<pre>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEETs
June 30, 2001, 2000 and September 30, 2000
Jun. 30 Jun. 30 Sep. 30
2001 2000 2000
Unaudited Unaudited Audited
ASSETS
Current assets
Cash and cash equivalents 52,787 109,710 33,688
Prepaid expenses 0 0 158,546
Total current assets 52,787 109,710 192,234
Property and equipment, net 62,651 64,028 93,304
License and technology, net 0 10,000 0
Other asset 0 0 0
TOTAL ASSETS 115,438 183,738 285,538
<page> 98
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET
June 30, 2001, 2000 and September 30, 2000
Jun. 30 Jun. 30 Sep. 30
2001 2000 2000
Unaudited Unaudited Audited
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable 134,724 204,400 97,827
Accrued compensation 364,510 602,400 438,647
Due to officer 101,833 0 75,000
Other current liabilities 236,877 228,115 152,995
Notes payable 365,136 399,813 390,937
Total current liabilities 1,203,080 1,434,728 1,155,406
Long-term debt 404,113 0 0
TOTAL LIABILITIES 1,607,193 1,434,728 1,155,406
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized,
140,020 shares issued and
outstanding 140,020 140,020 140,020
Convertible preferred stock - Class B,
$1.00 par value; 1,000,000
shares authorized, -0- shares
issued and outstanding 0 0 0
Common stock, no par value;
250,000,000 shares authorized,
30,306,592, 21,280,572, and 23,527,738
shares issued and outstanding 17,074,709 14,961,846 16,187,421
Additional paid-in capital:
Convertible preferred stock - Class B,
$1.00 par value; 1,000,000 stock options
exercisable 100,000 100,000 100,000
Common stock, no par value;
4,107,154, 4,763,500, and 3,207,154
stock options and warrants exercisable 1,265,005 1,477,740 1,135,005
Stock subscription receivable 0 0 (15,450)
Accumulated (deficit) (20,071,489) (17,930,596)(18,416,864)
TOTAL STOCKHOLDERS' (DEFICIT) (1,491,755) (1,250,990) (869,868)
TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIT 115,438 183,738 285,538
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended June 30, 2001 and 2000
and the Cumulative Period
From December 1, 1990 (Inception) Through June 30, 2001
Dec. 1, 1990
(Inception)
Nine Months Nine Months Through
Jun. 30 Jun. 30 Jun. 30
2001 2000 2001
Unaudited Unaudited Unaudited
Revenues 0 0 517,460
Cost of goods sold 0 134,875 529,791
Gross profit (loss) 0 (134,875) (12,331)
General and administrative 1,523,993 3,107,003 14,869,816
Bad debt write-offs 0 0 1,680,522
Unrealized loss on derivative instrument 98,919 0 98,919
(Loss) from operations (1,622,912) (3,241,878)(16,661,588)
Non-operating income (expense) (31,713) (83,994) (2,159,429)
Minority interest 0 0 62,500
Net (loss) (1,654,625) (3,325,872)(18,758,517)
Weighted average shares
outstanding -
basic and diluted 27,123,787 16,275,993
Net (loss) per share (0.06) (0.20)
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 2001
<table>
Preferred Stock Common Stock Total
Class A and Options No Par Value Accumulated Shareholders'
Class B & Common Value Shares Value Deficit Equity (Deficit)
<c> <c> <c> <c> <c> <c>
Balance, Dec. 1, 1990
(re-entry
development stage) 0 0 10,609 1,042,140 (1,042,140) 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 515
Services, Mar. 1993 0 0 2,000 500 0 500
Services, Mar. 1993 0 0 1,200 600 0 600
Net loss for the year 0 0 0 0 (5,459) (5,459)
Balance, Sep. 30, 1993 0 0 16,809 1,044,755 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 23,655
Services, Sep. 1994 0 0 8,700 11,614 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 33,000
Net loss for the year 0 0 0 0 (32,544) (32,544)
Balance, Sep. 30, 1994 16,345 16,345 50,000 1,131,024 (1,080,143) 67,226
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 2001
Preferred Stock Common Stock Total
Class A and Options No Par Value Accumulated Shareholders'
Class B & Common Value Shares Value Deficit Equity (Deficit)
Shares issued in exchange for:
Cash, Feb. 1995 0 0 1,160 232,000 0 232,000
Debt repayment, Feb. 1995 0 0 2,040 408,000 0 408,000
Debt repayment, Feb. 1995 0 0 4,778 477,810 0 477,810
Acquisition of assets, CIPI
Feb. 1995 0 0 28,750 1,950,000 0 1,950,000
Acquisition of assets,
Apr. 1995 0 0 15,000 0 0 0
Cash and services, Apr.
and May 1995 0 0 16,000 800,000 0 800,000
Cash, Jun. 1995 0 0 500 30,000 0 30,000
Acquisition of assets and
services, Sep. 1995 0 0 4,000 200,000 0 200,000
Cash, Sep. 1995 0 0 41 3,000 0 3,000
Acquisition of assets,
Sep. 1995 0 0 35,000 1,750,000 0 1,750,000
Return of assets, CIPI
Sep. 1995 0 0 (27,700) (1,950,000) 0 (1,950,000)
Net loss for the year 0 0 0 0 (2,293,867) (2,293,867)
Balance, Sep. 30, 1995 16,345 16,345 129,569 5,031,834 (3,374,010) 1,674,169
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 2001
Preferred Stock Common Stock Total
Class A and Options No Par Value Accumulated Shareholders'
Class B & Common Value Shares Value Deficit Equity (Deficit)
Shares issued in exchange for:
Cash, Feb. 1996 0 0 1,389 152,779 0 152,779
Debt repayment, Feb. 1996 0 0 10,000 612,000 0 612,000
Services, Feb. 1996 0 0 3,160 205,892 0 205,892
Cash, Mar. 1996 0 0 179 25,000 0 25,000
Shares returned and
canceled Mar. 1996 0 0 0 (15,000) 0 0 $ 0
Services, Apr. 1996 0 0 13 2,069 0 2,069
Services, Sep. 1996 4,155 A 4,155 586 36,317 0 40,472
Services, Oct. 1996 0 0 6,540 327,000 0 327,000
Debt repayment, Nov. 1996 0 0 2,350 64,330 0 64,330
Net loss for the year 0 0 0 0 (2,238,933) (2,238,933)
Balance, Sep. 30, 1996 20,500 20,500 138,786 6,457,221 (5,612,943) 864,778
Shares issued in exchange for:
Services, Mar. 1997 0 0 228 6,879 0 6,879
Services, Apr. 1997 0 0 800 13,120 0 13,120
Services, Jul. 1997 0 0 1,500 16,200 0 16,200
Cash, Jul. 1997 0 0 15,000 300,000 0 300,000
Services, Aug. 1997 0 0 5,958 56,000 0 56,000
Adjustment for partial
shares due to reverse
stock split (1:20) 0 0 113 0 0 0
Services, Oct. 1997 0 0 1,469,666 587,865 0 587,865
Debt repayment, Oct 1997 0 0 1,540,267 620,507 0 620,507
Cash, Oct. 1997 0 0 1,500,000 281,250 0 281,250
Services, Nov. 1997 0 0 4,950 10,538 0 10,538
Net loss for the year 0 0 0 0 (2,739,268) (2,739,268)
Balance, Sep. 30, 1997 20,500 20,500 4,677,268 8,349,580 (8,352,211) 17,869
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 2001
Preferred Stock Common Stock Total
Class A and Options No Par Value Accumulated Shareholders'
Class B & Common Value Shares Value Deficit Equity (Deficit)
Shares issued in exchange for:
Services, Dec. 1997
through Nov. 1998 0 0 2,551,610 2,338,264 0 2,338,264
Debt repayment, Apr. 1998
through Sep. 1998 0 0 250,000 129,960 0 129,960
Cash, Jan. 1998 through
Jul. 1998 0 0 4,833,334 1,139,218 0 1,139,218
Acquisition of assets,
Jul. 1998 0 0 300,000 421,478 0 421,478
Acquisition of 20% minority
interest in subsidiary,
Jul. 1998 0 0 50,000 59,247 0 59,247
Services, Nov. 1998 60,000 A 60,000 0 0 0 60,000
Net loss for the year 0 0 0 0 (4,928,682) (4,928,682)
Balance, Sep. 30, 1998 80,500 80,500 12,662,212 12,437,747 (13,280,893) (762,646)
Shares issued in exchange for:
Shares returned and canceled
Dec. 1998 0 0 (1,350,000) (814,536) (814,536)
Services, Dec. 1998
through Sep. 1999 0 0 560,029 349,454 349,454
Cash, Dec. 1998
through Sep. 1999 0 0 1,155,800 129,537 129,537
Debt repayment, Sep. 1999 39,520 A 39,520 960,321 197,500 237,020
Services, Dec. 1998
through Sep. 1999 150,000 B 150,000 0 0 150,000
Debt repayment, Sep. 1999 100,000 A 100,000 0 0 100,000
Net loss for the period 0 0 0 0 (1,323,831) (1,323,831)
Balance, Sep. 30, 1999 370,020 370,020 13,988,362 12,299,702 (14,604,724) (1,935,002)
<page> 104
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 2001
Preferred Stock Common Stock Total
Class A and Options No Par Value Accumulated Shareholders'
Class B & Common Value Shares Value Deficit Equity (Deficit)
Shares issued in exchange for:
Shares reacquired and canceled, Oct. 1999
Services, Oct. 1999 (17,500) (12,000) (12,000)
through Sep. 2000 0 0 2,405,469 990,949 990,949
Cash, Oct. 1999
through Sep. 2000 0 0 2,295,482 839,425 839,425
Stock subscription receivable,
Sep. 2000 0 0 0 (15,450) (15,450)
Reduction of exercise price on
officer and employee stock
options, Mar. 2000 Options 1,113,610 0 0 1,113,610
Issuance of consultant stock
options Mar. 2000
Exercise officer stock options Options 214,130 214,130
in exchange for officer's debt
May 2000 Options (407,735) 0 0 (407,735)
Consultant's stock options,
Sep. 2000 Options 65,000 65,000
Exercise officer stock options
in exchange for officer's debt
May 2000 20,000 A 20,000 2,056,346 897,707 917,707
Retainers, debt and accrued
liabilities, Oct. 1999
through Sep. 2000 0 0 2,799,579 1,171,638 1,171,638
Net loss for the period 0 0 0 0 (3,812,140) (3,812,140)
Balance, Sep. 30, 2000 390,020 1,375,025 23,527,738 16,171,971 (18,416,864) (1,869,868)
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 2001
Preferred Stock Common Stock Total
Class A and Options No Par Value Accumulated Shareholders'
Class B & Common Value Shares Value Deficit Equity (Deficit)
Shares issued in exchange for:
Services, Oct. 2000
through Jun. 2001 0 0 1,564,393 281,8684 0 281,684
Stock subscription receivable,
Oct. 2000 0 0 0 15,450 0 15,450
Debt, Jan. 2001 0 0 4,214,461 530,504 0 530,604
Cash, Jan. 2001 0 0 1,000,000 75,000 0 75,000
Issuance of consultant stock
warrants, Apr. 2001 Options 130,000 0 0 0 130,000
Net loss for the period 0 0 0 0 (1,624,625) (1,654,625)
Balance, Jun. 30, 2001 390,020 1,505,025 30,306,592 17,074,709 (20,071,489) (1,491,755)
</table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2001 and 2000
and the Cumulative Period
From December 1, 1990 (Inception) Through June 30, 2001
Dec. 1, 1990
(Inception)
Nine Months Nine Months Through
Jun. 30 Jun. 30 Jun. 30
2001 2000 2001
Unaudited Unaudited
Net income (loss) (1,654,625) (3,325,872) (18,973,747)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Non-cash items
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 30,653 61,044 1,641,241
Stock and options issued for services 411,684 2,682,623 6,930,751
Stock issued for interest 0 13,575 535,591
Minority interest 0 0 (62,500)
Write-off of intangibles 0 0 1,299,861
Settlements 0 0 (25,000)
Unrealized loss on derivative
instruments 98,919 0 98,919
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses 158,546 158,546
Interest receivable 0 0 (95,700)
Deposits 0 7,000 (25,000)
Increase (decrease) in liabilities
Accounts payable 56,097 (57,941) 302,133
Accrued compensation 328,267 (284,983) 1,565,007
Due to officer 26,833 0 736,709
Other current liabilities 83,882 49,651 455,448
Net cash provided (used) by
operating activities (459,744) (854,903) (4,059,541)
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2001 and 2000
and the Cumulative Period
From December 1, 1990 (Inception) Through June 30, 2001
Dec. 1, 1990
(Inception)
Nine Months Nine Months Through
Jun. 30 Jun. 30 Jun. 30
2001 2000 2001
Investing activities
Increase in notes receivable 0 0 (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment 0 0 (181,109)
Net cash provided (used) by
investing activities 0 0 (1,597,666)
Financing activities
Common stock issued for cash 90,450 704,491 3,043,835
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Proceeds from debts
Related party 0 68,500 1,852,691
Other 537,506 177,000 744,050
Payments on debt
Related party 0 0 (46,407)
Other (149,113) (12,382) (202,285)
Subscription receivable 0 0 20,000
Contributed capital 0 0 515
Net cash provided by
financing activities 478,843 937,609 6,041,866
Net increase in cash and cash equivalents 19,099 82,706 52,787
Cash and cash equivalents
beginning of period 33,688 27,004 0
Cash and cash equivalents end of period 52,787 109,710 52,787
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2001 and 2000
and the Cumulative Period
From December 1, 1990 (Inception) Through June 30, 2001
Dec. 1, 1990
(Inception)
Nine Months Nine Months Through
Jun. 30 Jun. 30 Jun. 30
2001 2000 2001
Cash paid during the year for
Interest 0 25,245 175,937
Taxes 0 0 3,250
Non-cash activities
Common stock issued for
Purchase of stock 0 0 281,250
Prepaid expenses 0 0 133,546
PP&E 0 0 130,931
Deposit 0 0 0
License & technology 0 0 2,191,478
Repayment of debt 530,604 0 3,883,463
Service & interest 0 2,482,068 4,949,192
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (the "Company") was incorporated under the laws of
Colorado on February 3, 1986, to analyze and invest in business opportunities
as they may occur.
TechniLink has developed the Cube 2001 series for the monitoring and
controlling of various devices in the petroleum and gas industry.
PrimeLink has developed a product line that uses cutting edge communications to
assist in the monitoring of meters for utility companies and the petroleum
industry. This technology, while eliminating the need for a meter reader, is
more significant in enabling the utility companies to utilize energy
conservation and, in the case of power companies, re-routing of electrical
power to areas where it is needed. The devices are also in use in vending
machines to monitor sales and functions of the vending machine without the
physical inspection usually needed.
In September 1995, the Company acquired 80% of the outstanding stock of
TechniLink, Inc., a California corporation, and 80% of the outstanding stock of
PrimeLink, Inc., a Kansas corporation, in exchange for an aggregate of 200,000
shares of the Company's common stock. The acquisitions were accounted for as
purchases. Both PrimeLink and TechniLink are start-up companies with no
material operating activity and therefore no pro forma statements of operations
were provided for 1995.
The acquisitions of these companies occurred in connection with the signing of
the license agreements discussed in Note 10. The Company issued a total of
700,000 shares of common stock and assumed a loan of $400,000 to acquire the
licenses and the Corporations. The only major asset acquired from PrimeLink
and TechniLink was the license and technology. The aggregate transactions were
valued at $1,750,000, the fair market value of common stock issued, and
recorded in licenses and technology on the balance sheet.
Organization (continued)
On July 22, 1998, the Company acquired the remaining 20% interest in
TechniLink, Inc. for 50,000 shares of the Company's common stock valued at
$59,247.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc., was
formed, which has not, as yet, commenced operations. PrimeLink, Inc. and
TechniLink, Inc. are in the process of winding down. Upon dissolution, their
assets will be distributed to Conectisys Corporation. PrimeLink, Inc. will do
its future business in California as United Telemetry Company.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Basis of presentation and going concern uncertainty
The accompanying consolidated financial statements include the transactions of
Conectisys Corporation, its wholly-owned subsidiary TechniLink, Inc., and its
80% owned subsidiary PrimeLink, Inc. All material intercompany transactions
and balances have been eliminated in the accompanying consolidated financial
statements. Certain prior period amounts in the accompanying consolidated
financial statements have been reclassified to conform to the current year's
presentation.
The Company returned to the development stage in accordance with SFAS No. 7 on
December 1, 1990 and during the fiscal year ended November 30, 1995. The
Company has completed two mergers and is in the process of developing its
technology and product lines.
As of June 30, 2001, the Company had a deficiency in working capital of
approximately $1,500,000, and had incurred continual operating losses since its
return to the development stage ($1.8 million in 1996, $2.3 million in 1997,
$4.2 million in 1998, $1.0 million in 1999 (nine months), $3.5 million in 2000
and 1.5 million for the nine months ended June 30, 2001, which raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans for correcting these deficiencies include the future sales
of their newly licensed products and to raise capital through the issuance of
common stock and from continued officer advances to assist in providing the
Company with the liquidity necessary to retire the outstanding debt and meet
operating expenses (See Notes 14(a), 14(b), and 14(c)). In the longer term,
the Company plans to achieve profitability through the operations of the
subsidiaries. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
the recorded asset amounts or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue in existence.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily 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. Actual results could
differ from those estimates.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires that the Company disclose estimated
fair values for its financial instruments. The following summary presents a
description of the methodologies and assumptions used to determine such
amounts. Fair value estimates are made at a specific point in time and are
based on relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties, matters of
judgment and, therefore, cannot be determined with precision. These estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular instrument. Changes
in assumptions could significantly affect the estimates.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Fair value of financial instruments
Since the fair value is estimated at June 30, 2001, the amounts that will
actually be realized or paid at settlement of the instruments could be
significantly different. The carrying amount of cash and cash equivalents is
assumed to be the fair value because of the liquidity of these instruments.
Accounts payable, accrued compensation, other current liabilities, and notes
payable approximate fair value because of the short maturity of these
instruments. Long-term debt is recorded at face value because the principal
amount is convertible into common stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from
November 30 to September 30.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid
debt instruments with original maturities of three months or less. All funds
on deposit are with one financial institution.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on
property and equipment using the straight-line method over the expected useful
lives of the assets, which are generally five years for vehicles and office
equipment and seven years for furniture and fixtures.
Licensing agreements
The costs of acquiring license rights are capitalized and amortized over the
shorter of the estimated useful life of the license or the term of the license
agreement. The licenses are being amortized over a period of five years.
During the year ended November 30, 1998, the Company acquired additional
license rights in the amount of $421,478 from TechniLink. Although the license
remains viable, the Company currently lacks the resources to develop and market
it. Accordingly, during the ten month period ended September 30, 1999, the
Company accelerated amortization on this asset by writing it down to its net
realizable value of $40,000, incurring a charge of $283,133. The balance
was fully amortized at September 30, 2000.
Technology
Deferred technology costs include capitalized product development and product
improvement costs incurred after achieving technological feasibility and are
amortized over a period of five years. At both September 30, 2000 and 1999,
respectively, no deferred technology costs were recognized.
Impairment of long-lived assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) has
been effective for financial statements for fiscal years beginning after
December 15, 1995. The standard established new guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment,
certain identifiable intangible assets and goodwill, should be recognized and
how impairment losses should be measured.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Impairment of long-lived assets
The Company wrote-off the balance of the carrying value of older licenses and
deferred technology during the year ended November 30, 1998, as a consequence
of persistent competitive pressure. The expense incurred was $632,257.
Accounting for stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS No. 123 also encourages, but does not require, companies to record
compensation cost for stock-based employee compensation. The Company has
chosen to account for stock-based compensation utilizing the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. Also, in accordance with SFAS No. 123, the Company has
provided footnote disclosures with respect to stock-based employee
compensation. The cost of stock-based compensation is measured at the grant
date on the value of the award, and this cost is then recognized as
compensation expense over the service period. The value of the stock-based
award is determined using a pricing model whereby compensation cost is the
excess of the fair market value of the stock as determined by the model at the
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for goods
or services are valued at the cost of the goods or services received or at the
market value of the shares issued, depending on the ability to estimate the
value of the goods or services received.
Income taxes
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, which requires the Company to recognize deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's consolidated financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement carrying amounts and tax basis
of assets using the enacted rates in effect in the years in which the
differences are expected to reverse.
Net loss per common share - diluted
Net loss per common share - diluted is based on the weighted average number of
common and common equivalent shares outstanding for the periods presented.
Common equivalent shares representing the common shares that would be issued on
exercise of convertible securities and outstanding stock options and warrants
reduced by the number of shares which could be purchased from the related
exercise proceeds are not included since their effect would be anti-dilutive.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Recent accounting pronouncements
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," (SFAS No. 130) issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The
adoption of SFAS No. 130 did not have a material effect on the Company'
financial position or its results of operations.
Statement of Financial Accounting Standard No. 131, "Disclosure About Segments
of an Enterprise and Related Information," (SFAS No. 131) issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. SFAS No. 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. Adoption of SFAS No. 131 did
not have an effect on the Company's financial position or its results of
operations; however, additional disclosures may have to be made in the future
relating to the above items.
Statement of Financial Accounting Standard No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," SFAS No. 132) issued by the
FASB is also effective for financial statements with fiscal years beginning
after December 15, 1997. It revises employers' disclosure requirements for
pensions and other postretirement benefits and eliminates certain disclosures
that are no longer as useful as they were when SFAS No. 87, SFAS No. 88, and
SFAS No. 106 were issued. Adoption of SFAS No. 132 did not have an effect on
the Company's financial position or results of operations.
New accounting pronouncements
The Financial Accounting Standards Board has established the following new
pronouncements, none of which have (will) materially affect the Company: SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities
(effective for years beginning after June 15, 2000)," SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise - an amendment of SFAS No.
65 (effective for fiscal quarters beginning after December 15, 1998)," SFAS No.
135, "Rescission of SFAS No. 75 and Technical Corrections (effective for fiscal
years ending after December 15, 1999)," SFAS No. 136, "Transfer of Assets to a
Not-for-Profit Organization or Charitable Trust That Raises Contributions for
Others (generally effective for financial statements issued for fiscal periods
beginning after December 15, 1999)," SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133 - an amendment of SFAS No. 133 (effective June 1999)," SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of SFAS No. 133 (effective for years beginning after June 15,
2000)," SFAS No. 139, "Rescission of SFAS No. 53 and amendments to SFAS No. 63,
89, and 121 (effective for fiscal years beginning after December 15, 2000),"
and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - a replacement of SFAS No. 125 (effective
for certain disclosures for fiscal years ending after December 15, 2000)."
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 2. RELATED PARTY TRANSACTIONS
Until recently, the Company leased office space in Agua Dulce, California from
S.W. Carver Corporation, a company owned by a major shareholder of the Company.
The lease was for a period of twelve months, renewable annually in April at the
option of the lessee. Effective April, 1998, the monthly rent was increased
from $2,000 to $2,500. Around September 1, 2000, the lease was terminated due
to the sale of the building. At that time the Company moved certain property
and equipment to its Valencia locations.
NOTE 3. PREPAID EXPENSES AND DEPOSITS
During the year ended September 30, 2000, the Company issued 462,487 shares of
its common stock as retainers for consulting services ($128,611) and accounting
fees ($4,935). In addition, the Company recognized the unearned portion of an
engineering contract ($25,000) as a prepaid asset, bringing the total prepaid
expense balance at September 30, 2000 to $158,546. Entire prepaid balance shown
was expensed during the nine month period ended June 30, 2001.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2001 consisted of the following:
Office equipment $ 262,320
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 314,291
Accumulated depreciation (251,640)
-----------
Net book value $ 62,651
===========
NOTE 5. LICENSES AND TECHNOLOGY
Licenses and technology at June 30, 2001 consisted of the following:
License $ 421,478
Accumulated amortization (421,478)
-----------
Net bk value $ -
===========
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 6. DUE TO OFFICER
During the ten month period ended September 30, 1999, the Company received cash
advances from its CEO totaling $555,193. At September 30, 1999, $197,500 of
these advances was exchanged for the assumption of a promissory note to S.W.
Carver, due on demand (and in no event later than October 1, 2000) at an annual
interest rate of 10%, and another $287,020 of these advances was exchanged for
equity. Also at September 30, 1999, $62,522 in accrued compensation was
transferred to the advance account, resulting in a balance of $133,195. This
balance was converted into a promissory note due on demand (and in no event
later than October 1, 2000) at an annual interest rate of 10%.
During the first half of the year ended September 30, 2000, the Company's CEO
advanced the Company an additional $68,500 (net of a $5,000 repayment) at an
annual interest rate of 10%. Total interest on the advances and promissory
notes amounted to $21,766 through May 22, 2000, at which time the total
principal plus accrued interest on the aggregate loans ($420,961) was
effectively paid-off through the exercise of 2,056,346 common stock options and
20,000 Preferred Class A stock options. The total exercise price for these
stock options was $509,972. The balance of the proceeds of $89,011 was applied
against accrued officer compensation. During August and September 2000, the
Company's CEO advanced the Company another $75,000, which remained unpaid
through year-end. During the nine months ended June 30, 2001, the officer
advanced the Company an additional $15,000 bringing the total to $90,000 which
has been converted to a note.
Another officer of the Company advanced the Company $60,000 during the six
months ended June 30, 2001 which has been converted to a note.
NOTE 7. NOTES PAYABLE
Long-term debt (as noted below) consisted of a $300,000 advance from Laurus
Master Fund, LTD., which accrues interest at an annual rate of 8% and is
convertible upon maturity into shares of the Company's common stock. Loan fees
for this transaction amounted to $32,775. The conversion feature allows the
note holder, at its option, to exchange the debt (along with accrued interest)
for stock according to the market price in effect on the date of the principal
advance (April 12, 2001), which was $0.136 per share, resulting in a share
premium of 539,216 common shares for principal and another share premium of
10,335 common shares for accrued interest at June 30, 2001, based upon the
closing market price of the Company's common stock on June 30, 2001 of $0.18
per share. Accordingly, the fair value of this derivative instrument at June
30, 2001 included an additional liability pertaining to an unrealized loss of
$98,919 related to the anticipated future issuance of the aforementioned
premium shares.
Notes payable at June 30, 2001 consisted of the following:
Note payable to Devon Investment Advisors,
unsecured, due on demand, interest payable
at an annual rate of 10% $ 241,824
Note payable to Black Dog Ranch LLC,
unsecured, semi-monthly payments of $2,500,
including interest at an annual rate
of 18%, with remaining balance due and
payable on December 1, 2001 123,312
Note Payable to Laurus Master Fund, LTD.
secured by a six month eight percent
convertible debenture and 4,772,860
shares of restricted common stock 267,225
Note Payable to Laurus Master Fund, LTD.
secured by a six month, 8%
convertible debenture and 4,772,860
shares of restricted common stock,
maturing on October 12, 2001
Principal advance $300,000
Accrued interest 5,194
--------
305,194
Unrealized loss - equivalent to
549,551 additional common shares
@ $0.18 98,919 404,113
-------- ---------
Total notes payable 769,249
Less current portion (365,136)
---------
Long-term debt $ 404,113
=========
<page> 117
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 7. NOTES PAYABLE (continued)
The maturity of long-term debt at June 30, 2001 was as follows:
Year ended June 30, 2001: $ 632,361
---------
Total notes payable $ 632,361
=========
NOTE 8. SHAREHOLDERS' EQUITY (DEFICIT)
The Company is authorized to issue 50,000,000 shares of $1.00 par value
preferred stock, no liquidation preference. One million of the preferred
shares are designated as Class A preferred shares which have super voting
power wherein each share receives 100 votes and has anti-dilution rights. One
million of the preferred shares are designated as Class B preferred shares
which have conversion rights wherein each share may be converted into ten
shares of common stock.
In December, 1998, the Company canceled 1,350,000 shares of its common stock
previously issued to a consultant and valued at $814,536, which were contingent
on the establishment of a $5,000,000 line of credit (never achieved).
In December, 1998, the Company issued 750,000 shares of its common stock valued
at $50,000 to a consultant for services rendered.
In January and September, 1999, the Company issued a total of 152,548 shares of
its common stock for consultant services rendered of $45,360.
During the months March, 1999 through September, 1999, the Company issued a
total of 405,800 shares of its common stock valued at $79,537 in a private
placement.
In September, 1999, the Company issued 100,000 shares of its common stock for
consultant fees rendered of $84,644.
In September, 1999, the Company issued 960,321 shares of its common stock to
repay related party debt of $197,500.
In September, 1999, the Company issued a total of 47,481 shares of its common
stock valued at $15,957 as hiring bonuses for two employees.
In September, 1999, the Company issued 260,000 shares of its common stock to
its president as compensation for director fees of $203,493 and also issued him
39,520 of its Class A $1.00 par value preferred stock to partially repay debt.
In September, 1999, the Company issued options to purchase 500,000 shares each
(a total of 1,000,000) of its Class B convertible preferred stock at a price of
$5.00 per share in exchange for debt reduction of $50,000 each (a total of
$100,000) to a note holder and the Company's president.
In September, 1999, the Company issued options to purchase 600,000 shares of
the Company's common stock (500,000 options to its president and 100,000
options to an employee) valued at $150,000.
<page> 118
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
In October, 1999, the Company re-acquired and canceled 17,500 common shares
from the former president of PrimeLink, in return for a $12,000 consulting
agreement.
During the months October, 1999 through March, 2000, the Company issued a total
of 241,200 shares of its common stock valued at $52,919 in a private placement.
In conjunction with this issuance and the March through September, 1999
issuance noted above, certain shareholders received warrants to purchase
506,500 shares of common stock at $2.00 per share through November 1, 2001.
During the period October, 1999 through September, 2000, the Company issued a
total of 2,612,796 shares of its common stock to various consultants for
services rendered and to be rendered (retainer of $128,611) totaling
$1,051,932.
In November, 1999, the Company received cash of $66,927 to cover the balance
due on an old subscription for 300,000 shares of the Company's common stock.
In November, 1999 through September, 2000, the Company issued 240,000 shares of
its common stock to its outside accountant for services rendered and to be
rendered (retainer of $4,935) in the amount of $130,000.
In December, 1999 and February, 2000, the Company issued 879,309 shares of its
common stock to current and former officers for accrued compensation in the
amount of $419,747.
In December, 1999, the Company issued an additional 19,804 shares of its common
stock valued at $7,195 (net of 6,283 canceled shares valued at $10,805) in full
settlement of a vendor dispute.
In February and March, 2000, a consultant exercised 250,000 common stock
options at $125,000 ($0.50 per share)
In March, 2000, the Company issued 20,000 shares of its common stock for
$16,000 in legal services.
In March, 2000, the Company issued 500,672 shares of its common stock in
subscriptions and private placements totaling $195,000.
In March, 2000, the Company issued 135,000 shares of its common stock to an
officer for $89,042.
In March 2000, the Company issued 563,500 common stock options to a consultant
valued at $214,130.
In March, 2000, the Company adjusted the exercise price on 2,600,000 common
stock options previously issued to two officers and an employee, resulting in
an increase in compensation expense of $1,113,610.
In April, 2000 through September, 2000, the Company issued 1,019,800 shares of
its common stock through cash subscriptions totaling $242,450, for which
$15,450 (representing 61,800 shares) had not yet been collected as of September
30, 2000.
During April, 2000 through September, 2000, an additional 242,560 shares of the
Company's common stock were issued in a private placement totaling $68,087. In
conjunction with these and previous issuances, certain shareholders received
warrants to purchase 446,305 shares of the Company's common stock at $2.00 per
share through September 1, 2002.
<page> 119
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 8. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In May, 2000, the Company's CEO exercised 2,056,346 common stock options and
20,000 Class A Preferred stock options in exchange for debt and accrued
compensation aggregating $509,972. $407,735 was transferred from stock options
exercisable to common stock as a result of this transaction.
In June, 2000, a note-holder converted $200,000 principal value of debt into
800,000 shares of the Company's common stock (at $0.25 per share).
In August and September, 2000, three officers and an employee received 539,389
shares of the Company's common stock as payment for $229,693 of accrued
compensation.
In September, 2000, old liabilities of $108,020 were transferred to
shareholders' equity (deficit) in recognition of additional paid-in capital.
In September, 2000, the Company issued 500,000 common stock options to a
consultant valued at $43,900 (representing a floating exercise price that was
15% below the current market price of the Company's common stock).
In October, 2000, the Company received $15,450 for stock subscription
receivable.
In October, 2000, the Company issued 141,777 shares of common stock valued at
$30,907 to the officers for accrued compensation.
In October, 2000, the Company issued 66,414 shares of common stock valued at
$19,200 to a consultant for accrued services rendered.
In November, 2000, the Company issued 50,000 shares of common stock valued at
$20,000 to a consultant for services rendered.
In December, 2000, the Company issued 110,000 shares of common stock valued at
$12,005 to two consultants for services rendered.
In January, 2001, the Company issued 400,000 shares of common stock valued at
$34,000 to a consultant for accrued services rendered.
In January 2001, the Company issued 1,000,000 shares of common stock for $75,000
cash.
In January 2001, the Company issued 300,000 shares of common stock to convert
$75,000 of debt outstanding.
In March 2001, the Company issued 100,000 shares of common stock valued at
$24,633 to a consultant for services rendered.
In April 2001, the Company issued 1,000,000 common stock warrants to a
consultant valued at $130,000, as consideration for providing the Company with
advances under a convertible debenture arrangement (See Note 7 above).
In April 2001, the Company issued 450,000 shares of common stock valued at
52,712 to four new members to the board of directors.
In April 2001, the Company issued 3,356,270 shares of common stock valued at
$371,497 as accrued compensation to officers of the Company for the 1st and 2nd
quarters of the fiscal year 2001.
In April 2001, the Company issued 312,974 shares of common stock valued at
$39,651 for services.
In June 2001, the Company issued 491,419 shares of common stock valued at
$132,683 for services.
NOTE 9. INCOME TAXES
Deferred income taxes consisted of the following at September 30, 2001:
Deferred tax asset, benefit
of net operating loss
carryforward $ 7,500,000
Deferred tax liability -
Valuation allowance (7,500,000)
-----------
Net deferred taxes $ -
===========
The valuation allowance offsets the net deferred tax asset, since it is more
likely than not that it would not be recovered.
<page> 120
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 10. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into seven employment agreements with key Individuals,
the terms of the agreements are as follows:
1) The President and CEO of PrimeLink entered into an agreement dated
September 15, 1995 for a period of three years. This agreement, along with his
royalty agreement, were mutually terminated. The separation agreement, as of
October 31, 1997, called for a settlement of $12,000 to be paid $1,000 monthly
for the following twelve months. As of September 30, 2000, $4,000 remained
unpaid.
2) The President and CEO of TechniLink entered into an agreement dated
September 15, 1995 for a period of three years. He is entitled to receive a
base salary of $90,000 per year and an annual bonus equal to 15% of the net
profits before taxes earned by TechniLink, Inc. He is also granted an option
to purchase up to 250,000 shares of the Company's restricted common stock at a
price equal to 50% of the average market value of the stock on the date of
purchase. In December, 1998, he resigned from the Company.
3) The CEO (now former President) of the Company entered into an agreement
dated October 2, 1995 (which was amended September 1, 1997 and September 1,
1999) for a period of five years, and he is entitled to receive a base salary
of $160,000 per year. The employee shall further receive a bonus, paid at
year-end, equal to 50% of the employee's salary, for continued employment. The
staying bonus will be compensated for with the Company's restricted common
stock. He is also granted an option to purchase up to 2,000,000 shares of the
Company's restricted common stock at a price equal to 50% of the average market
value for the prior 30 trading days before exercise. On March 27, 2000, the
exercise price was adjusted to a flat $0.3864 per share, with an expiration
date of December 2, 2003.
4) The Acting President of the Company entered into an agreement dated
September 11, 2000 for a period of six months through March 11, 2001, and he is
entitled to receive a base salary (consulting fees) of $120,000 per year, of
which 50% shall be paid in cash and 50% shall be paid in restricted common
stock at a rate equal to 50% of the average market closing price for the last 5
trading days of each quarter. He shall be issued 100,000 shares of restricted
common stock as a hiring bonus, at a per share price of $0.28415, equivalent to
50% of the average market closing price for the prior 30 trading days before
the agreement date. He shall further receive performance bonuses (paid in
restricted common stock) upon successful completion of specific milestones
pertaining to the implementation and deployment of the HNET System. The
incentive package could net him up to 650,000 shares of restricted common
stock. He is also granted an option through March 11, 2001 to purchase up to
100,000 shares of the Company's restricted common stock at a price of $0.38 per
share.
<page> 121
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 10. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
5) The Chief Financial Officer of the Company entered into an agreement
dated October 2, 1995 (which was amended September 1, 1997) for a period of
three years, and he is entitled to receive a base salary of $80,000 per year
and an annual bonus of 2% of the Company's pretax income. The employee shall
further receive a bonus, paid at year-end, equal to 50% of the employee's
salary, for continued employment. The staying bonus shall be compensated for
with the Company's restricted common stock. He is also granted an option to
purchase up to 500,000 shares of the Company's restricted common stock at a
price equal to 50% of the average market value at the date of purchase.
Effective February, 1999, he resigned from the Company.
6) The Secretary and Treasurer of the Company entered into an Agreement
dated October 2, 1995 (which was amended September 1, 1997, September 1, 1999,
and June 30, 2000) for a period of five years (extended through April 1, 2005),
and she is entitled to receive a base salary of $80,000 per year. The employee
shall further receive a bonus, paid at year-end, equal to 50% of the employee's
salary, for continued employment. The staying bonus shall be compensated for
with the Company's restricted common stock. She is also granted an option to
purchase up to 500,000 shares of the Company's restricted common stock at a
price equal to 60% of the average market value for the prior 180 trading days
before exercise. On March 27, 2000, the exercise price was adjusted to a flat
$0.38 per share, with an expiration date of December 31, 2004.
7) The Chief Technical Officer of the Company entered into an agreement
dated August 1, 1998 for an initial term of three years, and he is entitled to
receive a base salary of $150,000 per year, with a minimum of $90,000 to be
paid annually in cash and the balance paid (at the option of the Company) in
cash or restricted common stock under rule 144. The employee shall receive a
hire-on bonus of $75,000 worth of the Company's restricted common stock under
rule 144, at one-half market price. The employee shall further receive
performance bonuses (paid in restricted common stock, as above) upon successful
completion of specific milestones pertaining to the implementation and
deployment of certain software (up to $862,500). If substantially all
performance milestones are met, he is also granted an option to purchase up to
500,000 shares of the Company's restricted common stock at a price equal to 60%
of the average market value at the date of purchase. As of September 30, 2000,
none of the aforementioned milestones had been successfully completed.
<page> 122
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
License agreements
The Company has entered into license agreements with the Presidents of both
PrimeLink and TechniLink. The license agreements were entered into on
September 20, 1995, in connection with the acquisition of PrimeLink and
TechniLink (see Note 1 above), and are for a period of five years. As
consideration for these license agreements, the Company issued each licensee
250,000 shares of its restricted common stock and will pay each licensee a
royalty of 5% of net sales of the applicable product. In addition, in the
event of the sale or merger of TechniLink or PrimeLink, a royalty sum of 20% of
the sales price of the license shall be paid to the licensee; the sales price
shall not be less than $1,500,000. The licenses were valued at the fair market
value of the stock issued to obtain the licenses. In 1997, there was a
separation agreement between the President of PrimeLink and the Company,
whereby the President of PrimeLink agreed to forfeit royalty rights and return
all shares of the Company's common stock obtained pursuant to the license
agreement for a $12,000 settlement.
Litigation
There have been three recent legal proceedings in which the Company has been a
party:
The first case, Securities and Exchange Commission (the "Plaintiff") vs. Andrew
S. Pitt, Conectisys Corp., Devon Investments Advisors, Inc., B&M Capital Corp.,
Mike Aaman, and Smith Benton & Hughes, Inc. (Defendants) Civil Case # 96-4164.
The case alleges that a fraudulent scheme was orchestrated and directed by the
defendants to engage in the sale and distribution of unregistered shares of
Conectisys by creating the appearance of an active trading market for the stock
of Conectisys and artificially inflating the price of its shares. In the suit,
the SEC sought permanent injunctions from violating securities laws. The SEC
did not seek any civil penalties from the Company. The courts, having
conducted a trial of this matter without jury and taken it under submission,
found for the plaintiff as follows: against Conectisys on the claim that the
defendant violated section 5(a), 5(c), and 17(a). Conectisys was not found to
have violated section 10(b), 10(b-5), or 15(c). The Company was subsequently
ordered to disgorge profits totaling $175,000. On March 5, 1999, the Company
entered into an Amended Final Judgment of Permanent Injunctive Relief with the
Securities and Exchange Commission ("SEC"). The Company and the SEC agreed on
a settlement in which the Company would dismiss its then pending appeal and
take a permanent injunction that it would not in the future violate sections
5(a), 5(c), 17(a), 10(b), 10(b-5), or 15(c); in return the SEC would not demand
the previously ordered disgorgement of $175,000.
The second case was brought by Clamar Capital Corp. (the "Plaintiff") against
Smith Benton & Hughes; Michael Zaman; Claudia Zaman; Andrew Pitt and Conectisys
Corp. (collectively the "Defendants"). The case was brought before the
District Court of Arapahoe, State of Colorado, Case # 97-CV-1442, Division 3.
The Plaintiff did not specify an amount of damages that it sought from the
Defendants. On March 26, 1999, the District Court of Arapahoe, State of
Colorado, dismissed the civil case against Conectisys Corp. brought by Clamar
Capital Corp.
<page> 123
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Litigation (continued)
The third case was brought by Southern Arizona Graphic Associates, Inc. (the
"Plaintiff") against Conectisys Corporation (the "Defendant"). The case was
brought before the Superior Court of the State of Arizona, County of Pima, Case
# 333852. The claim was for goods, printing services, and funds advanced by
the Plaintiff. On December 8, 1999, the Company's Board of Directors approved
the issuance of 26,087 shares of the Company's common stock valued at $18,000
in full settlement of the defendant's claim. The matter was subsequently
dismissed with prejudice.
The Company, during its normal course of business, may be subjected from time
to time to disputes and to legal proceedings against it. Both counsel and
management do not expect that the ultimate outcome of any current claims will
have a material adverse effect on the Company's financial statements.
NOTE 11. MAJOR CUSTOMERS
The Company, as a development stage enterprise, did not have revenues during
nine months ended June 30, 2001 and the year ended September 30, 2000.
NOTE 12. STOCK OPTIONS
During the fiscal year ended September 30, 1999, the Company issued to a note
holder options to purchase 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share. As consideration, the Company
reduced the debt by $50,000 and received an extension of time to pay-off its
promissory note. The Company also issued to its CEO options to purchase
another 500,000 shares of the Company's Class B preferred stock at an exercise
price of $5.00 per share in exchange for a reduction in debt of $50,000. Total
consideration received on the above issued options, as evidenced by debt
reduction, was $100,000. These options can be exercised through November 1,
2002 and can also be converted into common stock at the rate of 10 common
shares for each Class B preferred share.
The Company's CEO currently owns 140,020 shares of the Company's Class A
preferred stock, of which 20,000 shares were purchased during the year ended
September 30, 2000, and has options to purchase another 9,980 shares for $1.00
per share through December 1, 2001.
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. During the
year ended September 30, 2000, the Company issued 100,000 common stock options
to its acting president at an exercise price of $0.38 per share, exercisable
over a six-month period. This option expired in March 2001. As the exercise
price approximated the market price of the common stock on the date of grant,
no compensation cost was recorded in the financial statements. Had
compensation cost for stock options granted during the year ended September 30,
2000 been determined based on the fair value at the grant dates consistent with
the method of FASB Statement No. 123 (utilizing the Black-Scholes model
assuming a risk-free annual rate of return of 6% and volatility factor of 50%),
the Company's net loss would have increased by $25,000.
<page> 124
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 12. STOCK OPTIONS (continued)
During the ten month period ended September 30, 1999, 500,000 common stock
options were issued to the Company's CEO and another 100,000 common stock
options were issued to an employee. These options were valued at $150,000 in
aggregate. No pro forma information required by SFAS No. 123 is included, as
the disclosure would not be materially different from the amounts and
disclosures already presented. On March 27, 2000, the Company fixed the
exercise prices of 2,600,000 common stock options previously issued at (higher)
floating exercise prices to the Company's CEO, the Company's secretary, and the
employee, resulting in an additional compensation cost of approximately
$1,113,610, increasing the total common stock options exercisable by the same
amount. In May, 2000, the Company's CEO exercised 2,056,346 common stock
options, resulting in the transfer of $407,735 of common stock options
exercisable to common stock. Adding in the value of 1,163,500 common stock
options corresponding to consultant issuances in March, 2000 and September,
2000 in the amount of $279,130 (as noted above) brought the balance of common
stock options exercisable at September 30, 2000 to $1,235,005. The total
balance of stock options exercisable at September 30, 2000 was 1,235,005,
including $100,000 attributable to the Company's Class B preferred stock.
The Company has granted various common stock options and warrants to employees
and consultants. Generally, the options and warrants were granted at
approximately the fair market value of the Company's common stock at the date
of grant and vested immediately, except that when restricted rule 144 common
stock was issued, the options and warrants were granted at an average market
discount of 50% (ranging from 20% to 75%). Compensation expense for options and
warrants issued to employees for services as measured by the (discounted)
market value of the common stock at the date of grant and the exercise price in
accordance with APB Opinion No. 25, with pro forma disclosure of the excess of
market value as required by FASB No. 123. All options and warrants issued to
consultants and other non-employees were recorded at the fair value of the
services rendered and equivalent to market value (as discounted, if applicable)
of the equity instruments received as per FASB No. 123. The market value was
determined by utilizing an averaging convention of between 5 to 30 days of the
closing price of the Company's common shares as traded on the over-the-counter
bulletin board (stock symbol CNES) through the grant date and applying certain
mathematical assumptions as required under the Black-Scholes model. Such
assumptions, pertaining to the risk-free annual rate of return and stock
volatility, were the same as those mentioned above when making fair value
disclosures for the issuance of officer and employee stock options.
The pro forma effect on the net loss for the year ended September 30, 2000 is
indicated below:
As Reported Pro Forma
----------- -----------
Net loss $(3,812,140) $(3,837,140)
Net loss per share -
Basic and diluted $(.21) $(.21)
Total compensation expense recognized during the year ended September 30, 2000
in connection with options and warrants issued to officers and employees and
granted at exercise prices below fair market value was $1,113,610, attributable
to a reduction in exercise prices on 2,600,000 common stock options, as
described below.
In February, 2000, the Company's Board of Directors approved the issuance of a
performance bonus award option of 250,000 shares of common stock to a
consultant under the Company's Non-qualified Stock Option Plan at an exercise
price of $0.50 per share (the approximate market value of the common stock).
These options were all exercised by March, 2000. For services rendered during
the year ended September 30, 2000, the Company issued 563,500 common stock
options to a consultant at an exercise price of $2.00 per share, exercisable
over an approximate three-year period. As a retainer, the Company also issued
another 500,000 common stock options to a consultant at an exercise price set
at 15% below the current market value of the Company's common stock,
exercisable over a twelve-month period. Under the Black-Scholes model
(assuming the same risk-free interest and volatility factors as noted above),
the above stock options were recorded at a value of $214,130 and $65,000,
respectively.
During the ten month period ended September 30, 1999, 500,000 common stock
options were issued to the Company's CEO and another 100,000 common stock
options were issued to an employee. Total compensation expense recognized for
these below-market options was $150,000 in aggregate. No pro forma information
required by SFAS No. 123 is included, as the disclosure would not be materially
different from the amounts and disclosures already presented. On March 27,
2000, the Company fixed the exercise prices of 2,600,000 common stock options
previously issued at (higher) floating exercise prices to the Company's CEO,
the Company's secretary, and the employee, resulting in an additional
compensation cost of approximately $1,113,610, increasing the total common
stock options exercisable by the same amount. In May, 2000, the Company's CEO
exercised 2,056,346 common stock options, resulting in the transfer of $407,735
of common stock options exercisable to common stock. Adding in the value of
1,163,500 common stock options corresponding to consultant issuances in March,
2000 and September, 2000 in the amount of $279,130 (as noted above) brought the
balance of common stock options exercisable at September 30, 2000 to
$1,135,005. The total balance of stock options exercisable at September 30,
2000 was 1,235,005, including $100,000 attributable to the Company's Class B
preferred stock.
In April, 2001, the Company issued 1,000,000 common stock warrants to a
consultant as consideration for advancing the Company funds through a
convertible debenture (in effect, an equity line-of-credit), convertible into
common stock at an exercise price of approximately $0.196 (120% above the
market price of the Company's common stock at the date of issuance) and
exercisable over a four-year time frame. Under the Black-Scholes model, these
warrants were valued at $130,000, bringing the total balance of stock options
and warrants exercisable at June 30, 2001 to $1,365,005.
The Company has granted various common stock options and warrants to employees
and consultants. Generally, the options and warrants were granted at
approximately the fair market value of the Company's common stock at the date
of grant and vested immediately, except that when restricted rule 144 common
stock was issued, the options and warrants were granted at an average market
discount of 50% (ranging from 20% to 75%). Compensation expense for options and
warrants issued to employees for services as measured by the (discounted)
market value of the common stock at the date of grant and the exercise price in
accordance with APB Opinion No. 25, with pro forma disclosure of the excess of
market value as required by FASB No.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 12. STOCK OPTIONS (continued)
123. All options and warrants issued to consultants and other non-employees
were recorded at the fair value of the services rendered and equivalent to
market value (as discounted, if applicable) of the equity instruments received
as per FASB No. 123. The market value was determined by utilizing an averaging
convention of between 5 to 30 days of the closing price of the Company's common
shares as traded on the over-the-counter bulletin board (stock symbol CNES)
through the grant date and applying certain mathematical assumptions as
required under the Black-Scholes model. Such assumptions, pertaining to the
risk-free annual rate of return and stock volatility, were the same as those
mentioned above when making fair value disclosures for the issuance of officer
and employee stock options.
The common stock option activity during the fiscal year ended September 30,
2000 and nine-month period ended June 30, 2001 was as follows:
Common Stock
Options Weighted
and Average
Warrants Price
---------- --------
Balance outstanding, September 30, 1999 3,600,000 $ .64
Granted 1,913,500 .86
Exercised (2,306,346) .27
---------- --------
Balance outstanding, September 30, 2000 3,207,154 $ .69(1)
Granted 1,000,000 .20
Expired (100,000) .38
---------- --------
Balance outstanding, June 30, 2001 4,107,154 $ .58(1)
========== ========
(1) Due to floating strike prices, weighted average price upon issuance is
$0.94, upon exercise is $0.69.
<page> 125
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 12. STOCK OPTIONS (continued)
The following table summarizes information about common stock options at June
30, 2001:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
------------- --------- ------- ------- --------- -------
$ .50 - $ .50 500,000 5 $ .50 500,000 $ .50#
$2.00 - $2.00 563,500 23 $ 2.00 563,500 $ 2.00
$ .39 - $ .39 1,443,654 32 $ .39 1,443,654 $ .39*
$ .38 - $ .38 100,000 45 $ .38 100,000 $ .38*
$ .20 - $ .20 1,000,000 46 $ .20 1,000,000 $ .20
$ .38 - $ .38 500,000 57 $ .38 500,000 $ .38*
$ .20 - $2.00 4,107,154 34 $ .58 4,107,154 $ .58
============= ========= == ======= ========= =======
# Currently a floating exercise price
* Formerly a floating exercise price
The above table excludes 952,805 warrants exercisable at $2.00 per
share, which have nominal value and which were issued to certain stock
subscription investors. Of these warrants, 506,500 expire November 1,
2001 and 446,305 expire September 1, 2002. The table also excludes a
contingent issuance to the Company's Chief Technical Officer of
2,000,000 common stock options exercisable at $0.50 per share and
expiring December 31, 2002. These common stock options will not vest
until certain milestones have been attained.
NOTE 13. FORM S-8 FILING
In December 1999, the Company filed a Form S-8 registration statement for the
Conectisys Corporation Non-Qualified Stock and Stock Bonus Plan (the "Plan").
The purpose of the Plan is to compensate independent consultants of the Company
through the granting of non-qualified stock options (as described in Sections
83 and 41 of the Internal Revenue Code). Shares of stock covered by stock
options and stock bonuses consist of 1,000,000 shares of the common stock of
the Company. The entire registration has been filled. 750,000 shares were
issued to consultants for services rendered in the amount of $323,725 and
250,000 shares were issued at $0.50 per share pursuant to a Performance Award
Option to a consultant. The entire 250,000 share option was exercised during
the quarter ended December 30, 2000, resulting in a $125,000 cash inflow to the
Company.
<page> 126
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
NOTE 14. SUBSEQUENT EVENTS
On August 8, 2001 the Company filed an Amended Form SB-2/A Registration
Statement with the Securities & Exchange Commission to register up to
4,411,765 common shares owned by an existing shareholder will be registered
for sale.
The Company has filed corporate certificates of dissolution with the California
Secretary of State for its 80%-owned subsidiary PrimeLink, Inc. and its wholly-
owned subsidiary TechniLink, Inc. These will become effective when valid tax
clearance certificates have been issued by the Franchise Tax Board. Upon
dissolution, the assets of the dissolved subsidiaries will be distributed to
the parent corporation.