<pre>
<table>
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 2001
Dec. 31 Dec. 31 Sep. 30
2001 2000 2001
Unaudited Unaudited Audited
<c> <c> <c>
Assets
Current assets
Cash and Cash Equivalents 9,673 6,651 6,111
Prepaid expenses and deposits 0 158,546 48,800
Total current assets 9,673 165,197 54,911
Property and equipment, net 65,311 85,046 71,961
License and technology, net 0 0 0
Debt issuance cost, net 0 0 0
Total assets 74,984 250,243 126,872
<page> 1
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 2001
Dec. 31 Dec. 31 Sep. 30
2001 2000 2001
Unaudited Unaudited Audited
Liabilities and shareholders' equity
Current liabilities
Accounts payable 174,723 143,922 100,758
Accrued compensation 705,458 540,020 541,179
Due to officers 49,130 150,000 101,209
Accrued interest payable 178,001 178,539 171,955
Other current liabilities 8,982 0 5,239
Notes payable 600,058 308,437 384,370
Total current liabilities 1,716,352 1,320,918 1,304,710
Long-term debt, net of current 317,194 75,000 311,194
Total liabilities 2,033,546 1,395,918 1,615,904
Shareholders' equity
Preferred stock - Class A 1,000,000 shares authorized
$1.00 par value, 200,020 issued and outstanding 200,020 140,020 140,020
Common stock - 250,000,000 shares authorized,
no par value, authorized, 33,633,234, 3,207,154 and
32,133,234 issued and outstanding, respectively 17,655,569 16,269,533 17,412,119
Additional paid in capital
Convertible preferred stock - Class B 1,000,000 shares
authorized, $1.00 par value, 100,000 0 100,000
no share issued and outstanding
Common stock, no par value
5,307,154, 23,996,938, 5,607,154 stock
options exercisable 1,257,983 999,775 1,275,233
Beneficial conversion option 155,027 0 155,027
Accumulated gain (deficit) during development stage (21,278,361) (18,555,003) (20,571,431)
Total shareholders' equity (1,958,562) (1,145,675) (1,489,032)
Total liabilities and shareholders' equity 74,984 250,243 126,872
<page> 2
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2001 and 2000
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2001
Dec. 1, 1990
(Inception)
Through
Dec. 31 Dec. 31 Dec. 31
2001 2000 2001
Unaudited Unaudited Unaudited
Revenues 0 0 517,460
Cost of goods sold 0 0 567,721
Gross profit 0 0 (50,261)
General and administrative 680,276 365,659 16,040,749
Bad debt write-offs 0 1,680,522
Loss from operations (680,276) (365,659) (17,771,532)
Non-operating income (expense) (26,654) 0 (1,124,022)
Interest Expense 0 (7,710) (1,305,065)
Net loss (706,930) (373,369) (20,200,619)
Weighted average shares outstanding 33,170,191 23,963,478
Net loss per share (0.02) (0.02)
</table>
<page> 3
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 December 31, 2001
<table>
Deficit
Accumulated
Preferred Stock Common Stock Additional Stock During the
Class A No Par Paid-in Subscription Development
Shares Value Shares Value Capital Receivable Stage Total
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Balance, December 1, 1990 (re-entry
development stage) 10,609 1,042,140 (1,042,140) 0
Shares issued in exchange for
Cash, May 31, 1993 1,000 1,000 1,000
Capital contribution, May 31, 1993 2,000 515 515
Services, March 26, 1993 2,000 500 500
Services, March 26, 1993 1,200 600 600
Net loss for the year ended
November 30, 1993 (5,459) (5,459)
Balance, November 30, 1993 16,809 1,044,755 (1,047,599) (2,844)
Shares issued in exchange for
Services, May 1, 1994 2,400 3,000 3,000
Cash, September 1, 1994 17,771 23,655 23,655
Services, September 15, 1994 8,700 11,614 11,614
Cash, September 26, 1994 3,000 15,000 15,000
Cash, October 6, 1994 16,345 A 16,345 16,345
Cash, September and October, 1994 1,320 33,000 33,000
Net loss for the year (32,544) (32,544)
Balance, November 30, 1994 16,345 16,345 50,000 1,131,024 (1,080,143) 67,226
<page> 4
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 December 31, 2001
Deficit
Accumulated
Preferred Stock Common Stock Additional Stock During the
Class A No Par Paid-in Subscription Development
Shares Value Shares Value Capital Receivable Stage Total
Share issued in exchange for
Cash, February 13, 1995 1,160 232,000 232,000
Debt repayment, February 13, 1995 2,040 408,000 408,000
Debt repayment, February 20, 1995 4,778 477,810 477,810
Acquisition of assets, CIPI February 1995 28,750 1,950,000 1,950,000
Acquisition of assets, April 5, 1995 15,000 0
Cash and services, April and May, 1995 16,000 800,000 800,000
Cash, June 1, 1995 500 30,000 30,000
Acquisition of assets and services, September 26 4,000 200,000 200,000
Cash, September 28, 1995 41 3,000 3,000
Acquisition of assets, September 1995 35,000 1,750,000 1,750,000
Return of assets, CIPI September 1995 (27,700) (1,950,000) (1,950,000)
Ner loss for the year (2,293,867)(2,293,867)
Balance, November 30, 1995 16,345 16,345 129,569 5,031,834 (3,374,010) 1,674,169
Shares issued in exchange for
Cash, February, 1996 1,389 125,000 125,000
Debt repayment, February, 1996 10,000 639,779 639,779
Services, February, 1996 3,160 205,892 205,892
Cash, March, 1996 179 25,000 25,000
Shares returned and canceled, March, 1996 (15,000) 0
Services, April 1996 13 2,069 2,069
Services, September, 1996 4,155 A 4,155 586 36,317 40,472
Services, October, 1996 6,540 327,000 327,000
Debt repayment, November, 1996 2,350 64,330 64,330
Ner loss for the year (2,238,933)(2,238,933)
Balance, November 30, 1996 20,500 20,500 138,786 6,457,221 (5,612,943) 864,778
<page> 5
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 December 31, 2001
Deficit
Accumulated
Preferred Stock Common Stock Additional Stock During the
Class A No Par Paid-in Subscription Development
Shares Value Shares Value Capital Receivable Stage Total
Shares issued in exchange for
Services, March, 1997 228 6,879 6,879
Debt, April, 1997 800 13,120 13,120
Services, July, 1997 1,500 16,200 16,200
Cash, July, 1997 15,000 300,000 300,000
Services, August 1997 5,958 56,000 56,000
Adjustment for partial shares 113
Services, October, 1997 1,469,666 587,865 587,865
Debt, October, 1997 1,540,267 620,507 620,507
Note Receivable 1,500,000 281,250 281,250
Services, November, 1997 4,950 10,538 10,538
Net loss for the year (2,739,268)(2,739,268)
Balance, November 30, 1997 20,500 20,500 4,677,268 8,349,580 (8,352,211) 17,869
Shares issued in exchange for
Services, December, 1997
Through Nov. 1998 2,551,610 2,338,264 2,338,264
Cash, January, 1998
Through November, 1998 4,833,334 1,139,218 1,139,218
Debt repayment, April, 1998
Through November, 1998 250,000 129,960 129,960
Acquisition of assets, July, 1998 300,000 421,478 421,478
Acquisition of 20% minority
Interest in subsidiary 50,000 59,247 59,247
Services, November, 1998 60,000 A 60,000 60,000
Net loss for the year (4,928,682)(4,928,682)
Balance, November 30, 1998 80,500 80,500 12,662,212 12,437,747 (13,280,893) (762,646)
<page> 6
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 December 31, 2001
Deficit
Accumulated
Preferred Stock Common Stock Additional Stock During the
Class A No Par Paid-in Subscription Development
Shares Value Shares Value Capital Receivable Stage Total
Shares issued in exchange for
Returned and canceled, December, 1998 (1,350,000) (814,536) (814,536)
Services, December, 1998
Through September 1999 560,029 349,454 150,000 499,454
Cash, December, 1998
Through September 1999 1,155,800 129,537 129,537
Debt repayment, September, 39,520 A 39,520 960,321 197,500 100,000 337,020
Net loss for the year (1,323,831)(1,323,831)
Balance, September 1999 120,020 120,02013,988,362 12,299,702 250,000 0 (14,604,724)(1,935,002)
Shares issued in exchange for
Reacquired and canceled, October, 1999 (17,500) (12,000) (12,000)
Services, October, 1999
Through September 2000 2,405,469 990,949 990,949
Cash, October 1999
Through September 2000 2,295,482 839,425 (15,450) 823,975
Retainers, debt and accrued liabilities,
October 1999 through September, 2000 2,799,579 1,171,638 1,171,638
Issuance of stock option, March, 2000 214,130 214,130
Reduction of exercise prices on 2,600,000
officer and employee common stock options,
March, 2000 1,113,610 1,113,610
Exercise of 2,056,346 common and 20,000
preferred officer stock 20,000 20,000 2,056,346 897,707 (407,735) 509,972
Issuance of 500,000 consultant stock option
September, 2000 65,000 65,000
Net loss for the year (3,812,140)(3,812,140)
Balance, September 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) (869,868)
<page> 7
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 December 31, 2001
Deficit
Accumulated
Preferred Stock Common Stock Additional Stock During the
Class A No Par Paid-in Subscription Development
Shares Value Shares Value Capital Receivable Stage Total
Shares issued in exchange for
Services, October, 2000
Through September 2001 3,471,007 572,790 572,790
Cash, October 2000
Through September 2001 1,045,500 78,787 78,787
Retainers, debt and accrued
liabilities,
October 2000 through September, 2001 3,688,989 487,121 487,121
Collection of stock subscription 15,450 15,450
Exercise of 400,000 common stock
options, January, 2001 400,000 86,000 (52,000) 34,000
Issuance of 1.000,000 consultant
stock option
in conjunction with $300,000 principal
value of 8% convertible debt, April, 2001 77,228 77,228
Issuance of 2,000,000 consultant stock option
September, 2001 115,000 115,000
Beneficial conversion option
pertaining to $300,000
convertible debt and accrued
interest, April, 2001
through September 2001 155,027 155,027
Net loss for the year (2,154,567)(2,154,567)
Balance, September 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 0 (20,571,431)(1,489,032)
Shares issued in exchange for
Retainers, debt and accrued
liabilities,
October 2001 through
December 2002 60,000 A 60,000 1,200,000 187,200 247,200
Exercise of 300,000 common stock
options, December, 2001 300,000 56,250 (17,250) 39,000
Net loss for the period (706,930) (706,930)
Balance, December 2001 200,020 200,020 33,633,234 17,655,569 1,515,310 0 (21,278,361)(1,909,762)
<page> 8
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENT OF CASHFLOWS
For the Three Months Ended December 31, 2001 and 2000
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2001
<table>
Dec. 1, 1990
(Inception)
Through
Dec. 31 Dec. 31 Dec. 31
2001 2000 2001
Unaudited Unaudited Unaudited
<c> <c> <c>
Operating activities
Net income (loss) (706,930) (373,369) (20,239,619)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Provision for bad debt 1,422,401
Depreciation and amortion 6,650 8,258 3,214,206
Stock issued for servic 250,200 82,112 7,493,057
Stock issued for intere 0 0 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Interest receivable 0 0 (95,700)
Deposits 0 0 133,546
Increase (decrease) in liabilities
Accounts payable 73,965 46,095 385,962
Accrued interest payable 12,046 0 12,046
Accrued compensation 164,279 101,373 1,803,842
Due to officers 0 0 736,085
Other current liabilities 3,743 25,544 399,508
Net cash provided by (used by) operating activities (199,047) (109,987) (4,290,776)
<page> 9
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENT OF CASHFLOWS
For the Three Months Ended December 31, 2001 and 2000
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2001
Dec. 1, 1990
(Inception)
Through
Dec. 31 Dec. 31 Dec. 31
2001 2000 2001
Unaudited Unaudited Unaudited
Investing activities
Collection of notes receivable 0 0 0
Increase in notes receivable 0 0 (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment 0 0 (191,843)
Net cash from (used by) investing activities 0 0 (1,608,400)
Financing activities
Common stock issued for cash 0 15,450 3,032,172
Stock warrants 0 0 77,228
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Debt issuance cost 0 0 (32,775)
Proceeds from debts
Related party 0 75,000 206,544
Other 254,688 0 2,493,778
Payments on debt
Related party (52,079) 0 (105,251)
Other 0 (7,500) (96,407)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 515
Net cash from (used by) financing activities 202,609 82,950 5,908,849
Net increase (decrease) in cash 3,562 (27,037) 9,673
Cash beginning of period 6,111 33,688 0
Cash end of period 9,673 6,651 9,673
<page> 10
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENT OF CASHFLOWS
For the Three Months Ended December 31, 2001 and 2000
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2001
Dec. 1, 1990
(Inception)
Through
Dec. 31 Dec. 31 Dec. 31
2001 2000 2001
Unaudited Unaudited Unaudited
Cash paid during the year for
Interest 0 0 209,801
Taxes 0 0 4,050
Non-cash activities
Common stock issued for
Purchase of stock 0 0 281,250
Prepaids 0 0 182,346
PP&E 0 0 130,931
Deposit 0 0 0
License & technology 0 0 2,191,478
Minority interest 0 0 59,247
Repayment of debt 39,000 0 3,864,180
Service & interest 0 0 4,949,192
Preferred Stock issued for
Services 0 0 60,000
Repayment of debt 60,000 0 119,250
Preferred Stock Options for
Repayment of Debt 0 0 100,000
<page> 11
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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.
Basis of presentation and going concern uncertainty
The accompanying consolidated financial statements include the accounts and
transactions of Conectisys Corporation, its wholly-owned subsidiaries
TechniLink, Inc. and United Telemetry Company, 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 balances 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 December 31, 2001, the Company had a deficiency in working capital of
approximately $1,700,000, and had incurred continual net losses since its
return to the development stage $2.2 million in 1996, $2.7 million in 1997,
$4.9 million in 1998, $1.3 million in 1999 (ten months), $3.6 million in
2000, $2.2 million in 2001, and 0.7 million for the three months ended
December 31, 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 the Company's newly licensed products and the raising of capital
through the issuance of common stock and from continued officer advances,
which will help provide the Company with the liquidity necessary to retire
its outstanding debt and meet operating expenses. The Company has recently
received a commitment of up to $15,000,000 from an investor group through
the establishment of an equity line of credit (see Note 14(a)). The equity
line will be implemented once an SB-2 Registration Statement for shares to
be resold by the investor group has been declared effective by the SEC.
<page> 12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
Basis of presentation and going concern uncertainty (continued)
In the longer term, the Company plans to achieve profitability through the
operations of its 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.
Since the fair value is estimated at December 31, 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, due to officer, other
current liabilities, and notes payable approximate fair value because of
the short maturity of these instruments.
<page> 13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001
Fair value of financial instruments (continued)
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.
Research and development costs
The Company has been engaged in researching, engineering, and developing
its HNet technologies since August 1995, and has recently begun deployment
of a pilot project, which did not generate any revenue during the past
fiscal year. Although still a development stage company, the Company plans
to engage large-scale cost reduction runs for the production and subsequent
sale of the HNet System in 2002.
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.
<page> 14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
Licensing agreements (continued)
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 December 31,
2001, 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. 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."
<page> 15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001
Accounting for stock-based compensation (continued)
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 files a consolidated income tax return. 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. The Company has recognized a
valuation allowance covering 100% of the net deferred tax assets (primarily
tax benefits from net operating loss carryforwards), because it is more
likely than not that the tax benefits attributable to the deferred tax
assets will not be realized in the future.
<page> 16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
Net loss per common share - basic and 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.
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's 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.
<page> 17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
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. 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 fiscal 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)," 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)," SFAS No.
141, "Business Combinations," which eliminates the pooling-of-interests
method for business combinations initiated after June 30, 2001, SFAS No.
142, "Goodwill and Other Intangible Assets" (effective for fiscal years
beginning after March 15, 2001), which enhances disclosure for these assets
subsequent to their acquisition, SFAS No. 143, "Accounting for Asset
Retirement Obligations," which is effective for financial statements issued
for fiscal years beginning after June 15, 2002, and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (effective
for financial statements issued for fiscal years beginning after December
15, 2001, and interim periods within those fiscal years), which supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" and provides guidance for estimating
the recoverability of the carrying amount of these assets through a
probability-weighted cash flow approach.
<page> 18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 2. RELATED PARTY TRANSACTIONS
The Company previously 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 one year,
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 recorded 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. All
these prepaid assets were expensed during the year ended September 30,
2001. Another 386,584 shares of common stock (valued at $43,800) were
issued to a consultant as a retainer at September 30, 2001, for cash
payments that were subsequently made by the consultant to other vendors in
October 2001. An attorney was paid a retainer in September 2001 for
services not yet rendered, bringing the total prepaid expense balance at
September 30, 2001 to $48,800.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 consisted of the following:
Office equipment $ 273,054
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 325,025
Accumulated depreciation (259,714)
-----------
Net book value $ 65,311
===========
<page> 19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 5. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at December 31, 2001 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
===========
NOTE 6. DEBT ISSUANCE COSTS
In April 2001, the Company received proceeds of $300,000 from an investor
in return for a six-month 8% convertible note and 1,000,000 common stock
warrants, exercisable at $0.192 per share over a four-year period. Debt
issuance costs on this transaction amounted to $32,775, and consisted of
$24,000 in finder's fees, $8,000 in legal fees, a $750 escrow agent fee,
and a $25 bank wire fee. These debt issuance costs were fully amortized as
interest expense at September 30,2001.
NOTE 7. DUE TO OFFICERS
At September 30, 2000, the Company's CEO had made cumulative advances to
the Company of $75,000. On October 1, 2000, these advances were rolled
into a revolving promissory note, due on demand, at an annual interest rate
of 18%. During the year ended September 30, 2001, additional advances were
made in the amount of $20,000 and note repayments totaled $50,000. Accrued
interest was determined to be $11,880, bringing the loan balance at
September 30, 2001 to $56,880. A new promissory note agreement for this
amount was drawn up at the close of business on September 30, 2001,
expiring September 1, 2002. Interest expense (at 10%) on advances made to
the Company by the CEO for the year ended September 30, 2000 amounted to
$21,766, including $10,583 associated with the assumption of a promissory
note due S.W. Carver, which was paid-off in May 2000. During the three
months ended December 31, 2001, the Company issued 60,000 shares of
preferred A stock for a reduction of $60,000 on the note. An additional
$1,259 of interest was accrued during this period bringing the balance to
$15,140. The Company's Secretary/Treasurer advanced the Company
approximately $61,945 during the year ended September 30, 2001, under a
separate revolving promissory note agreement effective October 1, 2000.
The note is a demand note, which accrues interest at an annual rate of 18%.
Total repayments of the note amounted to $40,681. Accrued interest was
$4,610 during the year ended September 30, 2001, bringing the loan balance
at year-end to $25,874.
<page> 20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 7. DUE TO OFFICERS
A new promissory note agreement for this amount was drawn up at the close
of business on September 30, 2001, expiring September 1, 2002. The
Secretary/Treasurer also borrowed on a personal credit card for the
Company's behalf in the amount of $18,455, bringing the total obligation
due the Secretary/Treasurer at September 30, 2001 to $44,329. During the
three months ended December 31, 2001, the Company paid back $12,000 on this
note and accrued interest of $1,661 bringing the balance to $33,990. The
total amount due both officers at December 31, 2001 was $49,130.
NOTE 8. NOTES PAYABLE
Notes payable at December 31, 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, due on demand, including interest
at an annual rate of 18%, expiring
September 1, 2002 268,234
Note payable to Salvatore Amato, secured
by 300,000 share of restricted common stock,
payable March 1, 2002, interest payable
at an annual rate of 18% 25,000
Note payable to Salvatore Amato, secured
by 666,667 share of restricted common stock,
payable March 1, 2002, interest payable
at an annual rate of 18% 40,000
Note payable to Edward Sloan, secured
by 416,667 share of restricted common stock,
payable March 1, 2002, interest payable
at an annual rate of 18% 25,000
<page> 21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 8. NOTES PAYABLE
Note payable to Laurus Master Fund, Ltd.,
secured by 4,773,208 shares of common stock
beneficially owned by officers, convertible
into approximately 3,041,363 shares of common
stock at the current market price ($0.1233
at December 31, 2001), with interest payable
at an annual rate of 8%, initially due
October 12, 2001, extended to January 15, 2001 $300,000
Accrued interest on note payable to Laurus
Fund, Ltd., secured by 4,773,208 shares of
common stock beneficially owned by officers,
convertible into approximately 113,483 shares
of common stock at the current market price
($0.1233 at December 31, 2001) 17,194 317,194
-------- --------
Total notes payable 917,252
Current portion (600,058)
--------
Long-term portion $ 317,194
=========
The maturity of long-term debt at December 31, 2001 was as follows:
Year ended September 30,: 2002 $ 600,058
Thereafter 317,194
---------
Total notes payable $ 917,252
=========
<page> 22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 8. NOTES PAYABLE (continued)
On April 12, 2001, the Company received $300,000 in proceeds from an
investor and issued a $300,000 principal value 8% convertible note due on
October 12, 2001, along with 1,000,000 common stock warrants, exercisable
at $0.192 per share over a four-year period. $77,228 of the proceeds was
allocated to the cost of the warrants, with the remaining $222,772
allocated to the cost of the debt instrument, based on the relative fair
market values of the note and the warrants at the date of issuance (in
accordance with Accounting Principles Board Opinion No. 14). A
convertible note discount of $77,228 was also recognized, which was
effectively fully amortized at December 31, 2001 as interest expense.
The note is convertible (at the option of the holder) into common stock at
the lesser of 80% of the average of the 3-lowest closing bid prices during
the 30 trading days prior to the closing date (April 12, 2001) or 80% of
the average of the 3-lowest closing bid prices during the 30 trading days
prior to the conversion date (assumed to be December 31, 2001). At April
12, 2001, the note was convertible into approximately 2,181,500 common
shares at an exercise price of approximately $0.1021 per share, and at
December 31, 2001, the note was convertible into approximately 3,041,363
common shares at an exercise price of approximately $0.0732 per share. In
either instance, the fair value of the debt instrument (due to the 80%
pricing advantage) was $375,000 (a 25% premium on the principal value),
resulting in a further convertible debt discount of $152,228, representing
the difference between the note's fair value of $375,000 and the allocated
proceeds at issuance of $222,772. This discount was also fully amortized
at December 31, 2001.
A corresponding $152,228 credit was also made to additional paid-in capital
for the conversion benefit option, i.e., the intrinsic value of the matured
debt instrument. Interest accrued at 8% on the $300,000 note principal
through December 31, 2001 was $11,194; for presentation purposes, this was
added to the principal value of the note at the year-end balance sheet
date. The holder can also convert the accrued interest into common stock
at a 25% premium ($2,799), bringing the total conversion benefit option to
$155,027. Total amortization of interest on the discounted convertible
note during the year ended September 30, 2001 (including $32,775 in debt
issuance costs associated with the transaction) amounted to $265,030.
<page> 23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 8. NOTES PAYABLE (continued)
The maturity date on the $300,000 principal value 8% convertible note,
initially October 12, 2001, has been extended to December 1, 2001. Because
of the inherent conversion benefit feature, the aggregate note with accrued
interest, totaling $317,194 at December 31, 2001, has been classified as a
long-term liability.
NOTE 9. 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 October 2000 through April 2001, the Company issued 250,000 common
shares to two consultants for services valued at $67,500.
In October 2000 and April 2001, the Company issued 229,388 restricted
common shares to a consultant for prior year's services of $19,200 and
current year's services of $22,080.
During the months of October 2000, April 2001, and July 2001, officers of
the Company were issued a total of 3,764,249 restricted common shares for
accrued compensation of $300,291 and current year's compensation of
$160,927.
In November 2000, the Company issued 50,000 restricted common shares valued
at $20,000 to its outside accountant for services rendered.
In December 2000, the Company issued 10,000 shares of common stock to a
consultant for prior year's accrued services of $4,330.
<page> 24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001
NOTE 9. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In January 2001, a consultant exercised 400,000 common stock options at
$0.085 each; the $34,000 in exercise proceeds were applied against an
outstanding note payable due the consultant. In connection with this
transaction, $52,000 of additional paid-in capital (recorded as stock
options exercisable) was reclassified to common stock.
In January 2001, an investor purchased 1,000,000 shares of the Company's
restricted common stock for $75,000.
In January 2001, a note holder converted $75,000 principal value of debt
for 300,000 restricted shares of the Company's common stock.
In March 2001, 45,500 shares of the Company's common stock were issued to
investors in a private placement for $3,787 in cash. The shareholders also
received 45,500 common stock warrants, exercisable through March 3, 2003 at
$2.00 per share.
In April 2001, the Company issued 1,000,000 common stock warrants, along
with $300,000 principal value 8% convertible debt. Of the $300,000 in
proceeds, $77,228 was allocated to the cost of the warrants, which are
exercisable at $0.192 per share over a four-year period. The balance of
the proceeds ($222,772) was allocated to the cost of the debt instrument.
In April 2001, the Company recognized the conversion benefit option on the
$300,000 principal value 8% convertible debt noted above. The conversion
benefit option was recorded at its intrinsic value of $152,228,
representing the difference between the fair market value of the debt
instrument ($375,000) and the recorded initial cost ($222,772). At the
date of issuance, the conversion benefit option was based on the conversion
of the debt into 2,181,500 common shares.
In April 2001, the Company issued 50,000 restricted shares each (a total of
150,000 shares) as bonuses to a director and two consultants, valued at
$16,982.
In April 2001, the Company issued 50,000 restricted shares of the Company's
common stock to a consultant for services valued at $5,846.
In April 2001, the Company issued in aggregate 400,000 restricted shares of
the Company's common stock (100,000 shares each) to four members of its
advisory board for consulting services rendered totaling $46,772.
<page> 25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 9. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In June 2001 through September 2001, the Company issued 1,177,012 common
shares to a consultant for services totaling $232,683.
In September 2001, the Company issued the above consultant another 779,347
shares of the Company's common stock valued at $88,300, of which $44,500
pertained to vendor payables advanced by the consultant, with the balance
of $43,800 being a retainer. The consultant was also issued 2,000,000
common stock options, exercisable at $0.13 each over four years and valued
at $115,000.
In September 2001, the Company recognized an additional conversion benefit
option of $2,799, corresponding to a 25% premium on $11,194 in accrued
interest on $300,000 principal value 8% convertible debt.
In October 2001, the Company issued 1,200,000 shares of common stock valued
at $187,200 to a consultant.
In December 2001, the Company issued 60,000 shares of preferred A stock to
the President of the Company for a $60,000 debt reduction.
In December 2001, the above-mentioned consultant exercised 300,000 shares
of common stock in exchange for reduction in debt of $39,000.
NOTE 10. INCOME TAXES
Deferred income taxes consisted of the following:
Deferred tax asset, benefit
of net operating loss carryforward $ 6,000,000
Valuation allowance (6,000,000)
-----------
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.
The Company has approximately $15,100,000 in respective federal and
California net operating loss carryforwards. The federal net operating
loss carryforwards expire as follows: $2,700,000 in the year 2012,
$5,300,000 in 2018, $1,200,000 in 2019, $3,500,000 in 2020, and $2,400,000
in 2021. The California net operating loss carryforwards expire as
follows: $2,700,000 in the year 2002, $5,300,000 in 2003, $1,200,000 in
2004, $3,500,000 in 2005, and $2,400,000 in 2006.
<page> 26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 11. COMMITMENTS AND CONTINGENCIES
Litigation
There has been one recent legal proceeding in which the Company has been a
party:
The case was brought by Southern Arizona Graphic Associates, Inc. (the
"Plaintiff") against Conectisys Corporation (the "Defendant"), 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 subject 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 12. STOCK OPTIONS AND WARANTS
The following table summarizes information about common stock options at
December 31, 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
- ------------- --------- ------- ------- --------- -------
$2.00 - $2.00 563,500 14 $ 2.00 563,500 $ 2.00
$ .39 - $ .39 1,443,654 23 $ .39 1,443,654 $ .39
$ .38 - $ .38 100,000 36 $ .38 100,000 $ .38
$ .19 - $ .19 1,000,000 39 $ .19 1,000,000 $ .19
$ .13 - $ .13 1,700,000 44 $ .13 1,700,000 $ .13
$ .38 - $ .38 500,000 48 $ .38 500,000 $ .38
$ .13 - $2.00 5,307,154 34 $ .44 5,307,154 $ .44
============= ========= == ======= ========= =======
The above tables exclude 995,055 warrants exercisable at $2.00 per
share, which have nominal value and which were issued to certain stock
subscription investors. Of these warrants, 503,250 expire November 1,
2001, 446,305 expire September 1, 2002, and 45,500 expire March 3,
2003. Another 465,050 common stock warrants were approved for
issuance in September 2001 pursuant to a stock purchase agreement that
was not yet effective at year-end. The tables also exclude 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 FILINGS
In September 2001, the Company filed another S-8 registration statement,
amending its Non-Qualified Stock Option and Stock Bonus Plan for
independent consultants to the Company and authorizing the issuance of an
additional 3,000,000 shares of common stock. 1,000,000 of these shares were
issued to a consultant as a retainer in September 2001, valued at $113,300.
Another 1,200,000 in retainer shares were issued to consultants valued at
in the period ending December 31, 2001. Subsequent to the first quarter
end, another 750,000 shares were issued to consultants for services leaving
an unissued balance of 50,000 common shares.
Note 14. Subsequent Events
The Company has come to settlement terms for the satisfaction of the April
12, 2001 Promissory Note with Laurus Master Fund, Ltd. as follows:
(1) Conectisys shall pay Laurus Master Fund, Ltd. $100,000;
(2) Within 35 days Conectisys shall file a Registration Statement for the
remaining balance of $200,000 plus interest and fees on the original Note
date 4-12-01.
(3) Within 30 days Conectisys shall pay Laurus Master Fund, Ltd. $200,000
and issue a New Promissory Note replacing the existing Note. The new Note
shall have a due date of December 31, 2002 in the principal amount of
$75,000 and shall bear interest at 14% per annum; Terms of the new Note
shall require Conectisys beginning on April 1, 2002 minimum monthly
payments of $7,500 until the remaining principal and interest under the new
Note have been paid in full.
Upon of payment of $200,000 and issuance of the new Promissory Note:
a. The Registration Rights Agreement is immediately be canceled;
b. 1,000,000 Warrants of Conectisys common stock are immediately
canceled; and
c. Laurus shall return to Conectisys all common stock held as security
for the previous original Note with the except that Laurus shall retain
ConectiSys common stock in the aggregate amount of 811,770 shares as
security for remaining $75,000 principal amount due on new Note and to
ensure timely monthly payments of $7,500 per month.
</pre>