Item 1. Financial Statements.
SOLAR WIND ENERGY TOWER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
335,261
|
|
|
$
|
61,758
|
|
Capitalized financing costs
|
|
|
126,386
|
|
|
|
–
|
|
Total current assets
|
|
|
461,647
|
|
|
|
61,758
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
307
|
|
|
|
2,284
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Capitalized financing costs
|
|
|
98,409
|
|
|
|
–
|
|
Deposits
|
|
|
1,559
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
561,922
|
|
|
$
|
66,342
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
121,032
|
|
|
$
|
171,245
|
|
Accrued liabilities and expenses
|
|
|
421,745
|
|
|
|
737,964
|
|
Advances from stockholders/officers
|
|
|
170,000
|
|
|
|
170,000
|
|
Notes payable
|
|
|
358,770
|
|
|
|
358,770
|
|
Convertible notes payable, net of unamortized debt discount of $808,335 and $353,129, respectively
|
|
|
356,651
|
|
|
|
278,266
|
|
Convertible notes payable, related party, net of unamortized debt discount of $66,062 and $131,047, respectively
|
|
|
213,938
|
|
|
|
148,953
|
|
Derivative liabilities
|
|
|
2,674,621
|
|
|
|
689,093
|
|
Total current liabilities
|
|
|
4,316,757
|
|
|
|
2,554,291
|
|
|
|
|
|
|
|
|
|
|
Long term debt:
|
|
|
|
|
|
|
|
|
Notes payable, related party
|
|
|
385,000
|
|
|
|
–
|
|
Notes payable
|
|
|
80,000
|
|
|
|
–
|
|
Convertible notes payable, net of unamortized debt discount of $103,315
|
|
|
–
|
|
|
|
24,456
|
|
Total liabilities
|
|
|
4,781,757
|
|
|
|
2,578,747
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001 per share; 10,000,000 shares authorized; none issued and outstanding as of June 30, 2014 and December 31, 2013
|
|
|
–
|
|
|
|
–
|
|
Common stock, par value $0.0001 per share; 900,000,000 and 500,000,000 shares authorized as of June 30, 2014 and December 31, 2013, respectively; 512,457,350 and 370,728,168 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively
|
|
|
51,246
|
|
|
|
37,073
|
|
Common stock to be issued
|
|
|
420,000
|
|
|
|
420,000
|
|
Additional paid in capital
|
|
|
8,203,021
|
|
|
|
5,896,890
|
|
Accumulated deficit
|
|
|
(12,894,073
|
)
|
|
|
(8,866,368
|
)
|
Stockholders' deficit attributable to Solar Wind Energy Tower, Inc.
|
|
|
(4,219,806
|
)
|
|
|
(2,512,405
|
)
|
Non-controlling interest
|
|
|
(29
|
)
|
|
|
–
|
|
Total stockholders' deficit
|
|
|
(4,219,835
|
)
|
|
|
(2,512,405
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
561,922
|
|
|
$
|
66,342
|
|
See the accompanying notes to the unaudited condensed consolidated financial statements
SOLAR WIND ENERGY TOWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
1,190
|
|
|
$
|
8,391
|
|
|
$
|
10,223
|
|
|
$
|
22,284
|
|
Selling, general and administrative
|
|
|
507,502
|
|
|
|
483,903
|
|
|
|
933,060
|
|
|
|
879,032
|
|
Depreciation
|
|
|
988
|
|
|
|
1,120
|
|
|
|
1,976
|
|
|
|
2,240
|
|
Total operating expenses
|
|
|
509,680
|
|
|
|
493,414
|
|
|
|
945,259
|
|
|
|
903,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(509,680
|
)
|
|
|
(493,414
|
)
|
|
|
(945,259
|
)
|
|
|
(903,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,300,091
|
)
|
|
|
(319,189
|
)
|
|
|
(2,606,025
|
)
|
|
|
(574,989
|
)
|
(Loss) gain on change in fair value of derivative liabilities
|
|
|
(517,858
|
)
|
|
|
1,191,857
|
|
|
|
(476,450
|
)
|
|
|
81,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(3,327,629
|
)
|
|
|
379,254
|
|
|
|
(4,027,734
|
)
|
|
|
(1,396,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes (benefit)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(3,327,629
|
)
|
|
|
379,254
|
|
|
|
(4,027,734
|
)
|
|
|
(1,396,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
29
|
|
|
|
–
|
|
|
|
29
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME ATTRIBUTABLE TO SOLAR WIND ENERGY TOWER, INC. COMMON SHAREHOLDERS
|
|
$
|
(3,327,600
|
)
|
|
$
|
379,254
|
|
|
$
|
(4,027,705
|
)
|
|
$
|
(1,396,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share, basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share, diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic
|
|
|
493,584,706
|
|
|
|
296,661,260
|
|
|
|
451,372,066
|
|
|
|
291,703,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, diluted
|
|
|
493,584,706
|
|
|
|
364,731,453
|
|
|
|
451,372,066
|
|
|
|
291,703,592
|
|
See the accompanying notes to the unaudited condensed consolidated financial statements
SOLAR WIND ENERGY TOWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 2014
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Non
|
|
|
|
|
|
|
Preferred stock
|
|
|
Common stock
|
|
|
Common to be Issued
|
|
|
Paid In
|
|
|
Accumulated
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Total
|
|
Balance, January 1, 2014
|
|
|
–
|
|
|
$
|
–
|
|
|
|
370,728,168
|
|
|
$
|
37,073
|
|
|
|
6,000,000
|
|
|
$
|
420,000
|
|
|
$
|
5,896,890
|
|
|
$
|
(8,866,368
|
)
|
|
$
|
–
|
|
|
$
|
(2,512,405
|
)
|
Shares issued in settlement of debt
|
|
|
–
|
|
|
|
–
|
|
|
|
134,104,182
|
|
|
|
13,411
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,451,667
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,465,078
|
|
Shares issued for consulting services rendered
|
|
|
–
|
|
|
|
–
|
|
|
|
500,000
|
|
|
|
50
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,200
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,250
|
|
Sale of common stock
|
|
|
–
|
|
|
|
–
|
|
|
|
7,125,000
|
|
|
|
712
|
|
|
|
–
|
|
|
|
–
|
|
|
|
24,288
|
|
|
|
–
|
|
|
|
–
|
|
|
|
25,000
|
|
Reclassify fair value of warrants from equity to liability
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(13,202
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(13,202
|
)
|
Fair value of warrants issued in connection with notes payable
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
253,119
|
|
|
|
–
|
|
|
|
–
|
|
|
|
253,119
|
|
Fair value of warrants issued as director compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
33,181
|
|
|
|
–
|
|
|
|
–
|
|
|
|
33,181
|
|
Reclassify fair value of warrants from liability to equity
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,677
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,677
|
|
Reclassify fair value of debt derivative to equity upon note repayment in full
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
168,786
|
|
|
|
–
|
|
|
|
–
|
|
|
|
168,786
|
|
Stock based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
378,415
|
|
|
|
–
|
|
|
|
–
|
|
|
|
378,415
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(4,027,705
|
)
|
|
|
(29
|
)
|
|
|
(4,027,734
|
)
|
Balance, June 30, 2014
|
|
|
–
|
|
|
$
|
–
|
|
|
|
512,457,350
|
|
|
$
|
51,246
|
|
|
|
6,000,000
|
|
|
$
|
420,000
|
|
|
$
|
8,203,021
|
|
|
$
|
(12,894,073
|
)
|
|
$
|
(29
|
)
|
|
$
|
(4,219,835
|
)
|
See
the accompanying notes to the unaudited condensed consolidated financial statements
SOLAR WIND ENERGY TOWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For the six months ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,027,734
|
)
|
|
$
|
(1,396,828
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,976
|
|
|
|
2,240
|
|
Amortization of debt discounts and OID
|
|
|
660,896
|
|
|
|
292,084
|
|
Amortization of financing costs
|
|
|
28,324
|
|
|
|
18,500
|
|
Non cash interest
|
|
|
1,821,237
|
|
|
|
163,925
|
|
Stock based compensation
|
|
|
413,847
|
|
|
|
261,009
|
|
Fair value of warrants issued in connection with notes payable
|
|
|
–
|
|
|
|
43,568
|
|
Loss (gain) from change in fair value of derivative liabilities
|
|
|
476,450
|
|
|
|
(81,717
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Advances from stockholders/officers
|
|
|
–
|
|
|
|
(15,000
|
)
|
Accounts payable and accrued expenses
|
|
|
26,425
|
|
|
|
126,211
|
|
Net cash used in operating activates
|
|
|
(598,579
|
)
|
|
|
(586,008
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
25,000
|
|
|
|
30,500
|
|
Proceeds from issuance of note payable
|
|
|
80,000
|
|
|
|
75,000
|
|
Proceeds from issuance of convertible notes payable
|
|
|
923,000
|
|
|
|
514,000
|
|
Repayments of convertible notes payable
|
|
|
(155,918
|
)
|
|
|
–
|
|
Net cash provided by financing activities
|
|
|
872,082
|
|
|
|
619,500
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
273,503
|
|
|
|
33,492
|
|
Cash, beginning of period
|
|
|
61,758
|
|
|
|
13,761
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
335,261
|
|
|
$
|
47,253
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
–
|
|
|
$
|
–
|
|
Income taxes paid
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Fair value of warrants issued in connection with notes payable
|
|
$
|
253,119
|
|
|
$
|
–
|
|
Notes payable issued in settlement of accrued officer salaries
|
|
$
|
385,000
|
|
|
$
|
–
|
|
Common stock issued in settlement of debt
|
|
$
|
1,465,078
|
|
|
$
|
306,574
|
|
See
the accompanying notes to the unaudited condensed consolidated financial statements
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
NOTE 1 – SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies
applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.
Business and Basis of Presentation
Solar Wind Energy Tower, Inc. (the “Company,”
“we,” “our,” “us”), formerly known as Superior Silver Mines, Inc., was incorporated in the
State of Idaho on January 22, 1962 as Superior Mines Company and then changed its name to Superior Silver Mines, Inc. The
Company reincorporated as a Nevada corporation on December 27, 2010. The Company has been dormant for a number of years,
and has no known mineral reserves.
On December 29, 2010, Solar Wind Energy Tower
Inc., a Nevada corporation (the “Company” or "Solar Wind"), completed a reverse merger (the “Merger”)
with Solar Wind Energy, Inc., a corporation formed under the laws of the State of Delaware on July 26, 2010 (“Solar Wind
- Subsidiary”). In connection with the Merger, the Company issued to the stockholders of Solar Wind - Subsidiary
in exchange for their Solar Wind - Subsidiary Common Stock, the right to receive an aggregate of 300,000,000 shares of the Company’s
Common Stock. As a result of the reverse merger, Solar Wind - Subsidiary is now a wholly-owned subsidiary of the Company.
For accounting purposes, Solar Wind - Subsidiary
was the surviving entity. The transaction was accounted for as a recapitalization of Solar Wind - Subsidiary pursuant to which
Solar Wind - Subsidiary was treated as the surviving and continuing entity although the Company is the legal acquirer rather than
a reverse acquisition. Accordingly, the Company’s historical financial statements are those of Solar Wind - Subsidiary
immediately following the consummation of the reverse merger. Also, going forward the business operations of Solar Wind - Subsidiary
will become the Company’s principal business operations.
The Company plans to design, develop, and construct
large downdraft towers that use benevolent, non-toxic natural elements to generate electricity and clean water economically (“Downdraft
Towers”) by integrating and synthesizing numerous proven as well as emerging technologies. In addition to constructing Downdraft
Towers in the United States and abroad, the Company intends to be prepared to establish partnerships at home and abroad to propagate
these systems and meet increasing global demand for clean water and electricity
On January 21, 2011, the Company changed its
name to Clean Wind Energy Tower, Inc. and on March 11, 2013, changed its name to Solar Wind Energy Tower Inc. along with
its wholly-owned subsidiary, a corporation formed under the laws of the State of Delaware, which changed its name from Clean Wind
Energy, Inc. to Solar Wind Energy, Inc. In addition, effective January 24, 2011, the Company’s quotation symbol on the Over-the-Counter
Bulletin Board was changed from SSVM.OB to CWET.OB and on March 11, 2013, in conjunction with our name change, the Company’s
quotation symbol on the Over-the-Counter Bulletin Board was changed from CWET.OB to SWET.OB.
In April 2014, the Company organized Arizona
Green Power, LLC, an Arizona limited liability company for the purpose to acquire development property from the City of San Luis,
Arizona. In connection with financing of the project, the Company reduced its ownership interest to 98.67% in connection with the
issuance of a note payable by Arizona Green Power, LLC on April 7, 2014.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
Interim Financial Statements
The following (a) condensed consolidated balance
sheet as of December 31, 2013, which has been derived from audited financial statements, and (b) the unaudited condensed consolidated
interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included.
Operating results for the three and six months
ended June 30, 2014 are not necessarily indicative of results that may be expected for the year ending December 31, 2014. These
condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K, filed with the Securities
and Exchange Commission (“SEC”) on March 28, 2014.
Going Concern
The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However, the Company has reported net losses of $4,027,734 and
$1,396,828 for the six month periods ended June 30, 2014 and 2013, respectively, accumulated deficit of $12,894,073 and total current
liabilities in excess of current assets of $3,855,110 as of June 30, 2014.
The Company does not have any revenues from
operations and will be dependent on funds raise to satisfy its ongoing capital requirements for at least the next 12 months. The
Company will require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot
predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be
able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the
Company may be unable to implement its current plans for expansion or respond to competitive pressures, any of these circumstances
would have a material adverse effect on its business, prospects, financial condition and results of operations.
The unaudited condensed consolidated financial
statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities
that might be necessary should the Company be unable to continue as a going concern.
Fair Value of Financial Instruments
Our short-term financial instruments, including
cash, other assets and accounts payable and accrued expenses consist primarily of instruments without extended maturities, the
fair value of which, based on management’s estimates, reasonably approximate their book value. The fair value of our notes
and advances payable is based on management estimates and reasonably approximates their book value based on their current maturity.
Research and development
In accordance with ASC 730, “Research
and Development”, the Company expenses all research and development costs as incurred. The Company had incurred $1,190 and
$10,223 for the three and six months ended June 30, 2014, respectively; and $8,391 and $22,284 for the three and six months ended
June 30, 2013 respectively, in research and development costs. The Company expects the research and development costs to increase
in the future as it continues to invest in the infrastructure that is critical to achieve our business goals and objectives.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
Net Income (loss) per Common Share
The Company computes net income (loss) per
share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”). Basic net income
(loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock. Diluted
net income (loss) per share is computed using the weighted average number of common and common stock equivalent shares outstanding
during the period. There is no effect on diluted loss per share since the common stock equivalents are anti-dilutive for the three
and six months ended June 30, 2014 and 2013, respectively. Dilutive common stock equivalents consist of shares issuable upon conversion
of convertible notes and exercise of warrants. Fully diluted shares for the three and six months ended June 30, 2014 were 675,450,951
and 633,238,321, respectively; and 364,731,453 and 291,703,592 shares for the three and six months ended June 30, 2013, respectively.
Common stock equivalents excluded from the net income (loss) per share for the three and six month periods ended June 30, 2014
were 181,866,255 shares, and for the three and six month periods ended June 30, 2013 were 2,187,101 and 70,257,294 shares, respectively.
Stock Based Compensation
The Company account for its stock based awards
in accordance with Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”), which requires a
fair value measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors,
including restricted stock awards. We estimate the fair value of stock using the stock price on date of the approval of the award.
The fair value is then expensed over the requisite service periods of the awards, which is generally the performance period and
the related amount recognized in our consolidated statements of operations.
Stock-based compensation expense in connection
with stock warrants issued to consultants in exchange for services rendered for the three and six months ended June 30, 2014 was
$190,253 and $378,415, respectively; $145,185 and $261,009 for the three and six months ended June 30, 2013, respectively.
Derivative financial instruments
Accounting Standards Codification subtopic
815-40, Derivatives and Hedging, Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company
on October 1, 2009. The Company’s convertible debt has reset provisions to the exercise price if the Company issues equity
or a right to receive equity, at a price less than the exercise prices. In addition, the Company has the possibility of exceeding
their common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provisions
of convertible notes after consideration of all existing instruments that could be settled in shares.
Capitalized Financing Costs
Capitalized financing costs represent costs
incurred in connection with obtaining the debt financing. These costs are amortized ratably and charged to financing
expenses over the term of the related debt. The amortization for the three and six months ended June 30, 2014 was $28,324. Accumulated
amortization of deferred financing costs was $28,324 and $-0- at June 30, 2014 and December 31, 2013, respectively.
Recently Issued Accounting Pronouncements
The Company has adopted Accounting Standards
Update (ASU) No. 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including
an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
. The amendments in this ASU remove all incremental
financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915,
Development
Stage Entities
, from the FASB
Accounting Standards Codification
™.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
A development
stage entity is one that devotes substantially all of its efforts to establishing a new business and for which: (
a
) planned
principal operations have not commenced; or (
b
) planned principal operations have commenced, but have produced no significant
revenue. For example, many start-ups or even long-lived organizations that have not yet begun their principal operations or do
not have significant revenue would be identified as development stage entities.
For public business
entities, the presentation and disclosure requirements in Topic 915 will no longer be required for the first annual period beginning
after December 15, 2014. The revised consolidation standards are effective one year later, in annual periods beginning after December
15, 2015. Early adoption is permitted.
There are various other updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 2 – ACCRUED LIABILITIES AND EXPENSES
Accrued liabilities and expenses as of June
30, 2014 and December 31, 2013 consist of the following:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Accrued payroll
|
|
$
|
152,138
|
|
|
$
|
505,118
|
|
Accrued stock purchase warrants
|
|
|
29,400
|
|
|
|
29,400
|
|
Accrued lawsuit (Note 12 below)
|
|
|
122,985
|
|
|
|
122,985
|
|
Accrued interest and other
|
|
|
117,222
|
|
|
|
80,461
|
|
Total
|
|
$
|
421,745
|
|
|
$
|
737,964
|
|
NOTE 3 – ADVANCES FROM SHAREHOLDERS/OFFICERS
Advances from shareholders are comprised of the fair value of common
stock pledged as collateral by shareholder (see Note 12 below).
NOTE 4 – NOTES PAYABLE
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Promissory notes issued June 20, 2012
|
|
$
|
268,270
|
|
|
$
|
268,270
|
|
Promissory note issued June 6, 2013
|
|
|
90,500
|
|
|
|
90,500
|
|
Note payable issued April 7, 2014
|
|
|
80,000
|
|
|
|
–
|
|
Total
|
|
|
438,770
|
|
|
|
358,770
|
|
Less current portion
|
|
|
358,770
|
|
|
|
358,770
|
|
Long term portion
|
|
$
|
80,000
|
|
|
$
|
–
|
|
On June 20, 2012, the Company issued three
promissory notes payable in the aggregate of $268,270 in settlement of outstanding accounts payable. The notes mature earlier of
(1) one year from the date of issuance, (2) completion of any major financing event or events in which the Company receives aggregate
proceeds of $2,000,000 or more, or (3) any liquidation or reorganization, merger or recapitalization of the Company, bear an interest
rate of 8% per annum due at maturity and are unsecured. The notes are currently in default.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
On June 6, 2013, the Company issued a secured
promissory note payable with a face amount of $97,500 with an original interest discount (“OID”) of $22,500. The note
was originally due in full on October 3, 2013, subsequently extended to November 15, 2013, and is secured by a Company issued note
to the Company’s CEO for $150,000 (See note 7). The Company is obligated to file by July 5, 2013 a registration statement
on Form S-1 registering an equity line of credit to the benefit of the note holder and to become effective by September 18, 2013.
The Company filed Form S-1 on June 24, 2013 and on October 16, 2013 became effective. Effective November 16, 2013, the remaining
unpaid balance of $90,500 was in default, the promissory note became due and payable with interest rate at 22% per annum thereafter
for any unpaid balance.
On April 7, 2014, Arizona Green Power, LLC,
a majority owned subsidiary of the Company, issued a note payable for $80,000 with interest at 10% per annum, due at maturity of
April 6, 2016. In connection with the issuance of the note, the Company granted i) a 1.33% ownership interest in Arizona Green
Power, LLC and ii) a warrant to purchase 1,920,000 shares of the Company’s common stock exercisable at $0.05 per share expiring
on March 7, 2016. The warrants were valued using the Black Sholes option pricing method with the following assumptions: dividend
yield $-0-, volatility of 158.38% and risk free rate of 0.41%. The determined fair value of the warrant of $3,070 is amortized
as financing costs of the term of the related note (2 years).
NOTE 5 – CONVERTIBLE NOTES PAYABLE
Convertible notes payable are comprised of the following:
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Convertible promissory notes, due December 31, 2014, net of unamortized debt discount of $60,127 and $119,274, respectively
|
|
$
|
178,873
|
|
|
$
|
119,726
|
|
Convertible note payable, due January 24, 2015, net of unamortized debt discount and OID of $17,712
|
|
|
–
|
|
|
|
10,059
|
|
Convertible note payable, due December 19, 2013
|
|
|
–
|
|
|
|
32,500
|
|
Convertible note payable, due July 1, 2014, net of unamortized debt discount and OID of $12,478
|
|
|
–
|
|
|
|
15,492
|
|
Convertible note payable, due April 15, 2014, net of unamortized debt discount of $12,231
|
|
|
–
|
|
|
|
20,269
|
|
Convertible note payable, due May 15, 2014, net of unamortized debt discount of $13,500
|
|
|
–
|
|
|
|
14,000
|
|
Convertible note payable, due January 24, 2015, net of unamortized debt discount of $36,977
|
|
|
–
|
|
|
|
13,023
|
|
Convertible note payable, due August 21, 2014, net of unamortized debt discount and OID of $19,925
|
|
|
–
|
|
|
|
11,287
|
|
Convertible promissory notes, due June 18, 2014, net of unamortized debt discount of $19,973
|
|
|
–
|
|
|
|
12,527
|
|
Convertible promissory note, due July 14, 2014, net with unamortized debt discount and OID of $20,569
|
|
|
–
|
|
|
|
17,931
|
|
Convertible promissory note, due August 16, 2014, net of unamortized debt discount and OID of $24,049
|
|
|
–
|
|
|
|
14,451
|
|
Convertible promissory note, due October 22, 2014, net of unamortized debt discount and OID of $25,226
|
|
|
–
|
|
|
|
5,986
|
|
Convertible promissory note, due November 1, 2014, net of unamortized debt discount and OID of $47,226
|
|
|
–
|
|
|
|
10,274
|
|
Convertible promissory note, due September 10, 2014, net of unamortized debt discount of $38,678
|
|
|
–
|
|
|
|
3,822
|
|
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Convertible promissory note, due January 24, 2015, net of unamortized debt discount of $5,802 and $48,625, respectively
|
|
|
14,714
|
|
|
|
1,375
|
|
Convertible promissory note, due October 10, 2014, net of unamortized debt discount of $12,055
|
|
|
20,445
|
|
|
|
–
|
|
Convertible promissory note, due November 14, 2014, net of unamortized debt discount of $13,700
|
|
|
13,800
|
|
|
|
–
|
|
Convertible promissory note, due February 20, 2015, net of unamortized debt discount and OID of $16,069
|
|
|
8,901
|
|
|
|
–
|
|
Convertible promissory note, due February 2, 2015, net of unamortized debt discount of $28,408
|
|
|
21,592
|
|
|
|
–
|
|
Convertible promissory note, due January 7, 2015, net of unamortized debt discount of $25,489
|
|
|
12,011
|
|
|
|
–
|
|
Convertible promissory note, due May 2, 2015, net of unamortized debt discount of $26,658
|
|
|
8,342
|
|
|
|
–
|
|
Convertible promissory note, due January 24, 2015, net of unamortized debt discount of $49,000
|
|
|
14,000
|
|
|
|
–
|
|
Convertible promissory notes, due May 2, 2015, net of unamortized debt discount of $67,068
|
|
|
12,932
|
|
|
|
–
|
|
Convertible promissory note, due May 9, 2015, net of unamortized debt discount of $192,945
|
|
|
32,055
|
|
|
|
–
|
|
Convertible promissory note, due June 9, 2015, net of unamortized debt discount of $311,014
|
|
|
18,986
|
|
|
|
–
|
|
Total
|
|
|
356,651
|
|
|
|
302,722
|
|
Less short term portion
|
|
|
(356,651
|
)
|
|
|
(278,266
|
)
|
Long term portion
|
|
$
|
–
|
|
|
$
|
24,456
|
|
Asher notes:
On January 8, 2014, the Company entered into
a Securities Purchase Agreement with Asher Enterprises, Inc. ("Asher"), for the sale of an 8% convertible note in the
principal amount of $32,500 (the "Note"). The financing closed on January 8, 2014. The total net proceeds the Company
received from this Offering was $30,000.
The Note bears interest at the rate of 8% per
annum. All interest and principal must be repaid on October 10, 2014. The Note is convertible into common stock, at Asher’s
option, at a 42% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period
prior to conversion.
On February 12, 2014, the Company entered into
a Securities Purchase Agreement with Asher Enterprises, Inc. ("Asher"), for the sale of an 8% convertible note in the
principal amount of $27,500 (the "Note"). The financing closed on February 12, 2014. The total net proceeds the Company
received from this Offering was $25,000.
The Note bears interest at the rate of 8% per
annum. All interest and principal must be repaid on November 14, 2014. The Note is convertible into common stock, at Asher’s
option, at a 42% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period
prior to conversion.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
In the event the Company prepays the Notes
in full, the Company is required to pay off all principal, interest and any other amounts owing multiplied by (i) 120% if prepaid
during the period commencing on the closing date through 30 days thereafter, (ii) 125% if prepaid 31 days following the closing
through 60 days following the closing, (iii) 130% if prepaid 61 days following the closing through 90 days following the closing
and (iv) 135% if prepaid 91 days following the closing through 120 days following the closing. (v) 140% if prepaid 121 days following
the closing through 150 days following the closing, (vi) 150% if prepaid 121 days following the closing through 180 days following
the closing. After the expiration of 180 days following the date of the Note, the Company has no right of prepayment.
JMJ Financial
On July 11, 2012, the Company issued a Convertible
Promissory Note to JMJ Financial (“JMJ”) providing JMJ with the ability to invest up to $275,000 which contains a 10%
original issue discount (the “JMJ Note”). The transaction closed on July 25, 2012. During the six months ended June
30, 2014, the Company received two tranches of net proceeds in the amount of $70,000, of which $50,000 was paid. As of June 30,
2014 and December 31, 2013, the aggregate principal amount outstanding under the July 11, 2012 issued convertible promissory note
was $24,970 and $90,395, respectively.
The maturity dates are one year from the effective
date of each payment by JMJ to the Company (the “Maturity Date”). The conversion price (the “Conversion Price”)
for each portion of consideration paid by JMJ to the Company is lesser of: (1) the closing price of the Company’s stock on
the day the portion of consideration is paid to the Company, or (2) 70% of the lowest trade price in the 25 trading days previous
to the conversion.
The JMJ Notes bear interest at 0% for the first
60 days and a one-time interest charge of 10% will be applied to the Principal Sum thereafter.
At any time after the Effective Date, the Company
will have the option, upon 20 days business notice to JMJ, to prepay the entire remaining outstanding principal amount of the Note
in cash, provided that (i) the Company will pay JMJ 150% of the principal amount outstanding in repayment, (ii) such amount must
be paid in cash on the next business day following the 20 day business day notice period, and (iii) JMJ may still convert the Note
pursuant to the terms herein during the 20 day business period until such repayment amount has been received in full.
Typenex Co-Investment, LLC
On May 13, 2013, the Company issued a Convertible
Promissory Note to Typenex Co-Investment, LLC (“Typenex”) providing Typenex with the ability to invest up to $555,000
which contains a 10% original issue discount (the “Typenex Note”). The transaction closed on May 13, 2013. All issued
tranches are due 20 months from the date of issuance.
On February 26, 2014, the Company issued a
$50,000 Convertible Promissory Note (the “Note”) to Typenex Co-Investment LLC under the May 13, 2013 described transaction.
The total proceeds the Company received from this offering was $50,000.
The Note is convertible into common stock,
at holder’s option, at the lower of i) 35% discount to the average of the two lowest closing bid prices of the common stock
during the 20 trading day period prior to conversion or 40% if average of the two lowest bid prices are less than $0.01 or ii)
$0.04.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
KBM Worldwide, Inc.
On April 1, 2014, the Company entered into
a Securities Purchase Agreement with KBM Worldwide, Inc. ("KBM"), for the sale of an 8% convertible note in the principal
amount of $37,500 (the "Note"). The financing closed on April 1, 2014. The total net proceeds the Company received from
this Offering was $35,000.
The Note bears interest at the rate of 8% per
annum. All interest and principal must be repaid on January 7, 2015. The Note is convertible into common stock, at KBM’s
option, at a 42% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period
prior to conversion.
On April 29, 2014, the Company entered into
a Securities Purchase Agreement with KBM Worldwide, Inc. ("KBM"), for the sale of an 8% convertible note in the principal
amount of $63,000 (the "Note"). The financing closed on April 29, 2014. The total net proceeds the Company received from
this Offering was $60,000.
The Note bears interest at the rate of 8% per
annum. All interest and principal must be repaid on February 2, 2015. The Note is convertible into common stock, at KBM’s
option, at a 42% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period
prior to conversion.
Union Capital LLC
On May 2, 2014, the Company entered into a
Securities Purchase Agreement with Union Capital LLC. ("Union"), for the sale of an 8% convertible note in the principal
amount of $40,000 (the "Note"). The financing closed on May 2, 2014. The total net proceeds the Company received from
this Offering was $35,000.
The Note bears interest at the rate of 8% per
annum. All interest and principal must be repaid on May 2, 2015. The Note is convertible into common stock, at Unions option, at
a 42% discount to the lowest closing price of the common stock during the 10 trading day period prior to conversion.
Adar Bays, LLC
On May 2, 2014, the Company entered into a
Securities Purchase Agreement with Adar Bays, LLC. ("Adar"), for the sale of an 8% convertible note in the principal
amount of $40,000 (the "Note"). The financing closed on May 2, 2014. The total net proceeds the Company received from
this Offering was $35,000.
The Note bears interest at the rate of 8% per
annum. All interest and principal must be repaid on May 2, 2015. The Note is convertible into common stock, at Adar’s option,
at a 42% discount to the lowest closing price of the common stock during the 10 trading day period prior to conversion.
JDF Financial Capital, Inc.
On June 9, 2014, the Company entered a financing
transaction by entering into a Purchase agreement dated June 3, 2014 (the “Purchase Agreement”) with JDF Capital Inc.
(the “Purchaser”) for an aggregate principal amount of $885,000 (the “Purchase Price”). Pursuant to the
Purchase Agreement, the Company issued the following to the Purchaser: (i) a 10% Convertible Promissory Note (the “Note”),
(ii) a warrant to purchase an aggregate of 7,000,000 shares of the Company’s common stock, par value $0.001 per share, for
an exercise price of $0.05 per share for a period of 150 days from the effective date of the registration statement (the “First
Warrant”), and (iii) a warrant to purchase an aggregate of 8,750,000 shares of the Company’s common stock, par value
$0.001 per share, for an exercise price of $0.04 per share for a period of 90 days from the effective date of the registration
statement (the “Second Warrant” and collectively, the “Warrants”).
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
The exercise price and number of shares of
the Company’s common stock issuable under the Warrants are subject to adjustments for stock dividends, splits, combinations,
subsequent rights offerings, pro rata distributions and any issuance of securities below the exercise price of the Warrants. Any
adjustment to the exercise price shall similarly cause the number of warrant shares to be adjusted proportionately so that the
total value of the Warrants shall remain the same.
The Notes earn an interest rate of 10% per
annum and a maturity date of 12 months from the date of the principal amount advanced. The Notes are convertible any time after
the issuance date of the Note, and the Purchaser has the right to convert the Note into shares of the Company’s common stock
at a conversion price equal to 42% discount to the lowest closing price of the common stock for the 15 trading days immediately
prior the conversion date, subject to a maximum conversion price of $0.03 per share.
In the event of default, the Purchaser has
the right to require the Company to repay in cash all or a portion of the Note at a price equal to 120% of the aggregate principal
amount of the Note plus all accrued but unpaid interest. In addition, in the event of a Major Transaction (as defined in the Note),
the Purchaser has the right to require the Company to prepaid all or a portion of the Note at a price equal to 110% of the aggregate
principal amount plus all accrued but unpaid interest. In the event of a Triggering Event (as defined in the Note), the Purchaser
has the right to require the Company to prepaid all or a portion of the Note at a price equal to the sum of (i) the greater of
(a) 120% of the aggregate principal amount plus all accrued but unpaid interest and (ii) all other costs, expenses and liquidated
damages due in respect of the Note and other transaction documents under the Purchase Agreement.
The first tranche of the Note has been funded
to the Company by the Purchaser upon execution of the Purchase Agreement, in the principal amount of $555,000, consisting of the
aggregate principal sum of $500,000 advanced by the Holder, $5,000 in expenses incurred by the Purchaser and 10% prepaid interest
per annum over 12 months. The Purchaser also agreed to fund the Company the second tranche of the Note in the principal amount
of $330,000, consisting of a cash payment of $300,000 and 10% pre-paid interest, within 15 business days of effectiveness of the
registration statement.
Pursuant to the Purchase Agreement, the Company
is obligated to file a registration statement with the Securities and Exchange Commission (the “SEC”), not later than
60 days after the closing date, to cover the shares to be issued upon conversion of the Note and upon exercise of the Warrants.
In the event the Company did not (i) file the registration statement within the required timeframe, (ii) cause the registration
statement to be declared effective by the SEC within 120 days following the closing date, (iii) cause the registration statement
to be declared effective by the SEC within 5 trading days following the date on which the Company is notified by the SEC that the
registration statement will not be reviewed or is no longer subject to further review and comments, or (iv) the registration statement
ceases to be effective for over 20 trading days, then the Company shall pay to the Purchaser liquidated damages equal to 2% of
the purchase price per month, not to exceed a total of 6% of the purchase price paid by the Purchaser.
The Company has identified the embedded derivatives
related to the above described Notes. These embedded derivatives included certain conversion features and reset provisions. The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the
inception date of the Notes and to fair value as of each subsequent reporting date.
At the inception of the 2014 Notes, the Company
determined the aggregate fair value of $2,697,767 of embedded derivatives. The fair value of the embedded derivatives was determined
using the Black Scholes Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility
of 157.33% to 197.24%, (3) weighted average risk-free interest rate of 0.11 % to 0.23%, (4) expected life of 0.75 to 1.00 years,
and (5) estimated fair value of the Company’s common stock of $0.0045 to $0.0271 per share.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
The determined fair value of the debt derivatives
of $2,697,768 was charged as a debt discount up to the net proceeds of the note with the remainder of $1,821,237 charged to current
period operations as non-cash interest expense.
At June 30, 2014, the Company marked to market
the fair value of the debt derivatives and determined a fair value of $2,289,808. The Company recorded a loss from change in fair
value of debt derivatives of $155,201 and $150,860 for the three and six months ended June 30, 2014. The fair value of the embedded
derivatives was determined using Black Scholes Option Pricing Model based on the following assumptions: (1) dividend yield of 0%,
(2) expected volatility of 197.24%, (3) weighted average risk-free interest rate of 0.04% to 0.11%, (4) expected life of 0.28 to
0.94 years, and (5) estimated fair value of the Company’s common stock of $0.0305 per share.
The charge of the amortization of debt discounts
and costs for the three and six months ended June 30, 2014 was $341,588 and $571,296, respectively, and $135,311 and $227,099 for
the three and six months ended June 30, 2013, respectively. which was accounted for as interest expense. Also, the Company has
accrued interest expense of $37,103 as of June 30, 2013.
During the six months ended June 30, 2014,
the Company issued an aggregate of 134,104,182 shares of its common stock in settlement of the convertible note payable and related
interest.
NOTE 6 – NOTES PAYABLE, RELATED PARTY
On April 18, 2014, the Company issued an aggregate
of $385,000 promissory notes to officers and key employees in settlement of accrued salaries. The promissory notes bear interest
at the rate of 2% per annum. All interest and principal must be repaid on April 18, 2016. In connection with the issuance of the
notes, the Company issued an aggregate of 59,413,581 warrants to purchase the Company’s common stock at $0.00648 per share
for two years.
The warrants were valued using the Black Sholes
option pricing method with the following assumptions: dividend yield $-0-, volatility of 180.09% and risk free rate of 0.43%. The
determined fair value of the warrants of $250,049 is amortized as financing costs of the term of the related notes (2 years).
The Company has accrued interest expense of
$1,540 as of June 30, 2014.
NOTE 7 – CONVERTIBLE NOTES PAYABLE, RELATED PARTY
During 2012, the Company issued an aggregate
of $280,000 convertible promissory notes to officers and key employees in settlement of accrued salaries.
The convertible promissory notes bear interest
at the rate of 8% per annum. All interest and principal must be repaid on December 31, 2014. The convertible promissory notes are
convertible into common stock, at the holders’ option at $0.015 per common share.
Due to the nature of the notes described in
Note 5 above, the Company has identified the embedded derivatives related to the above described Notes. These embedded derivatives
included certain conversion features and the uncertainty of sufficient authorized shares to meet possible conversion demands. The
accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the
inception date of the notes and to fair value as of each subsequent reporting date.
The fair value of the embedded derivatives
was determined using Black Scholes Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected
volatility of 200.41% to 200.80%, (3) weighted average risk-free interest rate of 0.25%, (4) expected life of 2.0 years, and (5)
estimated fair value of the Company’s common stock of $0.0165 to $0.0167 per share.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
The determined fair value of the debt derivatives
of $262,285 was charged as a debt discount up to the net proceeds of the note.
At June 30, 2014, the Company marked to market
the fair value of the debt derivatives and determined a fair value of $384,813. The Company recorded a loss from change in fair
value of debt derivatives of $363,214 and $331,114 for the three and six months ended June 30, 2014, respectively. The fair value
of the embedded derivatives was determined using Black Scholes Option Pricing Model based on the following assumptions: (1) dividend
yield of 0%, (2) expected volatility of 197.24%, (3) weighted average risk-free interest rate of 0.07%, (4) expected life of 0.50
years, and (5) estimated fair value of the Company’s common stock of $0.0305 per share.
The charge of the amortization of debt discounts
and costs for the three and six months ended June 30, 2014 was $32,672 and $64,985, respectively, and $32,672 and $64,985 for the
three and six months ended June 30, 2013, respectively; which was accounted for as interest expense. Also, the Company has accrued
interest expense of $33,541 as of June 30, 2014.
NOTE 8 – DERIVATIVE LIABILITIES
As described in Notes 5 and 7 above, the Company
issued convertible notes that contain conversion features and reset provision. The accounting treatment of derivative financial
instruments requires that the Company record fair value of the derivatives as of the inception date and to fair value as of each
subsequent reporting date. Refer to Notes 5 and 7 for assumptions used to determine fair values.
During the six months ended June 30, 2014,
the Company has the possibility of exceeding their common shares authorized when considering the number of possible shares that
may be issuable to satisfy settlement provisions of convertible notes after consideration of all existing instruments that could
be settled in shares. The accounting treatment of derivative financial instruments required that the Company reclassify
the derivative from equity to a liability at their fair values as of the date possible issuable shares exceeded the authorized
level and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating,
non-cash income or expense at each reporting date. If the fair value of the derivatives was higher at the subsequent balance
sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the
subsequent balance sheet date, the Company recorded non-operating, non-cash income.
The Company determined the previously issued
warrants required reclassification from equity as of January 2014. Accordingly, the Company reclassified the determined fair value
of $13,202 from additional paid in capital to derivative liabilities. On April 2, 2014, the Company increased its authorized shares
to 900,000,000. Accordingly, the fair value of the warrants at April 2, 2014 of $7,677 was reclassified from derivative liabilities
to additional paid in capital.
The fair value of the derivative in January
2014 was determined using the Black Sholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility:
157.27%; risk free rate: 1.75%; and expected life: 4.37 years.
At April 2, 2014, the Company marked to market
the fair value of the warrant derivative and determined a fair value of $7,677. The Company recorded a gain from change in fair
value of derivative of $557 and $5,524 for the three and six months ended June 30, 2014. The fair value of the embedded derivatives
was determined using Black Scholes Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected
volatility of 159.32%, (3) weighted average risk-free interest rate of 1.62%, (4) expected life of 4.10 years, and (5) estimated
fair value of the Company’s common stock of $0.0045 per share.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
NOTE 9 – STOCKHOLDERS' EQUITY
Preferred stock
The Company has authorized 10,000,000 shares
of preferred stock, with a par value of $0.0001 per share. As of June 30, 2014 and December 31, 2013, the Company did not have
any preferred stock issued and outstanding.
Common stock
The Company has authorized 900,000,000 and
500,000,000 shares of common stock, with a par value of $0.0001 per share as of June 30, 2014 and December 31, 2013, respectively.
As of June 30, 2014 and December 31, 2013, the Company has 512,457,350 and 370,728,168, respectively, shares of common stock issued
and outstanding.
On April 2, 2014, the Company’s majority
stockholders approved to amend the Articles of Incorporation to increase the number of authorized shares of common stock from 500,000,000
to 900,000,000 shares.
On May 20, 2014, the Company issued 500,000
shares of its common stock for investor relations services valued at $2,250.
In 2013 and 2012, the Company issued an aggregate
of 15,000,000 and 21,500,000 shares of common stock for future services of $328,500 and $1,305,000, respectively. The Company accretes
the fair value of the shares issued as stock based compensation during the requisite service period to operations. During the three
and six months ended June 30, 2014, the Company recorded $190,253 and $378,415, respectively, and $108,353 and $218,581 for the
three and six months ended June 30, 2013, respectively, as stock based compensation.
NOTE 10 – WARRANTS
Warrants
The following table summarizes the changes
in warrants outstanding and related prices for the shares of the Company’s common stock at June 30, 2014:
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Warrants
Outstanding
Weighted
Average
Remaining
Contractual Life
(years)
|
|
|
Weighted
Average
Exercise price
|
|
|
Number
Exercisable
|
|
|
Warrants
Exercisable
Weighted
Average
Exercise Price
|
|
$
|
0.00648
|
|
|
|
59,413,581
|
|
|
|
1.80
|
|
|
$
|
0.00648
|
|
|
|
59,413,581
|
|
|
$
|
0.00648
|
|
|
0.00860
|
|
|
|
5,787,037
|
|
|
|
1.76
|
|
|
|
0.00860
|
|
|
|
5,787,037
|
|
|
|
0.00860
|
|
|
0.02000
|
|
|
|
2,495,000
|
|
|
|
1.76
|
|
|
|
0.02000
|
|
|
|
2,495,000
|
|
|
|
0.02000
|
|
|
0.04000
|
|
|
|
8,750,000
|
|
|
|
Contingent
|
|
|
|
0.04000
|
|
|
|
-
|
|
|
|
-
|
|
|
0.05000
|
|
|
|
1,920,000
|
|
|
|
1.69
|
|
|
|
0.05000
|
|
|
|
1,920,000
|
|
|
|
0.05000
|
|
|
0.05000
|
|
|
|
7,000,000
|
|
|
|
Contingent
|
|
|
|
0.05000
|
|
|
|
-
|
|
|
|
-
|
|
|
0.10000
|
|
|
|
2,187,101
|
|
|
|
3.90
|
|
|
|
0.10000
|
|
|
|
2,187,101
|
|
|
|
0.10000
|
|
|
|
|
|
|
87,552,719
|
|
|
|
1.90
|
|
|
|
|
|
|
|
71,802,719
|
|
|
$
|
0.01113
|
|
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
Transactions involving the Company’s warrant issuance are
summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Price Per
Share
|
|
Outstanding at December 31, 2012
|
|
|
2,187,101
|
|
|
$
|
0.10
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Canceled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2013
|
|
|
2,187,101
|
|
|
|
0.10
|
|
Granted
|
|
|
85,365,628
|
|
|
|
0.01
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Canceled or expired
|
|
|
–
|
|
|
|
–
|
|
Outstanding at June 30, 2014
|
|
|
87,552,729
|
|
|
$
|
0.01
|
|
On April 4, 2014, in recognition of past services
by the two (2) Directors, the Company approved for issuance of an aggregate of 2,495,010 and 5,787,037 warrants to purchase the
Company’s common stock at $0.02 and $0.0086 per share for two years.
The warrants were valued using the Black Sholes
option pricing method with the following assumptions: dividend yield $-0-, volatility of 158.38% and risk free rate of 0.43%. The
determined fair value of the warrants of $33,181 was charged to current period operations.
As described in Note 4, On April 7, 2014, the
Company issued a warrant to purchase 1,920,000 shares of the Company’s common stock exercisable at $0.05 per share expiring
on March 7, 2016 in connection with the issuance of a note. The warrants were valued using the Black Sholes option pricing method
with the following assumptions: dividend yield $-0-, volatility of 158.38% and risk free rate of 0.41%. The determined fair value
of the warrant of $3,070 is amortized as financing costs of the term of the related note (2 years).
As described in Note 6, the Company issued
an aggregate of 59,413,581 warrants to purchase the Company’s common stock at $0.00648 per share for two years in connection
with the issuance of notes payable.
The warrants were valued using the Black Sholes
option pricing method with the following assumptions: dividend yield $-0-, volatility of 180.09% and risk free rate of 0.43%. The
determined fair value of the warrants of $250,049 is amortized as financing costs of the term of the related notes (2 years).
As described in Note 5, the Company (ii) issued
a warrant to purchase an aggregate of 7,000,000 shares of the Company’s common stock, par value $0.001 per share, for an
exercise price of $0.05 per share for a period of 150 days from the effective date of the registration statement (the “First
Warrant”), and (iii) issued a warrant to purchase an aggregate of 8,750,000 shares of the Company’s common stock, par
value $0.001 per share, for an exercise price of $0.04 per share for a period of 90 days from the effective date of the registration
statement. Due to the contingency nature of these warrants, the Company will determine the fair value at the date of the effectiveness
of the registration statement.
NOTE 11- NON CONTROLLING INTEREST
In April 2014, the Company organized Arizona
Green Power, LLC, an Arizona limited liability company for the purpose to acquire development property from the City of San Luis,
Arizona. At the time of formation, Arizona Green Power, LLC did not have any significant assets or liabilities. In connection with
financing of the project, the Company reduced its ownership interest to 98.67% in connection with the issuance of a note payable
by Arizona Green Power, LLC on April 7, 2014.
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
A reconciliation of the non-controlling loss
attributable to the Company:
Net loss attributable to non-controlling interest
for the six months ended June 30, 2014:
|
|
June 30,
2014
|
|
Net loss
|
|
$
|
2,194
|
|
Average Non-controlling interest percentage
|
|
|
1.33
|
%
|
Net loss attributable to the non-controlling interest
|
|
$
|
29
|
|
The following table summarizes the changes in non-controlling Interest
from December 31, 2013 to June 30, 2014:
Balance, December 31, 2013
|
|
$
|
–
|
|
Transfer (to) from the non-controlling interest as a result of change in ownership
|
|
|
–
|
|
Net loss attributable to the non-controlling interest
|
|
|
(29
|
)
|
Balance, June 30, 2014
|
|
$
|
(29
|
)
|
NOTE 12 – CONTINGENCIES
Litigation
Hanover Holdings I, LLC vs Solar Wind Energy Tower Inc.(f/k/a
Clean Wind Energy Tower, Inc.)
On December 27, 2012, we were served with a
Complaint in the matter of Hanover Holdings I, LLC filed with the Supreme Court of the State of New York, stipulating that Solar
Wind Energy Tower Inc. (f/k/a Clean Wind Energy Tower, Inc.) has yet to pay the remaining outstanding balance, related interest
and penalties, as described in a convertible promissory note issued by Solar Wind Energy Tower Inc. (f/k/a Clean Wind Energy Tower,
Inc.) to the benefit of Hanover Holdings I, LLC on February 29, 2012 and has failed to honor a notice of conversion issued by Hanover
Holdings I, LLC on or about September 7, 2012. Total claim amount is for $122,985.
The Company is now in settlement discussions
with Hanover Holdings I, LLC, and expects to settle the matter. However, the ultimate outcome cannot be determined at this time.
From time to time, we may become involved in
various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently
not party to any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect
on our business, financial condition or operating results.
NOTE 13 – FAIR VALUE MEASUREMENTS
ASC 825-10 defines fair value as the price
that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded
at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions
that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk
of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be
used to measure fair value:
SOLAR WIND ENERGY TOWER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
|
·
|
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
·
|
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
|
·
|
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are unobservable.
|
Items recorded or measured at fair value on
a recurring basis in the accompanying unaudited condensed consolidated financial statements consisted of the following items as
of June 30, 2014:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Long-term investments
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Derivative liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,674,621
|
|
|
$
|
2,674,621
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,674,621
|
|
|
$
|
2,674,621
|
|
The table below sets forth a summary of changes
in the fair value of the Company’s Level 3 financial liabilities (derivative liability) for the six months ended June 30,
2014.
Six months ended June 30, 2014:
|
|
Derivative Liabilities
|
|
Balance, December 31, 2013
|
|
$
|
689,093
|
|
|
|
|
|
|
Transfers in (out) at mark-market value on date of payoff or conversion
|
|
|
(1,194,215
|
)
|
|
|
|
|
|
Transfers in (out) upon reclassification from (to) equity
|
|
|
5,525
|
|
|
|
|
|
|
Transfers in upon initial fair value of derivative liabilities
|
|
|
2,697,768
|
|
|
|
|
|
|
Loss from change in fair value of derivative liabilities
|
|
|
476,450
|
|
|
|
|
|
|
Balance, June 30, 2014
|
|
$
|
2,674,621
|
|
|
|
|
|
|
Total loss for the six month period included in earnings relating to the liabilities held at June 30, 2014
|
|
$
|
(476,450
|
)
|
Level 3 Liabilities were comprised of our bifurcated
convertible debt features on our convertible notes.
NOTE 14 – SUBSEQUENT EVENTS
Subsequent issuances of common stock
In July 2014, the Company issued an aggregate
of 11,690,205 shares of common stock in settlement of $124,970 outstanding notes payable.
Hanover Holdings I, LLC vs Solar Wind Energy
Tower Inc.(f/k/a Clean Wind Energy Tower, Inc.) The Company is now in settlement negotiations with Hanover Holdings I, LLC and
expects to settle the matter.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the
Company’s financial condition and results of operations should be read in conjunction with the accompanying financial statements
and related notes thereto for the quarter ended June 30, 2014, as well as the Company’s consolidated financial statements
and related notes thereto and management’s discussion and analysis of financial condition and results of operations in the
Company’s Form 10-K for the year ended December 31, 2013 filed on March 28, 2014.
Solar Wind Energy Tower, Inc. (the “Company,”
“we,” “our,” “us”), formerly known as Superior Silver Mines, Inc., was incorporated in the
State of Idaho on January 22, 1962 as Superior Mines Company and then changed its name to Superior Silver Mines, Inc. The
Company reincorporated as a Nevada corporation on December 27, 2010. The Company has been dormant for a number of years,
and has no known mineral reserves.
On December 29, 2010, Solar Wind Energy Tower
Inc., a Nevada corporation (the “Company” or "Solar Wind"), completed a reverse merger (the “Merger”)
with Solar Wind Energy, Inc., a corporation formed under the laws of the State of Delaware on July 26, 2010 (“Solar Wind
- Subsidiary”). In connection with the Merger, the Company issued to the stockholders of Solar Wind - Subsidiary
in exchange for their Solar Wind - Subsidiary Common Stock, the right to receive an aggregate of 300,000,000 shares of the Company’s
Common Stock. As a result of the reverse merger, Solar Wind - Subsidiary is now a wholly-owned subsidiary of the Company.
For accounting purposes, Solar Wind - Subsidiary
was the surviving entity. The transaction was accounted for as a recapitalization of Solar Wind - Subsidiary pursuant to which
Solar Wind - Subsidiary was treated as the surviving and continuing entity although the Company is the legal acquirer rather than
a reverse acquisition. Accordingly, the Company’s historical financial statements are those of Solar Wind - Subsidiary
immediately following the consummation of the reverse merger. Also, going forward the business operations of Solar Wind - Subsidiary
will become the Company’s principal business operations.
The Company plans to design, develop, and construct
large downdraft towers that use benevolent, non-toxic natural elements to generate electricity and clean water economically (“Downdraft
Towers”) by integrating and synthesizing numerous proven as well as emerging technologies. In addition to constructing Downdraft
Towers in the United States and abroad, the Company intends to be prepared to establish partnerships at home and abroad to propagate
these systems and meet increasing global demand for clean water and electricity
On January 21, 2011, the Company changed its
name to Clean Wind Energy Tower, Inc. and on March 11, 2013, changed its name to Solar Wind Energy Tower Inc. along with
its wholly-owned subsidiary, a corporation formed under the laws of the State of Delaware, which changed its name from Clean Wind
Energy, Inc. to Solar Wind Energy, Inc. In addition, effective January 24, 2011, the Company’s quotation symbol on the Over-the-Counter
Bulletin Board was changed from SSVM.OB to CWET.OB and on March 11, 2013, in conjunction with our name change, the Company’s
quotation symbol on the Over-the-Counter Bulletin Board was changed from CWET.OB to SWET.OB.
Forward Looking Statements
This report may contain “forward-looking
statements,” which represent the Company’s expectations or beliefs, including, but not limited to, statements concerning
industry performance and the Company’s results, operations, performance, financial condition, plans, growth and strategies,
which include, without limitation, statements preceded or followed by or that include the words “may,” “will,”
“expect,” “anticipate,” “intend,” “could,” “estimate,” or “continue”
or the negative or other variations thereof or comparable terminology. Any statements contained in this report or the information
incorporated by reference that are not statements of historical fact may be deemed to be forward-looking statements.
These statements by their nature involve substantial
risks and uncertainties, some of which are beyond the Company’s control, and actual results may differ materially depending
on a variety of important factors, including those risk factors discussed under “Trends, Risks and Uncertainties”,
many of which are also beyond the Company’s control. You should not place undue reliance on these forward-looking statements,
which speak only as of the date of this report. The Company does not undertake any obligation to update or release any revisions
to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence
of unanticipated events, except to the extent such updates and/or revisions are required by applicable law.
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, published
by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their
financial statements. While all these significant accounting policies impact our consolidated financial condition and results of
operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the
most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and
estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances,
it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated
results of operations, financial position or liquidity for the periods presented in this report.
General
The Company’s Consolidated Financial
Statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates,
judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue, if any, and expenses, and the disclosure
of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions
that it believes 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. Senior management has discussed the development,
selection and disclosure of these estimates with the Board of Directors. Management believes that the accounting estimates employed
and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions
or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used,
or if changes in the estimate that are reasonably possible could materially impact the consolidated financial statements. Management
believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of
the Consolidated Financial Statements.
Revenue Recognition
The Company has generated no revenues to date.
It is the Company’s policy that revenue from product sales or services will be recognized in accordance with ASC 605 “Revenue
Recognition”. Four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably
assured.
Determination of criteria (3) and (4) are
based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability
of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are
provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product was not
delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been
delivered or no refund will be required. The Company did not have any revenue during the period ended June 30, 2014.
Fair Value of Financial Instruments
The Company adopted the provisions under FASB
for Fair Value Measurements, which define fair value for accounting purposes, establishes a framework for measuring fair value
and expands disclosure requirements regarding fair value measurements. The Company’s adoption of these provisions did not
have a material impact on its consolidated financial statements. Fair value is defined as an exit price, which is the price that
would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants
at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates
to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which
fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require
less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less
price observability and are generally measured at fair value using valuation models that require more judgment. These valuation
techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency
of the asset, liability or market and the nature of the asset or liability. The Company has categorized its financial assets and
liabilities measured at fair value into a three-level hierarchy in accordance with these provisions.
In January 2010 the FASB issued Update No.
2010-05 “Compensation—Stock Compensation—Escrowed Share Arrangements and Presumption of Compensation” (“2010-05”).
2010-05 re-asserts that the Staff of the Securities Exchange Commission (the “SEC Staff”) has stated the presumption
that for certain shareholders escrowed share represent a compensatory arrangement. 2010-05 further clarifies the criteria required
to be met to establish a position different from the SEC Staff’s position. The Company does not believe this pronouncement
to have any material impact on its financial position, results of operations or cash flows.
Accounting for Derivatives
In 2013 and 2014, we issued convertible notes
payable that contained certain conversion features which we identified as embedded derivatives. In addition, the Company has the
possibility of exceeding their common shares authorized when considering the number of possible shares that may be issuable to
satisfy settlement provisions of convertible notes after consideration of all existing instruments that could be settled in shares. Therefore,
in accordance with ASC 815-40
,
we reclassified the fair value of the conversion feature from equity to a liability at the
date of issuance. Subsequent to the initial issuance date, we are required to adjust to fair value the derivative as
an adjustment to current period operations.
New Accounting Pronouncements
The Company has adopted Accounting Standards
Update (ASU) No. 2014-10,
Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including
an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation
. The amendments in this ASU remove all incremental
financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915,
Development
Stage Entities
, from the FASB
Accounting Standards Codification
™.
A development
stage entity is one that devotes substantially all of its efforts to establishing a new business and for which: (
a
) planned
principal operations have not commenced; or (
b
) planned principal operations have commenced, but have produced no significant
revenue. For example, many start-ups or even long-lived organizations that have not yet begun their principal operations or do
not have significant revenue would be identified as development stage entities.
For public business
entities, the presentation and disclosure requirements in Topic 915 will no longer be required for the first annual period beginning
after December 15, 2014. The revised consolidation standards are effective one year later, in annual periods beginning after December
15, 2015. Early adoption is permitted.
There are various other updates recently issued,
most of which represented technical corrections to the accounting literature or application to specific industries and are not
expected to a have a material impact on the Company's financial position, results of operations or cash flows
RESULTS OF OPERATIONS
Three months ended June 30, 2014 as compared to three months
ended June 30, 2013
Revenue
The Company has not generated revenue since inception.
Operating Expenses
Research and development
During the three months ended June 30, 2014,
research and development costs were $1,190 compared to $8,391 for the same period last year. The Company's expenditures for research
and development is dependent on available resources and future expenditures are expected to increase with additional financing.
Selling, general and administrative
During the three months ended June 30, 2014,
selling, general and administrative expenses were $507,502 as compared to $483,903 for the same period last year, a 5% increase.
The primary increase is due to increase professional and consulting fees incurred in the current period as compared to same period
last year.
Depreciation
Depreciation expense for the three months ended
June 30, 2014 was $988 as compared to $1,120 for the same period last year due to the aging of our equipment.
Other income (expense)
Interest expense
Interest expense for the three months ended
June 30, 2014 was $2,300,091 compared to $319,189 for the same period last year. In the current period, we incurred $388,839 non-cash
debt discount and OID amortization and $1,806,804 in non-cash interest expense on issued convertible debt as compared to $155,524
and $99,120, respectively for the same period last year.
Gain (loss) on change in fair value of derivative
liabilities
During 2013 and 2014, we issued convertible
promissory notes with an embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to
market as a non-cash adjustment to our current period operations. This resulted in a loss of $(517,858) and a gain of
$1,191,857 on change in fair value of derivative liabilities for the three months ended June 30, 2014 and 2013, respectively.
Six months ended June 30, 2014 as compared to six months ended
June 30, 2013
Revenue
The Company has not generated revenue since inception.
Operating Expenses
Research and development
During the six months ended June 30, 2014,
research and development costs were $10,223 compared to $22,284 for the same period last year. The Company's expenditures for research
and development is dependent on available resources and future expenditures are expected to increase with additional financing.
Selling, general and administrative
During the six months ended June 30, 2014,
selling, general and administrative expenses were $933,060 as compared to $879,032 for the same period last year, a 6% increase.
The primary increase is due to increase professional and consulting fees incurred in the current period as compared to same period
last year.
Depreciation
Depreciation expense for the six months ended
June 30, 2014 was $1,976 as compared to $2,240 for the same period last year due to the aging of our equipment.
Other income (expense)
Interest expense
Interest expense for the six months ended June
30, 2014 was $2,606,025 compared to $574,989 for the same period last year. In the current period, we incurred $660,896 non-cash
debt discount and OID amortization and $1,821,237 in non-cash interest expense on issued convertible debt as compared to $292,084
and $163,925, respectively for the same period last year.
Gain (loss) on change in fair value of derivative
liabilities
During 2013 and 2014, we issued convertible
promissory notes with an embedded derivative, all requiring us to fair value the derivatives each reporting period and mark to
market as a non-cash adjustment to our current period operations. This resulted in a loss of $(476,450) and a gain of
$81,717 on change in fair value of derivative liabilities for the six months ended June 30, 2014 and 2013, respectively.
Liquidity and Capital Resources
We have financed our operations since inception
primarily through private offerings of our equity securities and issuance of convertible notes.
Working Capital
Our working capital deficit increased by $1,362,577
during the six months ended June 30, 2014 from a working capital deficit (current liabilities in excess of current assets) of $2,492,533
at December 31, 2013 to a working capital deficit of $3,855,110 at June 30, 2014. The increase in working capital deficit for the
six months ended June 30, 2014 is due to a combination of reasons, of which the significant factors include:
|
·
|
Cash had a net increase from working capital by $273,503 for the six months ended June 30, 2014. The most significant uses and proceeds of cash were:
|
|
o
|
Approximately $599,000 of cash consumed in operating activities;
|
|
|
|
|
o
|
Proceeds of $923,000 from issuance of convertible notes payable, net of repayments of $155,918
|
|
|
|
|
o
|
Proceeds of $80,000 from issuance of note payable
|
|
|
|
|
o
|
Proceeds of $25,000 from the sale of our common stock
|
Total current assets of $461,647 and $61,758
as of June 30, 2014 and December 31, 2013, respectively, cash representing 73% and 100% as of June 30, 2014 and December 31, 2013,
respectively.
Proceeds from the issuance of convertible promissory notes
During the six months ended June 30, 2014,
the Company received proceeds of $923,000 from the issuance of Convertible Promissory Notes.
Proceeds from the issuance of note payable
During the six months ended June 30, 2014,
the Company received proceeds of $80,000 from the issuance of note payable.
Proceeds from the sale of our common stock
During the six months ended June 30, 2014,
the Company received proceeds of $25,000 from the sale of the Company’s common stock.
Cash flow analysis
Cash used in operations was $598,579 during
the six month period ended June 30, 2014. During the six month period ended June 30, 2014, our primary capital needs were for operating
expenses, including funds to support our business strategy, which primarily includes working capital necessary to fund operations
and reducing our account payables.
We did not utilize cash for investing activities.
Cash provided by financing activities was a
total net proceeds of $872,082 from the issuance of sale of our common stock and Convertible and Non-Convertible Promissory Notes.
The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. The Company has reported a net loss of $4,027,734 for the six
month period ended June 30, 2014, accumulated deficit of $12,894,073 and total current liabilities in excess of current assets
of $3,855,110 as of June 30, 2014.
The Company does not have any revenues from
operations and will be dependent on funds raise to satisfy its ongoing capital requirements for at least the next 12 months. The
Company will require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot
predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be
able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the
Company may be unable to implement its current plans for expansion or respond to competitive pressures, any of these circumstances
would have a material adverse effect on its business, prospects, financial condition and results of operations.
Management expects that global economic conditions
will continue to present a challenging operating environment through 2014. To the extent permitted by working capital resources,
management intends to continue making targeted investments in strategic operating and growth initiatives. Working capital management
will continue to be a high priority for 2014.
While we have been able to manage our working
capital needs with the current credit facilities, additional financing is required in order to meet our current and projected cash
flow requirements from operations. We cannot predict whether this new financing will be in the form of equity or debt. We may not
be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. Additional investments are
being sought, but we cannot guarantee that we will be able to obtain such investments.
Financing transactions may include the issuance
of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common
stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance
of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs
and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to
seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution
or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.
If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
Inflation
We do not believe that inflation has had a
material effect on our business, financial condition or results of operations. If our costs were to become subject to significant
inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure
to do so could adversely affect our business, financial condition and results of operations.
Off-Balance sheet Arrangements
We do not maintain off-balance sheet arrangements
nor do we participate in any non-exchange traded contracts requiring fair value accounting treatment.
Number of Employees
As of June 30, 2014, the Company had 3 full
time employees.
Disclosure of Contractual Obligations
The Company does not have any significant contractual
obligations which could negatively impact our results of operations and financial condition.