UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K /A
 
þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the fiscal year ended December 31, 2008
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to ____________

Commission File Number 0-29185
 
Save the World Air, Inc.
(Exact name of registrant as specified in its charter)
 
Nevada
 
52-2088326
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
235 Tennant Avenue
Morgan Hill, California 95037
 (Address, including zip code, of principal executive offices)
 
 (408)-778-0101
 (Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
 Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o    No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer  o      Accelerated filer  o        Non-accelerated filer o      Smaller reporting company x
 
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
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates (excluding voting shares held by officers and directors) as of June 30, 2008 was $21,360,524.
 
The number of shares of the Registrant’s Common Stock outstanding as of March 2, 2009 was 64,498,834 shares.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 9, 10, 11 and 12) of this Form 10K is herein incorporated by reference to Registrant’s definitive Proxy Statement for its 2009 Annual Meeting of Stockholders.
 


 
 

 


SAVE THE WORLD AIR, INC.
FORM 10-K
INDEX
 
   
Page
PART I
Item 1
Business
 
1
 
Item 1A Risk Factors  
18
 
Item 1B Unresolved Staff Comments  
26
 
Item 2
Properties
 
26
 
Item 3
Legal Proceedings
 
26
 
Item 4
Submission of Matters to a Vote of Security Holders
 
27
 
PART II
Item 5
Market for Common Equity and Related Stockholder Matters
 
28
 
Item 6 Selected Financial Data      
Item 7
Management’s Discussion and Analysis or Plan of Operation
 
29
 
Item 7A Quantitative and Qualitative Disclosures About Market Risk       
Item 8
Financial Statements
 
37
 
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
37
 
Item 9A(T)
Controls and Procedures
 
37
 
Item 9B
Other Information
 
38
 
PART III
Item 10
Directors and Executive Officers of Registrant
 
39
 
Item 11
Executive Compensation
 
39
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters
 
39
 
Item 13
Certain Relationships and Related Transactions
 
40
 
Item 14
Principal Accountant Fees and Services
 
40
 
PART IV
Item 15
Exhibits
 
41
 
SIGNATURES
 
44
 


 
i

 

PART I

Forward-Looking Statements

This Annual Report on Form 10-K 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 below under the heading “Risk Factors.” All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements.

Item 1.   Business

The discussion of our business is as of the date of filing this report, unless otherwise indicated.

Overview

Save the World Air, Inc. (“STWA” or “Company” or “we”) designs, licenses and develops products to increase engine performance, reduce harmful emissions and increase fuel efficiency.  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.
 
We have three product lines; MAG ChargR™ and ECO ChargR™, ELEKTRA™ and AOT (Applied Oil Technology).
 
MAG ChargR is past the development stage and we believe that an initial small run of several thousand units may be manufactured and sold by the end of second quarter 2009.  We believe ELEKTRA may be nearing the end of the product development cycle which we believe could culminate in an upcoming Society of Automotive Engineers (SAE)  test to prove and certify the level of fuel savings.  AOT is in the research and development phase.
 
The Company believes that its current product line represents a large addressable market of approximately $6.9 billion made up of existing tractor trailer owners, diesel fleet managers, diesel OEM manufacturers, individual automobile enthusiasts and motorcycle OEM manufacturers.
 

 
1

 

We have obtained a license from Temple University for their patent-pending uniform electric field technology, called ELEKTRA. The ELEKTRA technology consists of passing fuel through a dynamically-controlled strong electrical field.  Although ELEKTRA has a similar effect on fuels as our ZEFS and MK IV technologies, ELEKTRA incorporates a uniform electrical field principle versus the fixed magnetic field used by ZEFS™ and MK IV™ technologies in the MAG ChargR and ECO ChargR products.
 
The Company holds US Patent # 6901917, effective May 21, 2001 for “DEVICE FOR SAVING FUEL AND REDUCING EMISSIONS” covered in the United States, Australia, Canada, China, Russia, India, Indonesia and Mexico for the ZEFS technology used in the MAG ChargR and ECO ChargR.
 
We are also working with Temple University and have had discussions with domestic and international corporations to develop the AOT (Applied Oil Technology) product line for oil refineries and pipelines.  The AOT product line uses the same dynamically-controlled strong electrical field concepts to reduce viscosity as ELEKTRA but is designed for pipeline applications that use thicker, more viscous fuels than the ELEKTRA market.  The AOT product is intended to improve the speed of highly viscous fluids such as crude oil traveling through pipelines.
 
Our MAG ChargR™ and ECO ChargR™  products use fixed magnetic fields to alter some physical properties of fuel by incorporating our patented and patent-pending ZEFS and MK IV technologies.  We differentiate MAG ChargR and ECO ChargR products based on their differing attributes and marketing focus. ECO ChargR products are primarily designed to reduce harmful emissions and MAG ChargR products are primarily designed to enhance performance and fuel economy. Our ECO ChargR product is intended to reduce exhaust emissions in vehicle and small utility motors.  We intend that the ECO ChargR will be marketed primarily to original equipment manufacturers (“OEMs”) as well as to pilot and government-mandated emissions programs.  Our MAG ChargR product is intended to increase power and improve mileage. MAG ChargR is being marketed to municipal fleets and to the specialty consumer accessories market for many types of vehicles, including but not limited to cars, trucks, motorcycles, scooters, all terrain vehicles (“ATVs”), snowmobiles, personal watercraft and small utility motors.  
 
Our first revenues in 2006 and 2007 were generated from initial sales in Asia for our ECO ChargR product in the motorcycle industry. We plan on commencing sales of ECO ChargR to customers in the United States in the motorcycle industry in second quarter of 2009. We also plan on commencing initial sales of our MAG ChargR in the United States in the automobile and motorcycle industry in the second quarter of 2009.  See “Recent Developments” and “Sales and Marketing” below.
 
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.  See “Competition”, “Government Regulation and Environmental Matters” and “Intellectual Property” below.
 
There are significant risks associated with our business, our Company and our stock.  See “Risk Factors” below.
 
We are a development stage Company that generated minimal revenues in 2006 and 2007. We did not generate any sales or revenues in 2008. 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 2008 and will need to raise substantial additional capital in 2009, 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 technologies. Our mailing address is 235 Tennant Avenue, Morgan Hill, California 95037. Our telephone number is (323) 932-7040. Our corporate website is www.stwa.com.  
 
Our common stock is quoted under the symbol “ZERO” on the Over-the-Counter Bulletin Board.
 
Recent Developments

In December 2008, Dr. Luke Turgeon was retained by us as an engineering consultant  to work on the design and engineering of the Company’s ELEKTRA products for its commercialization.  His depth of knowledge and experience in the designing of analog integrated circuits should be helpful to us in moving our efforts to produce and sell our ELEKTRA products.

 
2

 


On February 24, 2009,  we received notice from the California Air Resources Board (CARB) that we have been issued an Executive Order (EO number D-659) approving the MagChargR products for sale in California.  A CARB Executive Order is recognized by the EPA, meaning the product can also be legally sold in all 50 states subject to any applicable state regulations.
  
On February 20, 2009, we entered into a distribution agreement for the MagChargR with Magnumforce Race Car Fabrication, Inc. (Magnumforce). The agreement provides for an initial order of $125,000, payment of which is contingent upon Magnumforce selling our product to its customers.  The product was tested in 2007 in connection with fuel savings and emission reduction and the CARB certification was necessary before distribution and sales could occur.  Magnumforce manufactures and markets a broad line of racing and high performance products for Dodge, Chrysler and Plymouth vehicles through multiple points of distribution.

Our Business Strategy
 
Our business strategy is to fill the need created by three major trends, the increasing cost of fuel, the desire to reduce fuel consumption and the desire to reduce pollution related to transportation.
 
     The Crisis of the Effect of Motor Emissions on Air Pollution

                The incomplete and inefficient burning of fossil fuel in internal combustion engines results in unburned gases, such as hydrocarbons (“THC”), carbon monoxide (“CO”) and oxides of nitrogen (“NOx”) being expelled as harmful emission as a by-product of the engine’s exhaust. These emissions have contributed to significant air pollution and depletion of the ozone layer that protects the world’s atmosphere from harmful ultraviolet radiation. As a result, the world has experienced significant deterioration to its air quality since the beginning of the 20th century and the problem has gotten progressively worse with each passing year. Forecasts published by the World Resources Institute indicate that this trend will continue to accelerate.

                According to the Goddard Institute for Space Studies, in 2000, the world’s roads were supporting about 800 million vehicles, almost 500 million of which are cars and the remainder of which are trucks, buses, motorcycles and scooters. The United States, Japan and Europe account for the majority of motor vehicles, but future growth is expected to be most rapid in Asia and Latin America. Vehicle population is projected to increase by 50-100% by 2030. As a result, vehicles will continue to apply pressure to the environment and it is projected that emissions of all pollutants will be significantly higher in 2030 than today, unless additional controls on emissions are implemented.

                In the United States, California, through the California Air Resources Board (“CARB”), continues to set the lowest emission standards for the country and the United State Environmental Protection Agency (“EPA”) has indicated it may adopt lower emission standards, which would be applicable throughout the United States. California Governor Arnold Schwarzenegger has also announced his intent to seek greenhouse gas (“GHG”) legislation and the United States Congress is also considering GHG legislation. See “Government Regulation and Environmental Matters” below.)

                Governments internationally recognize the serious effects caused by air pollution and many nations have enacted legislation to mandate that engine manufacturers be required to reduce exhaust emissions caused by their products. As evidenced by the overwhelming participation in the establishment of the Kyoto Accord, many nations are moving towards tighter GHG emissions control as well. The European Union (“EU”) currently requires all member nations to adopt EURO 3 emissions standards for motorcycles and EURO 4 emissions standards for automobiles and trucks. Some Eastern European countries contemplating EU admission, and certain Asian countries, have also announced gradual phase-in of EURO standards, including China, Indonesia, Vietnam, Thailand and India. See “Government Regulation and Environmental Matters” below.)

                Notwithstanding initiatives such as these, much more needs to be done to reverse the harmful effects of decades of pollutants contributed by motor emissions. Yet, the cost of adding emissions control devices to engines or vehicles has always been a challenge, since manufacturers shift the cost of such devices to the consumer. In developing nations, where incomes are extremely low, economics and the lack of government resources have hampered progress. Nonetheless, we believe that the social and political realities of protecting our environment may result in further government mandates that manufacturers adopt solutions to reduce harmful motor emissions.

We believe there is a large worldwide demand for products which could increase fuel efficiency and enhanced performance in vehicles and our efforts and focus are directed toward that end.

 
3

 
 
Our Technologies and Products
 
ELEKTRA
 
We have obtained a license from Temple University for its patent-pending electric field technology, called ELEKTRA™. The ELEKTRA technology consists of passing fuel through a specific strong electrical field.  A 2008 paper published by Dr. Rongjia Tao, Ph.D., Chair of the Physics Department at Temple University titled “Electrorheology Leads to Efficient Combustion” says that ELEKTRA lowers the viscosity of fuel, resulting in better atomization of the fuel and improved combustion.
 
Unlike MAG ChargR and ECO ChargR, the implementation of ELEKTRA will be essentially universal, with only a handful of engine models required to cover most applications.  The ELEKTRA technology is designed to be installed in the fuel supply lines of vehicles and, because there are very few variations in the size and type of those lines, we anticipate that a relatively small number of variable capacity devices and a selection of installation adapters will cover most vehicle installations.
 
We have entered into three License Agreements with Temple University covering Temple University’s current patent applications concerning certain electric field effects on gasoline, kerosene and diesel fuel particle size distribution, and concerning electric field effects on crude oil and edible oil viscosity.  The License Agreements are exclusive and the territory licensed to us is worldwide. Pursuant to the License Agreements, we are required to pay to Temple University (i) license fees in the aggregate amount of $300,000.  A payment of $50,000 was due on November 1, 2006; a payment of $100,000 was due on March 2, 2007; a payment of $75, 000 was due on February 2, 2008 and the final payment was due on February 2, 2009.  Annual maintenance fees of $25,000 for the first license were due on November 1, 2007 and November 1, 2008.  Annual maintenance payments of $125,000 for two of the licenses were due January 1, 2008. In addition, each License Agreement separately provides that we will pay royalties to Temple University on net sales of products incorporating the technology licensed under that License Agreement in an amount equal to 7% of the first $20 million of net sales, 6% of the next $20 million of net sales and 5% of net sales in excess of $40 million. Sales under the three License Agreements are not aggregated for purposes of calculating the royalties payable to Temple University. In addition, we have agreed to bear all costs of obtaining and maintaining patents in any jurisdiction where we direct Temple University to pursue a patent for either of the licensed technologies. Should we not wish to pursue a patent in a particular jurisdiction, that jurisdiction would not be included in the territory licensed to  us.
 
At December 31, 2008 we were in default in the amount of $300,000 in connection with our payment obligations under the License Agreements and maintenance payments.  On November 10, 2008, we received written notice from Temple University of a material breach relating to required payments under the License Agreements.  The notice provides us with 60 days’ notice to cure the material breach.  Our failure to cure could result in a termination of the License Agreements. If the termination occurs,  we estimate this would have a material adverse impact on our financial condition and operations.  Under the License Agreements we are subject to a penalty of 1% per month of the amounts due and unpaid under the License Agreements.  As of December 31. 2008, we estimate the penalty to be $40,250, and we have accrued this in the accompanying financial statements.
 
We have also entered into a research and development agreement (R&D Agreement) with Temple University to conduct further research on the ELEKTRA technology. Under the R&D Agreement Temple University will conduct a 24-month research project towards expanding the scope of, and developing products utilizing, the technologies covered under the License Agreements, including design and manufacture of prototypes utilizing electric fields to improve diesel, gasoline and kerosene fuel injection in engines using such fuels and a device utilizing a magnetic field to reduce crude oil viscosity for crude oil (paraffin and mixed base) and edible oil flow in pipelines. If the research project yields results within the scope of the technologies licensed pursuant to the License Agreements, those results will be deemed included as rights licensed to us pursuant to the License Agreements. If the research project yields results outside of the scope of the technologies covered by the License Agreements, we have a six-month right of first negotiation to enter into a new worldwide, exclusive license agreement with Temple University for the intellectual property covered by those results.  Pursuant to the R&D Agreement, we will make payments to Temple University in the aggregate amount of $500,000.

At December 31, 2008 we were in default in the amount of $376,250 under the R&D Agreement.  On November 10, 2008, we received written notice of default from Temple University. The notice provides us with 60 days to cure the material breach.  Our failure to cure the breach could result in the termination of the R&D Agreement.  If the termination occurs, we estimate this would have a material adverse impact on our financial condition and operations.  

 
4

 


At November 30, 2008, we owed to Temple University a total of $716,500 for the License Agreements, Maintenance Fees, R&D Agreement and penalties.  On January 9, 2009, we entered into a Letter Agreement with Temple University wherein Temple University granted to us an extension of time to cure the above-referenced breaches until March 31, 2009.  The Letter Agreement provides for payments of $100,000 on each of January 31, 2009, February 28, 2009 and March 31, 2009.   We made the January 31, 2009 payment but did not make the payment due on February 28, 2009. On March 26, 2009 we received a written extension for both the February 28, 2009 payment and the March 31, 2009 payment until April 30, 2009.  All additional amounts past due as of November 10, 2008 will be re-negotiated on or before March 31, 2009, however, this has now been extended to April 30, 2009.  A penalty equal to 1% of the amount due and unpaid on the first day of each calendar month will be added to the outstanding amount due Temple University.
 
We believe that the applications for products incorporating the ELEKTRA technology will include gas, diesel and bio-fuel injected motor vehicles, as well as applications in aviation, marine, oil pipeline and refining industries.  Subject to our cash flow and liquidity limitations, we are currently developing diesel tractor trailer applications and our present intention, subject to change, is to seek joint venture partners to commercialize the ELEKTRA technology in various applications.  Subject to adequate financing, we currently believe that we may be able to commence sales of ELEKTRA products by the third quarter of 2009.
 
Applied Oil Technology (AOT)
 
We have also entered into a research and development agreement (“R&D Agreement”) with Temple University to conduct further research on the ELEKTRA technology. Under the R&D Agreement Temple University in conducting an ongoing research project towards expanding the scope of, and developing products utilizing, the technologies covered under the License Agreements, including a device utilizing a magnetic field to reduce crude oil viscosity for crude oil (paraffin and mixed base) and edible oil flow in pipelines.
 
ZEFS and MK IV Technologies in MAG ChargR and ECO ChargR
 
The ZEFS and the MK IV technology in the MAG ChargR and ECO ChargR products place a magnetic field in and around the fuel and air that lowers fuel thickness and influences oxygen to improve combustion. MAG ChargR and ECO ChargR contain permanent rare-earth magnets, which produce a very strong magnetic field. This field, when arranged in specific manner of shape and strength, causes a change in the fuel as it passes through the field. As fuel passes through the magnetic field, a change in the fuel occurs facilitating a decline in both viscosity and surface tension. This allows for finer atomization, resulting in a more optimized mixture and therefore more efficient combustion.  Depending on the specific application of these products to specific makes and models of vehicles, this improved combustion may offer one or more of the following benefits; (i) lower emissions, (ii) more horsepower and torque and (iii) improved fuel economy.  
 
The paper titled, “Viscosity Reduction in Liquid Suspensions by Electric or Magnetic Fields” published by Dr. Rongjia Tao, Ph.D., of Temple University, shows that applying a magnetic field reduces thickness (viscosity) of oil by 17%.  The paper “Magnetic Field Effects on the Combustion Processes in Diffusion Flames” published by LSU in 2005 demonstrates that oxygen is attracted to a magnetic field.  The ZEFS and MK IV technologies used in the MAG ChargR and ECO ChargR products use these properties of reduced fuel viscosity and influenced flow of oxygen to improve combustion.
 
Improved combustion increases engine power and performance.  We have introduced the ECO ChargR, which incorporated our MK IV technology, and the MAG ChargR, which incorporates either our ZEFS or MK IV technologies, depending upon the application.  We have designed and tested various versions of our MAG ChargR and ECO ChargR products for use on 2- and 4-stroke carbureted and fuel injection gasoline engines.
 
We differentiate our MAG ChargR and ECO ChargR products based on their differing attributes and marketing focus. ECO ChargR products are primarily designed for devices with engines that fall outside environmental regulation and often do not have emissions control systems.  MAG ChargR products are primarily designed for engines already subject to environmental regulation and vehicles that often do already have some emissions control technology.
 

 
5

 

Additionally, ECO ChargR products are primarily designed to reduce harmful emissions and MAG ChargR products are primarily designed to enhance performance and fuel economy.  The ECO ChargR is intended to reduce exhaust emissions in vehicle and small utility motors.  ECO ChargR products will be marketed primarily to OEMs as well as to pilot and government-mandated emissions programs.  The MAG ChargR is intended to increase power and improve mileage. MAG ChargR products will be marketed primarily to the specialty consumer accessories market for many types of vehicles, including but not limited to cars, trucks, motorcycles, scooters, ATVs, snowmobiles, personal watercraft and small utility motors.  Because our MAG ChargR and ECO ChargR products are customized to specific brands, models and engine sizes, these products will require hundreds of individually developed models to accommodate the market.
 
MAG ChargR and ECO ChargR have been developed for one-, two- and four- barrel carbureted and fuel injection engines. These products are easily fitted to the base plates of carburetors and fuel injection systems; the devices are compact, there are no moving parts. They are also inexpensive to produce, extremely durable and unaffected by poor quality fuel.
 
We believe that testing by the Company, as well as by independent third-party laboratories, has demonstrated that both MAG ChargR and ECO ChargR generate significant reductions in THC and CO emissions and, in the case of MAG ChargR, also improve fuel efficiency by lowering gas consumption and increase engine performance.  

Research and Development
  
In late 2005, we established a research and product development facility in Morgan Hill, California.   We have tested products incorporating our ZEFS and MK IV technologies for multiple makes and models of automobiles, motorcycles and ATVs.  We are engaged in research and development of additional prototypes and products, including ELEKTRA and other magnetic technologies and products, at our Morgan Hill facility.
 
The Company has entered into a research and development agreement (R&D Agreement) with Temple University to conduct further research on the ELEKTRA technology. Under the R&D Agreement Temple University will conduct a 24-month research project towards expanding the scope of, and developing products utilizing, the technologies covered under the License Agreements, including design and manufacture of prototypes utilizing electric fields to improve diesel, gasoline and kerosene fuel injection in engines using such fuels and a device utilizing a magnetic field to reduce crude oil viscosity for crude oil (paraffin and mixed base) and edible oil flow in pipelines.

Independent Laboratory and Scientific Testing
 
ECO ChargR (ZEFS Technology)
 
The four internationally recognized emissions standards testing agencies for the certification of motor vehicles, parts, systems and aftermarket devices are the EPA, CARB, United Kingdom Vehicle Certification Agency (“VCA”) and Technischer Überwachungs-Verein (TUV-Germany/EU).
 
 Independent third-party laboratories have conducted tests of devices incorporating our ZEFS and MK IV technologies.  We believe that research and testing using government standard test equipment in Thailand has demonstrated that the tested devices incorporating our ZEFS technology improves performance.  
 
In 2006, testing on a device incorporating our MK IV technology for Harley-Davidson style motors was conducted at the EPA and CARB certified testing facility Olson Labs. We believe that these tests yielded results that would allow these motors to meet current and future EPA and CARB emissions standards without expensive fuel injection and catalytic converters.
 

 
6

 

Further testing on a used 4-stroke motorcycle incorporating our ZEFS technology was conducted in November 2005 in Bangkok, Thailand at Automotive Emission Laboratory, Pollution Control Department, Ministry of Natural Resources and Environment of Thailand, and was performed jointly with S.P. Suzuki of Thailand, the authorized distributor of Suzuki products in Thailand.  The test results were as follows:
 

 
 
THC (g/km)
CO (g/km)
NOx (g/km)
CO2 (g/km)
Without ECO ChargR (ZEFS)
0.536
0.162
9.67
52.851
With ECO ChargR (ZEFS)
0.52
0.104
1.42
48.553
% Change
-3.00%
-35.80%
-85.32%
-8.13%

 
In addition, during the testing horsepower increased at all ranges, peaking at 18.8% at 50km/h and fuel economy increased 33% over the baseline tests.
 
 Additional testing was conducted in early March 2006 on a new Chinese-manufactured carbureted 4-stroke Suyijia SZK125 motorcycle incorporating our ZEFS technologies at Hong Kong Exhaust Emissions Laboratory (“HKEEL”).  The test results were as follows:
 

 
 
THC (g/km)
CO (g/km)
NOx (g/km)
CO2 (g/km)
Without ECO ChargR (ZEFS)
0.36
0.087
2.59
44.53
With ECO ChargR (ZEFS)
0.33
0.108
1.86
43.6
% Change
-8.3%
24.1%
-28.2%
-2.1%

 
In addition, during the testing fuel economy increased 7% over the baseline tests.
 
Also in May 2006, at the request of the office of the Minister of Energy for the Kingdom of Thailand, we participated in a “hot start” test at the testing laboratories of the Thai petroleum company, the PTT Public Company Limited, of products incorporating our MK IV technology for fuel efficiency. In this test, the Thai distributor for Suzuki Motorcycles, SP Suzuki, supplied a new 125cc 4-stroke Best motor scooter to be tested without our preparing or participating in the installation of a device incorporating our ECO ChargR (MK IV technology). The mean test results showed an average 5.13% improvement in fuel efficiency, as follows:
 
  
 
Run 1
 
Run 2
 
Run 3
   
   
(l/km)
 
(l/km)
 
(l/km)
 
Average
Baseline FC Test Runs without MK IV Device
   
0.0196
     
0.0195
     
0.0193
     
0.0195
 
FC Test Runs with MK IV Device
   
0.0186
     
0.0184
     
0.0185
     
0.0185
 
Difference
   
0.0010
     
0.0011
     
0.0008
     
0.0010
 
Improvement
   
5.10
%
   
5.64
%
   
4.15
%
   
5.13
%

 
7

 

In February 2007, tests were performed at Olson Labs for the purpose of evaluating the emissions reduction and fuel efficiency improvement benefits of our ECO ChargR product.  The mean test results were as follows:
 
Total Hydrocarbon (THC) Emissions (gms/km)
   
Suzuki 110cc
 
RevTech 100cc
 
Merch 125cc
AVERAGE BASELINE
   
0.124
     
1.821
     
1.372
 
AVERAGE ECO ChargR
   
0.098
     
1.685
     
1.302
 
% Improvement
   
21.0
%
   
7.5
%
   
5.1
%
 
 
Carbon Monoxide (CO) Emissions (gms/km)
   
Suzuki 110cc
 
RevTech 100cc
 
Merch 125cc
AVERAGE BASELINE
   
1.729
     
29.086
     
21.201
 
AVERAGE ECO ChargR
   
1.231
     
18.160
     
15.805
 
% Improvement
   
28.8
%
   
37.6
%
   
25.5
%
 
 
Oxides of Nitrogen (NOx) Emissions (gms/km)
   
Suzuki 110cc
 
RevTech 100cc
 
Merch 125cc
AVERAGE BASELINE
   
0.066
     
0.136
     
0.287
 
AVERAGE ECO ChargR
   
0.063
     
0.196
     
0.268
 
% Improvement
   
4.5
%
   
-44.0
%
   
6.4
%
                         
Fuel Economy (miles per gallon)
   
Suzuki 110cc
 
RevTech 100cc
 
Merch 125cc
AVERAGE BASELINE
   
241.97
     
39.68
     
34.83
 
AVERAGE ECO ChargR
   
253.16
     
41.08
     
34.82
 
% Improvement
   
4.6
%
   
3.5
%
   
0.0
%
 
 
Sales and Marketing
 
According to the Goddard Institute for Space Studies, in 2000, the world's roads were supporting about 800 million vehicles, almost 500 million of which are cars and the remainder of which are trucks, buses, motorcycles and scooters. Vehicle population is projected to increase by 50-100% by 2030. As a result, vehicles will continue to apply pressure to the environment unless additional controls on emissions are implemented.
 

 
8

 

In the United States, California, through the California Air Resources Board (“CARB”), continues to set the strictest emission standards for the country and the United States Environmental Protection Agency (“EPA”) has indicated it may adopt more stringent emission standards, which would be applicable throughout the United States. California Governor Arnold Schwarzenegger has also announced his intent to seek greenhouse gas (“GHG”) legislation and the United States Congress is also considering GHG legislation.  
 
Governments internationally recognize the serious effects caused by air pollution and many nations have enacted legislation to mandate that engine manufacturers be required to reduce exhaust emissions caused by their products. As evidenced by the overwhelming participation in the establishment of the Kyoto Accord, many nations are moving towards tighter GHG emissions control as well. The European Union (“EU”) currently requires all member nations to adopt EURO 3 emissions standards for motorcycles and EURO 4 emissions standards for automobiles and trucks. Some Eastern European countries contemplating EU admission, and certain Asian countries, have also announced gradual phase-in of EURO standards, including China, Indonesia, Vietnam, Thailand and India.
 
Management believes that US EPA, CARB and international governments will continue to lower emission standards below even these recent levels. Yet, the cost of adding emissions control devices to engines or vehicles has always been a challenge, since manufacturers shift the cost of such devices to the consumer.  In developing nations, where incomes are extremely low, economics and the lack of government resources have hampered progress.  
 
We have three product lines; MAG ChargR™ and ECO ChargR™, ELEKTRA™ and AOT (Applied Oil Technology)   The MAG ChargR is past the development stage and the Company believes that an initial small run of several thousand units may be manufactured and sold by the end of second quarter 2009.  We believe that ELEKTRA may be nearing the end of the product development cycle which we believe could culminate in an upcoming SAE (Society of Automotive Engineers) test to prove and certify the level of fuel savings.  AOT is in the research and development phase.
 
ELEKTRA
 
Management believes that there is a large and active market for a product such as ELEKTRA that can reduce the fuel consumption of diesel engines.  In 2006, the US Department of Transportation published that there were 3.1 million “Truck, combination” (tractor trailers), Busses and Class I locomotives in service in the US. According to the Specialty Equipment Manufacturing Association’s “2004/05 Diesel Market Study,” there were 3.1 million Diesel Light Trucks registered in the US and 151,427 diesel cars sold in the US since 1991.
 
In a 2008 paper published by Dr. Rongjia Tao, Ph.D., Chair of the Physics Department at Temple University titled “Electrorheology Leads to Efficient Combustion,” Dr. Tao stated that over six months of testing that ELEKTRA increased highway mileage of a Mercedes 300D 19% , from 32 mpg to 38 mpg and increased city mileage 12% to 15%.
 
The Company has had  preliminary discussions with the American Trucking Association and with AITA (America’s Independent Truckers Association, Inc)  The SAE (Society of Automotive Engineers) has advised us that once the Type II fuel evaluation test results in verifying a meaningful fuel savings, they will publish a story on the product along with the test results and accompanying photos and contact information.
 
Subject to proper capitalization, we intend to embark upon a sales and marketing program through distributors in the trucking industry.
 
Applied Oil Technology
 
The pipeline construction industry in the U.S. was approximately $11 billion in 2007 according to October 27 2008 “Pipeline Construction U.S. Industry Report” from IBIS World.  The overall pipeline industry is forecast to grow at 4.7%.  Management is in the process of developing more specific analysis of the market for the AOT products.
 
 
9

 
 
 
MAG ChargR
 
In October 2004, we commenced initial marketing efforts for MAG ChargR and ECO ChargR products incorporating our ZEFS and MK IV technology.  We are focused on selling or licensing our technologies and products domestically and internationally to the consumer specialty accessories market, to municipalities, to motorcycle, automobile, carburetor, fuel-injection and diesel engine manufacturers and exhaust and muffler OEMs. We have made presentations of our MAG ChargR and ECO ChargR products to OEMs in the United States, Asia and Europe.  We have already had discussions with the Department of General Services in California which maintains a fleet of more than 50,000 vehicles including more than 5000 police cars.
 
On most automobiles, the MAG ChargR is installed between the throttle body and the intake manifold.  The geometry of this part of the engine varies with each automobile make, manufacturer, year and engine displacement.  STWA has identified dozens of MAG ChargR models that will fit popular models from Cadillac, Chevrolet, Chrysler, Dodge, Ford, GMC, Hummer, Isuzu, Jeep, Lincoln, Mercury, Mitsubishi, Nissan, Pontiac and Toyota.  The MAG ChargR models selected include nine of the top 50 bestselling automobiles of all time.
 
In determining the order to bring MAG ChargR models to market, the following criteria have been considered.
 
 Size of the installed base of cars applicable to an individual MAG ChargR model
 
 Probability that the owner of such an automobile would purchase and aftermarket performance enhancement product
 
 Level of improvement that MAG ChargR delivers for a specific make, model, year and displacement
 
On February 20, 2009, we entered into a distribution agreement for the MagChargR with Magnumforce Race Car Fabrication, Inc.  (Magnumforce). The agreement provides for an initial order of $125,000, payment of which is contingent upon Magnumforce selling our product to its customers.  The product was tested in 2007 in connection with fuel savings and emission reduction and the CARB certification was necessary before distribution and sales could occur.  Magnumforce manufactures and markets a broad line of racing and high performance products for Dodge, Chrysler and Plymouth vehicles through multiple points of distribution.
 
We have also had discussions with Brothers Performance and Motorcycle Products Consulting Incorporated (MPCI) to carry the MAG ChargR product.
 
According to SEMA, buying behavior has shifted in the last twelve months with enthusiasts now purchasing more performance products online than at retail.  To that end, we have targeted online retailers as distribution partners.
 
ECO ChargR
 
In July 2006, we entered into a separate agreement with SS Sales, to provide exclusive marketing and promotional services in the western United States and western Canada for our MAG ChargR and ECO ChargR products.  SS Sales will be paid a commission equal to 5% of the gross amount actually collected on contracts we enter into during the contract term for existing or future customers introduced by SS Sales. SS Sales is owned by Nathan Shelton, one of the directors of the Company since February 12, 2007.  We also have an agreement pending with Scaffidi-Bolio & Associates to be our sales agents in a defined territory in the eastern United States and eastern Canada.
 
At this time we have devoted limited resources to the marketing of our ECO ChargR while we focus on our MAG ChargR and ELEKTRA.  Management is reassessing on a continuing basis the devotion of the Company’s resources to its products.

 
10

 

 
Manufacturing and Product Development
 
ELEKTRA
 
As a result of six months of field testing and refining, we are refitting the ELEKTRA with a new power supply and electronics to optimize the exposure of the fuel to the electric field in an attempt to  create peak efficiency. Dr. Luke Turgeon and his company have recently been retained by us to bring simulation and electronic design skills in an attempt to allow us to go from design to a stable cost effective volume production in the fastest time possible.
 
Management believes that having the SAE (Society of Automotive Engineers) Type II test results verifying that ELEKTRA saves 10% of more on fuel consumption will be the milestone that will allow the Company to begin closing sales of the product.  The 10% fuel savings target is for the after-market ELEKTRA product.  Management believes that the OEM product, integrated into the manufacturer’s design may be able to yield higher levels of fuel savings due to the fact that the manufacturer will have ELEKTRA communicate the engine’s electronics to optimize the advantageous effect as the fuel flow changes over time.
 
Upon completion of our tests and the results being published, management will seek contracts within the trucking industry and the selection of a manufacturing company as follows:
 
Selecting a Manufacturing Partner
 
We intend to outsource the manufacturing of the ELEKTRA and are looking for three things in selecting a manufacturing partner.  We are currently interviewing candidates.
 
 Existing proven, large-scale manufacturing and distribution for transportation OEMs
 
 Existing relationships with fleet managers of large diesel truck operators
 
 Forward-looking proactive corporate vision looking to bold expand their market share
 
Applied Oil Technology
 
The Company has signed a Non-Disclosure Agreement with a multi-national energy company with a market capitalization in excess of $250 billion.  The Company is seeking to develop a manufacturing and product development plan for AOT.
 
MAG ChargR and ECO ChargR
 
As of December 15, 2008, the Company has built and tested three working prototypes of the MAG ChargR for the following make, model and engine configurations.
 
Make
Model
Year
Engine
Chrysler
SRT8
2006
6.1L Hemi
Dodge
Challenger
2008
6.1L Hemi
Chevrolet
Suburban
2005
4.6L Big Block
 
Of these three models, the Company has received and published the following test results for product performance.
 
Make
Model
Year
Engine
HP Increase @ 4680 RPM
Torque Increase @ 4680 RPM
Chrysler
SRT8
2006
6.1L Hemi
3.4%
5.4%
Chevrolet
Suburban
2005
Big Block
11.5%
8.9%

 
11

 
 
In order to start sales in California, the Company is required to obtain a certification for the MAG ChargR from the California Air Resources Board (CARB).  The Company has received CARB certification and can now sell and distribute throughout the United States.
 
For the MAG ChargR product roll-out, we will attempt to have the  product ready for the ten most popular general purpose automobiles listed above and the ten most popular Muscle Cars that fit our value proposition.  According to Musclecarfacts.net on December 14, 2008, the ten most popular Muscle Cars in 2008 are, in order; the 2009 Camaro, the 1967 Camaro, the 1969 Camaro, the 1970 Challenger, the 1974 GTO, the 1970 AMX, the 1970 Barracuda, the 1969 AMX, the 1968 Camaro, and the 1968 AMX.
 
 The manufacture of the magnets used in products incorporating our ZEFS or MK IV technologies requires a rare-earth metal, neodymium. Neodymium is readily available in China, at relatively stable prices.
 
Competition
 
The automotive and motor engine industry is highly competitive. We have many competitors in the United States and throughout the world developing technologies to make engines more environmentally friendly and fuel-efficient. Many of our competitors have greater financial, research, marketing and staff resources than we do. For instance, automobile manufacturers have already developed catalytic converters on automobiles in order to reduce emissions, but, as discussed above, this creates greenhouse gases and makes controlling emissions costly and complex. The industry has also proposed high-pressure fuel injection systems for gas and diesel applications but these modifications are extremely expensive.
 
Although we are unaware of any technologies that compete directly with our technologies, there can be no assurance that any unknown existing or future technology will be, superior to products incorporation our ZEFS and MK IV technologies, as well as any products we may produce incorporating the ELEKTRA  technology may provide, the benefits of all of emission reductions, fuel efficiency and engine performance enhancement.   There are competing products which provide one or more of the beneficial attributes of our ZEFS, MK IV and ELEKTRA technologies, but not all three benefits.  Additionally, we believe that those competing products that show benefit in more than one area demonstrate greater benefit in only one area and provide only minimal improvements in other areas.
 
Competing emissions reduction products are largely comprised of catalytic converters and alternative fuels. Catalytic converters are much more expensive than products incorporating our ZEFS and MK IV technologies, and are sensitive and subject to damage caused by the poor quality or adulteration of fuel commonly used in developing nations. In addition, while catalytic converters reduce emissions, they do not improve fuel efficiency or engine performance. Domestically, there are a large number of manufacturers and distributors of catalytic converters, such as Engelhart Inc., Dow Corning Inc., Delphi Corporation and Car Sound Exhaust System, Inc., among others. Internationally, most catalytic converters are manufactured and distributed by Engelhart Inc., Delphi Corporation and a large number of smaller businesses in a fragmented industry.
 
 Alternative fuels such as hydrogen, electricity, liquid natural gas and ethanol, generally require more costly conversions and the fuels are not readily available, if at all, in most of the world.
 
 We are not aware of any other technology using magnetic, uniform electrical field fuel treatments or products based on such technology which has been proven to significantly improve fuel mileage. There are many products currently on the market that claim to increase fuel efficiency. We believe that the majority of these products have not undergone or provided independent scientific validation from a recognized third party, or testing at a certified laboratory. Fuel injection does improve fuel efficiency and performance, but is extremely expensive from the perspective of the developing nations of the world. Major domestic and international manufacturers and distributors of fuel injection systems include Delphi Corporation, Robert Bosch Corporation, Siemens Corporation, and a large number of smaller businesses in a fragmented industry.
 
We are not aware of any other technology using magnetic, uniform electrical field fuel treatments or products based on such technology which has been proven to significantly improve performance. There are many products which a consumer can purchase to increase overall performance. All of the most effective such products, including forced induction, nitrous oxide injection and exotic exhaust, are very expensive, increase emissions, reduce fuel efficiency and shorter the life of the engine. Major domestic and international manufacturers and distributors of performance-enhancing systems include Holley Performance Products, Inc., Nitrous Express Inc., Paxton Automotive Corporation, Eaton Corporation, Vortec Engineering LLC, Flowermaster, Inc., Hedman Manufacturing, Inc., Gibson Performance, Inc. and a large number of smaller businesses in a fragmented industry.
 

 
12

 

Government Regulation and Environmental Matters

Our research and development activities are not subject to any governmental regulations that would have a significant impact on our business and we believe that we are in compliance with all applicable regulations that apply to our business as it is presently conducted. Our products, as such, are not subject to certification or approval by the EPA or other governmental agencies domestically or internationally. Instead, such agencies test and certify a sample engine fitted with our products.  Depending upon whether we manufacture or license our products in the future and in which countries such products are manufactured or sold, we may be subject to regulations, including environmental regulations, at such time.

U.S. Government Regulation

We are currently pursuing EPA and CARB executive order exemptions for our products. These exemptions would signify that our products do not adversely affect vehicles emissions and would allow our products to be used on emissions control equipped on and off-road vehicles. We are also submitting our technologies to the EPA under the “511 Program” which was established in 1970 to evaluate new emissions and fuel saving technologies for cars and trucks. In April 2007, we made a formal request that the EPA consider our carbureted 4-stroke engine device as part of this program, even though there are few carbureted cars and trucks left on the road, because the EPA is tightening emissions regulation on motorcycle, utility and non-road vehicles. We believe that these applications are well suited for our technologies.  We are unable to estimate the time it may take for the EPA to act upon our application or predict whether or not such application will be favorably received, especially considering that we are asking the EPA to amend its existing program.
 
EU Regulation
 
The current EU emissions standard for motorcycles is EURO 3, and for automobiles and trucks the emissions standard is EURO 4. Although there is not a EURO 4 standard for motorcycles currently, the current trend appears to be for stricter regulation. On the other hand, the automobile standard is currently moving towards adopting EURO 5 standards by 2009 and EURO 6 by 2014. These standards are difficult to attain and the automotive industry is spending billions of Euros to engineer solutions. European auto manufacturers are becoming increasingly at odds with the European Commission (“EC”), the body which evaluates the industry and makes regulatory standards recommendations to the EU, over CO2 emissions regulations.
 
The CO2 emissions limits are currently a voluntary agreement between the EU and the auto manufacturers. The EU target is to reach an average CO2 emission of 120 g/km for all new passenger cars by 2012. However it has become increasingly clear that the voluntary agreement will not succeed. The average CO2 emissions per car have dropped only to 160 g/km in 2005, whereas the average was 186 g/km in 1995.  Because of this, lawmakers have started considering regulation.  In late 2005, the European Parliament passed a resolution in support of mandatory CO2 emissions standards to replace the current voluntary agreement. In late 2006, the EC announced that it was working on a proposal for a legally-binding limit CO2 emissions from cars. The EC is also proposing the doubling of the fuel efficiency of new cars by 2020.
 
Currently the only accepted method for reducing a vehicle’s CO, THC and NOx emissions is catalytic converters, but this system converts these gases into largely CO2 and N2O, both GHGs. Therefore the lower the CO, THC and NOx output, the higher the CO2 production. The only remedy is increasing fuel efficiency and the automakers argue this is costly and results in small low-power vehicles which consumers will not want to buy.


 
13

 

Intellectual Property

ELEKTRA
 
On May 14, 2004, we filed a patent application in Australia with respect to certain technology   (Method and Apparatus for a Treatment of a Fluid).  We entered into a license agreement with Temple University (the “2004 License Agreement”), for a research project with Dr. Rongjia Tao as principal investigator. That project and the related products involve the development and commercialization of underwater and cold temperature applications for improving oil flow under different temperature and pressure conditions. In connection with the 2004 License Agreement, we assigned the original patent application for this technology to Temple University and agreed to assign all subsequent patent applications for this technology to Temple University.  Under the 2004 License Agreement, we have the right to file additional patent applications, at our sole expense but for the benefit of Temple University, in various countries.  We have exclusive rights to this technology only in countries where we file patent applications.  In 2005, 2006 and 2007, we filed several additional patent applications in various countries.  As a result of Dr. Tao’s recently announced progress in reducing viscosity of crude oil with magnetic pulses, we believe that this technology may have commercial viability. We are maintaining the patent applications in the countries in which we have filed them, while we continue to explore the commercial benefits of pursuing this opportunity in these and possibly other countries.   
 
Method and Apparatus for Treatment of a Fluid Patent Application
 
This is an apparatus for the magnetic treatment of oils to improve viscosity.  Under the 2004 License Agreement with Temple University, we have filed the following patent applications, at our sole expense and for the benefit of Temple University, in order to secure rights to license this technology in these countries.  US PTO Application #11/519168 was filed on May 13, 2005.   The priority date is May 14, 2004 from Australian patent application 2004902563.  This has been registered in other territories as follows.
 

 
Country
 
Number
 
Filing date
 
Status
GCC *
 
GCC/P/2005/5066
 
22 August 2005
 
Application filed – awaiting examination.
Brazil
 
0510871-3
 
13 May 2005
 
Examination to be requested by May 2008
Canada
 
2566739
 
13 May 2005
 
Examination to be requested by May 2010
China
 
200580023369.3
 
13 May 2005
 
Examination requested April 2007
Algeria
 
060593
 
13 May 2005
 
Application filed – awaiting examination
Eurasia **
 
200602114
 
13 May 2005
 
Under examination – response filed.
Egypt
 
PCT 1087/2006
 
13 May 2005
 
Application filed – awaiting examination
United Kingdom
 
0624025.3
 
13 May 2005
 
Under examination – response filed
Indonesia
 
WO0200603429
 
13 May 2005
 
Application filed – examination to be requested by 13 May 2008
Libya
 
To be advised
     
Application sent to agent
Mexico
 
PA/a/2006/013206
 
13 May 2005
 
Application filed – awaiting examination
Norway
 
20065632
 
13 May 2005
 
Application filed – awaiting examination
United States
 
11/519168
 
13 May 2005
 
Application filed – awaiting examination
 
* Covers Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, and Bahrain.
 
** The Eurasian Patent Convention was signed on September 9, 1994 in Moscow by the Heads of the Governments of the Republic of Azerbaijan, the Republic of Armenia, the Republic of Belarus, Georgia, the Republic of Kazakstan, the Kyrgyz Republic, the Republic of Moldova, the Russian Federation, the Republic of Tajikistan, Ukraine and came into force on August 12, 1995 after Turkmenistan, Belarus and Tajikistan deposited their instruments of accession to the Convention to the WIPO Director General, on March 1, 1995, May 8, 1995 and May 12, 1995 respectively. To date, the Convention is also ratified by the Russian Federation, the Republic of Kazakhstan, Republic of Azerbaijan, the Kyrgyz Republic, the Republic of Moldova and the Republic of Armenia.
 
14

 

MAG ChargR and ECO ChargR
 
ZEFS Patent Applications
 
In December 1998, we acquired all of the marketing and manufacturing rights to the ZEFS technologies from the purported inventor of the technology in exchange for 5,000,000 shares of our common stock, $500,000 and $10 royalty for each unit sold. In November 2002, under our settlement with the bankruptcy trustee for the estate of the purported inventor and his wife, the trustee transferred all ownership and legal rights to an existing international patent application for the ZEFS MK I technology to us. In exchange for these rights, we issued to the bankruptcy trustee a warrant to purchase 500,000 shares of our common stock at $1.00 share and granted a $0.20 royalty on each device we sell.
 
In May 2002, we settled a dispute with Kevin “Pro” Hart, who claimed proprietary rights to the ZEFS technologies. In November 2002, under our settlement with the bankruptcy trustee for the estate of Mr. Hart, the trustee assigned all ownership and legal rights to the international patent application for the ZEFS technology to us, in exchange for an option to purchase 500,000 shares of our common stock at $1.00 share and a $0.20 royalty on each device we sell. Mr. Hart died in March 2006.
 
We obtained the patent application for the ZEFS MK1 device originally filed in Australia on May 19, 2000. The United States Patent and Trademark Office issued the patent on 7 June 2005 for the ZEFS MK1 device. The duration of the patent is 20 years from the date the original application was filed. Overall, we have applied for a patent on an international basis in approximately 64 countries worldwide.
 
 ZEFS MK1—Device For Saving Fuel and Reducing Emissions. This fuel saving device has a disk- like nonmagnetic body provided with a central opening and a number of permanent magnets having opposed polarities positioned about the central opening to provide multidirectional magnetic fields. The device is positioned in a fuel air mixture to reduce emissions.
 
The following table summarizes the status of the ZEFS MK1 patent application in the following countries:
 
Country
 
Number
 
Filing date
 
Status
Australia
 
2001258057
 
21 May 2001
 
GRANTED
             
             
             
Canada (small
entity status)
 
2409195
 
21 May 2001
 
Examination requested April 2006
China
 
01809802.9
 
21 May 2001
 
Under examination – response filed
Columbia
 
02115018
 
21 May 2001
 
Examination requested 23 July 2004.
             
Czech Republic
 
PV 2002-4092
 
21 May 2001
 
Accepted  - awaiting Deed of Letters Patent
Eurasian +++
 
200201237
 
21 May 2001
 
GRANTED. Renewed in Russia only.
Europe  ++
 
019331222.2
 
21 May 2001
 
Awaiting examination
             
Hong Kong
 
04100327.0
 
21 May 2001
 
Automatic grant upon grant of the Chinese application
             
India*
 
IN/PCT/2002/01523
 
21 May 2001
 
Under Examination – response filed
Indonesia
 
WO0200202844
 
21 May 2001
 
Accepted – awaiting Deed of Letters Patent

 
15

 


             
Korea [South]
 
2002-7015531
 
21 May 2001
 
Under examination – response filed.
Japan
 
586731/2001
 
21 May 2001
 
Examination to be requested by 21 May 2008
Mexico
 
PA/A/2002/011365
 
21 May 2001
 
GRANTED
             
New Zealand
 
523113
 
21 May 2001
 
GRANTED
Norway
 
20025531
 
21 May 2001
 
Awaiting examination
Poland
 
P358837
 
21 May 2001
 
Awaiting examination
             
Singapore
 
93310
[WO 01/90562]
 
21 May 2001
 
GRANTED
             
Sri Lanka
 
12918
 
21 May 2001
 
GRANTED
             
             
United States
 
6901917
 
21 May 2001
 
GRANTED
Vietnam
 
1-2002-01168
 
21 May 2001
 
GRANTED
++European patent application covers Austria Belgium Switzerland Liechtenstein Cyprus Germany Denmark Spain Finland France Great Britain Greece Ireland Italy Luxembourg Netherlands Portugal Sweden Turkey Lithuania Latvia Slovenia Romania Macedonia.
 
 +++ The Eurasian Patent Convention was signed on September 9, 1994 in Moscow by the Heads of the Governments of the Republic of Azerbaijan, the Republic of Armenia, the Republic of Belarus, Georgia, the Republic of Kazakhstan, the Kyrgyz Republic, the Republic of Moldova, the Russian Federation, the Republic of Tajikistan and Ukraine.
 
 MK IV Patent Applications
 
Device for Saving Fuel and Reducing Emissions.  This device is similar to the Mark 1 device but uses stacked magnets.  The following table summarizes the status of the MK IV patent application in the following countries:
 
Country
 
Number
 
Filing date
 
Status
China
 
NA
 
20 June 2006
 
Application sent to Agent
Japan
 
NA
 
20 June 2006
 
Application sent to Agent
Korea [South]
 
NA
 
20 June 2006
 
Application sent to Agent
Malaysia
 
PI 20062013
 
2 May 2006
 
Examination due by 2 May 2008
PCT
 
PCT/AU2006/000861
 
20 June 2006
 
Demand for IPE filed – IPRP favorable.
Taiwan
 
95115220
 
28 April 2006
 
Examination due by 29 April 2009
Thailand
 
0601001997
 
2 May 2006
 
Application filed - awaiting examination
United States
 
NA
 
20 June 2006
 
Application sent to Agent
 
The priority date is June 21, 2005 from Australian patent application 2005903248.
 

 
16

 

Trademarks
 
ECO ChargR™
 
Country
 
Number
 
Filing Date
 
Status
Australia
 
1121860
 
4 July 2006
 
GRANTED
Madrid *
 
1121860
 
4 January 2007
 
GRANTED
Canada
 
1330199
 
4 January 2007
 
Accepted – awaiting Registration Certificate
Indonesia
 
D00 2007 000330
 
4 January 2007
 
Application filed – awaiting examination
Malaysia
 
2007/00156
 
4 January 2007
 
Application filed – awaiting examination
Thailand
 
649741
 
4 January 2007
 
Application filed – awaiting examination
Taiwan
 
96000462
 
4 January 2007
 
Under examination – response filed.
 
* Madrid Protocol application designates the following countries:
 
 
China
  
European Community
  
United States
  
Japan
  
Korea
  
Singapore
  
Vietnam

MAG ChargR™
 
Country
 
Number
 
Filing Date
 
Status
Australia
 
1121864
 
4 July 2006
 
Registered Co-Existence Agreement with Mag Instruments
Madrid
 
1121864
 
4 January 2007
 
GRANTED
Canada
 
1330200
 
4 January 2007
 
Under examination – response filed
Indonesia
 
D00 2007 000331
 
4 January 2007
 
Application filed – awaiting examination
Malaysia
 
2007/00157
 
4 January 2007
 
Application filed – awaiting examination
Thailand
 
649742
 
4 January 2007
 
Application filed – awaiting examination
Taiwan
 
96000465
 
4 January 2007
 
Allowed/Accepted.

STWA PERFORMANCE™
 
 Country
 
Number
 
Filing Date
 
Status
Australia
 
1140033
 
11 July 2006
 
GRANTED
Madrid
 
1140033
 
10 July 2007
 
GRANTED
 
 
17

 
Non-Disclosure Agreements
 
To further protect our intellectual property, we have entered into agreements with certain employees and consultants, which limit access to, and disclosure or use of, our technology. There can be no assurance, however, that the steps we have taken to deter misappropriation of our intellectual property or third party development of our technology and/or processes will be adequate, that others will not independently develop similar technologies and/or processes or that secrecy will not be breached. In addition, although management believes that our technology has been independently developed and does not infringe on the proprietary rights of others, there can be no assurance that our technology does not and will not so infringe or that third parties will not assert infringement claims against us in the future. Management believes that the steps they have taken to date will provide some degree of protection; however, no assurance can be given that this will be the case.

Employees
 
As of December 31, 2008, we had seven full-time employees. As of such date, we also utilized the services of sixteen part-time consultants to assist us with various matters, including engineering investment relations, public relations, accounting and sales and marketing. We intend to hire additional personnel to provide services when they are needed on a full-time basis. We recognize that our efficiency largely depends, in part, on our ability to hire and retain additional qualified personnel as and when needed and we have adopted procedures to assure our ability to do so.
 
Item 1A.  Risk Factors

We have just begun to generate revenues, we have a history of losses, and we cannot assure you that we will ever become or remain profitable. As a result, you may lose your entire investment.
 
We generated our first revenues from operations in late 2006 and, accordingly, we have incurred net losses every year since our inception in 1998. For the fiscal years ended December 31, 2008 and 2007, we had net losses of $6,052,724 and $6,262,743, respectively.  To date, we have dedicated most of our financial resources to research and development, general and administrative expenses and initial sales and marketing activities. We have funded all of our activities through sales of our securities, including equity and debt.  We anticipate net losses and negative cash flow to continue until such time as our products are brought to market in sufficient amounts to offset operating losses. As planned, we have significantly expanded both our research and development efforts, and our sales and marketing efforts, during the past year. Consequently, we will need to generate substantial additional funds, from a combination of revenue and external financing activities, to fund our operations. Our ability to achieve profitability is dependent upon our continuing research and development, product development, and sales and marketing efforts, to deliver viable products and the company’s ability to successfully bring them to market. Although our management is optimistic that we will succeed in marketing products incorporating our ZEFS, MK IV, CAT-MATE and ELEKTRA technologies, there can be no assurance that we will ever generate significant revenues or that any revenues that may be generated will be sufficient for us to become profitable or thereafter maintain profitability. If we cannot generate sufficient revenues or become or remain profitable, we may have to cease our operations and liquidate our business.
 
Our independent auditors have expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
 
In their report dated March 27, 2009, our independent auditors stated that our consolidated financial statements for the year ended December 31, 2008 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of our recurring negative cash flows from operations and accumulated deficit. We had an accumulated deficit of $42,743,064 as of December 31, 2008. Our ability to continue as a going concern is subject to our ability to obtain significant additional capital to fund our operations and to generate revenue from sales, of which there is no assurance. The going concern qualification in the auditor’s report could materially limit our ability to raise additional capital. If we fail to raise sufficient capital, we may have to liquidate our business and you may lose your investment.

 
18

 


Since we have not yet begun to generate positive cash flow from operations, our ability to continue operations is dependent on our ability to either begin to generate positive cash flow from operations or our ability to raise capital from outside sources.
 
We have not generated positive cash flow from operations and have relied on external sources of capital to fund operations. We had $59,346 in cash at December 31, 2008 and negative cash flow from operations of $2,163,656 for the year ended December 31, 2008.
 
We currently do not have credit facilities available with financial institutions or other third parties, and historically have relied upon best efforts third-party funding. Though we have been successful at raising capital on a best efforts basis in the past, we can provide no assurance that we will be successful in any future best-efforts financing endeavors. We will need to continue to rely upon financing from external sources to fund our operations for the foreseeable future. If we are unable to raise sufficient capital from external sources to fund our operations, we may need to curtail operations.
 
We will need substantial additional capital to meet our operating needs, and we cannot be sure that additional financing will be available.

As of December 31, 2008 and thereafter, our expenses ran, and are expected to continue to run, at a “burn rate” of approximately $200,000 per month, which amount could increase during 2009. We are not currently able to fund operations on a current basis, and we will require substantial additional capital in order to operate.  In order to fund some of our capital needs, we conducted private offerings of our securities in 2007 and 2008. We also established what is generally referred to as an equity line of credit of up to $10,000,000 with Dutchess Private Equity Fund, LLP (“Dutchess”), under which we may put shares of our common stock to Dutchess for sale into the marketplace and receive the proceeds of these sales.  From November 6, 2006 through December 31, 2006, we raised $380,095 gross proceeds from such puts, and between January 1, 2007 and June 12, 2007, we raised an additional $992,055 gross proceeds from such puts. We may need to rely substantially on additional puts from the equity line of credit unless and until we can arrange additional interim or permanent financings.  Reliance on the equity line of credit could create downward pressure on the price of our common stock and is dilutive to our existing shareholders.  While discussion regarding additional interim and permanent financings are being actively conducted, management cannot predict with certainty that the equity line of credit will be available to provide adequate funds, or any funds at all, or whether any additional interim or permanent financings will be available at all or, if it is available, if it will be available on favorable terms. If we cannot obtain needed capital, our research and development, and sales and marketing plans, business and financial condition and our ability to reduce losses and generate profits will be materially and adversely affected.  Additionally risks specifically relating to our equity line of credit with Dutchess are set forth at the end of this section.
 
We will need additional capital to repay certain short-term debt as it matures.
 
We have $896,720 remaining principal amount of convertible subordinated notes due February 2009, August 2009, October 2009 and December 2009 to certain investors.  In January 2009, we issued $250,000 convertible notes in our 2009 Winter Offering-I to certain investors, which will be due in April 2009. From February 13, 2009 to March 4, 2009 we issued $186,340 convertible notes in our 2009 Winter Offering-II to certain investors, which will be due in March 2010.
 
Due to the Company’s limited capital resources, management cannot predict with certainty that there will be cash available to repay these obligations, and other obligations, on their respective maturity dates.  If we do not raise adequate funds, we would be unable to repay these obligations as they mature during the next twelve months and we could default on such obligations.
 

 
19

 

As a company with an unproven business strategy, our limited history of operations makes evaluation of our business and prospects difficult.
 
Our business prospects are difficult to predict because of our limited operating history, early stage of development and unproven business strategy. Since our incorporation in 1998, we have been and continue to be involved in development of products using our technology, establishing manufacturing and marketing of these products to consumers and industry partners. Although we believe our technology and products in development have significant profit potential, we may not attain profitable operations and our management may not succeed in realizing our business objectives.
 
If we are not able to devote adequate resources to product development and commercialization, we may not be able to develop our products.
 
Our business strategy is to develop, manufacture and market products incorporating our ZEFS, MK IV and ELEKTRA technologies, and, to a lesser extent, our CAT-MATE technology.  We also intend to develop, manufacture and market products incorporating the ELEKTRA technology. We believe that our revenue growth and profitability, if any, will substantially depend upon our ability to:

 
raise additional needed capital for research and development;
 
 
complete development of our products in development; and
 
 
successfully introduce and commercialize our new products.

Certain of our products are still under various stages of development. Because we have limited resources to devote to product development and commercialization, any delay in the development of one product or reallocation of resources to product development efforts that prove unsuccessful may delay or jeopardize the development of other product candidates. Although our management believes that it can finance our product development through private placements and other capital sources, if we do not develop new products and bring them to market, our ability to generate revenues will be adversely affected.
 
The commercial viability of the ZEFS and CAT-MATE technologies remains largely unproven and we may not be able to attract customers.
 
Despite the fact that have entered into various distribution agreements and made some initial sales of our products to distributors, to the best of our knowledge, no consumer or automobile manufacturer has used the products incorporating the ZEFS or CAT-MATE technologies to reduce motor vehicle emissions to date. Accordingly, the commercial viability of our devices is not known at this time. If commercial opportunities are not realized from the use of products incorporating the ZEFS and CAT-MATE technologies, our ability to generate revenue would be adversely affected.  There can be no assurances that we will be successful in marketing our products, or that customers will ultimately purchase our products. Failure to have commercial success from the sale of our products will significantly and negatively impact our financial condition.
 
The commercial viability of the ELEKTRA technology remains largely unproven and we may not be able to attract customers.
 
To the best of our knowledge, no consumer or automobile manufacturer has used the products incorporating the ELEKTRA technology to reduce motor vehicle emissions to date. Accordingly, the commercial viability of our devices is not known at this time. If commercial opportunities are not realized from the use of products incorporating the ELEKTRA technology, our ability to generate revenue would be adversely affected.  There can be no assurances that we will be successful in marketing our products, or that customers will ultimately purchase our products. Failure to have commercial success from the sale of our products will significantly and negatively impact our financial condition.
 

 
20

 

If our products and services do not gain market acceptance, it is unlikely that we will become profitable.
 
The market for products that reduce harmful motor vehicle emissions is evolving and we have many successful competitors. Automobile manufacturers have historically used various technologies, including catalytic converters, to reduce exhaust emissions caused by their products. At this time, our technology is unproven, and the use of our technology by others is limited. The commercial success of our products will depend upon the adoption of our technology by auto manufacturers and consumers as an approach to reduce motor vehicle emissions. Market acceptance will depend on many factors, including:
 
 
the willingness and ability of consumers and industry partners to adopt new technologies;
 
 
the willingness and ability of consumers and industry partners to adopt new technologies;
 
 
the willingness of governments to mandate reduction of motor vehicle emissions;
     
 
our ability to convince potential industry partners and consumers that our technology is an attractive alternative to other technologies for reduction of motor vehicle emissions; 
     
 
our ability to manufacture products and provide services in sufficient quantities with acceptable quality and at an acceptable cost; and 
     
 
our ability to place and service sufficient quantities of our products. 
 
If our products do not achieve a significant level of market acceptance, demand for our products will not develop as expected and it is unlikely that we will become profitable.
 
We need to outsource and rely on third parties for the manufacture, sales and marketing of our products, and our future success will be dependent on the timeliness and effectiveness of the efforts of these third parties.
 
We do not have the required financial and human resources or capability to manufacture market and sell our products. Our business model calls for the outsourcing of the manufacture, and sales and marketing of our products in order to reduce our capital and infrastructure costs as a means of potentially improving our financial position and the profitability of our business. Accordingly, we must enter into agreements with other companies that can assist us and provide certain capabilities that we do not possess. We have entered into certain distribution agreements, but we may not be successful in entering into additional such alliances on favorable terms or at all. Even if we do succeed in securing additional distribution agreements, we may not be able to maintain them. Furthermore, any delay in entering into agreements could delay the development and commercialization of our products and reduce their competitiveness even if they reach the market. Any such delay related to our existing or future agreements could adversely affect our business.
 
We do not currently have an agreement in place for the manufacture of products incorporating our ZEFS or MK IV technologies.
 
If any party to which we have outsourced certain functions fails to perform its obligations under agreements with us, the development and commercialization of our products could be delayed or curtailed.
 
To the extent that we rely on other companies to manufacture, sell or market our products, we will be dependent on the timeliness and effectiveness of their efforts. If any of these parties do not perform its obligations in a timely and effective manner, the commercialization of our products could be delayed or curtailed because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.
 

 
21

 

Any revenues that we may earn in the future are unpredictable, and our operating results are likely to fluctuate from quarter to quarter.
 
We believe that our future operating results will fluctuate due to a variety of factors, including:

 
·  
delays in product development;
     
 
·  
market acceptance of our new products;
 
 
·  
changes in the demand for, and pricing, of our products;
 
 
·  
competition and pricing pressure from competitive products;
 
 
·  
manufacturing delays; and
 
 
·  
expenses related to, and the results of, proceedings relating to our intellectual property.
 
A large portion of our expenses, including expenses for our facilities, equipment and personnel, is relatively fixed and not subject to further significant reduction. In addition, we expect our operating expenses will increase in 2009 as we continue our research and development and increase our production and marketing activities, among other activities. Although we expect to generate revenues from sales of our products, revenues may decline or not grow as anticipated and our operating results could be substantially harmed for a particular fiscal period. Moreover, our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price most likely would decline.
 
Nondisclosure agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
 
In order to protect our proprietary technology and processes, we rely in part on nondisclosure agreements with our employees, licensing partners, consultants, agents and other organizations to which we disclose our proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. Since we rely on trade secrets and nondisclosure agreements, in addition to patents, to protect some of our intellectual property, there is a risk that third parties may obtain and improperly utilize our proprietary information to our competitive disadvantage. We may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights.
 
The manufacture, use or sale of our current and proposed products may infringe on the patent rights of others, and we may be forced to litigate if an intellectual property dispute arises.
 
If we infringe or are alleged to have infringed another party’s patent rights, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, do not successfully defend an infringement action or are unable to have infringed patents declared invalid, we may:
 
 
·  
incur substantial monetary damages;
 
 
·  
encounter significant delays in marketing our current and proposed product candidates;
 
 
·  
be unable to conduct or participate in the manufacture, use or sale of product

 
22

 


     
 
· 
candidates or methods of treatment requiring licenses;
     
 
· 
lose patent protection for our inventions and products; or
     
 
· 
find our patents are unenforceable, invalid, or have a reduced scope of protection.
 
 Parties making such claims may be able to obtain injunctive relief that could effectively block our ability to further develop or commercialize our current and proposed product candidates in the United States and abroad and could result in the award of substantial damages. Defense of any lawsuit or failure to obtain any such license could substantially harm the company. Litigation, regardless of outcome, could result in substantial cost to and a diversion of efforts by the Company to operate its business.
 
We may face costly intellectual property disputes.
 
Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technologies and either to operate without infringing the proprietary rights of others or to obtain rights to technology owned by third parties. Our pending patent applications, specifically patent rights of the MK IV, ELEKTRA and CAT-MATE technologies, may not result in the issuance of any patents or any issued patents that will offer protection against competitors with similar technology. Patents we have received for our ZEFS technologies, and which we may receive, may be challenged, invalidated or circumvented in the future or the rights created by those patents may not provide a competitive advantage. We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.
 
We were involved in a patent infringement suit brought by our former sole director and executive officer.
 
In April 2005, Jeffrey A. Muller, the Company’s former sole director and executive officer, filed a complaint against us seeking declaratory and injunctive relief and alleging unfair competition in connection with a claimed prior patent interest in the ZEFS technologies. Mr. Muller is seeking to have the patent rights in the ZEFS technologies that were previously transferred to us by Mr. Muller’s bankruptcy trustee declared null and void. Muller’s claims for patent infringement against the Company were dismissed and the case was closed on October 15, 2008, by order of George B. Daniels, United States District Judge, Southern District of New York.
 
We may not be able to attract or retain qualified senior personnel.
 
We believe we are currently able to manage our current business with our existing management team. However, as we expand the scope of our operations, we will need to obtain the full-time services of additional senior management and other personnel. Competition for highly-skilled personnel is intense, and there can be no assurance that we will be able to attract or retain qualified senior personnel. Our failure to do so could have an adverse effect on our ability to implement our business plan. As we add full-time senior personnel, our overhead expenses for salaries and related items will increase compensation packages, these increases could be substantial.
 
If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to achieve profitability.
 
Our future success is substantially dependent on the efforts of our senior management, particularly Cecil Bond Kyte, our Chief Executive Officer, Charles R. Blum, our President and Eugene E. Eichler, our Interim Chief Financial Officer. The loss of the services of members of our senior management may significantly delay or prevent the achievement of product development and other business objectives. Because of the scientific nature of our business, we depend substantially on our ability to attract and retain qualified marketing, scientific and technical personnel, including consultants. There is intense competition among specialized automotive companies for qualified personnel in the areas of our activities. If we lose the services of, or do not successfully recruit key marketing, scientific and technical personnel, the growth of our business could be substantially impaired. We do not maintain key man insurance for any of these individuals.
 

 
23

 


We expect to incur increased costs under the Sarbanes-Oxley Act of 2002.
 
As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as related rules adopted by the SEC, has imposed substantial requirements on public companies, including certain corporate governance practices and requirements relating to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Effective disclosure of controls and procedures and internal controls are necessary for us to produce reliable financial reports and are important in helping prevent financial fraud generally. In order to accomplish this, we have retained an outside consulting firm to assist us in implementing proper procedures. We will incur significant up-front expenses to do so. If we are unable to achieve and maintain adequate disclosure controls and procedures and internal controls, our business and operating results could be harmed.
 
Changes in stock option accounting rules may adversely affect our reported operating results, our stock price, and our ability to attract and retain employees.
 
In December 2004, the Financial Accounting Standards Board (“FASB”) published new rules that will require companies such as us to record all stock-based employee compensation as an expense. The new rules apply to stock options grants, as well as a wide range of other share-based compensation arrangements including restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As required by FASB, we adopted these rules effective January 1, 2006.  As a small company with limited financial resources, we have depended upon compensating our officers, directors, employees and consultants with such stock based compensation awards in the past in order to limit our cash expenditures and to attract and retain officers, directors, employees and consultants. Accordingly, if we continue to grant stock options or other stock based compensation awards to our officers, directors, employees, and consultants, our future earnings, if any, will be reduced (or our future losses will be increased) by the expenses recorded for those grants. These compensation expenses may be larger than the compensation expense that we would be required to record were we able to compensate these persons with cash in lieu of securities. Since we are a small company, the expenses we may have to record as a result of future options grants may be significant and may materially negatively affect our reported financial results.
 
Currently, there is only very limited trading in our stock, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell your shares.
 
The shares of our common stock are thinly-traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company engaged in a high risk business which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that can generate or influence daily trading volume and valuation. Should we even come to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous trading without negatively impacting our share price. We cannot provide any assurance that a broader or more active public trading market for shares of our common stock will develop or be sustained.  Due to these conditions, we cannot give any assurance that shareholders will be able to sell their shares at or near bid prices or at all.

 
24

 

The market price of our stock is volatile.
 
The market price for our common stock has been volatile during the last year, ranging from a closing bid price of $0.86 on March 18, 2008 to a closing bid price of $0.12 on November 21, 2008, and a closing bid price of $0.40 on March 12, 2009. Additionally, the bid price of our stock has been both higher and lower than those amounts on an intra-day basis in the last year. Because our stock is thinly traded, its price can change dramatically over short periods, even in a single day. The market price of our common stock could fluctuate widely in response to many factors, including:
 
 
·  
developments with respect to patents or proprietary rights;
 
 
·  
announcements of technological innovations by us or our competitors;

 
·  
announcements of new products or new contracts by us or our competitors;
     
 
· 
actual or anticipated variations in our operating results due to the level of development expenses and other factors;
     
 
·
changes in financial estimates by securities analysts and whether any future earnings of ours meet or exceed such estimates;

 
·
conditions and trends in our industry;
     
 
·
new accounting standards;
     
 
·
general economic, political and market conditions and other factors; and
     
 
· 
the occurrence of any of the risks described in this Memorandum.
 
 
Substantial sales of common stock could cause our stock price to fall.
 
In the past year, there have been times when average daily trading volume of our common stock has been extremely low, and there have been many days in which no shares were traded at all. At other times, the average daily trading volume of our common stock has been high...  Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for our common stock and could impair our ability to raise capital through the sale of our equity securities.
 
Potential issuance of additional shares of our common stock could dilute existing stockholders.
 
We are authorized to issue up to 200,000,000 shares of common stock. To the extent of such authorization, our Board of Directors has the ability, without seeking stockholder approval, to issue additional shares of common stock in the future for such consideration as the Board of Directors may consider sufficient. The issuance of additional common stock in the future will reduce the proportionate ownership and voting power of the common stock offered hereby.

 
25

 

Our common stock is subject to penny stock regulation, which may make it more difficult for us to raise capital.
 
Our common stock is considered penny stock under SEC regulations. It is subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. For example, broker-dealers must make a suitability determination for the purchaser, receive the purchaser’s written consent to the transaction prior to sale, and make special disclosures regarding sales commissions, current stock price quotations, recent price information and information on the limited market in penny stock. Because of these additional obligations, some broker-dealers may not effect transactions in penny stocks, which may adversely affect the liquidity of our common stock and shareholders’ ability to sell our common stock in the secondary market. This lack of liquidity may make it difficult for us to raise capital in the future.
 
Item 1B. Unresolved Staff Comments
 
None

Item 2. Properties

Our Executive Offices and our engineering, production and testing facility is located at 235 Tennant Avenue, Morgan Hill, California, 95037.  In September 2005, the Company entered into a lease for the term September 1, 2005 through August 31, 2007 and carried an option to renew for two additional years at the then prevailing market rate. Monthly rent was $2,240 per month under this lease. The lease was amended in February 2006 for additional space. Monthly rate under the amended lease was $4,160 per month.  The Company renewed this lease on August 9, 2007 for an additional two-year term.  The rent is $4,640 per month for the first six months of the new term of the lease and $5,480 per month for the remaining eighteen months of the new term of the lease.  We believe that this space is adequate for our current and planned needs.

In May 2008, the Company entered into a lease agreement for its administrative offices in Los Angeles, California.  The term of the lease was for $3,000 per month from June 1, 2008 through November 20, 2008.  The Company is currently on a month to month basis with rent payment of $3,750.

Item 3. Legal Proceedings

On December 19, 2001, the SEC filed civil charges in the United States Federal District Court, Southern District of New York, against us, our former President and then sole director Jeffrey A. Muller, and others, alleging that we and the other defendants were engaged in a fraudulent scheme to promote our stock. The SEC complaint alleged the existence of a promotional campaign using press releases, Internet postings, an elaborate website, and televised media events to disseminate false and materially misleading information as part of a fraudulent scheme to manipulate the market for stock in our corporation, which was then controlled by Mr. Muller. On March 22, 2002, we signed a Consent to Final Judgment of Permanent Injunction and Other Relief in settlement of this action as against the corporation only, which the court approved on July 2, 2002. Under this settlement, we were not required to admit fault and did not pay any fines or restitution.
 
On July 2, 2002, after an investigation by our newly constituted board of directors, we filed a cross-complaint in the SEC action against Mr. Muller and others seeking injunctive relief, disgorgement of monies and stock and financial restitution for a variety of acts and omissions in connection with sales of our stock and other transactions occurring between 1998 and 2002.  Among other things, we alleged that Mr. Muller and certain others sold Company stock without providing adequate consideration to us; sold insider shares without making proper disclosures and failed to make necessary filing required under federal securities laws; engaged in self-dealing and entered into various undisclosed  related-party transactions; misappropriated for their own use proceeds from sales of our stock; and entered into various undisclosed arrangement regarding the control, voting and disposition of their stock.
 
On July 30, 2002, the U.S. Federal District Court, Southern District of New York, granted our application for a preliminary injunction against Mr. Muller and others, which prevented Mr. Muller and other cross-defendants from selling, transferring, or encumbering any assets and property previously acquired from us, from selling or transferring any of our stock that they may have owned or controlled, or from taking any action to injure us or our business and from having any direct contact with our shareholders. The injunctive order also prevented Mr. Muller or his nominees from engaging in any effort to exercise control over our corporation and from serving as an officer or director of our company.
 

 
26

 

In the course of the litigation, we have obtained ownership control over all patent rights to the ZEFS device.
 
On January 4, 2007, the Court entered a final judgment against Jeffrey Muller which barred Mr. Muller from serving as an officer or director of a public company for a period of 20 years, ordered Mr. Muller to disgorge any shares of our stock that he still owns and directed the Company to cancel any issued and outstanding shares of our stock still owned by Mr. Muller. Mr. Muller was also ordered to disgorge unlawful profits in the amount of $7.5 million and to pay a civil penalty in the amount of $100,000.  Acting in accordance with the ruling and decision of the Court, we have canceled (i) 8,047,403 shares of common stock that had been held by Mr. Muller and/or his affiliates, (ii) options to acquire an additional 10,000,000 shares of our common stock held by Mr. Muller personally and (iii) $1,017,208 of debt which Mr. Muller claimed was owed to him by the Company.  After an appeal filed by Mr. Muller was dismissed the Judgment against him is considered final.

On February 8, 2007, Federal Magistrate Judge Maas issued a post-judgment order, at our request, which further concluded that all of the shares of the Company’s stock held by Mr. Muller or any of his nominees directly or indirectly owned or controlled were to be recaptured by the Company and were subject to disgorgement and forfeiture.  The ruling provided that all shares, options and any other obligations allegedly owed by the Company to Mr. Muller were to be disgorged in our favor and confirmed the earlier judgment holding Mr. Muller liable for $7.5 million in actual damages, imposing a $100,000 fine and barring Mr. Muller from any involvement with a publicly traded company for 20 years.  With prejudgment interest, this ruling brings the actual damages against Muller to over $11 million.  Additionally, the Court clarified that the order required the disgorgement of any shares of the Company’s stock that Mr. Muller or any of his nominees directly or indirectly owned or controlled.  In furtherance of this order, the Company has taken action to cancel over 3.6 million shares which had been issued to offshore companies.  The Order also confirmed the appropriateness of actions previously taken by the Company to acquire the patent rights and to consolidate the manufacturing, marketing and distribution rights with its ownership of all rights to the existing patents.  On February 11, 2009, Judge Maas confirmed that his previous decision was modified and the Company’s Motion for Summary Judgment was granted in favor of the Company as set forth in his order of February 8, 2007.  A proposed Final Judgment in favor of the Company is pending before the United States District Court, Southern District of New York.
 
Patent Infringement Claims by Jeffrey A. Muller

In April 2005, Jeffrey A. Muller, the Company’s former sole director and executive officer, filed a complaint against us in the Federal District Court for the Central District of California, seeking declaratory and injunctive relief and alleging unfair competition in connection with a claimed prior patent interest in the ZEFS device and stock option rights. In seeking declaratory relief, Mr. Muller is seeking to have the patent rights in the ZEFS device that were previously transferred to us by Mr. Muller’s bankruptcy trustee declared null and void.
 
This lawsuit brought by Mr. Muller arose out of the same claims that were the subject of litigation in the Federal District Court for the Southern District of New York, in which the Court entered judgment against Mr. Muller.  Those claims are pending further proceedings.  While we believe that we have valid claims and defenses, there can be no assurance that an adverse result or outcome on the pending motions or a trial of this case would not have a material adverse effect on our financial position or cash flow.  Muller’s claims for patent infringement against the Company were dismissed and the case was closed on October 15, 2008, by order of George B. Daniels, United States District Judge, Southern District of New York.

Litigation Involving Scottish Glen Golf Company
 
We were involved in litigation with Scottish Glen Golf Company, Inc. (SGGC) doing business as KZ Golf, Inc., the Company’s previous landlord on claims in the aggregate amount of $104,413.   The Company does not dispute the fact that certain amounts of unpaid past rent are due but does dispute that it owes the aggregate of $104,413 demanded by SGGC; more than half of which are purported “late fees” which was assessed at the rate of $100 per day.  It was the Company’s position that the late fees are void and unenforceable and that the Company is entitled to a set-off for office space that reverted back to SGGC.

On April 30, 2008 the Company and SGGC settled their pending litigation relating to the Company’s prior offices.  The Company agreed to pay SGGC $51,000 in full settlement of SGGC’s claims.  On May 28, 2008 the initial payment of $34,000 was made and on July 9, 2008 the final payment of $17,000 was made and the Complaint was dismissed, with prejudice.   The Company recorded $52,069 as other income and as a reduction of accounts payable. 

Item 4. Submission of Matters to a Vote of Security Holders.

Not Applicable

 
27

 



PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Through May 21, 2007, our common stock was traded on the Over the Counter Bulletin Board (the “OTCBBJ under the symbol “ZERO”. Effective May 22, 2007, our common stock was removed from the OTCBB and placed on the “Pink Sheets”. Effective February 8, 2008, our common stock was reinstated and currently trades on the OTCBB. The following table sets forth the high and low bid prices of the Company’s common stock for the quarters indicated as quoted on the Pink Sheets or the OTCBB, as applicable, as reported by Yahoo Finance. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
   
2008
   
2007
 
   
High
   
Low
   
High
   
Low
 
First First Quarter
 
$
0.86
   
$
0.30
   
$
1.17
   
$
0.60
 
 Snd Second Quarter
 
$
0.79
   
$
0.37
   
$
0.80
   
$
0.25
 
Th    Third Quarter
 
$
0.45
   
$
0.27
   
$
0.60
   
$
0.17
 
Fou   Fourth Quarter
 
$
0.40
   
$
0.12
   
$
0.48
   
$
0.15
 

According to the records of our transfer agent, we had 907 stockholders of record of our common stock at March 2, 2009. The Company believes that the number of beneficial owners is substantially higher than this amount.
 
We do not pay a dividend on our common stock and we currently intend to retain future cash flows to finance our operations and fund the growth of our business. Any payment of future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions in respect to the payment of dividends and other factors that our Board of Directors deems relevant.

Issuances of Unregistered Securities in Last Fiscal Year

2007/2008 Winter Offering                                                      

From December 27, 2007 to February 29, 2008, the Company conducted an offering (the “2007/2008 Winter Offering”) and issued convertible notes in the aggregate face amount of $521,400.  These notes were sold for an aggregate purchase price of $474,000.  The notes are convertible into 1,042,800 shares of the Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 521,400 shares of the Company’s common stock.  (See “Details of Recent Financial Transactions”.)

2008 Spring Offering

On May 27, 2008, the Company made an offering (the “2008 Spring Offering”) with a certain investor and issued a Convertible Note in the amount of $66,000.  The note was sold for a purchase price of $60,000.  The note is convertible into 132,000 shares of the Company’s common stock and in addition the investor received warrants entitling the holder to purchase up to 66,000 shares of the Company’s common stock.  (See “Details of Recent Financial Transactions”.)

2008 Summer Offering

From July 17, 2008 to August 31, 2008, the Company conducted an offering (the “2008 Summer Offering”) and issued Convertible Notes in the aggregate amount of $484,000.  These Notes were sold for an aggregate purchase price of $440,000.  The Notes are convertible into 1,423,530 shares of the Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 711,764 shares of the Company’s common stock.  (See “Details of Recent Financial Transactions”.)


 
28

 

2008 Fall Offering

From September 8, 2008 to October 31, 2008, the Company conducted an offering (the “2008 Fall Offering”) and issued  Convertible Notes in the aggregate amount of $198,220.  These Notes were sold for an aggregate purchase price of $180,200.  The Notes are convertible into 1,321,466 shares of the Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 660,734 shares of the Company’s common stock.  (See “Details of Recent Financial Transactions”.)

2008 Winter Offering

From November 24, 2008 to December 5, 2008, the Company conducted an offering (the “2008 Winter Offering”) and issued Convertible Notes in the aggregate amount of $524,700.  These Notes were sold for and aggregate purchase price of $477,000.  The Notes are convertible into 3,086,470 shares of the Company’s common stock and in addition, investors received warrants entitling the holders to purchase up to 1,543,235 shares if the Company’s common stock.  (See “Details of Recent Financial Transactions”.)
 
Other Issuances
 
During the year ended December 31, 2008, convertible notes in the amount of $3,986,439 of our previously issued and outstanding Investor Notes were converted to 11,025,930 shares of common stock.

During the year ended December 31, 2008, we issued 2,744,898 shares of common stock in settlement of payables and loan in the amount of $963,396.

During the year ended December 31, 2008, we issued 1,635,000 shares of common stock for consulting services.

During the year ended December 31, 2008, we received $532,325 from warrants exercised and issued 1,064,650 shares of common stock.
 
Item 6. Selected Consolidated Financial Data
Not Applicable

Item 7. Management’s Discussion and Analysis or Plan of Operation

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and supplementary data referred to in Item 7 of this Form 10-K.
 
This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning future revenue sources and concentration, selling, general and administrative expenses, research and development expenses, capital resources, additional financings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed above in Item 1 and elsewhere in this Form 10-K, particularly in “Risk Factors,” that could cause actual results to differ materially from those projected. Unless otherwise expressly indicated, the information set forth in this Form 10-K is as of December 31, 2008, and we undertake no duty to update this information.

Overview

We are a development stage company that generated its first initial revenues in the fourth quarter of 2006. Our focus is on research and development, and initial sales and marketing, of products incorporating our proprietary and patented technology, which is designed to reduce harmful emissions, and/or improve fuel efficiency and engine performance on equipment and vehicles driven by internal combustion engines. We have devoted the bulk of our efforts to the completion of the design, the development of our production models, testing of devices and the promotion of our products in the marketplace. We anticipate that these efforts will continue during 2009.
 

 
29

 


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 2008 and will need to raise substantial additional capital in 2009, and possibly beyond, to fund our sales and marketing efforts, continuing research and development, and certain other expenses, until our revenue base grows sufficiently.

Results of Operation

Revenues were $0 for the fiscal year ended December 31, 2008, compared to $39,000 a year ago, a decrease of $39,000. Cost of goods sold were $0 for the fiscal year ended December 31, 2008, compared to $10,720 for the fiscal year ended December 31, 2007. We realized a gross profit of $0 for the fiscal year ended December 31, 2008, compared to $28,280 for the fiscal year ended December 31, 2007, a decrease of $28,280.
 
Operating expenses were $3,298,918 for the fiscal year ended December 31, 2008, compared to $3,956,345 for the fiscal year ended December 31, 2007, a decrease of $657,427. The decrease is attributable to a decrease in cash expenses of $1,633,932 offset by an increase in non-cash expenses of $976,505. Specifically, the decrease in cash expenses is attributable to decreases in salaries and benefits expenses ($631,554); consulting and professional fees ($618,433); office and other expenses ($133,008); corporate expenses ($132,573); travel ($89,032); exhibit and trade shows ($29,332). The increase in non-cash expenses is attributable to increases in stocks, options and warrants given to employees, consultants and lawyer ($1,104,975); and bad debt ($1,380); offset by a decrease in depreciation expense ($129,850).
 
Research and development expenses were $652,363 for the fiscal year ended December 31, 2008, compared to $600,816 for the fiscal year ended December 31, 2007, an increase of $51,547. Our research and development expenses include contracts with RAND and Temple University, consultant’s fees, travel, cost of services and supplies. The increase in research and development expenses is primarily attributable to an increase in contracts with RAND Corporation and Temple University of $156,903. This increase was offset by decreases in testing tools and supplies ($71,090); travel expenses ($18,169); and consultant’s fees ($16,097).
 
Interest and other income was $200 for the fiscal year ended December 31, 2008, compared to $3,475 for the fiscal year ended December 31, 2007, a decrease of $3,275. This decrease is attributable to a decrease in dyno-testing and consulting income.  Interest expense was $2,153,449 for the fiscal year ended December 31, 2008, compared to $1,736,537 for the fiscal year ended December 31, 2007.  This increase of $416,912 is attributable to an increase in non-cash interest expense and financing fees of $413,562 and an increase in cash interest expense and financing fees of $3,350.
 
We had a net loss of $6,052,724 or $0.11 per share for the fiscal year ended December 31, 2008 compared to a net loss of $6,262,743, or $0.16 per share for the fiscal year ended December 31, 2007.
 
Liquidity and Capital Resources

General

We have incurred negative cash flow from operations in the developmental stage since our inception in 1998. As of December 31, 2008, we had cash of $59,346 and an accumulated deficit of $42,743,064. Our negative operating cash flow in 2008 was funded primarily through the sale convertible notes as well as sale of our stock by Dutchess Private Equity Fund, LLC (“Dutchess”) under our equity line of credit.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company had a net loss of $6,052,724 and a negative cash flow from operations of $2,163,656 for the year ended December 31, 2008, and had a working capital deficiency of $2,677,084 and a stockholders’ deficiency of $2,589,865 at December 31, 2008.  These factors raise substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 
30

 

During 2008, we raised an aggregate of $2,163,525 gross and net proceeds from the sale of our stock and the issuance of debt, as follows:
 
 
Gross and net proceeds of $474,000 from the issuance of convertible notes and warrants in a Spring 2008 offering.  The face amount of the notes is $521,400.
 
Gross and net proceeds of $60,000 from the issuance of convertible notes and warrants in a Spring 2008 offering.  The face amount of the notes is $66,000.
 
Gross and proceeds of $440,000 from the issuance of convertible notes and warrants in a Summer 2008 offering.  The face amount of the notes is $484,000.
 
Gross and net proceeds of $180,200 from the issuance of convertible notes and warrants in a Fall 2008 offering.  The face amount of the notes is $198,220.
 
Gross and net proceeds of $477,000 from the issuance of convertible notes and warrants in a Winter 2008 (2nd) offering.  The face amount of the notes is $524,700.
 
Gross and net proceeds of $532,325 from the issuance of stock upon exercise warrants.
 
Subsequent to fiscal year ended December 31, 2008 and through March 12, 2009, we raised an aggregate of $683,320 gross and net proceeds from issuance of convertible notes and warrants in our 2009 Winter Offering 1 & 2.
     
Details of Recent Financing Transactions
 
2007-2008 Winter Offering

From December 27, 2007 to February 29, 2008  the Company conducted an offering (the “2007-2008 Winter Offering”) of up to $1,000,000 aggregate face amount of its convertible notes (the “2007- 2008 Winter Notes”) with a small number of accredited investors.  Of this amount, $521,400 aggregate face amount of the 2007-2008 Winter Notes were sold for an aggregate purchase price of $474,000 net proceeds.  Therefore, while the stated interest rate on the 2008 Winter Notes is 0%, the implied interest rate on the 2007-2008 Winter Notes is 10%.  The 2007-2008 Winter Notes mature on the first anniversary of their date of issuance.  The 2007-2008 Winter Notes are convertible, at the option of the noteholder, into shares of common stock of the Company (the “Conversion Shares”) at a conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing date of the 2007-2008 Winter Offering (the “Conversion Price”).  Up to $1,042,800 Conversion Shares are issuable at a Conversion Price of $0.50 per share.
 
Each of the investors in the 2007-2008 Winter Offering received, for no additional consideration, a warrant (the “2007-2008 Winter Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the (2007-2008 Winter Notes) are convertible (the “2007-2008 Warrant Shares”)  Each  2007-2008 Winter Warrant is exercisable on a cash basis only at a Price of $0.50 per share, and is exercisable for a period of two years from the date of issuance.  Up to 521,400 2007-2008 Warrant Shares are initially issuable on exercise of the 2007-2008 Winter Warrants.  As of December 31, 2008, investors have converted $455,400 of the Convertible Notes into 910,800 shares of the Company’s common stock.  The outstanding balance at December 31, 2008 is $66,000. These Notes were converted in January 2009.

2008 Spring Offering

On May 27, 2008,  the Company made an offering (the “2008 Spring Offering”) with a certain investor of which, $66,000 face amount of the 2008 Spring Note was sold for $60,000 net proceeds.  Therefore, while the stated interest rate on the 2008 Spring Note is 0%, the implied interest rate on the 2008 Spring Note is 10%. The 2008 Spring Note will mature on the first anniversary of the date of issuance.  The 2008 Spring Note is convertible, at the option of the noteholder, into shares of common stock of the Company (the “Conversion Shares”) at a conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing date of the 2008 Spring Offering (the “Conversion Price”).  The 132,000 Conversion Shares are issuable at a Conversion Price of $0.50 per share.
 

 
31

 


The investor in the 2008 Spring Offering received, for no additional consideration, a warrant (the “ 2008 Spring Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the ( 2008 Spring Notes) are convertible (the “2008 Spring Warrant Shares”).  The 2008 Spring Warrant Shares is exercisable on a cash basis only at a Price of $0.50 per share, and is exercisable for a period of two years from the date of issuance.  The 66,000 2008 Spring Warrant Shares are initially issuable upon exercise of the 2008 Spring Warrants.  As of December 31, 2008, investors have converted $66,000 of the Convertible Notes into 132,000 shares of the Company’s common stock.  There   was no outstanding balance at December 31, 2008.

2008 Summer Offering

From July 17, 2008 to August 31, 2008,  the Company conducted an offering (the “2008 Summer Offering”) of up to $600,000 aggregate face amount of its convertible notes “the”2008 Summer Offering) with a small number of accredited investors. Of this amount $484,000 aggregate face amount of the 2008 Summer Notes were sold for an aggregate purchase price of $440,000 net proceeds.  Therefore, while the stated interest rate on the 2008 Summer Notes is 0%, the implied interest rate on the 2008 Summer Notes is 10%.  The 2008 Summer Notes will mature on the first anniversary of the date of issuance.  The 2008 Summer Notes are convertible, at the option of the noteholders, into shares of common stock of the Company (the “Conversion Shares”) at a conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing date of the 2008 Summer Offering (the “Conversion Price”).  Up to 1,423,530 Conversion Shares are issuable at a Conversion Price of $0.34 per share.
 
Each of the investors in the 2008 Summer Offering received, for no additional consideration, a warrant (the “ 2008 Summer Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the ( 2008 Summer Notes) are convertible (the “2008 Summer Warrant Shares”). Each 2008 Summer Warrant is exercisable on a cash basis only at a price of $0.50 per share, and is exercisable for a period of two years from the date of issuance.  Up to 711,764 2008 Summer Warrant Shares are initially issuable upon exercise of the 2008 Summer Warrants.  As of December 31, 2008, investors have converted $143,000 of the Convertible Notes into 420,589 shares of the Company’s common stock.  The outstanding balance at December 31, 2008 was $341,000.

2008 Fall Offering

From September 8, 2008 to October 31, 2008, the Company conducted an offering (the “2008 Fall Offering”) of up to $500,000 aggregate face amount of its Convertible Notes.  A total of $198,220 aggregate face amount of the 2008 Fall Notes were sold for an aggregate purchase price of $180,220 net proceeds.  Therefore, while the stated interest on the 2008 Fall Notes is 0%, the implied interest rate on the 2008 Fall Notes is 10%.  The 2008 fall notes will mature on the first anniversary of the date of issuance.  The 2008 Fall Notes are convertible, at the option of the noteholders, into shares of common stock of the Company (the “Conversion Shares”) at a conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing date of the 2008 Fall Offering (the “Conversion Price”).  Up to 1,321,466 Conversion Shares are issuable at a Conversion Price of $0.15 per share.

Each of the investors in the 2008 Fall Offering received, for no additional consideration, a warrant (the “ 2008 Fall Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the ( 2008 Fall Notes) are convertible (the “2008 Fall Warrant Shares”). Each 2008 Fall Warrant is exercisable on a cash basis only at a price of $0.50 per share, and is exercisable for a period of two years from the date of issuance.  Up to 660,734 2008 Fall Warrant Shares are initially issuable upon exercise of the 2008 Fall Warrants.  As of December 31, 2008, investors have converted $46,200 of the Convertible Notes into 308,000 shares of the Company’s common stock.  The outstanding balance at December 31, 2008 was $152,020.  During January 2009, $24,200 Notes were converted.


 
32

 


2008 Winter Offering

From November 24, 2008 to December 5, 2008, the Company conducted an offering (the “2008 Winter Offering”) of up to $500,000 aggregate face amount of its Convertible Notes.  A total of $524,700 aggregate face amount of the 2008 Winter Notes were sold for an aggregate purchase price of $477,000 net proceeds.  Therefore, while the stated interest on the 2008 Winter Notes is 0%, the implied interest rate on the 2008 Winter Notes is 10%.  The 2008 Winter Notes will mature on the first anniversary of the date of issuance.  The 2008 Winter Notes are convertible, at the option of the noteholders, into shares of common stock of the Company (the “Conversion Shares”) at a conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing date of the 2008 Winter Offering (the “Conversion Price”).  Up to 3,086,470 Conversion Shares are issuable at a Conversion Price of $0.17 per share.

Each of the investors in the 2008 Winter Offering received, for no additional consideration, a warrant (the “ 2008 Winter Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the ( 2008 Winter Notes) are convertible (the “2008 Winter Warrant Shares”). Each 2008 Winter Warrant is exercisable on a cash basis only at a price of $0.30 per share, and is exercisable for a period of two years from the date of issuance.  Up to 1,543,235 2008 Winter Warrant Shares are initially issuable upon exercise of the 2008 Winter Warrants.  As of December 31, 2008, investors have converted $187,000 of the Convertible Notes into 1,099,999 shares of the Company’s common stock.  The outstanding balance at December 31, 2008 was $337,700.  During January 2009, $110,000 Notes were converted.

Summary
 
We have cash on hand to meet expenses only for a short period of time.  In order to fund the repayment of our outstanding notes, we must raise additional funds. At December 31, 2008, these notes included the Winter 2007/2008 Notes due in February 2009, the Summer 2008 Notes due in August 2009,  the Fall 2008 Notes due in October 2009 and the Winter 2008 Notes due in December 2009.  In addition to the funds required to continue to operate our business, including without limitation the expenses we will incur in connection with the license and research and development agreements with Temple University, costs associated with product development and commercialization of the ELEKTRA technology, costs to manufacture 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, as discussed below, we have substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment agreements, certain severance payments to a former officer and consulting fees, during the remainder of 2009 and beyond.
 
In light of the Company’s financial commitments over the next several months and its liquidity constraints, we have implemented cost reduction measures in all areas of operations, including but not limited to personnel lay-offs, marketing and advertising, deferral of placing orders to manufacturers of our ECO ChargR and MAG ChargR products for sale to our existing distributors, research and development and product development of ELEKTRA products, and certain other expenses.  We intend to review these measures on an ongoing basis and make additional decisions as may be required.
 
Therefore, in addition to the completed 2008 Winter Offering, the 2009 Winter Offering and  the 2009 Winter Offering #2, the Company is actively pursuing additional financing alternatives   No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. At present, we have relatively few financing options available to us.
 

 
33

 

Contractual Obligations
 
The following table discloses our contractual commitments for future periods. Long-term commitments are comprised operating leases and minimum guaranteed compensation payments under employment and other agreements.  See Note 10 to Notes to Consolidated Financial Statements, “Commitments and Contingencies”.

Year ending December 31,
 
Operating Leases (1)
   
Guaranteed Payments
 
2009
 
$
43,840
   
$
466,200
(2)
2010
   
0
     
142,567
(3)
Total
 
$
43,840
   
$
608,767
 
 
(1) 
Consists of rent for our Morgan Hill Facility expiring on August 31, 2009. (For description of this property, see Part 1, Item 2, and “Property”.
(2) 
Consists of an aggregate of $72,967 in total compensation, including base salary and certain contractually-provided benefits, to   one executive officer, pursuant to an employment agreement that expires on July 25, 2009; $193,233 in total compensation, including base salary and certain contractually-provided benefits, to an executive officer, pursuant to an employment agreement that expires on January 30, 2010 and $200,000 in licensing and maintenance fees to Temple University.
(3) 
Consists of  an aggregate of $17,567 in total compensation, including base salary and certain contractually-provided benefits to an executive officer, pursuant to an employment agreement that expires on January 30, 2010 and $125,000 in licensing and maintenance fees due to Temple University.
 
Licensing Fees to Temple University.  For details of the licensing agreements with Temple University, see Part I, Item 1, “Business - Our Business Strategy - Our Technologies and Products”.

Critical Accounting Policies and Estimates
 
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosure of contingent assets and liabilities. We evaluate, on an on-going basis, our estimates and judgments, including those related to the useful life of the assets. We base our estimates on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an 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 the Notes to the Consolidated Financial Statements, “Summary of Significant Accounting Policies”.
 
We believe the following critical accounting policies, among others, require significant judgments and estimates used in the preparation of our consolidated financial statements.
 
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing our consolidated financial statements as described in Note 1 to Notes to Consolidated Financial Statements. See Item 7, “Financial Statements”. Actual results could differ from those estimates.
 

 
34

 

Revenue Recognition
 
The Company has adopted Staff Accounting Bulletin 104, “Revenue Recognition” and therefore recognizes revenue based upon meeting four criteria:

   
Persuasive evidence of an arrangement exists;
   
Delivery has occurred or services rendered;
   
The seller’s price to the buyer is fixed or determinable; and
   
Collectability is reasonably assured.

The Company contract manufactures fixed magnetic field products and sells them to various original equipment manufacturers in the motor vehicle and small utility motor markets. The Company negotiates an initial contract with the customer fixing the terms of the sale and then receives a letter of credit or full payment in advance of shipment. Upon shipment, the Company recognizes the revenue associated with the sale of the products to the customer.  Freight charges pertaining to shipments are recorded as General and Administrative Expense.
 
Accounts Receivable Allowance Policy
 
The Company reports accounts receivable in relation to sales of product.  The Company performs an analysis of the receivable balances in order to determine if an allowance for doubtful accounts is necessary.  As of December 31, 2008, no allowance is necessary.
 
Property and equipment and depreciation
 
Property and equipment are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, generally ranging from three to ten years. Expenditures for major renewals and improvements that extend the useful lives of property and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.

Long-lived assets
 
The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying values of long-lived assets to determine whether or not impairment to such value has occurred. No impairments were recorded for the year ended December 31, 2007.  The Company recorded an impairment of approximately $505,000 during the period from inception (February 18, 1998) through December 31, 2007.

Stock-Based Compensation

On January 1, 2006, the Company adopted Statements of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
 
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s financial statements for the years ended December, 2008 and 2007 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under SFAS 123(R) for employee and directors for the years ended December 31, 2008 and 2007 were $645,745 and $67,592, respectively.
 

 
35

 

The Company’s determination of fair value of share-based payment awards to employees and directors on the date of grant uses the Black-Scholes model, which is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.  Forfeitures are recognized as incurred.
 
The Company accounts for stock option and warrant grants issued to non-employees for goods and services using the guidance of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18: “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” whereby the fair value of such option and warrant grants is determined using the Black-Scholes option pricing model at the earlier of the date at which the non-employee’s performance is completed or a performance commitment is reached.
 
Recent accounting pronouncements
 
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161). This Statement requires enhanced disclosures about an entity's derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133,  "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In December 2007, the FASB issued FASB Statement No. 141 (R), "Business Combinations" (FAS 141(R)), which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business.  Statement 141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Earlier adoption is prohibited.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51".  SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent's equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently.  SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated.  SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.  SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited.  SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements.  The presentation and disclosure requirements are applied retrospectively for all periods presented.

 
 
36

 

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

Not Applicable
 
Item 8.   Financial Statements

Our consolidated financial statements as of and for the years ended December 31, 2008 and 2007 are presented in a separate section of this report following Item 14 and begin with the index on page F-1.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A(T).  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)  were ineffective as of December 31, 2008, due to the material weaknesses in our internal control over financial reporting described below.

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  Internal control consists of procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, recorded and reported and our assets are safeguarded against unauthorized or improper use, to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

We identified certain matters that constitute material weakness (as defined under the Public Company Accounting Oversight Board Auditing Standard No. 2) in our internal control over financial reporting as discussed on Management’s Annual Report on Internal Control Over Financial Reporting below.

In light of the material weaknesses in internal control over financial reporting described below, we performed additional analysis and other post-closing procedures to ensure that our financial statements were prepared in accordance with generally accepted accounting principles.  Despite material weaknesses in our internal control over financial reporting, we believe that the financial statements included in our Form 10-K for the period ended December 31, 2008 fairly present, in all material respects, our financial condition, results of operations, changes in shareholder’s equity and cash flows for the periods presented.

Management’s Annual Report on Internal Control over Financial Reporting.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitation, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives.
 
 
37

 
Our Chief Executive Officer, Chief Financial Officer and Controller conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Based on that assessment, we have identified the following material weaknesses and have implemented the following remediation of material weaknesses in internal control over financial reporting:

Lack of segregation of duties
 
We have limited staff in our corporate offices and, as such, there is a lack of segregation of duties.  In December 2006 our Controller retired and in January 2007 our Chief Financial officer retired due to medical problems.  We have subsequently hired an Interim Chief Financial Officer and a full-time Controller and our former Controller provides certain financial consulting services.

Lack of documented and reviewed system of internal control

We have an internal control weakness due to the lack of a documented and reviewed system of internal control.  We have determined that to perform the processes and remediate this internal control deficiency, we will either need to engage an internal control consultant or reassign existing personnel.  We have started to enhance some of our key internal control systems surrounding inventory purchasing and control, and to document those changes; however, this process is on-going and the implementation of policies and procedures may take several quarters.

As a result of the material weaknesses described above, management concluded that, as of December 31, 2008, we did not maintain effective internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework, issued by COSO.


We have retained a consulting firm and are conducting an evaluation to design and implement adequate systems of accounting and financial statement disclosure controls. We expect to complete a review during 2009 to comply with the requirements of the SEC, which as required by SEC rules, will include an opinion from our auditors regarding management’s report on internal control over financial reporting for our fiscal year ending 2009.  We believe that the ultimate success of our plan to improve our internal control over financial reporting will require a combination of additional financial resources, outside consulting services, legal advice, additional personnel, further reallocation of responsibility among various persons, and substantial additional training of those of our officers, personnel and others, including certain of our directors such as our Chairman of the Board and committee chairs, who are charged with implementing and/or carrying out our plan.  It should also be noted that the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
 
Our annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting and management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only Management’s report in this annual report.

Item 9B. Other Information

On January 9, 2009,  we entered into an Agreement with (Endeavor Group, LLC). We have retained Endeavor Group, LLC as our non-exclusive financial advisor and investment banking advisor to provide general financial advisory and investment banking service to us. We paid Endeavor Group, LLC $10,000 upon execution of the agreement and will pay additional fees relating to capital investments which may be received by us. We may issue to Endeavor stock certificates representing an aggregate of 500,000 shares of common stock of which 250,000 shares were issued upon execution of this Agreement, with the remaining 250,000 shares, to be issued as compensation for investment funds received by us, if any, if certain goals are met.

On January 28, 2009, we entered into an Agreement with a consultant to provide services to prepare a five year business plan including detailed income, balance and cash flow statements; capital requirements; use of proceeds; competition analysis and an AOT market analysis.  The consultant is to be paid $7,000 for the first month and $5,000 for the second and third months of his services for a total of $17,500.  The consultant has received 30,000 restricted shares of common stock.

On January 30, 2009, Cecil Bond Kyte was appointed Chief Executive Officer of the Company, replacing Charles R. Blum.  Mr. Blum continues to serve as President of the Company.
 
 
38

 
From January 13, 2009, through January 26, 2009, the Company conducted and concluded a private offering (the “Winter 2009 Offering”) of up to $250,000 aggregate face amount of its convertible notes (the “Winter 2009 Notes”) with 8 accredited investors. A total of $250,000 aggregate face amount of the Winter 2009 Notes were sold for an aggregate purchase price of $250,000.  The Winter 2009 Notes bear interest at 10% per annum, payable at maturity. The Winter 2009 Notes mature three months from  their date of issuance. The Winter 2009 Notes are convertible, at the option of the noteholder, into shares of common stock of the Company (the “Conversion Shares”) at an initial conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing dates of the Winter 2009 Offering (the “Conversion Price”). Up to 694,444 Conversion Shares are initially issuable at a Conversion Price of $0.36 per share.

Each of the investors in the Winter 2009 Offering received, for no additional consideration, a warrant (the “Winter 2009 Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the Winter 2009 Notes are convertible (the “Warrant Shares”).  Each Winter 2009 Warrant is exercisable on a cash basis only at an initial price of $0.50 per share, and is exercisable immediately upon issuance and for a period of two (2) years from the date of issuance. Up to 347,722 Warrant Shares are initially issuable on exercise of the Winter 2009 Warrants.

We received $250,000 in net proceeds in the Winter 2009 Offering which will be used for general corporate purposes and working capital.

From February 4, 2009 to March 11, 2009,  we conducted and concluded a private offering (the “2009 Winter Offering #2”)  of up to $250,000 aggregate face amount of its convertible notes (the “Winter 2009 #2 Notes”) with 17 accredited investors.  A total of $247,302 aggregate face amount of the Winter 2009 #2 Notes were sold for an aggregate purchase price of $224,820.  While the stated interest rate on the Winter 2009 #2 Notes is 0%, the actual interest rate on the Winter 2009 #2 Notes is 10% per annum.  The Winter 2009 #2 Notes mature on the first anniversary of their date of issuance.  The Winter 2009 #2 Notes are convertible, at the option of the noteholder, into shares of common stock of the Company (the “Conversion Shares”) at an initial conversion price equal to the average of the closing bid price of the Company’s common stock for the five trading days preceding the closing dates of the Winter 2009 #2 Offering (the “Conversion  Price”).  Up to 772,818 Conversion Shares are initially issuable at a Conversion Price of $0.32 per share.

Each of the investors in the Winter 2009 #2 Offering received, for no additional consideration, a warrant (the “Winter 2009 #2 Warrants”), entitling the holder to purchase a number of shares of the Company’s common stock equal to 50% of the number of shares of common stock into which the Winter 2009 #2 Notes are convertible (the “Warrant Shares”).  Each Winter 2009 #2 Warrant is exercisable on a cash basis only at an initial price of $0.50 per share, and is exercisable immediately upon issuance and for a period of two (2) years from the date of issuance.  Up to 386,409 Warrant Shares are initially issuable on exercise of the Winter 2009 #2 Warrants.

We received $224,820 in net proceeds in the Winter 2009 #2 Offering which will be used for general corporate purposes and working capital.


PART III

Information required by Part III is incorporated by reference from our Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2009 Annual Meeting of Stockholders, currently scheduled to be held on April 30, 2009 (the “Proxy Statement”).

Item 10.   Directors and Executive Officers of Registrant

The information required by this section is incorporated by reference to the Proxy Statement.

Code of Business Conduct.

We have adopted codes of business conduct and ethics for our directors, officers and employees which also meet the requirements of a code of ethics under Item 406 of Regulation S-K. You can access the Company’s Code of Business Conduct and Ethics and our Code of Ethics for Senior Executives and Financial Officers on the Corporate Governance page of the Company’s website at  www.stwa.com. Any shareholder who so requests may obtain a printed copy of the Code of Conduct by submitting a request to the Company’s Corporate Secretary.

Item 11.   Executive Compensation

The information required by this section is incorporated by reference to the Proxy Statement.

Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this section is incorporated by reference to the Proxy Statement.
 
 
39


 
Item 13.   Certain Relationships and Related Transactions

The information required by this section is incorporated by reference to the Proxy Statement.

Item 14.   Principal Accountant Fees and Services
 
The Audit Committee has selected Weinberg & Company, P.A. to audit our financial statements for the fiscal year ended December 31, 2008.

Weinberg & Company, P.A. was first appointed in fiscal year 2003, and has audited our financial statements for fiscal years 2002 through 2008.
 
Audit and Other Fees
 
The following table summarizes the fees charged by Weinberg & Company, P.A. for certain services rendered to the Company during 2008 and 2007.
 
   
Amount
 
Type of Fee 
 
Fiscal
Year 2008
   
Fiscal
Year 2007
 
Audit(1)
 
$
103,850
   
$
193,186
 
Audit Related(2)
   
0
     
0
 
Taxes (3)
   
0
     
0
 
All Other (4)
   
 0
     
  0
 
Total
 
$
103,850
   
$
193,186
 
 
______________
(1) 
This category consists of fees for the audit of our annual financial statements included in the Company’s annual report on Form 10-K and review of the financial statements included in the Company’s quarterly reports on Form 10-Q. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, statutory audits required by non-U.S. jurisdictions and the preparation of an annual “management letter” on internal control matters.
(2) 
Represents services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years, aggregate fees charged for assurance and related services that are reasonably related to the performance of the audit and are not reported as audit fees. These services include consultations regarding Sarbanes-Oxley Act requirements, various SEC filings and the implementation of new accounting requirements.
(3) 
Represents aggregate fees charged for professional services for tax compliance and preparation, tax consulting and advice, and tax planning.
(4) 
Represents aggregate fees charged for products and services other than those services previously reported.
 

 
40

PART IV

Item 15.   Exhibits

 
(a)  
The following documents are filed as part of this Form 10-K.

Financial Statements:

Reference is made to the contents to the consolidated financial statements of Save the World Air, Inc. under Item 7 of this Form 10-K.

 
(b)  
Exhibits:
 
The exhibits listed below are required by Item 601 of Regulation S-K.
 
Exhibit No.
 
Description
 
3.1(1)
 
Articles of Incorporation, as amended, of the Registrant.
 
3.2(1)
 
Bylaws of the Registrant.
 
10.1(2)
 
Commercial Sublease dated October 16, 2003 between the Registrant and KZ Golf, Inc.
 
10.2(9)
 
Amendment dated June 15, 2004 to Exhibit 10.1
 
10.3 (10)
 
Amendment dated August 14, 2005 to Exhibit 10.1
 
10.4(10)
 
General Tenancy Agreement dated March 14, 2006 between the Registrant and Autumlee Pty Ltd.
 
10.5(3)
 
Agreement dated December 13, 2002 between the Registrant and RAND.
 
10.6(2)**
 
Agreement dated May 7, 2003 between the Registrant and RAND.
 
10.7(5)
 
Modification No. 1 dated as of August 21, 2003 to Exhibit 10.5
 
10.8(5)
 
Modification No. 2 dated as of October 17, 2003 to Exhibit 10.5
 
10.9(5)
 
Modification No. 3 dated as of January 20, 2004 to Exhibit 10.5
 
10.10(4)
 
Deed and Document Conveyance between the Trustee of the Property of Jeffrey Ann Muller and Lynette Anne Muller (Bankrupts).
 
10.11(4)
 
Assignment and Bill of Sale dated May 28, 2002 between the Registrant and Kevin Charles Hart.
 
10.12(11)†
 
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Eugene E. Eichler.
 
10.13(15)†
 
Severance Agreement dated November 8, 2006 between the Registrant and Eugene E. Eichler
 
10.14(11)†
 
Amended and Restated Employment Agreement dated October 5, 2005 between the Registrant and Bruce H. McKinnon.
 
10.15(6)
 
Save the World Air, Inc. 2004 Stock Option Plan
 
10.16(8)
 
Form of Incentive Stock Option Agreement under 2004 Stock Option Plan
 
10.17(8)
 
Form of Non-Qualified Stock Option Agreement under 2004 Stock Option Plan
 
10.18(8)
 
Consulting Agreement dated as of October 1, 2004 between the Registrant and John Fawcett
 
10.19(7)
 
License Agreement dated as of July 1, 2004 between the Registrant and Temple University – The Commonwealth System of Higher Education
 
10.20(8)
 
Consulting Agreement dated as of November 19, 2004 between the Registrant and London Aussie Marketing, Ltd.
 
10.21(13)
 
Amendment dated September 14, 2006 to Exhibit 10.20
 
10.22(8)†
 
Employment Agreement dated September 1, 2004 with Erin Brockovich
 
10.23(15)†
 
Amendment dated as of July 31, 2006 to Exhibit 10.22
 
10.24(8)
 
Assignment of Patent Rights dated as of September 1, 2003 between the Registrant and Adrian Menzell
 
10.25(8)
 
Global Deed of Assignment dated June 26, 2004 between the Registrant and Adrian Menzell
 
10.26(11)†
 
Amended and Restated Employment Agreement dated as of March 1, 2006 between the Registrant and John Richard Bautista III
 
10.27(9)
 
Lease dated August 15, 2005 between the Registrant and Thomas L. Jackson
 
10.28(10)
 
Amendment dated February 1, 2006 to Exhibit 10.27
 
10.29(10)
 
Form of 9% Convertible Note issued in the 2005 Interim Financing
 
10.30(10)
 
Form of Stock Purchase Warrant issued in the 2005 Interim Financing
 
10.31(10)
 
Form of Stock Purchase Warrant issued in the 2005 Bridge Financing
 
10.32(11)
 
Form of Stock Purchase Warrant issued in 2006 Regulation S financing
 
10.33(11)
 
Form of Stock Purchase Warrant issued in 2006 PIPE financing
 
10.34(12)
 
Commercial Sublease between the Registrant and KZG Golf dated January 1, 2006
 
10.35(12)
 
Investment Agreement dated September 15, 2006 between the Registrant and Dutchess Private Equities Fund
 
10.36(12)
 
Registration Rights Agreement dated September 15, 2006 between the registrant and Dutchess Private Equities Fund, LLP
 
10.37(17)
 
License Agreement between the Registrant and Temple University dated February 2, 2007
 

 
41

 


10.38(17)
 
License Agreement between the Registrant and Temple University dated February 2, 2007
 
10.39(17)
 
R&D Agreement between the Registrant and Temple University dated February 2, 2007
 
10.40(14)
 
Note Purchase Agreement dated December 5, 2006 between the registrant and Morale Orchards LLC
 
10.41(14)
 
Form of Stock Purchase Warrant issued to Morale Orchards LLC
 
10.42(14)
 
Form of Convertible Note issued to Morale Orchards LLC
 
10.43(16)
 
Consulting Agreement dated January 4, 2007 between the Registrant and Spencer Clarke LLC
 
10.44(15)
 
Agreement dated as of July 15, 2006 between the Company and SS Sales and Marketing Group
 
10.45(15)
 
Engagement Agreement between the Registrant and Charles K. Dargan II
 
10.46(15)
 
Form of 10% Convertible Note issued in 2007 PIPE Offering
 
10.47(15)
 
Form of Stock Purchase Warrant issued in 2007 PIPE Offering
 
10.48(18)
 
Appointment of New Directors, Nathan Shelton, Steven Bolio and Dennis Kenneally
 
10.49(19)
 
Issuance of RAND Final Report
 
10.50(20)
 
Delisting from OTCBB to OTC Pink Sheets
 
10.51(21)
 
Resignation of Director, Dennis Kenneally
 
10.52(22)
 
Resignation of Officer, Bruce H. McKinnon
 
10.53(23)
 
Form of 10% Convertible Note issued in 2007 Spring Offering
 
10.54(23)
 
Form of Stock Purchase Warrant issued in 2007 Spring Offering
 
10.55(24)
 
Termination of North Hollywood Lease
 
10.56(25)
 
Modification Agreement of 10% 2007 PIPE Convertible Notes
 
10.57(26)
 
Form of 10% Convertible Note issued in 2007 Summer Offering
 
10.58(26)
 
Form of Stock Purchase Warrant issued in 2007 Summer Offering
 
10.59(27)
 
Resignation of Director, J. Joseph Brown
 
10.60(28)
 
Resignation of Chief Financial Officer and Appointment of Interim Chief Financial Officer
 
10.61(29)
 
Severance Agreement dated June 15, 2007 between Registrant and Bruce H. McKinnon
 
10.62(30)
 
Resignation of Director, Bruce H. McKinnon
 
10.63(31)
 
Second Modification Agreement of 10% 2007 PIPE Convertible Notes
 
10.64(32)
 
Form of 10% Convertible Note issued in 2007 Fall Offering
 
10.65(32)
 
Form of Stock Purchase Warrant issued in 2007 Fall Offering
 
10.66(33)
 
Resignation of Director, Joseph Helleis
 
10.67(34)
 
Form of 10% Convertible Note issued in 2007/8 Winter Offering
 
10.68(34)
 
Form of Stock Purchase Warrant issued in 2007/8 Winter Offering
 
10.69(34)
 
Modification and Satisfaction Agreement of Convertible Notes with Morale Orchards, LLP and Matthews & Partners
 
10.70(35)
 
Termination of employment relationship with John Bautista
 
10.71(36)
 
Form of 10% Convertible Note issued in 2008 Summer Offering
 
   
Form of Stock Purchase Warrant issued in 2008 Summer Offering
 
10.72(37)
 
Form of 10% Convertible Note issued in 2008 Fall Offering
 
   
Form of Stock Purchase Warrant issued in 2008 Fall Offering
 
10.73(38)
 
Form of 10% Convertible Note issued in 2008 Winter Offering
 
   
Form of Stock Purchase Warrant issued in 2008 Winter Offering
 
10.74(39)
 
Letter Agreement with Temple University extending default date
 
10.75(40)
 
Notice of first payment to Temple University under Letter Agreement
 
   
Announcement of date of 2009 Annual Shareholder Meeting
 
   
Appointment of Cecil Bond Kyte as new Chief Executive Officer
 
10.76(41)
 
Form of 10% Convertible Note issued in 2009 Winter Offering
 
   
Form of Stock Purchase Warrant issued in 2009 Winter Offering
 
10.77(42)*
 
Employment Agreement with Cecil Bond Kyte, January 30, 2009
 
10.78(43)
 
Form of 10% Convertible Note issued in 2009 Winter #2 Offering
 
   
Form of Stock Purchase Warrant issued in 2009 Winter #2 Offering
 
21
 
List of Subsidiaries
 
24*
 
Power of Attorney (included on Signature Page)
 
31.1*
 
Certification of Chief Executive Officer of Annual Report Pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e).
 
31.2*
 
Certification of Chief Financial Officer of Annual Report Pursuant to 18 U.S.C. Section 1350.
 
32.1*
 
Certification of Chief Executive Officer and Chief Financial Officer of Annual Report pursuant to Rule 13(a)—15(e) or Rule 15(d)—15(e).
 

 
42

 


   
*
 
Filed herewith.
**
 
Confidential treatment previously requested.
 
Management contract or compensatory plan or arrangement.
 
(1)
      
Incorporated by reference from Registrant’s Registration Statement on Form 10-SB (Registration Number 000-29185), as amended, filed on March 2, 2000.
(2)
 
Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2002.
(3)
 
Incorporated by reference from Registrant’s Form 8-K filed on December 30, 2002.
(4)
 
Incorporated by reference from Registrant’s Form 8-K filed on November 12, 2002.
(5)
 
Incorporated by reference from Registrant’s Form 10-QSB for the quarter ended March 31, 2004.
(6)
 
Incorporated by reference from Appendix C of Registrant’s Schedule 14A filed on April 30, 2004, in connection with its Annual Meeting of Stockholders held on May 24, 2004.
(7)
 
Incorporated by reference from Registrant Form 8-K filed on July 12, 2004.
(8)
 
Incorporated by reference from registrant’s Form 10-KSB for the fiscal year ended December 31, 2004.
(9)
 
Incorporated by reference from Registrant’s Form 10-QSB for the quarter ended September 30, 2005
(10)
 
Incorporated by reference from Registrant’s Form 10-KSB for the fiscal year ended December 31, 2005
(11)
 
Incorporated by reference from Registrant’s Form SB-2 filed on June 28, 2006 (SEC File No. 333- 333-135415)
(12)
 
Incorporated by reference from Registrant’s Form 8-K filed on September 21, 2006
(13)
 
Incorporated by reference from Registrant’s Form SB-2 filed on October 6, 2006 (SEC File No. 333-137855)
(14)
 
Incorporated by reference from Registrant’s Form 8-K filed on December 11, 2006
(15)
 
Incorporated by reference from Registrant’s Form 10KSB for the fiscal year ended December 31, 2006
(16)
 
Incorporated by reference from Registrant’s form 8-K filed on January 10, 2007
(17) 
 
Incorporated by reference from Registrant’s form 8K filed on February 8, 2007 
(18) 
 
Incorporated by reference from Registrant’s form 8K filed on February 16, 2007 
(19) 
 
Incorporated by reference from Registrant’s form 8K filed on May 3, 2007 
(20) 
 
Incorporated by reference from Registrant’s form 8K filed on May 22 2007 
(21) 
 
Incorporated by reference from Registrant’s form 8K filed on June 8, 2007 
(22) 
 
Incorporated by reference from Registrant’s form 8K filed on June 15, 2007 
(23) 
 
Incorporated by reference from Registrant’s form 8K filed on July 2, 2007 
(24) 
 
Incorporated by reference from Registrant’s form 8K filed on July 18, 2007 
(25) 
 
Incorporated by reference from Registrant’s form 8K filed on August 30, 2007 
(26) 
 
Incorporated by reference from Registrant’s form 8K filed on October 9, 2007 
(27) 
 
Incorporated by reference from Registrant’s form 8K filed on October 23, 2007 
(28) 
 
Incorporated by reference from Registrant’s form 8K filed on November 9, 2007 
(29) 
 
Incorporated by reference form Registrant’s Form 10QSB for the nine months ended September 30, 2007 
(30) 
 
Incorporated by reference from Registrant’s form 8K filed on November 15, 2007 
(31) 
 
Incorporated by reference from Registrant’s form 8K filed on December 11, 2007 
(32) 
 
Incorporated by reference from Registrant’s form 8K filed on December 20, 2007 
(33) 
 
Incorporated by reference from Registrant’s form 8K filed on February 25, 2008 
(34)
 
Incorporated by reference from Registrant’s form 8K filed on March 11, 2008
(35)
 
Incorporated by reference from Registrant’s form 8K filed on March 27, 2008
(36)
 
Incorporated by reference from Registrant’s form 8K filed on September 3, 2008
(37)
 
Incorporated by reference from Registrant’s form 8K filed on November 6, 2008
(38)
 
Incorporated by reference from Registrant’s form 8K filed on December 11, 2008
(39)
 
Incorporated by reference from Registrant’s form 8K filed on January 13, 2009
(40)
 
Incorporated by reference from Registrant’s form 8K filed on January 28, 2009
(41)
 
Incorporated by reference from Registrant’s form 8K filed on January 29, 2009
(42)
 
Incorporated by reference from Registrant’s form 10K for the twelve months ended December 31, 2009
 (43)
 
Incorporated by reference from Registrant’s form 8K filed on March 17, 2009
     


 
43

 

 

SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
         
 
Save The World Air, Inc.
 
 
 
By:  
/s/ CECIL BOND KYTE
 
   
Cecil Bond Kyte
 
Date: November 12 , 2009
 
Chief Executive Officer
 
 
POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Cecil Bond Kyte and Eugene E. Eichler, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME
 
TITLE
 
DATE
 
 
/s/ CECIL BOND KYTE
 
Chief Executive Officer and Chairman of the Board of Directors
 
November 12 , 2009
Cecil Bond Kyte
       
 
/s/ CHARLES R. BLUM
 
President
 
November 12 , 2009
Charles R. Blum
 
       
/s/ EUGENE E. EICHLER
 
Interim Chief Financial Officer
 
November 12, 2009
Eugene E. Eichler
 
       
/s/ JOHN PRICE
 
Director
 
November 12, 2009
John Price
 
       
/s/ NATHAN SHELTON
 
Director
 
November 12, 2009
Nathan Shelton
 
       
/s/ STEVEN BOLIO
 
Director
 
November 12, 2009
Steven Bolio
       
                       

 
44

 
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

SAVE THE WORLD AIR, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
DECEMBER 31, 2008 AND 2007

 
 
Page
 
Report of Independent Registered Public Accounting Firm
 
F-2
Consolidated balance sheets
 
F-3
Consolidated statements of operations
 
F-4
Consolidated statements of stockholders’ deficiency
 
F-5
Consolidated statements of cash flows
 
F-18
Notes to consolidated financial statements
F-19
 
 
F-1


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of:
Save The World Air, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of Save The World Air, Inc. and Subsidiary (a development stage enterprise) (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ deficiency and cash flows for the years then ended and for the period from February 18, 1998 (inception) to December 31, 2008.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Save The World Air, Inc. and Subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended and for the period from February 18, 1998 (inception) to December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring losses from operations since its inception. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/Weinberg & Company, P.A.
 
Weinberg & Company, P.A.
Los Angeles, California
March 27, 2009
 
 
F-2

 
SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

 
   
December 31,
 
   
2008
   
2007
 
ASSETS
Current assets
           
Cash
 
$
59,346
   
$
47,660
 
Accounts receivable
   
80
     
1,380
 
Inventories
   
     
30,256
 
Other current assets
   
33,195
     
20,552
 
Total current assets
   
92,621
     
99,848
 
Property and Equipment, net
   
131,969
     
201,058
 
Other assets
   
11,250
     
4,500
 
Total assets
 
$
235,840
   
$
305,406
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
 
                 
Current liabilities
               
Accounts payable- related parties
 
$
93,003
   
$
323,413
 
Accounts payable – License Agreements
   
716,500
     
161,250
 
Accounts payable- other
   
384,467
     
555,736
 
Accrued expenses
   
795,448
     
742,719
 
Accrued research and development fees
   
8,347
     
53,347
 
Accrued professional fees
   
390,535
     
274,499
 
Loan payable- related party
   
78,280
     
83,596
 
Loans and other payable due to Morale/Matthews
   
     
1,748,452
 
Convertible debentures, net- related parties
   
12,466
     
227,136
 
Convertible debentures, net- others
   
290,659
     
495,044
 
Total current liabilities
   
2,769,705
     
4,665,192
 
                 
Commitments and contingencies
               
                 
Stockholders’ deficiency
               
Common stock, $.001par value: 200,000,000 shares authorized, 62,940,891 and 46,470,413, shares issued and outstanding at December 31, 2008 and 2007, respectively
   
62,941
     
46,471
 
Common stock to be issued
   
16,500
     
4,000
 
Additional paid-in capital
   
40,129,758
     
32,280,083
 
Deficit accumulated during the development stage
   
(42,743,064
)
   
(36,690,340)
 
Total stockholders’ deficiency
   
(2,533,865
)
   
(4,359,786
)
Total liabilities and stockholder’s deficiency
 
$
235,840
   
$
305,406
 

See notes to consolidated financial statements.

 
F-3

 

SAVE THE WORLD AIR, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
 
CONSOLIDATED STATEMENTS OF OPERATIONS
       
         
Inception
 
         
(February
 
         
18, 1998) to
 
   
Years Ended December 31,
   
December 31,
 
   
2008
   
2007
   
2008
 
                   
Net sales
  $
   
$
39,000
   
$
69,000
 
Cost of goods sold
   
     
10,720
     
24,120
 
Gross profit
   
     
28,280
     
44,880
 
Operating expenses
   
3,062,537
  
   
3,956,345
     
29,921,858
 
Research and development expenses
   
652,363
     
600,816
     
5,458,593
 
Non-cash patent settlement cost
   
     
     
1,610,066
 
Loss before other income
   
(3,714,900
)
   
(4,528,881
)
   
(36,945,637
)
Other income (expense)
                       
Other income (loss)
   
(4,648)
     
3,384
     
(1,140)
 
Interest income
   
     
91
     
16,342
 
Interest expense
   
(1,461,927)
     
(1,736,537
)
   
(5,954,306
)
Loss on disposition of equipment
   
(14,426
)
   
     
(14,426
)
Settlement of Debt Due Morale/ Matthews
   
(927,903)
     
 
   
(927,903)
 
Settlement of litigation and debt
   
71,880
     
     
1,089,088
 
Loss before provision for income taxes
   
(6,051,924
)
   
(6,261,943
)
   
(42,737,982
)
Provision for income taxes
   
            800