SAVI MEDIA GROUP, INC.

(A Development Stage Company)

Quarterly Report on Form 10-QSB for the

Quarterly Period Ending September 30, 2006

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Unaudited Consolidated Balance Sheets:
September 30, 2006 and December 31, 2005			3
Unaudited Consolidated Statements of Operations:
For the three and nine months ended September 30, 2006 and 2005 and
for the period from inception, August 13, 2002, to September 30, 2006			5
Unaudited Consolidated Statement of Stockholders’ Deficit
For the nine months ended September 30, 2006			6
Unaudited Consolidated Statements of Cash Flows:
For the nine months ended September 30, 2006 and 2005 and
for the period from inception, August 13, 2002, to September 30, 2006			9
Notes to Unaudited Consolidated Financial Statements			10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Controls and Procedures			21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			22
Item 2. Changes in Securities			22
Item 3. Defaults Upon Senior Securities			22
Item 4. Submission of Matters to a Vote of Security Holders			22
Item 5. Other Information			22
Item 6. Exhibits			22
SIGNATURES			23

 

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SAVI MEDIA GROUP, INC.
A Corporation in the Development Stage
CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 2006 and December 31, 2005
		September 30,			December 31,
		2006			2005
ASSETS
Current assets:
Cash and cash equivalents		$	23,103		$	336
Total current assets			23,103			336
Property and equipment, net			649,699			5,208
Deferred loan costs			100,343			-
Intangible assets - patents			38,500			38,500
Total assets		$	811,645		$	44,044

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SAVI MEDIA GROUP, INC.
A Corporation in the Development Stage
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 2006 and December 31, 2005
		September 30,			December 31,
		2006			2005
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Note payable		$	-		$	142,500
Convertible debt			588,360			6,519
Note payable to stockholder			8,526			-
Deposit for warrant exercise			-			23,805
Accounts payable and accrued liabilities			100,216			31,448
Accounts payable assumed in recapitalization			159,295			159,295
Derivative financial instrument liabilities			20,763,988			707,499
Total current liabilities			21,620,385			1,071,066
Commitments and contingencies
Stockholders' deficit:
Series A convertible preferred stock; $0.001 par value,
10,000,000 shares authorized, issued and outstanding			10,000			10,000
Series B convertible preferred stock; $0.001 par value,
10,000,000 shares authorized, none issued and outstanding			-			-
Series C convertible preferred stock; $0.001 par value,
10,000,000 shares authorized, 6,455,275 and 6,060,000 shares
issued and outstanding at September 30, 2006 and December 31, 2005,
respectively			6,455			6,060
Common stock: $0.001 par value, 990,000,000 shares
authorized, 448,106,564 and 209109976 shares issued and
outstanding at September 30, 2006 and December 31, 2005,
respectively			448,107			209,110
Additional paid-in capital			249,782,840			247,147,631
Losses accumulated during the development stage			(271,056,142	)		(248,399,823	)
Total stockholders' deficit			(20,808,740	)		(1,027,022	)
Total liabilities and stockholders' deficit		$	811,645		$	44,044

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

 

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SAVI MEDIA GROUP, INC.
A Corporation in the Development Stage
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 2006 and 2005 and for the Period
From Inception, August 13, 2002, to September 30, 2006
		Three Months Ended						Nine Months Ended						Inception to
		September 30,			September 30,			September 30,			September 30,			September 30,
		2006			2005			2006			2005			2006
Operating costs and expenses:
General and administrative
expenses, except stock
based compensation		$	577,989		$	140,978		$	1,535,380		$	425,475		$	2,783,435
Stock-based compensation			-			3,148,000			587,638			137,077,475			246,027,077
Research and development			125,689			72,790			750,564			211,086			1,050,507
Loss from operations			(703,678	)		(3,361,768	)		(2,873,582	)		(137,714,036	)		(249,861,019	)
Other income and (expenses)
Interest Income			130			-			141			1			161
Gain on settlement			-			-			-			-			197,033
Cost of rescission			-			-			-			-			(43,074	)
Cost of recapitalization			-			-			-			-			(273,987	)
Goodwill impairment			-			-			-			-			(541,101	)
Loss on extinguishment
of debt			(132,464	)		-			(492,464	)		-			(492,464	)
Interest expense			(45,630,008	)		(5,683	)		(45,647,530	)		(915,671	)		(46,608,397	)
Change in value of
derivative financial
instruments			25,987,432			291,542			26,377,167			(88,811	)		26,566,706
Total other income
and expenses, net			(19,774,910	)		285,859			(19,762,686	)		(1,004,481	)		(21,195,123	)
Net loss		$	(20,478,588	)	$	(3,075,909	)	$	(22,636,268	)	$	(138,718,517	)	$	(271,056,142	)
Weighted average shares
outstanding			440,497,868			121,114,740			351,263,928			105,229,366
Net loss per common share -
basic and diluted		$	(0.05	)	$	(0.03	)	$	(0.06	)	$	(1.32	)

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

 

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SAVI MEDIA GROUP, INC.
A Corporation in the Development Stage
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLERS' DEFICIT
For the Nine Months Ended September 30, 2006
		Series A Preferred Stock						Series B Preferred Stock
		Shares			Amount			Shares			Amount
Balance at December 31, 2005			10,000,000		$	10,000			-		$	-
Common and preferred stock issued for cash			-			-			-			-
Exercise of warrants			-			-			-			-
Conversion of debt to equity			-			-			-			-
Common and Preferred stock issued in
exchange for consulting services			-			-			-			-
Reduction of shares in escrow			-			-			-			-
Common stock issued for debt commitment			-			-			-			-
Cancellation of shares			-			-			-			-
Common stock issued for debt extinguishment			-			-			-			-
Net Loss			-			-			-			-
Balance at September 30, 2006			10,000,000		$	10,000			-		$	-

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SAVI MEDIA GROUP, INC.
A Corporation in the Development Stage
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLERS' DEFICIT
For the Nine Months Ended September 30, 2006
		Series C Preferred Stock						Common Stock
		Shares			Amount			Shares			Amount
Balance at December 31, 2005			6,060,000		$	6,060			209,109,976		$	209,110
Common and preferred stock issued for cash			395,275			395			600,000			600
Exercise of warrants			-			-			389,540			389
Conversion of debt to equity			-			-			162,049,548			162,050
Common and Preferred stock issued in
exchange for consulting services			1,000,000			1,000			7,125,000			7,125
Reduction of shares in escrow			-			-			(21,167,500	)		(21,167	)
Common stock issued for debt commitment			-			-			30,000,000			30,000
Cancellation of shares			(1,000,000	)		(1,000	)		-			-
Common stock issued for debt extinguishment			-			-			60,000,000			60,000
Net Loss			-			-			-			-
Balance at September 30, 2006			6,455,275		$	6,455			448,106,564		$	448,107

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

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SAVI MEDIA GROUP, INC.
A Corporation in the Development Stage
UNAUDITED CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLERS' DEFICIT
For the Nine Months Ended September 30, 2006
								Losses
								Accumulated
		Additional						During the
		Paid-In			Subscription			Development
		Capital			Receivable			Stage			Total
Balance at December 31, 2005		$	247,147,631		$	-		$	(248,399,823	)	$	(1,027,022	)
Common and preferred stock issued for cash			529,237			-			-			530,232
Exercise of warrants			425,577			-			-			425,966
Conversion of debt to equity			(115,415	)		-			-			46,635
Common stock issued in exchange
for consulting services			603,643			-			-			611,768
Reduction of shares in escrow			21,167			-			-			-
Common stock issued for debt commitment			420,000			-			-			450,000
Cancellation of shares			1,000			-			-			-
Common stock issued for debt extinguishment			750,000			-			-			810,000
Net Loss			-			-			(22,656,319	)		(22,656,319	)
Balance at September 30, 2006		$	249,782,840		$	-		$	(271,056,142	)	$	(20,808,740	)

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

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SAVI MEDIA GROUP, INC.
A Corporation in the Development Stage
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2006 and 2005 and for the Period
From Inception, August 13, 2002, to September 30, 2006
		September 30,			September 30,			Inception to September
		2006			2005			30, 2006
Cash flows from operating activities:
Net loss		$	(22,656,319	)	$	(163,426,061	)	$	(271,056,142	)
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation expense			46,190			521			47,232
Gain on settlement			-			-			(197,033	)
Impairment of goodwill			-			-			541,101
Cost of recapitalization			-			-			273,987
Compensatory common and preferred
stock issuances			611,768			162,783,558			212,555,557
Amortization of deferred compensation			-			-			2,233,150
Compensatory option issuances			-			31,250,000			31,250,000
Interest imputed on non-interest bearing note
from a stockholder			-			-			7,254
Interest expense recognized through
accretion of discount on long-term debt			45,623,400			3,699			46,569,445
Common stock issued for rescission agreement			-			-			43,074
Common stock issued to pay accounts
payable and accrued liabilities			-			-			50,000
Change in value of derivative financial instruments			(26,377,167	)		-			(26,566,706	)
Loss on extinguishment of debt			492,464			-			492,464
Changes in accounts payable and accrued liabilities			68,768			6,216			146,033
Net cash used by operating activities			(2,190,896	)		30,617,933			(3,610,584	)
Cash flows from investing activities:
Purchase of equipment			(690,681	)		(6,250	)		(696,931	)
Acquisition of patent rights			-			-			(38,500	)
Net cash used in investing activities			(690,681	)		(6,250	)		(735,431	)
Cash flows from financing activities:
Proceeds from stockholder advances			8,526			7,600			58,198
Repayment of stockholder advances			(5,000	)		(5,000	)		(5,000	)
Net proceeds from convertible debentures			2,104,040			50,000			2,154,040
Proceeds from note payable			-			142,500			142,500
Payments on notes payable			-			-			(63,000	)
Proceeds from warrant exercise			402,161			10,900			692,558
Proceeds from sale of common and preferred stock			394,617			235,730			1,389,822
Net cash provided by financing activities			2,904,344			441,730			4,369,118
Net increase in cash and cash equivalents			22,767			31,053,413			23,103
Cash and cash equivalents at beginning of year			336			3,835			-
Cash and cash equivalents at end of year		$	23,103		$	31,057,248		$	23,103

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

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SAVI MEDIA GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 

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1.	Organization and Significant Accounting Policies

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

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

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

Significant Estimates

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

Principles of Consolidation

The unaudited consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all significant intercompany accounts and transactions.

Interim Financial Statements

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America 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 nine-month periods ended September 30, 2006 and 2005 are not necessarily indicative of the results that may be expected for the respective full years.

 

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

We review the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non-employees in connection with consulting or other services they provide.

 

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SAVI MEDIA GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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1.	Organization and Significant Accounting Policies, continued

Derivative Financial Instruments, continued

Certain instruments, including convertible debt and equity instruments and the freestanding options and warrants issued in connection with those convertible instruments, may be subject to registration rights agreements, which impose penalties for failure to register the underlying common stock by a defined date. These potential cash penalties may require the Company to account for the debt or equity instruments or the freestanding options and warrants as derivative financial instrument liabilities, rather than as equity. In addition, when the ability to physical or net-share settle the conversion option or the exercise of the freestanding options or warrants is deemed to be not within the control of the company, the embedded conversion option or freestanding options or warrants may be required to be accounted for as a derivative financial instrument liability.

Certain instruments, including convertible debt and equity instruments and the freestanding options and warrants issued in connection with those convertible instruments, may be subject to registration rights agreements, which impose penalties for failure to register the underlying common stock by a defined date. These potential cash penalties may require the Company to account for the debt or equity instruments or the freestanding options and warrants as derivative financial instrument liabilities, rather than as equity. In addition, when the ability to physical or net-share settle the conversion option or the exercise of the freestanding options or warrants is deemed to be not within the control of the company, the embedded conversion option or freestanding options or warrants may be required to be accounted for as a derivative financial instrument liability.

Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments. To the extent that the initial fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value.

The discount from the face value of the convertible debt or equity instruments resulting from allocating some or all of the proceeds to the derivative instruments, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method. When the instrument is convertible preferred stock, the dividends payable are recognized as they accrue and, together with the periodic amortization of the discount, are charged directly to retained earnings.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed periodically, including at the end of each reporting period. If re-classification is required, the fair value of the derivative instrument, as of the determination date, is re-classified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

2.           Going Concern Considerations 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is presently a shell company and has limited operations and resources. The Company has accumulated net losses in the development stage of $271,056,142 for the period from inception, August 13, 2002, to September 30, 2006. Additionally, at September 30, 2006, the Company is in a negative working capital position of $21,597,282 and has a stockholders’ deficit of $20,808,740. Such matters raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

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

 

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

 

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2.	Going Concern Considerations, continued

 

·

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

In order to address its ability to continue as a going concern, implement its business plan and fulfill commitments made in connection with its agreement for acquisition of patent rights the Company intends to raise additional capital from sale of its common stock. Sources of funding may not be available on terms that are acceptable to the Company and its stockholders, or may include terms that will result in substantial dilution to existing stockholders.

 

3.	Derivative Financial Instruments

Golden Gate Financing

During the year ended December 31, 2005 the Company issued $50,000 of convertible notes to a third party. As part of the financing transaction, the Company also issued warrants to purchase shares of stock at various exercise prices. The convertible debentures bore interest at 5 1/4%, matured two years from the date of issuance and were convertible into shares of the Company’s common stock, at the Investor’s option. These notes were paid-off or settled during the quarter ended September 30, 2006.

Cornell Financing

On July 10, 2006, we entered into a Securities Purchase Agreement with Cornell Capital Partners L.P. providing for the sale by us to Cornell of our 10% secured convertible debentures in the aggregate principal amount of $2,970,000 of which $1,670,000 was advanced immediately. We entered into an amended and restated securities purchase agreement with Cornell on August 17, 2006. The second installment of $200,000 was advanced on August 17, 2006. The third installment of $600,000 was advanced on 09/05/06. The last installment of $500,000 will be advanced two business days prior to the registration statement being declared effective by the SEC. A portion of the funds advanced were used to pay off the existing convertible debenture and other advances made by Golden Gate Investors. In connection with the securities purchase agreement, we agreed to issue Cornell warrants to purchase an aggregate 2,900,000,000 shares of common stock, exercisable for a period of five years as follows: 

 

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

All of the warrants were issued upon closing.  We also issued to the investor 30 million shares of restricted common stock as a commitment fee.

The estimated fair value of the warrants was $43,440,334 at the date of issue. These amounts have been classified as a derivative instrument and recorded as a liability on the Company's balance sheet in accordance with current authoritative guidance. The estimated fair value of the warrants was determined using the Black-Scholes option-pricing model. The model uses several assumptions including: historical stock price volatility, risk-free interest rate, remaining time till maturity, and the closing price of the Company's common stock to determine estimated fair value of the derivative liability.

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3.          Derivative Financial Instruments, continued

In accordance with the provisions of SFAS No. 133, Accounting for Derivative Instruments, the Company is required to adjust the carrying value of the instrument to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of Other Income (Expense). The recorded value of such warrants can fluctuate significantly based on fluctuations in the market value of the underlying securities of the issuer of the warrants, as well as in the volatility of the stock price during the term used for observation and the term remaining for the warrants.

The debentures mature on the second anniversary of the date of issuance and bear interest at the annual rate of 10%. Holders may convert, at any time, any amount outstanding under the debentures into shares of our common stock at a conversion price per share equal to $0.013. Beginning the earlier of (i) the first business day of the month immediately following the month in which the registration statement is first declared effective or (ii) November 1, 2006, and continuing on the first business day of each calendar month thereafter, we are required to make a mandatory redemption payment of $225,000 and accrued and unpaid interest, which payment can be made in cash or in restricted common stock.

We have the option, in our sole discretion, to settle the monthly mandatory redemption amount by (i) paying the investor cash in an amount equal to 115% of the monthly mandatory redemption amount, or (ii) issuing to the investor the number of shares of common stock equal to the monthly mandatory redemption amount divided by $0.007, provided, however, that in order for us to issue shares upon payment of the monthly mandatory redemption amount (A) the registration statement is effective, (B) no event of default shall have occurred, and (C) the closing bid price for our common stock shall be greater than the redemption conversion price (currently $0.007) as of the trading day immediately prior to the redemption date.   However, in the event that (A) the registration statement is effective, (B) no event of default shall have occurred, and (C) the closing bid price for our common stock is less than the redemption conversion price (currently $0.007) but is greater than $0.003, we shall have the option to settle mandatory redemptions by issuing to the investor the number of shares of common stock equal to the mandatory redemption amount divided by the default conversion price ($0.003).

In the event that certain events of default, such as failure to pay principal or interest when due, failure to issue common stock upon conversion or the delisting or lack of quotation of our common stock, the redemption conversion price will be reduced to the default conversion price.

Cornell has agreed to restrict its ability to convert the debenture and exercise the warrants and receive shares of our common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of our common stock.

We, at our option, have the right, with three business days advance written notice, to redeem a portion or all amounts outstanding under this debenture prior to the maturity date provided that the closing bid price of our common stock, is less than $0.013 at the time of the redemption. In the event of a redemption, we are obligated to pay an amount equal to the principal amount being redeemed plus a 15% redemption premium, and accrued interest.

In connection with the Purchase Agreement, we also entered into a registration rights agreement, as amended, providing for the filing, within 60 days of closing, of a registration statement with the Securities and Exchange Commission registering the common stock issuable upon conversion of the debentures. We are obligated to use our best efforts to cause the registration statement to be declared effective no later than 90 days after filing the registration statement and to insure that the registration statement remains in effect until the earlier of (i) all of the shares of common stock issuable upon conversion of the debentures have been sold or (ii) July 10, 2008. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the Registration Statement with the Securities and Exchange Commission no later than September 8, 2006, or if the registration statement is not declared effective by November 22, 2006, we are required to pay to Cornell, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the debentures.

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3.	Derivative Financial Instruments, continued

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

In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), the debt features provision (collectively, the features) contained in the terms governing the Notes are not clearly and closely related to the characteristics of the Notes. Accordingly, the features qualified as embedded derivative instruments at issuance and, because they do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be accounted for separately from the debt instrument and recorded as derivative financial instruments.

 

Pursuant to the terms of the Notes, these notes are convertible at the option of the holder, at anytime on or prior to maturity. The debt features represents an embedded derivative that is required to be accounted for apart from the underlying Notes. At issuance of the Notes, the debt features had an estimated initial fair value of 3,120,541.

In subsequent periods, if the price of the security changes, the embedded derivative financial instrument related to the debt features will be adjusted to the fair value with the corresponding charge or credit to other expense or income. The estimated fair value of the debt features was determined using a lattice model with probability weighted average expected cash flows with the closing price on original date of issuance, a conversion price based on the terms of the respective contract, a period based on the terms of the notes, and a volatility factor on the date of issuance. For the three months and nine months ended September30, 2006, due in part to a decrease in the market value of the Company's common stock, the Company recorded an "other income" on the consolidated statement of operations for the change in fair value of the debt features of approximately $2,722,955. At September 30, 2006, the estimated fair value of the debt features was approximately $588,046. For the three months and nine months ended September30, 2006, due in part to a decrease in the market value of the Company's common stock, the Company recorded an "other income" on the consolidated statement of operations for the change in fair value of the warrants of approximately $23,264,398. At September 30, 2006, the estimated fair value of the warrants was approximately $20,175,936.

The recorded value of the debt features and warrants related to the Notes can fluctuate significantly based on fluctuations in the fair value of the Company's common stock, as well as in the volatility of the stock price during the term used for observation and the term remaining for the warrants. The significant fluctuations can create significant income and expense items on the financial statements of the company.

Because the terms of the convertible notes (“notes”) require such classification, the accounting rules required additional convertible notes and non-employee warrants to also be classified as liabilities, regardless of the terms of the new notes and/or warrants. This presumption has been made due to the company no longer having the control to physical or net share settle subsequent convertible instruments because it is tainted by the terms of the notes. Were the notes to not have contained those terms or even if the transactions were not entered into, it could have altered the treatment of the other notes and the conversion features of the latter agreement may have resulted in a different accounting treatment from the liability classification. The notes and warrants, as well as any subsequent convertible notes or warrants, will be treated as derivative liabilities until all such provisions are settled.

 

4.	Stockholders’ Equity

Following is a description of transactions affecting stockholders equity in the three months ended September 30, 2006:

·

The Company issued 500,000 shares of common stock to an individual in a private placement for $5,000.

·

The Company issued 30,000,000 shares of common stock to the holder of its 10% convertible debt as a commitment fee.

·

The Company issued 30,000,000 shares of common stock to the holder of its convertible debt as a payment related to the extinguishment of the Golden Gate Investors debt. The Company recognized a loss on debt extinguishment in the amount of $450,000 related to this issuance.

 

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5.	Subsequent Events

The Cornell financing required that beginning November 1, 2006, and continuing on the first business day of each calendar month thereafter, we are required to make a mandatory redemption payment of $225,000 and accrued and unpaid interest, which payment can be made in cash or in restricted common stock. We have not made these payments to date, but are in ongoing discussions with Cornell Capital to provide additional financing and waive any existing defaults.

We have no other commitments from officers, directors or affiliates to provide funding. If we are unable to obtain debt and/or equity financing upon terms that we deem sufficiently favorable, or at all, it would have a materially adverse impact upon our ability to pursue our business strategy and maintain our current operations. As a result, it may require us to delay, curtail or scale back some or all of our operations.

6.	Supplemental Disclosure of Cash Flow Information

Following is an analysis of non-cash investing and financing activities for the nine months ended September 30, 2006.

Preferred stock issued for note payable		$	142,500
Common stock issued for debt conversion			856,635

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

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

OVERVIEW

Business History

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

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

Business Summary

We are considered a development stage enterprise because we currently have no significant operations, have not yet generated revenue from new business activities and are devoting substantially all of our efforts to business planning and the search for sources of capital to fund our efforts. We have acquired all rights to "blow-by gas and crankcase engine emission reduction technology" which we intend to develop and market on a commercial basis. The technology is a gasoline and diesel engine emission reduction device which will allow us to sell to our customers a low-cost and relatively more effective and efficient emission reduction and engine efficiency for implementation in both new and presently operating automobiles. The technology is designed and we believe that it will offer better mileage and longer engine lifespan. The technology is also believed to provide for dramatic reductions in harmful emissions in engines and vehicles, a reduction in costs to do so as well as reducing all related emission costs. The goal of the technology is to sell a commercially-viable product which delivers superior emission reduction technology and operating performance.

We currently have the right to develop, produce, market and distribute a new product which provides for increased fuel economy and reduced emissions in automotive applications for both new and existing vehicles and may be used in other non-automotive applications. The technology may be sold internationally and we are pursuing opportunities simultaneously dometically and internationally. We plan to seek the rights to develop and sell additional products and will seek strategic partnerships with manufacturers and distributors in the various industries where our products may be sold and to develop markets in other areas.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are 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 financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our estimates under different assumptions or conditions, and these differences may be material.

 

We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Income Taxes

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

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Results of Operations

During the period from inception, August 13, 2002, to September 30, 2006, we have not generated any revenue from operations. As of September 30, 2006, we have accumulated net losses in the development stage of 271,056,142 for the period from inception, August 13, 2002, to September 30, 2006. Additionally, at September 30, 2006, we are in a negative working capital position of $21,597,282 and have a stockholders’ deficit of $20,808,740. Our auditors have opined that such matters raise substantial doubt about our ability to continue as a going concern. We financed our operations mainly through the sale of common stock and have been entirely dependent on outside sources of financing for continuation of operations. For the remainder of fiscal 2006, we will continue to pursue funding for our business. There is no assurance that we will continue to be successful in obtaining additional funding on attractive terms or at all, nor that the projects towards which additional paid-in capital is assigned will generate revenues at all.

Plan of Operation

We believe that there are six critical elements for the building of a successful research & development company that has the capacity to manufacture technology for the implementation of immediate and long-term solutions to the global challenges of air, water, and land pollution.

	1.	People - this includes a qualified board of directors, advisory board members, management, employees, shop personnel, Q.C., project managers, journeymen, welders, machinists, cnc operators, cad cam, shop planners, senior engineers, tool & design, maintenance personnel, calibrators & inspectors, sheet metal fabricators, debburing & finishing personnel, purchasers, transporters, cnc trainers and consultants, etc.;
	2.	Projects - a credible portfolio of projects that have the appropriate risk-return ratio in order to generate potentially significant shareholder value;
	3.	Capital - based upon the reputation of the people and the quality of the projects, there must be sufficient capital in order to launch the company and to provide for additional fundings;
	4.	Technology - the most advanced interpretation methods, techniques and methods should be utilized in order to maximize the potential for finding and developing immediate and long term solutions to the global challenges of air, water, and land pollution;
	5.	Favorable positioning - the international influence of the oil and gas companies along with the automotive & diesel industries requires a combination of secured relationships with their appointed leadership in these various industries as well as with all the various local and international governmental entities; and
	6.	Manufacturing capability and equipment- the competitive nature of the automotive & diesel industry requires a unique approach and a significant capital commitment in order to secure the latest in hi-tech equipment, technology, research, and the creation of numerous patents as well as to expedite mass production.

People:

In August 2004 Savi Media Group was founded by Serge Monros and Mario Procopio. Serge Monros sold several technologies to Savi Media that he personally developed over the last 17 years. Mario Procopio was hired as the President, Chief Executive Officer and director of with a mandate to acquire the initial funding for the planned projects and to assist in aggressively transforming us into an emerging research & development company utilizing cutting edge of technologies in the field of automotive and diesel retrofitting and pollution control. In August 2004, Mario and Serge recruited enough capital to acquire a bulletin board company, pay off its existing debts, and begin to launch the varied projects of which the DynoValve is one of several projects. Two years later, we have contracted with engineering firms and over three-dozen professionals as either employees or consultants and officers and directors. Recently, we announced the addition of Greg Sweeney as CEO on August 30, 2006 and Phillip C. Scott as CFO on August 17, 2006.

We have contracted with several significant additions to the operating team through the establishment of a Strategic Advisory Board. On this board we have notables, including General Alexander Haig with a background serving in the U.S.Government as Secretary of State for Ronald Reagan, Commander in Chief, U.S. European Command for President Gerald Ford, Senior Military Advisor to Dr. Henry Kissinger White House Chief of Staff for President Nixon, and as a 4 Star General in Japan, Korea, Europe, & Vietnam. In addition to his military accomplishments, General Haig has held a number of key positions in political and business leadership, and presently serves as Chairman of Worldwide Associates, Inc., and is a senior advisor to United Technologies Corporation. He also serves on the Board of Directors of America Online, Inc., Interneuron Pharmaceuticals, Inc., MGM Grand, Inc., the National Foundation for Advanced Cardiac Surgery, Preferred Employers Holdings, Inc., as well as Metro-Goldwyn-Mayer, Inc. and United Technologies Corp.

 

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We continue to seek additional qualified candidates to join our Board of Directors and Advisory Board. We intend to utilize our strong industry contacts with top quality consultants, contractors, and employees to expand these Boards.

Projects:

During the quarter ended September 30, 2006, we further refined our strategic plan and have determined that the maximum value to all of our shareholders is best served by targeting three focused project areas that provide for long-term growth from our invested capital. The three major project areas are as follows:

A fully functional R & D Lab and office with limited manufacturing capabilities and state of the art diagnostic equipment.

We have constructed and established this lab with its adjacent offices located at 2530 S. Birch St. Santa Ana, CA. 92707. We have completed the installation of overhead cranes, begun placement and calibration of machinery, and further developed our manufacturing flow process study. The lab should be fully functional and in use before April 2007. We also acquired a 270,000 square foot R & D lab and office in Tian Jin, China in the Auto Trade - Free Trade Zone in order to test and retrofit heavy duty equipment, machinery, and certain diesel engines that they have shipped overseas from China to our facility here in the U.S. We also have established dependable mutually benefiting relationships with about a dozen large manufacturers around the world for contract outsourcing so that when we grow beyond our capacity locally to meet certain production needs we can adequately outsource.

 

Implement the initial testing phases in order to secure revenues, licensing agreements, and contracts.

Domestic and international entities have given us projects to test our equipment on selected diesels, stationary machines, and technology for certification and verification. As we continue to obtain favorable results in these certified tests, there is greater potential for obtaining purchase orders and contracts.

On November 7, 2006, we announced that we had received recently received a progress summary from California Environmental Engineering (CEE), an environmental testing laboratory on the Phase I testing of the SaVi DynoValvePro. The initial results indicated an improvement (reduction) in all tailpipe emissions.

Joe Jones, CEE Research Director, noted in his report that "the initial capability in lowering Hydro Carbons (HC), Carbon Monoxide (CO), and Nitrogen Oxides (NOx) while increasing fuel economy is considered important. Seldom does an individual system technology lower all tailpipe emissions while improving fuel economy. The early results verify the viability of the technology and indicate that more dramatic results may be expected and achieved with time."

The Phase I tests were being conducted on an International DT466 210HP compression ignition engine, representative of those currently available in medium and heavy-duty vehicles. The tests were conducted under the Federal 8-Mode test cycle for variable speed engines as defined in 40-CFR, Part 89, as amended July 13, 2005. Diesel (D-2) ultra low sulfur test fuel was obtained and used for the SaVi Phase 1 test series. The fuel used contained less than 15ppm of sulfur content. The results, while positive, are based on limited test data. Phase I testing will continue to be performed on the SaVi DynoValve-Pro.

CEE is licensed to test products in order to allow certification by the California Air Resources Board exemption procedure and the U.S. Environmental Protection Agency guidelines. This process allows issuance of an Executive Order (EO) which provides the holder the opportunity to legally sell their product.

Become a technology partner to the various entities that are focused on environmental solutions.

We are presently participating in a consortium of companies with emission reduction technologies for the problem solving of both our local environmental challenges and to assist in China’s pursuit of immediate solutions to the particular needs in their environment.

During the quarter ended September 30, 2006, we had limited operations and we expect to require additional cash of a minimun of approximately $5,000,000 over the next twelve months. Those funds will be used for continued operation in the development stage. Purusant to a securities purchase agreement entered into with Cornell Capital Partners, we will receive an additional $500,000 upon the effectiveness of a resale registration statement, which was filed in November 2006 and is being reviewed by the SEC. Additional financing will still need to be obtained. Due to our still being in a development stage, sources of funding may not be available on terms that are acceptable to management and existing stockholders, or may include terms that will result in substantial dilution to existing stockholders.

Liquidity and Capital Resources

As of September 30, 2006, total current assets were $23,103 consisting of cash and cash equivalents.

 

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Total current liabilities were $21,620,385 as of September 30, 2006, consisting of convertible debt net of discounts of $588,360, accounts payable and accrued liabilities of $100,216, accounts payable assumed in recapitalization of $159,295 derivative financial instrument liabilities of $20,763,988, and advances from stockholder of $8,526.

 

We incurred net losses of $271,056,142 during the period from inception, August 13, 2002, to September 30, 2006. In addition, at September 30, 2006, we were in a negative working capital deficit of $21,597,282 and had a stockholders' deficit of $20,808,740. As a result, our independent registered public accounting firm, in its report dated April 13, 2006, has expressed substantial doubt about our ability to continue as a going concern.

Our ability to continue as a going concern is dependent upon several factors. These factors include our ability to:

Our ability to continue as a going concern is dependent upon several factors. These factors include our ability to:

• further implement our business plan;

• obtain additional financing or refinancing as may be required; and

• generate revenues.

•  $1,670,000 was disbursed on July 10, 2006;
  
•  $200,000 was disbursed on August 17, 2006;
  
•  $600,000 was disbursed on September 1, 2006; and
  
•  $500,000 will be disbursed two business days prior to the effectiveness of this registration statement.

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

None.

 

ITEM 5 - OTHER INFORMATION

 

None.

 

ITEM 6 - EXHIBITS

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

 

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

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

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

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SAVI MEDIA GROUP, INC.
Date: December 19, 2006	By: /s/ GREG SWEENEY
	Greg Sweeney
	President, Chief Executive Officer (Principal Executive Officer)
Date: December 19, 2006	By: /s/ PHILLIP C. SCOTT
	Phillip C. Scott
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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