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EX-32.1 - CERTIFICATION - SaviCorpsavicorp_10q-ex3201.htm
EX-32.2 - CERTIFICATION - SaviCorpsavicorp_10q-ex3202.htm
EX-31.1 - CERTIFICATION - SaviCorpsavicorp_10q-ex3101.htm
EX-31.2 - CERTIFICATION - SaviCorpsavicorp_10q-ex3102.htm

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-QSB



(Mark One)

 

xQuarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2008

 

oTransition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ____________ to ______________

 

For the Period Ended September 30, 2008

 

Commission file number 000-27727

 

SaviCorp

(Name of Small Business Issuer in Its Charter)

 

Nevada 91-1766174
(State of Incorporation) (IRS Employer Identification No.)

 

2530 S. Birch Street

Santa Ana, CA 92707

 

(Address of Principal Executive Offices)

 

(877) 611-7284

 

Issuer's Telephone Number

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x    No o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o    No x

 

As of October 21, 2013, the Company had 5,970,827,673 shares of its par value $0.001 common stock issued and outstanding.

 

Transitional Small Business Disclosure Format (check one):

 

Yes o    No x

 

 
 

  

SAVICORP

(A Corporation in the Development Stage)

Quarterly Report on Form 10-QSB for the

Quarterly Period Ending September 30, 2008

 

 

Table of Contents

 

PART I. FINANCIAL INFORMATION  
   
Item 1. Unaudited Condensed Financial Statements 2
   

Balance Sheets:

September 30, 2008 and December 31, 2007

2
   

Statements of Operations:

For the three and nine months ended September 30, 2008 and 2007 and for the period from inception, August 13, 2002, to September 30, 2008

3
   

Statement of Stockholders’ Deficit:

For the period from inception, August 13, 2002, to September 30, 2008

4
   

Statements of Cash Flows:

For the nine months ended September 30, 2008 and 2007 and for the period from inception, August 13, 2002, to September 30, 2008

7
   
Notes to Unaudited Financial Statements 8
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
   
Item 3. Controls and Procedures 29
   
PART II. OTHER INFORMATION  
   
Item 1. Legal Proceedings 29
   
Item 2. Changes in Securities 30
   
Item 3. Defaults Upon Senior Securities 31
   
Item 4. Submission of Matters to a Vote of Security Holders 32
   
Item 5. Other Information 32
   
Item 6. Exhibits 32
   
SIGNATURES 33

 

 

1
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Financial Statements

 

SaviCorp

A Corporation in the Development Stage

BALANCE SHEETS

September 30, 2008 and December 31, 2007

 

   September 30,   December 31, 
   2008   2007 
ASSETS   (unaudited)      
           
Current assets:          
Cash and cash equivalents  $   $ 
           
Total current assets        
           
Deferred financing costs       30,118 
           
Total assets  $   $30,118 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current liabilities:          
Convertible debt, net of unamortized discount of $0 and $920,033, as of 9/30/08 and 12/31/07 respectively, in default as of 9/30/08   2,470,000    1,564,967 
Accounts payable and accrued liabilities   3,552,349    2,519,388 
Related party accounts payable   372,786    332,786 
Accounts payable assumed in recapitalization   159,295    159,295 
Derivative liabilities - embedded derivatives   600,931    83,371 
Derivative liabilities - warrants   1,120,151    2,246,896 
           
Total current liabilities   8,275,512    6,906,703 
           
Commitments and contingencies        
           
Stockholders' deficit:          
Series A convertible preferred stock; $0.001 par value,10,000,000 shares authorized, 5,347,500 and 10,000,000 issued and outstanding at September 30, 2008 and December 31, 2007, respectively   5,348    10,000 
Series B convertible preferred stock; $0.001 par value,10,000,000 shares authorized, none issued and outstanding        
Series C convertible preferred stock; $0.001 par value,10,000,000 shares authorized, 3,415,000 and 4,915,000 issued and outstanding at September 30, 2008 and December 31, 2007, respectively   3,415    4,915 
Common stock: $0.001 par value, 6,000,000,000 shares authorized, 1,403,604,264 and 1,045,456,564 shares issued and at September 30, 2008 and December 31, 2007, respectively   1,403,605    1,045,457 
Change in accounting principle   658,128    658,128 
Additional paid-in capital   250,535,468    250,636,093 
Losses accumulated during the development stage   (260,881,476)   (259,231,178)
           
Total stockholders' deficit   (8,275,512)   (6,876,585)
           
Total liabilities and stockholders' deficit  $   $30,118 

 

The accompanying notes are an integral part of the unaudited financial statements.

 

2
 

 

SaviCorp

A Corporation in the Development Stage

STATEMENTS OF OPERATIONS

For the 3 and 9 months ended September 30, 2008 and 2007 and for the Period

From Inception, August 13, 2002, to September 30, 2008

(unaudited)

 

   For the three months ended:   For the nine months ended:     
   September 30,   September 30,   September 30,   September 30,   Inception (August 13, 2002) to September 30, 
   2008   2007   2008   2007   2008 
                     
Operating costs and expenses:                         
General and administrative expenses  $313,533   $263,841   $444,621   $2,412,286   $252,371,938 
Research and development      $2,809       $420,923    1,664,686 
Loss from operations   (313,533)   (266,650)   (444,621)   (2,833,209)   (254,036,624)
                          
Other income and (expenses)                         
Interest income                   175 
Gain on settlement                   545,914 
Cost of rescission                   (43,074)
Cost of recapitalization                   (273,987)
Goodwill impairment                   (541,101)
Impairment of property and equipment               (185,657)   (235,299)
Impairment of patent rights                   (38,500)
Change in fair value of financial instruments   468,889    2,758,583    609,185    17,092,641    44,918,068 
Loss on debt extinguishment                   (492,464)
Interest expense   (611,366)   (306,808)   (1,201,540)   (778,607)   (49,137,602)
Registration rights expense   (463,824)   (31,985)   (613,322)   (671,840)   (1,546,982)
                          
Total other income and (expenses), net   (606,301)   2,419,790    (1,205,677)   15,456,537    (6,844,852)
                          
Net profit (loss) before cumulative effect of                         
change in accounting principle   (919,834)   2,153,140    (1,650,298)   12,623,328    (260,881,476)
                          
Cumulative effect of change in accounting principle               658,129     
                          
                          
Net profit (loss)  $(919,834)  $2,153,140   $(1,650,298)  $13,281,457   $(260,881,476)
                          
Weighted average shares outstanding   1,403,504,264    1,015,565,260    1,262,085,026    940,074,027      
Fully diluted weighted average shares outstanding   1,403,504,264    2,607,092,760    1,262,085,026    2,531,601,527      
                          
Net profit/(loss) per common share - basic  $(0.00)  $0.00   $(0.00)  $0.01      
Net profit/(loss) per common share - diluted  $(0.00)  $0.00   $(0.00)  $0.01      

 

 

 

The accompanying notes are an integral part of the unaudited financial statements

 

3
 

 

SaviCorp

A Corporation in the Development Stage

STATEMENT OF STOCKHOLDERS' DEFICIT

For the Period From Inception, August 13, 2002, to September 30, 2008

(unaudited)

 

   Preferred Stock A   Preferred Stock B   Preferred Stock C   Common Stock       Change in Accounting   Additional Paid-In   Deferred   Losses Accumulated During the Development     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Principle   Capital   Compensation   Stage   Total 
                                                                  
Balance at inception, August 13, 2002      $       $       $       $   $   $   $   $   $ 
                                                                  
Initial contribution to establish Energy Resource Management, Inc.                                       1,020            1,020 
                                                                  
Recapitalization on August 26, 2002                           5,335    5        (5)            
                                                                  
Common stock issued in exchange for consulting services                           1,086    1        2,233,149    (1,030,917)        1,202,232 
                                                                  
Net Loss                                               (1,555,838)   (1,555,838)
                                                                  
Balance at December 31, 2002      $       $       $    6,421   $6   $   $2,234,164   $(1,030,917)  $(1,555,838)  $(352,586)
                                                                  
Recognition of deferred compensation under consulting agreements                                           1,030,917        1,030,917 
                                                                  
Common stock issued for cash under  Regulation D offering                           4,180    4        154,996            155,000 
                                                                  
Common stock issued in exchange for consulting services and employee compensation                           1,200    1        170,055            170,056 
                                                                  
Common stock issued in exchange for extension of acquisition agreement                           110            4,400            4,400 
                                                                  
Common stock issued as a contribution to a related charitable organization                           2,280    3        91,197            91,200 
                                                                  
Common stock issued to escrow for acquisition of DreamCity                           8,000    8        359,992            360,000 
                                                                  
Interest recognition on loan from stockholder                                       6,209            6,209 
                                                                  
Net loss                                               (1,999,913)   (1,999,913)
                                                                  
Balance at December 31, 2003      $       $       $    22,191   $22   $   $3,021,013   $   $(3,555,751)  $(534,716)

 

The accompanying notes are an integral part of the unaudited financial statements.

 

4
 

 

SaviCorp

A Corporation in the Development Stage

STATEMENT OF STOCKHOLDERS' DEFICIT

For the Period From Inception, August 13, 2002, to September 30, 2008

(unaudited)

 

   Preferred Stock A   Preferred Stock B   Preferred Stock C   Common Stock       Change in Accounting   Additional Paid-In   Deferred   Losses Accumulated During the Development     
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Principle   Capital   Compensation   Stage   Total 
                                                                  
Common Stock issued for acquisition of patent rights   5,000,000    5,000                    5,100,000    5,100        (10,100)            
                                                                  
Common stock issued for cash under Regulation D offering                           39,600,000    39,600        403,125            442,725 
                                                                  
Common stock issued in payment of legal fees                           252,000    252        49,748            50,000 
                                                                  
Special dividend to certain major stockholders in Gene-Cell, Inc.                           5,000,000    5,000        (5,000)            
                                                                  
Common stock issued in exchange for consulting services and employee compensation   5,000,000    5,000                    31,926,240    31,926        106,196,089            106,233,015 
                                                                  
Common stock issued to repay debt                           5,002,000    5,002        94,998            100,000 
                                                                  
Common stock issued to round stock splits                           45,336    45        (45)            
                                                                  
Net loss                                               (106,417,974)   (106,417,974)
                                                                  
Balance at December 31, 2004   10,000,000   $10,000       $       $    86,947,767   $86,947   $   $109,749,828   $   $(109,973,725)  $(126,950)
                                                                  
Common stock issued for cash under Regulation D offering                           22,150,950    22,151        374,409            396,360 
                                                                  
Common and preferred stock issued in exchange for consulting services and employee compensation                   6,060,000    6,060    42,828,835    42,829        105,491,829            105,540,718 
                                                                  
Common stock issued upon exercise of stock warrants                           244,763    245        268,935            269,180 
                                                                  
Common stock issued for conversion of notes payable                           42,215,361    42,215        27,353            69,568 
                                                                  
Return and cancellation of shares                           (6,466,700)   (6,467)       6,467             
                                                                  
Common stock issued to escrow for debt conversions and warrant exercises                           21,190,000    21,190        (21,190)            
                                                                  
Issuance of compensatory stock options to Chief Executive Officer                                       31,250,000            31,250,000 
                                                                  
Net Loss                                               (138,426,088)   (138,426,088)
                                                                  
Balance at December 31, 2005   10,000,000   $10,000       $    6,060,000   $6,060    209,109,976   $209,110   $   $247,147,631   $   $(248,399,823)  $(1,027,022)
                                                                  
Common stock issued for cash under Regulation D offering                   395,275    395    600,000    600        529,237            530,232 
                                                                  
Common and preferred stock issued in exchange for consulting services and employee compensation                   1,000,000    1,000    7,125,000    7,125        603,643            611,768 
                                                                  
Common stock issued upon exercise of stock options/warrants                           389,540    389        425,577            425,966 
                                                                  
Common stock issued for conversion of notes payable                           162,049,548    162,050        (115,415)           46,635 
                                                                  
Return and cancellation of shares                   (1,000,000)   (1,000)               1,000             
                                                                  
Common stock issued/(returned) to/(from) escrow for debt conversions and warrant exercises                           (21,167,500)   (21,167)       21,167             
                                                                  
Shares Issued for Debt Extinguishment                           60,000,000    60,000        750,000            810,000 
                                                                  
Shares issued for Debt Commitment                           30,000,000    30,000        420,000              450,000 
                                                                  
Conversion of Preferred C for Common                   (1,540,000)   (1,540)   154,000,000    154,000        (152,460)            
                                                                  
Net Loss                                               (22,870,501)   (22,870,501)
                                                                  
Balance at December 31, 2006   10,000,000   $10,000       $    4,915,275   $4,915    602,106,564   $602,107   $    249,630,380   $    (271,270,324)  $(21,022,922)

 

The accompanying notes are an integral part of the unaudited financial statements.

 

5
 

 

SaviCorp

A Corporation in the Development Stage

STATEMENT OF STOCKHOLDERS' DEFICIT

For the Period From Inception, August 13, 2002, to September 30, 2008

(unaudited)

 

    Preferred Stock A     Preferred Stock B     Preferred Stock C     Common Stock             Change in Accounting     Additional Paid-In     Deferred     Losses Accumulated During the Development        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Principle      Capital      Compensation     Stage      Total  
                                                                                                         
Change in Accounting Principle                                                     658,128                         658,128  
                                                                                                         
Common and preferred stock issued in exchange for consulting services and employee compensation                                         393,350,000       393,350             1,022,710                   1,416,060  
                                                                                                         
Common stock issued upon exercise of stock options/warrants                                         50,000,000       50,000             (37,500 )                 12,500  
                                                                                                         
Imputed interest on related party debt                                                           20,503                   20,503  
                                                                                                         
Net Profit                                                                       12,039,146       12,039,146  
                                                                                                         
Balance at December 31, 2007     10,000,000     $ 10,000           $       4,915,275     $ 4,915       1,045,456,564     $ 1,045,457     $ 658,128       250,636,093     $       (259,231,178 )   $ (6,876,585 )
                                                                                                         
Common and preferred stock forfeited in settlement agreement     (1,000,000 )     (1,000.00 )                 (1,500,000 )     (1,500 )     (7,102,300 )     (7,102 )           123,602                   114,000  
                                                                                                         
Conversion of Preferred A for Common     (3,652,500 )     (3,652 )                             365,250,000       365,250             (361,598 )                  
                                                                                                         
Imputed interest on related party debt                                                           23,423                   23,423  
                                                                                                         
Wages Payable forfeited from related party                                                           45,000                   45,000  
                                                                                                         
Expenses incurred by related party for no consideration                                                           68,948                   68,948  
                                                                                                         
Net Loss                                                                       (1,650,298 )     (1,650,298 )
                                                                                                         
Balance at
September 30, 2008
    5,347,500     $ 5,348       -     $ -       3,415,275     $ 3,415,       1,403,604,264     $ 1,403,605       658,128       250,535,468     $ -       (260,881,476)   $ (8,275,512)

 

  

 

 

 

The accompanying notes are an integral part of the unaudited financial statements.

 

 

6
 

 

SaviCorp

A Corporation in the Development Stage

STATEMENTS OF CASH FLOWS

For the 9 Months Ended September 30, 2008 and 2007 and for the Period

From Inception, August 13, 2002, to September 30, 2008

(unaudited)

 

   For the nine months ended:   Inception (August 13, 2002) to 
   September 30,   September 30,   September 30, 
   2008   2007   2008 
Cash flows from operating activities:               
Net profit/(loss)  $(1,650,298)  $12,623,328    (260,881,476)
Adjustments to reconcile net profit (loss) to net cash provided by (used in) operating activities:              
Gain on settlement           (827,914)
Impairment of property and equipment       185,657    420,956 
Impairment of goodwill           541,101 
Cost of recapitalization           273,987 
Amortization of deferred compensation           2,233,150 
Compensatory common and preferred stock issuances       1,416,060    213,971,617 
Compensatory option issuances           31,250,000 
Interest imputed on non-interest bearing note from a stockholder   23,423        51,180 
Interest expense recognized on issuance and through accretion of discount on long-term debt   950,151    567,275    48,519,898 
Change in fair value of derivatives   (609,185)   (17,092,641)   (44,918,067)
Loss on extinguishment of debt           492,464 
Impairment of patent rights           38,502 
Common stock issued for rescission agreement           43,074 
Common stock issued to pay of accounts payable           50,000 
Contributed capital   113,948        113,948 
Depreciation expense       625    50,819 
Changes in operating assets and liabilities               
Accrued registration rights expense   613,322        1,546,982 
Changes in prepaid assets            
Changes in related party accounts payable   40,000        375,351 
Changes in accounts payable and accrued liabilities   518,640    2,302,239    2,807,116 
Net cash provided by (used in) operating activities       2,543    (3,847,312)
                
Cash flows from investing activities:               
Acquisition of equipment           (487,894)
Acquisition of patents           (38,500)
Net cash used in investing activities           (526,394)
                
Cash flows from financing activities:               
Bank overdraft/payoff overdraft       (3,631)    
Proceeds from stockholder advances           49,672 
Net proceeds from convertible debt           2,154,040 
Proceeds from note payable           157,500 
Proceeds from warrant exercise and deposit for warrant exercise           692,558 
Payments on notes payable           (63,000)
Proceeds from sale of common stock           1,382,937 
Net cash provided by (used in) financing activities       (3,631)   4,373,707 
                
Net increase (decrease) in cash and equivalents       (1,088)    
                
Cash and cash equivalents at beginning of year       1,088     
                
Cash and cash equivalents at end of period            

 

 

The accompanying notes are an integral part of the unaudited financial statements.

 

7
 

 

SAVICORP

A Corporation in the Development Stage

NOTES TO FINANCIAL STATEMENTS

For the Three and Nine Month Periods Ended September 30, 2008 and September 30, 2007 and for the Period

From Inception, August 13, 2002 to September 30, 2008

(unaudited)

 

1. Organization and Significant Accounting Policies

 

SaviCorp (the "Company") is a Nevada Corporation that has acquired rights to "blow-by gas and crankcase engine emission reduction technology" which it intends to develop and market on a commercial basis. The technology is a relatively simple gasoline and diesel engine emission reduction device that the Company intends to sell to its customers for effective and efficient emission reduction and engine efficiency for implementation in both new and presently operating automobiles. The Company is considered a development stage enterprise because it currently has no significant operations, has not yet generated revenue from new business activities and is devoting substantially all of its efforts to business planning and the search for sources of capital to fund its efforts.

 

The Company was originally incorporated as Energy Resource Management, Inc. on August 13, 2002 and subsequently adopted name changes to Redwood Energy Group, Inc. and SaVi Media Group, Inc., upon completion of a recapitalization on August 26, 2002. The re-capitalization occurred when the Company acquired the non-operating public shell of Gene-Cell, Inc. Gene-Cell Inc. had no significant assets or operations at the date of acquisition and the Company assumed all liabilities that remained from its prior discontinued operation as a biopharmaceutical research company. The historical financial statements presented herein are those of SaVi Media Group, Inc. and its predecessors, Redwood Energy Group, Inc. and Energy Resource Management, Inc.

 

The non-operating public shell used to recapitalize the Company was originally incorporated as Becniel and subsequently adopted name changes to Tzaar Corporation, Gene-Cell, Inc., Redwood Energy Group, Inc., Redwood Entertainment Group, Inc., SaVi Media Group, Inc., and finally its current name SaviCorp.

 

Significant Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased, to be cash equivalents. The Company had no cash equivalents as of September 30, 2008 and as of December 31, 2007.

 

Concentration of Credit Risk 

 

Cash and cash equivalents are the primary financial instruments that subject the Company to concentrations of credit risk. The Company maintains its cash deposits with major financial institutions selected based upon management’s assessment of the financial stability. Balances periodically exceed the $100,000 federal depository insurance limit; however, the Company has not experienced any losses on deposits.

 

Furniture and Equipment

 

Furniture and equipment is recorded at cost. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gains or losses are included in the results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Repairs and maintenance costs are expensed as incurred.

 

Impairment Of Long-Lived Assets

 

The Company evaluates the recoverability of long-lived assets when events and circumstances indicate that such assets might be impaired and determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Impairments are charged to operations in the period to which events and circumstances indicate that such assets might be impaired.

 

8
 

 

Intangible Assets

 

Intangible assets are amortized using the straight-line method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company provides a valuation allowance to reduce deferred tax assets to their net realizable value.

 

Stock-Based Compensation

 

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), and began expensing at fair value on a straight-line basis the costs resulting from share-based payment transactions.

 

Prior to 2006, the Company elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for stock options granted to employees as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Under APB 25, the Company did not recognize share-based payment expense in its financial statements because the stock option awards qualified as fixed awards and the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of grant.

 

Valuation of Derivatives

 

Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) established financial accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The convertible debentures issued to Golden Gate Investors on May 5, 2005 and to Cornell Partners in 2006 are subject to derivative accounting under SFAS 133 and EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." A model was developed that values the compound embedded derivatives within the convertible notes and associated freestanding warrants. The embedded derivatives are valued using a lattice model which incorporates a probability weighted discounted cash flow methodology. This model is based on future projections of the various potential outcomes. The model analyzed the underlying economic factors that influenced which likely events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. interest rates, stock price, conversion price, etc.). The primary factors driving the economic value of the embedded derivatives are stock price, stock volatility, whether the Company has obtained a timely registration, an event of default, and the likelihood of obtaining alternative financing. The warrants issued with the convertible debt are a freestanding derivative financial instrument. Using a lattice model with a probability weighted exercise price, the fair value of the derivative was computed at inception and at each reporting period and are recorded as a derivative liability.

 

The derivative liabilities result in a reduction of the initial carrying amount (as unamortized discount) of the Convertible Note. This derivative liability is marked-to-market each quarter with the change in fair value recorded in the income statement. Unamortized discount is amortized to interest expense using the effective interest method over the life of the Convertible Note. If the Note is converted or the warrants are exercised, the derivative liability is released and recorded as additional paid in capital.

 

Profit/Loss Per Share

 

Basic and diluted net profit or loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period.

 

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

 

On January 1, 2007, we adopted the provisions of FSP EITF 00-19-2 to account for the registration payment arrangement associated with our July 2006 financing (the “July 2006 Registration Payment Arrangement”). As of January 1, 2007 and December 31, 2007, management determined that it was probable that we would have payment obligation under the July 2006 Registration Payment Arrangement; therefore, the Company accrued a contingent obligation of $340,860 as required under the provisions of FSP EITF 00-19-2. In addition, the compound embedded derivative liability associated with the July 2006 Financing was adjusted to eliminate the registration payment arrangement and the comparative financial statements of prior periods and as of December 31, 2006 have been adjusted to apply the new method retrospectively. The cumulative effect of this change in accounting principle adjusted retained earnings as of December 31, 2006 by $658,129. The following financial statement line items for the twelve months ended December 31, 2006 were affected by the change in accounting principle. In addition, under EITF 00-19, the Company would not book the contingent registration rights payment payable.

 

9
 

 

   As of 
   December 31,
2006
 
Under EITF 00-19    
 Income Statement Impacts     
 Change in value of CED   2,871,934 
 Amortization of Discount   117,504 
 Balance Sheet Impacts      
 Discount on Note   1,764,136 
 Derivative Liability   3,459,979 
      
Under EITF 00-19-02     
 Income Statement Impacts      
 Change in value of CED   2,302,219 
 Amortization of Discount   112,211 
 Balance Sheet Impacts      
 Discount on Note   1,730,720 
 Derivative Liability   2,768,435 

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statements No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.

 

SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. In addition, SFAS 159 does not establish requirements for recognizing and measuring dividend income, interest income or interest expense, nor does it eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, Fair Value Measurements (SFAS 157), and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company currently is evaluating the impact of adopting SFAS 159.

 

2. Going Concern Considerations

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. In 2008, the Company had limited operations and resources. The Company has accumulated net losses in the development stage of $260,881,476 for the period from inception, August 13, 2002, to September 30, 2008. At September 30, 2008, the Company is in a negative working capital position of $8,275,512 and has a stockholders' deficit of $8,275,512. Additionally, as of September 30, 2008 the Company faced substantial challenges to future success as follows:

 

  · The Company is delinquent on critical liabilities such as payments to key consultants.

 

  · The Company was in default of its registration rights agreement with the investor in its long-term debt. Such default and the Company’s inability to fund its ongoing operations increase the likelihood that the investor could seize its assets to partially satisfy the debt or find another operator of those assets.

 

Such matters raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

The goals of the Company will require a significant amount of capital and there can be no assurances that the Company will be able to raise adequate short-term capital to sustain its current operations in the development stage, or that the Company can raise adequate long-term capital from private placement of its common stock or private debt to emerge from the development stage. There can also be no assurances that the Company will ever attain profitability. The Company's long-term viability as a going concern is dependent upon certain key factors, including:

 

  · The Company's ability to obtain adequate sources of funding to sustain it during the development stage.

 

  · The ability of the Company to successfully produce and market its gasoline and diesel engine emission reduction device in a manner that will allow it to ultimately achieve adequate profitability and positive cash flows to sustain its operations.

 

10
 

 

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.

 

11
 

 

4. Accounts Payable and Accrued Liabilities – Related Party

 

Accounts payable and accrued liabilities to a related party of $372,786, at September 30, 2008 represents amounts due to His Divine Vehicle, Inc, ("HDV", a company owned by the Company’s chief technology officer who is also a major stockholder). The amounts due HDV are primarily related to actual and estimated operations and research and development activities that were paid by HDV on behalf of the Company.

 

5. 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).

 

6. Debt

 

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 September 30, 2008. A portion of the funds advanced were used to pay off the existing convertible debenture and other advances made by Golden Gate Investors totaling $1,016,942. Following is an analysis of the proceed received and related fees and expenses paid with such proceeds.

 

Gross amount received – contractual balance  $2,470,000 
Less commissions paid   (247,000)
Less legal fees   (108,960)
Less structuring fee   (10,000)
      
Net proceeds  $2,104,040 

 

Following is an analysis of long-term debt at September 30, 2008:

 

Contractual balance, in default   $ 2,470,000  
Less unamortized discount     -  
         
Convertible debt   $ 2,470,000  

 

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.

 

12
 

 

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 and shown on the balance sheet at December 31, 2007 and September 30, 2008 at $933,660 and $1,546,982 respectively.

 

In connection with the securities purchase agreement dated July 10, 2006, the Company executed a security agreement in favor of the investor granting them a first priority security interest in all of the Company’s goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The security agreement states that if an event of default occurs under the secured convertible debentures or security agreement, the investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements. Based on the Company’s current default of the registration rights agreement, the investor could take possession of substantially all assets of the Company.

 

7. Commitments and Contingencies

 

Legal Proceedings

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.

 

On January 16, 2007, Serge Monros, the Company’s then chief technology officer, filed a derivative suit on behalf of the Company naming the Company, Mario Procopio, and Kathy Procopio as defendants in the Superior Court of the State of California for the County of San Diego. Mr. Monros’ derivative suit alleged the following causes of action: (i) breach of fiduciary duty of loyalty; (ii) breach of fiduciary duty of care; (iii) unjust enrichment; (iv) conversion; (v) waste of corporate assets; and (vi) trade libel.

 

On January 25, 2007, Mario Procopio filed a derivative suit on behalf of the Company naming the Company and Serge Monros in the Superior Court of the State of California for the County of Orange. Mr. Procopio’s derivative suit alleged the following causes of action: (i) breach of contract; (ii) promise without intent to perform; (iii) breach of fiduciary duty; (iv) rescission; (v) intentional misrepresentation; (vi) negligent misrepresentation; and (vii) conversion.

 

These two suits were settled on February 25, 2008. In reaching the settlement, no parties have made any admission of liability or wrongdoing. As part of the settlement, Mario Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have voluntarily waived accrued unpaid compensation in the amount of $114,000 and returned the following securities to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares, 7,102,300 common shares, and 125,000,000 options. As consideration, the Company has agreed to a limited indemnification of the Procopios for certain transactions agreed-upon by the Procopios and the Company. The Procopios also waive any rights to the 4,000,000 Preferred A shares they previously pledged to Cornell Capital and the parties understand that Cornell Capital retains control of this stock. The gain on settlement was booked to additional paid in capital.

 

In January 2007, Herrera Partners filed an arbitration claim against the Company in Harris County, Texas. Herrera Partners claim was for $63,700 for non-payment for services rendered. The suit was settled in November, 2008 and a payment schedule was agreed upon and paid. The Company booked a $9,014 gain on settlement.

 

On March 14, 2007, United Rentals filed a suit against the Company, Greg Sweeney, and Mario Procopio in Orange County Superior Court. United Rentals claim is for non-payment for services rendered. A judgment was entered in favor of United Rentals Northwest, Inc. and subsequently paid.

 

13
 

 

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 investment; $530,232 was raised privately in 2006 (cash for shares), $0 in 2007 (although HDV sold $13,000 of its shares), $1,000 in 2008 (although HDV sold $453,750 of its shares), $442,000 in 2009, $879,550 in 2010, $1,930,828 in 2011, $342,000 in the first calendar quarter of 2012 and $100,000 in the 2nd quarter of 2012. There is concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required by federal law). The Company is planning to offer rescission to many private placement investors shortly after the posting of this Annual Report on OTC Markets.

 

In 2006, the Company issued shares for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $7,875 in 2008 and shares for services valued at $74,400 in 2009. We have no plans to offer rescission for these share issuances.

 

The Company offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at by Counsel. The results of our 2011 rescission offer, in terms of rescission offers accepted by shareholders, were very encouraging. The Company had one rescission offer acceptance and refunded $1,000.

 

Generally, the Company believes it has good relationships with their shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered shares from us since January 1, 2006 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any accepted rescission offer. However, there is no assurance that rescission offer acceptances will not have a material effect on our finances or that we will be able to re-pay those electing to rescind in a complete and timely manner.

 

The Company received a letter dated June 7, 2013 with a Civil Complaint titled Arnold LamarrWeese, et al v. SaviCorp filed in the Northern District of West Virginia. In addition to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's counsel began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants have sued for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts to hold the Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company has filed for dismissal and intends on vigorously defending its rights or reaching a settlement to release the Company and Mr. Monros of any liability.

 

14
 

 

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.

 

8. Stockholders' Equity

 

Common Stock

 

Following is a description of transactions affecting common stock.

 

Inception to December 31, 2002

 

On August 26, 2002 the Company entered into the recapitalization transaction under which the Company agreed to acquire all of the issued and outstanding common stock of Energy Resource Management, Inc. ("ERM") in exchange for 4,000,000 shares of the Company's common stock.

 

On August 26, 2002 and September 30, 2002 the Company entered into consulting agreements with five consultants for services related to business strategy and business development. The consulting agreements had a term of two to three months and required the Company to issue 905,000 shares of common stock valued at $2,232,150 based on the quoted market price on the dates of the transactions. The transactions resulted in a charge to consulting expense of $1,202,233 for the period from inception, August 13, 2002, to December 31, 2002 and deferred compensation, presented as an increase in stockholders' deficit of $1,030,917, at December 31, 2002.

 

Year ended December 31, 2003

 

Effective March 3, 2003 the Company adopted a 3 to 1 forward stock split. This stock split has been reflected in the accompanying financial statements on a retroactive basis and all references to shares outstanding, weighted average shares and earnings per share have been restated to reflect the split as if it had occurred at inception.

 

In April 2003, the Company demanded return of 1,050,000 shares of common stock, issued under the consulting agreements in 2002, as a result of nonperformance of services and failure by specific members of the Company's business development consulting team to fulfill specific contractual obligations to the Company.

 

In June 2003, the Company negotiated an extension to its DreamCity acquisition agreement in exchange for 275,000 shares of restricted common stock. This acquisition was completed in October 2003, upon issuance of an additional 20,000,000 shares.

 

In September 2003 the Company issued 5,700,000 shares of common stock to New Creation Outreach, Inc., as a donation to support its ministries. New Creation Outreach is a related party because at the time, certain members of Company management and the board of directors are also officers in New Creation Outreach, Inc.

 

At various dates in 2003, the Company sold 10,450,000 shares of its common stock at prices ranging from $0.01 to $0.02 per share and received total proceeds of $155,000. These shares were sold under private placements exempt from registration.

 

Year Ended December 31, 2004

 

Effective September 2, 2004 and November 19, 2004, the Company's board of directors declared a 1 for 25 reverse stock split and a 1 for 100 reverse stock split, respectively. The reverse stock splits, with a total impact of 1 for 2500, have been reflected in the accompanying financial statements and all references to common stock outstanding, additional paid in capital, weighted average shares outstanding and per share amounts prior to the record dates of the reverse stock splits have been restated to reflect the stock splits on a retroactive basis. Subsequently to the stock splits, the Company awarded a total of 5,000,000 post-split shares to certain early investors and key stockholders in Gene-Cell, Inc. This stock issuance has been shown as a special dividend in the accompanying statement of stockholders' deficit.During 2004, the Company amended its Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to 1,000,000,000 shares.

 

The Company issued 5,002,000 shares of common stock to the owner of Energy Resource Management, Inc. to rescind a re-capitalization transaction that occurred in 2002.

 

The Company issued 4,000 shares of common stock in payment of the acquisition price of 20% of SaVi Group (See Note 3). The Company subsequently issued 5,000,000 shares of common stock, 5,000,000 shares of Series A preferred stock and 125,000,000 three-year stock options (to acquire shares of the Company's common stock at $0.00025 per share) to complete the acquisition of the rights to the patents. The patents came over at Serge Monros's basis, which was zero, because the development of the patents was a research and development effort. Serge Monros also received 100,000 shares of common stock, valued at $20,000, as compensation for his role of chief technology officer of the Company.

 

15
 

 

The Company issued 17,560,000 shares of common stock to associates of Serge Monros that were involved in the initial development of the patents that he owns, or are now assisting the Company. These issuances were considered compensation and a cost of the transaction and valued at $3,160,800.

 

The Company subsequently issued 5,100,000 shares of common stock, 5,000,000 shares of Series A preferred stock and 125,000,000 three-year stock options to acquire shares of the Company's common stock at $0.00025 per share to Mario Procopio, the Company's Chief Executive Officer, for compensation and for his efforts in arranging the acquisition of the rights to the patents owned by Serge Monros. The stock issuances to Mario Procopio were valued at $101,020,000.

 

The Company issued 252,000 shares of common stock to its former legal counsel for approximately $50,000 of services provided.

 

The Company issued 2,000,000 shares of common stock to Kathleen Procopio for services she provided as chief financial officer of the Company. These services were valued at $460,000, based on the quoted market price of the common stock. Kathleen Procopio is the spouse of the Company's chief executive officer, Mario Procopio.

 

The Company issued 7,166,240 shares of common stock as compensation to various individuals that provided services to the Company. These shares were valued at $1,572,215.

 

The company sold 39,600,000 shares of common stock to qualified investors and received cash proceeds of $442,725

 

Year Ended December 31, 2005

 

During 2005, the Company amended its Articles of Incorporation to increase its authorized shares of common stock from 1,000,000,000 to 6,000,000,000 shares.

 

The Company issued 42,828,835 shares of common stock to various individual that provided consulting and other services to the Company and recognized compensation expense of $5,337,218 related to those issuances.

 

The Company issued 22,150,950 shares of common stock to under private placements of its common stock and received cash proceeds of $396,360.

 

The Company cancelled 6,466,700 shares previously issued to consultants.

 

The Company issued 244,763 shares of common stock to the Investor upon exercise of stock warrants.

 

The company issued 42,215,361 shares of common stock to the Investor upon conversion of $2,448 of convertible debt.

 

The Company issued 42,828,835 shares of common stock to various individual that provided consulting and other services to the Company and recognized compensation expense of $5,337,218 related to those issuances.

 

The Company issued 22,150,950 shares of common stock to under private placements of its common stock and received cash proceeds of $396,360.

 

The Company cancelled 6,466,700 shares previously issued to consultants.

 

The Company issued 244,763 shares of common stock to the Investor upon exercise of stock warrants.

 

The company issued 42,215,361 shares of common stock to the Investor upon conversion of $2,448 of convertible debt.

 

Year Ended December 31, 2006

 

The Company issued 7,125,000 shares of common stock to various individual that provided consulting and other services to the Company and recognized compensation expense of $121,768 related to those issuances.

 

The Company issued 600,000 shares of common stock to under private placements of its common stock and received cash proceeds of $6,000.

 

The Company issued 389,540 shares of common stock to the holder of its convertible debt upon exercise of stock warrants and received proceeds of $425,966.

 

The Company issued 162,048,548 shares of common stock to the holder of its convertible debt upon conversion of $3,903 of debt.

 

The Company issued 60,000,000 shares of common stock to Golden Gate Investors in connection with an agreement to retire the outstanding debt owed to Golden Gate Investors.

 

16
 

 

The Company issued 30,000,000 shares of common stock to Cornell Capital in connection with the agreement to issue Cornell Capital a Senior Secured Convertible Debt instrument.

 

The Company exchanged 1,540,000 Preferred C shares for 154,000,000 shares of common stock.

 

Year Ended December 31, 2007

 

The Company issued 393,350,000 shares of common stock to twenty-two individuals that provided consulting and other services to the Company and recognized compensation expense of $1,416,060 related to those issuances based on the market value of the shares on the date of grant.

 

Period Ended September 30, 2008

 

In February 2008, as part of the settlement, Mario Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have returned to the Company 7,102,300 common shares.

 

In March 2008, 1,500,000 Preferred A shares were converted to 150,000,000 common shares. In May 2008, 2,152,000 Preferred A shares were converted to 215,200,000 common shares.

 

Stock Options

 

Gene-Cell, Inc., the company, used in the recapitalization (See Note 1) periodically issued incentive stock options to key employees, officers, and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The Board of Directors approved the issuance of all stock options. The exercise price of an option granted was determined by the fair market value of the stock on the date of grant. Reverse stock splits by the Company resulted in the reduction of outstanding options to less than 150 shares with exercise prices that are so high that the exercise of the options will never be practical. Expiration dates range from March, 2008 through July, 2012.

 

During April 2005, the Company granted a total of 250,000,000 options to Mario Procopio and Serge Monros as additional consideration for the assignment of the patent and services provided to us. The options were granted on April 6, 2005, are exercisable starting July 6, 2005, and expire on April 6, 2008. The options are exercisable at the rate of $250 for every one million shares of common stock ($0.00025 per share). These options represent all outstanding options of the Company at December 31, 2006 and 2005. The options to Serge Monros were considered as part of the acquisition of patent rights. The options issued to Mario Procopio were valued at estimated market value of $31,250,000 and charged to compensation expense. On August 24, 2007, Serge Monros exercised 50,000,000 options for total consideration of $12,500. No proceeds were actually received as the consideration received was a credit to amounts owed to Serge Monros. In February 2008, as part of the settlement, Mario Procopio returned 125,000,000 options. The remaining 75,000,000 options held by Serge Monros expired unexercised.

 

Incentive Stock Plan

 

During the year ended December 31, 2005 the 2005 Incentive Stock Plan was adopted by the Company’s Board of Directors and approved by the stockholders in August 2005. The 2005 Plan provides for the issuance of up to 25,000,000 shares and/or options. The primary purpose of the 2005 Incentive Stock Plan is to attract and retain the best available personnel for us in order to promote the success of our business and to facilitate the ownership of our stock by employees. The 2005 Incentive Stock Plan is administered by our Board of Directors. Under the 2005 Incentive Stock Plan, key employees, officers, directors and consultants are entitled to receive awards. The 2005 Incentive Stock Plan permits the granting of incentive stock options, non-qualified stock options and shares of common stock with the purchase price, vesting and expiration terms set by the Board of Directors. No options have been issued under the Plan at September 30, 2008.

 

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:

 

            Remaining
Number of     Exercise     Life
Warrants     Price     Years
  1,000,000,000     $ 0.0030     2.5
  1,000,000,000       0.0060     2.5
  300,000,000       0.0100     2.5
  200,000,000       0.0150     2.5
  150,000,000       0.0200     2.5
  100,000,000       0.0300     2.5
  60,000,000       0.0500     2.5
  40,000,000       0.0750     2.5
  30,000,000       0.1000     2.5
  20,000,000       0.1500     2.5
                 
  2,900,000,000     $ 0.0114      

 

17
 

 

Gene Cell, Inc. and Redwood Entertainment Group, Inc. periodically issued incentive stock options to key employees, officers, and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The Board of Directors approved the issuance of all stock options. The exercise price of an option granted was determined by the fair market value of the stock on the date of grant. Reverse stock splits by the Company resulted in the reduction of outstanding options to less than 150 shares with exercise prices that are so high that the exercise of the options will never be practical. The options expire from March 2008 to July 2012.

 

Preferred Stock

 

During the year ended December 31, 2005, the Company set preferences for its Series A, B and C preferred stock. The Company is authorized to issue 40,000,000 shares of preferred stock, $0.01 par value per share. At December 31, 2006 the Company had 10,000,000 shares of series A preferred stock issued and outstanding and 4,915,275 shares of series C preferred stock issued and outstanding. The Company’s preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors.

 

The Series A and Series C preferred stock provides for conversion on the basis of 100 shares of common stock for each share of preferred stock converted, with conversion at the option of the holder or mandatory conversion upon restructure of the common stock and holders of the series A preferred stock vote their shares on an as-converted basis. Holders of the series A preferred stock participates on distribution and liquidation on an equal basis with the holders of common stock.

 

The series B preferred stock provides for conversion on the basis of 10 shares of common stock for each share of preferred stock converted, with conversion at the option of the holder or mandatory conversion upon restructure of the common stock and holders of the series A preferred stock vote their shares on an as-converted basis. Holders of the series B preferred stock participates on distribution and liquidation on an equal basis with the holders of common stock.

 

Following is a description of transactions affecting preferred stock.

 

Inception to December 31, 2002

 

None

 

Year Ended December 31, 2003

 

None

 

Year Ended December 31, 2004

 

The Company issued 5,000,000 shares of Series A Preferred Stock for the acquisition of patent rights as described in Note x.

 

The Company issued 5,000,000 shares of Series A Preferred Stock for compensation to Mario Procopio, the then current CEO. The Company incurred in compensation expense based on the market value of the equivalent common shares that the preferred shares could convert into.

 

Year Ended December 31, 2005

 

The Company issued 6,060,000 shares of Series C Preferred Stock to various individuals for consulting services and employee compensation. The Company expensed $105,540,718 in compensation expense based on the market value of the equivalent common shares that the preferred shares could convert into.

 

Year Ended December 31, 2006

 

The Company issued 395,275 shares of Series C Preferred Stock for cash of $381,730 and extinguishment of debt of $142,500.

 

The Company issued 1,000,000 shares of Series C Preferred Stock to a vendor for lease facilities and services provided valued at $490,000.

 

1,000,000 shares of Series C Preferred Stock was returned to the Company by two officers/primary stockholders of the Company.

 

18
 

 

Year Ended December 31, 2007

 

None.

 

Period Ended September 30, 2008

 

In February 2008, as part of the settlement, Mario Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have returned to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares.

 

In March 2008, 1,500,000 Preferred A shares were converted to 150,000,000 common shares. In May 2008, 2,152,000 Preferred A shares were converted to 215,200,000 common shares.

 

Potentially Dilutive Equity Instruments

 

An analysis of potentially dilutive equity instruments at September 30, 2008

 

Warrants issued in connection with Cornell financing   2,900,000,000 
Stock options issued at for patent rights and Compensation    
Series A Preferred Stock convertible to common stock on a 100 for 1 basis   534,750,000 
Series C Preferred Stock convertible to common stock on a 100 for 1 basis   341,500,000 
      
Total   3,776,250,000 

 

Other Equity Transactions

 

Year Ended December 31, 2007

 

Interest was imputed on non-interest bearing related party debt in the amount of $20,503 and credited to additional paid in capital.

 

Period Ended September 30, 2008

 

Interest was imputed on non-interest bearing related party debt in the amount of $23,423 and credited to additional paid in capital.

 

His Divine Vehicle, a related party contributed $68,948 in capital by incurring expenses on behalf of the Company.

 

Greg Sweeney, the former CEO, waived $45,000 in wages which was credited to additional paid in capital.

 

9. Related Party Transactions

 

The Company engaged in various related party transactions involving the issuance of shares of the Company's common stock during the year ended December 31, 2007 and the period ended June 30, 2008. Those transactions included the exercise of options by Serge Monros and are described in Note 8.

 

As discussed in Note 7, Serge Monros, the Company’s current chief technology officer, filed a derivative suit on behalf of the Company naming the Company, Mario Procopio, and Kathy Procopio as defendants in the Superior Court of the State of California for the County of San Diego.

 

As also discussed in Note 7, Mario Procopio filed a derivative suit on behalf of the Company naming the Company and Serge Monros in the Superior Court of the State of California for the County of Orange.

 

During 2007 and 2008 His Divine Vehicle, Inc. incurred costs on behalf of the Company. At September 30, 2008, the Company owes His Divine Vehicle, Inc. $372,786 and Serge Monros $294,000 in accrued wages.

 

In the first nine months of 2008, HDV incurred $68,948 in expenses on behalf of the company and received no compensation. This amount was booked to additional paid in capital.

 

Greg Sweeney, the former CEO waived $45,000 of accrued wages as part of his settlement agreement with the company.

 

 

19
 

 

10. Change in Accounting Principle for Registration Payment Arrangements.

 

In December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position on No. EITF 00-19-2, Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”). FSP EITF 00-19-2 provides that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement should be separately recognized and measured in accordance with Statement of Financial Accounting Standards (“FAS”) No. 5, Accounting for Contingencies , which provides that loss contingencies should be recognized as liabilities if they are probable and reasonably estimable. Subsequent to the adoption of FSP EITF 00-19-2, any changes in the carrying amount of the contingent liability will result in a gain or loss that will be recognized in the statement of operations in the period the changes occur. The guidance in FSP EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of FSP EITF 00-19-2. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of FSP EITF 00-19-2, this guidance is effective for our financial statements issued for the year beginning January 1, 2007, and interim periods within that year.

 

On January 1, 2007, we adopted the provisions of FSP EITF 00-19-2 to account for the registration payment arrangement associated with our July 2006 financing (the “July 2006 Registration Payment Arrangement”). As of January 1, 2007 and December 31, 2007, management determined that it was probable that we would have payment obligation under the July 2006 Registration Payment Arrangement; therefore, the Company accrued a contingent obligation of $340,860 as required under the provisions of FSP EITF 00-19-2. In addition, the compound embedded derivative liability associated with the July 2006 Financing was adjusted to eliminate the registration payment arrangement and the comparative financial statements of prior periods and as of December 31, 2006 have been adjusted to apply the new method retrospectively. The cumulative effect of this change in accounting principle adjusted retained earnings as of December 31, 2006 by $658,129. The following financial statement line items for the twelve months ended December 31, 2006 were affected by the change in accounting principle. In addition, under EITF 00-19, the Company would not book the contingent registration rights payment payable.

 

   As of 
   December 31,
2006
 
Under EITF 00-19    
 Income Statement Impacts     
 Change in value of CED   2,871,934 
 Amortization of Discount   117,504 
 Balance Sheet Impacts      
 Discount on Note   1,764,136 
 Derivative Liability   3,459,979 
      
Under EITF 00-19-02     
 Income Statement Impacts      
 Change in value of CED   2,302,219 
 Amortization of Discount   112,211 
 Balance Sheet Impacts      
 Discount on Note   1,730,720 
 Derivative Liability   2,768,435 

 

The net impact to the balance sheet is $658,128 and shows in the equity section of the balance sheets.

 

11.Fair Value of Financial Instruments.

 

The Company’s financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities and convertible debt. The estimated fair value of cash, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments.

 

The Company utilizes various types of financing to fund its business needs, including convertible debt with warrants attached. The Company reviews its warrants and conversion features of securities issued as to whether they are freestanding or contain an embedded derivative and, if so, whether they are classified as a liability at each reporting period until the amount is settled and reclassified into equity with changes in fair value recognized in current earnings. At December 31, 2007, the Company had convertible debt and warrants to purchase common stock, the fair values of which are classified as a liability. Some of these units have embedded conversion features that are treated as a discount on the notes. Such financial instruments are initially recorded at fair value and amortized to interest expense over the life of the debt using the effective interest method.

  

Inputs used in the valuation to derive fair value are classified based on a fair value hierarchy which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

Level one — Quoted market prices in active markets for identical assets or liabilities;

 

Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

 

Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

 

20
 

 

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the convertible debt and warrants to purchase common stock (discussed above). The Company classifies the fair value of these convertible notes and warrants under level three.

 

Based on the guidance in FASB No. 133 and related guidance, the Company concluded the convertible notes and common stock purchase warrants are required to be accounted for as derivatives as of the issue date due to a reset feature on the conversion/exercise price. At the date of issuance the convertible subordinated financing, warrant derivative liabilities were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these derivatives reflected in the consolidated statements of operations as “Gain (loss) on derivative liabilities.” These derivative instruments are not designated as hedging instruments under ASC 815-10 and are disclosed on the balance sheet under Derivative Liabilities.

 

The following table summarizes the convertible debt and warrant liabilities activity for the period December 31, 2007 to September 30, 2008:

 

Description  Convertible Notes   Warrant Liabilities   Total 
Fair value at December 31, 2007  $83,371   $2,246,896   $2,330,267 
Change in Fair Value  $517,560   $(1,126,745)  $(609,185)
Fair value at September 30, 2008  $600,931   $1,120,151   $1,721,082 

 

For the nine month period ended September 30, 2008, net derivative income was $609,185.

 

The lattice methodology was used to value the convertible notes and warrants issued, with the following assumptions.

 

Assumptions   September 30, 2008     December 31, 2007  
Dividend yield     0.00%       0.00%  
Risk-free rate for term     1.02%-2.28%       3.07%-3.49%  
Volatility     335%       225%  
Maturity dates     0.0-3.272 years       0.0-3.748 years  
Stock Price     0.0015       0.0008  

 

The Golden Gate warrants (102,125) expired on 05/05/07. 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 is due and payable.

 

12. Non-Cash Investing and Financing Transactions and Supplemental Disclosure of Cash Flow Information

 

During the period ended September 30, 2008 and the year ended December 31, 2007, the Company engaged in various non-cash investing and financing activities as follows:

 

   2008   2007 
Common stock issued for exercise of stock options for debt due option holder  $   $12,500 
Change in accounting principle  $   $691,544 
Settlement of AP with fixtures & furniture  $   $16,119 
Conversion of Preferred Stock into Common Stock  $361,598   $ 
Procopio Settlement  $123,602   $

 

During the period ended September 30, 2008 and the year ended December 31, 2007, the Company made no cash interest payments or income tax payments.

 

13. Subsequent Events.

 

Stock Issuances:

 

Since 2008, the Board of Directors authorized the issuance of an aggregate of 1,885,018,272 shares of its common stock, 1,525,000 shares of its Preferred A shares and 10,355,500 of its Preferred C shares to accredited and non-accredited investors for total proceeds of $4,772,843. In addition, the Board of Directors has authorized the issuance of an aggregate of 1,549,418,387 shares of its common stock, 2,406,667 shares of its Preferred A shares and 456,000 of its Preferred C shares to accredited and non-accredited investors for services rendered valued at an aggregate of $6,245,339. 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.

 

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Legal Proceedings:

 

On January 16, 2007, Serge Monros, the Company’s then chief technology officer, filed a derivative suit on behalf of the Company naming the Company, Mario Procopio, and Kathy Procopio as defendants in the Superior Court of the State of California for the County of San Diego. Mr. Monros’ derivative suit alleged the following causes of action: (i) breach of fiduciary duty of loyalty; (ii) breach of fiduciary duty of care; (iii) unjust enrichment; (iv) conversion; (v) waste of corporate assets; and (vi) trade libel. This case was settled on 02/25/2008.

 

On January 25, 2007, Mario Procopio filed a derivative suit on behalf of the Company against the Company and Serge Monros in the Superior Court of the State of California for the County of Orange. Mr. Procopio’s derivative suit alleged the following causes of action: (i) breach of contract; (ii) promise without intent to perform; (iii) breach of fiduciary duty; (iv)rescission; (v) intentional misrepresentation; (vi) negligent misrepresentation; and (vii) conversion.

 

These two suits were settled on February 25, 2008. In reaching the settlement, no parties have made any admission of liability or wrongdoing. As part of the settlement, Mario Procopio, Kathy Procopio, and certain private corporations controlled by theProcopios have voluntarily waived accrued unpaid compensation and returned the following securities to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares, 7,102,300 common shares, and 125,000,000 options. As consideration, the Company has agreed to a limited indemnification of the Procopios for certain transactions agreed-upon by the Procopios and the Company. The Procopios also waive any rights to the 4,000,000 Preferred A shares they previously pledged to Cornell Capital and the parties understand that Cornell Capital retains control of this stock.

 

On or about July 10, 2006, the Company and YA Global, then known as Cornell Capital Partners, L.P., entered into a Securities Purchase Agreement which was subsequently amended and restated on August 17, 2006 (collectively the “SPA”) wherein the Company issued and sold to YA Global secured convertible debentures in the aggregate amount of approximately US$2,485,000 (collectively, the “Debentures”) and certain warrants (collectively the “Prior Warrants” and with the Debentures, the “Securities”) to purchase an aggregate of 2,900,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”).

 

In connection with the SPA, the Company and YA Global entered into ancillary agreements, including a Security Agreement, an Insider Pledge and Escrow Agreement, a Registration Rights Agreement, and other related documents (the SPA and such ancillary agreements are collectively referred to hereinafter as “Financing Documents”). Copies of the Financing Documents have been attached to the Company’s prior filings with the United States Securities and Exchange Commission (the “SEC”) and are hereby incorporated in their entirety by reference.

 

On July 28, 2011, the Company and Cornell reached a settlement for this debt under the terms of a Repayment Agreement. Pursuant to the terms of the Repayment Agreement, all of the Company’s obligations under the Financing Documents have been terminated in full. Without limitation, all amounts otherwise due under the Debentures are deemed satisfied in full, the Prior Warrants are deemed cancelled, and any and all security interests granted by the Company in favor of YA Global pursuant to the Financing Documents have been extinguished, including the release of 4,000,000 shares of Series A Preferred Stock held in escrow. In exchange for the foregoing, the Company delivered to YA Global: (i) a one-time cash payment of US$550,000; and (ii) new warrants to purchase up to 25,000,000 shares of Common Stock at an exercise price of $0.0119 (the “Current Warrants”). The Current Warrants expire on or about July 28, 2014. A copy of the Repayment Agreement and Current Warrants have been attached as exhibits to the Form 8-K filed August 2, 2011 and are hereby incorporated in their entirety by reference.

 

The Company received a letter from the Securities and Exchange Commission, Los Angeles Regional Office, dated May 9, 2011. The letter informed us that the SEC had entered into a “formal order of investigation” into “Savi Media Group, Inc.” The letter included a “Subpoena 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 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, we believe we have provided all requested material to the SEC.

 

Status of prior private investment; $0 in 2007 (although HDV sold $13,000 of its shares), $1,000 in 2008 (although HDV sold $453,750 of its shares), $442,000 in 2009, $879,550 in 2010, $1,930,828 in 2011, $342,000 in the first calendar quarter of 2012 and $100,000 in the 2nd quarter of 2012. There is concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required by federal law).

  

In 2006, the Company issued shares for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $7,875 in 2008 and shares for services valued at $74,400 in 2009. We have no plans to offer rescission for these share issuances.

 

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We offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at by Counsel. The results of our 2011 rescission offer, in terms of rescission offers accepted by shareholders, were very encouraging. We had one rescission offer acceptance and refunded $1,000.

 

Licensing Events:

 

HDV, an affiliate of Mr. Monros, manufactures the “DynoValve” and “DynoValve Pro” products based on these patent applications and then sells them to the Company for resale pursuant to the Product Licensing Agreement dated December 15, 2008, as amended on December 16, 2009. Under the Product Licensing Agreement, the price at which HDV sells the products to the Company is subject to change at any time upon written notice. The Company may determine the prices that it charges to its customers. The Product Licensing Agreement is non-exclusive and automatically renews on an annual basis provided certain sales volumes are achieved and the Company is otherwise not in breach. HDV may, after an applicable cure period, terminate the Product Licensing Agreement earlier if it believes that the Company is deficient in meeting its responsibilities. HDV may amend the Product Licensing Agreement at any time by giving notice to the Company, unless the Company objects within ten days of such notice.

 

As consideration for HDV entering into the Product Licensing Agreement, the Company agreed to issue to Mr. Monros and HDV, if and when available, an aggregate of 500 Million shares of Common Stock, 5 Million shares of Series A Preferred Stock and 5 Million shares of Series C Preferred Stock. In July, 2011, HDV and Mr. Monros entered into a revised licensing agreement which modified the prior consideration paid to an aggregate of 600 Million shares of Common Stock, 6.5 Million shares of Series A Preferred Stock and 2.5 Million shares of Series C Preferred Stock. In connection with this transaction, Mr. Monros waived $350,000 in accrued salary owed to him by the Company, and HDV waived $372,000 owed to it by the Company.

 

Mr. Monros has continued the process of preparing patent applications for the other versions of the DynoValve products & related IP. In March, 2013, the Company entered into a five (5) year Master Distribution Agreement with His Divine Vehicle to sell the DynoValve and DynoValve Pro in various international territories. The consideration for the agreement was guaranteeing a minimum annual volume, payment for the DynoValves acquired and a three percent (3%) royalty payment.

 

Major Contracts:

 

In 2013, the Company has entered into a 5 year licensing agreement with Dyno Green Tech, LLC ("DGT") to sell the DynoValve products in the licensed territories (UAE, Dubai, Malaysia, India, and Africa). DGT has ordered 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.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this Quarterly Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from Management’s expectations. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for products that may be distributed by the Company and services offered by competitors, as well as general conditions of the marketplace.

 

Overview

 

We are considered a development stage enterprise because as of September 30, 2008 we have no significant operations, have not yet generated revenue from new business activities and are devoting substantially all of our efforts to business planning and the search for sources of capital to fund our efforts. We have acquired all rights to certain technology for the production of a gasoline and diesel engine emission reduction device which we believe delivers superior emission reduction technology and operating performance. This technology is an emission reduction device believed to reduce, harmful exhaust emissions in gasoline and diesel engines, and increase fuel efficiency. As of June 30, 2008 we do not have any products available for sale and we will acquire additional funding before we will be able to begin production of our products and there is no guarantee that we will be able to obtain such additional funding.

 

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.

 

Business History

 

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.

 

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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 and to Golden Gate Investors in 2005 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 both the Golden Gate debenture and the Cornell Capital 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.

  

Results of Operations

 

During the period from inception, August 13, 2002, to September 30, 2008, we have not generated any revenue from operations. As of September 30, 2008, we have accumulated net losses in the development stage of $260,881,476 for the period from inception, August 13, 2002, to September 30, 2008. Additionally, at September 30, 2008, we are in a negative working capital position of $8,275,512 and a stockholders' deficit position $8,275,512. 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. For the remainder of fiscal 2008, 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 paid-in capital is assigned will generate revenues at all.

 

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;

 

25
 

 

  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.

 

As of March 31, 2008, we had limited operations and we expect to require additional cash of a minimum of approximately $3,000,000 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.

  

As of September 30, 2008, 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 continue operation in the development stage.

 

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.

 

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Liquidity and Capital Resources

 

As of September 30, 2008, the Company had no cash or current assets.

 

Total current liabilities were $8,275,512 as of September 30, 2008, consisting of convertible debt, net, of $2,470,000, derivative liabilities of $1,721,082, accounts payable and accrued liabilities of $3,925,135, and accounts payable assumed in recapitalization of $159,295.

 

We had a negative working capital of $8,275,512 as of September 30, 2008.

 

We incurred net losses of $260,881,476 during the period from inception, August 13, 2002, to September 30, 2008. In addition, at September 30, 2008, we were in a negative working capital position and had a stockholders' deficit of $8,275,512. As a result, our independent registered public accounting firm, in its report dated October 25, 2013, has expressed substantial doubt about our ability to continue as a going concern.

 

Our average monthly operational expenses have been $49,402 per month, for the period ended September 30, 2008.

 

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 generate 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 will 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:

 

Number of Warrants   Exercise Price
           
1,000,000,000     $   0.003
1,000,000,000     $   0.006
300,000,000     $   0.01
200,000,000     $   0.015
150,000,000     $   0.02
100,000,000     $   0.03
60,000,000     $   0.05
40,000,000     $   0.075
30,000,000     $   0.10
20,000,000     $   0.15

 

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 mature on the second anniversary of the date of issuance and bear 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 have 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).

 

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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 has 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, have 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 June 30, 2008, 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.

 

 

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ITEM 3. CONTROLS AND PROCEDURES

 

a) Evaluation of Disclosure Controls and Procedures. As of September 30, 2008, 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.

 

PART II - OTHER INFORMATION

 

ITEM 1. - LEGAL PROCEEDINGS

 

From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business.

 

On January 16, 2007, Serge Monros, the Company’s then chief technology officer, filed a derivative suit on behalf of the Company naming the Company, Mario Procopio, and Kathy Procopio as defendants in the Superior Court of the State of California for the County of San Diego. Mr. Monros’ derivative suit alleged the following causes of action: (i) breach of fiduciary duty of loyalty; (ii) breach of fiduciary duty of care; (iii) unjust enrichment; (iv) conversion; (v) waste of corporate assets; and (vi) trade libel. This case was settled on 02/25/2008.

 

On January 25, 2007, Mario Procopio filed a derivative suit on behalf of the Company against the Company and SergeMonros in the Superior Court of the State of California for the County of Orange. Mr. Procopio’s derivative suit alleged the following causes of action: (i) breach of contract; (ii) promise without intent to perform; (iii) breach of fiduciary duty; (iv) rescission; (v) intentional misrepresentation; (vi) negligent misrepresentation; and (vii) conversion.

 

These two suits were settled on February 25, 2008. In reaching the settlement, no parties have made any admission of liability or wrongdoing. As part of the settlement, Mario Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have voluntarily waived accrued unpaid compensation and returned the following securities to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares, 7,102,300 common shares, and 125,000,000 options. As consideration, the Company has agreed to a limited indemnification of the Procopios for certain transactions agreed-upon by the Procopios and the Company. The Procopios also waive any rights to the 4,000,000 Preferred A shares they previously pledged to Cornell Capital and the parties understand that Cornell Capital retains control of this stock.

 

In January 2007, Herrera Partners filed an arbitration claim against the Company in Harris County, Texas. Herrera Partners claim was for $63,700 for non-payment for services rendered. The suit was settled in January, 2009 and a payment schedule was agreed upon and paid.

 

On March 14, 2007, United Rentals filed a suit against the Company, Greg Sweeney, and Mario Procopio in Orange County Superior Court. United Rentals claim is for non-payment for services rendered. A judgment was entered in favor of United Rentals Northwest, Inc. and has been subsequently paid.

 

On or about July 28, 2011, SaviCorp, a Nevada corporation, formerly known as Savi Media Group, Inc. (the “Company”) entered into a Repayment Agreement (the “Repayment Agreement”) with YA Global Investments, L.P., a Cayman Islands exempt limited partnership formerly known as Cornell Capital Partners, L.P. (“YA Global”).

 

On or about July 10, 2006, the Company and YA Global, then known as Cornell Capital Partners, L.P., entered into a Securities Purchase Agreement which was subsequently amended and restated on August 17, 2006 (collectively the “SPA”) wherein the Company issued and sold to YA Global secured convertible debentures in the aggregate amount of approximately US$2,485,000 (collectively, the “Debentures”) and certain warrants (collectively the “Prior Warrants” and with the Debentures, the “Securities”) to purchase an aggregate of 2,900,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”).

 

In connection with the SPA, the Company and YA Global entered into ancillary agreements, including a Security Agreement, an Insider Pledge and Escrow Agreement, a Registration Rights Agreement, and other related documents (the SPA and such ancillary agreements are collectively referred to hereinafter as “Financing Documents”). Copies of the Financing Documents have been attached to the Company’s prior filings with the United States Securities and Exchange Commission (the “SEC”) and are hereby incorporated in their entirety by reference.

 

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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 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, we believe we have provided all requested material to the SEC. Updates on the investigation will be supplied by supplemental filings hereto.

 

Status of prior private investment; $0 in 2007 (although HDV sold $13,000 of its shares), $1,000 in 2008 (although HDV sold $453,750 of its shares), $442,000 in 2009, $879,550 in 2010, $1,930,828 in 2011, $342,000 in the first calendar quarter of 2012 and $100,000 in the 2nd quarter of 2012. There is concern that these private placement securities sales were not made in compliance with applicable law (lack of material disclosure and/or failure to file securities sales notices as required by federal law).

 

In 2006, the Company issued shares for services valued at $611,768. There were issued shares for services valued at $1,416,060 in 2007; shares for services valued at $7,875 in 2008 and shares for services valued at $74,400 in 2009. We have no plans to offer rescission for these share issuances.

 

We offered rescission to many of the 2011 investors in late 2011 (“2011 rescission offer”). The legal sustainability of these rescission offers is also being looked at by Counsel. The results of our 2011 rescission offer, in terms of rescission offers accepted by shareholders, were very encouraging. We had one rescission offer acceptance and refunded $1,000.

 

Generally, we believe we have good relationships with our shareholders. Our plan is to offer rescission to most shareholders obtaining privately offered shares from us since January 1, 2007 through 2011. The Company has pledged to use our best efforts, in good faith, to honor any accepted rescission offer. However, there is no assurance that rescission offer acceptances will not have a material effect on our finances or that we will be able to re-pay those electing to rescind in a complete and timely manner.

 

The Company received a letter dated June 7, 2013 with a Civil Complaint titled Arnold LamarrWeese, et al v. SaviCorp filed in the Northern District of West Virginia. In addition to SaviCorp, Serge Monros and Craig Waldrop are being sued individually. Settlement discussions failed and Plaintiff's counsel began service of Process. The Company and Mr. Monros have hired Shustak and Partners to defend the claim. The defendants have sued for breach of contract, fraud, vicarious liability, and unlawful sale by an unregistered broker. The lawsuit attempts to hold the Company and Mr. Monros responsible for alleged improprieties of Waldrop. The Company has filed for dismissal and intends on vigorously defending its rights or reaching a settlement to release the Company and Mr. Monros of any liability.

 

We may become involved in material legal proceedings in the future.

 

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

For the nine months ended September 30, 2008, the Company issued/cancelled the following:

 

In February 2008, as part of the settlement, Mario Procopio, Kathy Procopio, and certain private corporations controlled by the Procopios have returned the following securities to the Company: 1,000,000 Preferred A shares, 1,500,000 Preferred C shares, 7,102,300 common shares, and 125,000,000 options.

 

In March 2008, 1,500,000 Preferred A shares were converted to 150,000,000 common shares. In May 2008, 2,152,000 Preferred A shares were converted to 215,200,000 common shares.

 

For the remainder of 2008, the Board of Directors authorized the issuance of 13,500,000 shares of its common stock and 112,500 shares of its Preferred C stock to 6 accredited and unaccredited investors for services rendered valued at an aggregate of $14,625 based on the market value at the date awarded. The Board of Directors authorized the issuance of an aggregate of 500,000,000 common shares, 5,000,000 Preferred A shares and 5,000,000 Preferred C shares in exchange for a licensing agreement with His Divine Vehicle. His Divine Vehicle subsequently loaned back 1,000,000 Preferred A shares. 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.

 

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Since 2008, the Board of Directors authorized the issuance of an aggregate of 1,885,018,272 shares of its common stock, 1,525,000 shares of its Preferred A shares and 10,355,500 of its Preferred C shares to accredited and non-accredited investors for total proceeds of $4,772,843. In addition, the Board of Directors has authorized the issuance of an aggregate of 1,549,418,387 shares of its common stock, 2,406,667 shares of its Preferred A shares and 456,000 of its Preferred C shares to accredited and non-accredited investors for services rendered valued at an aggregate of $6,245,339. 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 3. DEFAULTS UPON SENIOR SECURITIES

 

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 will 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:

 

Number of Warrants   Exercise Price
           
1,000,000,000     $   0.003
1,000,000,000     $   0.006
300,000,000     $   0.01
200,000,000     $   0.015
150,000,000     $   0.02
100,000,000     $   0.03
60,000,000     $   0.05
40,000,000     $   0.075
30,000,000     $   0.10
20,000,000     $   0.15

 

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 mature on the second anniversary of the date of issuance and bear 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 have 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 has 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.

 

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We, at our option, have 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 June 30, 2008, the Company was in default on this debt and the associated registration rights agreement.

 

The Company is in default of its registration rights agreement with the investor and its long-term debt. Such default and the Company’s inability to fund its ongoing operations increase the likelihood that the investor could seize its assets to partially satisfy the debt or find another operator of those assets.

  

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended

 

31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended

 

32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

 

32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

 

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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.

 

 

  SaviCorp
   
Date: October 25, 2013 By: /s/ SERGE MONROS
  Serge Monros
  President, Chief Executive Officer (Principal Executive Officer) and Director
   
Date: October 25, 2013 By: /s/ SERGE MONROS
  Serge Monros
  Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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