UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
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For the fiscal year ended December 31, 2006
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 0-29185
Save the World Air, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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52-2088326
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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5125
Lankershim Boulevard
North Hollywood, California 91601
(Address, including zip code, of principal executive offices)
(818) 487-8000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value.
Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
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No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of Registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
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No
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Registrants revenues for its most recent fiscal year: $30,000
The aggregate
market value of voting and non-voting common equity held by non-affiliates of
the Registrant was approximately $14,583,218 as of May 9, 2007, based upon the average of the
high and low bid prices on the OTC Bulletin Board reported for such date. This calculation does not
reflect a determination that certain persons are affiliates of the
Registrant for any other purpose.
The number of shares of the Registrants Common Stock outstanding as of May 9, 2007 was
41,196,180 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2007 Annual Meeting of Stockholders (the
Proxy Statement), to be filed with the Securities and Exchange Commission, are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes
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No
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SAVE THE WORLD AIR, INC.
FORM 10-KSB
INDEX
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PART I
Forward-Looking Statements
This Annual Report on Form 10-KSB contains forward-looking statements. These forward-looking
statements include predictions regarding our future:
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revenues and profits;
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customers;
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research and development expenses and efforts;
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scientific and other third-party test results;
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sales and marketing expenses and efforts;
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liquidity and sufficiency of existing cash;
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technology and products;
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the outcome of pending or threatened litigation; and
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the effect of recent accounting pronouncements on our financial
condition and results of operations.
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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 below under the heading Risk
Factors. 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.
Item 1.
Business
The discussion of our business is as of the date of filing this report, unless otherwise
indicated.
Overview
We are a green technology company that leverages a suite of patented, patent-pending and
licensed intellectual properties related to the treatment of fuels. Technologies patented by, or
licensed to, us utilize either magnetic or uniform electrical fields to alter physical
characteristics of fuels and are designed to create a cleaner combustion. Cleaner combustion has
been shown to improve performance, enhance fuel economy and/or reduce harmful emissions in
laboratory testing.
Our ECO ChargR and MAG ChargR products use fixed magnetic fields to alter some physical
properties of fuel, by incorporating our patented and patent-pending ZEFS and MK IV technologies.
We differentiate ECO ChargR and MAG ChargR products based on their differing attributes and
marketing focus. ECO ChargR products are primarily designed to reduce harmful emissions and MAG
ChargR products are primarily designed to enhance performance and fuel economy.
Our ECO ChargR product is intended to reduce exhaust emissions in vehicle and small
utility motors. ECO ChargR will be marketed primarily to original equipment manufacturers (OEMs)
as well as to pilot and government-mandated emissions programs. Our MAG ChargR product is intended
to
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increase power and improve mileage. MAG ChargR will be marketed primarily to the specialty
consumer accessories market for many types of vehicles, including but not limited to cars, trucks,
motorcycles, scooters, all terrain vehicles (ATVs), snowmobiles, personal watercraft and small
utility motors. On the other hand, because our ECO ChargR and MAG ChargR products are customized
to specific brands, models and engine sizes, these products ultimately will require hundreds of
individually developed parts, which can be expensive and time-consuming to produce. See Our
Technologies and Products below.
Our first revenues have come from initial sales in Asia for our ECO ChargR product in the
motorcycle industry. We commenced initial sales of ECO ChargR to customers in the United States in
the motorcycle industry in first quarter of 2007. We also commenced initial sales of our MAG ChargR
product in Asia and the United States in the motorcycle industry in the first quarter of 2007. See
Recent Developments and Sales and Marketing below.
We have obtained a license from Temple University for their patent-pending uniform electric
field technology, tentatively called ELEKTRA. The ELEKTRA technology consists of passing fuel
through a specific strong electrical field. Although ELEKTRA has a similar effect on fuels as our
ZEFS and MK IV technologies, ELEKTRA incorporates a uniform electrical field principle. Based on
our early research and product development, we believe that ELEKTRA carries certain advantages over
our ZEFS and MK IV technologies, primarily not requiring as many variations for products
incorporating the ELEKTRA technology compared to products incorporating the ZEFS or MK IV
technologies. Preliminary testing conducted in Europe by an outside research and development
facility indicates that ELEKTRA causes a significant change in some of the physical characteristics
of the fuel, resulting in better atomization of the fuel and improved combustion.
We have also entered into a research and development agreement with Temple University to
conduct further research on the ELEKTRA technology and magnetic technologies in general. Together
with Temple University, we have developed prototype products using the ELEKTRA technology and we
are continuing testing, and research and development. We are in the early stages of developing
ELEKTRA products that, based on the previously mentioned preliminary testing, is intended to
improve fuel economy and change fuel viscosity, and may improve performance and reduce emissions,
depending upon the specific application. When it is developed, we intend to market ELEKTRA
products primarily to the transportation industry, oil refineries and pipelines, and OEMs. See Our
Technologies and Products below.
At this time, we do not intend to devote significant effort to the commercialization of
products incorporating our CAT-MATE technology. However, we are considering various possible ways
to take advantage of opportunities that may become available to us. See Our Technologies and
Products below.
We operate in a highly competitive industry. Many of our activities may be subject to
governmental regulation. We have taken aggressive steps to protect our intellectual property. See
Competition, Government Regulation and Environmental Matters and Intellectual Property below.
There are significant risks associated with our business, our company and our stock. See
Risk Factors below.
We are a development stage company that generated its first initial revenues in the fourth
quarter of 2006. Our expenses to date have been funded primarily through the sale of stock and
convertible debt, as well as proceeds from the exercise of stock purchase warrants. We raised
capital in 2006 and will need to raise substantial additional capital in 2007, and possibly beyond,
to fund our sales and marketing efforts, continuing research and development, and certain other
expenses, until our revenue base grows sufficiently. See Managements Discussion and Analysis
below.
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 Annual Report.
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Since February 2, 2006, our common stock has been quoted on the Over-the-Counter Bulletin
Board under the symbol ZERO.
Recent Developments
During 2005 and 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 were with Team Phantom of Alaska and Motorcycle Products
Consulting Incorporated (MPCI) of California. These agreements provide for the sale of our
product lines in the North American OEM and specialty consumer accessories market for motorcycles,
to certain named prospective purchasers. We began shipping products under the agreement with MPCI
in small quantities commencing in the second quarter of 2007. We currently do not believe that we
will be receiving any orders from Team Phantom for our products and we do not expect that
relationship to be viable for us.
In January 2006, we entered into our first international distributorship agreement, with
Golden Allied Enterprises (Group) Co., Ltd., (GAE). This distributorship agreement (the GAE
Agreement) provides that GAE will serve as our exclusive distributor for our ZEFS and CAT-MATE
products 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 successfully completed in April 2006, during which tests of a device incorporating our ZEFS
technology achieved EURO2 standards and devices incorporating a combination of our ZEFS and
CAT-MATE technologies achieved EURO3 standards. See Independent Laboratory and Scientific
Testing and Sales and Marketing below.
In April 2006, we entered into a product development agreement with Kwong Kee (Qing Xin)
Environmental Exhaust Systems Company, Ltd. (Kwong Kee) in China. Under this agreement, Kwong
Kee, a manufacturer of mufflers and catalytic converters, collaborates with us on product
development for certain markets, primarily in Asia, and makes available to us its research and
development facilities, testing equipment and product design and development support team. See
Sales and Marketing and Manufacturing below.
In July 2006, we entered into an agreement with Quadrant Technology L.P. (Quadrant),
pursuant to which Quadrant provides product development services. Under this agreement, we also
granted Quadrant a right of first refusal to manufacture certain of our products. See Sales and
Marketing and Manufacturing below.
Also in July 2006, we entered into an agreement with Marketing Matters, Inc. (Marketing
Matters) 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 (SS Sales), to provide marketing and promotional
services in the western United States and western Canada for our products. SS Sales will be paid a
commission equal to 5% of the gross amount actually collected on contracts we enter into during the
contract term for existing or future customers introduced by SS Sales in the territory covered by
the agreement. SS Sales is owned by Nathan Shelton, one of the directors of the Company. See
Sales and Marketing below.
In October 2006, we entered into a distributorship agreement with PT Citra Cahaya Indonesia
(PTCC), who will serve as the exclusive distributor for our products in Indonesia. We began
delivering some of our products under this agreement (the PTCC Agreement) in the first quarter of
2007. See Sales and Marketing below.
Also in October 2006, we introduced our ECO ChargR and MAG ChargR products for use in
motorcycles at the INERMOT motorcycle trade show in Cologne, Germany. In November 2006, we
introduced our ECO ChargR and MAG ChargR products for use in automobiles and trucks at the SEMA
convention in Las Vegas, Nevada.
In December 2006, we entered into a distributorship agreement with T&C Adtech Co., Ltd.
Adtech), who will serve as the exclusive distributor for our ECO ChargR, MAG ChargR and CAT-
MATE products in Vietnam. The agreement (the Adtech Agreement) is for one year and will be
renewed automatically for successive periods if certain minimum firm orders are placed by Adtech in
twelve-month periods ending on September 30. See Sales and Marketing below.
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In February 2007, we entered into two license agreements with Temple University, one covering
Temple Universitys current patent application concerning certain electric field effects on
gasoline, kerosene and diesel fuel particle size distribution (in fuel injection engines), and the
other covering Temple Universitys current patent application concerning electric field effects on
crude oil. We also entered into a research and development agreement, to conduct further research
on the ELEKTRA technology and magnetic technologies in general. See Our Technology and Products
below.
In April 2007, we received the final report of RAND Corporation (RAND), whom we had retained
in December 2002 to study the scientific validity and market potential of our original ZEFS
technology, help us develop a plan to assess the technical basis for our ZEFS technology and
understand the potential market for products incorporating the ZEFS technology if a technical basis
were established. See RAND Report below.
Our Business Strategy
The Crisis of the Effect of Motor Emissions on Air Pollution
The incomplete and inefficient burning of fossil fuel in internal combustion engines results
in unburned gases, such as hydrocarbons (THC), carbon monoxide (CO) and oxides of nitrogen
(NOx) 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.
According to the Goddard Institute for Space Studies, in 2000, the worlds roads were
supporting about 800 million vehicles, almost 500 million of which are cars and the remainder of
which are trucks, buses, motorcycles and scooters. The United States, Japan and Europe account for
the majority of motor vehicles, but future growth is expected to be most rapid in Asia and Latin
America. Vehicle population is projected to increase by 50-100% by 2030. As a result, vehicles
will continue to apply pressure to the environment and it is projected that emissions of all
pollutants will be significantly higher in 2030 than today, unless additional controls on emissions
are implemented.
In the United States, California, through the California Air Resources Board (CARB),
continues to set the lowest emission standards for the country and the United State Environmental
Protection Agency (EPA) has indicated it may adopt lower emission standards, which would be
applicable throughout the United States. California Governor Arnold Schwarzenegger has also
announced his intent to seek greenhouse gas (GHG) legislation and the United States Congress is
also considering GHG legislation. See Government Regulation and Environmental Matters below.
Governments internationally recognize the serious effects caused by air pollution and many
nations 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, many nations are moving towards tighter GHG emissions control as
well. The European Union (EU) currently requires all member nations to adopt EURO 3 emissions
standards for motorcycles and EURO 4 emissions standards for automobiles and trucks. Some Eastern
European countries contemplating EU admission, and certain Asian countries, have also announced
gradual phase-in of EURO standards, including China, Indonesia, Vietnam, Thailand and India. See
Government Regulation and Environmental Matters below.
Among recent developments:
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The EU has tightened standards on light duty vehicle emissions and fuel quality
for 2000 and 2005, broadened coverage (e.g., cold temperature), and imposed low
sulfur
requirements for diesel fuel and gasoline; Euro 3, 4 and 5 standards for heavy duty
trucks and buses, will require advanced NOx and particulate matter (PM) post-combustion
pollution control systems. The auto industry has agreed to a voluntary commitment
to reduce carbon dioxide (CO
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) emissions per kilometer driven by 25%
by 2008.
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CARB tightened CO, HC, NOx and PM requirements and established principles of
fuel neutrality (diesel vehicles meet the same standards as gasoline vehicles) and
usage neutrality (light trucks and sport utility vehicles used primarily as
passenger cars must meet the same standards as cars); CARB decided that diesel PM
is a toxic air contaminant leading to an effort to further reduce PM emissions
from existing diesel vehicles.
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EPA, in conjunction with CARB, imposed the largest enforcement action in
history on the heavy engine industry; EPA adopted stringent national PM and NOx
standards for heavy duty trucks and buses and mandated low sulfur diesel fuel to
enable the advanced technologies necessary to achieve these requirements.
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China and India adopted the Euro 1 auto and truck emissions standards and are
phasing out the use of unleaded gasoline.
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Notwithstanding initiatives such as these, much more needs to be done to reverse the harmful
effects of decades of pollutants contributed by motor emissions. Yet, the cost of adding emissions
control devices to engines or vehicles has always been a challenge, since manufacturers shift the
cost of such devices to the consumer. In developing nations, where incomes are extremely low,
economics and the lack of government resources have hampered progress. Nonetheless, we believe
that the social and political realities of protecting our environment may result in further
government mandates that manufacturers adopt solutions to reduce harmful 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 Technologies and Products
ZEFS and MK IV.
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 introduced the ECO ChargR, which incorporated our MK IV
technology, and the MAG ChargR, which incorporates either our ZEFS or MK IV technologies, depending
upon the application. We have designed and tested various versions of our ECO ChargR and MAG
ChargR products for use on 2- and 4-stroke carbureted and fuel injection gasoline engines and are
in the process of designing versions of the ECO ChargR and MAG ChargR products for application on
various types of 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 ECO ChargR and MAG ChargR are unaffected by the problem
of bad fuel. Catalytic converters also do not share the benefits of our ECO ChargR and MAG ChargR
of increased fuel efficiency and performance. In fact, in many cases catalytic converters are
detrimental to mileage and power.
ECO ChargR and MAG ChargR 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 fuel 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. The
scientific theory behind the
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ZEFS technology is described in certain scientific papers and
published articles. See RAND Report below.
ECO ChargR and MAG ChargR 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.
We differentiate our ECO ChargR and MAG ChargR products based on their differing attributes
and marketing focus. ECO ChargR products are primarily designed to reduce harmful emissions and MAG
ChargR products are primarily designed to enhance performance and fuel economy. The ECO ChargR is
intended to reduce exhaust emissions in vehicle and small utility motors. ECO ChargR products will
be marketed primarily to OEMs as well as to pilot and government-mandated emissions programs.
The MAG ChargR is intended to increase power and improve mileage. MAG ChargR products will be
marketed primarily to the specialty consumer accessories market for many types of vehicles,
including but not limited to cars, trucks, motorcycles, scooters, ATVs, snowmobiles, personal
watercraft and small utility motors. On the other hand, because our ECO ChargR and MAG ChargR
products are customized to specific brands, models and engine sizes, these products ultimately will
require hundreds of individually developed parts, which can be expensive and time-consuming.
Testing by the Company, as well as by independent third-party laboratories, has demonstrated
that both ECO ChargR and MAG ChargR generate significant reductions in THC and CO emissions and, in
the case of MAG ChargR, also improves fuel efficiency by lowering gas consumption and increases
engine performance. For RANDs conclusions about some of our testing regarding emissions
reductions, see RAND Report below. See also Independent Laboratory and Scientific Testing
below.
ELEKTRA
. We have obtained a license from Temple University for their patent-pending
uniform electric field technology, tentatively called ELEKTRA. The ELEKTRA technology consists of
passing fuel through a specific strong electrical field. Although ELEKTRA has a similar effect on
fuels as our ZEFS and MK IV technologies, ELEKTRA incorporates a uniform electrical field
principle. Based on our early research and product development, we believe that ELEKTRA carries
certain advantages over our ZEFS and MK IV technologies, primarily not requiring as many variations
for products incorporating the ELEKTRA technology compared to products incorporating the ZEFS or MK
IV technologies. Preliminary testing conducted in Europe by an outside research and development
facility indicates that ELEKTRA causes a significant change in some of the physical characteristics
of the fuel, resulting in better atomization of the fuel and improved combustion.
We have entered into two license agreements with Temple University, one covering Temple
Universitys current patent application concerning certain electric field effects on gasoline,
kerosene and diesel fuel particle size distribution, and the other covering Temple Universitys
current patent application concerning electric field effects on crude oil viscosity, and any and
all United States and foreign patents issuing in respect of the technologies described in such
applications (individually, a License Agreement and collectively, the License Agreements).
Initially, the License Agreements are exclusive and the territory licensed to the Company is
worldwide. Pursuant to the License Agreements, the Company will pay to Temple University (i)
license fees in the aggregate amount of $250,000, payable in three installments of $100,000, the
first installment of which was paid in March 2007, and $75,000 on each of February 2, 2008 and
February 2, 2009, respectively; and (ii) annual maintenance fees of $125,000 annually commencing
January 1, 2008. In addition, each License Agreement separately provides that the Company will pay
royalties to Temple University on net sales of products incorporating the technology licensed under
that License Agreement in an amount equal to 7% of the first $20 million of net sales, 6% of the
next $20 million of net sales and 5% of net sales in excess of $40 million. Sales under the two
License Agreements are not aggregated for purposes of calculating the royalties payable to Temple
University. In addition, the Company has agreed to bear all costs of obtaining and maintaining
patents in any jurisdiction where the Company directs Temple University to pursue a patent for
either of the licensed technologies.
Should the Company not wish to pursue a patent in a particular jurisdiction, that jurisdiction
would not be included in the territory licensed to the Company.
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We have also entered into a research and development agreement (R&D Agreement) with Temple
University to conduct further research on the ELEKTRA technology. Under the R&D Agreement Temple
University will conduct a 24-month research project towards expanding the scope of, and developing
products utilizing, the technologies covered under the License Agreements, including design and
manufacture of prototypes utilizing electric fields to improve diesel, gasoline and kerosene fuel
injection in engines using such fuels and a device utilizing a magnetic field to reduce crude oil
viscosity for crude oil (paraffin and mixed base) flow in pipelines. Pursuant to the R&D Agreement,
we will make payments to Temple University in the aggregate amount of $500,000, payable in eight
non-refundable installments commencing with $123,750, which was paid in March 2007, and $53,750
every three months thereafter until paid in full. If the research project yields results within the
scope of the technologies licensed pursuant to the License Agreements, those results will be deemed
included as rights licensed to the Company pursuant to the License Agreements. If the research
project yields results outside of the scope of the technologies covered by the License Agreements,
the Company has a six-month right of first negotiation to enter into a new worldwide, exclusive
license agreement with Temple University for the intellectual property covered by those results.
Dr. Rongjia Tao, of Temple University, is the principal investigator of the ELEKTRA technology
and we intend that he will work with us in research and development and product development,
seeking to produce two commercial products: (i) a product utilizing an electric field to improve
the fuel injection in engines for diesel, kerosene, and gasoline; and (ii) a product utilizing
electric or magnetic fields to reduce crude oil viscosity and improve crude oil flow in pipelines.
We are in the early stages of developing ELEKTRA products that, based on preliminary testing, is
intended to improve fuel economy and change fuel viscosity, and may improve performance and reduce
emissions, depending upon the specific application. Dr. Taos published articles in
The
International Journal of Physics
have reported how uniform electrical field technology affects
fuels. We believe that this effect is identical, or substantially similar, to that of our own
magnetic technology; therefore, we expect to achieve similar results with ELEKTRA as Dr. Tao
reported with respect to uniform electrical field technology generally. When it is developed, we
intend to market ELEKTRA products primarily to the transportation industry, oil refineries and
pipelines, and OEMs. Our ability to make progress with Temple University is dependent, in part, on
our ability to finance our obligations and devote adequate financial resources to the
commercialization of the ELEKTRA technology. See Managements Discussion and Analysis or Plan of
Operations Liquidity and Capital Resources.
Unlike ECO ChargR and MAG ChargR, ELEKTRA is essentially universal, with only a handful of
versions required to cover most applications. The ELEKTRA technology is designed to be installed
in the fuel supply lines of vehicles and, because there are very few variations in the size and
type of those lines, we anticipate that a relatively small number of variable capacity devices and
a selection of installation adapters will cover most vehicle installations.
We believe that the applications for products incorporating the ELEKTRA technology will
include gas, diesel and bio-fuel injected motor vehicles, as well as applications in aviation,
marine, oil pipeline and refining industries
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Subject to our cash flow and liquidity limitations,
we are currently developing motor vehicle applications and our present intention, subject to
change, is to seek joint venture partners to commercialize the ELEKTRA technology in various
applications. Subject to adequate financing, we currently believe that we will commence sales of
ELEKTRA products in late 2007. See Managements Discussion and Analysis or Plan of Operations
Liquidity and Capital Resources.
CAT-MATE.
Our CAT-MATE technology is designed to work in conjunction with, and
enhance the function of, common catalytic converters, when incorporated into their design. Our
CAT-MATE technology allows a converter to ignite more quickly and more easily on small displacement
motors. 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 idling, which causes most converters to extinguish and then become
fouled with oil and contaminants eventually rendering them difficult to relight or useless. We
believe that our CAT-MATE
technology can be used on 2- and 4-stroke motorcycles, off-road and
marine vehicles, generators, lawn
mowers, on stationary implements and on carbureted and fuel injection motor vehicles. At this
time, we do not intend to devote significant effort to the commercialization of products
incorporating our CAT-MATE
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technology. However, we are considering various possible ways to take
advantage of opportunities that may become available to us.
Research and Development
We are actively continuing our development of products incorporating our ZEFS and MK IV
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
prototype ECO ChargR and MAG ChargR products as demonstration units, during presentations before
manufacturers. It is our intention to continue to develop products incorporating these
technologies. Because of the complexity and enormity of the task of designing multiple variations
of our ECO CharG and MAG ChargR products to fit the numerous makes and models of engines, we intend
to seek the cooperation of manufacturers to assist us in engineering, marketing and installing our
ECO ChargR and MAG ChargR products.
We are also engaged in early research and development of products incorporating our ELEKTRA
technology 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 a relatively few
manufacturers, the number of product variations utilizing our ELEKTRA technology needed to service
these fleets is considerably less than the number of variations required by our ECO ChargR and MAG
ChargR products.
We have tested products incorporating our ZEFS, MK IV and CAT-MATE technologies for multiple
makes and models of automobiles, motorcycles and ATVs, and the results of tests of devices
incorporating our ZEFS technology were provided to RAND for evaluation.
RAND assisted us in establishing research and testing protocols at our Queensland, Australia
facililty. In late 2005, we established a state-of-the-art research and product development
facility in Morgan Hill, California. In connection with the establishment of our Morgan Hill
facility, we transitioned the primary site of our research and development from Queensland to
Morgan Hill. We no longer use our Queensland facility, which we are in the process of closing.
RAND also assisted us in setting up our testing protocols at Morgan Hill. In addition, we are
engaged in research and development of additional prototypes and products, including ELEKTRA and
other magnetic technologies and products, at our Morgan Hill facility.
In April 2006, we entered into a product development agreement with Kwong Kee. Under this
agreement, Kwong Kee, a manufacturer of mufflers and catalytic converters, collaborates with us on
product development for certain markets, primarily in Asia, and makes available to us its research
and development facilities, testing equipment and product design and development support team in
China.
On May 14, 2004, we filed a patent application in Australia with respect to certain technology
(Method and Apparatus for a Treatment of a Fluid). Following discussions with Temple University
about a number of matters, including intellectual property rights, in July 2004, we entered into a
license agreement with Temple University (the 2004 License Agreement), 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. In connection with the 2004 License
Agreement, we assigned the original patent application for this technology to Temple University and
agreed to assign all subsequent patent applications for this technology to Temple University.
Under the 2004 License Agreement, we have the right to file additional patent applications, at our
sole expense but for the benefit of Temple University, in various countries. We have exclusive
world-wide rights to this technology; however, if we do not file a patent application or maintain
a patent in any country, then Temple University has the right to file the patent application
or maintain the patent in that country and, in such event, we would lose our license rights in
that country. In 2005, we filed several additional patent applications. To date, we
have spent approximately $56,856 on these patent
applications in various countries. As a result of Dr. Taos recently announced progress in
reducing viscosity of crude oil with magnetic pulses, we believe that this technology may have
commercial viability. We are maintaining the patent applications in the countries in which we have
filed them, while we continue to explore the commercial benefits of pursuing this opportunity in
these and possibly other countries. See Intellectual Property below.
We spent $401,872 in 2006 and $1,150,361 in 2005 on research and development. See
Managements Discussion and Analysis of Financial Condition and Results of Operation Results of
Operations and Note 11 to Notes to Consolidated Financial Statements for a more complete
understanding of our research and development expenses.
8
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 EPA, CARB, United Kingdom Vehicle
Certification Agency (VCA) and Technischer Überwachungs-Verein (Germany/EU).
Independent third-party laboratories have conducted tests of devices incorporating our ZEFS,
MK IV and CAT-MATE technologies, which tests we have sought in order to gain better market
acceptance by manufacturers and governmental regulatory officials. Research and testing using
government-standard testing equipment in the United States, Thailand, China and Hong Kong has
demonstrated that the tested devices incorporating our ZEFS technology reduce engine emissions,
such as THC and CO, and, for the most part, NOx, 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 ZEFS 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 THC, CO and NOx. For RANDs conclusions about some of our testing regarding
emissions reductions, see RAND Report below.
With respect to third-party test results reported for NOx, some tests have shown that NOx on
tested devices incorporating our technologies has increased. Based on informal discussions we have
had with manufacturers of the tested vehicles and/or engineers at the testing laboratories, and
other anecdotal evidence, we believe that such increases, when reported, are due to the vehicle,
such as problems with the vehicles exhaust system, rather than problems with the tested device
incorporating our technologies.
In December 2002, we retained RAND to study the scientific validity and market potential of
our original ZEFS technology, help us develop a plan to assess the technical basis for our ZEFS
technology and understand the potential market for products incorporating the ZEFS technology if a
technical basis were established. RAND outlined a research and evaluation program for the Company
to examine the theoretical basis of the ZEFS device and to test the impact of the device when
installed on vehicles.
In early 2003, RAND determined that a comprehensive product-testing program was warranted. As
a result, in May 2003, we entered into an arrangement under which RAND coordinated and supervised
both a theoretical scientific study of the concepts underlying our ZEFS technology, 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 was chosen to research the ZEFS technology. Temple Universitys research of the ZEFS
technology concluded in early 2005.
Most of RANDs work on our behalf concluded in December 2005, while further
development of our technologies continued. In 2006, our MK IV technology was first developed and
enhancements have continued into early 2007. We submitted to RAND additional test results from the
MK technology conducted in January 2007 at Olson Ecologic Labs (Olson Labs) in Fullerton,
California, on three separate motorcycles of differing displacements to demonstrate the
effectiveness of more current versions of our technology. The conclusions of RANDs final report,
which was published on April 27, 2007, are summarized under RAND Report below.
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 CO, THC and NOx. These results were certified by 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 THC, CO and NOx emissions, compared to the
in-place original OEM exhaust system. In 2006, testing on a device incorporating our MK IV
technology
9
for Harley-Davidson style motors was conducted at the EPA and CARB certified testing
facility Olson Labs. 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 technology 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 mean test results surpassed hot start EURO 2 standards in all three of the harmful
exhaust emissions, THC, CO and NOx, by the following amounts:
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|
|
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|
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|
THC
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|
NOx
|
|
CO
|
EURO2 Standard
|
|
1.20 g/km
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|
0.30 g/km
|
|
5.50 g/km
|
With ZEFS Device
|
|
0.52 g/km
|
|
0.10 g/km
|
|
1.42 g/km
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% Below EURO2
|
|
|
56
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%
|
|
|
65
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%
|
|
|
74
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%
|
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. These certified
best test results surpassed cold start EURO 3 standards for motorcycles of 150cc or less in all
three of the harmful exhaust emissions, THC, CO and NOx, by the following amounts:
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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 regarding the HKEEL testing is the fact that it is generally difficult for
anyone to meet EURO 3 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, Shanghai Motor Vehicle Test Center conducted tests of devices incorporating our
ZEFS and CAT-MATE technologies as required by our distribution agreement required with GAE. See
Sales and Marketing below. The results of these tests is summarized below:
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Technical Targets
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CO
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|
HC
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NOx
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|
|
|
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|
g/km
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|
g/km
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|
g/km
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|
|
|
|
EURO3 Standard
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|
£
2.0
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|
|
£
0.8
|
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|
£
0.15
|
|
Measured Values
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|
ZEFS Device (hot start)(a)
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0.90
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0.20
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0.13
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|
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|
ZEFS/CAT-MATE Device (cold start)(b)
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1.04
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0.18
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0.12
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(a)
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|
A hot start test is run for EURO2 compliance, which standard was achieved.
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(b)
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|
A cold start test is run for EURO3 compliance, which standard was achieved.
|
Also 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
10
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 a device incorporating our MK IV technology. The mean test results showed an
average 5.13% improvement in fuel efficiency, as follows:
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Run 1
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Run 2
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Run 3
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(l/km)
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(l/km)
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|
(l/km)
|
|
Average
|
Baseline FC Test Runs without MK IV Device
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|
|
0.0196
|
|
|
|
0.0195
|
|
|
|
0.0193
|
|
|
|
0.0195
|
|
FC Test Runs with MK IV 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
|
%
|
In February 2007, tests were performed at Olson Labs for the purpose of evaluating the
emissions reduction and fuel efficiency improvement benefits of our ECO ChargR product. The mean
test results were as follows:
Total Hydrocarbon (THC) Emissions (gms/km)
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|
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Suzuki 110
|
|
RevTech 100
|
|
Merch 125
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AVERAGE BASELINE
|
|
|
0.124
|
|
|
|
1.821
|
|
|
|
1.372
|
|
AVERAGE ECO CHARGR
|
|
|
0.098
|
|
|
|
1.685
|
|
|
|
1.302
|
|
% Improvement
|
|
|
21.0
|
%
|
|
|
7.5
|
%
|
|
|
5.1
|
%
|
Carbon Monoxide (CO) Emissions (gms/km)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suzuki 110
|
|
RevTech 100
|
|
Merch 125
|
AVERAGE BASELINE
|
|
|
1.729
|
|
|
|
29.086
|
|
|
|
21.201
|
|
AVERAGE ECO CHARGR
|
|
|
1.231
|
|
|
|
18.160
|
|
|
|
15.805
|
|
% Improvement
|
|
|
28.8
|
%
|
|
|
37.6
|
%
|
|
|
25.5
|
%
|
Oxides of Nitrogen (NOx) Emissions (gms/km)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suzuki 110
|
|
RevTech 100
|
|
Merch 125
|
AVERAGE BASELINE
|
|
|
0.066
|
|
|
|
0.136
|
|
|
|
0.287
|
|
AVERAGE ECO CHARGR
|
|
|
0.063
|
|
|
|
0.196
|
|
|
|
0.268
|
|
% Improvement
|
|
|
4.5
|
%
|
|
|
-44.0
|
%
|
|
|
6.4
|
%
|
Fuel Economy (miles per gallon)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suzuki 110
|
|
RevTech 100
|
|
Merch 125
|
AVERAGE BASELINE
|
|
|
241.97
|
|
|
|
39.68
|
|
|
|
34.83
|
|
AVERAGE ECO CHARGR
|
|
|
253.16
|
|
|
|
41.08
|
|
|
|
34.82
|
|
% Improvement
|
|
|
4.6
|
%
|
|
|
3.5
|
%
|
|
|
0.0
|
%
|
These results from Olson Labs were submitted to RAND (see RAND Report below) and to the EPA
for consideration for the EPA 511 Program. See Government Regulation and Environmental Matters
below.
11
RAND Report
In December 2002, we retained the RAND to study the scientific validity and market potential
of our original ZEFS technology, help us develop a plan to assess the technical basis for our ZEFS
technology and understand the potential market for products incorporating the ZEFS technology if a
technical basis were established. RAND outlined a research and evaluation program for the Company
to examine the theoretical basis of the ZEFS device and to test the impact of the device when
installed on vehicles.
In early 2003, RAND determined that a comprehensive product-testing program was warranted. As
a result, in May 2003, we entered into an arrangement under which RAND coordinated and supervised
both a theoretical scientific study of the concepts underlying our ZEFS technology, as well as an
empirical study. In response to an RFP that RAND sent to 14 universities
in the United States, Temple University was chosen to research the ZEFS technology. Temple
Universitys research of the ZEFS technology concluded in early 2005.
Most of RANDs work on our behalf concluded in December 2005, while further development of
our technologies continued. In 2006, our MK IV technology was first developed and enhancements
have continued into early 2007. We submitted to RAND additional test results from the MK
technology conducted in January 2007 at Olson Labs, on three separate motorcycles of differing
displacements to demonstrate the effectiveness of more current versions of our technology.
On April 27, 2007, RAND issued its final report, entitled An Approach to Assessing the
Technical Feasibility and Market Potential of a New Automotive Device. RAND opined that the
application of magnetic fields has not been shown in scientific literature to lower the viscosity
of automotive fuels. RAND concluded, among other things, that we would need to conduct further
laboratory studies and in-use testing to determine the effectiveness of the ZEFS technology in
reducing pollutants and increasing fuel efficiency in gasoline and diesel-powered vehicles.
RANDs analysis of the laboratory testing data that we had previously had undertaken found at
best mixed results from these tests, and therefore RAND could not confirm the effectiveness of the
ZEFS technology in actual use. For purposes of its report, RAND did not review certain additional
tests that were conducted for us, including the tests by Olson Labs in early 2007, after RANDs
fieldwork was completed.
The RAND report said the existing technical literature does not contain credible reports that
the application of magnetic fields to either gasoline or diesel fuel oil will reduce the
viscosities of these automotive fuels. Researchers at Temple University, who were funded by us as a
result of the competitive grants process administered by RAND, have reported findings indicating a
potential connection between magnetic fields and fuel viscosity. However, RAND reported that such
laboratory work has not yet been independently reviewed and published by the Temple University
research team, and it does not settle the issue of how magnetic fields might affect actual engine
performance.
RAND concluded that the market potential for products incorporating our ZEFS technology will
depend significantly on demonstrating positive results from our technology, competition posed by
other technologies, and regulatory policies and cost-effectiveness to other alternatives.
It should be noted that RAND tested our original ZEFS technology as to its effect on emissions
reduction only and not performance enhancement or fuel economy. Versions of the ZEFS technology
studied by RAND are not being marketed by us as emissions reduction products. We believe that a
reassessment and redesign of our products intended to improve the consistency of third-party test
results led to the development and evolution of products incorporating our MK IV technology
intended to reduce
emissions, which has taken place since the completion of RANDs fieldwork. We further believe
that these newer iterations of our Companys technologies have performed more consistently in
testing at independent third-party labs since the completion of RANDs fieldwork. The MK IV
technology has also undergone
12
independent third-party testing, which we believe shows significant
improvement when compared to our original ZEFS technology.
Sales and Marketing
In October 2004, we commenced initial marketing efforts for products incorporating our ZEFS
and CAT-MATE technologies, and these efforts are continuing with respect to ZEFS-based products.
Subsequently, we commenced initial marketing efforts for products incorporating our MK IV
technology, and these efforts are also continuing. We are focused on selling or licensing our
technologies and products domestically and internationally to motorcycle, automobile, carburetor,
fuel-injection and diesel engine manufacturers as well as exhaust and muffler OEMs and the consumer
specialty accessories market. We have made presentations of our ZEFS, MK IV and CAT-MATE
technologies and our products to OEMs in the United States, Asia and Europe.
United States
. 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 were with Team
Phantom and MPCI. These agreements provide for the sale of our product lines in the North American
OEM and specialty consumer accessories market for motorcycles, to certain named prospective
purchasers. In April 2007, we shipped 200 units of our ECO ChargR and MAG ChargR products for
motorcycles to MPCI. Our timing to ship additional installments under a purchase order from MPCI
depends upon our financing and ability to pay for the manufacture of products from our outsourced
manufacturer. See Managements Discussions and Analysis or Plan of Operations Liquidity and
Capital Resources. We currently do not believe that we will be receiving any orders from Team
Phantom for our products and we do not expect that relationship to be viable for us.
China
. In January 2006, we entered into our first international distributorship
agreement, with GAE. The GAE Agreement provides that GAE will serve as our exclusive distributor
for our ZEFS and CAT-MATE products in the Peoples Republic of China. The GAE Agreement was
conditioned upon our ZEFS-based products achieving EURO2 standards in tests to be conducted in
Shanghai. These tests were successfully completed in May 2006, during which tests of a device
incorporating our ZEFS technology achieved EURO2 standards and devices incorporating a combination
of our ZEFS and CAT-MATE technologies achieved EURO3 standards. See Independent Scientific and
Laboratory Testing above.
The initial term of the GAE agreement is for sixteen months from March 2006 and will be
renewed automatically for successive periods of 12 months each if certain minimum firm orders are
placed, as follows:
500,000 units in the first year
1,000,000 units in the second year
2,000,000 units in the third year
3,000,000 units in the fourth year; and
5,000,000 units in the fifth year.
If GAE purchases 11,500,000 or more units during the first five years, the term of the
GAE Agreement shall be extended for an additional period of five years. If GAE sells 15,000,000 or
more units during the second five years, the term of the GAE Agreement shall be extended for a
second additional period of five years. Upon each such renewal a mutually agreeable schedule of
prices and number of units to be purchased by GAE shall be determined. The agreement is terminable
by either party upon 10 days written notice following a material breach which is not cured within
20 days by the party receiving written notice of a breach. We have also given GAE rights of first
refusal to distribute in the Peoples Republic of China new products which we may create.
Pursuant to the GAE Agreement, in order to retain exclusivity as our distributor in China, GAE
was required to place its initial order on or before July 31, 2006 for 100,000 units. Of this
amount, 10,000 units were scheduled for delivery by September 30, 2006; 30,000 units were scheduled
for delivery in
March 2007; 30,000 units were scheduled for delivery in June 2007; and 30,000 units were
scheduled for delivery in July 2007. GAE was also required to have issued in our favor an
irrevocable stand-by letter of credit in the sum of $60,000 equal to the purchase price of 10,000
units comprising the first shipment.
13
After the first shipment and no later than January 31, 2007,
GAE was required to have issued in our favor an additional letter of credit in an amount equal to
$540,000, which is the purchase price of the remaining 90,000 units comprising the initial order.
In July 2006, GAE placed its initial order under the GAE Agreement, for 100,000 units, to be
shipped in installments through July 2007. In November 2006, we shipped the first installment of
5,000 units to GAE. However, GAE has not requested additional shipments against this initial
order, nor posted additional letters of credit as required by the GAE Agreement, and we do not
believe that GAE will meet their target of ordering 500,000 units on or before July 31, 2007. We
are currently in discussions with GAE regarding a revised shipment schedule and changing GAEs
distributorship status to a non-exclusive arrangement, but we cannot give any assurances as to
what, if any, shipping schedule will result from such discussions.
Additionally, under the GAE Agreement, we agreed to issue warrants to GAE to purchase up to
1,000,000 shares of our common stock at a purchase price of $1.00 per share to GAE. Warrants to
purchase 200,000 shares of our common stock are issuable upon delivery of the $60,000 and $540,000
letters of credit. Warrants to purchase an additional 300,000 shares of our common stock are
issuable upon full payment for 500,000 units. Warrants to purchase 500,000 shares of our common
stock are issuable upon full payment for 10,000,000 units. The Warrants shall be exercisable for
two years from their respective dates of issuance. Because GAE has not placed the orders required
under the GAE Agreement nor supplied the required letters of credit, we have not yet issued the
warrants provided for in the GAE Agreement.
Under the GAE Agreement, we are required to provide technical support to GAE at our cost and
expense, as GAE shall reasonably request. We are responsible for the costs of shipping and
insurance relating to shipment to the port of Shanghai, Peoples Republic of China. GAE is
responsible for the payment of all taxes, duties and imposts assessed on the products. We are
responsible for any CIF mandated charges relating to the shipment of the products.
Indonesia
. In October 2006, we entered into the PTCC Agreement with PTCC,
who will serve as the exclusive distributor for our ECO ChargR, MAG ChargR and CAT-MATE products in
Indonesia.
The PTCC Agreement is for an initial term one year and will be renewed automatically for
successive periods if certain minimum firm orders as placed, for years ending September 30, as
follows:
50,000 units in the first year
50,000 units in the second year
100,000 units in the third year
150,000 units in the fourth year; and
250,000 units in the fifth year.
If PTCC sells 600,000 or more units during the first five years, the term of the PTCC
Agreement shall be extended for an additional period of five years. If PTCC sells 2,000,000 or more
units during the second five years, the term of the PTCC Agreement shall be extended for a second
additional period of five years. Upon each such renewal a mutually agreeable schedule of prices and
number of units to be purchased by PTCC shall be determined. The PTCC Agreement is terminable by
either party upon 10 days written notice following a material breach which is not cured within 20
days by the party receiving written notice of a breach. We have also given PTCC rights of first
refusal to distribute in Indonesia new products which we may create.
Pursuant to the PTCC Agreement, in order to retain exclusivity as our distributor in
Indonesia, PTCC was required to place its initial order on or before October 31, 2006 for 10,000
units. Of this amount, 2,000 units were originally scheduled for delivery in January 2007, and
2000 units were scheduled for delivery in each of March, April, May and June 2007. PTCC was also
required to have issued in our favor an irrevocable stand-by letter of credit in the sum of $95,000
equal to the purchase price of 10,000 units composing the first order. After the first shipment,
at the time of placement of an order PTCC is
required to have issued in our favor additional letters of credit in an amount equal to the
purchase price of the total number of units covered by such order.
14
We began delivering some of our products under this agreement in the first quarter of 2007,
with the first shipped installment of 2,000 units against an initial order of 10,000 units, and the
remainder of the order due to ship at various times under a revised schedule from June through
October 2007. We have received partial payment for the first installment. We have not yet received
firm orders for the subsequent shipments covered by the initial order.
Under the PTCC Agreement, we are required to provide technical support to PTCC at our cost and
expense, as PTCC shall reasonably request. We are responsible for the costs of shipping and
insurance relating to shipment to the port of Medan, North Sumatra, Indonesia. PTCC is responsible
for the payment of all taxes, duties and imposts assessed on the products. We are responsible for
any CIF mandated charges relating to the shipment of the products.
Vietnam.
In December 2006, we entered into the Adtech Agreement with Adtech, who will
serve as the exclusive distributor for our ECO ChargR, MAG ChargR and CAT-MATE products in Vietnam.
The agreement is for an initial term of one year and will be renewed automatically for
successive periods if certain minimum firm orders as placed, for years ending September 30, as
follows:
50,000 units in the first year
50,000 units in the second year
100,000 units in the third year
150,000 units in the fourth year; and
250,000 units in the fifth year.
If Adtech sells 600,000 or more units during the first five years, the term of the Adtech
Agreement shall be extended for an additional period of five years. If Adtech sells 2,000,000 or
more units during the second five years, the term of the Adtech Agreement shall be extended for a
second additional period of five years. Upon each such renewal a mutually agreeable schedule of
prices and number of units to be purchased by Adtech shall be determined. The Adtech Agreement is
terminable by either party upon 10 days written notice following a material breach which is not
cured within 20 days by the party receiving written notice of a breach. We have also given Adtech
rights of first refusal to distribute in Vietnam new products which we may create.
Pursuant to the Adtech Agreement, in order to retain exclusivity as our distributor in
Vietnam, Adtech was required to place its initial order on or before October 31, 2006 for 10,000
units. 2,000 units of which were scheduled for delivery in January 2007, 2000 units of which were
scheduled for delivery in March 2007 and the remaining 6,000 units of which were scheduled for
delivery in May 2007. Adtech was also required to have issued in our favor an irrevocable stand-by
letter of credit in the sum of $22,000 equal to the purchase price of the 2,000 units scheduled for
delivery in January 2007. After the first shipment, at the time of placement of an order Adtech is
required to have issued in our favor additional letters of credit in an amount equal to the
purchase price of the total number of units covered by such order.
We began delivering some of our products under this agreement in the first quarter of 2007,
with the first shipped installment of 2,000 units against an initial order of 10,000 units,
originally due to ship at various times through May 2007. We have received payment for the first
installment and intend to ship subsequent installments against payment, which we have not yet
received. We currently expect that additional shipments against the initial order will be
delivered, at the request of Adtech, in installments at various times through 2007, which is
subject to change. Based upon the anticipated modified order rate, we do not expect Adtech to
place orders totaling at least 50,000 units by September 30, 2007.
Under the Adtech Agreement, we are required to provide technical support to Adtech at our cost
and expense, as Adtech shall reasonably request. We are responsible for the costs of shipping and
insurance relating to shipment to the port of Ho Chi Minh City, Vietnam. Adtech is responsible for
the payment of all taxes, duties and imposts assessed on the products. We are responsible for any
CIF mandated charges relating to the shipment of the products.
Europe
. We also intend to seek distribution opportunities for products incorporating
our ZEFS, MK IV and ELEKTRA technologies in Europe, in addition to our marketing efforts in the
United States
15
and Asia. See Independent Laboratory and Scientific Testing and RAND Report
above. At this time, no such distribution agreements are in place.
Other Countries
. 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.
Other Efforts
. In April 2006, we entered into a product development
agreement with Kwong Kee. Under this agreement, Kwong Kee, a manufacturer of mufflers and catalytic
converters, collaborates with us on product development for certain markets, primarily in Asia, and
makes available to us its research and development facilities, testing equipment and product design
and development support team in China
In July 2006, we entered into an agreement with Quadrant, pursuant to which Quadrant provides
product development services. Under this agreement, we also granted Quadrant a right of first
refusal to manufacture certain of our products.
Also in July 2006, we entered into an agency agreement with Marketing Matters to provide
exclusive agency services in the United States for advertising, marketing, industry and trade show
promotion, as well as packaging design services. We agreed to pay a $5,000 monthly retainer fee
during the term of the agreement, which is through July 31, 2007. Certain additional services are
billed to us separately. Additionally, we agreed to pay a flat fee of $4,000 per print ad campaign
approved by us for development. This agreement is terminable on 90 days prior written notice.
Marketing Matters also executed a non-disclosure Agreement and agreed to keep confidential our
products, business, customers and methods of operation. Marketing Matters agreed not to perform
its services for any products or services competing with our products or services.
Also in July 2006, we entered into a separate agreement with SS Sales, to provide exclusive
marketing and promotional services in the western United States and western Canada (the
Territory) for our products. SS Sales will also provide advice, assistance and information on
marketing our products in the automotive after-market, and will seek to recruit and establish a
market with distributors, wholesalers and others. SS Sales will be paid a commission equal to 5%
of the gross amount actually collected on contracts we enter into during the contract term for
existing or future customers introduced by SS Sales in the Territory. The contact has a term of
five years unless sooner terminated by either party on 30 days notice. In the event of termination
SS Sales will be entitled to receive all commissions payable through the date of termination. SS
Sales is owned by Nathan Shelton, one of the directors of the Company since February 12, 2007.
In October 2006, we introduced our ECO ChargR and MAG ChargR products for use in motorcycles
at the INERMOT motorcycle trade show in Cologne, Germany. In November 2006, we introduced our ECO
ChargR and MAG ChargR products for use in automobiles and trucks at the SEMA convention in Las
Vegas, Nevada.
In recent months, we have also begun working with, and assisting, manufacturers of vehicles
and engines to obtain EPA and CARB certification in the United States for the sale of their
products. We assisted Shanghai Yide, a Chinese manufacturer of ATVs, in certification testing. At
the request of Shanghai Yide, Olson Labs conducted vehicle certification tests in February and
March 2007 on an ATV manufactured by Shanghai Yide, which was fitted with a combination of our ECO
ChargR and CAT-MATE products. These tests were conducted as part of the application process by
Shanghai Yide to obtain EPA and CARB approval for the sale of certain of its vehicles in the United
States, not to prove that our ECO ChargR and CAT-MATE technologies were the decisive factor in
allowing the ATV test to surpass EPA and CARB standards. The results of these tests met current
compliance standards, as well as the future 2010 standards requirements, for both EPA and CARB, as
follows:
16
Shanghai Yide 300cc ATV Certification Test Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THC
|
|
NOx
|
|
CO
|
|
THC+NOx
|
EPA Standard
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
1.5
|
|
CARB Standard
|
|
|
1.2
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
ECO ChargR and CAT-MATE
|
|
|
0.187
|
|
|
|
0.092
|
|
|
|
9.1985
|
|
|
|
0.279
|
|
% Below EPA
|
|
|
|
|
|
|
|
|
|
|
74
|
%
|
|
|
81
|
%
|
% Below CARB
|
|
|
84
|
%
|
|
|
|
|
|
|
39
|
%
|
|
|
|
|
Manufacturing
Subject to a right of refusal that Quadrant has to manufacture certain of our products, we
intend to outsource the manufacture of all our products incorporating our ZEFS and MK IV
technologies, as well as the magnets and housings used as components in those products. We believe
that we will have a number of choices available for third-party manufacturers of our products.
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.
Although products incorporating the ELEKTRA technology remain in development, we currently
intend to outsource the manufacture of any such products, as well as the components used in those
products.
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. Many of our competitors have greater financial,
research, marketing and staff resources than we do. For instance, automobile manufacturers have
already developed catalytic converters on automobiles in order to reduce emissions, but, as
discussed above, this creates greenhouse gases and makes controlling emissions costly and complex.
The industry has also proposed high-pressure fuel injection systems for gas and diesel applications
but these modifications are extremely expensive. While we believe that our technologies have
greater benefits, they 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 our technologies, there
can be no assurance that any unknown existing is, or future technology will be, superior to
products incorporating our ZEFS and MK IV technologies, as well as any products we may produce
incorporating the ELEKTRA technology. Our ZEFS and MK IV technologies provide, and we believe that
the ELEKTRA technology may 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, MK IV and ELEKTRA 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 independent third-party testing of devices incorporating our ZEFS and MK IV
technologies, which shows greater improvement in multiple areas. See Independent Laboratory and
Scientific Testing and RAND Report 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
17
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 technology using magnetic, uniform electrical field fuel
treatments or products based on such technology which has 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 scientific
validation from a recognized third party, 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 technology using magnetic, uniform electrical fiedl fuel
treatments or products based on such technology which has been proven to significantly improve
performance. There are many products which a consumer can purchase to increase overall performance.
All of 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.
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, or any products we may produce
incorporating our ELEKTRA technology.
Government Regulation and Environmental Matters
Our research and development activities are not subject to any governmental regulations that
would have a significant impact on our business and 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 EPA or other governmental agencies
domestically or internationally. Instead, such agencies test and certify a sample engine fitted
with our products. Depending upon whether we manufacture or license our products in the future and
in which countries such products are manufactured or sold, we may be subject to regulations,
including environmental regulations, at such time.
U.S. Government Regulation
We are currently pursuing EPA and CARB executive order exemptions for our products. These
exemptions would signify that our products do not adversely affect vehicles emissions and would
allow our products to be used on emissions control equipped on and off-road vehicles. We are also
submitting our technologies to the EPA under the 511 Program which was established in 1970 to
evaluate new emissions and fuel saving technologies for cars and trucks. In April 2007, we made a
formal request that the EPA consider our carbureted 4-stroke engine device as part of this program,
even though there are few carbureted cars and trucks left on the road, because the EPA is
tightening emissions regulation on motorcycle, utility and non-road vehicles. We believe that these
applications are well suited for our technologies. We are unable to estimate the time it may take
for the EPA to act upon our application or
predict whether or not such application will be favorably received, especially considering
that we are asking the EPA to amend its existing program.
18
EU Regulation
The current EU emissions standard for motorcycles is EURO 3, and for automobiles and trucks
the emissions standard is EURO 4. Although there is not a EURO 4 standard for motorcycles
currently, the current trend appears to be for stricter regulation. On the other hand, the
automobile standard is currently moving towards adopting EURO 5 standards by 2009 and EURO 6 by
2014. These standards are difficult to attain and the automotive industry is spending billions of
Euros to engineer solutions. European auto manufacturers are becoming increasingly at odds with the
European Commission (EC), the body which evaluates the industry and makes regulatory standards
recommendations to the EU, over CO
2
emissions regulations.
The CO
2
emissions limits are currently a voluntary agreement between the EU and the
auto manufacturers. The EU target is to reach an average CO
2
emission
of 120
g/km for all new passenger cars by 2012. However it has become increasingly clear that the
voluntary agreement will not succeed. The average CO
2
emissions per car have dropped
only to 160 g/km in 2005, whereas the average was 186 g/km in 1995. Because of this, lawmakers
have started considering regulation. In late 2005, the European Parliament passed a resolution in
support of mandatory CO
2
emissions standards to replace the current voluntary agreement.
In late 2006, the EC announced that it was working on a proposal for a legally-binding limit
CO
2
emissions from cars. The EC is also proposing the doubling of the fuel efficiency of
new cars by 2020.
Currently the only accepted method for reducing a vehicles CO, THC and NOx emissions is
catalytic converters, but this system converts these gases into largely CO
2
and N2O,
both GHGs. Therefore the lower the CO, THC and NOx output, the higher the CO
2
production. The only remedy is increasing fuel efficiency and the automakers argue this is costly
and results in small low-power vehicles which consumers will not want to buy.
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.
In May 2002, we settled a dispute with Kevin Pro Hart, who claimed proprietary rights to the
ZEFS technologies. In November 2002, under our settlement with the bankruptcy trustee for the
estate of Mr. Hart, the trustee assigned all ownership and legal rights to the international patent
application for the ZEFS technology to us, 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 died in March
2006. See Part I, Item 3. Legal Proceedings and Note 1 to Notes to Consolidated Financial
Statements below.
The CAT-MATE technology was created by Adrian Menzell, a member of our research team in
Australia. On August 20, 2003, Mr. Menzell filed preliminary Australian patent application
#2004900192 for the CAT-FLAP device, a version of the CAT-MATE technology. This technology was
enhanced and on June 4, 2004, Mr. Menzell filed preliminary Australian patent application
#2004903000 for the CAT-MATE. On September 1, 2003, we had 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 device 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 previously served as a consultant to our company.
19
ZEFS Patent Applications
We obtained the patent application for the ZEFS MK I device [PCT/AU01/00585] 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/AU01/00585] 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 a Notice of Allowance of Patent dated January 24, 2005 and the patent
issued on June 7, 2005 for the ZEFS MK I device. The duration of the patent is 20 years from the date
the original application was filed. 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 technology. Overall, we have applied for a patent on an
international basis in approximately 64 countries worldwide.
ZEFS MK IDevice For Saving Fuel and Reducing Emissions
.
Thi
s
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.
Application for Standard Patent Filed
|
Brazil
|
|
0111365-8
|
|
May 21, 2001
|
|
Examination requested September 5,
2003. Report expected mid-2007
|
Bulgaria
|
|
107391
|
|
May 21, 2001
|
|
Under examination response filed
|
Canada (small
entity status)
|
|
2409195
|
|
May 21, 2001
|
|
Examination requested April 2006
|
China
|
|
01809802.9
|
|
May 21, 2001
|
|
Under examination response filed
|
Columbia
|
|
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
|
Eurasian +++
|
|
200201237
|
|
May 21, 2001
|
|
GRANTED and VALIDATED in all member
states
|
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
|
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
|
20
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing date
|
|
Status
|
Poland
|
|
P358837
|
|
May 21, 2001
|
|
Awaiting examination
|
Serbia
|
|
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
|
|
GRANTED
|
Trinidad & Tobago
|
|
TT/A/2002/00213
|
|
May 21, 2001
|
|
GRANTED
|
Ukraine
|
|
20021210144
|
|
May 21, 2001
|
|
GRANTED
|
United States
|
|
6901917
|
|
May 21, 2001
|
|
GRANTED
|
Vietnam
|
|
1-2002-01168
|
|
May 21, 2001
|
|
GRANTED
|
++ 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 Macedonia.
+++ The Eurasian Patent Convention was signed on September 9, 1994 in Moscow by the Heads of the
Governments of the 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 .
ZEFS MK IIDevice 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
|
|
Exam requested July 2006
|
Europe
|
|
04737571.2
|
|
July 15, 2004
|
|
Filed Awaiting Examination
|
India
|
|
300/KOL NP/06
|
|
July 15, 2004
|
|
Under examination
acceptance/response due
March 18, 2008
|
Indonesia
|
|
WO0200600441
|
|
July 15, 2004
|
|
Examination to be requested
by July 15, 2007
|
Japan
|
|
Awaiting
|
|
July 15, 2004
|
|
Examination to be requested
by July 15, 2007
|
United States
|
|
10/564747
|
|
July 15, 2004
|
|
Filed, awaiting examination
|
ZEFS MK IIIEmission Control Devices.
This emission control device is particularly suited for
fuel injection systems 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:
21
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing date
|
|
Status
|
Thailand
China
|
|
095155
200480039739.8
|
|
November 3, 2004
November 4, 2004
|
|
Examination to be
requested by
September 2010
Examination
requested October
2006
|
Japan
|
|
Awaiting Number
|
|
November 4, 2004
|
|
Examination to be requested by
November 3, 2007
|
United States
|
|
10/578311
|
|
November 4, 2004
|
|
Application filed awaiting
examination
|
Europe
|
|
04796967.0
|
|
November 4, 2006
|
|
Application filed awaiting examination
|
MK IV Patent Applications
Device for Saving Fuel and Reducing Emissions
.
This device is similar to the Mark 1 device
but uses stacked magnets.
The following table summarizes the status of the MK IV patent application in the following
countries:
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing date
|
|
Status
|
Taiwan
|
|
95115220
|
|
April 28, 2006
|
|
Examination due by April 29, 2009
|
Thailand
|
|
0601001997
|
|
May 2, 2006
|
|
Application filed - awaiting examination
|
Malaysia
|
|
PI 20062013
|
|
May 2, 2006
|
|
Examination due by May 2, 2008
|
PCT
|
|
PCT/AU2006/000861
|
|
June 20, 2006
|
|
Demand for IPE filed IPRP favorable.
|
The priority date is June 21, 2005 from Australian patent application 2005903248.
Under the terms of the Paris Convention, the Australian patent application provided cover
note type protection for 12 months (i.e. until June 21, 2006) in all countries that are party to
the Paris Convention, including all the major economies. An International Patent Application (PCT
Application) was filed to continue the protection in a number of countries which are signatories
to the Patent Co-operation Treaty (the PCT). The PCT is an international agreement which
provides for a single filing to have simultaneous effect in a number of member countries. A single
search is conducted and the results of the search as well as a copy of the description and the
claims are communicated to each of the countries in which a patent is sought. The national patent
offices in each of the countries concerned subsequently process the PCT Application as a national
patent application, making use of the PCT search results. The filing of the PCT Application by the
Company extends the protection in all 133 signatory countries of the PCT until at least December
21, 2008.
Additional national patent applications are due by December 21, 2007. The Companys ability
to make these filings in a timely manner is dependent, in part, on its financial resources. See
Managements Discussion and Analysis or Plan of Operations Liquidity and Capital Resources.
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.
22
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing date
|
|
Status
|
Australia
|
|
2004312099
|
|
December 23, 2004
|
|
Examination to be
requested by
December 2009
|
Canada
|
|
2559287
|
|
December 23, 2004
|
|
Examination to be
requested by
December 2009
|
China
|
|
200480042295.3
|
|
December 23, 2004
|
|
Examination
requested December
2006
|
Europe
|
|
04802122.4
|
|
December 23, 2004
|
|
Application filed -
awaiting
examination
|
Indonesia
|
|
WO0200602208
|
|
December 23, 2004
|
|
Examination to be
requested by
December 2007
|
Japan
|
|
2006-548033
|
|
December 23, 2004
|
|
Examination to be
requested by
December 2007
|
Korea
|
|
2006-7016017
|
|
December 23, 2004
|
|
Examination Due by
December 23, 2009
|
Mexico
|
|
PA/a/2006/007863
|
|
December 23, 2004
|
|
Application filed
awaiting
examination
|
Malaysia
|
|
PI20050041
|
|
January 6, 2005
|
|
Examination to be
requested by
January 2010
|
New Zealand
|
|
548993
|
|
December 23, 2004
|
|
Application filed
awaiting
examination.
|
Thailand
|
|
096762
|
|
January 4, 2005
|
|
Examination to be
requested by
January 2010
|
Taiwan
|
|
93140533
|
|
December 24, 2004
|
|
Examination to be
requested by
December 2007
|
United States
|
|
N/A
|
|
|
|
Application filed
awaiting
examination.
|
The priority date is January 16, 2004 from Australian patent application 2004900192.
CAT-MATEInline 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.
Method and Apparatus for Treatment of a Fluid (Temple University
)
.
This is an
apparatus for the magnetic treatment of oils to improve viscosity. Under the 2004 License
Agreement with Temple University, we have filed the following patent applications, at our sole
expense and for the benefit of Temple University, in order to secure rights to license this
technology in these countries:
23
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing date
|
|
Status
|
GCC*
|
|
GCC/P/2005/5066
|
|
August 22, 2005
|
|
Application filed
awaiting
examination.
|
Brazil
|
|
0510871-3
|
|
May 13, 2005
|
|
Examination to be
requested by May
2008
|
Canada
|
|
2566739
|
|
May 13, 2005
|
|
Examination to be
requested by May
2010
|
China
|
|
200580023369.3
|
|
May 13, 2005
|
|
Examination to be
requested by May
2007
|
Algeria
|
|
060593
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
Eurasia**
|
|
200602114
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
Egypt
|
|
PCT 1087/2006
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
United Kingdom
|
|
0624025.3
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
Indonesia
|
|
WO0200603429
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
Mexico
|
|
PA/a/2006/013206
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
Norway
|
|
20065632
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
United States
|
|
11/519168
|
|
May 13, 2005
|
|
Application filed
awaiting
examination
|
|
|
|
*
|
|
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.
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.
|
24
We have filed applications for trademark protection for ECO ChargR in respect of the following
goods in the countries listed in the table below:
Class 7: Devices to treat fuel in combustion engines; devices positioned in the fuel train
of a combustion engine to reduce pollutants in the exhaust and maximize efficiency of
combustion; magnetic fuel treatment devices including in-line treatment devices; fuel
treatment devices utilizing magnets; all the foregoing being for petrol or diesel engines.
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
|
Renewal
|
Australia
|
|
1121860
|
|
July 4, 2006
|
|
Application Allowed
|
|
|
Canada
|
|
Awaiting number
|
|
|
|
|
|
|
Indonesia
|
|
D00 2007 000330
|
|
January 4, 2007
|
|
Awaiting examination
|
|
|
Madrid *
|
|
Awaiting number
|
|
|
|
|
|
|
Malaysia
|
|
Awaiting number
|
|
|
|
|
|
|
Thailand
|
|
Awaiting number
|
|
|
|
|
|
|
Taiwan
|
|
Awaiting number
|
|
|
|
|
|
|
|
|
|
*
|
|
The Madrid Protocol application designated the following countries:
United States, China, European Union, Japan, Korea, Singapore and
Vietnam.
|
The priority date is July 4, 2006 from Australian trade mark application no. 1121860
We have filed applications for trademark protection for MAG ChargR in respect of the following
goods in the countries listed in the table below:
Class 7: Devices to treat fuel in combustion engines; devices positioned in the fuel train
of a combustion engine to reduce pollutants in the exhaust and maximize efficiency of
combustion; magnetic fuel treatment devices including in-line treatment devices; fuel
treatment devices utilizing magnets; all the foregoing being for petrol or diesel engines..
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
|
Renewal
|
Australia
|
|
1121864
|
|
July 4, 2006
|
|
Application Allowed
|
|
|
Canada
|
|
Awaiting number
|
|
|
|
|
|
|
Indonesia
|
|
D00 2007 000331
|
|
January 4, 2007
|
|
Awaiting examination
|
|
|
Madrid *
|
|
Awaiting number
|
|
|
|
|
|
|
Malaysia
|
|
Awaiting number
|
|
|
|
|
|
|
Thailand
|
|
Awaiting number
|
|
|
|
|
|
|
Taiwan
|
|
Awaiting number
|
|
|
|
|
|
|
|
|
|
*
|
|
The Madrid Protocol application designated the following countries:
United States, China, European Union, Japan, Korea, Singapore and
Vietnam.
|
The priority date is July 4, 2006 from Australian trademark application no. 1121864.
We have filed a trademark application for STWA PERFORMANCE, as listed below for the following
goods:
Class 7: Devices to reduce noxious exhaust emissions from combustion engines, namely
inline valves, inline throttling valves, inline baffles and catalytic converter heaters;
devices positioned in the exhaust flow of a combustion engine and to reduce pollutants in
the exhaust, namely inline valves, inline throttling valves, inline baffles and catalytic
converter heaters; devices to radiate or transmit heat to a catalytic converter in an
exhaust system, namely inline valves, inline throttling valves, inline baffles and
catalytic converter heaters; devices to radiate or transmit heat to a
catalytic converter in an exhaust system and which absorbs the heat from the exhaust gases
and reradiates the heat to the catalytic converter in the exhaust system, namely inline
valves, inline
25
throttling valves, inline baffles and catalytic converter heaters; all the
foregoing being for petrol or diesel engines; devices to treat fuel in combustion engines;
devices positioned in the fuel train of a combustion engine to reduce pollutants in the
exhaust and maximize efficiency of combustion; magnetic fuel treatment devices including
in-line treatment devices; fuel treatment devices utilizing magnets; all the foregoing
being for petrol or diesel engines.
|
|
|
|
|
|
|
|
|
Country
|
|
Number
|
|
Filing Date
|
|
Status
|
Australia
|
|
|
1140033
|
|
|
October 11, 2006
|
|
Awaiting examination
|
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 December 31, 2006, we had 14 full-time employees and three part-time employees. As of
such date, we also utilized the services of one full-time consultant in our research and consulting
facility in Australia and three additional part-time 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.
Risk Factors
We have just begun to generate revenues, we have a history of losses, and we cannot assure you
that we will ever become or remain profitable. As a result, you may lose your entire investment.
We generated our first revenues from operations in late 2006 and, accordingly, we have
incurred net losses every year since our inception in 1998. For the fiscal years ended December 31,
2006 and 2005, we had net losses of $10,181,523 and $3,115,186, 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, including equity and debt. Although we generated our first revenues in
late 2006, 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
substantial additional funds, from a combination of revenue and external financing activities, to
fund our operations. Our ability to achieve profitability is dependent upon our continuing research
and development, product development, and sales and marketing efforts, to deliver viable products
and the companys ability to successfully bring them 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 significant 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 sufficient revenues or become or remain profitable,
we may have to cease our operations and liquidate our business.
26
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 May 15, 2007, our independent auditors stated that our
consolidated financial statements for the year ended December 31, 2006 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 $30,427,597 as of December 31, 2006. 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.
Since we have not yet begun to generate 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 $244,228 in cash at December 31, 2006 and negative cash flow
from operations of $5,197,587 for the year ended December 31, 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 will 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.
We will need substantial additional capital to meet our operating needs, and we cannot be sure
that additional financing will be available.
As of December 31, 2006 and thereafter, our expenses ran, and are expected to continue to run,
at a burn rate of approximately
$
550,000 per month, which amount could increase during 2007. We
are not currently able to fund operations on a current basis, and we will require substantial
additional capital in order to operate. In order to fund some our capital needs, we conducted
private offerings of our securities in early 2006 and in early 2007. The net proceeds of these
offerings have been exhausted. We also established what is generally referred to as an equity line
of credit of up to $10,000,000 with Dutchess Private Equity Fund, LLP (Dutchess), under which we
may put shares of our common stock to Dutchess for sale into the marketplace and receive the
proceeds of these sales. From November 6, 2006 through December 31, 2006, we raised $380,095 gross
proceeds from such puts, and between January 1, 2007 and May 9, 2007, we raised an additional
$699,591 gross proceeds from such puts. Almost all of the proceeds of those puts have been
exhausted. We will need to rely substantially on additional puts from the equity line of credit
unless and until we can arrange additional interim or permanent financings. Reliance on the equity
line of credit could create downward pressure on the price of our common stock and is dilutive to
our existing shareholders. While discussion regarding additional interim and permanent financings
are being actively conducted, management cannot predict with certainty that the equity line of
credit will be available to provide adequate funds, or any funds at all, or whether any additional
interim or permanent financings will be available at all or, if it is available, if it will be
available on favorable terms. If we cannot obtain needed capital, our research and development, and
sales and marketing plans, business and financial condition and our ability to reduce losses and
generate profits will be materially and adversely affected. Additionally risks specifically
relating to our equity line of credit with Dutchess are set forth at the end of this section.
We will need additional capital to repay certain short-term debt as it matures.
We issued an aggregate $1,225,000 principal amount of convertible notes to Morale Orchards,
LLC in December 2006 and January 2007, of which $612,500 is due in December 2007 and $612,500 is
due in January 2008. In addition, we also issued an aggregate $400,000 principal amount of
convertible subordinated notes due November 2007 and December 2007 to certain investors.
27
Due to the Companys limited capital resources, management cannot predict with certainty that
there will be cash available to repay these obligations, and other obligations, on their
respective maturity dates. If we do not raise adequate funds, we would be unable to repay these
obligations as they mature during the next twelve months and we could default on such obligations.
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
and MK IV technologies, and, to a lesser extent, our CAT-MATE technology. We also intend to
develop, manufacture and market products incorporating the ELEKTRA technology. We believe that our
revenue growth and profitability, if any, will substantially depend upon our ability to:
|
|
|
raise additional needed capital for research and development;
|
|
|
|
|
complete development of our products in development; and
|
|
|
|
|
successfully introduce and commercialize our new products.
|
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.
The commercial viability of the ZEFS and CAT-MATE technologies remains largely unproven and we
may not be able to attract customers.
Despite the fact that have entered into various distribution agreements and made
some initial sales of our products to distributors, to the best of our knowledge, no consumer or
automobile manufacturer has used the products incorporating the ZEFS or CAT-MATE technologies to
reduce motor vehicle emissions to date. Accordingly, the commercial viability of our devices is not
known at this time. If commercial opportunities are not realized from the use of products
incorporating the ZEFS 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 products. Failure to have commercial
success from the sale of our products will significantly and negatively impact our financial
condition.
28
RAND Corporation has raised questions about the scientific basis and testing results of the
ZEFS and CAT-MATE technologies.
On April 27, 2007, RAND issued its final report on our ZEFS and CAT-MATE technologies. In
that report, RAND opined that the application of magnetic fields has not been shown in scientific
literature to lower the viscosity of automotive fuels. RAND concluded, among other things, that we
would need to conduct further laboratory studies and in-use testing to determine the effectiveness
of our ZEFS technology in reducing pollutants and increasing fuel efficiency in gasoline and
diesel-powered vehicles.
Additionally, RANDs analysis of the third-party laboratory testing we previously had
undertaken found at best mixed results from these tests, and therefore RAND could not confirm the
effectiveness of our ZEFS technology in actual use. The RAND report said the existing technical
literature does not contain credible reports that the application of magnetic fields to either
gasoline or diesel fuel oil will reduce the viscosities of these automotive fuels.
The impact of the RAND report on our ability to continue to sell our products is unknown at
this time. However, if distributors or purchasers of our products, or governments, develop
reservations about the effectiveness of our products as a result of the RAND report, or otherwise,
it would likely have a material adverse impact on our ability to sell our products and generate
revenue.
The commercial viability of the ELEKTRA technology remains largely unproven and we may not be
able to attract customers.
To the best of our knowledge, no consumer or automobile manufacturer has used the products
incorporating the ELEKTRA technology to reduce motor vehicle emissions to date. Accordingly, the
commercial viability of our devices are not known at this time. If commercial opportunities are not
realized from the use of products incorporating the ELEKTRA technology, 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 products. Failure to have
commercial success from the sale of our 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. Automobile 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 technology by others is limited. The commercial
success of our products will depend upon the adoption of our technology by auto manufacturers and
consumers as an approach to reduce motor vehicle emissions. Market acceptance will depend on many
factors, including:
|
|
|
the willingness and ability of consumers and industry partners to adopt new technologies;
|
|
|
|
|
the willingness of governments to mandate reduction of motor vehicle emissions;
|
|
|
|
|
our ability to convince potential industry partners and consumers that our
technology is an attractive alternative to other technologies for reduction of
motor vehicle emissions;
|
|
|
|
|
our ability to manufacture products and provide services in sufficient
quantities with acceptable quality and at an acceptable cost; and
|
|
|
|
|
our ability to place and service sufficient quantities of our products.
|
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.
29
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.
We believe that our future operating results will fluctuate due to a variety of factors,
including:
|
|
|
delays in product development;
|
|
|
|
|
market acceptance of our new products;
|
|
|
|
|
changes in the demand for, and pricing, of our products;
|
|
|
|
|
competition and pricing pressure from competitive products;
|
|
|
|
|
manufacturing delays; and
|
|
|
|
|
expenses related to, and the results of, proceedings relating to our intellectual property.
|
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 2007 as we further increase our
research and development, production and marketing activities, among other activities. Although we
expect to generate revenues from sales of our products in future periods, 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.
30
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
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 our ability to further develop or commercialize our current and proposed product
candidates in the United States and abroad and could result in the 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 to operate its business.
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
31
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 Bruce McKinnon, our President and Chief Executive Officer, and John Bautista, our
Chief Operating Officer. 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, including
consultants. 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. We do not maintain key man insurance for any of these individuals.
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 SEC, 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.
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 (FASB) 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. As required by FASB, we adopted these rules
effective January 1, 2006. 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
32
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 consolidated
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.
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
provide any assurance that a broader or more active public trading market for shares of our common
stock will develop or be sustained. Due to these conditions, we cannot give any assurance that
shareholders will be able to sell their shares at or near bid prices or at all.
The market price of our stock is volatile.
The market price for our common stock has been volatile during the last year, ranging from a
closing bid price of $0.57 on December 18, 2006 to a closing bid price of $4.74 on March 13, 2006,
and a closing bid price of $0.56 on May 9, 2007. Additionally, the bid price of our stock has been
both higher and lower than those amounts on an intra-day basis in the last year. Because our stock
is thinly traded, its price can change dramatically over short periods, even in a single day. 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 Memorandum.
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33
Substantial sales of common stock could cause our stock price to fall.
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. If all of the
shares we registered with the SEC are issued by us under the equity line of credit, an additional
7,000,000 shares of our common stock will be able to be freely sold on the market. Because of the
limited trading volume, the sudden release of up to 7,000,000 additional freely trading shares 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 that we may issue under the equity line of credit, 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.
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.
There are 7,000,000 shares underlying our equity line of credit, which shares we have
registered with the SEC, and the sale of these shares could depress the market price of our common
stock.
The sale by Dutchess into the public market of up to 7,000,000 shares we have registered under
our equity line of credit with Dutchess could depress the market price of our common stock. As of
September 20, 2006, shortly before we filed a registration statement (the Dutchess Registration
Statement) with the SEC, we had 39,317,619 shares of common stock issued and outstanding and the
closing bid price of our common stock on the OTC Bulletin Board was $1.46. From November 6, 2006
through May 1, 2007, Dutchess sold, at our request, an aggregate 1,572,507 shares of our common
stock under the equity line of credit. As of May 9, 2007, we had 41,196,180 shares of common stock
issued and outstanding and the closing bid price of our common stock on the OTC Bulletin Board was
$0.56. Of course, stock price is influenced by many factors other than sales of our stock by
Dutchess.
Assuming we utilize the maximum amount available under the equity line of credit, existing
shareholders could experience substantial dilution upon the issuance of shares to Dutchess.
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, which was the closing bid price of our common stock
on September 20, 2006 and at 10%, 25% and 50% below $1.46 per share. However, the closing bid
price of our common stock on April 30, 2007 was $0.74, meaning that based on current stock prices
even more shares of our common stock would now have to be issued to Dutchess for the same dollar
amount we draw down under the equity line of credit than in the examples given in the below table.
The following table should be read in conjunction with the text above and the footnotes
immediately following the table:
34
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Percent below
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Percent of
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current market
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Price per share
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Number of shares
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Shares
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outstanding
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price
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(1)
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issuable (2)
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outstanding (3)
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shares (4)
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0 %
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$
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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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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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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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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
.
Since only
7,000,000 shares of our common stock are being registered by us at this time, 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. As of May 9, 2007, we had issued 1,601,907 shares of our common stock to
Dutchess under the equity line of credit and had received $1,079,686 gross proceeds from Dutchess
under the equity line of credit.
Our common stock is subject to penny stock regulation, which may make it more difficult for us
to raise capital.
Our common stock is considered penny stock under SEC regulations. It is subject to rules that
impose additional sales practice requirements on broker-dealers who sell our securities. For
example, broker-dealers must make a suitability determination for the purchaser, receive the
purchasers written consent to the transaction prior to sale, and make special disclosures
regarding sales commissions, current stock price quotations, recent price information and
information on the limited market in penny stock. Because of these additional obligations, some
broker-dealers may not effect transactions in penny stocks, which may adversely affect the
liquidity of our common stock and shareholders ability to sell our common stock in the secondary
market. This lack of liquidity may make it difficult for us to raise capital in the future.
Item 2.
Properties
Our principal executive offices consist of leased space in North Hollywood, California. We
lease this space from KZ Golf, Inc. (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
35
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, for which we pay KZG an additional $964 per month in
additional rent.
Bruce H. McKinnon, our President, Chief Executive 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.
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.
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 $1,018 at December 31, 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 $1,152 at December 31, 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 are in the process of closing down this facility.
Item 3.
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
36
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.
In the course of the litigation, we have obtained ownership control over Mr. Mullers claimed
patent rights to the ZEFS device. Under a Buy-Sell Agreement between Mr. Muller and dated December
29, 1998, Mr. Muller, who was listed on the ZEFS devise patent application as the inventor of the
ZEFS device, purported to grant us all international marketing, manufacturing and distribution
rights to the ZEFS device. Those rights were disputed because an original inventor of the ZEFS
device 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 the ZEFS device. 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 $0.20 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 the ZEFS device.
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.
Mr. Muller subsequently filed a Notice of Appeal from the Judgment resulting from this
decision to the Second Circuit Court of Appeals in New York. The clerk of the Court recently
issued an Order dismissing this appeal.
In response to the November 16, 2005 decision by the Court, Mr. 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 Mr. Mullers Motion to set aside the Decision on Summary Judgment issued against
Mr. Muller on November 16, 2005.
On October 27, 2006, Magistrate Judge Frank Maas, Federal District Court of the Southern
District of New York, issued an order granting summary judgment in favor of the Company. The ruling
provided that all shares, options and any other obligations allegedly owed by the Company to Mr.
Muller were to be disgorged. The ruling also confirmed an earlier decision issued on November 16,
2005 in favor of the SEC holding Mr. Muller liable for $7.5 million in actual damages, imposing a
$100,000 fine and barring Mr. Muller from any involvement with a publicly traded company for 20
years. With prejudgment
37
interest, this ruling brings the actual damages against Muller to over $9
million. Additionally, the Court further clarified that the scope of its previous disgorgement
order required the disgorgement of any shares of the Companys stock that Mr. Muller or any of his
nominees directly or indirectly own or control. The Company has taken action to cancel over 3.6
million shares which had been issued to the offshore companies.
The Court also confirmed the appropriateness of an action previously taken by the Company to
acquire the patent rights and to consolidate the manufacturing, marketing and distribution rights
with its ownership of all rights to the existing patents.
Finally, the Court ruled that Mr. Muller had no claim to an alleged $500,000 debt owed to him
while the damages of over $9 million remain unpaid. The Court also ruled that other assets that
were transferred by Mr. Muller to members of his family through various offshore corporations were
also to be disgorged. Because the Court left unresolved an issue concerning claims against one
Muller family member, the Company sought a modification of the Order. On February 8, 2007, Judge
Maas issued an Amended Order which concluded that all of the shares of the Companys stock held by
Mr. Muller or any of his nominees directly or indirectly owned or controlled were to be recaptured
by the Company and were subject to disgorgement and forfeiture. With this modification of the
October 27, 2007 ruling, this order provides the complete relief requested by the Company in its
motion for summary judgment.
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 the ZEFS device and stock option rights. In seeking declaratory
relief, Mr. Muller is seeking to have the patent rights in the ZEFS device 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.
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. That Complaint is currently pending, however, the issues raised in this Complaint
arise from the same claims already decided by the Court in its February 8, 2007 Amended Order. The
Company plans to file a request to dismiss the pending Complaint on several grounds, including that
the claims sought to be litigated in this latter complaint has been included within the Summary
Judgment Motions decided against Mr. Muller, his
nominees and assignees. 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.
Item 4.
Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of fiscal
2006.
38
PART II
Item 5.
Market for Common Equity and Related Stockholder Matters
Through February 1, 2006, our common stock was traded on the Pink Sheets under the symbol
ZERO. Effective February 2, 2006, our common stock is quoted on the Over the Counter Bulletin
Board (the OTCBB). The following table sets forth the high and low bid prices of the Companys
common stock for the quarters indicated as quoted on the Pink Sheets or the OTCBB, as applicable,
as reported by Yahoo Finance. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
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2005
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2006
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High
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Low
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High
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Low
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First Quarter
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$
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1.50
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$
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0.80
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$
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5.00
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$
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0.56
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Second Quarter
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$
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1.25
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$
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0.80
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$
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3.13
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$
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1.45
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Third Quarter
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$
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1.15
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$
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0.60
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$
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2.74
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$
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1.11
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Fourth Quarter
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$
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1.05
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$
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0.70
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$
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1.65
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$
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0.55
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According to the records of our transfer agent, we had 1,040 stockholders of record of our
common stock at May 9, 2007. The Company believes that the number of beneficial owners is
substantially higher than this amount.
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.
Issuances of Unregistered Securities in Last Fiscal Year
Bridge Notes
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 during 2006 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.
Overseas Offering
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.
2006 PIPE 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 (Spencer Clarke). 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 for various investment banking and other related
services,
39
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.
Other Issuances
During the year ended December 31, 2006, convertible notes in the amount of $2,576,379 of our
previously issued and outstanding Investor Notes were converted to 3,680,540 shares of common
stock, at a conversion rate of $0.70 per share. In addition, $3,707 of accrued interest was
converted to 5,296 shares of common stock, at a conversion rate of $0.70 per share. The Company
did not receive any proceeds in connection with the conversion of the Investor Notes.
During the year ended December 31, 2006, individuals exercised outstanding warrants to
purchase 2,328,452 shares of common stock for gross and net proceeds of $1,623,327.
Morale Orchards Transaction
On December 5, 2006, we entered into a Note Purchase Agreement (the Note Purchase Agreement)
with Morale Orchards, LLC (Morale). The entire equity interest in Morale is beneficially owned by
Leodis Matthews, who serves as the Companys litigator through his law firm. The Note Purchase
Agreement provides that Morale will purchase the Companys one-year Convertible Promissory Notes in
the aggregate face amount of $1,225,000 (the Morale Notes), and five-year Warrants (the Morale
Warrants) to purchase shares of our Common Stock at prices ranging from $0.70 to $0.85 per share.
The aggregate purchase price for the Morale Notes and Morale Warrants is $1,000,000. Therefore,
while the stated interest on the Morale Notes is 0%, the actual interest rate is 22.5% because the
Morale Notes are being purchased at a discount from their face amount.
Pursuant to the terms of the Note Purchase Agreement, Morale purchased one Morale Note in the
principal amount of $612,500 on December 5, 2006, for which it paid $500,000 and purchased the
other Morale Note in the principal amount of $612,500 on January 10, 2007, for which it paid
$500,000.
Each of the Morale Notes is convertible into shares of our Common Stock at a per share
conversion price initially equal to the closing price of a share of our Common Stock on the trading
day prior to the date of issuance of such Morale Note. The conversion right is exercisable during
the period commencing 90 days prior to the maturity of each Morale Note. Concurrently with the
issuance of a Morale Note, for no additional consideration, Morale will acquire Morale Warrants to
purchase a number of shares of our Common Stock equal to 50% of the number of shares of our Common
Stock initially issuable on conversion of the associated Morale Note. The Morale Warrants become
exercisable 180 days after the date of their issuance.
The Morale Note purchased by Morale on December 5, 2006 is convertible at the rate of $0.85
per share into 720,588 shares of our Common Stock and the Morale Warrants are exercisable at $0.85
per share for 360,294 shares of our Common Stock. The Morale Note purchased by Morale on January
10, 2007 is convertible at the rate of $0.70 per share into 875,000 shares of our Common Stock and
the Morale Warrants are exercisable at $0.70 per share for 437,500 shares of our Common Stock.
Repayment of each Morale Note is to be made monthly, at an amount equal to at least $3,750 for
each Morale Note. Additional payments may be made prior to maturity with no prepayment penalties.
In the event the Company has not repaid each Morale Note in full by the anniversary date of its
issuance, the remaining balance shall be increased by 10% as an initial penalty, and the Company
shall pay additional interest of 2.5% per month, compounded daily, for each month until such Morale
Note is paid in full.
Morale has piggyback registration rights pursuant to which Morale may require the Company to
include the shares of our Common Stock issuable upon conversion of the Morale Notes and exercise of
the Morale Warrants in certain future registration statements we may elect to file, subject to the
right of the Company and/or its underwriters to reduce the number of shares to be included in such
a registration in good faith based on market or other conditions.
40
The issuances of shares and warrants 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 (the Act),
or Regulations D or S promulgated thereunder.
Item 6.
Managements Discussion and Analysis or Plan of Operation
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the Consolidated Financial Statements and supplementary data
referred to in Item 7 of this Form 10-KSB.
This discussion contains forward-looking statements that involve risks and uncertainties. Such
statements, which include statements concerning future revenue sources and concentration, selling,
general and administrative expenses, research and development expenses, capital resources,
additional financings and additional losses, are subject to risks and uncertainties, including, but
not limited to, those discussed above in Item 1 and elsewhere in this Form 10-KSB, particularly in
Risk Factors, that could cause actual results to differ materially from those projected. Unless
otherwise expressly indicated, the information set forth in this Form 10-KSB is as of December 31,
2006, and we undertake no duty to update this information.
Overview
We are a development stage company that generated its first initial revenues in the fourth
quarter of 2006. Our focus is on research and development, and initial sales and marketing, of
products incorporating our proprietary and patented technology, which is designed to reduce harmful
emissions, and/or improve fuel efficiency and engine performance on equipment and vehicles driven
by internal combustion engines. We have devoted the bulk of our efforts to the completion of the
design, the development of our production models, testing of devices and the promotion of our
products in the marketplace. We anticipate that these efforts will continue during 2007.
Our expenses to date have been funded primarily through the sale of stock and convertible
debt, as well as proceeds from the exercise of stock purchase warrants. We raised capital in 2006
and will need to raise substantial additional capital in 2007, and possibly beyond, to fund our
sales and marketing efforts, continuing research and development, and certain other expenses, until
our revenue base grows sufficiently.
Results of Operations
For the fiscal year ended December 31, 2006, we recorded our first revenues and cost of goods
sold of $30,000 and $13,400, respectively, realizing a gross profit of $16,600,
compared to $0 and $0, respectively, for the year ended December 31, 2005.
Operating expenses were $7,412,227 for the fiscal year ended December 31, 2006, compared to
$2,631,082 for the fiscal year ended December 31, 2005, an increase of $4,781,145. The increase is
largely due to the continued cost of the Company bringing its first product to market and the
normal course of business operations. Much of the increase is also due to non-cash compensation to
both employees and to consultants and other professionals. Specifically, this increase is
attributable to increases in fair value of stock options given to employees ($2,253,263); salaries
and benefits expenses ($1,076,122); consulting and professional fees ($480,813); non-cash expenses
of amortization of deferred compensation, consulting fees, professional fees and settlement cost
($221,852); corporate expenses ($161,012); non-cash depreciation ($135,112); travel ($126,675);
office and other expenses (111,384); rent and utilities ($109,919); and exhibit and trade shows
($104,993).
Research and development expenses were $401,827 for the fiscal year ended December 31, 2006,
compared to $1,150,361 for the fiscal year ended December 31, 2005, a decrease of $748,534. Our
research and development expenses include contracts with RAND, consultants fees, capital
expenditures, cost of services and supplies. The decrease in research and development expenses is
primarily attributable to a
41
decrease in contracts with RAND Corporation ($785,000) and R&D consulting fees ($64,270). These
decreases were offset by increases in travel expenses ($68,686) and testing tools and supplies
($32,050).
Interest income was $15,422 for the fiscal year ended December 31, 2006, compared to $0 for the fiscal year ended
December 31, 2005. The increase is the result of excess cash from fund raising that was invested in a money market
account. Interest expense was $2,398,691 for the fiscal year ended December 31, 2006, compared to $348,964 for the
fiscal year ended December 31, 2005 an increase of $2,049,727. The increase is due to a non-cash increase of $1,965,894
from amortization of debt discount on convertible notes and payments of $83,833 on convertible notes. The settlement of
litigation and debt was $0 for the fiscal year ended December 31, 2006 compared to $1,017,208 for the fiscal year ended
December 31, 2005.
We had a net loss of $10,181,523, or $.28 per share, for the year ended December 31, 2006, as
compared to a net loss of $3,115,186, or $.08 per share for the fiscal year ended December 31,
2005.
Liquidity and Capital Resources
General
We have incurred negative cash flow from operations in the developmental stage since our
inception in 1998. As of December 31, 2006, we had cash of $244,228 and an accumulated deficit of
$30,427,597. Our negative operating cash flow in 2006 was funded primarily through the sale of
common stock and convertible notes.
The consolidated financial statements accompanying this Annual Report 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 our business. As reflected in the accompanying consolidated
financial statements, we had a net loss of $10,181,523 and a negative cash flow from operations of
$5,197,587 for the year ending December 31, 2006, and a stockholders deficiency of $896,694 as of
December 31, 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 consolidated financial statements do not include any
adjustments that might be necessary if we are unable to continue as a going concern.
During 2006, we raised an aggregate of $3,817,976 gross proceeds ($3,431,496 net proceeds)
from the sale of our stock and the issuance of debt, as follows:
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Gross proceeds of $550,000 (net proceeds of $478,500) from the issuance of the
Bridge Notes and related warrants in a private offering conducted by Spencer Clarke
that began in November 2005 and was completed in February 2006. In addition, the
Company received gross proceeds of $525,000 (net proceeds $456,750) in 2005 in this
offering.
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Gross proceeds of $737,881 (net proceeds of $667,803) from the sale of stock and
warrants in a private offering conducted by the company in April 2006.
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Gross proceeds of $1,650,000 (net proceeds of $1,435,500) from the sale of stock
and warrants in a PIPE offering conducted by Spencer Clarke, LLC of New York in April
and May 2006.
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Gross and net proceeds of $500,000 from the issuance of a convertible note and
related warrants in a private offering to Morale Orchards on December 5, 2006. The
face amount of the note is $612,500 due December 4, 2007.
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Gross proceeds of $380,095 (net proceeds of $349,693) from the issuance of stock
under our equity line of credit from Dutchess in November and December 2006.
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Also during 2006, we received $1,623,327 gross and net proceeds from the exercise of warrants
to purchase shares of our common stock and $60,000 gross and net proceeds from the exercise of
options to purchase shares of common stock. See Market for Common Equity and Related Stockholder
Matters
-
Issuances of Unregistered Securities in Last Fiscal Year for more details of the
issuances in 2006.
Subsequent to fiscal year ended December 31, 2006 and through May 9, 2007, we raised an
aggregate of $1,599,591 gross proceeds ($1,495,624 net proceeds) from the sale of our stock and the
issuance of debt, as follows:
42
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Gross and net proceeds of $500,000 from the issuance of a convertible note and
related warrants in a private offering to Morale Orchards on January 10, 2007. The
face amount of the note is $612,500 due January 9, 2008.
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Gross proceeds of $699,591 (net proceeds of $643,624) from the issuance of stock
under our equity line of credit from Dutchess.
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Gross proceeds of $400,000 (net proceeds of $352,000) from the issuance of Bridge
Notes and related warrants in a private offering conducted by Spencer Clarke that
began in January 2007 and was completed on April 27, 2007.
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Details of Recent Financing Transactions
General
.
In late 2005 and early 2006, we conducted the Bridge Offering and sold an aggregate
$1,075,000 principal amount of our 9% Bridge Notes and issued 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 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 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 the 2006 PIPE Offering and sold 873,018 shares of our common stock
(the PIPE Shares) at $1.89 per share and issued 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. 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 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.
Equity Line of Credit
.
In September 2006, to address our longer-term capital needs,
we entered into what is sometimes referred to as an equity line of credit arrangement with
Dutchess. See Risk Factors.
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.
In connection with the equity line of credit, we filed the Dutchess Registration Statement
with the SEC on October 6, 2006 to register 7,000,000 shares of Common Stock that we may issue
under the equity line of credit and the Dutchess Registration Statement was declared effective by
the SEC on October 30, 2006.
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. If we put more than the amount that would require us to issue the 7,000,000 shares that we
have registered with the SEC, 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 SEC, before we could make
further puts under the equity line of credit.
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
43
shares we desire to put to Dutchess. 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.
As 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.
For purposes of the Dutchess Registration Statement, we assumed that we would 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 equity line of credit. However, this may not in fact be the case. We would
only be able to put a total of approximately $5,908,000 for the same 7,000,000 shares, based on a
more current closing price of our Common Stock on January 11, 2007 of $0.87 per share, less the 3%
discount applicable to the price per share that Dutchess would pay under the terms of the equity
line of credit.
In part because of the drop of our stock price since the establishment of the equity line of
credit, we have not used the maximum amount of the equity line of credit to date that we could have
used. Additionally, as our business expands and new opportunities, technologies and markets
present themselves, our capital requirements are expected to increase.
Morale Transaction
. On December 5, 2006, we entered into a Note Purchase Agreement (the Note
Purchase Agreement) with Morale. The entire equity interest in Morale is beneficially owned by
Leodis Matthews, who is the Companys litigator through his law firm. The Note Purchase Agreement
provides that Morale will purchase the Companys one-year Convertible Promissory Notes in the
aggregate face amount of $1,225,000 (the Morale Notes), and five-year Warrants (the Morale
Warrants) to purchase shares of our Common Stock. The aggregate purchase price for the Morale
Notes and Morale Warrants is $1,000,000. Therefore, while the stated interest on the Morale Notes
is 0%, the actual interest rate is 22.5% because the Morale Notes are being purchased at a discount
from their face amount.
Pursuant to the terms of the Note Purchase Agreement, Morale purchased one Morale Note in the
principal amount of $612,500 on December 5, 2006, for which it paid $500,000 and purchased the
other Morale Note in the principal amount of $612,500 on January 10, 2007, for which it paid
$500,000.
Each of the Morale Notes is convertible into shares of our Common Stock at a per share
conversion price initially equal to the closing price of a share of our Common Stock on the trading
day prior to the date of issuance of such Morale Note. The conversion right is exercisable during
the period commencing 90 days prior to the maturity of each Morale Note. Concurrently with the
issuance of a Morale Note, for no additional consideration, Morale will acquire Morale Warrants to
purchase a number of shares of our Common Stock equal to 50% of the number of shares of our Common
Stock initially issuable on conversion of the associated Morale Note. The Morale Warrants become
exercisable 180 days after the date of their issuance.
The Morale Note purchased by Morale on December 5, 2006 is convertible at the rate of $0.85
per share into 720,588 shares of our Common Stock and the Morale Warrants are exercisable at $0.85
per share for 360,294 shares of our Common Stock. The Morale Note purchased by Morale on January
10, 2007 is convertible at the rate of $0.70 per share into 875,000 shares of our Common Stock and
the Morale Warrants are exercisable at $0.70 per share for 437,500 shares of our Common Stock.
Repayment of each Morale Note is to be made monthly, at an amount equal to at least $3,750 for
each Morale Note. Additional payments may be made prior to maturity with no prepayment penalties.
In the event the Company has not repaid each Morale Note in full by the anniversary date of its
issuance, the remaining balance shall be increased by 10% as an initial penalty, and the Company
shall pay additional interest of 2.5% per month, compounded daily, for each month until such Morale
Note is paid in full.
Morale has piggyback registration rights pursuant to which Morale may require the Company to
include the shares of our Common Stock issuable upon conversion of the Morale Notes and exercise of
the
44
Morale Warrants in certain future registration statements we may elect to file, subject to the
right of the Company and/or its underwriters to reduce the number of shares to be included in such
a registration in good faith based on market or other conditions.
2007 PIPE Offering
. From January 13 through April 27, 2007, the Company conducted an offering
(the 2007 PIPE Offering), through Spencer Clarke, as exclusive placement agent, of up to
$2,000,000 principal amount of its 10% convertible notes (the 2007 PIPE Notes). Interest on the
2007 PIPE Notes, at a rate of 10% per annum, is payable quarterly. The Notes are due nine months
from date of issuance. The Notes are convertible into shares of Common Stock at an initial
conversion price of $0.70 per share (the Conversion Shares). The Company raised $400,000 gross
proceeds ($352,000 net proceeds) in the 2007 PIPE Offering.
The Company has the right to redeem any or all of the outstanding 2007 PIPE Notes in its sole
discretion anytime after the termination of the 2007 PIPE Offering and prior to the maturity date
of the 2007 PIPE Notes. The redemption price shall be the face amount of the redeemed Notes plus
accrued and unpaid interest thereon. Subject to the following sentence, at any time prior to the
maturity date of the 2007 PIPE Notes, for each additional $1,000,000 of gross proceeds raised from
one or more offerings of the Companys equity or quasi-equity securities, the Company shall redeem
2007 PIPE Notes with a minimum face value of $500,000 together with accrued and unpaid interest,
until the entire outstanding 2007 PIPE Note is redeemed. Certain financings that the Company may
conduct outside of North America and only up to a maximum of UK £15,000,000 in the aggregate, are
exempt from this provision to redeem the 2007 PIPE Notes in whole or in part.
Investors in the 2007 PIPE Offering received, for no additional consideration, a warrant (the
2007 PIPE Warrant), entitling 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 2007 PIPE Notes are
convertible (the Warrant Shares). The 2007 PIPE Warrant will be exercisable on a cash basis only
and will have registration rights. The 2007 PIPE Warrant is exercisable at an initial price of
$1.00 per share, and is exercisable immediately upon issuance and for a period of three years from
the date of issuance.
Promptly, but no later than 90 days following the closing date of the 2007 PIPE Offering, the
Company is required file a registration statement with the SEC to register the Conversion Shares
and the Warrant Shares. The Company shall use its best efforts to ensure that such registration
statement is declared effective within 120 days after filing.
The proceeds of all of the offerings discussed above were exhausted by April 30, 2007 and we
are having difficulty meeting all of our obligations and operating expenses. In order to fund our
capital needs for the foreseeable future, including the operations of our business, and the
repayment of the Bridge Notes and 2007 PIPE Notes, both of which series of notes are due by the end
of 2007, and the Morale Orchards Notes, which are due in December 2007 and January 2008, we must
raise substantial additional funds, in addition to the funds required to operate our business,
including without limitation the expenses we will incur in connection with the license and research
and development agreements with Temple University, costs associated with product development and
commercialization of the ELEKTRA technology, costs to manufacture our products, costs to design and
implement an effective system of internal controls and disclosure controls and procedures, and
costs required to protect our intellectual property. In addition, as discussed below, we have
substantial contractual commitments, including without limitation salaries to our executive
officers pursuant to employment agreements, certain severance payments to a former officer and
consulting fees, during the remainder of 2007 and beyond.
In light of the Companys financial commitments over the next several months and its liquidity
constraints, we are implementing cost reduction measures in all areas of operations, including but
not limited to personnel lay-offs, marketing and advertising, deferral of placing orders to
manufacturers of our ECO ChargR and MAG ChargR products for sale to our existing distributors,
research and development and product development of ELEKTRA products, and certain other expenses.
We intend to review these measures on an ongoing basis and make additional decisions as may be
required.
45
We intend to continue to use our equity line of credit for some of our additional requirements
for 2007. However, the equity line of credit will not be sufficient to meet all of our current
liabilities and other obligations in 2007. Therefore, the Company is actively pursuing additional
financing alternatives, but no commitments have been received and, accordingly, no assurance can be
given that any financing will be available or, if available, that it will be on terms that are
satisfactory to the Company.
Contractual Obligations
The following table discloses our contractual commitments for future periods. Long-term
commitments are comprised operating leases and minimum guaranteed compensation payments under
employment and other agreements. See Note 12 to Notes to Consolidated Financial Statements,
Commitments and Contingencies.
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Operating Leases
|
|
|
Guaranteed Payments
|
|
2007
|
|
$
|
154,449
|
(1)
|
|
$
|
1,585,338
|
(3)
|
2008
|
|
$
|
150,348
|
|
|
$
|
300,000
|
(4)
|
2009
|
|
$
|
92,343
|
(2)
|
|
$
|
75,000
|
(5)
|
|
|
|
|
|
|
|
|
|
$
|
397,140
|
|
|
$
|
1,960,338
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We have assumed that we will renew the lease for our corporate offices at
North Hollywood, California when it expires on July 31, 2007, at an increase in rent
of 10%, as provided for in the lease. We have assumed that we will renew the lease
for our engineering, production and testing facility at Morgan Hill, California when
it expires on August 31, 2007, on the existing terms, including rent, for an
additional two-year period, expiring on July 31, 2009. For a description of these
properties, see Part I, Item 2, Properties.
|
|
(2)
|
|
Does not include rent for (i) our corporate offices at North Hollywood,
California beyond July 31, 2009 or (ii) our engineering, production and testing
facility at Morgan Hill, California beyond August 31, 2009, which are the expiration
dates of the respective renewal terms for those two leases.
|
|
(3)
|
|
Consists of an aggregate $545,600 in total compensation, including base
salary and certain contractually-provided benefits, to two executive officers,
pursuant to employment agreements that expire on December 31, 2007, and to one
additional officer, pursuant to an employment agreement that expires on February 28,
2008; $385,000 in licensing fees to Temple University; $322,800 in severance payments
to a former officer; $240,000 in consulting fees to Spencer Clarke; and $91,938 in
fees to certain other consultants.
|
|
(4)
|
|
Consists of licensing fees in the amount of $290,000 due to Temple
University; and salary in the amount of $10,000 for two months to an officer, pursuant
to an employment agreement that expires on February 28, 2008. Does not include
compensation to our two executive officers, whose employment agreements expire on
December 31, 2007.
|
|
(5)
|
|
Consists of licensing fees due to Temple University. Does not include
compensation to our two executive officers, whose employment agreements expire on
December 31, 2007.
|
Licensing Fees to Temple University.
For details of the licensing agreements with Temple
University, see Part I, Item 1, Business Our Business Strategy Our Technologies and Products.
We are current in our payments to Temple University.
Severance Payments to Former Officer.
On November 9, 2006, Eugene E. Eichler resigned as our
Chief Executive Officer and Chief Financial Officer, due to a medical disability. Mr. Eichlers
resignation as Chief Executive Officer took effect on November 20, 2006 and his resignation as
Chief Financial Officer took effect on the appointment of his successor on January 8, 2007.
Under the terms of Mr. Eichlers separation as an officer of the Company, he is entitled to be
paid out the remainder of the cash portion of his employment agreement, at a rate of $300,000 per
annum, through December 31, 2007, in accordance with the Companys normal pay policies. Options
granted to
46
him in February 2006 have been accelerated and fully vested on November 20, 2006;
additionally, Mr.Eichler will have until November 20, 2007 to exercise such options. Mr. Eichler is
also entitled to receive a stock option grant in 2007 equal to the lesser of (i) the number of
stock options Mr. Eichler was granted in 2006 or (ii) the highest number of options granted to any
of the then Chief Executive Officer, President or Chief Financial Officer on an annualized basis,
on terms no less favorable as granted to such person; provided, however, that such options to be
granted to Mr. Eichler shall be fully vested upon grant and shall be exercisable for one year from
the date of grant. The Company and Mr. Eichler have waived any claims they may have against each
other and have agreed to mutual indemnification.
Of the payments we are required to make under this arrangement, we have paid $25,000 for
January 2007 and have accrued but not yet paid $75,000 through April 30, 2007, by agreement between
the Company and Mr. Eichler.
Transactions with Spencer Clarke.
Spencer Clarke has served as our exclusive
placement agent in recent offerings of our securities. We also have retained Spencer Clarke as a
consultant to the Company, for which it will be separately compensated.
We entered into a consulting agreement dated January 4, 2007 with Spencer Clarke (the
Consulting Agreement), pursuant to which Spencer Clarke has agreed that for a twelve-month period
beginning January 15, 2007, Spencer Clarke will provide us with financial consulting services
(including but not limited to executive search, strategic partnerships, research on new markets,
strategic visibility, etc) to help further develop our strategic business plan.
For Spencer Clarkes services, we have agreed to pay Spencer Clarke a non-refundable fee of
$20,000 per month, payable in advance. The first payment, in the amount of $60,000 and covering
three months, is payable by us on March 15, 2007. We will also reimburse Spencer Clarke for
expenses they incur in connection with the performance of their services under the Consulting
Agreement, provided that expenses in excess of $2,000 require our prior approval before they may be
incurred by Spencer Clarke.
We have agreed to indemnify Spencer Clarke against any losses, claims, damages or liabilities
to which Spencer Clarke may become subject arising out of or in connection with the services they
render under the Consulting Agreement, unless it is finally judicially determined that such losses,
claims, damages or liabilities arose primarily out of the gross negligence or bad faith of Spencer
Clarke. We have also agreed to reimburse Spencer Clarke immediately for any legal or other
expenses they reasonably incur in connection with investigating, preparing to defend or defending
any lawsuits or other proceedings arising out of or in connection with their rendering of services
under the Consulting Agreement; provided, however, that in the event of a final judicial
determination that the alleged losses, claims, damages or liabilities arose primarily out of the
gross negligence or bad faith of Spencer Clarke, Spencer Clarke will remit to us any amounts
reimbursed, but the amount which Spencer Clarke must remit in such event is limited to the fee
payable by us to Spencer Clarke under the Consulting Agreement.
To date, we have not made any payments under the Consulting Agreement and have accrued $80,000
through April 30, 2007 with respect to this obligation.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these
consolidated 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.
47
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 consolidated 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. . For a more detailed discussion of the accounting policies of the Company,
see Note 2 of the Notes to the Consolidated Financial Statements, Summary of Significant
Accounting Policies.
We believe the following critical accounting policies, among others, require significant
judgments and estimates used in the preparation of our consolidated financial statements.
The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Certain significant estimates were made in connection with preparing
our consolidated financial statements as described in Note 1 to Notes to Consolidated Financial
Statements. See Item 7, Financial Statements. Actual results could differ from those estimates.
Revenue Recognition
The Company has adopted Staff Accounting Bulletin 104, Revenue Recognition and therefore
recognizes revenue based upon meeting four criteria:
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
|
Delivery has occurred or services rendered;
|
|
|
|
|
The sellers price to the buyer is fixed or determinable; and
|
|
|
|
|
Collectibility is reasonably assured.
|
The Company contract manufactures fixed magnetic field products and sells them to various
original equipment manufacturers in the motor vehicle and small utility motor markets. The Company
negotiates an initial contract with the customer fixing the terms of the sale and then receives a
letter of credit or full payment in advance of shipment. Upon shipment, the Company recognizes the
revenue associated with the sale of the products to the customer.
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 for the year ended December 31, 2006. The Company
recorded an impairment
48
of approximately $505,000 during the period from inception (February 18,
1998) through December 31, 2006.
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 year ended December 31, 2005, the Company would have recorded additional
compensation expense of $861,637.
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 year ended December 31, 2005 and for the period from inception
(February 18, 1998) to December 31, 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
December 31,
|
|
|
Since
|
|
|
|
2005
|
|
|
Inception
|
|
Net loss, as reported
|
|
$
|
(3,115,186
|
)
|
|
$
|
(30,427,597
|
)
|
Add: total fair value method stock-based
employee compensation expense
|
|
|
(1,039,268
|
)
|
|
|
(5,010,310
|
)
|
Less: deferred compensation amortization
for below market employee options
|
|
|
177,631
|
|
|
|
3,060,744
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(3,976,823
|
)
|
|
$
|
(32,377,163
|
)
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
As reported basic and diluted
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2006, the Company adopted Statements of Financial Accounting Standards No. 123R
(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 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 123R. The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123R.
The Company 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 the Companys
fiscal year 2006. The Companys consolidated financial statements as of and for the year ended
December 31, 2006 reflect the impact of SFAS 123R. In accordance with the modified prospective
transition method, the Companys consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123R. Stock-based compensation expense
recognized under SFAS 123R for employee and directors for the year ended December 31, 2006 was
$2,253,263. Basic and diluted loss
per share for the year ended December 31, 2006 would have been ($0.21) per share, if the
Company had not adopted SFAS 123R, compared to reported basic and diluted loss per share of ($0.28)
per share.
49
SFAS 123R 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 year ended December 31, 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
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 123R. 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 123R 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 123R 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 123R.
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 9 to Notes to Consolidated
Financial Statements. In accordance with SFAS 123R and SAB 107, this cost was written off against
Additional Paid-in Capital when SFAS 123R and SAB 107 were 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.
Recent Accounting Pronouncements
Statement No. 123R
The Company has adopted SFAS No. 123R effective January 1, 2006. It will be effective for all
awards granted after that date. For those stock option awards granted prior to January 1, 2006, but
for which the vesting period is not complete, the Company will use the modified prospective
transition method permitted by SFAS No. 123R. Under this method, the Company accounts for such
awards on a prospective basis, with expense being recognized in the statement of operations
beginning in the first quarter of 2006 using the grant-date fair values previously calculated for
the SFAS No. 123 pro forma disclosures presented in Note 2. The compensation expense not previously
recognized in the SFAS No. 123 pro forma
disclosures for the options that have not vested will be recognized over the remaining
employee service period required to earn the awards. For stock option awards granted after January
1, 2006 the Company will value those awards under the provisions of SFAS No. 123R and will record
compensation expense over the
50
employee service period required to earn the awards. Through December
31, 2005, the Company accounted for share-based payments to employees using Opinion No. 25s
intrinsic value method and as such, generally recognized no compensation expense for employee stock
options in the statement of operations. See Critical Accounting Policies and Estimates Stock
Based Compensation, for a detailed discussion of the affect of SFAS 123R on the consolidated
financial statements of the Company.
Statement No. 151
In November 2004, the 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 re-handling costs to be expenses
in the current period, regardless if they are abnormal amounts or not. This
statement became effective for us in the first quarter of 2006. SFAS 151 does
not have any effect on our consolidated financial statements.
Statement No. 154
In the first quarter of 2006, we adopted Statement No. 154 (SFAS 154),
Accounting Changes and Error Corrections a replacement of APB Opinion No. 20
and FASB Statement No. 3. SFAS 154 changed the requirements for the accounting
for and reporting of a voluntary change in the accounting principles. The
adoption of this statement did not affect our consolidated financial statements
in the period of adoption. Its effects on future periods will depend on the
nature and significance of any future accounting changes subject to this
statement.
Statement No. 157
FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements,
issued in September 2006, establishes a formal framework for measuring fair value under GAAP. It
defines and codifies the many definitions of fair value included among various other authoritative
literature, clarifies and, in some instances, expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for fair value measurements. Although
SFAS No. 157 applies to and amends the provisions of existing FASB and AICPA pronouncements, it
does not, of itself, require any new fair value measurements, nor does it establish valuation
standards. SFAS No. 157 applies to all other accounting pronouncements requiring or permitting
fair value measurements, except for; SFAS No. 123 (R), share-based payment and related
pronouncements, the practicability exceptions to fair value determinations allowed by various other
authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with
software revenue recognition. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The
Company is currently evaluating the effect SFAS 157 will have on its consolidated financial
position, results of operations and cash flows.
Statement No. 159
In February 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
159, The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115 (FAS 159). FAS 159, which becomes effective for the company
on January 1, 2008, permits companies to choose to measure many financial instruments and certain
other items at fair value and report unrealized gains and losses in earnings. Such accounting is
optional and is generally to be applied instrument by instrument. The Company does not anticipate
that election, if any, of
this fair-value option will have a material effect on its consolidated financial position,
results of operations and cash flows.
51
Interpretation No. 48
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48 (FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 establishes that the financial statement effects of a
tax position taken or expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits, that the position will
be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently assessing the impact this new standard will have on its consolidated
results of operations, financial position and cash flow. The Company does not expect the adoption
of FIN 48 to significantly affect its consolidated financial position, results of operations and
cash flows.
SAB No. 108
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 was issued in order to eliminate
the diversity in practice surrounding how public companies quantify financial statement
misstatements. SAB No. 108 requires that registrants quantify errors using both a balance sheet
(iron curtain) approach and an income statement (rollover) approach then evaluate whether either
approach results in a misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. SAB No. 108 is effective for fiscal years ending after November 15,
2006. The Company has adopted the bulletin during 2006. The adoption did not have a material effect
on the Companys consolidated financial position, results of operations or cash flows.
Item 7.
Financial Statements
Our consolidated financial statements as of and for the years ended December 31, 2006 and 2005
are presented in a separate section of this report following Item 14 and begin with the index on
page F-1.
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 8A.
Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this Annual Report on
Form 10-KSB. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) are not adequate to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms. These matters persist despite our having developed and partially implemented a plan to
ensure that all information will be recorded accurately, processed effectively, summarized promptly
and reported on a timely basis. Our plan to date has involved, in part, reallocation of
responsibilities among officers, various other personnel and some of our directors, and hiring
additional personnel. We began to implement this plan during 2005, including the hiring in August
2005 of a Controller who is a Certified Public Accountant. However, in December 2006 our
Controller retired and in January 2007 our Chief Financial Officer retired, although our former
Controller still provides certain financial consulting services for us. We have hired a new
part-time
Chief Financial Officer and a full-time Controller, although the latter is not a Certified
Public Accountant. One of several specific additional steps that the Company believes it must
undertake is to retain a consulting firm to, among other things, design and implement adequate
systems of accounting and financial statement disclosure controls during the current fiscal year to
comply with the requirements of the SEC.
52
We believe that the ultimate success of our plan to
improve our disclosure controls and procedures will require a combination of additional financial
resources, outside consulting services, legal advice, additional personnel, further reallocation of
responsibility among various persons, and substantial additional training of those of our officers,
personnel and others, including certain of our directors such as our Chairman of the Board and
committee chairs, who are charged with implementing and/or carrying out our plan. It should also
be noted that the design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions, regardless of how
remote.
(b) Changes in internal control over financial reporting.
Other than as described in Item
8A(a) above, there was no change in our internal control over financial reporting that occurred
during the period covered by this Annual Report on Form 10-KSB that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Item 8B. Other Information
On May 14, 2007, Erin Brockovich resigned as our Vice President of Environmental Affairs.
53
PART III
Certain information required by Part III is incorporated by reference from our Proxy Statement
to be filed with the Securities and Exchange Commission in connection with the solicitation of
proxies for our 2007 Annual Meeting of Stockholders, currently scheduled to be held in late June
2007 (the Proxy Statement).
Item 9.
Directors and Executive Officers of Registrant
The information required by this section is incorporated by reference from the section
entitled Proposal 1 Election of Directors in the Proxy Statement. Item 405 of Regulation S-B
calls for disclosure of any known late filing or failure by an insider to file a report required by
Section 16 of the Exchange Act. This disclosure is incorporated by reference to the section
entitled Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement. The
information required by this Item with respect to our executive officers is contained in Item 1 of
Part I of this Annual Report under the heading Business Executive Officers.
Code of Business Conduct
.
We have adopted codes of business conduct and ethics for our directors, officers and employees
which also meets the requirements of a code of ethics under Item 406 of Regulation S-B. You can
access the Companys Code of Business Conduct and Ethics and our Code of Ethics for Senior
Executives and Financial Officers on the Corporate Governance page of the Companys website at
www.stwa.com
. Any shareholder who so requests may obtain a printed copy of the Code of
Conduct by submitting a request to the Companys Corporate Secretary.
Item 10.
Executive Compensation
The information required by this section is incorporated by reference from the information in
the section entitled Executive Compensation in the Proxy Statement.
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this section is incorporated by reference from the information in
the section entitled Security Ownership of Certain Beneficial Owners and Management in the Proxy
Statement.
Item 12.
Certain Relationships and Related Transactions
The information required by this section is incorporated by reference from the information in
the section entitled Certain Relationships and Related Transactions in the Proxy Statement.
Item 13.
Exhibits
|
(a)
|
|
The following documents are filed as part of this Form 10-KSB.
|
|
|
|
|
Financial Statements:
|
|
|
|
|
Reference is made to the contents to the consolidated financial statements of Save the
World Air, Inc. under Item 7 of this Form 10-KSB.
|
|
|
(b)
|
|
Exhibits:
|
|
|
|
|
The exhibits listed below are required by Item 601 of Regulation S-B.
|
54
|
|
|
Exhibit No.
|
|
Description
|
3.1(1)
|
|
Articles of Incorporation, as amended, of the Registrant.
|
|
|
|
3.2(1)
|
|
Bylaws of the Registrant.
|
|
|
|
10.1(2)
|
|
Commercial Sublease dated October 16, 2003 between the Registrant
and KZ Golf, Inc.
|
|
|
|
10.2(9)
|
|
Amendment dated June 15, 2004 to Exhibit 10.1
|
|
|
|
10.3 (10)
|
|
Amendment dated August 14, 2005 to Exhibit 10.1
|
|
|
|
10.4(10)
|
|
General Tenancy Agreement dated March 14, 2006 between the
Registrant and Autumlee Pty Ltd.
|
|
|
|
10.5(3)
|
|
Agreement dated December 13, 2002 between the Registrant and RAND.
|
|
|
|
10.6(2)**
|
|
Agreement dated May 7, 2003 between the Registrant and RAND.
|
|
|
|
10.7(5)
|
|
Modification No. 1 dated as of August 21, 2003 to Exhibit 10.5
|
|
|
|
10.8(5)
|
|
Modification No. 2 dated as of October 17, 2003 to Exhibit 10.5
|
|
|
|
10.9(5)
|
|
Modification No. 3 dated as of January 20, 2004 to Exhibit 10.5
|
|
|
|
10.10(4)
|
|
Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne
Muller (Bankrupts).
|
|
|
|
10.11(4)
|
|
Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.
|
|
|
|
10.12(11)
|
|
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Eugene E.
Eichler.
|
|
|
|
10.13*
|
|
Separation Agreement and General Mutual Release of Claims dated as of November 9, 2006 between the Registrant and Eugene E. Eichler
|
|
|
|
10.14(11)
|
|
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Bruce H.
McKinnon.
|
|
|
|
10.15(6)
|
|
Save the World Air, Inc. 2004 Stock Option Plan
|
|
|
|
10.16(8)
|
|
Form of Incentive Stock Option Agreement under 2004 Stock Option Plan
|
|
|
|
10.17(8)
|
|
Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan
|
|
|
|
10.18(8)
|
|
Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett
|
|
|
|
10.19(7)
|
|
License Agreement dated as of July 1, 2004 between the Registrant and Temple University The Commonwealth
System of Higher Education
|
|
|
|
10.20(8)
|
|
Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.
|
|
|
|
10.21(13)
|
|
Amendment dated September 14, 2006 to Exhibit 10.20
|
|
|
|
10.22(8)
|
|
Employment Agreement dated September 1, 2004 with Erin Brockovich
|
|
|
|
10.23*
|
|
Amendment dated as of July 31, 2006 to Exhibit 10.22
|
|
|
|
10.24(8)
|
|
Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell
|
|
|
|
10.25(8)
|
|
Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell
|
|
|
|
10.26(11)
|
|
Amended and Restated Employment
Agreement dated as of March 1, 2006 between the Registrant and John Richard
Bautista III
|
|
|
|
10.27(9)
|
|
Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson
|
|
|
|
10.28(10)
|
|
Amendment dated February 1, 2006 to Exhibit 10.27
|
55
|
|
|
Exhibit No.
|
|
Description
|
10.29(10)
|
|
Form of 9% Convertible Note issued in the 2005 Interim Financing
|
|
|
|
10.30(10)
|
|
Form of Stock Purchase Warrant issued in the 2005 Interim Financing
|
|
|
|
10.31(10)
|
|
Form of Stock Purchase Warrant issued in the 2005 Bridge Financing
|
|
|
|
10.32(11)
|
|
Form of Stock Purchase Warrant issued in 2006 Regulation S financing
|
|
|
|
10.33(11)
|
|
Form of Stock Purchase Warrant issued in 2006 PIPE financing
|
|
|
|
10.34(12)
|
|
Commercial Sublease between the Registrant and KZG Golf dated January 1, 2006
|
|
|
|
10.35(12)
|
|
Investment Agreement dated September 15, 2006 between the Registrant and Dutchess Private Equities Fund
|
|
|
|
10.36(12)
|
|
Registration Rights Agreement dated September 15, 2006 between the registrant and Dutchess Private Equities
Fund, LLP
|
|
|
|
10.37(16)
|
|
License Agreement between the Registrant and Temple University dated February 2, 2007
|
|
|
|
10.38(16)
|
|
License Agreement between the Registrant and Temple University dated February 2, 2007
|
|
|
|
10.39(16)
|
|
R&D Agreement between the Registrant and Temple University dated February 2, 2007
|
|
|
|
10.40(14)
|
|
Note Purchase Agreement dated December 5, 2006 between the registrant and Morale Orchards LLC
|
|
|
|
10.41(14)
|
|
Form of Stock Purchase Warrant issued to Morale Orchards LLC
|
|
|
|
10.42(14)
|
|
Form of Convertible Note issued to Morale Orchards LLC
|
|
|
|
10.43(15)
|
|
Consulting Agreement dated January 4, 2007 between the Registrant and Spencer Clarke LLC
|
|
|
|
10.44*
|
|
Marketing Representation Agreement dated as of July 15, 2006 between the Company and SS Sales and Marketing Group
|
|
|
|
10.45*
|
|
Engagement Agreement between the
Registrant and CFO911
|
|
|
|
10.46*
|
|
Form of 10% Convertible Note issued in 2007 PIPE Offering
|
|
|
|
10.47*
|
|
Form of Stock Purchase Warrant issued in 2007 PIPE Offering
|
|
|
|
21*
|
|
List of Subsidiaries
|
|
|
|
23*
|
|
Consent of Weinberg & Co,
|
|
|
|
24*
|
|
Power of Attorney (included on Signature Page)
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)15(e) or Rule 15(d)15(e).
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350.
|
|
|
|
32.1*
|
|
Certification of Chief Executive Officer and Chief Financial Officer of Annual Report pursuant to Rule
13(a)15(e) or Rule 15(d)15(e).
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
Confidential treatment previously requested.
|
|
|
|
Management contract or compensatory plan or arrangement.
|
|
(1)
|
|
Incorporated by reference from Registrants Registration Statement on Form 10-SB (Registration Number 000-29185), as amended, filed on March 2, 2000.
|
|
(2)
|
|
Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2002.
|
|
(3)
|
|
Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.
|
56
|
|
|
(4)
|
|
Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.
|
|
(5)
|
|
Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2004.
|
|
(6)
|
|
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,
(6) 2004.
|
|
(7)
|
|
Incorporates by reference from Registrant Form 8-K filed on July 12, 2004.
|
|
(8)
|
|
Incorporated by reference from registrants Form 10-KSB for the fiscal year ended December 31, 2004.
|
|
(9)
|
|
Incorporated by reference from Registrants Form 10-QSB for the quarter ended September 30, 2005
|
|
(10)
|
|
Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2005
|
|
(11)
|
|
Incorporated by reference from Registrants Form SB-2 filed on June 28, 2006 (SEC File No. 333- 333-135415)
|
|
(12)
|
|
Incorporated by reference from Registrants Form 8-K filed on September 21, 2006
|
|
(13)
|
|
Incorporated by reference from Registrants Form SB-2 filed on October 6, 2006 (SEC File No. 333-137855)
|
|
(14)
|
|
Incorporated by reference from Registrants Form 8-K filed on December 11, 2006
|
|
(15)
|
|
Incorporated by reference from Registrants Form 8-K filed on January 10, 2007
|
|
(16)
|
|
Incorporated by reference from Registrants form 8-K filed on February 8, 2007
|
Item 14.
Principal Accountant Fees and Services
The information required by this section is incorporated by reference from the information in
the section entitled Proposal 2 Ratification of Appointment of Independent Auditors in the
Proxy Statement.
57
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this
report to be signed on its behalf by the undersigned, hereunto duly authorized.
|
|
|
|
|
|
Save The World Air, Inc.
|
|
|
By:
|
/s/ BRUCE MCKINNON
|
|
|
|
Bruce McKinnon
|
|
Date: May 25, 2007
|
|
Chief Executive Officer
|
|
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints, jointly and severally, Bruce H. McKinnon and Charles K. Dargan II, and each of them,
as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-KSB, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them,
or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
NAME
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ BRUCE H. MCKINNON
|
|
Chief Executive Officer and
Director
|
|
May 25, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/ CHARLES K. DARGAN II
|
|
Chief Financial Officer
|
|
May 25, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/ JOSEPH HELLEIS
|
|
Chairman of the Board
|
|
May 25, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/ STEVEN BOLIO
|
|
Director
|
|
May 25, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/ JOHN BROWN
|
|
Director
|
|
May 25, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/ EUGENE E. EICHLER
|
|
Director
|
|
May 25, 2007
|
|
|
|
|
|
58
|
|
|
|
|
NAME
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ DENNIS KENNEALLY
|
|
Director
|
|
May 25, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/ CECIL KYTE
Cecil Kyte
|
|
Director
|
|
May 25, 2007
|
|
|
|
|
|
/s/ JOHN PRICE
|
|
Director
|
|
May 25, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/ NATHAN SHELTON
|
|
Director
|
|
May 25, 2007
|
|
|
|
|
|
59
EXHIBIT INDEX
|
|
|
Exhibit No.
|
|
Description
|
3.1(1)
|
|
Articles of Incorporation, as amended, of the Registrant.
|
|
|
|
3.2(1)
|
|
Bylaws of the Registrant.
|
|
|
|
10.1(2)
|
|
Commercial Sublease dated October 16, 2003 between the Registrant
and KZ Golf, Inc.
|
|
|
|
10.2(9)
|
|
Amendment dated June 15, 2004 to Exhibit 10.1
|
|
|
|
10.3 (10)
|
|
Amendment dated August 14, 2005 to Exhibit 10.1
|
|
|
|
10.4(10)
|
|
General Tenancy Agreement dated March 14, 2006 between the
Registrant and Autumlee Pty Ltd.
|
|
|
|
10.5(3)
|
|
Agreement dated December 13, 2002 between the Registrant and RAND.
|
|
|
|
10.6(2)**
|
|
Agreement dated May 7, 2003 between the Registrant and RAND.
|
|
|
|
10.7(5)
|
|
Modification No. 1 dated as of August 21, 2003 to Exhibit 10.5
|
|
|
|
10.8(5)
|
|
Modification No. 2 dated as of October 17, 2003 to Exhibit 10.5
|
|
|
|
10.9(5)
|
|
Modification No. 3 dated as of January 20, 2004 to Exhibit 10.5
|
|
|
|
10.10(4)
|
|
Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne
Muller (Bankrupts).
|
|
|
|
10.11(4)
|
|
Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.
|
|
|
|
10.12(11)
|
|
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Eugene E.
Eichler.
|
|
|
|
10.13*
|
|
Separation Agreement and General Mutual Release of Claims dated as of November 9, 2006 between the Registrant and Eugene E. Eichler
|
|
|
|
10.14(11)
|
|
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Bruce H.
McKinnon.
|
|
|
|
10.15(6)
|
|
Save the World Air, Inc. 2004 Stock Option Plan
|
|
|
|
10.16(8)
|
|
Form of Incentive Stock Option Agreement under 2004 Stock Option Plan
|
|
|
|
10.17(8)
|
|
Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan
|
|
|
|
10.18(8)
|
|
Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett
|
|
|
|
10.19(7)
|
|
License Agreement dated as of July 1, 2004 between the Registrant and Temple University The Commonwealth
System of Higher Education
|
|
|
|
10.20(8)
|
|
Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.
|
|
|
|
10.21(13)
|
|
Amendment dated September 14, 2006 to Exhibit 10.20
|
|
|
|
10.22(8)
|
|
Employment Agreement dated September 1, 2004 with Erin Brockovich
|
|
|
|
10.23*
|
|
Amendment dated as of July 31, 2006 to Exhibit 10.22
|
|
|
|
10.24(8)
|
|
Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell
|
|
|
|
10.25(8)
|
|
Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell
|
|
|
|
10.26(11)
|
|
Amended and Restated Employment
Agreement dated as of March 1, 2006 between the Registrant and John Richard
Bautista III
|
|
|
|
10.27(9)
|
|
Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson
|
|
|
|
10.28(10)
|
|
Amendment dated February 1, 2006 to Exhibit 10.27
|
|
|
|
Exhibit No.
|
|
Description
|
10.29(10)
|
|
Form of 9% Convertible Note issued in the 2005 Interim Financing
|
|
|
|
10.30(10)
|
|
Form of Stock Purchase Warrant issued in the 2005 Interim Financing
|
|
|
|
10.31(10)
|
|
Form of Stock Purchase Warrant issued in the 2005 Bridge Financing
|
|
|
|
10.32(11)
|
|
Form of Stock Purchase Warrant issued in 2006 Regulation S financing
|
|
|
|
10.33(11)
|
|
Form of Stock Purchase Warrant issued in 2006 PIPE financing
|
|
|
|
10.34(12)
|
|
Commercial Sublease between the Registrant and KZG Golf dated January 1, 2006
|
|
|
|
10.35(12)
|
|
Investment Agreement dated September 15, 2006 between the Registrant and Dutchess Private Equities Fund
|
|
|
|
10.36(12)
|
|
Registration Rights Agreement dated September 15, 2006 between the registrant and Dutchess Private Equities
Fund, LLP
|
|
|
|
10.37(16)
|
|
License Agreement between the Registrant and Temple University dated February 2, 2007
|
|
|
|
10.38(16)
|
|
License Agreement between the Registrant and Temple University dated February 2, 2007
|
|
|
|
10.39(16)
|
|
R&D Agreement between the Registrant and Temple University dated February 2, 2007
|
|
|
|
10.40(14)
|
|
Note Purchase Agreement dated December 5, 2006 between the registrant and Morale Orchards LLC
|
|
|
|
10.41(14)
|
|
Form of Stock Purchase Warrant issued to Morale Orchards LLC
|
|
|
|
10.42(14)
|
|
Form of Convertible Note issued to Morale Orchards LLC
|
|
|
|
10.43(15)
|
|
Consulting Agreement dated January 4, 2007 between the Registrant and Spencer Clarke LLC
|
|
|
|
10.44*
|
|
Marketing Representation Agreement dated as of July 15, 2006 between the Company and SS Sales and Marketing Group
|
|
|
|
10.45*
|
|
Engagement Agreement between the
Registrant and CFO911
|
|
|
|
10.46*
|
|
Form of 10% Convertible Note issued in 2007 PIPE Offering
|
|
|
|
10.47*
|
|
Form of Stock Purchase Warrant issued in 2007 PIPE Offering
|
|
|
|
21*
|
|
List of Subsidiaries
|
|
|
|
23*
|
|
Consent of Weinberg & Co,
|
|
|
|
24*
|
|
Power of Attorney (included on Signature Page)
|
|
|
|
31.1*
|
|
Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)15(e) or Rule 15(d)15(e).
|
|
|
|
31.2*
|
|
Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350.
|
|
|
|
32.1*
|
|
Certification of Chief Executive Officer and Chief Financial Officer of Annual Report pursuant to Rule
13(a)15(e) or Rule 15(d)15(e).
|
|
|
|
*
|
|
Filed herewith.
|
|
**
|
|
Confidential treatment previously requested.
|
|
|
|
Management contract or compensatory plan or arrangement.
|
|
(1)
|
|
Incorporated by reference from Registrants Registration Statement on Form 10-SB (Registration Number 000-29185), as amended, filed on March 2, 2000.
|
|
(2)
|
|
Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2002.
|
|
(3)
|
|
Incorporated by reference from Registrants Form 8-K filed on December 30, 2002.
|
|
|
|
(4)
|
|
Incorporated by reference from Registrants Form 8-K filed on November 12, 2002.
|
|
(5)
|
|
Incorporated by reference from Registrants Form 10-QSB for the quarter ended March 31, 2004.
|
|
(6)
|
|
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,
(6) 2004.
|
|
(7)
|
|
Incorporates by reference from Registrant Form 8-K filed on July 12, 2004.
|
|
(8)
|
|
Incorporated by reference from registrants Form 10-KSB for the fiscal year ended December 31, 2004.
|
|
(9)
|
|
Incorporated by reference from Registrants Form 10-QSB for the quarter ended September 30, 2005
|
|
(10)
|
|
Incorporated by reference from Registrants Form 10-KSB for the fiscal year ended December 31, 2005
|
|
(11)
|
|
Incorporated by reference from Registrants Form SB-2 filed on June 28, 2006 (SEC File No. 333- 333-135415)
|
|
(12)
|
|
Incorporated by reference from Registrants Form 8-K filed on September 21, 2006
|
|
(13)
|
|
Incorporated by reference from Registrants Form SB-2 filed on October 6, 2006 (SEC File No. 333-137855)
|
|
(14)
|
|
Incorporated by reference from Registrants Form 8-K filed on December 11, 2006
|
|
(15)
|
|
Incorporated by reference from Registrants Form 8-K filed on January 10, 2007
|
|
(16)
|
|
Incorporated by reference from Registrants form 8-K filed on February 8, 2007
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-13
|
|
|
|
|
F-14
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Save the World Air, Inc.
We have audited the accompanying consolidated balance sheets of Save the World Air, Inc. and
Subsidiary (a development stage enterprise) as of December 31, 2006 and 2005 and the related
consolidated 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, 2006. These
financial consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated 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, 2006 and 2005 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,
2006, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006 the
Company adopted Statement of Financial Accounting Standard (SFAS), Share-Based Payment (SFAS
123(R)) which requires companies to estimate the fair value of share-based payment awards on the
date of grant using an option-pricing model.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated financial statements,
the Company had a net loss of $10,181,523 and a negative cash flow from operations of $5,197,587
for the year ended December 31, 2006, and had a working capital deficiency of $1,223,217 and a
stockholders deficiency of $896,694 as of December 31, 2006. 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 consolidated 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.
|
|
|
May 15, 2007
Los Angeles, California
F-2
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
244,228
|
|
|
$
|
279,821
|
|
Inventory
|
|
|
21,314
|
|
|
|
|
|
Other current assets
|
|
|
81,232
|
|
|
|
9,009
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
346,774
|
|
|
|
288,830
|
|
Property and equipment,
net
|
|
|
322,023
|
|
|
|
295,374
|
|
Other assets
|
|
|
4,500
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
$
|
673,297
|
|
|
$
|
588,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
233,707
|
|
|
$
|
155,456
|
|
Accrued expenses
|
|
|
468,413
|
|
|
|
179,461
|
|
Accrued research and development fees
|
|
|
95,000
|
|
|
|
680,000
|
|
Accrued professional fees
|
|
|
594,945
|
|
|
|
450,555
|
|
Payable to shareholder
|
|
|
|
|
|
|
45,000
|
|
Payable to related parties
|
|
|
|
|
|
|
158,732
|
|
Finders fees payable
|
|
|
|
|
|
|
8,916
|
|
Convertible debentures, net
|
|
|
177,926
|
|
|
|
318,759
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,569,991
|
|
|
|
1,996,879
|
|
Commitments and contingencies
Stockholders deficiency
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value: 200,000,000
shares authorized, 40,081,758 and 31,387,418,
shares issued and outstanding at December 31,
2006 and 2005, respectively
|
|
|
40,082
|
|
|
|
31,387
|
|
Common stock to be issued
|
|
|
60,000
|
|
|
|
612,521
|
|
Additional paid-in capital
|
|
|
29,430,821
|
|
|
|
18,336,178
|
|
Deferred compensation
|
|
|
|
|
|
|
(142,187
|
)
|
Deficit accumulated during the development stage
|
|
|
(30,427,597
|
)
|
|
|
(20,246,074
|
)
|
|
|
|
|
|
|
|
Total stockholders deficiency
|
|
|
(896,694
|
)
|
|
|
(1,408,175
|
)
|
|
|
|
|
|
|
|
|
|
$
|
673,297
|
|
|
$
|
588,704
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception (February
|
|
|
|
|
|
|
|
|
|
|
|
18, 1998) to
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
Net sales
|
|
$
|
30,000
|
|
|
$
|
|
|
|
$
|
30,000
|
|
Cost of goods sold
|
|
|
13,400
|
|
|
|
|
|
|
|
13,400
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,600
|
|
|
|
|
|
|
|
16,600
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
7,412,227
|
|
|
|
2,631,082
|
|
|
|
22,902,976
|
|
Research and development expenses
|
|
|
401,827
|
|
|
|
1,150,361
|
|
|
|
4,205,414
|
|
Non-cash patent settlement cost
|
|
|
|
|
|
|
|
|
|
|
1,610,066
|
|
|
|
|
|
|
|
|
|
|
|
Loss before other income
|
|
|
(7,797,454
|
)
|
|
|
(3,781,443
|
)
|
|
|
(28,701,856
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
125
|
|
Interest income
|
|
|
15,422
|
|
|
|
|
|
|
|
16,251
|
|
Interest expense
|
|
|
(2,398,691
|
)
|
|
|
(348,964
|
)
|
|
|
(2,755,843
|
)
|
Settlement of litigation and debt
|
|
|
|
|
|
|
1,017,208
|
|
|
|
1,017,208
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(10,180,723
|
)
|
|
|
(3,113,199
|
)
|
|
|
(30,424,115
|
)
|
Provision for income taxes
|
|
|
800
|
|
|
|
1,987
|
|
|
|
3,482
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,181,523
|
)
|
|
$
|
(3,115,186
|
)
|
|
$
|
(30,427,597
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.28
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
35,946,022
|
|
|
|
38,248,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIENCY
FROM INCEPTION (FEBRUARY 18, 1998) TO DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
F-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Finders fees related to stock issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,875
|
|
|
|
(312,582
|
)
|
|
|
|
|
|
|
|
|
|
|
(268,707
|
)
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
F-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
F-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
846,549
|
|
|
|
847
|
|
|
|
(612,521
|
)
|
|
|
611,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued upon exercise of warrants on March 23, 2006
|
|
|
1.50
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
37,475
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
Stock issued upon exercise of warrants on March 27, 2006
|
|
|
1.50
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
|
|
|
|
74,950
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Stock issued upon exercise of warrants on March 27, 2006
|
|
|
0.50
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
12,475
|
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
Stock issued upon exercise of warrants on March 30, 2006
|
|
|
1.00
|
|
|
|
10,000
|
|
|
|
10
|
|
|
|
|
|
|
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Stock issued upon exercise of warrants on April 10, 2006
|
|
|
0.50
|
|
|
|
36,250
|
|
|
|
36
|
|
|
|
|
|
|
|
18,089
|
|
|
|
|
|
|
|
|
|
|
|
18,125
|
|
Common stock issued for convertible debt on April 10, 2006
|
|
|
0.70
|
|
|
|
269,600
|
|
|
|
270
|
|
|
|
|
|
|
|
188,450
|
|
|
|
|
|
|
|
|
|
|
|
188,720
|
|
Stock issued for cash on April 24, 2006
|
|
|
1.56
|
|
|
|
473,000
|
|
|
|
473
|
|
|
|
|
|
|
|
737,408
|
|
|
|
|
|
|
|
|
|
|
|
737,881
|
|
Stock issued upon exercise of warrants on April 26, 2006
|
|
|
0.50
|
|
|
|
125,000
|
|
|
|
125
|
|
|
|
|
|
|
|
62,375
|
|
|
|
|
|
|
|
|
|
|
|
62,500
|
|
Stock issued upon exercise of warrants on April 26, 2006
|
|
|
1.50
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
|
|
|
|
149,900
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Common stock issued for convertible debt on April 26, 2006
|
|
|
0.70
|
|
|
|
35,714
|
|
|
|
36
|
|
|
|
|
|
|
|
24,964
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued upon exercise of warrants on May 6, 2006
|
|
|
0.50
|
|
|
|
200,000
|
|
|
|
200
|
|
|
|
|
|
|
|
99,800
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Stock issued upon exercise of warrants on May 15, 2006
|
|
|
1.50
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
|
|
|
|
37,475
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
Stock issued upon exercise of warrants on May 15, 2006
|
|
|
0.50
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
|
|
|
|
24,950
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Stock issued for cash on June 7, 2006
|
|
|
1.89
|
|
|
|
873,018
|
|
|
|
872
|
|
|
|
|
|
|
|
1,649,136
|
|
|
|
|
|
|
|
|
|
|
|
1,650,008
|
|
Common stock issued for convertible debt on June 7, 2006
|
|
|
0.70
|
|
|
|
1,535,716
|
|
|
|
1,536
|
|
|
|
|
|
|
|
1,073,464
|
|
|
|
|
|
|
|
|
|
|
|
1,075,000
|
|
Stock issued upon exercise of warrants on June 8, 2006
|
|
|
0.50
|
|
|
|
900,000
|
|
|
|
900
|
|
|
|
|
|
|
|
449,100
|
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
Stock issued upon exercise of warrants on June 9, 2006
|
|
|
0.50
|
|
|
|
9,000
|
|
|
|
9
|
|
|
|
|
|
|
|
4,491
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
Stock issued upon exercise of warrants on June 23, 2006
|
|
|
0.50
|
|
|
|
150,000
|
|
|
|
150
|
|
|
|
|
|
|
|
74,850
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Stock issued upon exercise of warrants on June 23, 2006
|
|
|
1.50
|
|
|
|
15,000
|
|
|
|
15
|
|
|
|
|
|
|
|
22,485
|
|
|
|
|
|
|
|
|
|
|
|
22,500
|
|
Common stock issued for convertible debt on June 30, 2006
|
|
|
0.70
|
|
|
|
219,104
|
|
|
|
219
|
|
|
|
|
|
|
|
153,155
|
|
|
|
|
|
|
|
|
|
|
|
153,374
|
|
Common stock issued for convertible debt on July 11, 2006
|
|
|
0.70
|
|
|
|
14,603
|
|
|
|
15
|
|
|
|
|
|
|
|
10,207
|
|
|
|
|
|
|
|
|
|
|
|
10,222
|
|
Common stock issued for convertible debt on August 7, 2006
|
|
|
0.70
|
|
|
|
1,540,160
|
|
|
|
1,540
|
|
|
|
|
|
|
|
1,076,572
|
|
|
|
|
|
|
|
|
|
|
|
1,078,112
|
|
F-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exercise of warrants on August 7, 2006
|
|
|
1.50
|
|
|
|
175,000
|
|
|
|
175
|
|
|
|
|
|
|
|
262,325
|
|
|
|
|
|
|
|
|
|
|
|
262,500
|
|
Common stock issued upon exercise of warrants on August 21, 2006
|
|
|
1.50
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
|
|
|
|
74,950
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Common stock issued for cash on August 22, 2006
|
|
|
1.00
|
|
|
|
14,519
|
|
|
|
15
|
|
|
|
|
|
|
|
14,504
|
|
|
|
|
|
|
|
|
|
|
|
14,519
|
|
Common stock issued upon exercise of warrants on August 23, 2006
|
|
|
1.00
|
|
|
|
3,683
|
|
|
|
4
|
|
|
|
|
|
|
|
3,679
|
|
|
|
|
|
|
|
|
|
|
|
3,683
|
|
Common stock issued upon exercise of warrants on August 28, 2006
|
|
|
1.50
|
|
|
|
5,000
|
|
|
|
5
|
|
|
|
|
|
|
|
7,495
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
Common stock issued for convertible debt on September 13, 2006
|
|
|
0.70
|
|
|
|
4,286
|
|
|
|
4
|
|
|
|
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Common stock issued upon exercise of warrants on September 13, 2006
|
|
|
0.50
|
|
|
|
150,000
|
|
|
|
150
|
|
|
|
|
|
|
|
74,850
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
Common stock issued for convertible debt on October 16, 2006
|
|
|
0.70
|
|
|
|
66,654
|
|
|
|
67
|
|
|
|
|
|
|
|
46,591
|
|
|
|
|
|
|
|
|
|
|
|
46,658
|
|
Common stock issued upon exercise of warrants on November 3, 2006
|
|
|
0.50
|
|
|
|
210,000
|
|
|
|
210
|
|
|
|
|
|
|
|
104,790
|
|
|
|
|
|
|
|
|
|
|
|
105,000
|
|
Common stock issued for put on equity line of credit on November 7, 2006
|
|
|
1.22
|
|
|
|
94,471
|
|
|
|
94
|
|
|
|
|
|
|
|
115,368
|
|
|
|
|
|
|
|
|
|
|
|
115,462
|
|
Common stock issued for put on equity line of credit on November 14, 2006
|
|
|
1.14
|
|
|
|
7,300
|
|
|
|
7
|
|
|
|
|
|
|
|
8,349
|
|
|
|
|
|
|
|
|
|
|
|
8,356
|
|
Common stock issued for put on equity line of credit on November 27, 2006
|
|
|
0.83
|
|
|
|
27,500
|
|
|
|
28
|
|
|
|
|
|
|
|
22,913
|
|
|
|
|
|
|
|
|
|
|
|
22,941
|
|
Common stock issued for put on equity line of credit on November 28, 2006
|
|
|
0.82
|
|
|
|
36,500
|
|
|
|
36
|
|
|
|
|
|
|
|
30,059
|
|
|
|
|
|
|
|
|
|
|
|
30,095
|
|
Common stock issued for put on equity line of credit on December 6, 2006
|
|
|
0.78
|
|
|
|
73,863
|
|
|
|
74
|
|
|
|
|
|
|
|
57,244
|
|
|
|
|
|
|
|
|
|
|
|
57,318
|
|
Common stock issued for put on equity line of credit on December 26, 2006
|
|
|
0.55
|
|
|
|
18,800
|
|
|
|
19
|
|
|
|
|
|
|
|
10,377
|
|
|
|
|
|
|
|
|
|
|
|
10,396
|
|
Common stock issued for put on equity line of credit on December 31, 2006
|
|
|
0.59
|
|
|
|
229,050
|
|
|
|
229
|
|
|
|
|
|
|
|
135,300
|
|
|
|
|
|
|
|
|
|
|
|
135,529
|
|
Common stock paid for, but not issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
Fair value of options issued to employees and officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,253,263
|
|
|
|
|
|
|
|
|
|
|
|
2,253,263
|
|
Fair value of warrants issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401,130
|
|
|
|
|
|
|
|
|
|
|
|
401,130
|
|
Write off of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,187
|
)
|
|
|
142,187
|
|
|
|
|
|
|
|
|
|
F-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Price per
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
During the
|
|
|
|
|
|
|
Share
|
|
|
Shares
|
|
|
Amount
|
|
|
to be Issued
|
|
|
Capital
|
|
|
Compensation
|
|
|
Development Stage
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for consulting services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,497
|
|
|
|
|
|
|
|
|
|
|
|
62,497
|
|
Warrants issued with convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
408,596
|
|
|
|
|
|
|
|
|
|
|
|
408,596
|
|
Intrinsic value of beneficial conversion associated with convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851,100
|
|
|
|
|
|
|
|
|
|
|
|
851,100
|
|
Finders fees related to stock issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(284,579
|
)
|
|
|
|
|
|
|
|
|
|
|
(284,579
|
)
|
Fees paid on equity line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,402
|
)
|
|
|
|
|
|
|
|
|
|
|
(30,402
|
)
|
Net loss for year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,181,523
|
)
|
|
|
(10,181,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
|
40,081,758
|
|
|
$
|
40,082
|
|
|
$
|
60,000
|
|
|
$
|
29,430,821
|
|
|
$
|
|
|
|
$
|
(30,427,597
|
)
|
|
$
|
(896,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-12
SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
|
|
(February 18, 1998)
|
|
|
|
Years Ended December 31,
|
|
|
Decmber 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,181,523
|
)
|
|
$
|
(3,115,186
|
)
|
|
$
|
(30,427,597
|
)
|
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
|
)
|
Stock based compensation expense
|
|
|
2,716,889
|
|
|
|
13,505
|
|
|
|
2,901,584
|
|
Issuance of common stock for services
|
|
|
|
|
|
|
|
|
|
|
4,668,102
|
|
Issuance of options for legal settlement
|
|
|
|
|
|
|
31,500
|
|
|
|
31,500
|
|
Issuance of warrants for legal settlement
|
|
|
|
|
|
|
4,957
|
|
|
|
4,957
|
|
Patent acquisition cost
|
|
|
|
|
|
|
|
|
|
|
1,610,066
|
|
Amortization of issuance costs and original issue debt discounts
|
|
|
2,284,742
|
|
|
|
318,759
|
|
|
|
2,799,305
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
177,631
|
|
|
|
3,060,744
|
|
Depreciation
|
|
|
154,457
|
|
|
|
19,345
|
|
|
|
188,219
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(21,314
|
)
|
|
|
|
|
|
|
(21,314
|
)
|
Prepaid expenses and other
|
|
|
(72,223
|
)
|
|
|
(6,407
|
)
|
|
|
(81,232
|
)
|
Other assets
|
|
|
|
|
|
|
(4,500
|
)
|
|
|
(4,500
|
)
|
Accounts payable and accrued expenses
|
|
|
(78,615
|
)
|
|
|
1,010,426
|
|
|
|
2,232,114
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,197,587
|
)
|
|
|
(2,567,178
|
)
|
|
|
(13,550,260
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(181,106
|
)
|
|
|
(279,123
|
)
|
|
|
(506,692
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(181,106
|
)
|
|
|
(279,123
|
)
|
|
|
(506,692
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds under equity line of credit
|
|
|
349,695
|
|
|
|
|
|
|
|
349,695
|
|
(Decrease) increase in payables to related parties and stockholder
|
|
|
(158,733
|
)
|
|
|
167,255
|
|
|
|
511,450
|
|
Advances from founding executive officer
|
|
|
|
|
|
|
|
|
|
|
517,208
|
|
Net proceeds from issuance of convertible notes and warrants
|
|
|
1,365,500
|
|
|
|
1,453,182
|
|
|
|
2,667,878
|
|
Net proceeds from issuance of common stock and common stock
issuable
|
|
|
3,786,638
|
|
|
|
1,420,859
|
|
|
|
10,254,949
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,343,100
|
|
|
|
3,041,296
|
|
|
|
14,301,180
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(35,593
|
)
|
|
|
194,995
|
|
|
|
244,228
|
|
Cash
, beginning of period
|
|
|
279,821
|
|
|
|
84,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
, end of period
|
|
$
|
244,228
|
|
|
$
|
279,821
|
|
|
$
|
244,228
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for
Interest
|
|
$
|
128,634
|
|
|
$
|
|
|
|
$
|
141,479
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
800
|
|
|
$
|
1,987
|
|
|
$
|
3,482
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
515,000
|
|
Issuance of common stock in settlement of payable
|
|
|
|
|
|
|
|
|
|
|
113,981
|
|
Cancellation of stock
|
|
|
|
|
|
|
8,047
|
|
|
|
8,047
|
|
Conversion of accounts payable and accrued expenses to common stock
|
|
|
|
|
|
|
612,521
|
|
|
|
612,521
|
|
Conversion of related party debt to convertible debentures
|
|
|
45,000
|
|
|
|
|
|
|
|
45,000
|
|
Conversion of convertible debentures to common stock
|
|
|
2,580,086
|
|
|
|
|
|
|
|
2,580,086
|
|
Write off of deferred compensation
|
|
|
142,187
|
|
|
|
|
|
|
|
142,187
|
|
See notes to consolidated financial statements.
F-13
SAVE THE WORLD AIR, INC. AND SUBISIDARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of business
Description of business
The Company is a green technology company that leverages a suite of patented, patent-pending
and licensed intellectual properties related to the treatment of fuels. Technologies patented by,
or licensed to, the Company utilize either magnetic or uniform electrical fields to alter physical
characteristics of fuels and are designed to create a cleaner combustion. Cleaner combustion has
been shown to improve performance, enhance fuel economy and/or reduce harmful emissions in
laboratory testing.
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. During the past four 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. Our ECO ChargR and
MAG ChargR products, use fixed magnetic fields to alter some physical properties of fuel, by
incorporating our patented and patent-pending ZEFS and MK IV technologies. When fitted to an
internal combustion engine, they are expected to reduce carbon monoxide, hydrocarbons and nitrous
oxide emissions and to increase power and improve mileage.. The Company has also developed
prototype products and named them CAT-MATE technology.
The Company has obtained licenses from Temple University for their patent-pending uniform
electric field technology, tentatively called ELEKTRA. The ELEKTRA technology consists of passing
fuel through a specific strong electrical field. Although ELEKTRA has a similar effect on fuels as
the Companys ZEFS and MK IV technologies, ELEKTRA incorporates a uniform electrical field
principle. Based on the Companys early research and product development, the Company believes
that ELEKTRA carries certain advantages over the Companys ZEFS and MK IV technologies, primarily
not requiring as many variations for products incorporating the ELEKTRA technology compared to
products incorporating the ZEFS or MK IV technologies. When it is developed, the Company intends to
market ELEKTRA products primarily to the transportation industry, oil refineries and pipelines, and
OEMs.
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 $9,000 in cash. Intercompany transactions and
balances have been eliminated in consolidation.
2. Summary of significant accounting policies
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 on product development and marketing 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 meaningful
revenues. The technologies are called ZEFS, MK IV, ELEKTRA and CAT-MATE. The Company is
currently marketing its ECO and MAG ChargR products incorporating ZEFS and MK IV technologies,
worldwide; and the Company is in the early stages of developing ELEKTRA products. Expenses have
been funded through the sale of company stock, convertible notes and the exercise of warrants. The
Company has taken actions to secure the intellectual property rights to the ZEFS, MK IV and
CAT-MATE devices and is the worldwide exclusive licensee for patent pending technologies associated
with the development of ELEKTRA.
F-14
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 consolidated 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 $10,181,523 and a negative cash flow from operations of
$5,197,587 for the year ended December 31, 2006, and had a working capital deficiency of $1,223,217
and a stockholders deficiency of $896,694 at December 31, 2006. 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 consolidated financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
Revenue Recognition Policy
The Company has adopted Staff Accounting Bulletin 104, Revenue Recognition and therefore
recognizes revenue based upon meeting four criteria:
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
|
Delivery has occurred or services rendered;
|
|
|
|
|
The sellers price to the buyer is fixed or determinable; and
|
|
|
|
|
Collectibility is reasonably assured.
|
The Company contract manufactures fixed magnetic field products and sells them to various
original equipment manufacturers in the motor vehicle and small utility motor markets. The Company
negotiates an initial contract with the customer fixing the terms of the sale and then receives a
letter of credit or full payment in advance of shipment. Upon shipment, the Company recognizes the
revenue associated with the sale of the products to the customer.
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 for the year ended December 31, 2006. The Company
recorded an impairment of approximately $505,000 during the period from inception (February 18,
1998) through December 31, 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
F-15
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,
2006 and 2005, the dilutive impact of outstanding stock options of 3,999,559 and 6,508,561,
respectively, and outstanding warrants of 20,897,311, and 20,792,492 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 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 year ended December 31, 2005, the Company would have recorded additional
compensation expense of $861,637.
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 year ended December 31, 2005 and for the period from inception
(February 18, 1998) to December 31, 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
December 31
|
|
|
Since
|
|
|
|
2005
|
|
|
Inception
|
|
Net loss, as reported
|
|
$
|
(3,115,186
|
)
|
|
$
|
(30,427,597
|
)
|
Add: total fair value method
stock-based employee
compensation expense
|
|
|
(1,039,268
|
)
|
|
|
(5,010,310
|
)
|
Less: deferred compensation
amortization for below market
employee options
|
|
|
177,631
|
|
|
|
3,060,744
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(3,976,823
|
)
|
|
$
|
(32,377,163
|
)
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
As reported basic and diluted
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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 year ended
December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective
transition
F-16
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 year ended December 31, 2006 was
$2,253,263. Basic and diluted loss per share for the year ended December 31, 2006 would have been
($0.21) per share, if the Company had not adopted SFAS 123(R), compared to reported basic and
diluted loss per share of ($0.28) 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 year ended December 31, 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
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 9). 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, 2006 and 2005, before adjustments for outstanding checks and deposits in
transit, the Company had $121,705 and $376,429, respectively, on deposit with three banks. The
deposits are federally insured up to $100,000 on each bank.
Warranties
The
Company has a warranty policy for its products. No warranty liability has been recorded as
of December 31, 2006 based on the limited sales and such amount is deemed immaterial.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market and primarily
consist of finished goods.
F-17
Reclassifications
Certain reclassifications of 2005 amounts have been made to conform with the 2006
presentation.
Recent accounting pronouncements
Statement No. 151
In November 2004, the 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 factory costs, excessive spoilage, double freight and re-handling
costs to be expenses in the current period, regardless if they are abnormal amounts or not. This
statement became effective for the Company in the first quarter of 2006. SFAS 151 does not have
effect on the Companys consolidated financial statements.
Statement No. 154
In the first quarter of 2006, the Company adopted Statement No. 154 (SFAS 154), Accounting
Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
154 changed the requirements for the accounting for and reporting of a voluntary change in the
accounting principles. The adoption of this statement did not affect the Companys consolidated
financial statements in the period of adoption. Its effects on future periods will depend on the
nature and significance of any future accounting changes subject to this statement.
Statement No. 157
FASB Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements,
issued in September 2006, establishes a formal framework for measuring fair value under GAAP. It
defines and codifies the many definitions of fair value included among various other authoritative
literature, clarifies and, in some instances, expands on the guidance for implementing fair value
measurements, and increases the level of disclosure required for fair value measurements. Although
SFAS No. 157 applies to and amends the provisions of existing FASB and AICPA pronouncements, it
does not, of itself, require any new fair value measurements, nor does it establish valuation
standards. SFAS No. 157 applies to all other accounting pronouncements requiring or permitting
fair value measurements, except for; SFAS No. 123 (R), share-based payment and related
pronouncements, the practicability exceptions to fair value determinations allowed by various other
authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with
software revenue recognition. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Statement No. 159
In February 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
159, The Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115 (FAS 159). FAS 159, which becomes effective for the company
on January 1, 2008, permits companies to choose to measure many financial instruments and certain
other items at fair value and report unrealized gains and losses in earnings. Such accounting is
optional and is generally to be applied instrument by instrument. The company does not anticipate
that election, if any, of this fair-value option will have a material effect on its (
consolidated)
financial condition, results of operations, cash flows or disclosures.
Interpretation No. 48
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48 (FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 establishes that the financial statement effects of
a tax position taken or expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits, that the position will
be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently assessing the impact this new standard will have on the consolidated
results of operations, financial position, or cash flows.
F-18
SAB 108
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 was issued in order to
eliminate the diversity in practice surrounding how public companies quantify financial statement
misstatements. SAB No. 108 requires that registrants quantify errors using both a balance sheet
(iron curtain) approach and an income statement (rollover) approach then evaluate whether either
approach results in a misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. SAB No. 108 is effective for fiscal years ending after November 15,
2006. The Company has adopted the bulletin during 2006. The adoption did not have a material effect
on results of operations, financial position, or cash flows.
3. Inventories
At December 31, 2006 inventories consists of $21,314 of finished goods.
4. Certain relationships and related transactions
Advances from founding executive officer
All of the marketing and manufacturing rights for the 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, 2006, working capital advances in the amount
of $517,208 and payment in the amount of $500,000 for marketing and distribution rights of the 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 12), 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, had advanced $158,732 as of December 31, 2005 to the Company for working
capital purposes. Advances by Masry and Vititoe are unsecured, non-interest bearing, and are due
on demand. These advances were repaid during the year ended December 31, 2006.
In 2005, Eugene Eichler, the Companys former Chief Executive Officer, advanced $45,000 to the
Company for working capital purposes. These advances were unsecured, bore interest at 6% per
annum and due on demand. In February 2006, these advances were converted into a convertible note
(Note 10).
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 December 31, 2006 was $327.
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 an officer of the Company. The original lease
term was from November 1, 2003 through October 16, 2005 and carried 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. The Company exercised 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
F-19
increase in the rental rate. Monthly rent is $6,208 per month under this amended sublease.
Additionally, the Company is leasing two new office spaces for $964 per month beginning
July 2006 on a month-to-month basis.
During the years ended 2006 and 2005, rent expense under the sublease was $90,610 and $34,900,
respectively. Lease expense under the sublease prior to 2005 was immaterial.
In July 2006, the Company enter into a separate agreement with SS Sales, to provide exclusive
marketing and promotional services in the western United States and western Canada ( the
Territory) for the Company,s products. SS Sales will also provide advice, assistance and
information on marketing the Company,s products in the automotive after-market, and will seek to
recruit and establish a market with distributors, Wholesalers and others. SS Sales will be paid a
commission equal to 5% of the gross amount actually collected on contracts the Company entered into
during the contract term for existing or future customers introduced by SS Sales in the Territory.
The contact has a term of five years unless sooner terminated by either party on 30 days notice.
In the event of termination SS Sales will be entiltled to receive all commissions payable through
the date of termination. SS Sales is owned by Nathan Shelton, one of the directors of the Company
since February 12,2007. No amount was due or paid under this contract as of December 31, 2006.
5. Property and equipment
At December 31, 2006 and 2005, property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
50,670
|
|
|
$
|
38,231
|
|
Furniture and fixtures
|
|
|
18,957
|
|
|
|
15,434
|
|
Machinery and equipment
|
|
|
54,161
|
|
|
|
26,930
|
|
Dies and molds
|
|
|
3,000
|
|
|
|
|
|
Testing equipment
|
|
|
147,312
|
|
|
|
147,312
|
|
Leasehold improvements
|
|
|
236,142
|
|
|
|
101,229
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
510,242
|
|
|
|
329,136
|
|
Less accumulated depreciation
|
|
|
(188,219
|
)
|
|
|
(33,762
|
)
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
322,023
|
|
|
$
|
295,374
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2006 and 2005, was $154,457 and $19,345,
respectively. Depreciation expense for the period from inception (February 18, 1998) through
December 31, 2006 was $188,219.
6. Income taxes
Income tax provision consists of the following:
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
800
|
|
|
|
1,987
|
|
|
|
|
|
|
|
|
Total current
|
|
|
800
|
|
|
|
1,987
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
800
|
|
|
$
|
1,987
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company has recorded a $10,276,437 valuation allowance against a
portion of its deferred tax assets, since at that time it was believed that such assets did not
meet the more likely than not criteria to be recoverable through projected future profitable
operations in the foreseeable future.
F-20
Failure by the Company to successfully maintain improved margins, grow revenues and/or
maintain anticipated savings on future interest costs, and maintain profitable operating results in
the near term, could adversely affect the Companys expected realization of some or all of its
deferred tax assets and could require the Company to record a valuation allowance against some or
all of such assets, which could adversely affect the Companys financial position and results of
operations.
The total income tax provision (benefit) was 0% of pretax income (loss) for the years ended
December 31, 2006 and 2005, respectively. A reconciliation of income taxes with the amounts
computed at the statutory federal rate follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Computed tax provision (benefit) at federal statutory rate (34%)
|
|
$
|
(3,461,446
|
)
|
|
$
|
(1,058,492
|
)
|
State income taxes, net of federal benefit
|
|
|
(406,769
|
)
|
|
|
(218,030
|
)
|
Permanent items
|
|
|
1,087,922
|
|
|
|
(45,815
|
)
|
Credits
|
|
|
|
|
|
|
(60,194
|
)
|
Valuation allowance
|
|
|
2,781,093
|
|
|
|
1,384,518
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
800
|
|
|
$
|
1,987
|
|
|
|
|
|
|
|
|
The deferred tax assets and deferred tax liabilities recorded on the balance sheet are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Deferred tax
|
|
|
Deferred tax
|
|
|
Deferred tax
|
|
|
Deferred tax
|
|
|
|
assets
|
|
|
liabilities
|
|
|
assets
|
|
|
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
382,359
|
|
|
$
|
|
|
|
$
|
173,796
|
|
|
$
|
|
|
Other
|
|
|
272
|
|
|
|
|
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382,631
|
|
|
|
|
|
|
|
174,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
8,490,347
|
|
|
|
|
|
|
|
5,852,406
|
|
|
|
|
|
Unexercised stock options and warrants
|
|
|
1,118,553
|
|
|
|
|
|
|
|
1,217,259
|
|
|
|
|
|
Credit carryovers
|
|
|
259,391
|
|
|
|
|
|
|
|
256,757
|
|
|
|
|
|
Depreciation
|
|
|
25,515
|
|
|
|
|
|
|
|
|
|
|
|
(5,549
|
)
|
Valuation allowance
|
|
|
(10,276,437
|
)
|
|
|
|
|
|
|
(7,495,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(382,631
|
)
|
|
|
|
|
|
|
(168,922
|
)
|
|
|
(5,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes net of valuation allowance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,549
|
|
|
$
|
(5,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company had net operating losses available for carryforward for
federal tax purposes of approximately $21.6 million expiring beginning in 2018. These carryforward
benefits may be subject to annual limitations due to the ownership change limitations imposed by
the Internal Revenue Code and similar state provisions. The annual limitation, if imposed, may
result in the expiration of net operating losses before utilization.
7. Equity line of credit
In September 2006, the Company entered into what is sometimes termed an equity line of credit
arrangement. Under the line of credit the Company may, but is not obligated to, put shares of
common stock from time to time over a 36-month period, at a purchase price calculated at 97% of the
lowest best closing bid for the Companys common stock for the five trading days following the put
notice. The Company may draw up to $10,000,000 under the line of credit. Because the price of the
common stock fluctuates and the number of shares of common stock, if any, that the Company may
issue, should exercise the put rights under the equity line of credit, will vary, the Company does
not know how many shares, if any, will actually issue under the equity line of credit. As of
December 31, 2006, the Company has registered and made available 7,000,000 shares of common stock
for possible future draws under the line of credit.
As of December 31, 2006 the Company has drawn down $380,095 ($349,695 net of closing costs) of
this commitment and issued 487,484 shares at an average price of $0.78 per share, leaving 6,512,516
shares available under the equity line of credit.
F-21
8. Stockholders deficiency
As of December 31, 2006, the Company has authorized 200,000,000 shares of its common stock, of
which 40,081,758 shares, respectively, were issued and outstanding.
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 year ended December 31, 2006, individuals exercised outstanding warrants to
purchase 2,328,452 shares of common stock for net proceeds of $1,623,327.
9. 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, 2006, 2,427,834 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, 2006
was 5.53 years. Stock option activity for the years ended December 31, 2006 and 2005, which
includes 3,250,000 options granted outside and prior to the adoption of the Plan, was as follows:
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
1,313,605
|
|
|
|
1.21
|
|
Options exercised
|
|
|
(2,860,000
|
)
|
|
|
0.10
|
|
Options forfeited
|
|
|
(962,607
|
)
|
|
|
0.84
|
|
F-22
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
Weighted Avg.
|
|
|
|
Options
|
|
|
Exercise Price
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, December 31, 2006
|
|
|
3,999,559
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
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,
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
Number
|
|
Exercise
|
|
Contractual
|
|
|
of Shares
|
|
Price
|
|
Life (Years)
|
As of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
3,999,559
|
|
|
$
|
0.99
|
|
|
|
5.55
|
|
Expected to Vest
|
|
|
3,974,774
|
|
|
$
|
0.99
|
|
|
|
5.51
|
|
Exercisable
|
|
|
3,352,932
|
|
|
$
|
0.96
|
|
|
|
4.99
|
|
Intrinsic value of employee options
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, 2006 and 2005, the Company recognized compensation expense
by amortizing deferred compensation of $0 and $177,631, respectively.
Black-Scholes value of employee options
During the years ended December 31, 2006 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:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
Expected life (years)
|
|
|
5.15
|
|
|
|
5.26
|
|
Risk free interest rate
|
|
|
4.59
|
%
|
|
|
4.02
|
%
|
Volatility
|
|
|
262.84
|
%
|
|
|
188.83
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The weighted average fair value for options granted in 2006 and 2005 were $1.66 and $0.69,
respectively.
During the year ended December 31, 2006, the Company granted 1,313,605 options, to certain
employees, exercisable at amounts ranging from $0.85 to $2.26, vested immediately or over one year
with a one to ten year life. The options were valued at an aggregate amount of $2,189,322 (or $1.66
per share on average) using the Black Scholes pricing model using a 0.5 to 5.5 year expected term,
95% to 282% volatility, no annual dividends, and a discount rate of 3.82% to 4.86%.
Warrants
The following table summarizes certain information about the Companys stock purchase warrants
(including the warrants discussed in Note 10).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
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
|
|
|
3,624,894
|
|
|
|
1.28
|
|
Warrants exercised
|
|
|
(2,328,452
|
)
|
|
|
0.68
|
|
Warrants cancelled
|
|
|
(1,191,619
|
)
|
|
|
1.46
|
|
|
|
|
|
|
|
|
Warrants outstanding, December 31, 2006
|
|
|
20,897,311
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
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.
10. Convertible notes and warrants
9% Convertible Notes
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 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
placement agent 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 consolidated
balance sheet.
During the year ended December 31, 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
F-24
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
placement agent 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.
During the year ended December 31, 2006, convertible notes in the amount of $2,576,379 of the
Notes were converted to 3,680,540 shares of stock at $0.70 per share. In addition, $3,707 of
accrued interest was converted to 5,296 shares at $0.70 per share. For the year ended December 31,
2006, $2,257,620 of the total discount has been amortized and included in the accompanying
consolidated statement of operations.
Morale Notes
On December 5, 2006, the Company entered into a Note Purchase Agreement (the Agreement) with
Morale Orchards, LLC, a limited liability company formed under the laws of the State of Oregon
(Morale). The entire equity interest in Morale is beneficially owned by Leodis Matthews who
provides legal services to the Company. The Agreement provides that Morale will purchase the
Companys one year Convertible Promissory Notes in the aggregate face amount of $1,225,000 (the
Morale Notes), and five-year Warrants (the Morale Warrants) to purchase shares of the Companys
common stock (the Common Stock). The aggregate purchase price for the Notes and Warrants is
$1,000,000. Therefore, while the stated interest on the Notes is 0%, the effective interest rate is
22.5% because the Notes are being purchased at a discount from their face amount.
Each of the Morale Notes is convertible into shares of the Companys Common Stock at a per
share conversion price initially equal to the closing price of a share of the Companys Common
Stock on the trading day prior to the date of issuance of such Note. The conversion right is
exercisable during the period commencing 90 days prior to the maturity of each Note. Concurrently
with the issuance of a Note, for no additional consideration, Morale will acquire Warrants to
purchase a number of shares of Common Stock equal to 50% of the number of shares of Common Stock
initially issuable on conversion of the associated Note. The Morale Warrants become exercisable 180
days after the date of their issuance. The Note purchased by Morale on December 5, 2006 is
convertible at the rate of $0.85 per share into 720,588 shares of the Companys Common Stock and
the Morale Warrants are exercisable at the same per share price for 360,294 shares of the Companys
Common Stock.
Repayment of each Note is to be made monthly, at an amount equal to at least $3,750 for each
Note. Additional payments may be made prior to maturity with no prepayment penalties. In the event
the Company has not repaid each Note in full by the anniversary date of its issuance, the remaining
balance shall be increased by 10% as an initial penalty, and the Company shall pay additional
interest of 2.5% per month, compounded daily, for each month until such Note is paid in full.
Morale has piggyback registration rights pursuant to which Morale may require the Company to
include the shares of the Companys Common Stock issuable upon conversion of the Morale Notes and
exercise of the Morale Warrants in certain future registration statements the Company may elect to
file, subject to the right of the Company and/or its underwriters to reduce the number of shares to
be included in such a registration in good faith based on market or other conditions.
During the year ended December 31, 2006, the Company issued Morale Notes totaling $612,500
discounted by $112,500, resulting in net proceeds to the Company of $500,000. In addition to the
discount, 360,264 additional warrants were issued to Morale. These warrants expire December 5, 2011
and are exercisable at a price of $0.85 per share.
The aggregate value of the Morale Warrants issued in connection with the offering and to the
finder were valued at $118,348 using the Black-Scholes option valuation model with the following
assumptions; risk-free interest rate of 4.39%; dividend yield of 0%; volatility factors of the
expected market price of common stock of 110.21%; and an expected life of five years (statutory
term) and vest over 180 days. The Company also determined that the notes contained a beneficial
conversion feature of $230,848.
The value of the Morale Warrants of $118,348, the conversion option of $230,848, and the
transaction fees of $112,500 are
F-25
considered as debt discount and are being amortized over the life of the Note. During 2006,
$27,122 of such discount has been amortized and included in the accompanying consolidated
statements of operations. The remaining unamortized debit discount as of December 31, 2006 of
$434,574 has been netted against the convertible debentures in the accompanying consolidated
balance sheet.
11. 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 multiple 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 also uses third party research and
development facilities in Los Angeles, California for the development of the ZEFS and CAT-MATE
devices. The Company spent $401,827 and $1,150,360 for the years ended December 31, 2006 and 2005,
respectively.
12. 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 our 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 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 the Companys 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 the
Companys 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 the Company, from selling or transferring any of the Companys
stock that they may own or control, or from taking any action to injure the Company or the
Companys business and from having any direct contact with the Companys shareholders. The
injunctive order also prevents Mr. Muller from engaging in any effort to exercise control over the
Companys corporation and from serving as an officer or director of the Company. While the Company
believes that the Company has valid claims, there can be no assurance that an adverse result or
settlement would not have a material adverse effect on the Companys financial position or cash
flow..
In the course of the litigation, the Company has obtained ownership control over Mr. Mullers
claimed patent rights to the ZEFS device. Under a Buy-Sell Agreement between Mr. Muller and the
Company dated December 29, 1998, Mr. Muller, who was listed on the ZEFS devise patent application
as the inventor of the ZEFS device, purported to grant us all international marketing,
manufacturing and distribution rights to the ZEFS device. Those rights were disputed because an
original inventor of the ZEFS device 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 the ZEFS device. 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 the ZEFS device.
F-26
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 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
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.
Mr. Muller subsequently filed a Notice of Appeal from the Judgment resulting from this
decision to the Second Circuit Court of Appeals in New York. The clerk of the Court recently
issued an Order dismissing this appeal.
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.
On October 27, 2006, Magistrate Judge Frank Maas, Federal District Court of the Southern District
of New York, issued an order granting summary judgment in favor of the Company. The ruling provided
that all shares, options and any other obligations allegedly owed by the Company to Jeffrey A.
Muller, its former Chairman, were to be disgorged. The ruling also confirmed an earlier decision
issued on November 16, 2005 in favor of the SEC holding Mr. Muller liable for $7.5 million in
actual damages, imposing a $100,000 fine and barring Muller from any involvement with a publicly
traded company for 20 years. With prejudgment interest, this ruling brings the actual damages
against Muller to over $9 million. Additionally, the Court further clarified that the scope of its
previous disgorgement order required the disgorgement of any shares of the Companys stock that Mr.
Muller or any of his nominees directly or indirectly own or control. The Company has taken action
to cancel over 3.6 million shares which had been issued to the offshore companies.
The Court also confirmed the appropriateness of an action previously taken by the Company to
acquire the patent rights and to consolidate the manufacturing, marketing and distribution rights
with its ownership of all rights to the existing patents.
Finally, the Court ruled that Mr. Muller had no claim to an alleged $500,000 debt owed to him
while the damages of over $9 million remain unpaid. The Court also ruled that other assets that
were transferred by Mr. Muller to members of his family through various offshore corporations were
also to be disgorged. Because the Court left unresolved an issue concerning claims against one
Muller family member, the Company sought a modification of the Order. On February 8, 2007, Judge
Maas issued an Amended Order which concluded that all of the STWA shares of Muller or any of his
nominees directly or indirectly owned or controlled were to be recaptured by STWA and were subject
to disgorgement and forfeiture. With this modification of the October 27, 2007 ruling, this order
provides the complete relief requested by the Company in its motion for summary judgment.
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 the ZEFS device and stock option rights. In seeking declaratory relief,
Mr. Muller is seeking to have the patent rights in the ZEFS device that were previously transferred
to the Company by Mr. Mullers bankruptcy trustee declared null and void.
F-27
This 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.
That Complaint is currently pending, however, the issues raised in this Complaint arise from the
same claims already decided by the Court in its February 8, 2007 Amended Order. The Company plans
to file a request to dismiss the pending Complaint on several grounds, including that the claims
sought to be litigated in this latter complaint has been included within the Summary Judgment
Motions decided against Muller, his nominees and assignees. While the Company believes that the
Company has 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.
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 expired December 31, 2005, with an
automatic one-year extension and provided 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 consistent and commensurate with the position and duties hereunder.
On November 9, 2006, the individual who served as the Companys Chief Executive Officer and
Chief Financial Officer resigned, due to a medical disability. His resignation as Chief Executive
Officer took effect on November 20, 2006 and his resignation as Chief Financial Officer takes
effect on the earlier to occur of (i) the appointment of his successor or (ii) January 31, 2007. He
will continue to serve as a director of the Company.
Under the terms of the separation agreement as an officer of the Company, he is entitled to be
paid out the remainder of the cash portion of his employment agreement through December 31, 2007,
in accordance with the Companys normal pay policies. Options granted to him in February 2006 have
been accelerated and will fully vest on November 20, 2006 and be recalculated under 123R;
additionally, the former officer will have until November 20, 2007 to exercise such options. He is
also entitled to receive a stock option grant in 2007 equal to the lesser of (i) the number of
stock options he was granted in 2006 or (ii) the highest number of options granted to any of the
then Chief Executive Officer, President or Chief Financial Officer on an annualized basis, on terms
no less favorable as granted to such person; provided, however, that such options to be granted to
the former officer shall be fully vested upon grant and shall be exercisable for one year from the
date of grant. The Company and the former officer have waived any claims they may have against each
other and have agreed to mutual indemnification. The Company expensed $345,000 for the remaining
term of his employment agreement and benefits for the year ended December 31, 2006.
Including those agreements entered into prior to 2006, minimum guaranteed compensation
payments under employment agreements, as amended, by year are as follows:
As of December 31:
|
|
|
|
|
Year
|
|
|
|
|
2007
|
|
$
|
868,000
|
|
2008
|
|
$
|
10,000
|
|
|
|
|
|
Total
|
|
$
|
878,000
|
|
During the year ended December 31, 2006, approximately $835,900 was paid for employment
agreement.
F-28
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
consultant earned 41,665 warrants and the remaining balance of 58,335 were 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. An officer 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. The Company occupies less than 25% of the facility and the rent payment is
comparable to other space in the area.
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. Additionally, the Company is leasing two new office spaces for $964
per month beginning July 2006 on a month-to-month basis.
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, 2006 and 2005, is
$165,879 and $44,180, respectively.
The following is a schedule by years of future minimum rental payments required under the
non-cancelable operating leases as of December 31, 2006 and assuming that the Company will exercise
its option to renew its leases at its primary administrative facility and its testing facility in
Morgan Hill:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
|
2007
|
|
$
|
154,449
|
|
2008
|
|
|
150,348
|
|
2009
|
|
|
92,343
|
|
|
|
|
|
Total
|
|
$
|
397,140
|
|
|
|
|
|
13. Subsequent events
On January 4, 2007, the Company entered into a Consulting Agreement (the Consulting
Agreement) with Spencer Clarke LLC (Spencer Clarke) pursuant to which Spencer Clarke has agreed
that for a twelve-month period beginning January 4, 2007, Spencer Clarke will provide the Company
with financial consulting services (including but not limited to executive search, strategic
partnerships, research on new markets, strategic visibility, etc) to help further develop the
Companys strategic business plan.
F-29
For Spencer Clarkes services the Company has agreed to pay Spencer Clarke a non-refundable
fee of $20,000 per month, payable in advance. The first payment, in the amount of $60,000 and
covering three months, was due by the Company on March 1, 2007. No payments have been made under
this agreement. The Company will also reimburse Spencer Clarke for expenses it incurs in connection
with the performance of its services under the Consulting Agreement, provided that expenses in
excess of $2,000 require the Companys prior approval before such expenses may be incurred by
Spencer Clarke.
On January 8, 2007 the Company engaged an individual to serve as its Chief Financial Officer
for a term of one year, subject to earlier termination on 30 days notice after the first three
months. During the term, he will receive a fee of $4,000 per month, which amount will be increased
to $8,000 or more in months during which the Company files its periodic reports with the Securities
and Exchange Commission. He will be eligible to receive grants of stock options under the Companys
Stock Option Plan on terms and conditions to be agreed upon between the Company and the individual.
He will be reimbursed for business expenses he incurs in connection with the performance of his
services as the Companys Chief Financial Officer.
On January 10, 2007, the Company issued Morale notes totaling $612,500 discounted by $112,500,
resulting in net proceeds to the Company of $500,000. In addition to the discount, 437,500 warrants
were issued to Morale. These warrants expire January 10, 2011 and are exercisable at $0.70 per
share. The note is convertible at the rate of $0.70 per share into 875,000 shares of the Companys
Common Stock.
From January 13 through April 27, 2007, the Company conducted an offering (the 2007 PIPE
Offering), through Spencer Clarke, as exclusive placement agent, of up to $2,000,000 principal
amount of its 10% convertible notes (the 2007 PIPE Notes). Interest on the 2007 PIPE Notes, at a
rate of 10% per annum, is payable quarterly. The Notes are due nine months from date of issuance.
The Notes are convertible into shares of Common Stock at an initial conversion price of $0.70 per
share (the Conversion Shares). The Company raised $400,000 gross proceeds ($352,000 net
proceeds) in the 2007 PIPE Offering.
The Company has the right to redeem any or all of the outstanding 2007 PIPE Notes in its sole
discretion anytime after the termination of the 2007 PIPE Offering and prior to the maturity date
of the 2007 PIPE Notes. The redemption price shall be the face amount of the redeemed Notes plus
accrued and unpaid interest thereon. Subject to the following sentence, at any time prior to the
maturity date of the 2007 PIPE Notes, for each additional $1,000,000 of gross proceeds raised from
one or more offerings of the Companys equity or quasi-equity securities, the Company shall redeem
2007 PIPE Notes with a minimum face value of $500,000 together with accrued and unpaid interest,
until the entire outstanding 2007 PIPE Note is redeemed. Certain financings that the Company may
conduct outside of North America are exempt from this provision to redeem the 2007 PIPE Notes in
whole or in part.
Investors in the 2007 PIPE Offering received, for no additional consideration, a warrant (the
2007 PIPE Warrant), entitling 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 2007 PIPE Notes are
convertible (the Warrant Shares). The 2007 PIPE Warrant will be exercisable on a cash basis only
and will have registration rights. The 2007 PIPE Warrant is exercisable at an initial price of
$1.00 per share, and is exercisable immediately upon issuance and for a period of three years from
the date of issuance.
Promptly, but no later than 90 days following the closing date of the 2007 PIPE Offering, the
Company is required to file a registration statement with the SEC to register the Conversion Shares
and the Warrant Shares. The Company shall use its best efforts to ensure that such registration
statement is declared effective within 120 days after filing.
From January 1, 2007 through May 9, 2007, the Company received gross proceeds of $699,591 (net
proceeds of $643,624) from the issuance of stock under our equity line of credit from Dutchess.
In February 2007, the Company entered into two license agreements with Temple University, one
covering Temples current patent application concerning certain electric field effects on gasoline,
kerosene and diesel fuel particle size distribution, and the other covering Temples current patent
application concerning electric field effects on crude oil viscosity, and any and all United States
and foreign patents issuing in respect of the technologies described in such applications
(individually, a License Agreement and collectively, the License Agreements). Initially, the
License Agreements are exclusive and the territory licensed to the Company is worldwide. Pursuant
to the License Agreements, the Company will pay to Temple (i) license fees in the aggregate amount
of $250,000.00, payable in three installments of $100,000.00, the first installment of which was
paid in March 2007, and $75,000.00 on each of February 2, 2008 and February 2, 2009, respectively;
and (ii) annual maintenance fees of $125,000 annually commencing January 1, 2008. In addition, each
License Agreement separately provides that the Company will pay royalties to Temple on net sales of
products incorporating the technology licensed under that License Agreement in an amount equal to
7% of the first $20 million of net sales, 6% of the next $20 million of net sales and 5% of net
sales in excess of $40 million. Sales under the two License
F-30
Agreements are not aggregated for purposes of calculating the royalties payable to Temple. In
addition, the Company has agreed to bear all costs of obtaining and maintaining patents in any
jurisdiction where the Company directs Temple to pursue a patent for either of the licensed
technologies. Should the Company not wish to pursue a patent in a particular jurisdiction, that
jurisdiction would not be included in the territory licensed to the Company.
In February 2007, the Company also entered into a research and development agreement (R&D
Agreement) with Temple University to conduct further research on the ELEKTRA technology. Under the
R&D Agreement, Temple will conduct a 24-month research project towards expanding the scope of, and
developing products utilizing, the technologies covered under the License Agreements, including
design and manufacture of prototypes utilizing electric fields to improve diesel, gasoline and
kerosene fuel injection in engines using such fuels and a device utilizing a magnetic field to
reduce crude oil viscosity for crude oil (paraffin and mixed base) flow in pipelines. Pursuant to
the R&D Agreement, the Company will make payments to Temple in the aggregate amount of $500,000.00,
payable in eight non-refundable installments commencing with $123,750, which was paid in March
2007, and $53,750 every three months thereafter until paid in full. If the research project yields
results within the scope of the technologies licensed pursuant to the License Agreements, those
results will be deemed included as rights licensed to the Company pursuant to the License
Agreements. If the research project yields results outside of the scope of the technologies covered
by the License Agreements, the Company has a six-month right of first negotiation to enter into a
new worldwide, exclusive license agreement with Temple for the intellectual property covered by
those results.
The Company also has an annual employment agreement with an officer for $60,000 a year, which
was renewed on March 1, 2007.
F-31