based compensation, and to determine the subsequent impact on the APIC
pool and Statements of Cash Flows of the tax effects of employee stock-based compensation awards
that are outstanding upon adoption of SFAS 123(R).
As of December 31, 2005, there was $142,187 of total unrecognized compensation costs
recognized within the shareholders deficit related to non-vested share-based compensation
arrangements granted under the 2004 Stock Option Plan (see Note 7). This cost was written off
against Additional Paid-in Capital when SFAS 123(R) was adopted.
The Company accounts for stock option and warrant grants issued to non-employees for goods and
services using the guidance of SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18:
Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, whereby the fair value of such option and warrant
grants is determined using the Black-Scholes option pricing model at the earlier of the date at
which the non-employees performance is completed or a performance commitment is reached.
Business and credit concentrations
The Companys cash balances in financial institutions at times may exceed federally insured
limits. As of December 31, 2004 and 2005 and June 30, 2006, before adjustments for outstanding
checks and deposits in transit, the Company had $67,718, $376,429 and $1,666,651, respectively, on
deposit with three banks. The deposits are federally insured up to $100,000 on each bank.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market and primarily
consist of finished goods.
Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles 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 date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Certain significant estimates were made in connection with preparing the Companys financial
statements. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications of 2005 amounts have been made to conform with the 2006
presentation.
Fair value of financial instruments
The carrying amounts of financial instruments, including cash, accounts payable and accrued
expenses, convertible notes, and payables to related parties approximate fair value because of
their short maturity as of December 31, 2004 and 2005 and June 30, 2006.
66
Recent accounting pronouncements
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (SFAS
151), Inventory Costs. This Statement amends the guidance in ARB No. 43 Chapter 4 Inventory
Pricing, to require items such as idle facility costs, excessive spoilage, double freight and
rehandling costs to be expensed in the current period, regardless if they are abnormal amounts or
not. This Statement will become effective for us in the first quarter of 2006. The adoption of SFAS
151 did not have a material impact on our financial condition, results of operations, or cash
flows.
In May 2005, the FASB issued Statement No. 154 (SFAS 154) Accounting Changes and Error
Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting principle. APB Opinion
20 previously required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of changing to the new
accounting principle. SFAS 154 requires retrospective application to prior periods financial
statements of changes in accounting principle, unless it is impracticable to determine either the
period-specific effects of the cumulative effect of the change. In the event of such
impracticality, SFAS 154 provides for other means of application. In the event the Company changes
accounting principles, it will evaluate the impact of SFAS 154.
3. Certain relationships and related transactions
Advances from founding executive officer
All of the marketing and manufacturing rights for ZEFS were acquired from founding officer
Jeffery A. Muller, for 5,000,000 shares of common stock, $500,000 and a $10 royalty for each unit
sold (see discussion below), pursuant to the Agreement entered into in December 1998, by and
between the Company and Mr. Muller. As of December 31, 2004, working capital advances in the amount
of $517,208 and payment in the amount of $500,000 for marketing and distribution rights of ZEFS are
due to Mr. Muller. Such amounts are interest free and do not have any due dates for payment.
In January 2000, the Company entered into an agreement offering Mr. Muller and Lynne Muller,
Mr. Mullers wife, the option to purchase 5,000,000 shares each at $0.10 per share as consideration
for work performed for the Company. Mrs. Muller subsequently transferred her option to Mr. Muller.
In connection with the Companys legal proceedings against Mr. Muller (see Note 10), during
2005 the Company has canceled (i) the 8,047,403 shares of its common stock held by Mr. Muller
and/or his affiliates, (ii) the options to acquire an additional 10,000,000 shares of the Companys
common stock held by Mr. Muller personally and (iii) the $1,017,208 of debt which Mr. Muller
claimed was owed to him by the Company.
Loans from related parties
Masry & Vititoe, a law firm in which Edward Masry, the Companys former Chief Executive
Officer, was a partner, has advanced $36,478, $158,732 and $0 as of December 31, 2004 and 2005 and
June 30, 2006, respectively, to the Company for working capital purposes. Advances by Masry and
Vititoe are unsecured, non-interest bearing, and are due on demand. In April 2006, the Company
repaid advances due Masry and Vititoe of $158,732. In April 2004, the Company issued 60,000 shares
of common stock to convert $15,000 of an outstanding loan made to the Company by the wife of Edward
Masry. The shares issued are valued at the current market price at the date of issuance of $91,800
resulting in additional charge to expense of $76,800, which was reflected as consulting expense in
the financial statements for the year ended December 31, 2004.
As of December 31, 2005, Eugene Eichler, the Companys Chief Executive Officer, advanced
$45,000 to the Company for working capital purposes. These advances are unsecured, bear interest at
6% per annum and are due on demand. In February 2006, these advances were converted into a
convertible note (Note 8).
Interest expense recognized under related-party loans was immaterial for all periods
presented. Interest expense recognized under related-party loans for the period from inception
(February 18, 1998) through June 30, 2006 was $327.
67
Lease agreement
During 2003, the Company had entered into a sublease lease agreement with an entity to lease
office space for its primary administrative facility. A director of the Company is an indirect
owner of the entity.
In August 2005, the Company amended its sublease of a portion of a building in North
Hollywood, California from an entity that is owned by a director of the Company. The lease term is
from November 1, 2003 through October 16, 2005 and carries an option to renew for two additional
years with a 10 percent increase in the rental rate. Monthly rent under this lease is $3,740 per
month under this lease as amended as of December 31, 2005. The Company exercises its option to
renew the lease through October 15, 2007.
In January 2006, the Company amended the existing sublease agreement, as a result of taking
more space and obtaining expanded support services. The sublease was amended to July 31, 2007 and
carries an option to renew for two additional years with a 10 percent increase in the rental rate.
Monthly rent is $6,208 per month under this amended sublease.
In July 2006, the Company acquired two additional offices comprising approximately 250 square
feet, and additional parking spaces. The Company expects that the increase in the rent it pays to
the landlord will be less than $1,000 per month; however, the Company has not concluded
negotiations with the landlord as to the exact amount of the additional rent.
During the years ended 2004 and 2005, and the six and three months ended June 30, 2006, rent
expense under the sublease was $30,400, $34,900, $37,248 and $18,624, respectively. Lease expense
under the sublease prior to 2004 was immaterial.
4. Property and equipment
At December 31, 2004 and 2005 and June 30, 2006, property and equipment consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Office equipment
|
|
$
|
50,013
|
|
|
$
|
329,136
|
|
|
$
|
458,251
|
|
Less accumulated depreciation
|
|
|
(14,417
|
)
|
|
|
(33,762
|
)
|
|
|
(90,979
|
)
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
35,596
|
|
|
$
|
295,374
|
|
|
$
|
367,272
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2004 and 2005, and the six and three
months ended June 30, 2005 and 2006 was $8,685, $19,345, $4,536, $2,268, $57,217 and $33,905,
respectively. Depreciation expense for the period from inception (February 18, 1998) through June
30, 2006 was $90,979.
5. Income taxes
As of December 31, 2005, and June 30, 2006, the Company has net operating loss (NOL)
carryforwards in the amount of approximately $14.6 million and $16.8 million, respectively, which
begin to expire in 2018. The deferred tax asset related to these NOL carryforwards has been fully
reserved. The provision for income taxes represents the minimum state income taxes payable plus
estimated penalties and interest.
The Companys ability to utilize its NOL is dependent upon current filing status with the
Internal Revenue Service (IRS) and is subject to the IRSs statute of limitations.
A reconciliation of the Companys tax provision to income taxes at the applicable statutory
rates is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Income taxes at statutory federal rate
|
|
$
|
(2,316,681
|
)
|
|
$
|
(1,032,035
|
)
|
|
$
|
(580,551
|
)
|
|
$
|
(740,102
|
)
|
State income taxes, net of federal benefit
|
|
|
(408,197
|
)
|
|
|
(268,021
|
)
|
|
|
(150,634
|
)
|
|
|
(192,118
|
)
|
Valuation allowance
|
|
|
2,721,312
|
|
|
|
1,301,243
|
|
|
|
732,361
|
|
|
|
932,220
|
|
Minimum state taxes, plus penalties and interest
|
|
|
800
|
|
|
|
800
|
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,766
|
)
|
|
$
|
1,987
|
|
|
$
|
1,976
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Stockholders deficiency
As of December 31, 2005 and June 30, 2006, the Company has authorized 200,000,000 shares of
its common stock, of which
68
31,387,418 and 37,360,368 shares, respectively, were issued and outstanding.
In April 2004, the Company issued 60,000 shares of common stock to convert $15,000 of related
party debt into equity (see Note 3). The shares issued were valued at the current market price of
the date of issuance of $91,800 resulting in additional charge to expense $76,800, which has been
reflected in the accompanying financial statements ended December 31, 2004.
During the year ended December 31, 2004, the Company sold 1,272,500 units of common stock
consisting of one share of common stock and one warrant to acquire a share of common stock at $1.50
for $1,272,500.
During 2004, the Company issued 960,500 shares of common stock for $194,200 from the exercise
of 960,500 warrants.
In November and December 2004, the Company sold 119,000 shares of its common stock in a series
of private placement transactions. The Company received proceeds, net of offering costs, in the
amount of $119,000 for the shares prior to December 31, 2004, but did not issue the stock
certificates until 2005. These shares were shown as common stock to be issued as of December 31,
2004 in the accompanying financial statement.
During the year ended December 31, 2005, the Company sold 1,599,500 units of common stock,
which consisted of one share of common stock and one warrant to acquire a share of common stock at
an exercise price of $1.50 per share, for net proceeds of $1,490,660. The 1,599,500 warrants were
issued to investors as part of an equity agreement and were not ascribed any value in the
accompanying financial statements. Of the 1,599,500 shares issued, the Company issued 68,500 shares
of common stock for which payment was previously received. The Company also issued 50,500 shares
for the exercise of warrants, 50,000 of which were paid for previously.
The warrants issued above were part of a private offering of 2,872,000 units that began July
29, 2004 and concluded on July 22, 2005. The expiration date of each of the warrants was previously
extended by one hundred eighty (180) days from its original expiration date. On February 6, 2006,
the Company extended the expiration date for each of the warrants by an additional one hundred
eighty-five (185) days, for a total extension of one year from its original expiration date.
During the year ended December 31, 2005, the Company agreed to issue 846,548 shares in
settlement of accrued expenses of $612,521. These shares are reflected as common stock to be issued
as of December 31, 2005, and were subsequently issued in 2006.
In April 2006, the Company sold an aggregate 473,000 shares of common stock and warrants to
purchase 118,250 additional shares of common stock at $2.60 per share, to two investors who are not
U.S. persons as that term is defined in Rule 902 of Regulation S promulgated under the Securities
Act of 1933, as amended. Gross proceeds to the Company in connection with these issuances were
$737,881 and net proceeds were $667,803.
In May 2006, the Company sold an aggregate 873,018 shares of common stock and warrants to
purchase 436,511 additional shares of common stock at $2.70 per share, for an aggregate $1,650,009
gross proceeds ($1,435,508 net proceeds). In addition, warrants exercisable for 87,302 shares of
the Companys common stock were issued to the Companys placement agent.
During the six months ended June 30, 2006, individuals exercised outstanding warrants to
purchase 1,745,250 shares of common stock for net proceeds of $1,117,625.
7. Stock options and warrants
The Company currently issues stock options to employees, directors and consultants under the
2004 Stock Option Plan (the Plan). As of December 31, 2005, the Company could issue options under
the Plan to acquire up to 5,000,000 shares of common stock. In February 2006, the board approved an
amendment to the Plan, increasing the authorized shares by 2,000,000 shares to 7,000,000 shares. At
December 31, 2005 and June 30, 2006, 1,741,439 and 3,068,743 were available to be granted under the
Plan. Prior to 2004, the Company granted 3,250,000 options outside the Plan to officers of the
Company that are still outstanding.
Employee options vest according to the terms of the specific grant and expire from 5 to 10
years from date of grant. Non-employee option grants to date are vested upon issuance. The
weighted-average, remaining contractual life of employee options outstanding at December 31, 2005
and June 30, 2006 was 5.26 years and 5.60 years, respectively. Stock option activity for the years
ended December 31, 2004 and 2005, and the six months ended June 30, 2006, which includes 3,250,000
options granted outside and prior to the adoption of the Plan, was as follows:
69
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Weighted Avg.
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Options, January 1, 2004
|
|
|
13,250,000
|
|
|
|
0.11
|
|
Options granted
|
|
|
1,172,652
|
|
|
|
1.03
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, December 31, 2004
|
|
|
14,422,652
|
|
|
|
0.18
|
|
Options granted
|
|
|
2,085,909
|
|
|
|
0.92
|
|
Options exercised
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(10,000,000
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
Options, December 31, 2005
|
|
|
6,508,561
|
|
|
|
0.53
|
|
Options granted (unaudited)
|
|
|
1,163,605
|
|
|
|
1.08
|
|
Options exercised (unaudited)
|
|
|
|
|
|
|
|
|
Options forfeited (unaudited)
|
|
|
(490,909
|
)
|
|
|
0.90
|
|
Options cancelled (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, June 30, 2006 (unaudited)
|
|
|
7,181,257
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2005 and the related weighted-average exercise price and
remaining life information are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Total Options
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$ 0.10
|
|
|
3,000,000
|
|
|
|
3.84
|
|
|
$
|
0.10
|
|
|
|
3,000,000
|
|
|
$
|
0.10
|
|
0.40
|
|
|
250,000
|
|
|
|
3.17
|
|
|
|
0.40
|
|
|
|
250,000
|
|
|
|
0.40
|
|
0.85
|
|
|
400,000
|
|
|
|
4.58
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
0.85
|
|
|
1,225,000
|
|
|
|
9.58
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
0.98
|
|
|
900,000
|
|
|
|
3.17
|
|
|
|
0.98
|
|
|
|
900,000
|
|
|
|
0.98
|
|
1.00
|
|
|
370,000
|
|
|
|
9.58
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
1.10
|
|
|
90,909
|
|
|
|
4.58
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
1.15
|
|
|
193,912
|
|
|
|
3.17
|
|
|
|
1.15
|
|
|
|
193,912
|
|
|
|
1.15
|
|
1.27
|
|
|
78,740
|
|
|
|
3.17
|
|
|
|
1.27
|
|
|
|
78,740
|
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.10-$1.27
|
|
|
6,508,561
|
|
|
|
5.26
|
|
|
$
|
0.53
|
|
|
|
4,422,652
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average exercise prices, remaining contractual lives and aggregate intrinsic
values for options granted, exercisable, and expected to vest under the Plan as of December 31,
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
As of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
6,508,561
|
|
|
$
|
0.53
|
|
|
|
5.26
|
|
|
$
|
2,600,000
|
|
Expected to Vest
|
|
|
6,017,652
|
|
|
$
|
0.43
|
|
|
|
5.31
|
|
|
$
|
2,600,000
|
|
Exercisable
|
|
|
4,422,652
|
|
|
$
|
0.52
|
|
|
|
3.62
|
|
|
$
|
2,600,000
|
|
Aggregate intrinsic value excludes those options that are not-in-the-money as of December
31, 2005. Awards that are expected to vest take into consideration estimated forfeitures for awards
not yet vested.
70
Options outstanding at June 30, 2006 and the related weighted average exercise price and
remaining life information is as follows: (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Total Options
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$ 0.10
|
|
|
3,000,000
|
|
|
|
3.35
|
|
|
$
|
0.10
|
|
|
|
3,000,000
|
|
|
$
|
0.10
|
|
0.40
|
|
|
250,000
|
|
|
|
2.67
|
|
|
|
0.40
|
|
|
|
250,000
|
|
|
|
0.40
|
|
0.85
|
|
|
1,225,000
|
|
|
|
9.08
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
0.85
|
|
|
850,000
|
|
|
|
9.65
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
0.98
|
|
|
900,000
|
|
|
|
2.67
|
|
|
|
0.98
|
|
|
|
900,000
|
|
|
|
0.98
|
|
1.00
|
|
|
370,000
|
|
|
|
9.08
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
1.15
|
|
|
193,912
|
|
|
|
2.67
|
|
|
|
1.15
|
|
|
|
193,912
|
|
|
|
1.15
|
|
1.27
|
|
|
78,740
|
|
|
|
2.67
|
|
|
|
1.27
|
|
|
|
78,740
|
|
|
|
1.27
|
|
1.69
|
|
|
313,605
|
|
|
|
9.65
|
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.10-1.69
|
|
|
7,181,257
|
|
|
|
5.60
|
|
|
$
|
0.59
|
|
|
|
4,422,652
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of employee options
During 2004 and prior, certain employee options were granted with exercise prices less the
than fair market value of the Companys stock at the date of grant. As the grants were to
employees, the intrinsic value method, as allowed under APB No. 25, was used to calculate the
related compensation expense. For the year ended December 31, 2004, the Company granted 1,172,652
options to certain employees, exercisable at amounts ranging from $0.98 to $1.27, vested over one
year with a ten-year life, except for 78,740 options issued to an employee who is a 10 percent
beneficial owner of the Company. The life of these options is 5 years. Options granted in 2004 were
valued using the intrinsic method at $248,891.
During the year ended December 31, 2005, certain employee options were granted with exercise
prices less the than fair market value of the Companys stock at the date of grant. As the grants
were to employees, the intrinsic value method was used to calculate the related compensation
expense. For the year ended December 31, 2005, the Company granted 2,085,909 options to certain
employees, exercisable at amounts ranging from $0.85 to $1.10, vested over one year with a ten-year
life, except for 90,909 options issued to an employee who is a 10 percent beneficial owner of the
Company. The life of these options is 5 years. Options granted in 2005 were valued using the
intrinsic method at $243,750.
During the years ended December 31, 2004 and 2005, and during the six and three months ended
June 30, 2005, the Company recognized compensation expense by amortizing deferred compensation of
$936,537, $177,631, $76,068, and $0, respectively.
Black-Scholes value of employee options
During the years ended December 31, 2004 and 2005, the Company valued employee options for
pro-forma purposes at the grant date using the Black-Scholes pricing model with the following
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2005
|
Expected life (years)
|
|
|
7.32
|
|
|
|
5.26
|
|
Risk free interest rate
|
|
|
5.42
|
%
|
|
|
4.02
|
%
|
Volatility
|
|
|
238.46
|
%
|
|
|
188.83
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The weighted average fair value for options granted in 2004 and 2005 were $1.10 and $0.69,
respectively.
During the three and six months ended June 30, 2006, the Company granted 1,163,605 options and
no options, respectively, to certain employees, exercisable at amounts ranging from $0.85 to $1.69,
vested over one year with a ten year life. The options were valued at an aggregate amount of
$1,809,518 (or $1.555 per share on average) using the Black Scholes pricing model using a 5.5 year
expected term, 130.61% volatility, no annual dividends, and a discount rate of 4.59%.
71
Warrants
The following table summarizes certain information about the Companys stock purchase
warrants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Warrants outstanding, January 1, 2004
|
|
|
14,252,414
|
|
|
$
|
0.48
|
|
Warrants granted
|
|
|
2,372,500
|
|
|
|
1.27
|
|
Warrants exercised
|
|
|
(960,500
|
)
|
|
|
0.20
|
|
Warrants cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding, December 31, 2004
|
|
|
15,664,414
|
|
|
|
0.62
|
|
Warrants granted
|
|
|
5,198,574
|
|
|
|
1.16
|
|
Warrants exercised
|
|
|
(50,500
|
)
|
|
|
0.99
|
|
Warrants cancelled
|
|
|
(20,000
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
Warrants outstanding, December 31, 2005
|
|
|
20,792,488
|
|
|
|
0.75
|
|
Warrants granted (unaudited)
|
|
|
3,264,600
|
|
|
|
1.33
|
|
Warrants exercised (unaudited)
|
|
|
(1,745,250
|
)
|
|
|
0.61
|
|
Warrants cancelled (unaudited)
|
|
|
(126,784
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
Warrants outstanding, June 30, 2006 (unaudited)
|
|
|
22,185,054
|
|
|
$
|
0.84
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2004, the Company issued 1,000,000 10-year warrants to
acquire 1,000,000 shares of the Companys common stock. The warrants require a payment of $1 for
each share purchased. The warrants were issued to finalize a settlement with the bankruptcy trustee
and others who had claims to ZEFS in exchange for the full release of their claims. The Company
valued the warrants at $1,585,265 and reflected the amount as patent settlement costs during the
year ended December 31, 2004. The warrants were issued in July 2004 when the Company became current
in its SEC filings. The warrants were valued by the Company using the Black Scholes pricing model
using a ten year term (statutory term), 46.2% volatility, no annual dividends, and a discount rate
of 4.57%. The trustee and the other individuals will also receive royalties when the product is
sold. There are no required royalties payable under this agreement for the year ended December 31,
2005.
During 2004, the Company issued to two consultants 100,000 warrants with an exercise price of
$1.00 per share, and using the Black Scholes pricing model, the fair value of these warrants was
valued at $53,300 and included as compensation expense. The remaining 1,272,500 warrants issued
during 2004 were issued to investors as part of equity agreement and were not ascribed any separate
value in the accompanying financial statements.
During the year ended December 31, 2005, the Company issued 10,000 warrants to an individual
for settlement of a claim. The Company also issued 25,000 warrants to an individual in exchange for
consulting services rendered. The warrants were valued at an aggregate amount of $18,462 using the
Black Scholes pricing model using 3-year and 5-year respective terms (statutory terms), 58.69%
volatility, no annual dividends, and a discount rate of 3.55% and 4.13%, respectively.
During February 2006, the Company issued 250,000 performance based warrants to an outside
consultant. These warrants are to be exercisable at $.40 per share, are fully vested and
exercisable immediately. These warrants were valued at $401,130 using the Black-Scholes option
valuation model with the following assumptions: risk-free interest rate of 4.59%, dividends yield
of 0%, volatility factors of the expected market price common of 130.61%, and an expected life of
five years.
In April 2006, the Company entered into a one-year agreement with an outside consultant to
provide public relations services. The terms of the agreement calls for monthly payments of $7,000.
Additionally, the Company issued a five-year warrant to the consultant. The warrant is exercisable
for up to 100,000 shares of common stock at an exercise price of $2.30 per share and vests as to
8,333 shares per month commencing April 30, 2006. The shares issuable upon exercise of the warrant
have piggyback registration rights. In August 2006 the Company terminated the agreement. The
consultant earned 41,665 warrants and the remaining balance of 58,335 were forfeited.
8. Convertible notes and warrants
During the year ended December 31, 2005, the Company completed the first part of a private
offering of its 9% Convertible Notes due at dates ranging between May 31, 2006 and July 31, 2006
(the Notes) and Warrants to purchase shares of the Companys
72
common stock which expire between August 31, 2007 and December 28, 2007 (the Warrants). The
Notes are convertible at $0.70 per share of common stock and the Warrants entitle the holder to
purchase a number of shares of the Companys common stock equal to 150% of the number of shares of
common stock into which the Note is convertible. The Warrants are exercisable at a price of $1.00
per share.
During the year ended December 31, 2005, the Company issued Notes totaling $1,576,378 and paid
related transaction fees of $123,196, resulting in net proceeds to the Company of $1,453,182. In
addition to the cash paid for transaction fees, 166,126 additional Warrants were issued to certain
placement agents. These Warrants expire between August 31, 2007 and December 28, 2007 and are
exercisable at a price of $1.00 per share.
The aggregate value of the Warrants issued in connection with the offering and to the finder
were valued at $696,413 using the Black-Scholes option valuation model with the following
assumptions; risk-free interest rate of 4.02% to 4.45%; dividend yield of 0%; volatility factors of
the expected market price of common stock of 83.59%; and an expected life of two years (statutory
term). The company also determined that the notes contained a beneficial conversion feature of
$756,768.
The value of the Warrants of $696,413, the conversion option of $756,768, and the transaction
fees of $123,196 are considered as debt discount and are being amortized over the life of the
Notes. During 2005, $318,759 of such discount has been amortized and included in the accompanying
statements of operations. The remaining unamortized debit discount as of December 31, 2005 of
$1,257,619 has been netted against the convertible debentures in the accompanying balance sheet.
During the six months ended June 30, 2006, the Company issued additional Notes totaling
$1,000,000 which included the conversion of $45,000 of debt owed to the Companys Chief Financial
Officer. The Company paid related transaction fees of $89,500 resulting in net proceeds to the
Company of $865,500. In addition to the cash paid for transaction fees, 117,857 additional Warrants
were issued to certain placement agents. These Warrants expire between August 31, 2007 and February
9, 2008 and are exercisable at a price of $1.00 per share.
The aggregate value of the Warrants issued in connection with the offering and to the finder
were valued at $620,252 using the Black-Scholes option valuation model with the following
assumptions; risk-free interest rate of 4.35% to 4.66%; dividend yield of 0%; volatility factors of
the expected market price of common stock of 130.61%; and an expected life of two years (statutory
term). The company also determined that the notes contained a beneficial conversion feature of
$290,248.
The value of the Warrants of $620,252, the conversion option of $290,248, and the transaction
fees of $89,500 are considered as debt discount and are being amortized over the life of the Notes.
For the six and three months ended June 30, 2006, respectively, $2,113,825 and $979,350 of the
total discount has been amortized and included in the accompanying statements of operations. The
remaining unamortized debt discount of $143,795 as of June 30, 2006 is netted against the
convertible debentures in the accompanying balance sheets.
During the six months ended June 30, 2006, $1,448,720 of the Notes were converted to 2,069,600
shares of stock at $0.70 per share. In addition, $3,595 of accrued interest was converted to 5,136
shares at $0.70 per share.
During the three months ended June 30, 2006, $1,242,000 of the Notes were converted to
1,774,286 shares of stock at $0.70 per share. In addition, $3,595 of accrued interest was
converted to 5,136 shares at $0.70 per share.
9. Research and development
The Company has research and development facilities in Morgan Hill, California and Queensland,
Australia. The Company has expanded research and development to include application of the ZEFS, MK
IV and CAT-MATE technologies for diesel engines, motorbikes, boats, generators, lawnmowers and
other small engines. The Company has purchased test vehicles, test engines and testing equipment.
The Company has completed testing on products incorporating its ZEFS, MK IV and CAT-MATE
technologies for automobiles, trucks motorcycles, off-road vehicles and stationary engines, the
results of which have been provided to RAND Corporation (RAND) for evaluation. RAND oversees the
research and development facilities. The Company spent $1,873,464, $1,150,361, $592,122, $190,637,
$178,873 and $121,111 for the years ended December 31, 2004 and 2005, and the six and three months
ended June 30, 2005 and 2006, respectively.
73
10. Commitments and contingencies
Legal matters
On December 19, 2001, the SEC filed civil charges in the United States Federal District Court,
Southern District of New York, against us, the Companys former President and then sole director
Jeffrey A. Muller, and others, alleging that the Company and the other defendants were engaged in a
fraudulent scheme to promote our stock. The SEC complaint alleged the existence of a promotional
campaign using press releases, Internet postings, an elaborate website, and televised media events
to disseminate false and materially misleading information as part of a fraudulent scheme to
manipulate the market for stock in the corporation, which was then controlled by Mr. Muller. On
March 22, 2002, the Company signed a consent to final judgment of permanent injunction and other
relief in settlement of this action as against the corporation only, which the court approved on
July 2, 2002. Under this settlement, the Company was not required to admit fault and did not pay
any fines or restitution. The SECs charges of fraud and stock manipulation continue against Mr.
Muller and others.
On July 2, 2002, after an investigation by the Companys newly constituted board of directors,
the Company filed a cross-complaint in the SEC action against Mr. Muller and others seeking
injunctive relief, disgorgement of monies and stock and financial restitution for a variety of acts
and omissions in connection with sales of the Companys stock and other transactions occurring
between 1998 and 2002. Among other things, the Company alleged that Mr. Muller and certain others
sold company stock without providing adequate consideration to the Company; sold insider shares
without making proper disclosures and failed to make necessary filings required under federal
securities laws; engaged in self-dealing and entered into various undisclosed related-party
transactions; misappropriated for their own use proceeds from sales of the Companys stock; and
entered into various undisclosed arrangements regarding the control, voting and disposition of
their stock. The Company contends that it is entitled to a judgment canceling all of the
approximately 8,716,710 shares of the Companys common stock that were previously obtained and
controlled, directly or indirectly, by Mr. Muller; divesting and preventing any subsequent holders
of the right to exercise options previously held by Mr. Muller for 10,000,000 shares of the
Companys common stock, conversion of an existing preliminary injunction to a permanent injunction
to prevent Mr. Muller from any involvement with the Company and a monetary judgment against Mr.
Muller and others in the amount of several million dollars.
In the course of the litigation, the Company has obtained ownership control over Mr. Mullers
claimed patent rights to ZEFS. Under a Buy-Sell Agreement between Mr. Muller and the Company dated
December 29, 1998, Mr. Muller, who was listed on the ZEFS patent application as the inventor of
ZEFS, purported to grant us all international marketing, manufacturing and distribution rights to
ZEFS. Those rights were disputed because an original inventor of ZEFS contested Mr. Mullers legal
ability to have conveyed those rights.
In Australia, Mr. Muller entered into a bankruptcy action seeking to overcome the Companys
claims for ownership of ZEFS. In conjunction with these litigation proceedings, a settlement
agreement was reached whereby the $10 per unit royalty previously due to Mr. Muller under his
contested Buy-Sell Agreement was terminated and replaced with a $.20 per unit royalty payable to
the bankruptcy trustee. On November 7, 2002, under a settlement agreement executed with the Mr.
Mullers bankruptcy trustee, the trustee transferred to the Company all ownership and legal rights
to this international patent application for ZEFS.
Both the SEC and the Company have filed Motions for Summary Judgment contending that there are
no material issues of fact in contention and as a matter of law, the Court should grant a judgment
against Mr. Muller and the cross-defendants. Mr. Muller has filed a response contending the motions
are without merit or substance.
Mr. Muller and several of the defendants filed a Motion to Dismiss the complaint filed by the
Company and moved for summary judgment in their favor. On December 28, 2004, Judge George B.
Daniels denied the cross-defendants motion to dismiss the Companys cross-complaint, denied the
request to vacate the July 2, 2002 preliminary injunction and denied the request for damages
against the Company. The court also refused to grant a summary judgment in favor of the
cross-defendants and dismissed Mr. Mullers claims against the Company for indemnification for his
legal costs and for damages resulting from the litigation. Neither Mr. Muller nor any of the
cross-defendants have filed any cross-claims against the Company and the Company is not exposed to
any liability as a result of the litigation, except for possibly incurring legal fees and expenses
should the Company lose the litigation.
On November 16, 2005, the Court granted the SECs motion for summary judgment. In granting the
motion, the Court has barred Mr. Muller from serving as an officer or director of a public company
for a period of 20 years, ordered Mr. Muller to disgorge any shares of our stock that he still owns
and directed the Company to cancel any issued and outstanding shares of our stock still owned by
74
Mr. Muller. Mr. Muller was also ordered to disgorge to the SEC unlawful profits in the amount
of $7.5 million and a pay a civil penalty in the amount of $100,000. Acting in accordance with the
Courts order, the Company has canceled (i) 8,047,403 shares of its common stock held by Mr. Muller
and/or his affiliates, (ii) options to acquire an additional 10,000,000 shares of the Companys
common stock held by Mr. Muller personally and (iii) $1,017,208 of debt which Mr. Muller claimed
was owed to him by the Company.
In response to the November 16, 2005 decision by the Court, Muller filed a motion seeking to
set aside the decision and order of the Court. On March 31, 2006, the Court issued a decision and
order denying Mullers motion to set aside the decision on summary judgment issued against Muller
on November 16, 2005.
A final decision on the motion for summary judgment filed by the Company, which potentially
would terminate the ongoing litigation, is still pending. Should the Court not grant summary
judgment in favor of the Company, the case will be scheduled for final disposition in a trial.
Although the outcome of this litigation cannot be predicted with any degree of certainty, the
Company is optimistic that, based upon previous developments in the litigation and the Courts
granting of the SECs motion for summary judgment, the Courts ruling on the motion for summary
judgment will either significantly narrow the issues for any later trial or will result in a final
disposition of the case in a manner favorable to the Company.
In April 2005, Jeffrey A. Muller, the Companys former sole director and executive officer,
filed a lawsuit in the Federal District Court for the Central District of California, seeking
declaratory and injunctive relief and alleging unfair competition in connection with a claimed
prior patent interest in ZEFS and stock option rights. In seeking declaratory relief, Mr. Muller is
seeking to have the patent rights in ZEFS that were previously transferred to the Company by Mr.
Mullers bankruptcy trustee declared null and void.
The Company was named as a defendant in a complaint filed before the Los Angeles Superior
Court, Civ. No. BC 312401, by Terracourt Pty Ltd, an Australian corporation (Terracourt),
claiming breach of contract and related remedies from promises allegedly made by the former
president of the Company in 1999. Terracourt sought specific performance of the former presidents
alleged promises to transfer to Terracourt an aggregate 480,000 shares of the Companys common
stock for office consultant and multimedia services. The complaint was filed on March 18, 2004.
Terracourt also filed a Statement of Damages seeking costs of the lawsuit and general damages of $2
million. The case proceeded to trial in the Los Angeles Superior Court in May, 2005. In June, 2005,
the Judge issued a statement of decision which denied Terracourts claims for 450,000 shares of
stock, monetary damages, and costs of the lawsuit. The Court also ruled that Terracourt was
entitled to receive an option exercisable for 30,000 shares of the Companys common stock,
exercisable at $.001 per share (par value). Both parties filed motions for a new trial on the issue
of the opinion. In September 2005, the court ruled that the Company must pay Terracourt a total of
$2,500 and cancelled the original award of 30,000 options.
This recent lawsuit brought by Mr. Muller arises out of the same claims that are the subject
of ongoing litigation in the Federal District Court for the Southern District of New York, in which
the Company has previously obtained a preliminary injunction against Mr. Muller barring him from
any involvement with the Company and preventing Mr. Muller, his agents or assigns, from exercising
any claimed rights to the Companys assets or stock. Mr. Muller previously filed the same complaint
in the Federal District Court for the Southern District of New York, which claim is pending
dismissal. On December 28, 2004, Federal District Court Judge George B. Daniels issued a decision
dismissing motions filed by Mr. Muller against the Companys cross-claims. The dismissal of those
motions involved similar causes of action as those contained in Mr. Mullers recent lawsuit
commenced in the Federal District Court for the Central District of California. Since the case in
New York is still pending, the filing of the new lawsuit in California is subject to various
defenses which should result in the dismissal of the new lawsuit.
On January 25, 2006, Mr. Mullers complaint, filed in the California District Court and
transferred to the Federal Court in the Southern District of New York, was assigned to Judge George
B. Daniels. It is expected that the Court will consolidate that complaint with the already pending
claims encompassed within the Companys Motion for Summary Judgment. While the Company believes
that it will have valid claims and defenses, there can be no assurance that an adverse result or
outcome on the pending motions or a trial of this case would not have a material adverse effect on
the Companys financial position or cash flow.
Employment agreements
In July 2005, the Company entered into an employment agreement with an individual to serve as
a Vice President of Operations for the Company. The agreement expires December 31, 2005, with an
automatic one-year extension and provides for annual base compensation of not less than $120,000
per year. During the employment term, the individual is eligible to participate in certain
incentive plans, stock option plans and similar arrangements in accordance with the Companys
recommendations at award levels
75
consistent and commensurate with the position and duties hereunder.
Including those agreements entered into prior to 2005, minimum guaranteed compensation
payments under employment agreements, as amended, by year are as follows:
As of December 31, 2005:
|
|
|
|
|
Year
|
|
|
|
|
2006
|
|
$
|
830,000
|
|
2007
|
|
|
810,000
|
|
|
|
|
|
Total
|
|
$
|
1,640,000
|
|
During the six and three months ended June 30, 2006, respectively, approximately $430,000 and
$202,000 of the 2006 commitment was paid.
Consulting agreements
In April 2006, the Company entered into a one-year agreement with an outside consultant to
provide public relations services. The terms of the agreement calls for monthly payments of $7,000.
Additionally, the Company issued a five-year warrant to the consultant. The warrant is exercisable
for up to 100,000 shares of common stock at an exercise price of $2.30 per share and vests as to
8,333 shares per month commencing April 30, 2006. The shares issuable upon exercise of the warrant
have piggyback registration rights. In August 2006 the Company terminated the agreement. The
consultants warrant vested as to 41,665 shares and the balance of 58,335 shares was forfeited.
Leases
During 2003, the Company had entered into a sublease lease agreement with an entity to lease
office space for its primary administrative facility. A director of the Company is an indirect
owner of the entity. As amended as of December 31, 2005, the lease term is from November 1, 2003
through October 31, 2007 and carries an option to renew for two additional years with a 10 percent
increase in the rental rate. Monthly rent is $3,740 per month under this lease for approximately
1,225 square feet, and for comprehensive office support services, including reception, parking and
conference facilities.
In January 2006, the Company amended the existing sublease agreement whereby it increased its
monthly rents from $3,740 to $6,208 and expires July 31, 2007 with an option to renew for two
additional years. The increase in rent was for an increase of space of approximately 475 square
feet, and for additional common area use, expanded office services, including a computer network
and additional parking spaces.
In July 2006, the Company acquired two additional offices comprising approximately 250 square
feet, and additional parking spaces. The Company expects that the increase in the rent it pays to
the landlord will be less than $1,000 per month; however, the Company has not concluded
negotiations with the landlord as to the exact amount of the additional rent.
In November 2003, the Company entered into a lease for a research and development facility
located in Queensland, Australia. The term of the lease is from November 15, 2003 through March 15,
2006 and carries an option to renew for two additional years each with an increase of the greater
of 5% or the increase in the then current Australian Consumer Price Index. Monthly rent is AUD
$1,292 (approximately US $1,000) per month under this lease. In March 2006, the Company entered
into a new lease for this facility for a term of two years commencing March 15, 2006. Monthly rent
is AUD $1,462 (approximately US $1,100) per month.
In September 2005, the Company entered into a lease for a testing facility located in Morgan
Hill, California. The term of the lease is from September 1, 2005 through August 31, 2007 and
carries an option to renew for two additional years at the then prevailing market rate. Monthly
rent is $2,240 per month under this lease. The lease was amended in February 2006 for additional
space. Monthly rate under the amended lease is $4,160 per month.
Total rent expense under these leases for the years ended December 31, 2004 and 2005, and the
six and three months ended June 30, 2005 and 2006, is $33,720, $44,180, $13,600, $10,200, $76,656,
and $35,518, respectively.
The following is a schedule by years of future minimum rental payments required under the
non-cancelable operating leases as of
76
December 31, 2005 and June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
Periods Ending December 31,
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
(Unaudited)
|
|
2006(1)
|
|
$
|
109,781
|
|
|
$
|
68,874
|
|
2007
|
|
|
88,224
|
|
|
|
94,000
|
|
2008
|
|
|
3,655
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
201,660
|
|
|
$
|
165,874
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The December 31, 2005 columns reflect the 2006 future minimum
lease payments anticipated for the full year 2006. The June 30,
2006 column reflects the 2006 future minimum lease payments
anticipated of the period July 1, 2006 to December 31, 2006.
|
11. Subsequent events
Subsequent to June 30, 2006, $1,127,658 of the convertible notes plus $112 of interest were
converted to 1,611,100 shares of stock at $0.70 per share.
In August 2006, the Company approved and authorized a grant to non-employee directors options
to purchase 120,000 shares of common stock at an exercise price of $2.255 per share. The options
vest in twelve months and expire in five years. The Company also approved and authorized a grant
to a non-employee director an option to purchase 30,000 shares of common stock at an exercise price
of $2.255 per share. The option vests immediately and expires in one year.
On August 8, 2006, the Compensation Committee of the Board of Directors approved an increase
in the base annual salary of one of the Companys officers from $150,000 to $200,000, effective as
of such date.
As
of September 20, 2006, individuals exercised outstanding warrants, at prices ranging from
$0.50 to $1.50 per share, to purchase an additional 373,202 shares for an aggregate $400,702 gross
and net proceeds.
In September 2006, the Company entered into what is sometimes termed an equity line of credit
arrangement with a private equity fund (the Fund). The Company has assumed that it will put
$9,913,400, or all 7,000,000 shares, based on a closing price of its common stock on September 20,
2006 of $1.46 per share, less the 3% discount applicable to the price per share that the Fund would
pay under the terms of the line of credit. However, this may not in fact be the case. If the
Company were to put more than the amount that would require it to issue the 7,000,000 shares being
registered hereunder, the Company would be required to file a new registration statement with
regard to the excess number of shares and have it declared effective by the Securities and Exchange
Commission before the Company could make further puts under the equity line of credit. In
addition, when amounts are drown upon under the facility, the Company will pay a commission equal
to 8% of such drawdown to its investment banker.
As of September 20, 2006, the Company has not drawn down any portion of the $10,000,000
commitment, leaving the entire $10,000,000 available under the equity line of credit.
77
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation provide that no officer or director shall be personally liable
to this corporation or our stockholders for monetary damages for breach of fiduciary duty as a
director or officer of this corporation. Our bylaws and Articles of Incorporation also provide that
we shall, to the maximum extent and in the manner permitted by the Nevada Revised Statutes,
indemnify each person who serves at any time as a director, officer, employee or agent of Save the
World Air, Inc. from and against any and all expenses, judgments, fines, settlements and other
amounts actually and reasonable incurred in connection with any proceeding arising by reason of the
fact that he is or was a director, officer, employee or agent of Save the World Air, Inc. We also
have the power to defend such person from all suits or claims in accord with the Nevada Revised
Statutes. The rights accruing to any person under our bylaws and Articles of Incorporation do not
exclude any other right to which any such person may lawfully be entitled, and we may indemnify or
reimburse such person in any proper case, even though not specifically provided for by the bylaws
and Articles of Incorporation.
Insofar as indemnification for liabilities for damages arising under the Securities Act of
1933, as amended (the Securities Act) may be permitted to our directors, officers, and
controlling persons pursuant to the foregoing provision, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
ITEM 25.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
|
|
|
|
|
SEC registration fee
|
|
$
|
1,198
|
|
Accounting fees and expenses
|
|
|
29,000
|
*
|
Legal fees and expenses
|
|
|
25,000
|
*
|
Printing and related expenses
|
|
|
15,000
|
*
|
Transfer agent fees and expenses
|
|
|
1,000
|
*
|
Miscellaneous
|
|
|
1,000
|
*
|
|
|
|
|
Total
|
|
$
|
72,198
|
*
|
ITEM 26.
RECENT SALES OF UNREGISTERED SECURITIES
From June 9, 2003 through October 16, 2003, the Company sold 8,417,414 shares of common stock
and issued 8,417,414 warrants to purchase common stock for gross proceeds of $2,104,353 (net
proceeds $2,027,768) as a part of an offering of common stock and warrants between November 26,
2002 and October 16, 2003.
In November 2003, the Company sold 60,000 shares of common stock (which stock was issued in
April 2004) and a warrant to purchase up to 60,000 shares of common stock exercisable at $0.50 per
share for five years, in consideration of the cancellation of a loan in the amount of $15,000 made
to us by Joette Masry, the wife of the Companys late Chief Executive Officer, Edward L. Masry.
In February 2004, the Company issued 488,560 shares of common stock to five individuals who
provided services to the Company in connection with this private offering of Common Stock.
In March 2004, the Company issued options to purchase a total 1,172,652 shares of common stock
to certain of its directors, officers and employees.
In July 2004, the Company issued ten-year warrants to purchase 1,000,000 shares of common
stock in connection with patent acquisition agreements with two individuals. These warrants are
exercisable at $1.00 per share. In addition, in October 2004, the Company issued one-year warrants
to purchase 50,000 shares of common stock pursuant to a distribution agreement with another
individual, which warrants are exercisable at $1.00 per share. In November 2004, the Company issued
five-year warrants to another individual to purchase 50,000 shares of common stock pursuant to a
consulting agreement with such individual, which warrants were exercisable at $1.00 per share.
During 2004, the Company issued an aggregate of 850,000 shares of common stock to six
individuals who were advisors or consultants to the Company and certain of their designees, in
exchange for advisory and consulting services rendered to the Company. Of such shares, 250,000
shares vested upon issuance thereof, 300,000 of such shares vested on April 1, 2004 and the
remainder vested
II-1
on April 1, 2005.
Also during 2004, the Company issued 960,500 shares of common stock to 12 persons in
connection with the exercise, at various exercise prices, of previously-issued warrants. The
Company received aggregate gross and net proceeds of $194,200 in connection with such exercises.
From July 2004 through July 2005, the Company engaged in a private offering of units,
comprised of shares of common stock and one-year warrants to purchase an equal number of shares of
our common stock at an exercise price of $1.50 per share. The expiration date of each of these
warrants has been extended for an aggregate of one additional year from their respective dates of
issuance, for a total term of two years from their respective dates of issuance. In this offering,
the Company sold an aggregate of 2,872,000 such units, consisting of 2,872,000 shares of common
stock and warrants to purchase 2,872,000 shares of common stock exercisable at $1.50 per share. For
the sale of such units, the Company received aggregate gross proceeds of $2,872,000 (net proceeds
of $2,761,620).
In January 2005, the Company issued 50,500 shares to two individuals in connection with their
exercise of warrants, for which we received gross and net proceeds of $50,200.
In July 2005, the Company issued options to purchase 2,085,909 shares of common stock to
certain of the Companys directors, officers and employees.
From August through September 2005, the Company sold an aggregate $1,501,378 principal amount
of its 9% Convertible Promissory Notes due July 31, 2006 (the Investor Notes) and Warrants (the
Investor Warrants) to purchase an aggregate of 3,217,239 shares of Common Stock, which Investor
Warrants expire on August 31, 2007. The Company received gross proceeds of $1,501,378 (net proceeds
of $1,428,432). The Investor Notes are convertible at $0.70 per share and the Investor Warrants are
exercisable at $1.00 per share. As part of the offering, warrants exercisable for an additional
53,627 shares of the Companys common stock were issued to the Companys placement agent.
From October 2005 through February 2006, the Company received gross proceeds of $1,075,000
(net proceeds of $935,250) in connection with the issuance of 9% Subordinated Convertible Notes due
May 31, 2006 (the Bridge Notes) and two-year Warrants (the Bridge Warrants) to purchase
2,303,568 shares of Common Stock in a private offering conducted by Spencer Clarke, LLC of New
York, as the Companys placement agent. The Bridge Notes are convertible at $0.70 per share and the
Bridge Warrants are exercisable at $1.00 per share. As part of the offering, warrants exercisable
for an additional 153,572 shares of the Companys common stock were issued to the Companys
placement agent. In 2006, all of the Bridge Notes were converted into a total of 1,535,715 shares
of Common Stock on or before the maturity date.
During 2005, the Company issued warrants to purchase 35,000 shares of common stock exercisable
at $1.00 per common share. Of this total, two-year warrants to purchase 25,000 shares were issued
as part of the terms of a consulting agreement and three-year warrants to purchase 10,000 shares
were issued in settlement of a claim.
In December 2005, the Company issued a total of 846,548 shares of common stock to eight
persons in settlement of an aggregate $625,521 of accounts payable.
In February 2006, the Company issued options to purchase a total of 1,163,605 shares of common
stock to certain of its directors, officers and employees. Also in February 2006, the Company
issued warrants to purchase a total of 250,000 shares of common stock at $.40 per share to a
consultant upon the successful completion of an agreement between the Company and such individual.
In March 2006, the Company issued 295,314 shares of its common stock in connection with the
conversion of $206,720 aggregate principal amount of Investor Notes.
In April 2006, the Company issued 10,000 shares of common stock in connection with the
conversion of $7,000 aggregate principal amount of Investor Notes.
In April 2006, the Company sold an aggregate 473,000 shares of common stock and warrants to
purchase 118,250 additional shares of common stock at $2.60 per share, to two investors who are not
U.S. persons as that term is defined in Rule 902 of Regulation S promulgated under the Securities
Act of 1933, as amended. Gross proceeds to the Company in connection with these
II-2
issuances were $737,881 and net proceeds were $667,803.
Also in April 2006, the Company issued a five-year warrant to one service provider in
connection with services to be provided. The warrant was exercisable for up to 100,000 shares of
common stock at an exercise price of $2.30 per share and vests as to 8,333 shares per month
commencing April 30, 2006. This warrant vested as to 41,665 shares and was forfeited as to the
balance of 58,335 shares upon the termination of the service providers services as of August 31,
2006. The 41,665 shares issuable upon exercise of the vested portion of the warrant have piggyback
registration rights.
In May 2006, the Company sold an aggregate 873,018 shares of common stock and warrants to
purchase 436,511 additional shares of common stock at $2.70 per share, for an aggregate $1,650,009
gross proceeds ($1,435,508 net proceeds). In addition, warrants exercisable for 87,302 shares of
the Companys common stock were issued to the Companys placement agent.
During the six-month period ended June 30, 2006, individuals exercised outstanding warrants to
purchase a total of 1,745,250 shares of the Companys common stock for an aggregate $1, 117,625
gross and net proceeds. Subsequent to June 30, 2006 and through September 20, 2006, individuals
exercised outstanding warrants, at various exercise prices, to purchase an additional 372,202
shares for an aggregate $400,702 gross and net proceeds.
The issuances of the securities described above were made in reliance on the exemptions from
registration set forth in Section 4(2) of the Securities Act of 1933, as amended, or Regulations D
or S promulgated thereunder.
ITEM 27.
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
3.1
|
(1)
|
|
Articles of Incorporation, as amended, of the Registrant.
|
|
|
|
|
|
|
3.2
|
(1)
|
|
Bylaws of the Registrant.
|
|
|
|
|
|
|
5*
|
|
|
Opinion of counsel.
|
|
|
|
|
|
|
10.1
|
(13)
|
|
Commercial Sublease dated as of January 1, 2006 between the Registrant and KZ Golf, Inc.
|
|
|
|
|
|
|
10.2
|
(12)
|
|
General Tenancy Agreement dated March 14, 2006 between the Registrant and Autumlee Pty Ltd.
|
|
|
|
|
|
|
10.3
|
(3)
|
|
Agreement dated December 13, 2002 between the Registrant and RAND.
|
|
|
|
|
|
|
10.4
|
(2)**
|
|
Agreement dated May 7, 2003 between the Registrant and RAND.
|
|
|
|
|
|
|
10.5
|
(4)
|
|
Modification No. 1 dated as of August 21, 2003 to Exhibit 10.4.
|
|
|
|
|
|
|
10.6
|
(4)
|
|
Modification No. 2 dated as of October 17, 2003 to Exhibit 10.4.
|
|
|
|
|
|
|
10.7
|
(4)
|
|
Modification No. 3 dated as of January 20, 2004 to Exhibit 10.4.
|
|
|
|
|
|
|
10.8
|
(5)
|
|
Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne Muller
(Bankrupts).
|
|
|
|
|
|
|
10.9
|
(5)
|
|
Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.
|
|
|
|
|
|
|
10.10
|
(6)
|
|
Employment Agreement dated December 1, 2003 between the Registrant and Edward L. Masry.
|
|
|
|
|
|
|
10.11
|
(14)
|
|
Amended and Restated Employment Agreement dated as of October 5, 2005 between the Registrant and Eugene E.
Eichler.
|
|
|
|
|
|
|
10.12
|
(14)
|
|
Amended and Restated Employment Agreement dated as of October 5, 2005 between the Registrant and Bruce H.
McKinnon.
|
|
|
|
|
|
|
10.13
|
(7)
|
|
Save the World Air, Inc. 2004 Stock Option Plan
|
|
|
|
|
|
|
10.14
|
(9)
|
|
Form of Incentive Stock Option Agreement under 2004 Stock Option Plan
|
II-3
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
10.15
|
(9)
|
|
Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan
|
|
|
|
|
|
|
10.16
|
(9)
|
|
Consulting Agreement dated as of April 1, 2003 between the Registrant and Adrian Menzell
|
|
|
|
|
|
|
10.17
|
(10)
|
|
Amendment
to Exhibit 10.16.
|
|
|
|
|
|
|
10.18
|
(9)
|
|
Consulting Agreement dated as of April 1, 2003 between the Registrant and Pat Baker
|
|
|
|
|
|
|
10.19
|
(10)
|
|
Amendment
to Exhibit 10.18.
|
|
|
|
|
|
|
10.20
|
(9)
|
|
Consulting Agreement dated as of April 1, 2003 between the Registrant and John Kostic
|
|
|
|
|
|
|
10.21
|
(10)
|
|
Amendment
to Exhibit 10.20.
|
|
|
|
|
|
|
10.22
|
(9)
|
|
Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett
|
|
|
|
|
|
|
10.23
|
(9)
|
|
Advisory Services Agreement dated as of July 7, 2003 between the Registrant and Sir Jack Brabham
|
|
|
|
|
|
|
10.24
|
(8)
|
|
License Agreement dated as of July 1, 2004 between the Registrant and Temple University The Commonwealth
System of Higher Education
|
|
|
|
|
|
|
10.25
|
(9)
|
|
Exclusive Capital Raising Agreement dated as of July 29, 2004 between the Registrant and London Aussie
Marketing, Ltd.
|
|
|
|
|
|
|
10.26
|
(9)
|
|
Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.
|
|
|
|
|
|
|
10.27
|
*
|
|
Amendment
to Exhibit 10.26.
|
|
|
|
|
|
|
10.28
|
(9)
|
|
Employment Agreement dated September 1, 2004 with Erin Brockovich
|
|
|
|
|
|
|
10.29
|
(9)
|
|
Representation Agreement dated as of October 1, 2004 between the Registrant and Gurminder Singh
|
|
|
|
|
|
|
10.30
|
(9)
|
|
Advisory Services Agreement dated as of August , 2002 between the Registrant and Bobby Unser, Jr.
|
|
|
|
|
|
|
10.31
|
(9)
|
|
Advisory Services Agreement dated as of August , 2002 between the Registrant and Nate Sheldon
|
|
|
|
|
|
|
10.32
|
(9)
|
|
Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell
|
|
|
|
|
|
|
10.33
|
(9)
|
|
Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell
|
|
|
|
|
|
|
10.34
|
(14)
|
|
Amended and Restated Employment Agreement dated as of March 1, 2006 between the Registrant and John Richard
Bautista, III
|
|
|
|
|
|
|
10.35
|
(11)
|
|
Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson
|
|
|
|
|
|
|
10.36
|
(12)
|
|
Amendment dated February 1, 2006 to Exhibit 10.35.
|
|
|
|
|
|
|
10.37
|
(11)
|
|
Form of Registrants 9% convertible note issued in 2005 Interim Financing
|
|
|
|
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10.38
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(11)
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Form of Registrants stock purchase warrant issued in 2005 Interim Financing
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10.39
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(12)
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Form of Registrants 9% convertible note issued in 2005 Bridge Financing
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10.40
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(12)
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Form of Registrants stock purchase warrant issued in 2005 Bridge Financing
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|
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10.41
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(14)
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Form of Registrants stock purchase warrant issued in 2006 Regulation S Financing
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10.42
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(14)
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Form of Registrants stock purchase warrant issued in 2006 PIPE Financing
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10.43
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(15)
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Investment Agreement dated as of September 15, 2006 between Registrant and Dutchess Private Equities Fund, L.P.
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10.44
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(15)
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Registration Rights Agreement dated as of September 15, 2006 between Registrant and Dutchess Private Equities
Fund, L.P.
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II-4
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Exhibit No.
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Description
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21*
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List of subsidiaries
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23*
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Consent of Weinberg & Company, P.A.
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24*
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Power of Attorney (included on Signature Page)
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*
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Filed herewith.
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**
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Confidential treatment previously requested.
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Management contract or compensatory plan or arrangement.
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(1)
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Incorporated by reference from Registrants Registration Statement on Form 10-SB (Registration Number
000-29185), as amended, filed on March 2, 2000.
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(2)
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Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2002.
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(3)
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Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.
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(4)
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Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2004.
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(5)
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Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.
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(6)
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Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2003.
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(7)
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Incorporated by reference from Appendix C of Registrants Schedule 14A filed on April 30, 2004, in
connection with its Annual Meeting of Stockholders held on May 24, 2004.
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(8)
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Incorporated by reference from Registrant Form 8-K filed on July 12, 2004.
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(9)
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Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2004.
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(10)
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Incorporated by reference from Registrants Form 10-QSB for the quarter ended June 30, 2005.
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(11)
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Incorporated by reference from Registrants Form 10-QSB for the quarter ended September 30, 2005.
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(12)
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Incorporated by reference from Registrants Form 10-KSB for the year ended December 31, 2005.
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(13)
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Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2006.
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(14)
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Incorporated by reference from Registrants Registration Statement on Form SB-2 (File No. 333-135415).
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(15)
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Incorporated by reference from Registrants Current Report on Form 8-K filed on September 21, 2006.
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ITEM 28.
UNDERTAKINGS
A. We hereby undertake to:
(1) File, during any period in which we offer or sell securities, a post-effective amendment
to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act.
(ii) Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the Calculation of Registration Fee table in
the effective registration statement.
II-5
(iii) Include any additional or changed information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each post-effective amendment
as a new registration statement of the securities offered, and the offering of the securities at
that time shall be the initial bona fide offering.
(3) File a post effective amendment to remove from registration any of the securities that
remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the Securities
Act to any purchaser in the initial distribution of the securities, the Company undertake that in
a primary offering of the Companys securities pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the following communications,
the undersigned small business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the
undersigned small business issuer or used or referred to by the undersigned small business
issuer;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or its securities
provided by or on behalf of the undersigned small business issuer; and
(iv) Any other communication that is an offer in the offering made by the undersigned
small business issuer to the purchaser.
B. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in the Securities Act of
1933 and will be governed by the final adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in
North Hollywood, California on
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Save The World Air, Inc.
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By:
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/s/
EUGENE E. EICHLER
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Eugene E. Eichler
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Chief Executive Officer
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Date: October 6, 2006
POWER OF ATTORNEY
The officers and directors of Save the World Air, Inc., whose signatures appear below, hereby
constitute and appoint Eugene E. Eichler and Bruce H. McKinnon, and each of them, their true and
lawful attorneys and agents, each with power to act alone, to sign, execute and cause to be filed
on behalf of the undersigned any amendment or amendments, including post-effective amendments, to
this registration statement of Save the World Air, Inc. on Form SB-2. Each of the undersigned does
hereby ratify and confirm all that said attorneys and agents shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates indicated.
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Name
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Title
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Date
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/s/ EUGENE E. EICHLER
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Chief Executive Officer, Chief Financial
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|
October 6, 2006
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Eugene E. Eichler
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Officer and Director
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/s/ BRUCE H. MCKINNON
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President, Chief Operating Officer and Director
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|
October 6, 2006
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Bruce H. McKinnon
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|
/s/
JOSEPH HELLEIS
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|
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Chairman of the Board
|
|
|
|
October 6, 2006
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Joseph Helleis
|
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|
/s/
JOHN J. BROWN
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|
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Director
|
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|
|
October 6, 2006
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John J. Brown
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/s/
JOHN F. PRICE
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Director
|
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|
|
October 6, 2006
|
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John F. Price
|
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/s/
CECIL KYTE
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|
Director
|
|
|
|
October 6, 2006
|
|
|
|
|
|
|
|
|
|
Cecil Kyte
|
|
|
|
|
|
|
|
|
II-7
Exhibit Index
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
3.1
|
(1)
|
|
Articles of Incorporation, as amended, of the Registrant.
|
|
|
|
|
|
|
3.2
|
(1)
|
|
Bylaws of the Registrant.
|
|
|
|
|
|
|
5*
|
|
|
Opinion of counsel.
|
|
|
|
|
|
|
10.1
|
(13)
|
|
Commercial Sublease dated as of January 1, 2006 between the Registrant and KZ Golf, Inc.
|
|
|
|
|
|
|
10.2
|
(12)
|
|
General Tenancy Agreement dated March 14, 2006 between the Registrant and Autumlee Pty Ltd.
|
|
|
|
|
|
|
10.3
|
(3)
|
|
Agreement dated December 13, 2002 between the Registrant and RAND.
|
|
|
|
|
|
|
10.4
|
(2)**
|
|
Agreement dated May 7, 2003 between the Registrant and RAND.
|
|
|
|
|
|
|
10.5
|
(4)
|
|
Modification No. 1 dated as of August 21, 2003 to Exhibit 10.4.
|
|
|
|
|
|
|
10.6
|
(4)
|
|
Modification No. 2 dated as of October 17, 2003 to Exhibit 10.4.
|
|
|