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ZERO > SEC Filings for ZERO > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for SAVE THE WORLD AIR INC

Form 10-Q for SAVE THE WORLD AIR INC


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements include predictions regarding our future:

? revenues and profits;

? customers;

? research and development expenses and efforts;

? scientific and other third-party test results;

? sales and marketing expenses and efforts;

? liquidity and sufficiency of existing cash;

? technology and products;

? the outcome of pending or threatened litigation; and

? the effect of recent accounting pronouncements on our financial condition and results of operations

You can identify these and other forward-looking statements by the use of words such as "may," "will," "expects", "anticipates," "believes," "estimates," "continues," or the negative of such terms, or other comparable terminology.

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

Overview

Save the World Air, Inc. ("STWA" or "Company" or "we") designs, licenses and develops products to improve energy efficiency of large-scale energy production and improve diesel engine performance reducing emissions and improving fuel economy. We are a green technology company that leverages a suite of patented, patent-pending and licensed intellectual properties related to the treatment of fuels. Technologies patented by or licensed to us utilize either magnetic or uniform electrical fields to alter physical characteristics of fuels and are designed to create cleaner combustion. Cleaner combustion has been shown to improve performance, enhance fuel economy and/or reduce harmful emissions in laboratory testing.

On August 1, 2011, Save The World Air, Inc. and Temple University entered into two Exclusive License Agreements. One Agreement relates to Temple's international patent applications, patents and technical information pertaining to technology associated with an electric and/or magnetic field assisted fuel injection system. The second agreement relates Temple's international patent applications and patents and technical information pertaining to technology to reduce crude oil viscosity. The License Agreements are exclusive to the Company and the territory licensed to the Company is worldwide.

We have two product lines; Applied Oil Technology ("AOT") and ELEKTRA™.

AOT

On July 16, 2010, the Company entered into a Letter of Intent with the U.S. Department of Energy-Naval Petroleum Reserve/Rocky Mountain Oilfield Testing Center (RMOTC) in Wyoming. On December 22, 2010, a formal Agreement was entered into with RMOTC for testing of our Applied Oil Technology (AOT). Third-party vendors and suppliers were used by the Company to provide the facility construction materials and the prototype's design and fabrication To conduct the testing, the Company was responsible for upgrading the testing facility's existing infrastructure, located on the Naval Petroleum Reserve #3. Design and engineering began in January 2011 and construction was completed in June 2011.

The AOT Phase II testing program began in July 2011. It is the Company's belief that the Phase II testing of the prototype will yield important information and data to the Company's product development team. Costs incurred for the testing during the nine months ended September 30, 2012 was $244,472.

Elektra

The Company's ELEKTRA technology is designed to improve diesel fuel economy in both land and marine diesel engines. The Company's preliminary experimental prototypes have shown repeatable improvements in fuel economy. Research is being conducted under controlled conditions at the Company's research facility in Morgan Hill California.

We operate in a highly competitive industry. Many of our activities are subject to governmental regulation. We have taken aggressive steps to protect our intellectual property.

There are significant risks associated with our business, our Company and our stock.

We are a development stage Company that generated minimal revenues in 2006 and 2007. We did not generate any sales or revenues from 2008 up to September 30, 2012. Our expenses to date have been funded primarily through the sale of stock and convertible debt, as well as proceeds from the exercise of stock purchase warrants. We raised capital in 2011 and will need to raise substantial additional capital in 2012, and beyond, to fund our sales and marketing efforts, continuing research and development, and certain other expenses, until our revenue base grows sufficiently to cover such expenditures. See "Management's Discussion and Analysis" below.

Our company was incorporated on February 18, 1998, as a Nevada corporation, under the name Mandalay Capital Corporation. We changed our name to Save the World Air, Inc. on February 11, 1999, following the acquisition of marketing and manufacturing rights of the ZEFS (legacy) technologies. Our mailing address is 735 State Street, Suite 500, Santa Barbara, California 93101. Our telephone number is (805) 845-3581. Our corporate website is www.stwa.com.

Our common stock is quoted under the symbol "ZERO" on the Over-the-Counter Bulletin Board

Results of Operations

We did not generate any revenue for the three-month and nine-month periods ended September 30, 2012 and 2011.

Operating expenses were $2,429,153 for the three-month period ended September 30, 2012, compared to $2,129,273 for the three-month period ended September 30, 2011, an increase of $299,880. This increase is attributable to an increase in non-cash expenses of $340,415, offset by a decrease in cash expenses of $40,535. Specifically, the increase in non-cash expense is attributable to increases in stocks and warrants given to consultants and employees. Specifically, the decrease in cash expense is attributable to decreases in consulting and professional fees of $91,481, office and other expenses of $57,359, offset by an increase in salaries and benefits of $55,745, corporate expenses of $38,450, and travel expenses of $14,110.

Operating expenses were $6,288,872 for the nine-month period ended September 30, 2012, compared to $4,640,508 for the nine-month period ended September 30, 2011, an increase of $1,648,364. This increase is attributable to increases in non-cash expenses of $1,580,431 and cash expenses of $67,933. Specifically, the increase in non-cash expense is attributable to increases in stock and warrants given to consultants and employees of $1,526,287, bad debt expense of $52,000, and depreciation expense of $2,144. Specifically, the increase in cash expense is attributable to increases in salaries and benefits of $377,349, travel expenses of $25,971, and office and other expenses of $6,873, offset by decreases in consulting and professional fees of $319,684 and corporate expenses of $22,576.

Research and development expenses were $177,311 for the three-month period ended September 30, 2012, compared to $379,391 for the three-month period ended September 30, 2011, a decrease of $202,080. This decrease is attributable to a decrease in contract fees of $223,405, offset by an increase in product testing, research and supplies of $21,325.

Research and development expenses were $528,201 for the nine-month period ended September 30, 2012, compared to $931,959 for the nine-month period ended September 30, 2011, a decrease of $403,758. This decrease is attributable to decreases in product testing, research and supplies of $336,602 and contract fees of $67,156.

Other income and expense were $2,064,240 expense for the three-month period ended September 30, 2012, compared to $256,910 income for the three-month period ended September 30, 2011, an increase in expense of $2,321,150. This increase is attributable to an increase in fair value of derivative liabilities of $3,847,012 and a decrease in other income of $107,860, offset by income from extinguishment of derivative liabilities of $1,377,911, decrease in interest expense of $239,811, and a gain in settlement of legal fees of $16,000.

Other income and expense were $4,720,779 expense for the nine-month period ended September 30, 2012, compared to $1,937,748 expense for the nine-month period ended September 30, 2011, an increase in expense of $2,783,031. This increase is attributable to an increase in the fair value of derivative liabilities of $5,578,171, and a decrease in other income of $130,335, offset by income from extinguishment of derivative liabilities of $1,463,487, decrease in interest expense of $1,222,213, and a gain in settlement of legal fees of $239,775.

We had a net loss of 4,670,704, or $0.04 per share, for the three-month period ended September 30, 2012, compared to a net loss of $2,251,754, or $0.02 per share, for the three-month period ended September 30, 2011.

We had a net loss of $11,538,652, or $0.09 per share, for the nine-month period ended September 30, 2012, compared to a net loss of $7,511,015, or $0.07 per share, for the nine-month period ended September 30, 2011.

We expect to incur additional net loss in the fiscal year ending December 31, 2012 primarily attributable to continued operating and marketing-related expenditures without the benefit of any significant revenue for the remainder of the year.

Liquidity and Capital Resources

Since its inception, we have been primarily engaged in organizational and pre-operating activities. We have generated insignificant revenues and have incurred accumulated losses of $80,828,119 from February 18, 1998 (Inception) through September 30, 2012. As reflected in the accompanying condensed consolidated financial statements, we had a net loss of $11,538,652 and a negative cash flow from operations of $3,310,280 for the nine months ended September 30, 2012, and had a working capital deficiency (excluding derivative liabilities) of $637,851 and a stockholders' deficiency of $3,600,463 at September 30, 2012. As a result, our independent registered public accounting firm, in their report on our 2011 consolidated financial statements, raised substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. Our operations from inception, February 18, 1998 to September 30, 2012 have been funded through issuances of our common stock and convertible notes. As of September 30, 2012, we raised an aggregate of $30,991,005 of which $18,396,488 was from the sale of convertible notes. As of September 30, 2012, the outstanding balance of convertible notes was $43,450, of which $27,500 represented convertible note offering, which closed on July 23, 2012. We expect substantially all of the outstanding notes will be converted into shares of common stock of the Company.

On September 30, 2012, we had cash on hand in the amount of $902,333. In addition to the funds on hand, we will require additional funds to continue to operate our business. This includes expenses we will incur in connection with license agreements; product development and commercialization of the AOT and ELEKTRA technologies; costs to manufacture and ship our products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual property. In addition, we have contractual commitments for salaries to one of our executive officers pursuant to an employment agreement, severance payments to a former officer and consulting fees, during 2012 and beyond. In light of our financial commitments over the next several months and its liquidity constraints, we have implemented cost reduction measures in all areas of operations. We intend to review these measures on an ongoing basis and make additional decisions as may be required.

Details of Recent Financing Transactions

From December 13, 2010 through July 23, 2012, the Company conducted private offerings of up to $10,000,000 aggregate face amount of its convertible notes. A total of $8,291,703 aggregate face amount of the notes were sold for an aggregate purchase price of $7,537,911. Through December 31, 2011, $6,239,029 of these notes were sold, of which $4,518,425 were converted during 2011, leaving a balance of convertible notes outstanding as of December 31, 2011 of $1,720,460. During 2012, the Company sold an additional $2,064,774 of these convertible notes, and an additional $3,741,784 of these notes were converted, leaving a balance of convertible notes outstanding of September 30, 2012 of $43,450. While the stated interest rate on the notes is 0%, the actual interest rate on the notes is 10% per annum. The notes mature on the first anniversary of their respective date of issuance. The notes outstanding at September 30, 2012 are convertible, at the option of the note holder, into 132,550 shares of common stock of the Company (the "Conversion Shares") at a conversion price of $0.25-$0.40 per share (the "Conversion Price").

Each of the investors in the offerings received, for no additional consideration, a warrant entitling the holder to purchase a number of shares of the Company's common stock equal to 100% of the number of shares of common stock into which the notes are convertible (the "Warrant Shares"). Each warrant is exercisable on a cash basis only at an initial price of $0.30-$0.40 per share, and is exercisable immediately upon issuance and for a period of two (2) to three (3) years from the date of issuance. Warrants to acquire 7,405,716 shares of common stock were granted during the nine months ended September 30, 2012.

During 2012, the Company sold $2,064,774 of convertible notes for aggregate consideration of $1,831,440, resulting in a discount of $187,094 and conversion of $46,240 of accounts payable. The aggregate relative value of the warrants issued in the 2012 offerings were valued at $832,814 using the Black-Scholes-Merton option valuation model with the following assumptions; risk-free interest rate of .23%-.28%; dividend yield of 0%; volatility factors of the expected market price of common stock of 111%; and an expected life of two to three years (statutory term). The Company also determined that the notes contained a beneficial conversion feature of $1,036,259. The aggregate value of $2,064,774 of the 2012 Offering Warrants, the beneficial conversion feature and the note discount are considered as debt discount and will be amortized over the life of the notes. The value of this debt discount was added to the outstanding debt discount of $1,550,918 as of December 31, 2011. During the period ended September 30, 2012, the Company amortized $3,587,802 of debt discount, resulting in an unamortized debt discount balance of $27,890 as of September 30, 2012.

As of September 30, 2012, the outstanding balance of the notes was $43,450.

Critical Accounting Policies and Estimates

Our discussion and analysis of our condensed consolidated financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an on-going basis, our estimates and judgments, including those related to the useful life of the assets. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the condensed consolidated results that we report in our financial statements. The SEC considers an entity's most critical accounting policies to be those policies that are both most important to the portrayal of a company's financial condition and results of operations and those that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain at the time of estimation.. For a more detailed discussion of the accounting policies of the Company, see Note 2 of Notes to the condensed consolidated financial statements.

We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing our condensed consolidated financial statements as described in Note 1 to Notes to condensed consolidated financial statements. Actual results could differ from those estimates.

Stock-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company's common stock option grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

Accounting for Derivative Financial Instruments

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average series Black-Scholes-Merton option pricing models to value the derivative instruments at inception and on subsequent valuation dates.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current baaed on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Recent Accounting Pronouncements

In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment", an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. We do not believe that the adoption of this new accounting guidance will have a significant effect on our goodwill impairment assessments in the future.

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, "Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities." This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption of this standard to have a material impact on its consolidated results of operations, financial condition, or liquidity.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

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