UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March
31, 2015
or
☐ |
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
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
735 State Street, Suite 500
Santa Barbara, California 93101
(Address, including zip code, of principal
executive offices)
(805)-845-3561
(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.
Check whether the Registrant (1) 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 ¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes x No ¨
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 the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer x |
|
|
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the Registrant’s
Common Stock outstanding as of May 1, 2015 was 181,338,244.
SAVE THE WORLD AIR, INC.
FORM 10-Q
INDEX
PART I – FINANCIAL INFORMATION |
3 |
Item 1. Unaudited Condensed Consolidated Financial Statements |
3 |
Condensed Consolidated Balance Sheets, Unaudited |
3 |
Condensed Consolidated Statement of Operations, Unaudited |
4 |
Condensed Consolidated Statement of Stockholders’ Equity, Unaudited |
5 |
Condensed Consolidated Statements of Cash Flows, Unaudited |
6 |
Notes to Condensed Consolidated Financial Statements, Unaudited |
7 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
Item 3. Quantitative and Qualitative Disclosure about Market Risk |
19 |
Item 4. Controls and Procedures |
19 |
|
|
PART II – OTHER INFORMATION |
20 |
Item 1. Legal Proceedings |
20 |
Item 1A. Risk Factors |
20 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
20 |
Item 3. Defaults Upon Senior Securities |
20 |
Item 4. Mine Safety Disclosures |
20 |
Item 5. Other Information |
20 |
Item 6. Exhibits |
21 |
SIGNATURES |
22 |
|
|
EXHIBITS |
23 |
EXHIBIT 31.1 |
|
EXHIBIT 31.2 |
|
EXHIBIT 32 |
|
PART I –
FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated
Financial Statements
SAVE THE WORLD AIR, INC.
Condensed
Consolidated Balance Sheets, Unaudited
| |
March 31 | | |
| |
| |
2015 | | |
December 31 | |
| |
(unaudited) | | |
2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 1,414,363 | | |
$ | 2,247,557 | |
Other current assets | |
| 49,124 | | |
| 72,225 | |
Total current assets | |
| 1,463,487 | | |
| 2,319,782 | |
Property and Equipment, net of accumulated depreciation of $50,393 and $47,180 at March 31, 2015 and December 31, 2014, respectively | |
| 31,647 | | |
| 21,946 | |
Other assets | |
| 5,830 | | |
| 5,830 | |
Total assets | |
$ | 1,500,964 | | |
$ | 2,347,558 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable-license agreements | |
$ | 417,032 | | |
$ | 405,313 | |
Accounts payable and accrued expenses | |
| 181,107 | | |
| 175,228 | |
Accrued expenses and accounts payable-related parties | |
| 243,692 | | |
| 259,507 | |
Convertible debentures, net of discounts of $57,934 and $105,542 at March 31, 2015 and December 31, 2014, respectively | |
| 133,906 | | |
| 139,098 | |
Total current liabilities | |
| 975,737 | | |
| 979,146 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity | |
| | | |
| | |
Common stock, $.001 par value: 300,000,000 shares authorized 181,338,244 and 181,028,244 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively | |
| 181,338 | | |
| 181,028 | |
Additional paid-in capital | |
| 98,563,424 | | |
| 98,232,582 | |
Accumulated deficit | |
| (98,219,535 | ) | |
| (97,045,198 | ) |
Total stockholders’ equity | |
| 525,227 | | |
| 1,368,412 | |
Total liabilities and stockholders’ equity | |
$ | 1,500,964 | | |
$ | 2,347,558 | |
See notes to condensed
consolidated financial statements.
SAVE THE WORLD AIR, INC.
Condensed
Consolidated Statement of Operations, Unaudited
| |
Three Months ended | |
| |
March 31 | |
| |
2015 | | |
2014 | |
Revenues | |
$ | – | | |
$ | – | |
Costs and Expenses | |
| | | |
| | |
Operating expenses | |
| 855,452 | | |
| 924,987 | |
Research and development expenses | |
| 272,777 | | |
| 451,987 | |
Loss before other income (expense) | |
| (1,128,229 | ) | |
| (1,376,974 | ) |
Other income (expense) | |
| | | |
| | |
Other income (loss) | |
| 1,500 | | |
| (26,500 | ) |
Interest expense | |
| (47,608 | ) | |
| – | |
Net loss | |
$ | (1,174,337 | ) | |
$ | (1,403,474 | ) |
Net loss per common share, basic and diluted | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
Weighted average common shares outstanding, basic and diluted | |
| 181,253,911 | | |
| 160,958,284 | |
See notes to condensed
consolidated financial statements.
SAVE THE WORLD AIR, INC.
Condensed
Consolidated Statement of Stockholders’ Equity, Unaudited
For
the Three Months Ended March 31, 2015
| |
| | |
| | |
Additional | | |
| | |
Total | |
| |
Common Stock | | |
Paid-in | | |
Accumulated | | |
Stockholders’ | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Equity | |
Balance, January 1, 2015 | |
| 181,028,244 | | |
$ | 181,028 | | |
$ | 98,232,582 | | |
$ | (97,045,198 | ) | |
$ | 1,368,412 | |
Common stock issued upon exercise of warrants and options, net | |
| 200,000 | | |
| 200 | | |
| 49,800 | | |
| | | |
| 50,000 | |
Common stock issued on conversion of convertible debentures | |
| 110,000 | | |
| 110 | | |
| 52,690 | | |
| | | |
| 52,800 | |
Fair value of options and warrants issued as compensation | |
| | | |
| | | |
| 228,352 | | |
| | | |
| 228,352 | |
Net loss | |
| | | |
| | | |
| | | |
| (1,174,337 | ) | |
| (1,174,337 | ) |
Balance, March 31, 2015 | |
| 181,338,244 | | |
$ | 181,338 | | |
$ | 98,563,424 | | |
$ | (98,219,535 | ) | |
$ | 525,227 | |
See notes to condensed
consolidated financial statements.
SAVE THE WORLD AIR, INC.
Condensed
Consolidated Statements of Cash Flows, Unaudited
| |
Three Months ended | |
| |
March 31 | |
| |
2015 | | |
2014 | |
Cash flows from Operating Activities | |
| | | |
| | |
Net loss | |
$ | (1,174,337 | ) | |
$ | (1,403,474 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | |
Stock based compensation expense | |
| 228,352 | | |
| 155,378 | |
Amortization of debt discounts | |
| 47,608 | | |
| – | |
Depreciation and amortization | |
| 3,213 | | |
| 3,456 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Prepaid expenses and other current assets | |
| 23,101 | | |
| 25,307 | |
Accounts payable and accrued expenses | |
| 5,879 | | |
| (215,264 | ) |
Accounts payable – license agreements | |
| 11,719 | | |
| 79,238 | |
Accounts payable and accrued expenses – related parties | |
| (15,815 | ) | |
| (13,340 | ) |
Net cash used in operating activities | |
| (870,280 | ) | |
| (1,368,699 | ) |
Cash flows from investing activities | |
| | | |
| | |
Purchase of equipment | |
| (12,914 | ) | |
| – | |
Net cash used in investing activities | |
| (12,914 | ) | |
| – | |
Cash flows from financing activities | |
| | | |
| | |
Net proceeds from exercise of warrants and options | |
| 50,000 | | |
| 1,308,284 | |
Net cash provided by financing activities | |
| 50,000 | | |
| 1,308,284 | |
Net decrease in cash | |
| (833,194 | ) | |
| (60,415 | ) |
Cash and cash equivalents, beginning of period | |
| 2,247,557 | | |
| 4,137,068 | |
Cash and cash equivalents, end of period | |
$ | 1,414,363 | | |
$ | 4,076,653 | |
| |
| | | |
| | |
| |
| | | |
| | |
| |
| | | |
| | |
Supplemental disclosures of cash flow information | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | – | | |
$ | – | |
Income Taxes | |
$ | – | | |
$ | – | |
Non-cash investing and financing activities | |
| | | |
| | |
Common stock issued on conversion of convertible debentures | |
$ | 52,800 | | |
$ | – | |
See notes to condensed
consolidated financial statements.
SAVE THE WORLD AIR, INC.
Notes
to Condensed Consolidated Financial Statements, Unaudited
THREE MONTHS ENDED MARCH 31, 2015 AND
2014
| 1. | Description of Business |
Save The World Air,
Inc. (“STWA”, “Company”) was incorporated on February 18, 1998, as a Nevada Corporation under the name
Mandalay Capital Corporation. The Company changed its name to Save the World Air, Inc. on February 11, 1999. The Company’s
common stock is quoted under the symbol “ZERO” on the Over-the-Counter Bulletin Board. More information including the
Company’s fact sheet, logos and media articles are available at our corporate website, www.stwa.com.
Save The World Air,
Inc. develops and commercializes energy efficiency technologies that assist in meeting increasing global energy demands, improving
the economics of oil extraction and transport, and reducing greenhouse gas emissions. The Company's intellectual property portfolio
includes 47 domestic and international patents and patents pending, a substantial portion of which have been developed in conjunction
with and exclusively licensed from Temple University of Philadelphia, PA (“Temple”). STWA's primary technology is called
Applied Oil Technology™ (AOT™), a commercial-grade crude oil pipeline transportation flow-assurance product. AOT™
has been proven in U.S. Department of Energy tests to increase the energy efficiency of oil pipeline pump stations. The AOT product
has transitioned from the research and development stage to initial commercial production for the midstream pipeline marketplace.
In 2014, the Company
began commercial development of a suite of products based around the Joule Heat technology. The Company began fabrication of prototype
equipment to be operated under a joint development agreement with a commercial entity in the fourth quarter, 2014. This prototype
equipment is scheduled for delivery under the joint development agreement in May, 2015, with testing to begin shortly thereafter.
The Company filed two additional provisional patents related to the technology’s method and apparatus in the second quarter
and fourth quarter of 2013, respectively. The first of the two provisional patents was finalized and submitted to non-provisional
status on April 29, 2014. The second of the two provisional patents was finalized and submitted to non-provisional status at the
end of the third quarter 2014.
Basis of Presentation
The accompanying condensed
consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable
rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain
information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed
or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC. The condensed consolidated balance sheet as of December
31, 2014 included herein was derived from the audited consolidated financial statements as of that date, but does not include all
disclosures, including notes, required by GAAP.
In the opinion
of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments
contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily
indicative of fiscal year-end results.
| 2. | Summary of Significant Accounting Policies |
Consolidation Policy
The accompanying consolidated
financial statements of Save the World Air, Inc. include the accounts of Save the World Air, Inc. (the Parent) and its wholly owned
subsidiary STWA Asia Pte. Limited. Intercompany transactions and balances have been eliminated in consolidation.
Going Concern
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 has not yet generated significant revenues and has incurred recurring net losses. During the quarter ended March 31,
2015, the Company incurred a net loss of $1,174,337 and used cash in operations of $870,280. These factors raise substantial
doubt about the Company’s 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 financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
In addition, the Company's
independent registered public accounting firm, in its report on the Company's December 31, 2014 financial statements, has raised
substantial doubt about the Company's ability to continue as a going concern.
At March 31, 2015,
the Company had cash on hand in the amount of $1,414,363. Management estimates that the current funds on hand will be sufficient
to continue operations through March 2016. Management is currently seeking additional funds, primarily through the issuance of
debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection
with the license and research and development agreements with Temple; costs associated with product development and commercialization
of the AOT and Joule Heat technologies; costs to manufacture and ship the 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, the Company
has substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment
agreements, certain payments to a former officer and consulting fees, during the remainder of 2015 and beyond.
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. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the
case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
Basic and Diluted Income
(loss) per share
Our computation of
earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to
common stockholders divided by the weighted average common shares outstanding for the period. Diluted income (loss) per share reflects
the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss)
of the Company as if they had been converted at the beginning of the periods presented, or issuance date, if later. In computing
diluted income (loss) per share, the treasury stock method assumes that outstanding options and warrants are exercised and the
proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive
effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise
price of the options and warrants. Potential common shares that have an antidilutive effect (i.e., those that increase income per
share or decrease loss per share) are excluded from the calculation of diluted EPS.
Income (loss) per common
share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the
respective periods. Basic and diluted (loss) per common share is the same for periods in which the Company reported an operating
loss because all warrants and stock options outstanding are anti-dilutive. At March 31, 2015 and 2014, we excluded the outstanding
securities summarized below, which entitle the holders thereof to acquire shares of common stock as their effect would have been
anti-dilutive.
| |
March 31, 2015 | | |
March 31, 2014 | |
Options | |
| 21,761,512 | | |
| 20,254,908 | |
Warrants | |
| 5,392,087 | | |
| 7,251,050 | |
Total | |
| 27,153,599 | | |
| 27,505,958 | |
Stock-Based Compensation
The Company periodically
issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing
costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance
provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized
over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the Financial Accounting Standards Board (FASB) whereas the value of the stock compensation
is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the
date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges
generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance
requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded
in the period of the measurement date.
The fair value of the
Company's stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions
related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends.
Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual
experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded
in future periods.
Business and Credit Concentrations
The Company’s
cash balances in financial institutions at times may exceed federally insured limits. As of March 31, 2015 and December 31, 2014,
before adjustments for outstanding checks and deposits in transit, the Company had $1,141,363 and $2,247,557, respectively, on
deposit with two banks. The deposits are federally insured up to $250,000 at each bank. The Company believes that no significant
concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial
viability of these financial institutions.
Estimates
The preparation of
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include
those related to assumptions used in valuing equity instruments issued for services. Actual results could differ from those estimates.
Fair Value of Financial
Instruments
Effective January 1,
2008, fair value measurements are determined by the Company's adoption of authoritative guidance issued by the FASB, with the exception
of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative
guidance did not have a material impact on the Company's fair value measurements. Fair value is defined in the authoritative
guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy
was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices
in active markets for identical assets or liabilities.
Level 2—Inputs,
other than the quoted prices in active markets, are observable either directly or indirectly.
Level 3—Unobservable
inputs based on the Company's assumptions.
The Company is required
to use of observable market data if such data is available without undue cost and effort. At March 31, 2015, the recorded amounts
for accounts payable, accrued expenses and convertible debentures approximate their fair value due to their short-term nature.
Recent Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers.
ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance
under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also
will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016, however, the FASB has proposed
a one-year deferral. Early adoption is not permitted, and either full retrospective adoption or modified retrospective adoption
is permitted. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements
and disclosure.
On August 27, 2014,
the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,
which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new
standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern
within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events
raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is
effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's
present or future consolidated financial statement presentation or disclosures.
| 3. | Certain Relationships and Related Transactions |
As of March
31, 2015 and December 31, 2014, the Company had accrued expenses and accounts payable to related parties in the amount of $243,692
and $259,507, respectively. Included in these amounts at March 31, 2015 and December 31, 2014 were unpaid salaries due the former
President and a current member of the Company’s Board of Directors of $120,429 and $135,429, respectively. The Company agreed
to pay the former President $5,000 per month until the unpaid salary is fully settled. Also included in these amounts at March
31, 2015 and December 31, 2014, is $80,586 in accrued directors fees.
| |
March 31 2015 | | |
December 31 2014 | |
Balance due on convertible notes | |
$ | 191,840 | | |
$ | 244,640 | |
Unamortized note discounts | |
| (57,934 | ) | |
| (105,542 | ) |
Balance on convertible notes, net of note discounts | |
$ | 133,906 | | |
$ | 139,098 | |
In the fourth quarter
of 2014, the Company issued convertible notes in the aggregate of $280,390 for cash consideration of $254,900, resulting in an
original issue discount of $25,490. The notes do not bear any interest, however, the Company used an implied interest rate of 10%.
The notes are unsecured, mature one year after issuance, and are convertible into 584,147 shares of common stock at a conversion
price of $0.48 per share. The Company determined that the notes contained a beneficial conversion feature of $94,845 since the
market price of the Company’s common stock was higher than the conversion price of the notes when issued.
Investors in the convertible
notes received, for no additional consideration, warrants to purchase a total of 146,037 shares of common stock. Each warrant is
exercisable on a cash basis only at an exercise price of $0.48 per share, are exercisable immediately upon issuance, and expire
one year from the date of issuance. The fair value of the warrants issued with the convertible notes was determined to be $24,826.
The fair value of the
warrants, the beneficial conversion feature, and the original issue discount, aggregated $145,161 and is considered a debt discount.
The debt discount is being amortized to interest expense over the term of the notes, or in full upon the conversion of a note.
During the three months ended March 31, 2015, amortization of the note discount totaled $47,608. The unamortized note discount
was $57,934 as of March 31, 2015.
During the three-month
period ended March 31, 2015, the Company converted $52,800 of these notes into 110,000 shares of common stock. As of March 31,
2015 the balance due on these notes was $191,840. As of December 31, 2014 the balance due on these notes was $244,640.
| 5. | Research and Development |
The Company constructs,
develops and tests the AOT and Joule Heat technologies with internal resources and through the assistance of various third party
entities. Costs incurred and expensed include fees such as patent fees, U.S. Department of Energy testing fees, purchase of test
equipment, pipeline pumping equipment, crude oil tank batteries, viscometers, SCADA systems, computer equipment, payroll and other
related equipment and various logistical expenses for the purposes of evaluating and testing the Company’s AOT and Joule
Heat prototypes.
Total expenses incurred
during the three-month periods ended March 31, 2015 and 2014 on Research and Development were $272,777 and $451,987, respectively.
AOT and Joule Heat Product
Development and Testing
Total expenses incurred
during the three-month periods ended March 31, 2015 and 2014 on AOT and Joule Heat product development and testing amounted to
$15,500, and $14,670, respectively, and have been reflected as part of Research and Development expenses on the accompanying consolidated
statement of operations.
AOT Prototypes
During the three-month
periods ended March 31, 2015 and 2014, the Company incurred total expenses of $13,392 and $358,079, respectively, in the manufacture
and delivery of AOT prototype equipment. These expenses have been reflected as part of Research and Development expenses on the
accompanying consolidated statement of operations.
Joule Heat Prototypes
On October 15, 2014,
the Company entered into a Joint Development Agreement with Newfield Pipeline Exploration Company (“Newfield”) to test
the effectiveness of the Company’s Joule Heat technology under operating conditions on Newfield’s oil pipeline. The
Company’s first Joule Heat prototype unit is scheduled for delivery to Newfield in May 2015, with installation and testing
scheduled for the second and third quarters of 2015. During the three-month period ended March 31, 2015, the Company incurred total
expenses of $164,666 in the manufacture and delivery of Joule Heat prototype equipment. These expenses have been reflected as part
of Research and Development expenses on the accompanying consolidated statement of operations. No such expenses were incurred in
the three-month period ended March 31, 2014.
Temple University Licensing
Agreement
On August 1, 2011,
the Company and Temple University (“Temple”) entered into two Exclusive License Agreements (collectively, the “License
Agreements”) relating to Temple’s patent applications, patents and technical information pertaining to technology associated
with an electric and/or magnetic field assisted fuel injector system (the “First Temple License”), and to technology
to reduce crude oil viscosity (the “Second Temple License”). The License Agreements are exclusive and the
territory licensed to the Company is worldwide and replace previously issued License Agreements.
Total expenses recognized
during the three-month periods ended March 31, 2015 and 2014 pursuant to these two agreements amounted to $46,875 in each period
and have been reflected in Research and Development expenses on the accompanying consolidated statement of operations.
As of March 31, 2015
and December 31, 2014, total unpaid fees due to Temple pursuant to these agreements amounted to $320,000 and $340,625, respectively,
which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.
There were no revenues
generated from these two licenses during the three-month periods ended March 31, 2015 and 2014.
Temple University Sponsored
Research Agreement
On March 19, 2012,
the Company entered into a Sponsored Research Agreement (“Research Agreement”) with Temple University (“Temple”),
whereby Temple, under the direction of Dr. Rongjia Tao, will perform ongoing research related to the Company’s AOT device
(the “Project”), for the period April 1, 2012, through April 1, 2014. All rights and title to intellectual
property resulting from Temple’s work related to the Project shall be subject to the Exclusive License Agreements between Temple and
the Company, dated August 1, 2011. In exchange for Temple’s research efforts on the Project, the Company
has agreed to pay Temple $500,000, payable in quarterly installments of $62,500.
In August 2013, the
Company and Temple amended the Research Agreement. Under the amended agreement, parties agreed that total cost for Phase 1 of the
agreement was $241,408 and total cost for Phase 2 of the agreement was $258,592 payable beginning September 1, 2013 in eight quarterly
installments of $32,324.
During the three-month
periods ended March 31, 2015 and 2014, the Company recognized a total expense of $32,344 and $32,363, respectively, pursuant to
this agreement and has been reflected in Research and Development expenses on the accompanying consolidated statement of operations.
As of March 31, 2015
and December 31, 2014, total unpaid fees due to Temple pursuant to this agreement amounted to $97,032 and $64,688, respectively,
which are included as part of Accounts Payable – licensing agreement in the accompanying consolidated balance sheets.
Kinder Morgan Crude
& Condensate, LLC Lease
On July 15, 2014, the
Company entered into an Equipment Lease/Option to Purchase Agreement (“Lease”) with Kinder Morgan Crude & Condensate,
LLC (“Kinder Morgan”). In accordance with the terms and conditions of the agreement, Kinder Morgan agreed to lease
and test the effectiveness of the Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines.
Equipment provided under the Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons
per minute.
The initial term (“Initial
Term”) of the Lease is four months, with an option to extend the Lease for up to a maximum of 84 months. During the Initial
Term, either the Company or Kinder Morgan may terminate the Agreement for any reason on 45 days’ written notice. Lease payments
shall be $20,000 per month; provided however, that in the event the Equipment is removed from service at its initial location during
the Initial Term, the monthly lease payments shall be reduced to $5,000 until the Equipment is placed back in service at its new
location, at which time the Lease payments shall resume at $20,000 per month. The agreement further provides that Kinder Morgan
shall have an option to purchase the equipment during the term of the Lease for a fixed price of between $600,000 and $1,200,000,
depending upon the date of purchase.
The equipment was delivered
to Kinder Morgan in December 2014 and installed in March 2015. In early April 2015, during pre-start testing, an electrical short
was discovered, and the Company and Kinder Morgan mutually agreed to replace the AOT pressure vessel with another unit. The replacement
unit was cleaned and field prepped for installation, and delivered to Kinder Morgan in late April, 2015. Installation is expected
to be completed in May 2015 and testing expected to resume in June 2015.
During the three months
ended March 31, 2015, the Company issued 110,000 shares of its common stock upon the conversion of $52,800 in convertible notes
at $0.48 per share, and issued 200,000 shares of common stock upon the exercise of warrants at $0.25 per share with proceeds of
$50,000.
| 8. | Stock Options and Warrants |
The Company periodically
issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing
costs. Options vest and expire according to terms established at the grant date.
Options
The Company currently
issues stock options to employees, directors and consultants under its 2004 Stock Option Plan (the Plan). The Company could issue
options under the Plan to acquire up to 7,000,000 shares of common stock as amended in May 2006.
As of December 31,
2014, options to purchase 4,292,030 shares granted under the Plan were outstanding and 1,439,637 shares were available to be granted.
In the three-month period ended March 31, 2015, the Company granted options to purchase shares under the plan to directors totaling
738,522 shares, and prior grants totaling 29,070 shares were forfeited. As of March 31, 2015, options to purchase 5,001,482 shares
granted under the Plan remain outstanding and 730,185 shares were available to be granted under the Plan.
As of March 31, 2015
and December 31, 2014, options granted outside of the Plan to purchase 16,760,000 shares were outstanding. During the three-month
period ended March 31, 2015, there were no grants, forfeitures or shares exercised outside of the Plan.
Employee options vest
according to the terms of the specific grant and expire from 2 to 10 years from date of grant. Non-employee option grants
have vested upon issuance and up to 2 years from the date of grant. The weighted-average, remaining contractual life of employee
and non-employee options outstanding at March 31, 2015 was 6.4 years. Stock option activity for the period December 31, 2014
up to March 31, 2015, was as follows:
| |
Options | | |
Weighted Avg. Exercise Price | |
December 31, 2014 | |
| 21,052,030 | | |
$ | 0.30 | |
Granted | |
| 738,522 | | |
| 0.48 | |
Exercised | |
| – | | |
| – | |
Forfeited | |
| (29,070 | ) | |
| 0.91 | |
September 30, 2014 | |
| 21,761,512 | | |
$ | 0.30 | |
The weighted average
exercise prices, remaining contractual lives for options granted, exercisable, and expected to vest as of March 31, 2015 were as
follows:
| |
Outstanding Options | |
Exercisable Options |
Option Exercise Price Per Share | |
Shares | | |
Life (Years) | |
Weighted Average Exercise Price | |
Shares | | |
Weighted Average Exercise Price |
$ 0.21 - $ 0.99 | |
| 21,498,283 | | |
6.0 | |
$0.29 | |
| 19,414,021 | | |
$0.28 |
$ 1.00 - $ 1.99 | |
| 263,229 | | |
5.0 | |
$1.22 | |
| 263,229 | | |
$1.22 |
| |
| 21,761,512 | | |
6.0 | |
$0.30 | |
| 19,677,250 | | |
$0.29 |
During the three month
period ending March 31, 2015 the Company granted options to purchase 738,522 shares of common stock to members of the Company’s
Board of Directors. The options are exercisable at prices ranging from $0.46 per share to $0.48 per share, vest monthly over a
twelve month period, and expire ten years from the date granted. Total fair value of these options at grant date was approximately
$296,267 using the Black-Scholes Option Pricing model with the following assumptions: life of 5 to 5.5 years; risk free interest
rate of 1.67% to 1.72%; volatility of 121% and dividend yield of 0%. During the three month periods ended March 31, 2015 and 2014,
the Company recognized compensation costs based on the fair value of options that vested of $207,425 and $107,907 respectively.
At March 31, 2015 the
aggregate intrinsic value of the options outstanding was $3,517,500. Future unamortized compensation expense on the unvested outstanding
options at March 31, 2015 is approximately $531,000.
Warrants
The following table
summarizes certain information about the Company’s stock purchase warrants activity for the period starting December 31,
2014 up to March 31, 2015.
| |
Warrants | | |
Weighted Avg. Exercise Price | |
December 31, 2014 | |
| 5,692,087 | | |
$ | 0.36 | |
Granted | |
| – | | |
| – | |
Exercised | |
| (200,000 | ) | |
| 0.25 | |
Cancelled | |
| (100,000 | ) | |
| 0.25 | |
Outstanding, March 31, 2015 | |
| 5,392,087 | | |
$ | 0.36 | |
The weighted average
exercise prices, remaining contractual lives for warrants granted, exercisable, and expected to vest as of March 31, 2015 were
as follows:
| |
Outstanding Warrants | |
Exercisable Warrants |
Warrant Exercise Price Per Share | |
| Shares | | |
Life (Years) | |
Weighted Average Exercise Price | |
| Shares | | |
Weighted Average Exercise Price |
$ 0.25 - $ 0.99 | |
| 5,272,087 | | |
2.8 | |
$0.35 | |
| 4,927,087 | | |
$0.34 |
$ 1.00 - $ 1.99 | |
| 120,000 | | |
0.8 | |
$1.01 | |
| 120,000 | | |
$1.01 |
| |
| 5,392,087 | | |
2.8 | |
$0.36 | |
| 5,047,087 | | |
$0.36 |
During the three month
period ending March 31, 2015, warrants to acquire 200,000 shares of common stock were exercised at $0.25 per share resulting in
proceeds of $50,000, and warrants to purchase 100,000 shares of common stock at $0.25 per share expired.
During the three months
ended March 31, 2015 and 2014, the Company recognized compensation costs of $20,927 and $17,271, respectively, based on the vested
fair value of warrants granted to consultants and an employee.
At March 31, 2015,
the aggregate intrinsic value of the warrants outstanding was $577,242. Future unamortized compensation expense on the unvested
outstanding warrants at March 31, 2015 is approximately $25,138.
| 9. | Contractual Obligations |
The Company has certain
contractual commitments as of March 31, 2015 for future periods, including office leases, minimum guaranteed compensation payments
and other agreements as described in the following table and associated footnotes:
| |
| | |
Research and | | |
| | |
| |
Year ending | |
Office | | |
License | | |
Compensation | | |
Total | |
December 31, | |
Lease (1) | | |
Agreements (2) | | |
Agreements (3) | | |
Obligations | |
2015 | |
$ | 52,470 | | |
$ | 219,804 | | |
$ | 262,500 | | |
$ | 534,774 | |
2016 | |
| 69,960 | | |
| 187,500 | | |
| 84,167 | | |
| 341,627 | |
2017 | |
| 69,960 | | |
| 187,500 | | |
| 15,429 | | |
| 272,889 | |
2018 | |
| 40,810 | | |
| 187,500 | | |
| – | | |
| 228,310 | |
2019 | |
| – | | |
| 187,500 | | |
| – | | |
| 187,500 | |
Total | |
$ | 233,200 | | |
$ | 969,804 | | |
$ | 362,096 | | |
$ | 1,565,100 | |
________________________
| (1) | Consists of rent for the Company’s Santa Barbara Facility expiring on July 31, 2018. |
| (2) | Consists of license maintenance fees to Temple University in the amount of $187,500 paid annually
through the life of the underlying patents or until otherwise terminated by either party, and a final payment under a research
agreement to Temple University in the amount of $32,304 due June 1, 2015. |
| (3) | Consists of base salary and certain contractually-provided benefits, to an executive officer, pursuant
to an employment agreement that expires on January 30, 2016 in the amount of $217,500 and a severance agreement of a former officer
in the amount of $120,429. |
| 10. | Commitments and Contingencies |
Legal matters
There are no current
or pending litigation of any significance with the exception of the matters that have arisen under, and are being handled in, the
normal course of business.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
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 this Form 10-Q.
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 elsewhere in this Form 10-Q, 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-Q is as of
March 31, 2015, and we undertake no duty to update this information.
Overview
STWA develops and commercializes
energy efficiency technologies that assist in meeting increasing global energy demands, improving the economics of oil extraction
and transport, and reducing greenhouse gas emissions. STWA's primary technology is called Applied Oil Technology™ (AOT™),
a commercial-grade crude oil pipeline transportation flow-assurance product. AOT™ has been proven in U.S. Department of Energy
tests and other independent tests, as well as in full scale operation on a commercial crude oil pipeline to increase the energy
efficiency of oil pipeline pump stations.
In 2014, we reached
a major milestone in the Company’s evolution, generating revenues from our AOT technology for the first time since our inception
in February 1998. We continue to devote the bulk of our efforts to the promotion, design, testing and the commercial manufacturing
and operations of our crude oil pipeline products in the upstream and midstream energy sector. We anticipate that these efforts
will continue during 2015.
Between 2011 and 2012,
the Company transitioned from prototype testing of its AOT technology at the U.S. Department of Energy Rocky Mountain Oilfield
Testing Center, Midwest, Wyoming, to the design and production of full-scale commercial prototype units. The Company worked in
a collaborative engineering environment with multiple energy industry companies to refine the AOT™ Midstream commercial design
to comply with the stringent standards and qualification processes as dictated by independent engineering audit groups and North
American industry regulatory bodies. In May 2013, the Company’s first commercial prototype unit known as AOT™ Midstream,
was completed.
In 2013, the Company
entered into an Equipment Lease/Option to Purchase Agreement (“TransCanada Lease”) with TransCanada Keystone Pipeline,
L.P. by its agent TC Oil Pipeline Operations, Inc. ("TransCanada") which agreed to lease and test the effectiveness of
the Company’s AOT technology and equipment on one of TransCanada’s operating pipelines. As previously reported in our
10-K report filed with the SEC on March 16, 2015, the first full test of the AOT equipment on the Keystone pipeline was performed
in July 2014, with preliminary data analyzed and reported by Dr. Rongjia Tao of Temple University. Upon review of the July 2014
test results and preliminary report by Dr. Tao, STWA and TransCanada mutually agreed that this initial test was flawed due to,
among other factors, the short term nature of the test, the inability to isolate certain independent pipeline operating factors
such as fluctuations in upstream pump station pressures, and limitations of the AOT device to produce a sufficient electric field
to optimize viscosity reduction. Although Dr. Tao’s preliminary report indicated promising results, STWA and TransCanada
mutually agreed that no conclusions could be reliably reached from the July 2014 test or from Dr. Tao’s preliminary report.
As a result of this test, the Company modified its testing protocols and contracted with an independent laboratory to perform follow-up
tests at the TransCanada facility. This independent laboratory performed viscosity measurements at the TransCanada facility during
subsequent testing in September 2014 and submitted a report which concluded that i) data indicated a decrease in viscosity of crude
oil flowing through the TransCanada pipeline due to AOT treatment of the crude oil; and ii) the power supply installed on our equipment
would need to be increased to maximize reduction in viscosity and take full advantage of the AOT technology. Although the power
supply was constrained, subsequent analysis of the Report and related laboratory testing at Temple University revealed a limited
sampling of test conditions at TransCanada under which the electrical field within the AOT was sufficient, in theory, to fully
treat crude oil flowing through the treatment vessel. Though statistically inconclusive, viscosity measurements of these limited
test samples indicate AOT treatment by the prototype equipment under commercial operating conditions resulted in viscosity reductions
reasonably consistent with expectations based on previous laboratory tests. While more testing is required to establish the efficacy
of our AOT technology, we are encouraged by the findings of our independent research laboratory and the results of subsequent comparative
analysis of data collected under laboratory and commercial operating conditions. We look forward to further development and commercialization
of our technology. In June 2014, the equipment was accepted by TransCanada and the lease commenced. The TransCanada Lease was terminated
by TransCanada, effective October 15, 2014. The Company has modified the design of the AOT power supply such that future installations
of the AOT device are expected to achieve sufficient electric field to optimize viscosity reduction.
On July 15, 2014, the
Company entered into an Equipment Lease/Option to Purchase Agreement (“Kinder Morgan Lease”) with Kinder Morgan Crude
& Condensate, LLC (“Kinder Morgan”) under which Kinder Morgan agreed to lease and test the effectiveness of the
Company’s AOT technology and equipment on one of Kinder Morgan’s operating pipelines. Equipment provided under the
Kinder Morgan Lease includes a single AOT Midstream pressure vessel with a maximum flow capacity of 5,000 gallons per minute. The
equipment was delivered to Kinder Morgan in December 2014 and installed in March 2015. In early April 2015, during pre-start testing,
an electrical short was discovered in the system. After extensive onsite diagnostics it was determined that the electrical short
was in the electrode array within the unit, either due to damage caused during transit or installation or due to a significant
presence of electrically conductive particulate matter in the crude oil condensate. Laboratory tests run at Temple University on
condensate samples provided by Kinder Morgan indicated the condensate was non-conductive. As such, internal damage was determined
to be the most likely cause of the electrical short. After thoroughly considering repair and replacement options, STWA and Kinder
Morgan mutually agreed the best course of action would be to replace the AOT pressure vessel with one held in inventory. Replacing
the unit was the most timely and cost effective solution, and provided STWA the opportunity to fully disassemble the damaged unit
and determine both cause and mitigating actions. Prior to delivering a replacement unit, STWA engineers tested the impedance of
the replacement AOT with a high volt ohmmeter to ensure the internal electrical components had not been similarly damaged. The
new unit passed the tests, confirming no mechanical short. The unit was then cleaned, prepped for field installation, and delivered
to Kinder Morgan in late April, 2015. Installation of the replacement unit was completed in May 2015. Next, the system was flooded
with condensate and the electrical impedance was tested. This test indicated low impedance. Though not confirmed at this time,
this test indicates reduced impedance may be caused by particulate matter in the condensate, thus delaying pre-start testing and
commencement of our lease with Kinder Morgan. We are working with Temple University and Kinder Morgan to resolve this issue. As
explained below, we believe reinstalling the unit in a vertical configuration will correct the issue of impedance reduction due
to conductive particulate matter.
Similar conditions
have been experienced in earlier prototype tests at the Rocky Mountain Oilfield Testing Center (“RMOTC”). In these
operations, the presence of conductive particulate matter was mitigated by installing the AOT in a vertical, rather than horizontal,
orientation. When installed horizontally, large particulate matter can congregate at the base of the treatment vessel. If these
particles are conductive, they can effectively bridge the gap between electrodes, reducing impedance and causing the system to
short out. When installed vertically, gravity draws the particles to the base of the unit, where they are flushed out along with
the flowing oil. Our upstream market AOT designs are based on a vertical configuration, as there is a much greater variety of products
transported in the upstream market, and conductive particulate matter would likely be an issue. However, based on laboratory testing
and analysis of the dielectric properties of a large variety of crude oils typically transported in the midstream market it was
determined that a horizontal configuration was both viable and optimized for typical midstream operations. No degradation in impedance
was experienced in our first commercial midstream crude oil pipeline installation, confirming the horizontal configuration to be
appropriate for the midstream crude oil marketplace. Our current experience on the Kinder Morgan pipeline leads us to now move
forward with our commercial midstream vertical AOT design as we expand to the midstream crude oil condensate market.
In 2014, the Company
began commercial development of a new suite of products based around the new electrical heat system which reduces oil viscosity
through a process known as joule heat (“Joule Heat”). The Company is designing and optimizing the Joule Heat technology
for the upstream oil transportation market. The Company filed two provisional patents related to the technology’s method
and apparatus in the second quarter and fourth quarter of 2013, respectively. The first of the two provisional patents was finalized
and submitted to non-provisional status on April 29, 2014. The second of the two provisional patents was finalized and submitted
to non-provisional status at the end of the third quarter 2014.
In October 2014, STWA
entered into a Joint Development Agreement with Newfield Exploration Company (“Newfield”) to test a commercial prototype
of STWA Joule Heat equipment, and combined Joule Heat and AOT technology, on a crude oil pipeline serving the Greater Monument
Butte oilfield located in the Uintah Basin of Utah. This test of the Joule Heat technology provides ideal conditions to demonstrate
efficiency and efficacy. The Uintah Basin is 5,000 to 10,000 feet above sea level with average low winter temperatures of 16ºF.
Crude oil pumped from the region is highly paraffinic with the consistency of shoe polish at room temperature. Uintah's black wax
crude must remain at a minimum of 95 degrees and yellow wax above 115 degrees and therefore requires a substantial amount of heat
to keep it above its high pour point. Newfield, like many other companies in the region, incurs significant operating expense in
the form of fuel and power used to heat the waxy crude and counter the cold climate conditions characteristic of Utah. The Company’s
first Joule Heat prototype unit is scheduled for delivery to Newfield in May 2015, with installation and testing scheduled for
the second and third quarters of 2015. In addition, the Company is retrofitting its first AOT prototype unit, previously tested
at the U.S. Department of Energy’s Rocky Mountain Oilfield Testing Center (“RMOTC”) and in China, for operations
in the upstream crude oil pipeline market (“AOT Upstream”). This AOT Upstream unit will be tested under typical upstream
commercial pipeline conditions on Newfield’s pipeline, both as a stand-alone AOT and in combination with Joule Heat technology.
Our expenses to date
have been funded primarily through the sale of shares of common stock and convertible debt, as well as proceeds from the exercise
of stock purchase warrants and options. We raised capital in 2014 and will need to raise substantial additional capital through
the end of 2015, and beyond, to fund our sales and marketing efforts, continuing research and development, and certain other expenses,
until our revenue base grows sufficiently.
There are significant
risks associated with our business, our Company and our stock. See “Risk Factors” in Part II, Item 1A below.
Results of Operation for the Three
Months ended March 31, 2015 and 2014
There were no revenues
and cost of sales for the three months ended March 31, 2015 and 2014.
Operating expenses
were $855,452 for the three-month period ended March 31, 2015, compared to $924,987 for the three-month period ended March 31,
2014, a decrease of $69,535. This decrease is attributable to an increase in non-cash expenses of $72,731, offset by a decrease
in cash expenses of $142,266. Specifically, the increase in non-cash expenses are attributable to decreases in depreciation of
$243 and accrued expenses attributable to options granted to employees of 4,580, offset by an increases in accrued expenses attributable
to options granted to directors of $67,675 and warrants granted to consultants of $9,879. The decrease in cash expense is attributable
to decreases in salaries and benefits of $159,081, corporate expenses of $4,660, travel and related expenses of $5,963, and rents
and utilities of $16,643, offset by an increases in consulting and professional fees of $34,745, and in office and other expenses
of $9,336.
Research and development
expenses were $272,777 for the three-month period ended March 31, 2015, compared to $451,987 for the three-month period ended March
31, 2014, a decrease of $179,210. This decrease is attributable to a decrease in prototype product development costs of $180,021
and an increase in product testing, research, patents and other costs of $830.
Other income and
expense were $46,108 expense for the three-month period ended March 31, 2015, compared to $26,500 expense for the three-month
period ended March 31, 2014, a net increase in other expenses of 19,608. This increase is attributable to an increase in
non-cash other expenses of $21,108 and an increase in cash income of $1,500. The increase in non-cash other expense is an
increase in expense attributable to interest, beneficial conversion factors and warrants associated with convertible notes of
$47,608, offset by a decrease in other non-cash expenses of $26,500 due an adjustment for doubtful receivables in 2014. The
increase in other cash income is due to the collection of $1,500 of doubtful receivables in 2015.
The Company had a net
loss of $1,174,337, or $0.01 per share, for the three-month period ended March 31, 2015, compared to a net loss of $1,403,474,
or $0.01 per share, for the three-month period ended March 31, 2014.
Liquidity and Capital Resources
General
We have incurred negative
cash flows from operations since our inception in 1998. As of March 31, 2015, we had cash of $1,414,363 and an accumulated deficit
of $98,219,535. Our negative operating cash flow in 2014 and the first three months of 2015 was funded primarily through exercise
of stock purchase warrants and options for cash.
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 $1,174,337 and a negative cash flow from operations of $870,280 for the three-month period
ended March 31, 2015. These factors raise substantial doubt about our ability to continue as a going concern. In addition,
the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2014 financial
statements, has raised substantial doubt about the Company’s ability to continue as a going concern. Our ability to continue
as a going concern is dependent upon our ability to raise additional funds and implement our business plan. The consolidated financial
statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Summary
At March 31, 2015,
we had cash on hand in the amount of $1,414,363. We will need additional funds 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 AOT and related technologies; costs to manufacture and ship our
products; costs to design and implement an effective system of internal controls and disclosure controls and procedures; costs
of maintaining our status as a public company by filing periodic reports with the SEC and costs required to protect our intellectual
property. In addition, 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 2015 and beyond.
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.
Going Concern
The accompanying condensed
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 $1,174,337 and a negative cash flow from operations of $870,280 for the nine month period
ended March 31, 2015 and an accumulated deficit of $98,219,535 as of March 31, 2015. These factors raise substantial doubt
about the Company’s ability to continue as a going concern. In addition, the Company’s independent registered public
accounting firm, in its report on the Company’s December 31, 2014 financial statements, has raised substantial doubt about
the Company’s 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 financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as a going concern.
In addition,
the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2014
financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
At March 31, 2015,
the Company had cash on hand in the amount of $1,414,363. Management expects that the current funds on hand will be sufficient
to continue operations through December 2015. Management is currently seeking additional funds, primarily through the issuance
of debt and equity securities for cash to operate our business, including without limitation the expenses it will incur in connection
with the license and research and development agreements with Temple; costs associated with product development and commercialization
of the Company’s technologies; costs to manufacture and ship the 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, the Company has
substantial contractual commitments, including without limitation salaries to our executive officers pursuant to employment agreements,
certain severance payments to former officers and consulting fees, during the remainder of 2015 and beyond.
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.
Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of
debt financing or cause substantial dilution for our stockholders, in case of equity financing.
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 1 of the Notes to the Condensed 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.
Estimates
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 the Condensed Consolidated Financial Statements. Actual results could differ from those estimates.
Stock-Based Compensation
The Company periodically
issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing
costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance
provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized
over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based
upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at
which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally
are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance
requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded
in the period of the measurement date.
The fair value of the
Company's common stock option grants is estimated using the Black-Scholes Option Pricing model, which uses certain assumptions
related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation
expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual experience. The
assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense recorded in future periods.
Research and Development
Costs
Costs incurred for
research and development are expensed as incurred. Purchased materials that do not have an alternative future use are also expensed.
Furthermore, costs incurred in the construction of prototypes with no certainty of any alternative future use and established commercial
uses are also expensed.
Item 3. Quantitative and Qualitative
Disclosure about Market Risk
We issue from time
to time fixed rate discounted convertible notes. Our convertible notes and our equity securities are exposed to risk as set forth
below, in Part II Item 1A, “Risk Factors.” Please also see Item 2, above, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Item 4. Controls and Procedures
| 1. | Disclosure Controls and Procedures |
The Company's
management, with the participation of the Company's chief executive officer and chief financial officer, evaluated, as of March
31, 2015, the effectiveness of the Company's disclosure controls and procedures, which were designed to be effective at the reasonable
assurance level. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based
on the evaluation of the Company's disclosure controls and procedures as of March 31, 2015, management, the chief executive officer
and the chief financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable
assurance level at that date.
(a) Changes in
Internal Control over Financial Reporting
No change in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II
– OTHER INFORMATION
Item 1. Legal Proceedings
There is no litigation
of any significance with the exception of the matters that have arisen under, and are being handled in, the normal course of business.
Item 1A. Risk Factors
There have been no
material changes in the risk factors previously disclosed in Form 10-K for the period ended December 31, 2014, which we filed with
the SEC on March 16, 2015.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
Issuances
During the three months
ended March 31, 2015, the Company issued 200,000 shares of common stock upon exercise of warrants at $0.25 per share for aggregate
net proceeds of $50,000.
During the three months
ended March 31, 2015, the Company issued 110,000 shares of its common stock upon the conversion of $52,800 in convertible notes
at $0.48 per share.
The proceeds received
by the Company in connection with the above issuances of shares were used for general corporate purposes.
Item 3. Defaults Upon Senior
Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
Increase in Outstanding
Shares
No additional shares
were issued by the Company during the period from April 1, 2015 through May 1, 2015.
Subsequent Events
See Part I, Item 2,
above.
Item 6. Exhibits
Exhibit No. |
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Description |
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31.1 |
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Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e) |
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31.2 |
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Certification of Chief Financial Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e) |
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32 |
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Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C. Section 1350 |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Schema Document |
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101.CAL |
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XBRL Calculation Linkbase Document |
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101.LAB |
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XBRL Label Linkbase Document |
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101.PRE |
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XBRL Presentation Linkbase Document |
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101.DEF |
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XBRL Definition Linkbase Document |
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. |
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Date: May 11, 2015 |
By: |
/s/ Greggory M. Bigger |
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Greggory M. Bigger |
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Chief Financial Officer |
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EXHIBITS
Exhibit No. |
|
Description |
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31.1 |
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Certification of Chief Executive Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e) |
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31.2 |
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Certification of Chief Financial Officer of Quarterly Report Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e) |
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32 |
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Certification of Chief Executive Officer and Chief Financial Officer of Quarterly Report Pursuant to 18 U.S.C. Section 1350 |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Schema Document |
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101.CAL |
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XBRL Calculation Linkbase Document |
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101.LAB |
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XBRL Label Linkbase Document |
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101.PRE |
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XBRL Presentation Linkbase Document |
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101.DEF |
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XBRL Definition Linkbase Document |
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
AND RULES 13A-14 AND 15D-14 UNDER THE SECURITIES
EXCHANGE ACT OF 1934
I, Greggory M. Bigger,
certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Save the World Air, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(d)-15(f) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its condensed consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
2.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: May 11, 2015 |
/s/ Greggory M. Bigger |
Greggory M. Bigger |
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
AND RULES 13A-14 AND 15D-14 UNDER THE SECURITIES
EXCHANGE ACT OF 1934
I, Greggory M. Bigger,
certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Save the World Air, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(d)-15(f) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its condensed consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: May 11, 2015 |
/s/ Greggory M. Bigger |
Greggory M. Bigger |
Chief Financial Officer |
EXHIBIT 32
CERTIFICATION OF PERIODIC FINANCIAL REPORT
BY THE CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
Solely for
the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, we, the undersigned Acting Chief Executive Officer and the Chief Financial Officer of Save the World Air, Inc.
(the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company
for the quarter ended March 31, 2015 (the “Report”) fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: May 11, 2015 |
/s/ Greggory M. Bigger |
Greggory M. Bigger |
Chief Executive Officer |
|
Date: May 11, 2015 |
/s/ Greggory M. Bigger |
Greggory M. Bigger |
Chief Financial Officer |
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