ITEM 1. DESCRIPTION OF BUSINESS.
Overview
In 2012, SaviCorp began to expand its revenue from new business activities. We were still devoting substantial efforts to business planning and the search for sources of capital to fund our efforts. We have acquired all rights to certain technology for the production of a gasoline and diesel engine emission reduction device which we believe delivers superior emission reduction technology and operating performance. This technology is an emission reduction device believed to reduce harmful exhaust emissions in gasoline and diesel engines, and increase fuel efficiency.
History
We were originally incorporated as Energy Resource Management, Inc. on August 13, 2002 and subsequently adopted name changes to Redwood Energy Group, Inc. and Redwood Entertainment Group, Inc., upon completion of a recapitalization on August 26, 2002. The re-capitalization occurred when we acquired the non-operating public shell of Gene-Cell, Inc., a public company. Gene-Cell had no significant assets or operations at the date of acquisition and we assumed all liabilities that remained from its prior discontinued operation as a biopharmaceutical research company. The historical financial statements presented herein are those of Redwood Entertainment Group, Inc. and its predecessors, Redwood Energy Group, Inc. and Energy Resource Management, Inc.
The public entity used to recapitalize the Company was originally incorporated as Becniel and subsequently adopted name changes to Tzaar Corporation, Gene-Cell, Inc., Redwood Energy Group, Inc., Redwood Entertainment Group, Inc., and finally its current name, Savi Media Group, Inc. In 2012, Savi Media Group, Inc. changed its name to SaviCorp.
Automotive Ventilation Systems
During a normal compression in an automotive engine, a small amount of gases in the combustion chamber escape past the pistons. Approximately 70% of these gases, known as blow-by gases, are unburned fuel that can dilute and contaminate the engine oil, causing corrosion to critical engine parts, and cause a build-up on sludge. As the engine speed increases, the pressure in the crankcase increases as a result of the blow-by gases. When the pressure gets too great in the crankcase, it can cause oil to leak past seals and gaskets, causing oil leaks. If the pressure is not relieved, it would cause all of the oil to blow out of the engine. Prior to 1963, cars used road draft tubes that just let the hydrocarbon emissions from the crankcase out into the open air. In 1963, automobiles created a positive crankcase ventilation, which consists of a valve, called the PCV valve, which creates a metered opening, and a hose that runs to the car’s intake manifold. The intake manifold has a vacuum effect that sucks the blow-by gases from the crankcase into the intake manifold, where the gases are burned. This process reduces the emissions produced by the engine as only the results of the burned gases are emitted.
Our Product
SaviCorp’s primary business is the sale of two inventions: the DynoValve & DynoValve Pro. The DynoValve is an OEM replacement for the present Positive Crankcase Ventilation (“PCV”) valve installed on most gasoline engines in the United States and in most other countries of the world. After exhaustive research and patent pending applications, on September 10, 2010, the Air Resources Board of the California Environmental Protection Agency issued Executive Order D-677, permitting the advertisement, sales and installation of the DynoValve on certain gas-powered vehicles in California. The savings, in both fuel economy and emissions, have surpassed the Company's expectation and our products are available now on the market. The Company believes this is "Green Technology" and substantially reduces automobiles’ "carbon footprint".
DynoValve & DynoValve Pro have the following positive features:
- Addresses carbon footprint (substantially reduces carbon monoxide emissions through smog emission tacking);
- Improves fuel use and mileage;
- Increases engine performance (Dynamometer readings show a dramatic increase in overall engine performance);
- Fuel use and oil consumption is substantially reduced;
- Cost effective:
o The savings in over-all fuel, oil and engine service requirements are significant;
o Carbon Credits are generated by the use of the DynoValve & DynoValve Pro;
o The expense of fitting DynoValve is recaptured with short use and dependent on mileage use (within 6 to 12 months for passenger cars but 2 months with a taxi);
o Useable with marine engines as well;
o The Company hopes to have the DynoValve Pro (diesel) available in 2013, which should be used by large fleet owners, locomotive, heavy equipment, stationary engines and marine engines as well as ocean liners.
- Suitable for original factory applications on new engines as well as retrofitting used vehicles.
The Company’s mission is to become a leading provider of multiple fuel efficiency and emission reduction technologies and related systems that solve practical emission reduction and engine combustion system problems. The Company’s strategy is to have a broad and highly competitive product line, skilled professional management and attain international brand recognition and market acceptance. Our main objective is to design, develop, manufacture and distribute exhaust emission and fuel efficiency technologies to world markets to significantly increase fuel efficiency and reduce emissions around the globe.
SaviCorp’s management team has over 80 years of combined experience in entrepreneurial ventures, technology development companies, venture financing, management, product development & marketing and administration. In addition, the Company’s strategic plan is structured to attract the best management for directing the development and growth of its organization in order to fulfill the Company’s aggressive market penetration mission.
Market Opportunities: SaviCorp is evolving from an aftermarket fuel-saving and emission-reduction product development company into a market-driven company. Our Management has comprehensive experience in introducing new products and technologies and is seeking to capitalize on our capabilities within our chosen market. The company is developing dynamic internal/external sales and marketing staff that will be charged with expanding distribution channels and penetrating high-value markets. Brand name recognition and broad market acceptance are the primary objectives of SaviCorp’s business development efforts.
Overall, there are numerous competing products on the market for consumers. It is no secret that fuel prices will remain high for the foreseeable future and, as a result, there are many fuel-saving devices under development by entrepreneurs and assorted technology companies. In this economic environment, most consumers are looking for products that will reduce their overall fuel and vehicle operating costs, allowing them to stay within their current household budgets. Most fuel-saving devices currently in the marketplace are variants of magnetic control devices, purporting to improve fuel economy by realigning fuel molecules as they pass through a magnetic field. Gasoline is a mixture of hydrocarbon molecules that vary in size and shape. Longer molecules tend to burn slower and incompletely while leaving unburned hydrocarbons that eventually form various exhaust pollutants. The magnetic devices on the market seek to delay the burning of short hydrocarbons and hasten the burning of the longer hydrocarbons (by reducing long molecules to short molecules). The general theory regarding a magnetic field’s possible effect on fuel may have some merit; however, in practice it has been found that any effect that the magnets may have with respect to changing the molecular composition of gasoline is minor and vanishes well before gasoline actually enters a vehicle’s engine because the molecules do not stay aligned after leaving the magnetic field. The EPA, Popular Mechanics, and even the Discovery Channel’s “Mythbusters” program have undertaken independent tests of such products. None of the tests conducted by these organizations showed any benefit from magnetic field devices.
Aside from the magnetic field devices described above there are many other types of “fad” or pseudo-scientific fuel-saving devices currently on the market that have been shown not to work; this has produced significant skepticism that taints legitimate devices that are under development. There are, however, some good products that have demonstrated their efficacy through rigorous independent and verifiable laboratory testing.
SaviCorp’s DynoValve® product is an example of a product that is grounded in solid science and engineering know-how that has demonstrated its efficacy in both laboratory and field tests.
In October 2010, a 24-month field test was concluded with the Los Angeles County Fire Department (LACoFD). LACoFD retrofitted 10 gasoline-powered vehicles with the DynoValve®. During the test, three vehicles were removed from service for various reasons unrelated to the beta field test. The remaining seven vehicles, after installation and adjustments to fine-tune and optimize the DynoValve® to each particular vehicle, successfully completed field-testing without any adverse impact on vehicle performance and/or maintainability. Overall, the vehicles achieved a significant reduction in emissions during the 24 months of testing.
The test vehicles exhibited substantial reductions in the following pollutants: hydrocarbons (HC), carbon monoxide (CO), and oxides of nitrogen (NOx). The LACoFD has expressed interest in testing the DynoValvePro®, a product that is intended for use on diesel engines, as soon as the Company is ready to release the product for testing and evaluation. The opportunity with the Los Angeles County Fire Department (LACoFD) is potentially very large; the agency has 190 stations with 22 battalions covering 2,200 square miles and 58 cities.
On December 9, 2010, SaviCorp announced that McCarthy Construction Company (St Louis, MO) had completed six weeks of testing on five randomly chosen vehicles from within its fleet. The results for each vehicle were significant emissions reduction, improved engine performance, and reduced fuel consumption. Following these initial results, McCarthy Construction Company decided to test an additional five vehicles at another facility. These additional tests went well, and we proceeded with the installation of our DynoValve® on some 250 vehicles that service its Newport Beach, California facility. McCarthy Construction Company believes that the device has the potential to extend the useful life of its vehicles by one or two years while also reducing the company’s fuel costs. McCarthy Construction Company employs 2,000 people and operates in all 50 states. McCarthy is headquartered in St. Louis, Missouri with regional offices in Phoenix, Arizona; Las Vegas, Nevada; Seattle, Washington; Portland, Oregon; Dallas, Texas; Sacramento, San Francisco and Newport Beach, California. The 136-year-old company is involved in large projects, having constructed airports, bridges, highways, hospitals, office buildings, retail/industrial centers, universities and research centers throughout the US. Here’s a link to a press release about McCarthy:
(http://www.savicorp.com/news/23-mccarthy-construction-leaving-green-footprints-with-savicorps-dynovalve.aspx).
North Carolina’s Stallings Police Department’s 25 Ford Crown Victoria (2011) fleet experienced a MPG increase of 31.58% after the installation of DynoValve. This is the type of success we hope to translate into contracts with larger public service entities nationwide.
We believe our business opportunities within the State of California alone are enormous. The state has 36 cities with over 100,000 residents and 217 cities with 25,000 to 100,000 residents-each of these cities has numerous municipal, corporate and small business fleets of vehicles that are potential customers for SaviCorp. SaviCorp management believes that this is a viable market for blow-by gases related crankcase ventilation system and emission reduction products.
Although SaviCorp believes that we have no direct competition in the marketplace, retail pricing may be dictated by the average consumer’s disposable income. In order for the DynoValve® to attain a leadership role in the industry, SaviCorp will need to price the product to reflect the value brought to end-users. As the market expands, future products should be priced more aggressively to increase market penetration and achieve a position of planned-for market dominance. SaviCorp’s goal of establishing sales and marketing partnerships and/or alliances will further our market penetration.
Car dealerships sell used and new vehicles and are also a viable market for SaviCorp. Used cars are normally identified as certified pre-owned vehicles, age ranging from one to 5 years old. A common car dealership sales tactic is to offer aftermarket products to buyers during the loan application process. In recent years, the sale of used cars has become a major source of profits for car dealerships in the wake of shrinking margins on new cars. To make them acceptable to more customers, most dealerships promote certified pre-owned vehicles to customers who want a warranty on their used car. This often raises the price, but in return provides customers with peace of mind. In the current economic environment, the relative demand for used cars has increased as sales of new cars have declined. Due to the fact that the product has the potential to lower operating costs as well as extend the useful life of a vehicle-a proposition that is very appealing to consumers-the DynoValve is targeted to the used car market.
As the year 2012 progressed, our customer base expanded. A major key to our longer-term success is our ability to arrange for sales and installations with customers operating large numbers of vehicles, commonly referred to as “fleets.” For our purposes, fleets can vary in size from 25 to 15,000 vehicles. Fleets can be located in specific geographical areas, such as within a city, within a county or two, part of a state, within a state or multiple states in a region of the US, or nationwide. For now, the Company is focused on fleets within the US. There are few product sales in Canada. We have patents pending in many “industrial” countries, including Mexico and Canada.
Typically, in the early stage, our relationship with a fleet size customer involves “proving” our technology on a test basis with a few vehicles operating as part of the customer’s fleet. We guarantee a 10% improvement in fuel efficiency. Once a customer has experienced “real time” results out in the field, our products gain acceptance and the rate of sales and installations take off at a faster pace. In almost all cases to date, we have exceeded the 10% guarantee. Generally, the longer vehicles are driven with our product in place, the more performance improves with the passage of time. Our results to date have varied from an 8% to 100% improvement. Currently, we have no fleets with less than a 15% rate of improvement. Fleets with Fords (4.6 litre engines) and Chevy light trucks (4.7 litre) are getting between 30% and 49% fuel savings.
In 2013, we have made major inroads in the Middle Eastern country of Dubai and others. We have a 5 year licensing agreement with them that we entered into this quarter. Regarding our progress, our original commitment for 2,000 DynoValves (sold at $250 each) equate to $500,000. In order for them to fulfill and maintain this 5 year licensing agreement, they are required to purchase 500 additional DynoValves per quarter (an additional 2,000 DynoValves / $500,000 per year) for a total of $2,500,000 over a 5 year span. With the initial investment of $500,000, this totals $3,000,000 for their 5 year licensing agreement. We have already delivered 2,000 of those DynoValves. The areas that are included in this agreement are UAE, Dubai, Malaysia, India, and Africa.
We sent a mechanic to Dubai to convince the Dubai Department of Standardization to mandate the DynoValve on all government vehicles and eventually to the general population (“the mandate”). When any country attempts to mandate a new individual product, there are usually issues. Understandably, there should not be certain vehicle exclusions for this particular mandate, therefore the DynoValve needs to be installable on all makes and models.
In our case, one issue is that many vehicles in these Middle Eastern countries are not compatible with the DynoValve or it simply does not fit. In order to resolve this compatibility issue, we’ve created a new product called the “DynoCap.” The DynoCap is an oil cap that has a fitting which fits directly on top of the oil cap allowing the DynoValve to sit either horizontally or vertically thus making it adaptable to virtually any gas driven engine that has a place to add oil, not limited to automobiles.
The new cap is now being tested at our corporate headquarters in Santa Ana, CA. We have vehicles travelling all over California to ensure performance is as effective as our standard DynoValve, when connected directly to the vehicle’s crankcase ventilation system. We have provided a few DynoCaps to Dubai to demonstrate how the compatibility issue has been resolved, and provided samples for their own testing with the device in their own countries. A provisionary patent and trademarks for the name have been filed with the US Trade and Patent Office and a PCT will be filed for the whole world.
The second issue is the wiring harness, which was originally created for the USA and met compliance regulations according to American standards. The Department of Standardization and the UAE affiliates did not approve of the exposed colored wires. As a result, we modified the wiring harness and completely molded all the connectors, improving the appearance which is actually beneficial for us. This brand new wiring harness was delivered to Dubai for their approval. The group loved it and guaranteed 100% that Savvy Green (our associate company in Dubai) would be given confirmation and status on the mandate (Preferred Vendor Status).
If SaviCorp gets this mandate, we may increase sales by possibly 50,000 units every 90 days or less. If this works as well as the DynoValve, it will cut installation time by at least 50%. Once tested, we will continue the process of obtaining an executive order for the DynoCap. We will also have quick release hoses as well as the vertical and horizontal versions. We hope it will also work on other fuels as well, and will expand our testing regarding this as soon as we can.
In near future, we are set to demonstrate in New Mexico. We will be training Ford dealerships in Albuquerque, which we believe is home to one of the biggest Ford dealers in the US. We will be training their mechanics for installation and their sales team for distribution and sales of the DynoValve. During training, there will be radio commercials airing on their local radio stations.
We have a 60 second spot on a local Los Angeles area television network, KABC, for 16 weeks beginning late August until November 23rd, hopefully generating more business.
Additionally, there are two other AM radio stations and another FM station that will be playing one minute commercials for DynoValve in the local areas where we will be training at these Ford dealerships. Most of these trainings will be in New Mexico, Lake Tahoe, and, perhaps, in Reno, Nevada. These will be the test beds, so if our campaigning is successful, we will then mimic this endeavor and move forward in other cities within the United States.
Besides Ford training, we are also bringing in two vehicles from the Los Angeles Police Department (“LAPD”). An appointment has already been scheduled with the City of Los Angeles. To our knowledge, they have around 150,000 vehicles. We believe they will introduce their Class 1 and 2 trucks which are their pickups and vans, to begin a pilot program.
There is also a police event in Fontana, CA where they test drive vehicles. Some police departments have actually chosen the Ford Interceptor which is going to be their brand new Ford Explorer, which the DynoValve does quite well on. We will receive two of these vehicles in the lab for DynoValve conversion. They will run these at the Fontana event track to see what the results are in comparison to their stock models. We are hoping this generates enough business to begin working with municipalities, and targeting the west coast police departments.
We are still currently doing installations for Con Edison in New York and New Jersey, as well as working with the EMTA. As a result of Hurricane Sandra, our efforts since the beginning of this year have declined due to damage and recovery efforts. However, it appears we are increasing speed and hopefully we’ll be back on track with Con Edison, which is a huge fleet as well as other large fleets on the east coast.
Our Company spokesperson, Lauren Fix AKA “The Car Coach,” has appeared on several local TV shows. With her recent appearance with John Stossel on Fox Business Channel, we received many calls as well as made several sales. Hopefully with her connections and her network of followers, we can obtain more sales.
“The DynoValve Pro Lite” is ready to go. This unit is very similar to the standard DynoValve Pro, with the exception of the oil separator, making it a much smaller unit since natural gas is much cleaner than diesel fuel. We are able to convert these, and we have some testing scheduled for Fullerton, CA School District for their co-generation plant as well as their school buses, which run on CNG (Compressed Natural Gas). This product is now being manufactured. We hope to take some of these test samples and begin installations and testing for results so we can introduce this to all CNG fleets out there. Most trucks and buses in California are now being converted to CNG. Hopefully, we will be able to hit that market and be able to offer the DynoValve Pro Lite CNG version. We also have a very large food supplier that is willing to lend some of their vehicles for testing.
If all goes well in the Middle East, it appears that DynoGreen Tech, LLC (“DGT“) as well as Savvy Green would like to have an exclusive distribution agreement to supply to all of Africa, Russia, and Europe. We believe it is too premature to make a commitment at this time without seeing their success with the existing countries they are currently licensed for. Although, they’ve been extremely successful in a short period of time, so we are hopeful and looking forward to revisiting this again.
The goal of the Company is to try to spread ourselves with the DynoValve Pro Lite and DynoCap right now. Hopefully we will increase business in the US and be able to branch out completely in the Middle East as well as eventually promote in Europe and other countries. We are speaking with the Philippines on some potential agreements.
The DynoCap looks very promising because it reduces installation time and it becomes more compatible to 2 stroke engines, motorcycles, small bikes, or large polluting 2 stroke and diesel engines. It will be less expensive to introduce without worries of having to separate the oil or clean the oil because all we are doing is capturing the vapor and recycling it. We are hoping to make the DynoCap in a smaller version to fit 2 stroke vehicles.
It is estimated there were 248 million vehicles on the road in the US alone at the end of 2010. The average age of these vehicles is estimated by the National Automobile Dealers Association to be ten and a half years. The United States has been the biggest producer of CO2 emissions on the planet; producing 22% of the World’s emissions in 1995, expecting to total 15% by 2035, topped at that point by China’s 17% and Eastern Europe/former Soviet Unions’ 19%.
We at SaviCorp are doing everything we can to build our capabilities to service an expanding customer base and help clean up the planet one vehicle at a time.
DynoValve Overview
Dyno: an instrument designed to measure power, exhaust emissions, and fuel economy.
Valves: devices that regulate the flow of gases through apertures by opening and closing.
In the 1960's, the PCV system appeared on new American domestic cars. The PCV system allows gases to escape in a controlled manner from the crankcase of an internal combustion engine. We believe that our DynoValve products are the most significant advances in PCV valve technology since the first engine exhaust emission control system.
We also believe the DynoValve (gasoline) &DynoValve Pro (diesel) are the first and only electronically controlled PCV/Crankcase Oil Recovery Emission Control Systems available.
DynoValve
The DynoValve products are electronically controlled PCV/ Crankcase Oil Recovery Emission Control Systems (“COREC”). Independent test results by Environmental Testing Corporation, CEE, of California show that with DynoValve products, there is a reduction of all exhaust emissions, especially in nitrogen oxide (“NOx”) while simultaneously reducing fuel and oil consumption. There are currently two types of DynoValve products - DynoValve and DynoValve Pro.
DynoValve is a patented PCV valve and designed for use in automotive gasoline powered vehicles. The DynoValve replaces Original Equipment Manufacturer (“OEM”) PCV valves. DynoValve eliminates the vacuum problems associated with today’s standard PCV valves by optimally regulating the flow of engine blow-by-gases. This ventilation is accomplished with the use of an electronically controlled reprogrammable microprocessor. The electronically-controlled DynoValve regulates the flow of blow-by gases returning to the engine intake system, thereby improving fuel mileage and reducing hydrocarbons (HC), carbon monoxide (CO) and oxides of nitrogen (NOx) exhaust emissions.
DynoValve Pro
DynoValve Pro is a closed crankcase emission control and oil recovery system designed for diesel engines. It filters particles and oil droplets from the blow-by gases. The filtered gas is then returned to the air intake system of the crankcase and the filtered oil is returned to the engine crankcase. By recycling the crankcase emissions through DynoValve Pro, harmful gases and oil film that causes engine and environmental problems is filtered. Maintenance costs may be lowered with the reduction of oily residue that coats the engine and its components or the prevention of clogged radiators and air cleaners. DynoValve Pro helps engines operate at full efficiency while improving performance and lowering the costs of operation. We currently are seeking the required approvals from the Air Resources Board of the California Environmental Protection Agency to advertise, sell and install DynoValve Pro in California.
Both DynoValve and DynoValve Pro can regulate the flow of gases depending on engine speed. This is accomplished by designing the DynoValve products & IP to be electronically activated by using a reprogrammable microprocessor that processes data from the engines' revolutions per minute (RPM).
Both DynoValve and DynoValve Pro are available in various sizes and versions and can be installed by a mechanic in approximately 1 to 2 ½ hours.
The DynoValve products are an improvement on the current pollution positive crankcase ventilation reduction controls, including the implementation of cleaner fuels and related hardware. While these measures have had the intended effect of reducing pollution causing emissions, they have not eliminated the emissions to an acceptable level. Our technology is more effective than passive systems currently in use, provides excellent fuel efficiency and virtually eliminates fugitive crankcase emissions. The goal of the Crankcase Ventilation System technology is to provide a more aggressive method of emission reduction that is not possible by passive means and improves fuel efficiency.
Independent Testing
We have sought out and have received independent testing results, which to-date have been very encouraging and validated our claims. At our request, tests were conducted by California Environmental Engineering, a greater Los Angeles area based leading independent environmental testing firm, over the last eight years. Overall, California Environmental Engineering is a consulting firm specializing in the testing of environmental and engine instrumentation. California Environmental Engineering provided a written conclusion after testing that provides, in part: “We have evaluated the data from the test runs in the demonstration of the Crankcase Ventilation System. We can attest to the positive effect of the Crankcase Ventilation System. In conclusion, the technology has demonstrated that it has both economic and environmental benefits". Additional testing has been done by KLD Environmental Consultations also with similar positive results.
Pricing
We have been selling DynoValves on a retail basis for $399, with some discounts given to early adopters and test clients. Installation fees typically run around $100. Wholesale prices have been in the $200 to $300 range.
Marketing Strategy
Our initial market segment focuses on developing and maintaining strategic partnering and marketing relationships with high profile, name-brand organizations. Initially, we will market through a select group of commercial retailers and focus to sign agreements with strategic partners or major commercialization partners. This will allow us to rapidly access our market through pre-existing relationships and to minimize overhead during the development of a sustainable revenue base.
In order to widen our market channels, we have and continue to implement an ongoing marketing campaign in parallel to our negotiation with major retail distributors and strategic partners so that we can respond effectively to the needs of the market while creating a direct access to its potential clients/and/or customers and insuring prompt delivery of our products. The target market will be local cities across the nation and major cities worldwide. As disclosed, we are also marketing our products directly to corporate fleets, municipalities, government entities and OEM’s.
We sell directly to retail customers and distributors. The targeted channels for this would be:
1. OEM/Private Label.
The goal will be to establish strategic partnerships and marketing relationships with high profile, name brand organizations. We could private label, co-label or customize our products, allowing partners to rapidly penetrate their customer base by using their name and reputation.
2. Catalog, Retail & OEM.
The goal will be to establish sales and marketing partnerships with compatible companies that directly sell and ship goods to consumers through catalog sales. This will be a further means of market penetration. Catalogs increase overall outreach into the marketplace, providing a venue in which products can be directly positioned against competition, and influence buyer awareness and acceptance on an extremely broad scale. We will work with catalog partners to stretch marketing and advertising budgets through co-op marketing means, including direct mail efforts.
3. Direct Mail.
Ongoing direct mail will also be an important sales technique to further penetrate the consumer market once our product lines are established. By concentrating on magazine circulation research and mailing list data, we will be able to quickly pinpoint buyers, fine tune our message for specific demographic segments and maximize sales through advertising and direct mail. Also, using a third party order entry provider will ensure timely response and turnaround of prospect queries and orders and give the Company the flexibility to further increase sales.
4. Internet.
Much of the work accomplished for direct mail and information distribution can be directly applied to the Company’s Web Site. This will make the products, Company, and technical information more cost effective and accessible in a timely fashion. It will also enable a more timely distribution of product information updates and potentially increase sales of our products. We plan to use social networking (i.e. Twitter, Facebook, etc.) as a way to further market our products. Currently we do have a small number of product sales generated from our website. See www.savicorp.com.
Suppliers
We currently have all of the production completed by His Divine Vehicle (“HDV”), a related entity owned by our CEO Serge Monros as determined by our licensing agreement with HDV.
Intellectual Property
We also own certain trademarks associated with the marketing of our products. DynoValve and DynoValve Pro have been registered with the US Patent and Trademark Office. We also claim copyright to certain white papers and marketing pieces. Due to our inability to generate commercial sales of our products, all patent costs were fully impaired in 2006.
The DynoValve products are the subject of several pending U.S. patent applications (US-2010/0076664-A1 and US-2010/0180872-A1) held by Serge V. Monros, Chief Executive Officer and Chairman of the Board of the Company. There are corresponding applications that have been filed in a number of foreign countries. HDV, an affiliate of Mr. Monros, manufactures the “DynoValve” and “DynoValve Pro” products based on these patent applications and then sells them to the Company for resale pursuant to the Product Licensing Agreement dated November 15, 2008, as amended on December 16, 2009. Under the Product Licensing Agreement, the price at which HDV sells the products to the Company is subject to change at any time upon written notice. The Company may determine the prices that it charges to its customers. The Product Licensing Agreement is non-exclusive and automatically renews on an annual basis provided certain sales volumes are achieved and the Company is otherwise not in breach. HDV may, after an applicable cure period, terminate the Product Licensing Agreement earlier if it believes that the Company is deficient in meeting its responsibilities. HDV may amend the Product Licensing Agreement at any time by giving notice to the Company, unless the Company objects within ten days of such notice.
As consideration for HDV entering into the Product Licensing Agreement, the Company agreed to issue to Mr. Monros and HDV, if and when available, an aggregate of 500 Million shares of Common Stock, 5 Million shares of Series A Preferred Stock and 5 Million shares of Series C Preferred Stock. In July, 2011, HDV and Mr. Monros entered into a revised licensing agreement which modified the prior consideration paid to an aggregate of 600 Million shares of Common Stock, 6.5 Million shares of Series A Preferred Stock and 2.5 Million shares of Series C Preferred Stock.
Mr. Monros has continued the process of preparing patent applications for the other versions of the DynoValve products & related IP. In March, 2013, the Company entered into a five (5) year Master Distribution Agreement with His Divine Vehicle to sell the DynoValve and DynoValve Pro in various international territories. The consideration for the agreement was guaranteeing a minimum annual volume, payment for the DynoValves acquired and a three percent (3%) royalty payment. The Company has entered into an agreement with DynoGreen Tech, LLC ("DGT") to sell the DynoValve products in the licensed territories. DGT had ordered 2,000 DynoValves as of 6/30/13. The DynoValves were shipped in the third quarter of 2013.
Competition
The industry is marked by competition in two industry segments: emission reduction and fuel efficiency. Our product is designed to compete within both segments. We face competition from numerous foreign and domestic companies of various sizes, most of which are larger and have greater capital resources. Competition in these areas is further complicated by possible shifts in market share due to technological innovation, changes in product emphasis and applications and new entrants with greater capabilities or better prospects.
Passive crankcase ventilation systems have been available for many years and have been, in fact, a required emission-control system on certain vehicles. In addition, the Environmental Protection Agency is responsible for setting emissions standards that all vehicles must meet. These emissions standards must be met by all new vehicles produced, resulting in all car manufacturers developing technology to lower emissions and raise fuel efficiency.
In addition to car manufacturers, we compete against other companies that develop after-market products that lower emissions and/or increase fuel efficiency. Some of these competitors’ products include Racor’s CCV, Majestic SAFE-T-PRODUCTS Refilter™, Save the World Air, Inc’s Mark I ZEFS device and Indigo Electronics CVS for boats. We are aware of no direct competition with our DynoValve. There is competition indirectly with fuel saving products, from fuel additives to cigarette lighter plug devices. Here are some examples of competitors’ products:
1. Racor Crankcase Ventilation Device: list price: $368.00; Parker Hannifin Corporation, Racor Division, Cleveland, Ohio 44124. Racor states: Racor CCV systems offer superior protection against contaminated crankcase blow-by and provide engine operators a highly effective solution. SaviCorp comment: no test results to compare with the DynoValve and our patented system provide superior oil coalescence and crankcase pressure control under the most severe conditions.
2. Refilters™ device: Majestic Companies, Ltd. incorporated in Maryland. No data on the device exists online. According to EDGAR online, Refilters™ could be retrofitted to existing heavy-duty diesel engines. http://sec.edgar-online.com/majestic-safe-t-products-ltd/sb-2-securities-registration-small-business/2002/11 /12/section21.aspx
3. Mark I ZEFS device: Save the World Air, Inc. Price: unknown. According to its manufacturer, the ZEFS devices create magnetic fields to reduce the size of the fuel molecules passing from the carburetor or center point fuel injector of the vehicle to the inlet manifold prior to combustion. This creates an atomization process that enhances the efficiency of combustion, which reduces harmful toxic emissions and increases fuel economy. ZEFS device has been granted a patent see United States Patent Application No. 10/275946. SaviCorp comment: Save the World Air Inc. makes Zero Emission Fuel Saver (ZEFS) technology that is intended to reduce tailpipe pollutants and increase fuel efficiency in gasoline and diesel-powered vehicles.
4. RAND Corporation has conducted independent tests and cannot confirm the benefits of ZEFS. "RAND's analysis of laboratory testing data provided by Save the World Air that deals with the performance of the ZEFS device installed in vehicles found at best mixed results from the tests and therefore could not confirm the effectiveness of the technology in actual use," said Michael Toman, director of the Environment Energy and Economic Development program at RAND, which carried out the study.
5. Atomic 4 AT-4CVS Crankcase Ventilation system device: Listed Price: Complete Retrofit Kit is $240.00 to $265.00 (Indigo Electronics, Williamsburg, VA 23185). The product (according to Indigo Electronics) eliminates Crankcase smoke completely with the system. The product eliminates fouling of carburetor air passages; and improves performance. SaviCorp comment: no test data to compare with DynoValve.
Government Regulations
We believe that we are in compliance with all applicable regulations that apply to our business as it is presently conducted. Our individual manufactured products, as such, are not subject to certification or approval by the U.S. Environmental Protection Agency or other governmental agencies domestically or internationally before they are sold. However, such agencies may test and certify a sample engine fitted with our devices before we are allowed to engage in certain activities, like selling or marketing our products in certain jurisdictions. For example, on September 10, 2010, the Air Resources Board of the California Environmental Protection Agency issued Executive Order D-677, permitting the advertisement, sales and installation of the DynoValve on certain gas-powered vehicles based on emissions test data generated on two vehicles. We intend to seek a similar order for DynoValve Pro. Our sales and marketing activities may be limited until we receive the necessary authorizations from the applicable environmental regulations.
Depending upon whether we manufacture or license our devices in the future and in which countries such devices are manufactured or sold, we may be subject to regulations, including environmental regulations at such time. However, we are not aware of any existing or probable governmental regulations that may have a material effect on the normal operations of our business. There also are no relevant environmental laws that require compliance by us that we have not complied with that may have a material effect on the normal operations of the business.
Employees
During 2012, we had consulting agreements with all management and staff members. We regularly utilize the services of consultants on an as-needed basis. As of October 1, 2014, the Company had 6 full time employees. In addition, we hire independent contractor labor on an as needed basis. Historically none of our employees belonged to a collective bargaining union. We have not experienced a work stoppage and historically our employee relations have been good.
RISKS RELATED TO BUSINESS
You should carefully consider the following risk factors and all other information contained herein as well as the information included in this Annual Report in evaluating our business and prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties, other than those we describe below, that are not presently known to us or that we currently believe are immaterial, may also impair our business operations. If any of the following risks occur, our business and financial results could be harmed. You should refer to the other information contained in this Annual Report, including our financial statements and the related notes.
Risks Relating to Our Business:
We Have a Limited Operating History Upon Which You Can Base An Investment Decision.
Our company was formed on August 13, 2002, and through December 31, 2010 we had not sold any products and did not have any agreements for the sale of our products or licensing of our technology. Therefore we have a limited operating history upon which you can make an investment decision, or upon which we can accurately forecast future sales, if any. Furthermore, once we begin producing products for sale we may not be able to market our technology and products sufficiently to generate public interest in our goods. If only a small portion of the population decides to use our products, we will experience limits on our revenues and our ability to achieve profitability. You should, therefore, consider us subject to the business risks associated with a new business. The likelihood of our success must be considered in light of the expenses, difficulties and delays frequently encountered in connection with the formation and initial operations of a new business.
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our Ability to Achieve Our Business Objectives.
We incurred net operating losses of $4,416,000 for the year ended December 31, 2012 and $4,863,030 for the year ended December 31, 2011. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to generate revenue. To date we have not generated any revenues from our business activities. As a result of continuing losses, we may exhaust all of our resources prior to completing the development of our products. Additionally, as we continue to incur losses, our accumulated deficit will continue to increase, which might make it harder for us to obtain financing in the future. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us, which could result in reducing or terminating our operations.
If We Are Unable to Obtain Additional Funding Our Business Operations Will be Harmed.
We will require additional funds to sustain and expand our research and development activities. As of December 31, 2012, we anticipate that we will require up to approximately $2,000,000 to fund our operations for the next twelve months, depending on revenue from operations. Additional capital will be required to effectively support the operations and to otherwise implement our overall business strategy. Even if we do receive additional financing, it may not be sufficient to sustain or expand our research and development operations or continue our business operations. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our research and development plans.
If We Do Obtain Additional Financing Our Then Existing Shareholders May Suffer Substantial Dilution.
In the event we are able to find addition financing, such additional funds will likely be obtained through additional equity financing. If we raise additional funds by issuing equity securities, existing stockholders may experience a dilution in their ownership. In addition, as a condition to giving additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future Financing.
In their report dated February 13, 2015, our independent auditors stated that our financial statements for the year ended December 31, 2012 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised due to our incurring net losses of $284,503,570 during the period from inception, August 13, 2002, to December 31, 2012. In addition, at December 31, 2012, we were in a negative working capital position of $8,222,829 and had a stockholders' deficit of $8,244,047. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, generating sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
Many of Our Competitors are Larger and Have Greater Financial and Other Resources than We do and Those Advantages Could Make it Difficult for Us to Compete With Them.
The general market for our products and services is extremely competitive and includes several companies which have achieved substantially greater market shares than we have, have longer operating histories, have larger customer bases, and have substantially greater financial, development and marketing resources than we do. If overall demand for our products should decrease it could have a materially adverse effect on our operating results.
Competition in the US Market is Fierce, With Significant Technical Developments Occurring Within the Past Several Years.
The market place is becoming more competitive with other product offerings including fuel additives, fuel line magnetic devices, inline catalytic converters, liquid injection systems and oil additives. While none appear to be offering the type of emission reduction technology and quality solution that we are producing, this may change as new emission type technology and related approaches emerge.
We Acquired Rights to Our Technology from One of the Founding Investors Without a Valuation Opinion or Arm’s Length Negotiations.
We acquired rights to our technology from one of the founding investors for a price and consideration which we believe to be reasonable but this price was not negotiated on an arm’s length basis nor was the transaction based upon a valuation opinion supporting that price. As a result, there is no assurance that price paid nor terms are reasonable. If the price paid was not reasonable or the terms of such transaction were not reasonable, we may have incurred costs which do not reflect the true value of the assets acquired and such costs may have unreasonably limited our likelihood of achieving our financial goals.
A Manufacturer's Inability to Produce Our Goods on Time and to Our Specifications Could Result in Lost Revenue and Net Losses.
While our new facility has limited manufacturing abilities, we will depend upon independent third parties, including His Divine Vehicle, an entity owned by our CEO, for the manufacture of substantially all of our products. Our products will be manufactured to our specifications by domestic or foreign manufacturers. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect as our revenues would decrease and we would incur net losses as a result of loss of sales of the product, if any sales could be made. Further, because quality is a leading factor when customers and retailers accept or reject goods, any decline in quality by our third-party manufacturers could be detrimental not only to a particular order, but also to our future relationship with that particular customer.
As a Result of Our Industry, We Need to Maintain Substantial Insurance Coverage, Which Could Become Very Expensive or Have Limited Availability.
Our marketing and sale of products and services creates an inherent risk of claims for liability. As a result, we have secured and will continue to maintain insurance in amounts we consider adequate to protect us from claims. We cannot, however, be assured to have resources sufficient to satisfy liability claims in excess of policy limits if required to do so. Also, there is no assurance that our insurance provider will not drop our insurance or that our insurance rates will not substantially rise in the future, resulting in increased costs to us or forcing us to either pay higher premiums or reduce our coverage amounts which would result in increased liability to claims.
Any Inability to Adequately Protect Our Proprietary Technology Could Harm Our Ability to Compete.
Our future success and ability to compete depends in part upon our proprietary technology, patents and trademarks, which we attempt to protect with a combination of patent, copyright, trademark and trade secret laws, as well as with our confidentiality procedures and contractual provisions. These legal protections afford only limited protection and are time-consuming and expensive to obtain and/or maintain. Further, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.
Any patents that are issued to us could be invalidated, circumvented or challenged. If challenged, our patents might not be upheld or their claims could be narrowed. Our intellectual property may not be adequate to provide us with competitive advantage or to prevent competitors from entering the markets for our products. Additionally, our competitors could independently develop non-infringing technologies that are competitive with, equivalent to, and/or superior to our technology. Monitoring infringement and/or misappropriation of intellectual property can be difficult, and there is no guarantee that we would detect any infringement or misappropriation of our proprietary rights. Even if we do detect infringement or misappropriation of our proprietary rights, litigation to enforce these rights could cause us to divert financial and other resources away from our business operations.
Our Products may Infringe Upon the Intellectual Property Rights of Others and Resulting Claims Against Us Could be Costly and Require Us to Enter Into Disadvantageous License or Royalty Arrangements.
The automotive parts industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement and the violation of intellectual property rights. Although we attempt to avoid infringing upon known proprietary rights of third parties, we may be subject to legal proceedings and claims for alleged infringement by us or our licensees of third-party proprietary rights, such as patents, trade secrets, trademarks or copyrights, from time to time in the ordinary course of business. Any claims relating to the infringement of third-party proprietary rights, even if not successful or meritorious, could result in costly litigation, divert resources and our attention or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making these claims may be able to obtain injunctions, which could prevent us from selling our products. Furthermore, former employers of our employees may assert that these employees have improperly disclosed confidential or proprietary information to us. Any of these results could harm our business. We may be increasingly subject to infringement claims as the number of products and the numbers of features grow.
If We Are Unable to Retain the Services of Mr. Monros or If We Are Unable to Successfully Recruit Qualified Personnel, We May Not Be Able to Continue Our Operations.
Our success depends to a significant extent upon the continued service of Mr. Serge Monros, our Chief Executive Officer, Chief Financial Officer and Chief Technology Officer. Loss of the services of Mr. Monros could have a material adverse effect on our growth, revenues, and prospective business. We do not maintain key-man insurance on the life of Mr. Monros. In addition, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified personnel. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms.
If We Become Subject to Additional Laws or Regulations Related to Our Products, We May Not Be Able to Continue Our Operations.
We are or may be subject to numerous federal, state, local and foreign laws and regulations governing our operations, including the handling, transportation and disposal of our products and our non-hazardous and hazardous substances and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water and groundwater. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities. Changes in environmental laws or the interpretation thereof or the development of new facts could also cause us to incur additional capital and operation expenditures to maintain compliance with environmental laws and regulations. We also may be subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment without regard to fault or knowledge about the condition or action causing the liability. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of previously owned or operated properties. The presence of contamination from such substances or wastes could also adversely affect our ability to utilize our leased properties. Compliance with environmental laws and regulations has not had a material effect upon our earnings or financial position; however, if we violate any environmental obligation, it could have a material adverse effect on our business or financial performance.
Risks Relating to our Convertible Debt and Warrants:
There Are a Large Number of Shares Underlying Our Convertible Debentures and Warrants That May be Available for Future Sale and the Sale of These Shares May Depress the Market Price of Our Common Stock.
As of December 31, 2012, we had 4,756,016,619 shares of common stock issued and outstanding, convertible debentures outstanding that may be converted into a maximum of 1,975,428,915 shares of common stock and outstanding warrants to purchase 600,666,667 shares of common stock. All of the shares, including all of the shares issuable upon conversion of the convertible debentures and upon exercise of our warrants, may be sold pending removal of any restrictions. The sale of these shares may adversely affect the market price of our common stock.
The Issuance of Shares Upon Conversion of the Convertible Debentures and Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to Our Existing Stockholders.
The issuance of shares upon conversion of the secured convertible debentures and exercise of warrants may result in substantial dilution to the interests of other stockholders. Although the convertible debt holders may not convert their convertible notes if such conversion would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent them from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the debt and warrant holders could sell more than their limit while never holding more than this limit.
Risks Relating to Our Common Stock:
There Are a Large Number of Shares Underlying Our Series A and C Convertible Preferred Stock and the Issuance of Shares Upon Conversion of the Series A and C Convertible Preferred Stock Would Cause Immediate and Substantial Dilution to Our Existing Stockholders.
As of December 31, 2012, we had 4,756,016,624 shares of common stock issued and outstanding and series A and C convertible preferred stock that may be converted into 1,036,284,200 shares of our common stock. The issuance of shares upon conversion of the series A and C convertible preferred stock would result in substantial dilution to the interests of other stockholders.
Our Officers And Directors Owned a Significant Interest in Our Voting Stock And Investors Did Not Have Any Voice in Our Management.
As a result of ownership of stock options and convertible preferred stock, our officers and directors, in the aggregate, beneficially own approximately 14% of our outstanding common stock as of December 31, 2012. As a result, these stockholders, acting together, had the ability to control substantially all matters submitted to our stockholders for approval, including:
· election of our board of directors;
· removal of any of our directors;
· amendment of our certificate of incorporation or bylaws; and
· adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
As a result of their ownership and positions, our directors and executive officers collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Management's stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
If We Fail to Remain Current in Our Reporting Requirements, We Could be Removed From the OTC Markets Which Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability of Stockholders to Sell Their Securities in the Secondary Market.
Companies trading on the OTC Markets, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Markets. If we fail to remain current on our reporting requirements, we could be removed from the OTC Markets. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
We Could be Removed From the OTC Markets Which Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability of Stockholders to Sell Their Securities in the Secondary Market.
The Company received a letter from the Securities and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a “formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena DucesTecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information contained in the subpoena. An index of the source of all such produced information and an authentication declaration were also to be supplied. The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the Company has violated federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the investigation. The SEC investigation appears to be ongoing since all info has been supplied to the best of the company’s knowledge. There is a risk that the SEC could take action adverse to the ability of the company to continue marketing its stock in the secondary markets.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the Trading Market in Our Securities is Limited, Which Makes Transactions in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
· that a broker or dealer approve a person's account for transactions in penny stocks; and
· the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
· obtain financial information and investment experience objectives of the person; and
· make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
· sets forth the basis on which the broker or dealer made the suitability determination; and
· that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
We do not own any real property. We currently lease our 40,000 square foot corporate headquarters located at 2530 South Birch Street, Santa Ana, CA 92707. Our telephone number at that office is (877) 611-7284 and our facsimile number is (714) 641-7113. The lease is for a one-year period with an annual lease payment of $110,000 and an annual extension option. We believe that these facilities are adequate for our current and immediately foreseeable operating needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
On or about July 28, 2011, SaviCorp, a Nevada corporation, formerly known as Savi Media Group, Inc. (the “Company”) entered into a Repayment Agreement (the “Repayment Agreement”) with YA Global Investments, L.P., a Cayman Islands exempt limited partnership formerly known as Cornell Capital Partners, L.P. (“YA Global”).
On or about July 10, 2006, the Company and YA Global, then known as Cornell Capital Partners, L.P., entered into a Securities Purchase Agreement which was subsequently amended and restated on August 17, 2006 (collectively the “SPA”) wherein the Company issued and sold to YA Global secured convertible debentures in the aggregate amount of approximately US$2,485,000 (collectively, the “Debentures”) and certain warrants (collectively the “Prior Warrants” and with the Debentures, the “Securities”) to purchase an aggregate of 2,900,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”).
In connection with the SPA, the Company and YA Global entered into ancillary agreements, including a Security Agreement, an Insider Pledge and Escrow Agreement, a Registration Rights Agreement, and other related documents (the SPA and such ancillary agreements are collectively referred to hereinafter as “Financing Documents”). Copies of the Financing Documents have been attached to the Company’s prior filings with the United States Securities and Exchange Commission (the “SEC”) and are hereby incorporated in their entirety by reference.
Pursuant to the terms of the Repayment Agreement, all of the Company’s obligations under the Financing Documents have been terminated in full. Without limitation, all amounts otherwise due under the Debentures are deemed satisfied in full, the Prior Warrants are deemed cancelled, and any and all security interests granted by the Company in favor of YA Global pursuant to the Financing Documents have been extinguished, including the release of 4,000,000 shares of Series A Preferred Stock held in escrow. In exchange for the foregoing, the Company delivered to YA Global: (i) a one-time cash payment of US$550,000; and (ii) new warrants to purchase up to 25,000,000 shares of Common Stock at an exercise price of $0.0119 (the “Current Warrants”). The Current Warrants expire on or about July 28, 2014. A copy of the Repayment Agreement and Current Warrants have been attached as exhibits to the Form 8-K filed August 2, 2011 and are hereby incorporated in their entirety by reference.
The Company received a letter from the Securities and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a “formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena DucesTecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information contained in the subpoena. An index of the source of all such produced information and an authentication declaration were also to be supplied. The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the Company has violated federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the investigation.
We hired the Los Angeles law firm of Troy Gould to represent us in the matter of this investigation. As of the date of this filing, we believe we have provided all requested material to the SEC. Updates on the investigation will be supplied by supplemental filings hereto.
Status of prior private investments; $0 in 2007 (although HDV sold $13,000 of its shares), $0 in 2008 (although HDV sold $445,750 of its shares), $0 in 2009 (although HDV sold $448,000 of its shares), $910,742 in 2010, $1,827,543 in 2011, and $629,500 in the first three quarters of 2012. There is concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required by federal law) and the Company may need to offer rescission rights to the investors.
In 2006, the Company issued shares for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $14,625 in 2008, shares for services valued at $380,500 in 2009, shares for services valued at $236,920 in 2010, shares for services valued at $3,370,273 in 2011, and shares for services valued at $3,165,039 during the first 3 quarters of 2012. We have no plans to offer rescission for these share issuances.
We offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at by Counsel. The results of our rescission offers, in terms of rescission offers accepted by shareholders, were very encouraging. We had four rescissions offers accepted and refunded $13,000 plus interest.
Generally, we believe we have good relationships with our shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered shares from us since January 1, 2007 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any accepted rescission offer. However, there is no assurance that rescission offer acceptances will not have a material effect on our finances or that we will be able to re-pay those electing to rescind in a complete and timely manner. As of the date hereof, the Company has postponed their plans to offer rescission to earlier purchasing shareholders, deeming it advisable to wait until the common stock price increases and they have more operating cash available to pay for the cost of undertaking this endeavor. The Company has booked a liability to account for this rescission liability and marks the liability to market on a quarterly basis. The rescission liability as of 12/31/12 is $2,183,544.
The Company received a letter dated June 7, 2013 with a Civil Complaint titled Arnold Lamarr Weese, et al v. SaviCorp filed in the Northern District of West Virginia. In addition to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's counsel began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants have sued for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts to hold the Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company is finalizing a negotiated settlement and expects to complete the settlement early in 2015. The Company has booked a liability for the estimated settlement cost based on the current price of the stock to be issued and attorney fees to be reimbursed of $1,580,252.
We may become involved in material legal proceedings in the future.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to a written consent of a majority of stockholders dated August 19, 2005, in lieu of a special meeting of the stockholders, the majority of stockholders approved the following actions:
1.
To elect five directors to the Company's Board of Directors, to hold office until their successors are elected and qualified or until their earlier resignation or removal;
2.
To ratify certain financing transactions requiring potential stock issuances in excess of currently authorized capital stock;
3.
To amend the Company's Articles of Incorporation, as amended, to:
(a)
increase the number of authorized shares of common stock, par value $.001 per share (the “Common Stock”), of the Company from 1,000,000,000 shares to 6,000,000,000 shares;
(b)
increase the number of authorized shares of preferred stock, par value $.001 per share (the “Preferred Stock”), of the Company from 30,000,000 shares to 40,000,000 shares;
4.
To ratify the selection of Ham, Langston &Brezina, L.L.P. as independent registered public accounting firm of the Company for the year ending December 31, 2005; and
5.
To adopt the Company’s 2005 Incentive Stock Plan.
There have been no stockholders meeting since August 19, 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock is quoted on the OTC Markets under the symbol “SVMI”.
For the periods indicated, the following table sets forth the high and low closing prices per share of common stock.
HOLDERS
As of December 31, 2014, we had approximately 861 holders of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Worldwide Stock Transfer, LLC, located at 1 University Plaza, Suite 505, in Hackensack, NJ 07601.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.
RECENT SALE OF UNREGISTERED SECURITIES
For the year ended December 31, 2012, the Company issued the following:
In January 2012, the Board of Directors authorized the issuance of 14,603,571 common shares to accredited and non-accredited investors for total proceeds of $45,500.
In February 2012, the Board of Directors authorized the issuance of 119,500,000 common shares to accredited and non-accredited investors for total proceeds of $248,500. The Company converted $80,000 of debt, $11,000 of convertible debt and $377,382 of derivative liability into 102,000,000 common shares
In March 2012, the Board of Directors authorized the issuance of 37,866,667 common shares to accredited and non-accredited investors for total proceeds of $93,200. The Company converted 20,000 of convertible debt and $539,025 of derivative liability into 40,000,000 common shares
In April 2012, the Board of Directors authorized the issuance of 57,260,000 common shares to accredited and non-accredited investors for total proceeds of $122,300.
In May 2012, the Board of Directors authorized the issuance of 12,000,000 common shares to accredited and non-accredited investors for total proceeds of $30,000.
In June 2012, the Board of Directors authorized the issuance of 14,250,000 common shares to accredited and non-accredited investors for total proceeds of $47,000.
In July 2012, the Board of Directors authorized the issuance of 4,375,000 common shares to accredited and non-accredited investors for total proceeds of $35,000.
In October 2012, the Board of Directors authorized the issuance of 40,000,000 common shares to accredited and non-accredited investors for total proceeds of $20,000.
In November 2012, the Board of Directors authorized the issuance of 32,000,000 common shares to accredited and non-accredited investors for total proceeds of $20,000.
In December 2012, the Board of Directors authorized the issuance of 12,500,000 common shares to accredited and non-accredited investors for total proceeds of $10,000.
Throughout the year, the Board of Directors also authorized the issuance of 414,343,445 common shares for services rendered by independent contractors issuances based on the market value of the stock.
In June 2012, the Board of Directors authorized the issuance of 100,000 Preferred C shares to accredited and non-accredited investors for total proceeds of $10,000.
Since 2012, the Board of Directors authorized the issuance of an aggregate of 568,152,694 shares of its common stock, 21,351,666 shares of its Preferred A shares, 133,306 shares of its Preferred B shares and 4,488,500 of its Preferred C shares to accredited and non-accredited investors for total proceeds of $2,502,450. In addition, the Board of Directors has authorized the issuance of an aggregate of 749,900,000 shares of its common stock, 2,751,667 shares of its Preferred A shares, 97,450 shares of its Preferred B shares and 60,000 of its Preferred C shares to accredited and non-accredited investors for services rendered valued at an aggregate of $5,518,517. No sales commissions were paid in connection with these issuances and all investors reviewed or had access to all of the Company’s filing pursuant to the Securities Exchange Act of 1934, as amended.
ITEM 6.
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following information should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 6, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-K that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties including those discussed in the “Risk Factors” section contained elsewhere in this report, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements in this report.
Business History
We were originally incorporated as Energy Resource Management, Inc. on August 13, 2002 and subsequently adopted name changes to Redwood Energy Group, Inc. and Redwood Entertainment Group, Inc., upon completion of a recapitalization on August 26, 2002. The re-capitalization occurred when we acquired the non-operating entity of Gene-Cell, Inc. Gene-Cell had no significant assets or operations at the date of acquisition and we assumed all liabilities that remained from its prior discontinued operation as a biopharmaceutical research company. The historical financial statements presented herein are those of SaVi Media Group, Inc. and its predecessors, Redwood Entertainment Group, Inc., Redwood Energy Group, Inc. and Energy Resource Management, Inc.
The public entity we used to recapitalize was originally incorporated as Becniel and subsequently adopted name changes to Tzaar Corporation, Gene-Cell, Inc., Redwood Energy Group, Inc., Redwood Entertainment Group, Inc., Savi Media Group, Inc., and finally to SaviCorp.
Business Summary
Until 2011, we were considered a development stage enterprise because we had no significant operations, had not yet generated revenue from new business activities and were devoting substantially all of our efforts to business planning and the search for sources of capital to fund our efforts. We had acquired all rights to "blow-by gas and crankcase engine emission reduction technology" which we intended to develop and market on a commercial basis.
This technology is an emission reduction device believed to reduce harmful exhaust emissions in gasoline and diesel engines, and increase fuel efficiency. Phase one testing at California Environmental Engineering indicated notable reduction in tailpipe emissions and Particulate Matter (PM) while improving fuel economy. The reductions were 5.1% in hydrocarbons, 5.1% in carbon monoxide, 5.5% in nitrogen oxides, while increasing fuel economy by 0.3%.
We currently have the right to market and distribute the DynoValve and DynoValve Pro products, which provides for increased fuel economy and reduced emissions in automotive applications for both new and existing vehicles and may be used in other non-automotive applications. Personal watercraft, small engine powered lawn equipment, and stand-alone power generation engines are additional markets that we intend to develop. The technology may be sold internationally and we are pursuing opportunities simultaneously domestically and internationally. We have no immediate plans to develop additional products at this time.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions, and these differences may be material.
We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. We provide a valuation allowance to reduce deferred tax assets to their net realizable value.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), and began expensing at fair value on a straight-line basis the costs resulting from share-based payment transactions.
Prior to 2006, the Company elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for stock options granted to employees as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Under APB 25, the Company did not recognize share-based payment expense in its financial statements because the stock option awards qualified as fixed awards and the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of grant.
Convertible Notes - Derivative Financial Instruments
The convertible notes issued to Cornell Capital in 2006, to His Divine Vehicle, Inc. and DS Enterprises, Inc. in 2009, and to Steve Botkin in 2012 have been accounted for in accordance with SFAS No. 133 and EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."
The Company has identified that these debenture have embedded derivatives. These embedded derivatives have been bifurcated from the host debt contract and accounted for as derivative liabilities in accordance with EITF 00-19. When multiple derivatives exist within the convertible notes, they have been bundled together as a single hybrid compound instrument in accordance with SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15, "Embedded Derivatives: Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid Instrument."
The embedded derivatives within the convertible notes have been recorded at fair value at the date of issuance and are marked-to-market each reporting period with changes in fair value recorded to the Company's income statement as "Net change in fair value of derivative liabilities." The Company has utilized a third party valuation firm to fair value the embedded derivatives using a lattice model with layered discounted probability-weighted cash flow methods.
The fair value of the derivative liabilities are subject to the changes in the trading value of the Company's common stock, as well as other factors. As a result, the Company's financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of the Company's stock at the balance sheet date and the amount of shares converted by note holders. Consequently, our financial position and results of operations may vary from quarter-to-quarter based on conditions other than our operating revenues and expenses.
Plan of Operations
We believe that there are six critical elements for the building of a successful research & development company that has the capacity to manufacture technology for the implementation of immediate and long-term solutions to the global challenges of air, water, and land pollution.
1.
People - this includes a qualified board of directors, advisory board members, management, employees, shop personnel, Q.C., project managers, journeymen, welders, machinists, CNC operators, cad cam, shop planners, senior engineers, tool & design, maintenance personnel, calibrators & inspectors, sheet metal fabricators, deburring & finishing personnel, purchasers, transporters, CNC trainers and consultants, etc.;
2.
Projects - a credible portfolio of projects that have the appropriate risk-return ratio in order to generate potentially significant shareholder value;
3.
Capital - based upon the reputation of the people and the quality of the projects, there must be sufficient capital in order to launch the company and to provide for additional fundings;
4.
Technology - the most advanced interpretation methods, techniques and methods should be utilized in order to maximize the potential for finding and developing immediate and long term solutions to the global challenges of air, water, and land pollution;
5.
Favorable positioning - the international influence of the oil and gas companies along with the automotive & diesel industries requires a combination of secured relationships with their appointed leadership in these various industries as well as with all the various local and international governmental entities; and
6. Manufacturing capability and equipment- the competitive nature of the automotive &diesel industry requires a unique approach and a significant capital commitment in order to secure the latest in hi-tech equipment, technology, research, and the creation of numerous patents as well as to expedite mass production.
People:
In August 2004 Savi Media Group was founded by Serge Monros and Mario Procopio. Serge Monros sold the Crankcase Ventilation technologies to Savi Media that he personally developed over the last 17 years. Mario Procopio was hired as the President, Chief Executive Officer and director with a mandate to acquire the initial funding for the planned projects and to assist in aggressively transforming us into an emerging research and development company in the field of automotive and diesel retrofitting and pollution control. In August 2004, enough capital was obtained to acquire a bulletin board company, pay off many of its existing debts, and begin to launch the varied projects of which the DynoValve is one of several projects.
We have established a Strategic Advisory Board and recruited qualified individuals to develop marketing strategies, feasibility studies, and update our business plan. Among those are Retired U.S. General Alexander M. Haig, Jr., Alexander P. Haig, John Hewitt, Marketing Specialist, and John Dunlap, former Executive Director of CalTrans.
Projects:
During 2006, we further refined our strategic plan and have determined that the maximum value to all of our shareholders is best served by targeting three focused project areas that provide for long-term growth from our invested capital. The three major project areas are as follows:
An R & D lab and adjacent offices
We have established an R & D lab with its adjacent offices located at 2530 S. Birch St. Santa Ana, CA. 92707. We have also negotiated with G & K Auto in acquiring a 270,000 square foot R & D lab and office in Tian Jin, China in the Auto Trade - Free Trade Zone in order to test and retrofit internal combustion engines both stationary and in automotive applications.
Implement the initial testing phases in order to secure revenues, licensing agreements, and contracts.
We hope to continue to test our emission control device on select diesel engines in order to obtain certification and validation of our technology. However, we currently lack the financial resources to continue testing. We hope to obtain an Executive Order from the California Air Resource Board which allows us to legally sell our product in California. This will assist in obtaining contracts and purchase orders. The monthly cost for each product testing is approximately $60,000 and completion of testing should be accomplished in six to nine months assuming there are no delays. Phase one testing on a new diesel engine at California Environmental Engineering indicated notable reduction in tailpipe emissions and Particulate Matter (PM) while improving fuel economy. The reductions were 5.1% in hydrocarbons, 5.1% in carbon monoxide, 5.5% in nitrogen oxides, while increasing fuel economy by 0.3%.
Become a technology partner to the various entities that are focused on environmental solutions.
We are presently participating in a consortium of companies with emission reduction technologies for the problem solving of both our local environmental challenges and to assist in China’s pursuit of immediate solutions to the particular needs in their environment. At this time we have not engaged in formal agreements with any company or initiated any actions or plans and have not committed any funds.
During the years ended December 31, 2012 and 2011, we had limited sales and we expect to require additional cash of a minimum of approximately $2,000,000 over the next twelve months. Those funds, if available, will be used for continued operation in the development stage. Additional financing will need to be obtained. Due to our still being in the development stage, sources of funding may not be available on terms that are acceptable to management and existing stockholders, or may include terms that will result in substantial dilution to existing stockholders.
Results of Operations
During the period from inception, August 13, 2002, to December 31, 2010, we had not generated any revenue from operations. During the year ended December 31, 2012, we generated $101,362 in revenues. This represented a growth of 80% over 2011 revenues of $56,240. Despite the growth in revenue, expenses far exceed revenue as loss from operations for 2012 was $4,416,000, a 9.2% improvement over 2011 loss from operations of $4,863,030.
During the year ended December 31, 2012, we generated $9,099,776 in Other Income/Expense. During the year ended December 31, 2011, we generated $57,694,847. Other Income/Expense consists of change in fair value of derivative instruments, interest expense, loss on debt settlement, loss on legal settlement, change in fair value of rescission liability, and registration rights expense. The primary reason for the drop in Other Income from 2011 to 2012 was due to a drop in the change in the fair value of derivative instruments.
Net profit for the year ended December 31, 2012 was 4,683,776. This is a drop from the net profit for the year ended December 31, 2011 of $52,831,817. The drop in net profit is primarily due to a drop in the Other Income from a drop in the change in fair value of derivative instruments.
At December 31, 2012, we are in a negative working capital position of $8,222,829 and had a stockholders' deficit of $8,244,047. Our auditors have opined that such matters raise substantial doubt about our ability to continue as a going concern. We financed our operations mainly through the sale of common stock and have been entirely dependent on outside sources of financing for continuation of operations. We will continue to pursue funding for our business. There is no assurance that we will continue to be successful in obtaining additional funding on attractive terms or at all, nor that the projects towards which additional capital is assigned will generate revenues at all.
Plan of Operation
During the year ended December 31, 2012, we had limited operations and we expect to require additional cash of approximately $2,000,000 over the next twelve months. Those funds will be used to expand sales.
Our plan of operations will require sources of funding that may not be available on terms that are acceptable to management and existing stockholders, or may include terms that will result in substantial dilution to existing stockholders.
Liquidity and Capital Resources
As of December 31, 2012, the Company had $10,839 in cash, $261 in accounts receivable, $100,147 in inventory, $14,785 in net fixed assets and $76,422 in pre-paid assets.
Total current liabilities were $8,410,498 as of December 31, 2012, consisting of convertible debt, net, of $730,742, derivative liabilities of $1,520,308, accounts payable and accrued liabilities of $2,210,579, notes payable of $25,778, settlement payable of $1,580,252, rescission liability of $2,183,544 and accounts payable assumed in recapitalization of $159,295.
We had a negative working capital of $8,222,829 as of December 31, 2012.
As a result, our independent registered public accounting firm, in its report dated February 13, 2015, has expressed substantial doubt about our ability to continue as a going concern.
Our average monthly operational expenses have been $370,588 per month for the year ended December 31, 2012.
Our ability to continue as a going concern is dependent upon several factors. These factors include our ability to:
· further implement our business plan;
· obtain additional financing or refinancing as may be required;
· and increase revenues.
We believe it is imperative that we raise an additional $5,000,000 of capital in order to implement our business plan. We are attempting to raise additional funds through debt and/or equity offerings. We intend to use any funds raised to pay down debt and to provide us with working capital. There can be no assurance that any new capital would be available to us or that we would have adequate funds for our operations, whether from our revenues, financial markets, or other arrangements will be available when needed or on terms satisfactory to us. Any additional financing may involve dilution to our then-existing shareholders.
On July 10, 2006, we entered into a Securities Purchase Agreement with Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10% secured convertible debentures in the aggregate principal amount of $2,970,000 of which $1,670,000 was advanced immediately. We entered into an amended and restated securities purchase agreement with Cornell on August 17, 2006. The second installment of $200,000 was advanced on August 17, 2006. The third installment of $600,000 was advanced on September 1, 2006. The last installment of $500,000 was to be advanced two business days prior to a registration statement being declared effective by the SEC. A portion of the funds advanced were used to pay off the existing convertible debenture and other advances made by Golden Gate Investors.
In connection with the securities purchase agreement, we agreed to issue Cornell warrants to purchase an aggregate 2,900,000,000 shares of common stock, exercisable for a period of five years as follows:
All of the warrants were issued upon closing. We also issued to the investor 30 million shares of restricted common stock as a commitment fee.
The debentures matured on the second anniversary of the date of issuance and bore interest at the annual rate of 10%. Holders may convert, at any time, any amount outstanding under the debentures into shares of our common stock at a conversion price per share equal to $0.013. Beginning the earlier of (i) the first business day of the month immediately following the month in which a registration statement is first declared effective or (ii) November 1, 2006, and continuing on the first business day of each calendar month thereafter, we are required to make a mandatory redemption payment of $225,000 and accrued and unpaid interest, which payment can be made in cash or in restricted common stock.
We had the option, in our sole discretion, to settle the monthly mandatory redemption amount by (i) paying the investor cash in an amount equal to 115% of the monthly mandatory redemption amount, or (ii) issuing to the investor the number of shares of common stock equal to the monthly mandatory redemption amount divided by $0.007, provided, however, that in order for us to issue shares upon payment of the monthly mandatory redemption amount (A) a registration statement is effective, (B) no event of default shall have occurred, and (C) the closing bid price for our common stock shall be greater than the redemption conversion price (currently $0.007) as of the trading day immediately prior to the redemption date. However, in the event that (A) a registration statement is effective, (B) no event of default shall have occurred, and (C) the closing bid price for our common stock is less than the redemption conversion price (currently $0.007) but is greater than $0.003, we shall have the option to settle mandatory redemptions by issuing to the investor the number of shares of common stock equal to the mandatory redemption amount divided by the default conversion price ($0.003).
In the event that certain events of default, such as failure to pay principal or interest when due, failure to issue common stock upon conversion or the delisting or lack of quotation of our common stock, the redemption conversion price will be reduced to the default conversion price.
Cornell had agreed to restrict its ability to convert the debenture and exercise the warrants and receive shares of our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of our common stock.
We, at our option, had the right with three business days advance written notice, to redeem a portion or all amounts outstanding under this debenture prior to the maturity date provided that the closing bid price of our common stock, is less than $0.013 at the time of the redemption. In the event of a redemption, we are obligated to pay an amount equal to the principal amount being redeemed plus a 15% redemption premium, and accrued interest.
In connection with the Purchase Agreement, we also entered into a registration rights agreement, as amended, providing for the filing, within 60 days of closing, of a registration statement with the Securities and Exchange Commission registering the common stock issuable upon conversion of the debentures. We are obligated to use our best efforts to cause the registration statement to be declared effective no later than 90 days after filing the registration statement and to insure that the registration statement remains in effect until the earlier of (i) all of the shares of common stock issuable upon conversion of the debentures have been sold or (ii) July 10, 2008. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the Registration Statement with the Securities and Exchange Commission no later than September 8, 2006, or if the registration statement is not declared effective by November 22, 2006, we are required to pay to Cornell, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the debentures.
In connection with the securities purchase agreement, we executed a security agreement in favor of the investor granting them a first priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The security agreement states that if an event of default occurs under the secured convertible debentures or security agreements, the investor has the right to take possession of the collateral, to operate our business using the collateral, and has the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements. As of December 31, 2010, the Company was in default on this debt.
We have no other commitments from officers, directors or affiliates to provide funding. If we are unable to obtain debt and/or equity financing upon terms that we deem sufficiently favorable, or at all, it would have a materially adverse impact upon our ability to pursue our business strategy and maintain our current operations. As a result, it may require us to delay, curtail or scale back some or all of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
There were no recent accounting pronouncements that have had or are likely to have a material effect on our financial position or results of operations.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS.
See Financial Statements beginning on this Annual Report on Form 10-K.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On November 14, 2011, SaviCorp (the "Company") dismissed Ham, Langston and Brezina LLP ("HLB") as its independent public accounting firm and appointed M&K CPAS, PLLC ("M&K") as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2007.
HLB's reports on the Company's financial statements as of and for the fiscal years ended December 31, 2006 and December 31, 2005 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles. However, HLB did include an explanatory paragraph in its audit report relative to a going concern uncertainty for the years ended December 31, 2006 and 2005.
During the fiscal years ended December 31, 2005 and December 31, 2006 there were (i) no "disagreements" as that term is defined in Item 304(a)(1)(iv) of Regulation S-K, between the Company and HLB on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of HLB would have caused HLB to make reference to the subject matter of the disagreement in their reports on the financial statements for such years, and (ii) no "reportable events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
During the fiscal years ended December 31, 2012, December 31, 2011, December 31, 2010, December 31, 2009, December 31, 2008, and December 31, 2007 and the subsequent interim and annual periods through February 13, 2015, neither the Company nor anyone acting on its behalf has consulted with M&K with respect to (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company that M&K concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue or (ii) any matter that was either the subject of a "disagreement" or "reportable event" as those terms are defined in Item 304(a)(1) of Regulation S-K.
ITEM 8A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. As of December 31, 2012, the Company’s management carried out an evaluation, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company’s system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective, as of the date of their evaluation, for the purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934. This assessment was made based on the need to amend prior filings due to embedded derivatives within various convertible securities and the lack of sufficient personnel to process transactions. We have hired an outside expert to evaluate and value derivative financial instruments in any and all convertible securities and when we obtain additional financing will hire additional personnel and implement procedures to properly account for and disclose all transactions.
b) Changes in internal controls. There were no changes in internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is likely to materially effect, the Company’s internal control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
ITEM 9.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The following information sets forth the names of our officers and directors, their present positions with us, and their biographical information.
Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Currently there are five seats on our board of directors.
Currently, our Directors are not compensated for their services, although their expenses in attending meetings are reimbursed. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Biographical resumes of each officer and director are set forth below.
Mr. Serge Monros has been the Chief Technology Officer and a director since August 2004. Since January, 2007, Mr. Monros has also served as the Chief Executive Officer. Since January, 2009, Mr. Monros has also served as the Chief Financial Officer. Since 2004, Mr. Monros has been the owner of His Divine Vehicle, a Santa Ana, California technology company.
Mr. Rudy Rodriguez has been our Chief Operating Officer since June 2005 and a director since November 2005. Since February 2000, Mr. Rodriguez has been the procurement manager for American Range, a commercial cooking equipment manufacturer located in Pacoima, California. Prior to February 2000, Mr. Rodriguez was the director of purchasing at Wilbur Curtis Company, Inc., a commercial coffee and tea equipment manufacturer located in Los Angeles, California.
Mr. Phil Pisanelli has been a director since August 2004. Since January 1981, Mr. Pisanelli has been the calibration manager for Boeing, Inc., located in Palmdale, California.
Audit Committee
The Board of Directors was reconfigured in January, 2007. The previous members of the Audit Committee of the Board as of December 31, 2005 are no longer directors. The present Board has not appointed an Audit Committee. None of the current Board of Directors is qualified to serve as an “audit committee financial expert”, as defined in the Regulations of the Securities and Exchange Commission. Phil Pisanelli is our only “independent director”, as defined in the Regulations of the Securities and Exchange Commission.
Code of Ethics
The Company has adopted a “Code of Business Ethics for Savi Media Group, Inc.” The Code is applicable to all employees of the Company, including its principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. The Company will provide a copy of the Code of Ethics, without charge, to any person who submits a request in writing to the President of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of the Company's Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they filed.
We have been provided with copies of all forms (3, 4 and 5) filed by officers, directors, or ten percent shareholders within three days of such filings. Based on our review of such forms that we received, or written representations from reporting persons that no Forms 5s were required for such persons, we believe that, during fiscal 2007, all Section 16(a) filing requirements have been satisfied on a timely basis for members of the Board of Directors and Executive Officers.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth certain information regarding our CEO and each of our most highly-compensated executive officers whose total annual salary and bonus for the fiscal years ending December 31, 2012, 2011, and 2010 exceeded $100,000. Of the salaries shown during 2012, 2011, and 2010, $10,800, $18,833 and $0 were paid. The remaining was accrued as of December 31, 2012:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Employment/Consultant Agreements
We have no employment or consulting agreements with any of our officers.
Remuneration of Directors
We currently do not have in effect a policy regarding compensation for serving on our board of directors. However, we do reimburse our directors for their reasonable expenses incurred in attending meetings of our board and our non-employee directors are periodically granted shares or options to purchase shares of our common stock.
Stock Option Plans
The 2005 Incentive Stock Plan was adopted by the Board of Directors and approved by the stockholders in August 2005. The 2005 Plan provides for the issuance of up to 25,000,000 shares and/or options.
2005 Incentive Stock Plan
The primary purpose of the 2005 Incentive Stock Plan is to attract and retain the best available personnel for us in order to promote the success of our business and to facilitate the ownership of our stock by employees. The 2005 Incentive Stock Plan is administered by our Board of Directors. Under the 2005 Incentive Stock Plan, key employees, officers, directors and consultants are entitled to receive awards. The 2005 Incentive Stock Plan permits the granting of incentive stock options, non-qualified stock options and shares of common stock with the purchase price, vesting and expiration terms set by the Board of Directors.
Option/Stock Appreciation Right Grants in 2011
None.
Aggregate Option/SAR Exercises in 2011 and December 31, 2012 Option Values
None.
Equity Compensation Plan Information
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following tables sets forth, as of December 31, 2012, the number of and percent of our common stock beneficially owned by
· by each person who is known by us to beneficially own more than 5% of our common stock;
· by each of our officers and directors; and
· by all of our officers and directors as a group.
We believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
A person is deemed to be the beneficial owner of securities that can be acquired by him within 60 days from December 31, 2012 upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of December 31, 2012 have been exercised and converted.
Savi Media Group, Inc.
Related Parties
December 31, 2012
* Less than 1%.
(1)
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of December 31, 2010 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
(2)
For purposes of calculating the percentage beneficially owned, the number of shares of each class of stock deemed outstanding includes 4,756,016,919 common shares; 5,953,233 Preferred "A" Shares and 4,409,609 Preferred "C" Shares outstanding as of December 31, 2012.
(3)
Includes 196,100,000 shares of common stock, 349,142,300 shares of common stock underlying series A convertible preferred stock, 20,241,200 shares of common stock underlying series C convertible preferred stock, and includes the conversion of the principal amount of 204,302 plus accrued interest through 12/31/12 of $49,796 converting into common shares at the conversion rate of $0.0005 subject to ownership limitations, owned by His Divine Vehicle, Inc., of which Mr. Monros is the Chief Executive Officer.
(4)
Includes 11,000,000 shares of common stock and 1,000,000 shares of common stock underlying series A convertible preferred stock.
(5)
Includes 52,000,000 shares of common stock and 50,000,000 shares of common stock underlying series C convertible preferred stock.
(6)
Includes 196,000,000 shares of common stock, 349,142,300 shares of common stock underlying series A convertible preferred stock, 20,241,200 shares of common stock underlying series C convertible preferred stock, and includes the conversion of the principal amount of 204,302 plus accrued interest through 12/31/12 of $49,796 converting into common shares at the conversion rate of $0.0005 subject to conversion limitations.
(7)
Includes 595,000,000 shares of options to acquire common stock at an exercise price of $0.0005.
Series A and C Voting Rights
Each share of Series A and C convertible preferred stock shall be entitled to cast that number of votes per share as is equal to the number of votes that holder would be entitled to cast had such holder converted his shares into shares of Common Stock on the record date for such vote. Each share of Series A and Series C convertible preferred stock is convertible into 100 shares of common stock.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 6,000,000,000 shares of Common Stock, $0.01 par value. As of December 31, 2012, there were 4,756,016,623 shares of common stock issued and outstanding. Holders of the common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights.
We have engaged WorldWide Stock Transfer, LLC as independent transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue 40,000,000 shares of preferred stock, $0.01 par value per share. As of December 31, 2012, there were 5,953,233 shares of series A preferred stock issued and outstanding and 4,409,609 shares of series C preferred stock issued and outstanding. The shares of preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors. The board of directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of Nevada.
The series A and series C preferred stock provides for conversion on the basis of 100 shares of common stock for each share of preferred stock converted, with conversion at the option of the holder or mandatory conversion upon restructure of the common stock and holders of the series A and series C preferred stock vote their shares on an as-converted basis. Holders of the series A and series C preferred stock participates on distribution and liquidation pari passu with the holders of the common stock. We have also filed certificates of Designation for series B preferred stock but no stock of this class has been issued as of December 31, 2012. The series B preferred stock provides for conversion on the basis of 10,000 shares of common stock for each share of preferred stock converted, with conversion at the option of the holder or mandatory conversion upon restructure of the common stock and holders of the series B preferred stock vote their shares on an as-converted basis. Holders of the series B preferred stock participates on distribution and liquidation pari passu with the holders of the common stock.
WARRANTS
In connection with a repayment agreement dated July 28, 2011, we issued YA Global warrants to purchase an aggregate of 25,000,000 shares of common stock, exercisable for a period of three years at a price of $0.0119.
The warrants issued to YA Global provide for certain anti-dilution protection in the event that (i) we issue shares of our common stock for a purchase price below the exercise price of the various warrants or in the event we issue options or other convertible securities with a conversion price below the exercise price, (ii) we effectuate a stock split, stock dividend or other form of recapitalization, or (iii) we declare a dividend payment to the holders of our common stocks. The exercise price was reset on August 8, 2011 to $0.0005.
In May 2010, the Company issued 5,000,000 warrants at an exercise price of $0.01 exercisable for a period of 5 years to a law firm for services rendered.
OPTIONS
We issued 2,000,000 options to Herrera Partners. They were issued on August 28, 2006, and expired on August 28, 2011 and had an exercise price of $0.01.
In addition, Gene-Cell, Inc. and Redwood Entertainment Group, Inc. periodically issued incentive stock options to key employees, officers, and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The Board of Directors approved the issuance of all stock options. The exercise price of an option granted was determined by the fair market value of the stock on the date of grant. Reverse stock splits by the Company resulted in the reduction of outstanding options to less than 85 shares with exercise prices that are so high that the exercise of the options will never be practical. Expiration dates range from February, 2012 through July, 2012.
CONVERTIBLE SECURITIES
On December 15, 2009, the Company converted accounts payable due to His Divine Vehicle, Inc. and DS Enterprises, Inc. into convertible promissory notes. The notes bear interest at 8%, matured on April 15, 2010, and convert into common shares at the conversion rate of $0.003 subject to anti-dilution protection. In August, 2011, the conversion rate was reset to $0.0005.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent permitted by Nevada law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our Articles of Incorporation, as amended, is to eliminate our rights and our shareholders (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act” or “Securities Act”) may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as disclosed below, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 10% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties.
We, having previously issued 4,000 shares of common stock towards the acquisition of Savi Group, holder of patents from Serge Monros, subsequently issued 5,000,000 shares of common stock, 5,000,000 shares of Series A preferred stock and 125,000,000 three-year stock options (to acquire shares of our common stock at $0.00025 per share) to Serge Monros to complete the acquisition of the rights to the patents. Serge Monros also received 100,000 shares of common stock as compensation for his role as our chief technology officer. We also issued 17,560,000 shares of common stock to associates of Serge Monros that were involved in the initial development of the patents that he owns.
As consideration for HDV entering into the Product License Agreement, the Company agreed to issue to Mr. Monros and HDV, if and when available, an aggregate of 500 Million shares of Common Stock, 5 Million shares of Series A Preferred Stock and 5 Million shares of Series C Preferred Stock. In September, 2009, HDV was awarded 300,000,000 common shares and 2,500,000 Preferred C shares for services rendered. In July, 2011, HDV and Mr. Monros entered into a revised licensing agreement which modified the prior consideration paid to an aggregate of 600 Million shares of Common Stock, 6.5 Million shares of Series A Preferred Stock and 2.5 Million shares of Series C Preferred Stock.
Mr. Monros has continued the process of preparing patent applications for the other versions of the DynoValve products & related IP. In March, 2013, the Company entered into a five (5) year Master Distribution Agreement with His Divine Vehicle to sell the DynoValve and DynoValve Pro in various internationally territories. The consideration for the agreement was a guaranteeing a minimum annual volume, payment for the DynoValves acquired and a three percent (3%) royalty payment.
We have no policy regarding entering into transactions with affiliated parties.
ITEM 13.
ITEM 13. EXHIBITS.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The aggregate fees billed by our auditors, for professional services rendered for the audit of the Company's annual financial statements for the years ended December 31, 2012 and 2011, and for the reviews of the financial statements included in the Company's Quarterly Reports on Form 10-Q during the fiscal years were $14,000 and $14,000, respectively.
Audit Related
Our auditors billed us $0 and $0 for audited related work during fiscal years 2012 and 2011, respectively.
Tax Fees
Our auditors billed us $0 and $0 for tax related work during fiscal years 2012 and 2011, respectively.
All Other Fees
Our auditors did not bill us for any other services during fiscal years 2012 or 2011.
The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SAVI MEDIA GROUP, INC.
Date: February 17, 2015 By: /s/ SERGE MONROS
Serge Monros
President, Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), Chief Technology Officer and Chairman of the Board of Directors
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.
In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated.
SAVICORP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors
SaviCorp
We have audited the accompanying balance sheets of SaviCorp (A Corporation in the Development Stage) (the “Company”) as of December 31, 2012 and December 31, 2011 and the related statements of operations, stockholders' deficit and cash flows for the twelve month periods then ended. The financial statements for the period from August 13, 2002 (inception) to December 31, 2012, insofar as it relates to amounts for prior periods through December 31, 2006, is based solely on the report of the other auditors. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SaviCorp as of December 31, 2012 and 2011 and the results of its operations and cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has accumulated net losses in the development stage, has negative working capital, and has a stockholders’ deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
February 13, 2015
SaviCorp
BALANCE SHEETS
December 31, 2011 and 2012
The accompanying notes are an integral part of the financial statements
SaviCorp
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2012 and 2011
The accompanying notes are an integral part of the financial statements
SaviCorp
STATEMENT OF STOCKHOLDERS' DEFICIT
For the Period From December 31, 2010 to December 31, 2012
The accompanying notes are an integral part of the financial statements
SaviCorp
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2012 and 2011
The accompanying notes are an integral part of the financial statements
SAVI CORP
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2012 and 2011
1. Organization and Significant Accounting Policies
SaviCorp (the "Company") is a Nevada Corporation that has acquired rights to "blow-by gas and crankcase engine emission reduction technology" which it intends to develop and market on a commercial basis. The technology is a relatively simple gasoline and diesel engine emission reduction device that the Company intends to sell to its customers for effective and efficient emission reduction and engine efficiency for implementation in both new and presently operating automobiles. The Company is considered a development stage enterprise because it currently has no significant operations, has not yet generated revenue from new business activities and is devoting substantially all of its efforts to business planning and the search for sources of capital to fund its efforts.
The Company was originally incorporated as Energy Resource Management, Inc. on August 13, 2002 and subsequently adopted name changes to Redwood Energy Group, Inc. and Savi Media Group, Inc., upon completion of a recapitalization on August 26, 2002. The re-capitalization occurred when the Company acquired the non-operating public shell of Gene-Cell, Inc. Gene-Cell Inc. had no significant assets or operations at the date of acquisition and the Company assumed all liabilities that remained from its prior discontinued operation as a biopharmaceutical research company. The historical financial statements presented herein are those of Savi Media Group, Inc. and its predecessors, Redwood Energy Group, Inc. and Energy Resource Management, Inc.
The non-operating public shell used to recapitalize the Company was originally incorporated as Becniel and subsequently adopted name changes to Tzaar Corporation, Gene-Cell, Inc., Redwood Energy Group, Inc., Redwood Entertainment Group, Inc., Savi Media Group, Inc., and finally its current name SaviCorp.
Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased, to be cash equivalents. The Company had cash equivalents of $427 as of December 31, 2011 and $10,839 as of December 31, 2012.
Concentration of Credit Risk
Cash and cash equivalents are the primary financial instruments that subject the Company to concentrations of credit risk. The Company maintains its cash deposits with major financial institutions selected based upon management’s assessment of the financial stability. Balances periodically exceed the $100,000 federal depository insurance limit; however, the Company has not experienced any losses on deposits.
Inventory
Inventories are stated at the lower of cost, computed using the first-in, first-out method, or market. If the cost of the inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value.
Furniture and Equipment
Furniture and equipment is recorded at cost. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gains or losses are included in the results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Repairs and maintenance costs are expensed as incurred.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets when events and circumstances indicate that such assets might be impaired and determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Impairments are charged to operations in the period to which events and circumstances indicate that such assets might be impaired.
Intangible Assets
Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company provides a valuation allowance to reduce deferred tax assets to their net realizable value.
Stock-Based Compensation
The Company adopted FASB guidance on stock based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Stock and stock options issued for services and compensation totaled $3,370,273 and $3,241,809 for the years ended December 31, 2011 and 2012, respectively.
Valuation of Derivatives
The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date. We analyzed the derivative financial instruments (the Convertible Notes), in accordance with ASC 815. The objective is to provide guidance for determining whether an equity-linked financial instrument is indexed to an entity’s own stock. This determination is needed for a scope exception which would enable a derivative instrument to be accounted for under the accrual method. The classification of a non-derivative instrument that falls within the scope of ASC 815-40-05 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” also hinges on whether the instrument is indexed to an entity’s own stock. A non-derivative instrument that is not indexed to an entity’s own stock cannot be classified as equity and must be accounted for as a liability. There is a two-step approach in determining whether an instrument or embedded feature is indexed to an entity’s own stock. First, the instrument's contingent exercise provisions, if any, must be evaluated, followed by an evaluation of the instrument's settlement provisions. The Company utilized multinomial lattice models that value the derivative liability within the notes based on a probability weighted discounted cash flow model. The Company utilized the fair value standard set forth by the Financial Accounting Standards Board, defined as the amount at which the assets (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
The derivative liabilities result in a reduction of the initial carrying amount (as unamortized discount) of the Convertible Notes. This derivative liability is marked-to-market each quarter with the change in fair value recorded in the income statement. Unamortized discount is amortized to interest expense using the effective interest method over the life of the Convertible Note. If the Note is converted or the warrants are exercised, the derivative liability is released and recorded as additional paid in capital.
Profit/Loss Per Share
Basic and diluted net profit or loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period. See Note 11 for a discussion of potentially dilutive instruments.
Fair Value of Financial Instruments
The Company includes fair value information in the notes to financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made.
New Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. This amendment explains which modifications constitute troubled debt restructurings (“TDR”). Under the new guidance, the definition of a troubled debt restructuring remains essentially unchanged, and for a loan modification to be considered a TDR, certain basic criteria must still be met. For public companies, the new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructuring occurring on or after the beginning of the fiscal year of adoption. The Company does not expect that the guidance effective in future periods will have a material impact on its financial statements.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will become effective for the Company on January 1, 2012. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact that adoption will have on its financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company on January 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on the Company’s financial position or results of operations.
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114. , Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In October 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification.
These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
We have adopted recently issued accounting pronouncements and have determined that they have no material effect on our financial position, results of operations, or cash flow. We do not expect any recently issued but not yet adopted accounting pronouncements to have a material effect on our financial position, results of operations or cash flow.
2. Going Concern Considerations
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. In 2012, the Company had limited operations and resources. At December 31, 2012, the Company is in a negative working capital position of $8,222,829 and has a stockholders' deficit of $8,244,047. Additionally, as of December 31, 2012 the Company faced substantial challenges to future success as follows:
· The Company is delinquent on critical liabilities such as payments to key consultants.
Such matters raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustment that might result from the outcome of this uncertainty.
The goals of the Company will require a significant amount of capital and there can be no assurances that the Company will be able to raise adequate short-term capital to sustain its current operations in the development stage, or that the Company can raise adequate long-term capital from private placement of its common stock or private debt to emerge from the development stage. There can also be no assurances that the Company will ever attain profitability. The Company's long-term viability as a going concern is dependent upon certain key factors, including:
· The Company's ability to obtain adequate sources of funding to sustain it during its growth stage.
· The ability of the Company to successfully produce and market its gasoline and diesel engine emission reduction device in a manner that will allow it to ultimately achieve adequate profitability and positive cash flows to sustain its operations.
In order to address its ability to continue as a going concern, implement its business plan and fulfill commitments made in connection with its agreement for acquisition of patent rights (See Note 3), the Company hopes to raise additional capital from sale of its common stock. Sources of funding may not be available on terms that are acceptable to the Company and its stockholders, or may include terms that will result in substantial dilution to existing stockholders.
3. Agreement for Acquisition of Patent Rights
On March 31, 2003, the Company entered into a letter of intent to acquire 20% of Savi Group, the name under which Serge Monros was conducting business in the ownership of numerous patents he had developed. The acquisition of 20% of Savi Group was completed in the second quarter of 2004 upon the Company's payment of $38,500 in cash and the issuance of 4,000 shares of the Company's common stock to Serge Monros.
Subsequent to the acquisition, the Company changed its name from Redwood Entertainment Group, Inc. to Savi Media Group, Inc. Serge Monros changed the name of the entity in which he holds the patents to His Divine Vehicle, Inc. (“HDVI”). Further discussions between the Company and Serge Monros led to a September 1, 2004 agreement (the "Agreement") under which the Company acquired 100% of the rights to various patents (the "Patents") owned by Serge Monros. The Agreement was amended and modified on December 30, 2004 and again on April 6, 2005. The most important patented technology, for which the Company acquired rights, was technology to produce a relatively simple gasoline and diesel engine emission reduction device that the Company intends to sell to manufacturers of new vehicles and owners of presently operating automobiles.
The Company does not have the records of the amounts spent in the development of the Patents and is unaware of the amounts expended.
Under the terms of the Agreement as amended, the Company acquired the Patents rights for the following consideration:
· 5,000,000 shares of Series A preferred stock to both Serge Monros, who owned the patents, and Mario Procopio, the Company's founder and Chief Executive Officer. The Series A preferred stock is convertible to and holds voting rights of 100 to 1 of those attributable to common stock. These shares are to remain in escrow for three years, and, accordingly, they will not be converted to common stock during that period.
· 5,000,000 shares of common stock to both Serge Monros and Mario Procopio.
· Three-year stock options to acquire 125,000,000 shares of the Company's common stock at $0.00025 per share to both Serge Monros and Mario Procopio. This provision of the agreement was reached in April 2005. The options to Serge Monros are considered part of the cost of the patent rights under the Agreement. The Options to Mario Procopio will be recognized as compensation expense of $31,250,000 in the second quarter of 2005.
The Agreement represents a three year relationship that may be renegotiated or rescinded at the end of that term if the use of the Patents does not produce revenue equal to costs associated with the Agreement or modified annual cost, whichever is less. The Agreement does not define the terms "Costs associated with the Agreement" or "Modified Annual Costs". Regardless of performance, the Agreement is eligible for renewal and/or modification on September 1, 2007.
In the event the Agreement is rescinded, the Patents and related technology will be returned to Serge Monros. Further, under the terms of the Agreement, the Company is required to build a $5,000,000 research and development lab and a manufacturing plant and Serge Monros will also own those assets, free and clear, in the event the Agreement is rescinded or the Company dissolved.
The Agreement contains two commitments by the Company as follows:
· Serge Monros and Mario Procopio each are to receive monthly compensation of $10,000 per month, depending on revenues and the raising of capital, but not less than $3,000 per month.
· Contingent consideration to Serge Monros of $75,000,000 in cash or in the form of stock options the exercise of which will provide net proceeds to Serge Monros of $75,000,000 over the next ten years. If options are issued, they will bear an exercise price of $0.00025 per share. This provision of the agreement is specifically tied to the performance of the Company and its ability to pay either in cash or stock options.
The Company recorded Patents at cost to Serge Monros because the Agreement resulted in the control of the Company by Serge Monros and Mario Procopio. Further, due to the fact that most costs incurred by Serge Monros in developing the patents represented research and development costs that were immediately expensed, the basis of the Patents has been limited to $38,500, the actual cash paid to Serge Monros under the initial agreement to acquire 20% of Savi Group. In 2006, The Company recorded a $38,500 impairment allowance that reduced the patents to a zero carrying value since it is clear the Company will not meet the requirements of the Agreement, and will likely lose any rights it has to such patents.
The Series A convertible preferred stock and the stock options issued under the Agreement could have a very significant future dilutive effect on stockholders.
HDV, an affiliate of Mr. Monros, manufactures the “DynoValve” and “DynoValve Pro” products and then sells them to the Company for resale pursuant to the Product Licensing Agreement entered into on November 15, 2008, as amended on December 16, 2009. Under the Product Licensing Agreement, the price at which HDV sells the products to the Company is subject to change at any time upon written notice. The Company may determine the prices that it charges to its customers. The Product Licensing Agreement is non-exclusive and automatically renews on an annual basis provided certain sales volumes are achieved and the Company is otherwise not in breach. HDV may, after an applicable cure period, terminate the Product Licensing Agreement earlier if it believes that the Company is deficient in meeting its responsibilities. HDV may amend the Product Licensing Agreement at any time by giving notice to the Company, unless the Company objects within ten days of such notice.
As consideration for HDV entering into the Product Licensing Agreement, the Company agreed to issue to Mr. Monros and HDV, if and when available, an aggregate of 500 Million shares of Common Stock, 5 Million shares of Series A Preferred Stock and 5 Million shares of Series C Preferred Stock.
4. Accounts Payable and Accrued Liabilities
Accounts Payable and Accrued Liabilities at December 31, 2012 and 2011, consisted of the following:
5. Accounts Payable and Accrued Liabilities - Related Party
The $15,000 amount due at December 31, 2011 and December 31, 2012 consist of $10,000 to Serge Monros and $5,000 to Greg Sweeney for payments made on behalf of the Company related to the Herrera Settlement.
6. Accounts Payable Assumed in Recapitalization
Accounts payable assumed in recapitalization, represents the liabilities of the public shell, at the time, Gene-Cell, Inc. that the Company assumed as part of the recapitalization. This balance is comprised of liabilities for legal fees and trade payables incurred by Gene-Cell, Inc. (See Note 1).
7. Settlement Payable
The Company received a letter dated June 7, 2013 with a Civil Complaint titled Arnold Lamarr Weese, et al v. SaviCorp filed in the Northern District of West Virginia. In addition to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's counsel began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants have sued for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts to hold the Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company is finalizing a negotiated settlement and expects to complete the settlement early in 2015. The Company has recorded a $1,580,252 liability based on the current settlement agreement offer.
8. Rescission Liability
The Company received a letter from the Securities and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a “formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena DucesTecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information contained in the subpoena. An index of the source of all such produced information and an authentication declaration were also to be supplied. The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the Company has violated federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the investigation.
The Company initially hired the Los Angeles law firm of Troy Gould to represent us in the matter of this investigation. As of the date of this filing, the Company believes it has provided all requested material to the SEC. Updates on the investigation will be supplied by supplemental filings hereto.
Status of prior private investments; $0 in 2007 (although HDV sold $13,000 of its shares), $0 in 2008 (although HDV sold $445,750 of its shares), $0 in 2009 (although HDV sold $448,000 of its shares), $910,742 in 2010, $1,827,543 in 2011, and $629,500 in the first three quarters of 2012. There is concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required by federal law) and the Company may need to offer rescission rights to the investors.
In 2006, the Company issued shares for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $14,625 in 2008, shares for services valued at $380,500 in 2009, shares for services valued at $236,920 in 2010, shares for services valued at $3,370,273 in 2011, and shares for services valued at $3,165,039 during the first 3 quarters of 2012. We have no plans to offer rescission for these share issuances.
We offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at by Counsel. The results of our rescission offers, in terms of rescission offers accepted by shareholders, were very encouraging. We had four rescissions offers accepted and refunded $13,000 plus interest.
Generally, we believe we have good relationships with our shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered shares from us since January 1, 2007 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any accepted rescission offer. However, there is no assurance that rescission offer acceptances will not have a material effect on our finances or that we will be able to re-pay those electing to rescind in a complete and timely manner. As of the date hereof, the Company has postponed their plans to offer rescission to earlier purchasing shareholders, deeming it advisable to wait until the common stock price increases and they have more operating cash available to pay for the cost of undertaking this endeavor. The Company has booked a liability to account for this rescission liability and marks the liability to market on a quarterly basis. The rescission liability as of 12/31/12 is $2,183,544.
9. Derivatives
In connection with the sale of debt or equity instruments, the Company may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
The Company's derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, the Company estimates fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option.
The following table summarizes the convertible debt and warrant liabilities derivative activity for the period December 31, 2010 to December 31, 2012:
For the year ended December 31, 2012, net derivative income was $13,896,345. For the year ended December 31, 2011, net derivative income was $54,839,304.
The lattice methodology was used to value the convertible notes and warrants issued, with the following assumptions.
The Cornell 7/10/06 convertible note ($2,470,000 balance) matured on 7/10/08. The Cornell 4/02/07 promissory note ($15,000 balance) became convertible upon default and matured. The Cornell 7/10/06 warrants (initial 2,900,000,000 warrants with exercise prices ranging from $0.003 to $0.150 and an expiration date of 7/10/11 reset to 66,000,000,000 warrants at $0.0005) had a term remaining of 0.522 years at 12/31/11. The Cornell debt and warrants were settled in 2011 (see Note 10). The HDV and DSE convertible notes matured on April 1, 2010 and are in default as of 12/31/11 and 12/31/12.
10. Convertible Debt
Cornell:
On July 10, 2006, we entered into a Securities Purchase Agreement with Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10% secured convertible debentures in the aggregate principal amount of $2,970,000 of which $1,670,000 was advanced immediately. We entered into an amended and restated securities purchase agreement with Cornell on August 17, 2006. The second installment of $200,000 was advanced on August 17, 2006. The third installment of $600,000 was advanced on September 1, 2006. The last installment of $500,000 would be advanced two business days prior to a registration statement being declared effective by the SEC. In addition, Cornell issued a note payable of $15,000 on April 2, 2007 that on default became convertible. The Company was in default on all debt to Cornell as of December 31, 2010 due to not paying the balance due at maturity. A portion of the funds advanced were used to pay off the existing convertible debenture and other advances made by Golden Gate Investors totaling $1,016,942. Following is an analysis of the proceeds received and related fees and expenses paid with such proceeds.
Following is an analysis of convertible debt due Cornell at December 31, 2012 and December 31, 2011:
The secured convertible debentures bear interest at 10% and mature two years from the date of issuance. Holders may convert, at any time, any amount outstanding under the secured convertible debentures into shares of the Company’s common stock at a conversion price per share equal to $0.013 beginning the earlier of (i) the first business day of the month immediately following the month in which a registration statement is first declared effective or (ii) November 1, 2006, and continuing on the first business day of each calendar month thereafter, we are required to make a mandatory redemption payment of $225,000 and accrued and unpaid interest, which payment can be made in cash or in restricted shares of our common stock.
The Company has the option, at its sole discretion, to settle the monthly mandatory redemption amount by (i) paying the investor cash in an amount equal to 115% of the monthly mandatory redemption amount, or (ii) issuing to the investor the number of shares of the Company’s common stock equal to the monthly mandatory redemption amount divided by $0.007, which is known as the redemption conversion price, provided, however, that in order the Company to issue shares upon payment of the monthly mandatory redemption amount (A) this registration statement is effective, (B) no event of default shall have occurred, and (C) the closing bid price for our common stock shall be greater than the redemption conversion price as of the trading day immediately prior to the redemption date. However, in the event that (A) this registration statement is effective, (B) no event of default shall have occurred, and (C) the closing bid price for our common stock is less than the redemption conversion price but is greater than $0.003, which is known as the default conversion price, we shall have the option to settle the monthly mandatory redemption amount by issuing to the investor the number of shares of common stock equal to the monthly mandatory redemption amount divided by the default conversion price.
In the event that certain events of default, such as failure to pay principal or interest when due, failure to issue common stock upon conversion or the delisting or lack of quotation of our common stock, the redemption conversion price will be reduced to the default conversion price. The investor has contractually agreed to restrict its ability to convert the debentures and receive shares of the Company’s common stock such that the number of shares of common stock held by it and its affiliates after such conversion does not exceed 4.9% of the then issued and outstanding shares of common stock.
The Company has the right, at its option, with three business days advance written notice, to redeem a portion or all amounts outstanding under the secured convertible debentures prior to the maturity date provided that the closing bid price of the Company’s common stock, is less than $0.013 at the time of the redemption. In the event of a redemption, the Company is obligated to pay an amount equal to the principal amount being redeemed plus a 15% redemption premium, and accrued interest.
In connection with the securities purchase agreement dated July 10, 2006, as amended, the Company granted the investor registration rights. Under the terms of the registration rights the Company was obligated to use its best efforts to cause the registration statement to be declared effective no later than December 7, 2006 and to insure that the registration statement remains in effect until the earlier of (i) all of the shares of common stock issuable upon conversion of the Debentures have been sold or (ii) July 10, 2008.
The Company defaulted on its obligations under the registration rights agreement because the Registration Statement was not declared effective by December 7, 2006. Accordingly, we are required to pay to Cornell, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the secured convertible debentures. Under FASB EITF 00-19-02, the registration rights liability is separated from the derivative liability.
In connection with the securities purchase agreement dated July 10, 2006, the Company executed a security agreement in favor of the investor granting them a first priority security interest in all of the Company’s goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The security agreement states that if an event of default occurs under the secured convertible debentures or security agreement, the investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements.
On or about July 28, 2011, the Company entered into a Repayment Agreement (the “Repayment Agreement”) with YA Global Investments, L.P., a Cayman Islands exempt limited partnership formerly known as Cornell Capital Partners, L.P. (“YA Global”).
Pursuant to the terms of the Repayment Agreement, all of the Company’s obligations under the Financing Documents have been terminated in full. Without limitation, all amounts otherwise due under the Debentures are deemed satisfied in full, the Prior Warrants are deemed cancelled, and any and all security interests granted by the Company in favor of YA Global pursuant to the Financing Documents have been extinguished, including the release of 4,000,000 shares of Series A Preferred Stock held in escrow. In exchange for the foregoing, the Company delivered to YA Global: (i) a one-time cash payment of US$550,000; and (ii) new warrants to purchase up to 25,000,000 shares of Common Stock at an exercise price of $0.0119 (the “Current Warrants”). The Current Warrants expire on or about July 28, 2014. A copy of the Repayment Agreement and Current Warrants have been attached as exhibits to the Form 8-K filed August 2, 2011 and are hereby incorporated in their entirety by reference. The Company recorded a gain on settlement of $19,139,391 based on the book value of the liabilities released and the fair value of the consideration paid.
DS Enterprises:
On December 15, 2009, the Company converted accounts payable due to DS Enterprises, Inc. 	into a convertible promissory note. The note bears interest at 8%, matured on April 15, 2010, and converts into common shares at the conversion rate of $0.003 (reset to $0.0005) subject to anti-dilution protection. This note was in default as of December 31, 2012 due to lack of payment upon maturity.
Following is an analysis of convertible debt due DS Enterprises at December 31, 2012 and December 31, 2011:
This note is considered a derivative instrument due to the anti-dilution protection related to the conversion feature. The Company recorded a derivative liability upon issuance which resulted in the note discount ($597,440 at issuance) and a loss on modification recorded as interest expense in the amount of $344,157. The Company also recorded $79,945 in interest expense upon the conversion of accounts payable to notes payable.
His Divine Vehicle - Related Party:
On December 15, 2009, the Company converted $204,302 of accounts payable due to His Divine Vehicle, Inc. into a convertible promissory note. The note bears interest at 8%, matured on April 15, 2010, and converts into common shares at the conversion rate of $0.003 (reset to $0.0005) subject to anti-dilution protection. This note was in default as of December 31, 2012 due to lack of payment upon maturity.
Following is an analysis of convertible debt - related party at December 31, 2012 and December 31, 2011:
This note is considered a derivative instrument due to the anti-dilution protection related to the conversion feature. The Company recorded a derivative liability upon issuance which resulted in the note discount ($204,302 at issuance) and a loss on modification recorded as interest expense in the amount of $131,967 in 2009.
Steve Botkin:
On July 17, 2012, the Company entered into a convertible promissory note with Steve Botkin. The note bears interest at 12%, matures on July 17, 2015 and converts into common shares at the conversion rate of 80% of market. On August 9, 2012, the Company entered into a convertible promissory note with Steve Botkin. The note bears interest at 12%, matures on August 9, 2015 and converts into common shares at the conversion rate of 80% of market.
Following is an analysis of convertible debt due Steve Botkin at December 31, 2012 and December 31, 2011:
This note is considered a derivative instrument due to the variable conversion feature. The Company recorded a derivative liability upon issuance which resulted in the note discount ($71,024 at issuance).
11. Notes Payable
In connection with the Herrera Settlement Agreement, the Company issued promissory notes to former officers who made payments on behalf of the company. The Notes were issued on November 15, 2008, bear interest of 12% and are due in one year from the date of issuance. The total due as of December 31, 2012 and December 31, 2011 includes $10,778 due to former officers who made payments or waived fees as part of the Herrera Settlement Agreement and the $15,000 due to Mr. Monros and Mr. Sweeney recorded as related party debt to Mr. Monros and Mr. Sweeney.
The Company issued Steve Botkin a note payable of $80,000 for accrued and unpaid wages. On 2/7/12, the Company issued Steve Botkin 80,000,000 shares as full consideration for the note payable. Based on the market price of the stock at the time of issuance, the Company recorded a loss on settlement of $928,000.
The Company has received $30,000 as an advance from an investor as of 12/31/12. The advance does not bear interest and was repaid in 2013.
12. Income Taxes
The Company files a U.S. Federal income tax return. The components of the net loss before income tax benefit for the years ended December 31, 2012 and 2011 are as follows:
The components of the Company's deferred tax assets at December 31, 2012 and 2011 are as follows:
At December 31, 2012, the Company had generated US net operating loss carry-forwards of approximately $2,439,735 which will expire in various years between 2012 and 2029. The benefit from utilization of net operating loss carry forwards incurred prior to December 30, 2004 is significantly limited in connection with a change in control of the Company (See Note 3). Such benefit could be subject to further limitations if significant future ownership changes occur in the Company. The Company believes that a significant portion of its unused net operating loss carry forwards will never be utilized due to expiration or limitations on use due to ownership changes.
At December 31, 2012 and December 31, 2011, the Company has no uncertain tax positions.
13. Commitments and Contingencies
Legal Proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.
On or about July 28, 2011, SaviCorp, a Nevada corporation, formerly known as Savi Media Group, Inc. (the “Company”) entered into a Repayment Agreement (the “Repayment Agreement”) with YA Global Investments, L.P., a Cayman Islands exempt limited partnership formerly known as Cornell Capital Partners, L.P. (“YA Global”).
On or about July 10, 2006, the Company and YA Global, then known as Cornell Capital Partners, L.P., entered into a Securities Purchase Agreement which was subsequently amended and restated on August 17, 2006 (collectively the “SPA”) wherein the Company issued and sold to YA Global secured convertible debentures in the aggregate amount of approximately US$2,485,000 (collectively, the “Debentures”) and certain warrants (collectively the “Prior Warrants” and with the Debentures, the “Securities”) to purchase an aggregate of 2,900,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”).
In connection with the SPA, the Company and YA Global entered into ancillary agreements, including a Security Agreement, an Insider Pledge and Escrow Agreement, a Registration Rights Agreement, and other related documents (the SPA and such ancillary agreements are collectively referred to hereinafter as “Financing Documents”). Copies of the Financing Documents have been attached to the Company’s prior filings with the United States Securities and Exchange Commission (the “SEC”) and are hereby incorporated in their entirety by reference.
Pursuant to the terms of the Repayment Agreement, all of the Company’s obligations under the Financing Documents have been terminated in full. Without limitation, all amounts otherwise due under the Debentures are deemed satisfied in full, the Prior Warrants are deemed cancelled, and any and all security interests granted by the Company in favor of YA Global pursuant to the Financing Documents have been extinguished, including the release of 4,000,000 shares of Series A Preferred Stock held in escrow. In exchange for the foregoing, the Company delivered to YA Global: (i) a one-time cash payment of US$550,000; and (ii) new warrants to purchase up to 25,000,000 shares of Common Stock at an exercise price of $0.0119 (the “Current Warrants”). The Current Warrants expire on or about July 28, 2014. A copy of the Repayment Agreement and Current Warrants have been attached as exhibits to the Form 8-K filed August 2, 2011 and are hereby incorporated in their entirety by reference.
The Company received a letter from the Securities and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a “formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena DucesTecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information contained in the subpoena. An index of the source of all such produced information and an authentication declaration were also to be supplied. The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the Company has violated federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the investigation.
The Company initially hired the Los Angeles law firm of Troy Gould to represent us in the matter of this investigation. As of the date of this filing, the Company believes it has provided all requested material to the SEC. Updates on the investigation will be supplied by supplemental filings hereto.
Status of prior private investments; $0 in 2007 (although HDV sold $13,000 of its shares), $0 in 2008 (although HDV sold $445,750 of its shares), $0 in 2009 (although HDV sold $448,000 of its shares), $910,742 in 2010, $1,827,543 in 2011, and $629,500 in the first three quarters of 2012. There is concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required by federal law) and the Company may need to offer rescission rights to the investors.
In 2006, the Company issued shares for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $14,625 in 2008, shares for services valued at $380,500 in 2009, shares for services valued at $236,920 in 2010, shares for services valued at $3,370,273 in 2011, and shares for services valued at $3,165,039 during the first 3 quarters of 2012. We have no plans to offer rescission for these share issuances.
We offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at by Counsel. The results of our rescission offers, in terms of rescission offers accepted by shareholders, were very encouraging. We had four rescissions offers accepted and refunded $13,000 plus interest.
Generally, we believe we have good relationships with our shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered shares from us since January 1, 2007 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any accepted rescission offer. However, there is no assurance that rescission offer acceptances will not have a material effect on our finances or that we will be able to re-pay those electing to rescind in a complete and timely manner. As of the date hereof, the Company has postponed their plans to offer rescission to earlier purchasing shareholders, deeming it advisable to wait until the common stock price increases and they have more operating cash available to pay for the cost of undertaking this endeavor. The Company has booked a liability to account for this rescission liability and marks the liability to market on a quarterly basis. The rescission liability as of 12/31/12 is $2,183,544.
The Company received a letter dated June 7, 2013 with a Civil Complaint titled Arnold Lamarr Weese, et al v. SaviCorp filed in the Northern District of West Virginia. In addition to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's counsel began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants have sued for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts to hold the Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company is negotiating a settlement and expects to reach a settlement to release the Company and Mr. Monros of any alleged liability in early 2015. The Company has recorded a settlement liability of $1,580,282 which represents an estimate of the fair value of the consideration to be paid to the Plaintiffs based on most recent settlement discussions. This amount includes the current value of approximately 300,000,000 shares to be issued and the $100,000 in legal fees to be paid.
Lease Commitments
The Company is currently leasing office space and adjacent research and development space on an annual basis from CEE, LLC, for $110,000 per year.
14. Stockholders' Equity
Common Stock
Following is a description of transactions affecting common stock for the years ended December 31, 2011 and 2012.
Year Ended December 31, 2011
In January 2011, the Board of Directors authorized the issuance of 12,550,000 common shares to accredited and non-accredited investors for total proceeds of $41,500.
In February 2011, the Board of Directors authorized the issuance of 82,525,000 common shares to accredited and non-accredited investors for total proceeds of $411,500.
In March 2011, the Board of Directors authorized the issuance of 6,562,858 common shares to accredited and non-accredited investors for total proceeds of $41,100.
In April 2011, the Board of Directors authorized the issuance of 2,642,857 common shares to accredited and non-accredited investors for total proceeds of $12,100.
In May 2011, the Board of Directors authorized the issuance of 7,766,667 common shares to accredited and non-accredited investors for total proceeds of $24,000.
In June 2011, the Board of Directors authorized the issuance of 58,155,555 common shares to accredited and non-accredited investors for total proceeds of $185,000.
In July 2011, the Board of Directors authorized the issuance of 209,160,541 common shares to accredited and non-accredited investors for total proceeds of $696,343.
In July, 2011 His Divine Vehicle revised its licensing agreement to issue 1,500,000 Preferred A shares and 100,000,000 common shares in exchange for 2,500,000 Preferred C shares.
In August 2011, the Board of Directors authorized the issuance of 52,200,000 common shares to accredited and non-accredited investors for total proceeds of $68,000.
In September 2011, the Board of Directors authorized the issuance of 28,000,000 common shares to accredited and non-accredited investors for total proceeds of $44,000.
In October 2011, the Board of Directors authorized the issuance of 36,000,000 common shares to accredited and non-accredited investors for total proceeds of $88,000.
In November 2011, the Board of Directors authorized the issuance of 58,800,000 common shares to accredited and non-accredited investors for total proceeds of $126,000. The Company converted 9,000 of convertible debt and 57,803 of derivative liability into 9,000,000 common shares
In December 2011, the Board of Directors authorized the issuance of 35,000,001 common shares to accredited and non-accredited investors for total proceeds of $70,000.
Throughout the year, the Board of Directors also authorized the issuance of 261,399,579 common shares for services rendered by independent contractors issuances based on the market value of the stock.
Throughout the year, 1,143,750 Preferred A shares were converted to 114,375,000 common shares and 1,392,333 Preferred C shares were converted to 139,233,300 common shares.
In May, 2011, the Company borrowed 128,414,606 common shares from directors of the Company.
In August, 2011, the Company repaid 200,000,000 common shares that were loaned to the Company.
Year Ended December 31, 2012
In January 2012, the Board of Directors authorized the issuance of 14,603,571 common shares to accredited and non-accredited investors for total proceeds of $45,500.
In February 2012, the Board of Directors authorized the issuance of 119,500,000 common shares to accredited and non-accredited investors for total proceeds of $248,500. The Company converted $80,000 of debt, $11,000 of convertible debt and $377,382 of derivative liability into 102,000,000 common shares
In March 2012, the Board of Directors authorized the issuance of 37,866,667 common shares to accredited and non-accredited investors for total proceeds of $93,200. The Company converted 20,000 of convertible debt and $539,025 of derivative liability into 40,000,000 common shares
In April 2012, the Board of Directors authorized the issuance of 57,260,000 common shares to accredited and non-accredited investors for total proceeds of $122,300.
In May 2012, the Board of Directors authorized the issuance of 12,000,000 common shares to accredited and non-accredited investors for total proceeds of $30,000.
In June 2012, the Board of Directors authorized the issuance of 14,250,000 common shares to accredited and non-accredited investors for total proceeds of $47,000.
In July 2012, the Board of Directors authorized the issuance of 4,375,000 common shares to accredited and non-accredited investors for total proceeds of $35,000.
In October 2012, the Board of Directors authorized the issuance of 40,000,000 common shares to accredited and non-accredited investors for total proceeds of $20,000.
In November 2012, the Board of Directors authorized the issuance of 32,000,000 common shares to accredited and non-accredited investors for total proceeds of $20,000.
In December 2012, the Board of Directors authorized the issuance of 12,500,000 common shares to accredited and non-accredited investors for total proceeds of $10,000.
Throughout the year, the Board of Directors also authorized the issuance of 414,343,445 common shares for services rendered by independent contractors issuances based on the market value of the stock.
Throughout the year, 359,500 Preferred A shares and 1,705,333 Preferred C shares were converted to 206,483,000 common shares.
In March, 2012, the Company repaid 50,000,000 common shares previously borrowed from directors of the Company.
Stock Options
Gene-Cell, Inc., the company, used in the recapitalization (See Note 1) periodically issued incentive stock options to key employees, officers, and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The Board of Directors approved the issuance of all stock options. The exercise price of an option granted was determined by the fair market value of the stock on the date of grant. Reverse stock splits by the Company resulted in the reduction of outstanding options to less than 85 shares with exercise prices that are so high that the exercise of the options will never be practical. Expiration dates ranged from March, 2012 through July, 2012. There are no stock options outstanding as of 12/31/12.
Incentive Stock Plan
During the year ended December 31, 2005 the 2005 Incentive Stock Plan was adopted by the Company’s Board of Directors and approved by the stockholders in August 2005. The 2005 Plan provides for the issuance of up to 25,000,000 shares and/or options. The primary purpose of the 2005 Incentive Stock Plan is to attract and retain the best available personnel for us in order to promote the success of our business and to facilitate the ownership of our stock by employees. The 2005 Incentive Stock Plan is administered by our Board of Directors. Under the 2005 Incentive Stock Plan, key employees, officers, directors and consultants are entitled to receive awards. The 2005 Incentive Stock Plan permits the granting of incentive stock options, non-qualified stock options and shares of common stock with the purchase price, vesting and expiration terms set by the Board of Directors. No options have been issued under the Plan as of December 31, 2011.
Stock Warrants
In connection with the securities purchase agreement (See Note 6), we agreed to issue Cornell warrants to purchase an aggregate 2,900,000,000 shares of common stock, exercisable for a period of five years as follows:
These warrants issued to Cornell expired in 2011.
In connection with the repayment agreement (see Note 10), we agreed to issue to YA Global warrants to purchase an aggregate of 25,000,000 shares of common stock, exercisable for a period of three years at an exercise price of $0.0119. The warrants issued to YA Global provide for certain anti-dilution protection in the event that (i) we issue shares of our common stock for a purchase price below the exercise price of the various warrants or in the event we issue options or other convertible securities with a conversion price below the exercise price, (ii) we effectuate a stock split, stock dividend or other form of recapitalization, or (iii) we declare a dividend payment to the holders of our common stock. The exercise price was reset on August 8, 2011 to $0.0005 and the number of warrants increased to 595,000,000.
The Company issued 5,000,000 warrants in May 2010 to a law firm for services rendered valued at $137,000 using a Black-Scholes-Merton model using the following inputs (0.0% dividend yield, stock price of $0.0274, risk-free rate of 2.43%, volatility of 417%, 5 year remaining term). The warrants expire in five years with an exercise price of $0.01.
The Company issued 666,667 warrants in April 2012 to a law firm for services rendered valued at $770 using a lattice model using the following inputs (0.0% dividend yield, stock price of $0.009, risk-free rate of 0.53%, volatility of 139%, 2.5 year remaining term). The warrants expire in thirty months with an exercise price of $0.015.
As of 12/31/12 the following warrants remain outstanding:
Preferred Stock
During the year ended December 31, 2005, the Company set preferences for its Series A, B and C preferred stock. The Company is authorized to issue 40,000,000 shares of preferred stock, $0.01 par value per share. At December 31, 2010 the Company had 9,956,483 shares of series A preferred stock issued and outstanding and 7,887,275 shares of series C preferred stock issued and outstanding. The Company’s preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors.
The Series A and Series C preferred stock provides for conversion on the basis of 100 shares of common stock for each share of preferred stock converted, with conversion at the option of the holder or mandatory conversion upon restructure of the common stock and holders of the series A preferred stock vote their shares on an as-converted basis. Holders of the series A preferred stock participates on distribution and liquidation on an equal basis with the holders of common stock.
The series B preferred stock provides for conversion on the basis of 10,000 shares of common stock for each share of preferred stock converted, with conversion at the option of the holder or mandatory conversion upon restructure of the common stock and holders of the series A preferred stock vote their shares on an as-converted basis. Holders of the series B preferred stock participates on distribution and liquidation on an equal basis with the holders of common stock.
Following is a description of transactions affecting preferred stock for the years ended December 31, 2011 and 2012.
Year Ended December 31, 2011
In January 2011, the Board of Directors authorized the issuance of 20,000 Preferred C shares to accredited and non-accredited investors for total proceeds of $20,000.
In July 2011, 4,000,000 Preferred A shares were cancelled out of escrow as part of the settlement with Cornell Partners.
In July, 2011 His Divine Vehicle revised its licensing agreement to issue 1,500,000 Preferred A shares and 100,000,000 common shares in exchange for 2,500,000 Preferred C shares.
In August, 2011, the Company repaid 2,000,000 Preferred C shares that were loaned to the Company.
Throughout the year, 1,143,750 Preferred A shares were converted to 114,375,000 common shares and 1,392,333 Preferred C shares were converted to 139,233,300 common shares.
Year Ended December 31, 2011
In June 2012, the Board of Directors authorized the issuance of 100,000 Preferred C shares to accredited and non-accredited investors for total proceeds of $10,000.
Throughout the year, 359,500 Preferred A shares and 1,705,333 Preferred C shares were converted to 206,483,000 common shares.
Potentially Dilutive Equity Instruments
An analysis of potentially dilutive equity instruments at December 31, 2012
Other Equity Transactions
Year Ended December 31, 2011
Interest was imputed on non-interest bearing related party debt in the amount of $30,620 and credited to additional paid in capital.
Year Ended December 31, 2012
Interest was imputed on non-interest bearing related party debt in the amount of $26,900 and credited to additional paid in capital.
15.
Related Party Transactions
The Company engaged in various related party transactions involving the issuance of shares of the Company's common stock during the years ended December 31, 2012 and 2011.
During 2007, 2008, 2009, 2010 and 2011 His Divine Vehicle, Inc. ("HDV") incurred costs on behalf of the Company. At December 31, 2012, the Company owed HDV $244,956 and Serge Monros $570,367 in accrued wages. At December 31, 2011, the Company owed HDV $314,452 and Serge Monros $437,167 in accrued wages.
HDV, an affiliate of Mr. Monros, manufactures the “DynoValve” and “DynoValve Pro” products and then sells them to the Company for resale pursuant to the Product Licensing Agreement entered into on November 15, 2008. As consideration for HDV entering into the Product Licensing Agreement, the Company agreed to issue to Mr. Monros and HDV, if and when available, an aggregate of 500 Million shares of Common Stock, 5 Million shares of Series A Preferred Stock and 5 Million shares of Series C Preferred Stock. HDV loaned 1,000,000 Preferred A shares to the Company in 2008. As additional consideration for the Licensing Agreement, HDV waived $332,786 owed to it by the company and Mr. Monros waived $306,000 in accrued wages. The excess value of the shares issued (common and preferred) over the debt waived was expensed to research and development. In July, 2011, the stock consideration paid for the licensing agreement was modified to increase the common shares by 100,000,000, increase the Series A Preferred Stock by 1,500,000 and reduce the Series C Preferred Stock by 2,500,000.
In 2009, HDV incurred $73,806 in expenses on behalf of the company and received no compensation. This amounts were booked to additional paid in capital.
The Board of Directors authorized the issuance of an aggregate of 300,000,000 common shares and 2,500,000 Preferred C shares in exchange for services rendered by His Divine Vehicle. His Divine Vehicle subsequently loaned back the 300,000,000 common shares and the 2,500,000 Preferred C shares.
On December 15, 2009, the Company converted $204,302 of accounts payable due to His Divine Vehicle, Inc. into a convertible promissory note. The note bears interest at 8%, matured on April 15, 2010, and converts into common shares at the conversion rate of $0.003 (reset to $0.0005) subject to anti-dilution protection. The note matured and is currently in default due to lack of payment at maturity.
In January, 2010 His Divine Vehicle loaned 2,000,000 Preferred A shares and the 1,000,000 Preferred C shares to the Company.
In August, 2011 His Divine Vehicle loaned 2,000,000 Preferred C shares and the 200,000,000 common shares to the Company.
16.
Non-Cash Investing and Financing Transactions and Supplemental Disclosure of Cash Flow Information
During the years ended December 31, 2012 and 2011, the Company engaged in various non-cash investing and financing activities as follows:
During the years ended December 31, 2012 and 2011, the Company made $5,000 in interest payments and no income tax payments.
17.
Fair Value of Financial Instruments.
The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities and convertible debt. The estimated fair value of cash, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments.
The Company utilizes various types of financing to fund its business needs, including convertible debt with warrants attached. The Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and, if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes in fair value recognized in current earnings. At December 31, 2012, the Company had convertible debt and warrants to purchase common stock, the fair values of which are classified as a liability. Some of these units have embedded conversion features that are treated as a discount on the notes. Such financial instruments are initially recorded at fair value and amortized to interest expense over the life of the debt using the effective interest method.
Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:
Level one - Quoted market prices in active markets for identical assets or liabilities;
Level two - Inputs other than level one inputs that are either directly or indirectly observable; and
Level three - Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company’s derivative liability is measured at fair value on a recurring basis. The Company classifies the fair value of these convertible notes and warrants derivative liability under level three. The Company’s settlement payable is measured at fair value on a recurring basis based on the most recent settlement offer. The Company classifies the fair value of the settlement payable under level three. The Company’s rescission liability is measured at fair value on a recurring basis based on the most recent stock price. The Company classifies the fair value of the rescission liability under level one.
Based on ASC Topic 815 and related guidance, the Company concluded the convertible notes and common stock purchase warrants are required to be accounted for as derivatives as of the issue date due to a reset feature on the conversion/exercise price. At the date of issuance the convertible subordinated financing, warrant derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statements of operations as “Gain (loss) on derivative liabilities.” These derivative instruments are not designated as hedging instruments under ASC 815-10 and are disclosed on the balance sheet under Derivative Liabilities.
The following table summarizes the convertible debt and warrant liabilities derivative activity for the period December 31, 2010 to December 31, 2012:
18.
Subsequent Events.
Stock Issuances:
Since 2012, the Board of Directors authorized the issuance of an aggregate of 568,152,694 shares of its common stock, 21,351,666 shares of its Preferred A shares, 133,306 shares of its Preferred B shares and 4,488,500 of its Preferred C shares to accredited and non-accredited investors for total proceeds of $2,502,450. In addition, the Board of Directors has authorized the issuance of an aggregate of 749,900,000 shares of its common stock, 2,751,667 shares of its Preferred A shares, 97,450 shares of its Preferred B shares and 60,000 of its Preferred C shares to accredited and non-accredited investors for services rendered valued at an aggregate of $5,518,517. No sales commissions were paid in connection with these issuances and all investors reviewed or had access to all of the Company’s filing pursuant to the Securities Exchange Act of 1934, as amended.
Legal Proceedings:
The Company received a letter from the Securities and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a “formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena DucesTecum,” meaning the Company was given a prescribed period of time to produce all requested documents and information contained in the subpoena. An index of the source of all such produced information and an authentication declaration were also to be supplied. The stated purpose of the investigation is a fact-finding inquiry to assist the SEC staff in determining if the Company has violated federal securities laws. The SEC states there is no implication of negativity or guilt at this stage of the investigation.
We hired the Los Angeles law firm of Troy Gould to represent us in the matter of this investigation. As of the date of this filing, we believe we have provided all requested material to the SEC.
Status of prior private investments; $0 in 2007 (although HDV sold $13,000 of its shares), $0 in 2008 (although HDV sold $445,750 of its shares), $0 in 2009 (although HDV sold $448,000 of its shares), $910,742 in 2010, $1,827,543 in 2011. There is concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required by federal law) and the Company may need to offer rescission rights to the investors.
In 2006, the Company issued shares for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $14,625 in 2008, shares for services valued at $380,500 in 2009, shares for services valued at $236,920 in 2010, and shares for services valued at $3,370,273 in 2011. We have no plans to offer rescission for these share issuances.
We offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at by Counsel. The results of our rescission offers, in terms of rescission offers accepted by shareholders, were very encouraging. We had four rescissions offers accepted and refunded $13,000 plus interest.
Generally, we believe we have good relationships with our shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered shares from us since January 1, 2007 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any accepted rescission offer. However, there is no assurance that rescission offer acceptances will not have a material effect on our finances or that we will be able to re-pay those electing to rescind in a complete and timely manner. As of the date hereof, the Company has postponed their plans to offer rescission to earlier purchasing shareholders, deeming it advisable to wait until the common stock price increases and they have more operating cash available to pay for the cost of undertaking this endeavor. The Company has booked a liability to account for this rescission liability and marks the liability to market on a quarterly basis. The rescission liability as of 12/31/12 is $1,823,399.
The Company received a letter dated June 7, 2013 with a Civil Complaint titled Arnold Lamarr Weese, et al v. SaviCorp filed in the Northern District of West Virginia. In addition to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's counsel began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants have sued for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts to hold the Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company is finalizing a negotiated settlement and expects to complete the settlement early in 2015. The Company has recorded a $1,580,252 liability based on the current settlement agreement offer.
Licensing Events:
Mr. Monros has continued the process of preparing patent applications for the other versions of the DynoValve products & related IP. In March, 2013, the Company entered into a five (5) year Master Distribution Agreement with His Divine Vehicle to sell the DynoValve and DynoValve Pro in various international territories. The consideration for the agreement was guaranteeing a minimum annual volume, payment for the DynoValves acquired and a three percent (3%) royalty payment. The Company is currently in default on this agreement.
Major Contracts:
In 2013, the Company has entered into a 5 year licensing agreement with DynoGreen Tech, LLC ("DGT") to sell the DynoValve products in the licensed territories (UAE, Dubai, Malaysia, India, and Africa). DGT has ordered 3,000 DynoValves as of 9/30/13. The DynoValves were shipped in the third quarter of 2013. In order for them to fulfill and maintain this 5 year licensing agreement, they are required to purchase 500 additional DynoValves per quarter for a total of $3,000,000 over a 5 year span.
In 2014, the Company entered into a 5 year licensing agreement with Beijing FlyingGlob Environmental Technology Limited Company, a company established in the People’s Republic of China. According to the terms of the Agreement, FlyingGlob will promote, distribute and sell SaviCorp's signature line of DynoValve® automotive products within its exclusive territory, which is defined as the People's Republic of China and the Special Administrative Regions of Hong Kong and Macau.
FlyingGlob entered into the distribution agreement, which establishes a minimum annual purchase volume of 500,000 DynoValve® units during the first year. In support of this requirement, FlyingGlob is to purchase an initial order of 50,000 units at a price of $8.25 million. During the final four years of the contract, FlyingGlob has agreed to a minimum purchase of 5.5 million units, for a total minimum order of 6 million units during the five-year term of the agreement. The successful distribution and sale of the 6 million units is estimated to produce revenues of approximately $679.5 million. In addition, the agreement provides for a $30 million licensing fee to be paid by FlyingGlob that may be paid over the term of the agreement.