<pre>
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 33-3560D
CONECTISYS CORPORATION
(Name of small business issuer in its charter)
COLORADO 84-1017107
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24730 AVENUE TIBBITTS, SUITE 130
VALENCIA, CALIFORNIA 91355
(Address of principal executive offices)
Issuer's telephone number (including area code): (661) 295-6763
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's only class of
common stock, no par value per share, was 48,534,286 on August 21, 2002.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
CONECTISYS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet at June 30, 2002......................F-1
Condensed Consolidated Statement of Operations for the Three
Months and Nine Months Ended June 30, 2002 and 2001 and
the Cumulative Period From December 31, 1990 (Inception)
Through June 30, 2002.................................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through June 30, 2002...................F-4
Condensed Consolidated Statement of Cash Flow for the Nine
Months Ended June 30, 2002 and 2001 and the Cumulative
Period From December 31, 2002 (Inception) Through
June 30, 2002.........................................................F-11
Notes to Condensed Consolidated Financial Statements.......................F-14
2
<table>
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED BALANCE SHEET
June 30, 2002
Jun. 30 Sep. 30
2002 2001
Unaudited Audited
Assets
Current assets
Cash 250,075 6,111
Prepaid expenses and deposits 0 48,800
Total current assets 250,075 54,911
Property and equipment, net 52,031 71,961
License and technology, net 0 0
Discount on Convertible Debt 639,863 0
Total assets 941,969 126,872
F-1
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED BALANCE SHEET
June 30, 2002
Jun. 30 Sep. 30
2002 2001
Unaudited Audited
Liabilities and shareholders' equity
Current liabilities
Bank overdraft 0 0
Accounts payable 57,633 100,758
Accrued compensation 854,327 541,179
Due to officers 132,981 101,209
Accrued interest payable 0 0
Other current liabilities 198,314 177,194
Notes payable
Related 0 0
Other 1,333,950 384,370
Total current liabilities 2,577,205 1,304,710
Long-term debt, net of current 311,194
Total liabilities 2,577,205 1,615,904
Shareholders' equity (deficit)
Preferred stock - Class A 1,000,000 shares authorized
$1.00 par value, 200,020 and 140,020 issued and outstanding
June 30, 2002 and September 30, 2001 respectively 200,020 140,020
Convertible preferred stock - Class B 1,000,000 shared authorized
no par value, no shares issued and outstanding 0 0
Common stock - no par value; 250,000,000 shares authorized,
45,498,936 and 32,133,234 shares issued and outstanding
at June 30, 2002 and September 30, 2001, respectively 18,337,422 17,412,119
Additional Paid-In Capital, Options and Warrants exercisable:
Convertible preferred stock - Class B, no par value; 1,000,000 stock
Options exercisable 100,000 100,000
Common Stock, no par value; 8,857,154 and 5,607,154 stock options
And warrants exercisable at June 30, 2002 and September 30, 2001 1,346,570 1,275,233
Beneficial conversion option; debt instruments 770,367 155,027
Deficit accumulated during development stage (22,389,615) (20,571,431)
Total shareholders' equity (deficit) (1,635,236) (1,489,032)
Total liabilities and shareholders' equity 941,969 126,872
</table>
<page>F-2
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months and Nine Months Ended June 30, 2002 and 2001
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2002
<table>
Dec. 1, 1990
3 Months 3 Months 9 Months 9 Months (Inception)
Ended Ended Ended Ended Through
June 30 June 30 June 30 June 30 June 30
2002 2001 2002 2001 2002
Unaudited Unaudited Unaudited Unaudited Unaudited
Revenues 0 0 0 0 517,460
Cost of goods sold 0 0 0 0 567,721
Gross profit 0 0 0 0 (50,261)
General and administrative 487,567 829,011 1,505,691 1,523,993 16,866,164
Bad debt write-offs 0 0 0 0 1,680,522
Unrealized loss on derivative
Instruments 0 98,919 0 98,919 0
Loss from operations (487,567) (927,930) (1,505,691) (1,622,912) (18,596,947)
Non-operating income (expense) 0 0 0 0 (1,097,368)
Interest (297,073) (16,293) (312,493) (31,713) (1,617,558)
Net loss (784,640) (944,223) (1,818,184) (1,654,625) (21,311,873)
Weighted average shares
outstanding 37,825,988 28,933,558 35,727,303 27,123,787
Net loss per share (.02) (.02) (.05) (.05)
</table>
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception)
Through June 30, 2002
<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
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>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through June 30, 2002
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)
Net 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
Net 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>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through June 30, 2002
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>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through June 30, 2002
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, 1999 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 120,020 120,020 13,988,362 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 option,
May, 2000 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>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through June 30, 2002
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 period (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)
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through June 30, 2002
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
Cash, October 2001 through
June, 2002 500,000 50,000 50,000
Debt, October 2001 through
June, 2002 6,083,334 361,110 361,110
Retainers and services,
October 2001 through
June, 2002 3,378,707 318,243 318,243
Debt, October 2001
through June, 2002 60,000 A 60,000 60,000
Exercise of 500,000 common
stock options, June, 2002 500,000 93,750 (28,750) 65,000
Beneficial conversion option
pertaining to $750,000
convertible debt and accrued
interest, March, 2002
through September June, 2002 661,484 661,484
Stock warrants pertaining to
$750,000 convertible debt
and accrued interest, April
through June 2002 100,087 100,087
Debt June, 2002 2,903,661 102,200 (46,144) 56,056
Net loss for the year (1,818,184)(1,818,184)
Balance, June 30, 2002 200,020 200,020 45,498,936 18,337,422 2,216,937 0 (22,389,615)(1,635,236)
</table>
<page>F-10
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENT OF CASHFLOW
For the Nine Months Ended June 30, 2002 and 2001
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2002
<table>
Dec. 1, 1990
(Inception)
Through
June 30 June 30 June 30
2002 2001 2002
Unaudited Unaudited Unaudited
Operating activities
Net income (loss) (1,818,184) (1,654,625) (21,311,873)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 19,930 30,653 3,227,486
Stock issued for services 361,110 411,684 7,567,967
Stock issued for interest 1,403 0 536,994
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)
Prepaid expenses 0 158,546 0
Interest receivable 0 0 (95,700)
Deposits 0 0 133,546
Increase (decrease) in liabilities
Bank overdraft 0 0 0
Accounts payable (43,125) 56,097 268,872
Accrued interest payable 0
Accrued compensation 313,148 328,267 1,952,711
Due to officers 26,833 736,085
Other current liabilities 32,331 83,882 428,076
Net cash provided by (used by) operating activities (1,133,387) (459,744) (5,225,116)
<page>F-11
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENT OF CASHFLOW
For the Nine months Ended June 30, 2002 and 2001
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2002
Dec. 1, 1990
(Inception)
Through
June 30 June 30 June 30
2002 2001 2002
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 50,000 90,450 3,082,172
Stock warrants 0 77,228
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Debt issuance cost 0 (32,775)
Proceeds from debts
Related party 25,000 0 231,544
Other 1,482,110 (537,506) 3,721,200
Payments on debt
Related party (80,975) 0 (134,147)
Other (150,250) (149,113) (246,657)
Decrease in subscription receivable 0 0 35,450
Contributed capital 515
Net cash from (used by) financing activities 1,325,885 478,843 7,083,591
Net increase (decrease) in cash 243,964 19,099 250,075
Cash beginning of period 6,111 33,688 0
Cash end of period 250,075 52,787 250,075
<page>F-12
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENT OF CASHFLOW
For the Nine months Ended June 30, 2002 and 2001
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2002
Dec. 1, 1990
(Inception)
Through
June 30 June 30 June 30
2002 2001 2002
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 541,250 530,604 4,366,430
Service & interest 362,513 0 5,311,705
Preferred Stock issued for
Services 0 0 60,000
Repayment of debt 60,000 119,250
</table>
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Organization and Activity
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company")
was incorporated under the laws of Colorado on February 3, 1986, to analyze
and invest in business opportunities as they may occur. The Company is a
development-stage entity developing automatic meter reading technologies
and products for remote reading of electronic energy meters located in
residential structures.
Basis of Presentation and Going Concern Uncertainty
The condensed consolidated financial statements included herein have been
prepared by Conectisys Corporation, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations. Conectisys Corporation believes
that the disclosures are adequate to make the information presented not
misleading when read in conjunction with its financial statements for the
year ended September 30, 2001. The financial information presented reflects
all adjustments that are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented. The
results of operations for the nine months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year
ending September 30, 2002, or any other period.
The accounting policies followed by Conectisys Corporation and other
information are contained in the notes to the Conectisys Corporation
financial statements filed as part of the Conectisys Corporation annual
report on Form 10-KSB for the fiscal year ended September 30, 2001. This
quarterly report should be read in conjunction with such annual report.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
The accompanying consolidated financial statements include the accounts and
transactions of Conectisys Corporation, its wholly-owned subsidiaries
TechniLink, Inc., United Telemetry Company and eEnergyServices.com, 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 June 30, 2002, the Company had a deficiency in working capital of
approximately $2,327,000 and has incurred continual net losses since its
return to the development stage in the approximate amounts of $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 $1.8 million
for the nine months ended June 30, 2002, which raises substantial doubt
about the Company's ability to continue as a going concern. 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.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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 June 30, 2002, 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.
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 research and development of its H-Net(TM)
automated meter-reading technologies and products since August 1995, and
has recently begun deployment of a pilot project. The Company's business
activities did not generate any revenue during the past fiscal year.
Although still a development stage company, the Company plans to commence
large-scale cost reduction runs for the production and subsequent sale of
its H-Net(TM) automated meter reading system in 2002.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 having a value of $421,478 from TechniLink.
Although it remains viable, the Company currently lacks the resources to
develop and market technologies and products utilizing those license
rights.
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. For the three-
month period ended June 30, 2002, no deferred technology costs were
recognized.
<page>F-17
0CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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."
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.
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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 consolidated income tax returns. 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.
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.
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 2. RELATED PARTY TRANSACTIONS
At September 30, 2000, Robert Spigno, the Company's Chief executive officer
and a member of the Company's board of directors, had made cumulative cash
advances to ConectiSys of $75,000. On October 1, 2000, these advances were
memorialized in a revolving promissory note, executed by ConectiSys in
favor of Mr. Spigno, due on demand, at an annual interest rate of 18%.
During the year ended September 30, 2001, additional cash advances were
made by Mr. Spigno under this note in the amount of $20,000 and the Company
repaid an aggregate of $50,000 to Mr. Spigno on this note. As of September
30, 2001, total accrued and unpaid interest was $11,880, resulting in a
$56,880 balance under the note. On September 30, 2001, the Company
executed a new promissory note due September 1, 2002 initially in that
amount. For the year ended September 30, 2000, the Company incurred
interest expenses in the amount of $21,766, including $10,583 associated
with the assumption by Mr. Spigno of a promissory note due S.W. Carver
Corporation, which was repaid in May 2000. The amounts due Mr. Spigno under
these arrangements as of June 30, 2002 totaled $124,074.
At September 30, 2000, Patricia Spigno, the Company's Chief Financial
Officer and Secretary, had made cumulative cash advances to ConectiSys of
$61,945, under a revolving promissory note effective October 1, 2000,
executed by ConectiSys in favor of Ms. Spigno, due on demand, at an annual
interest rate of 18%. During the year ended September 30, 2001, the Company
repaid an aggregate of $40,681 to Ms. Spigno on this note. As of September
30, 2001, total accrued and unpaid interest was $4,610, resulting in a
$25,874 balance under the note. On September 30, 2001, the Company
executed a new promissory note due September 1, 2002 initially in that
amount. Ms. Spigno also borrowed on a personal credit card for the
Company's benefit in the amount of $18,455, bringing the Company's total
obligation due Ms. Spigno at September 30, 2001 to $44,329. As of June 30,
2002, all amounts due Ms. Spigno under these arrangements had been paid.
In October 2001, an officer and director was granted a fully-vested option
to purchase up to 310,000 shares of Class A Preferred Stock at an exercise
price of $1.00 per share, which was the estimated value on that date. In
December 2001, that officer and director exercised a portion of that
option, purchasing 60,000 shares of Class A Preferred Stock for $1.00 per
share, which was the estimated value on that date.
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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. The balance of $48,800 was expensed during
the nine month period ended June 30, 2002.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2002 consisted of the following:
Office equipment $ 273,054
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 325,025
Accumulated depreciation (272,994)
-----------
Net book value $ 52,031
===========
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE
Notes payable at June 30, 2002 consisted of the following:
Convertible Debentures
Convertible Debenture #1
Note payable to AJW Partners, LLC $65,550
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12%
Accrued interest of $2,026 and principal
on Convertible Debenture convertible
into approximately 6,757,760
shares of common stock at the price
of $0.01 at June 30, 2002 2,026 67,576
--------
Note payable to New Millennium Capital 65,550
Partners II, LLC(Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12%
Accrued interest of $2,026 and principal
on Convertible Debenture convertible
into approximately 6,757,760
shares of common stock at the price
of $0.01 at June 30, 2002 2,026 67,576
--------
Note payable to AJW/New Millennium 74,000
Offshore, Ltd.(Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12%
Accrued interest of $2,287 and principal
on Convertible Debenture convertible
into approximately 7,628,700
shares of common stock at the price
of $0.01 at June 30, 2002 2,287 76,287
--------
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE (continued)
Note payable to Pegasus Capital Partners, LLC 41,650
Offshore, Ltd. Ltd. (Convertible
Debenture) due on March 29, 2003
at an annual interest rate of 12%
Accrued interest of $1,287 and principal
on Convertible Debenture convertible
into approximately 4,228,700
shares of common stock at the price
of $0.01 at June 30, 2002 1,287 42,287
--------
Convertible Debenture #2
Note payable to AJW Partners, LLC $40,000
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12%
Accrued interest of $684 and principal
on Convertible Debenture convertible
into approximately 4,068,400
shares of common stock at the price
of $0.01 at June 30, 2002 684 40,684
--------
Note payable to New Millennium Capital 40,000
Partners II, LLC(Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12%
Accrued interest of $684 and principal
on Convertible Debenture convertible
into approximately 4,068,400
shares of common stock at the price
of $0.01 at June 30, 2002 684 40,684
--------
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE (continued)
Note payable to AJW/New Millennium 45,000
Offshore, Ltd.(Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12%
Accrued interest of $770 and principal
on Convertible Debenture convertible
into approximately 4,577,000
shares of common stock at the price
of $0.01 at June 30, 2002 770 45,770
--------
Note payable to Pegasus Capital Partners, LLC 25,000
Offshore, Ltd. Ltd. (Convertible
Debenture) due on May 10, 2003
at an annual interest rate of 12%
Accrued interest of $428 and principal
on Convertible Debenture convertible
into approximately 2,542,800
shares of common stock at the price
of $0.01 at June 30, 2002 428 25,428
------
Convertible Debenture #3
Note payable to AJW Partners, LLC $80,000
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12%
Accrued interest of $369 and principal
on Convertible Debenture convertible
into approximately 8,036,900
shares of common stock at the price
of $0.01 at June 30, 2002 369 80,369
------
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE (continued)
Note payable to New Millennium Capital 80,000
Partners II, LLC(Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12%
Accrued interest of $369 and principal
on Convertible Debenture convertible
into approximately 8,036,900
shares of common stock at the price
of $0.01 at June 30, 2002 369 80,369
--------
Note payable to AJW/New Millennium 90,000
Offshore, Ltd.(Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12%
Accrued interest of $415 and principal
on Convertible Debenture convertible
into approximately 9,041,500
shares of common stock at the price
of $0.01 at June 30, 2002 415 90,415
--------
Note payable to Pegasus Capital Partners, LLC 50,000
Offshore, Ltd. Ltd. (Convertible
Debenture) due on June 17, 2003
at an annual interest rate of 12%
Accrued interest of $231 and principal
on Convertible Debenture convertible
into approximately 5,023,100
shares of common stock at the price
of $0.01 at June 30, 2002 231 50,231
-------
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including
interest at an annual rate of 18%,
expiring September 1, 2002 140,919
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE (continued)
Note payable to Devon Investment Advisors,
unsecured, due on demand, at an annual
interest rate of 10% 241,824
Note payable to Laurus Master Fund, Ltd.,
secured by 4,773,208 shares of common
stock beneficially owned by officers,
with terms as described in more detail
below 225,000
Accrued interest on note payable to Laurus
Master Fund, Ltd., secured by 4,773,208
shares of common stock beneficially
owned by officers, convertible into
approximately 9,447,375 shares of
common stock at the price of $0.016
at June 30, 2002 8,266 233,266
-------
Note Payable to Rowell McHatton $10,000
due April 22, 2003 at an annual
interest rate of 14%
Accrued interest of $265 and principal
Note convertible into approximately
171,084 shares of common stock at the
price of $0.06. 265 10,265
------- ----------
Total notes payable 1,333,950
Current portion (1,333,950)
-----------
Long-term portion $ -
============
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE (continued)
On April 12, 2001, the Company received $300,000 in proceeds from Laurus
Master Fund, Ltd. ("Laurus") 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 June 30, 2002 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 June 30, 2002). 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 June 30,
2002, the note was convertible into approximately 9,447,375 common shares
at an exercise price of approximately $0.016 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 fully amortized at June 30, 2002.
A corresponding $152,228 credit was 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 June 30, 2002 was $26,158; for presentation purposes, this interest
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>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE (continued)
On February 15, 2002, and as amended on April 2, 2002, the Company agreed
to settlement terms with Laurus regarding the Company's obligations under
its promissory note issued in favor of Laurus. Under the terms of this
settlement arrangement, the Company paid to Laurus $100,000 in cash on
February 19, 2002 and $50,000 in cash on April 5, 2002. The Company also
agreed with Laurus that the Company's obligations under a registration
rights agreement would terminate, and that the Company would make payments
in an aggregate of $75,000 by August 15, 2002. Further, the Company agreed
with Laurus that the principal balance of the 8% Convertible Promissory
Note would be reduced to $250,000, the interest rate would be increased to
14%, and that the $75,000 to be received by August 15, 2002 would further
reduce the principal balance of this note. The Company also agreed with
Laurus that under the note, the Company would make minimum monthly payments
commencing September 1, 2002 of $14,583 plus accrued and unpaid interest
until all amounts owed under the note have been repaid in full. Laurus also
agreed to a modification of their agreements with the Company that limits
the amount of the Company's common stock that Laurus may own at any time to
4.99%. In connection with the Company's arrangement with Laurus regarding
the repayment of its note, Laurus agreed that 500,000 warrants of the
1,000,000 warrants originally issued in connection with the 8% Convertible
Note, would be cancelled. Laurus further agreed that upon receipt of
payments in the aggregate amount of $225,000, it would return all shares of
common stock of the Company held as security with the exception of
2,335,885 shares which would remain outstanding as security for the full
satisfaction of the Company's obligations to Laurus. Finally, the Company
agreed to re-price 250,000 warrants held by Laurus from an exercise price
of $0.192 per share to an exercise price of $0.10 per share and also agreed
to re-price another 250,000 warrants held by Laurus from an exercise price
of $0.192 per share to an exercise price of $0.15 per share.
In February 2002, we borrowed $340,000 from the Mercator Momentum Fund.
This loan from the Mercator Momentum Fund was a short-term loan due May 15,
2002 and accrues interest at an annual rate of 18%. The loan was secured by
shares of common stock. On June 14, 2002 Mercator Momentum Fund transferred
collateral in the form of 5,861,814 shares of common stock to their name
because the Company was in default on the loan. Thereafter, On June 21,
2002.
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 5. NOTES PAYABLE (continued)
Mercator Momentum Fund filed an action against Conectisys Corporation,
Robert A. Spigno and Patricia A. Spigno in the Superior Court of
California, County of Los Angeles (Case No. BC276283) for breach of
promissory note, foreclosure of security interests and fraud and deceit.
Mr. Spigno is the Chairman of the Board and a director of the Company and
is also our Chief Executive Officer. Ms. Spigno is the Company's Secretary
and Chief Financial Officer. On July 3, 2002, Mercator Momentum Fund filed
a first amended complaint in the Superior Court of California, County of
Los Angeles (Case No. BC276283) adding a claim for common count for money
lent. Mercator Momentum Fund seeks damages of approximately $243,000 plus
approximately $66 in interest per day commencing June 21, 2002 and other
compensatory and punitive damages of unspecified amount. The Company
believes that Mercator Momentum Fund's claims are without merit because,
among other factors, they have affirmative defenses to those claims,
including usury and the satisfaction of amounts owed under loan from
Mercator Momentum Fund as a result of the enforcement by Mercator Momentum
Fund of its security interest in shares of common stock. The Company
intends to vigorously defend against these claims and to pursue appropriate
counterclaims against Mercator Momentum Fund.
NOTE 6. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's
continued research and development efforts as of March 29, 2002, the
Company entered into a securities purchase agreement and related agreements
with four accredited investors (the "Purchasers") for the purchase of up to
$750,000 of the Company's 12% Convertible Debentures due one year from
their date of issuance. The Company granted the holders of the debentures a
continuing security interest in all of the Company's assets to secure the
Company's obligations under the debentures and related agreements. The
debentures bear interest at a rate of 12% per annum, payable quarterly in
common stock or cash at the option of the Purchasers.
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 6. SECURED CONVERTIBLE DEBENTURES (continued)
On March 29, 2002 the Company issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of the company's outstanding shares of
common stock. The debentures initially were convertible into shares of
common stock at the lesser of $.06 per share and 50% of the average of the
lowest three intra-day trading prices of a share of common stock during the
20 trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares
of common stock at a per share exercise price equal to the lesser of $.045
and the average of the lowest three intra-day trading prices during the 20
trading days immediately preceding an exercise.
On May 10, 2002 the Company issued an aggregate of $150,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of the Company's outstanding shares of
common stock. The debentures initially were convertible into shares of
common stock at the lesser of $.06 per share and 50% of the average of the
lowest three intra-day trading prices of a share of common stock during the
20 trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 750,000 shares of
common stock at a per share exercise price equal to the lesser of $.045 and
the average of the lowest three intra-day trading prices during the 20
trading days immediately preceding an exercise.
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 6. SECURED CONVERTIBLE DEBENTURES (continued)
On June 17, 2002 the Company issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of the company's outstanding shares of
common stock. The debentures initially were convertible into shares of
common stock at the lesser of $.06 per share and 50% of the average of the
lowest three intra-day trading prices of a share of common stock during the
20 trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares
of common stock at a per share exercise price equal to the lesser of $.045
and the average of the lowest three intra-day trading prices during the 20
trading days immediately preceding an exercise.
The Company's convertible debentures and related warrants contain anti-
dilution provisions whereby, if the Company issues common stock or
securities convertible into or exercisable for common stock at a price less
than the conversion or exercise prices of the debentures or warrants, the
conversion and exercise prices of the debentures or shall be adjusted as
stipulated in the agreements governing such debentures and warrants.
The fair value of the twelve debt instruments (due to the 100% pricing
advantage) in aggregate was $1,500,000 (a 100% premium on the principal
value) making the beneficial conversion option $649,913 at inception
($750,000 less the $100,087 allocated to the issuance of the 3,750,000
related warrants).
During the nine months ended June 30, 2002, the Company issued 2,903,661
shares of common stock in connection with regular interest payments and
upon conversion of an aggregate of $53,250 of principal and $1,403 of
related interest on the Company's convertible debentures. A corresponding
reduction of $46,144 to the beneficial conversion option was made.
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 6. SECURED CONVERTIBLE DEBENTURES (continued)
Interest accrued at 12% on the aggregate original principal amount of
$750,000 of convertible debentures through June 30, 2002 was $11,571. The
holders can also convert the accrued interest into common stock at a 100%
premium ($11,571), bringing the total beneficial conversion option balance
to $615,340 at June 30, 2002.
As of June 30, 2002, the Company was indebted for an aggregate of $708,321
of principal and accrued and unpaid interest on these convertible
debentures. To the extent debentures issued by the Company are converted
into shares of common stock, the Company will not be obligated to repay the
converted amounts.
The Company's authorized capital stock consists of 250,000,000 shares of
common stock, no par value per share, and 50,000,000 shares of preferred
stock, $1.00 par value per share. Of the 50,000,000 authorized shares of
preferred stock, 1,000,000 shares have been designated as Class A Preferred
Stock and 1,000,000 shares have been designated as Class B Preferred Stock,
and the remaining 48,000,000 shares are undesignated. As of June 30, 2002,
there were 44,486,027 shares of the Company's common stock outstanding held
by approximately 700 holders of record and 200,020 shares of the Company's
Class A Preferred Stock outstanding held by one holder of record and no
shares of Class B Preferred Stock outstanding.
Each share of Class A Preferred Stock is entitled to 100 votes per share on
all matters presented to the Company's shareholders for action. The Class A
Preferred Stock does not have any liquidation preference, additional voting
rights, conversion rights, anti-dilution rights or any other preferential
rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the
Company's common stock. The Class B Preferred Stock does not have any
liquidation preference, voting rights, other conversion rights, anti-
dilution rights or any other preferential rights.
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 Class A Preferred
stock to the President of the Company for a $60,000 debt reduction
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 7. SHAREHOLDERS' EQUITY (DEFICIT) AND STOCK ISSUANCES
In December 2001, a consultant exercised 300,000 shares of common stock in
exchange for reduction in debt of $39,000.
In January 2002, the Company issued an aggregate of 450,000 shares of
common stock valued at $51,000 to two consultants for services rendered.
In February 2002, the Company issued 2,613,334 shares of common stock to
five note holders in exchange for the cancellation of $209,000 of debt.
In February 2002, the Company issued 3,500,000 shares of common stock as
collateral for a Promissory Note.
In March 2002, the Company issued 50,000 shares of common stock valued at
$2,000 to a consultant as compensation for services rendered.
During quarter ended June 2002, 3,750,000 warrants were issued in
conjunction with aggregate convertible debt of $750,000, the portion of the
proceeds allocable to the warrants was $100,087.
In April 2002, the Company issued 630,000 shares of common stock to two
consultants for $63,000 of services.
In May 2002, the Company issued 100,000 shares of common stock to a
consultant for $5,000 of services.
In May 2002, the Company issued 200,000 shares of common stock and options
to purchase 200,000 shares of common stock at exercise price of $.50 per
share in exchange for an aggregate of $20,000 in cash.
In June 2002, the Company issued 300,000 shares of common stock and options
to purchase 300,000 shares of common stock at exercise price of $.50 per
share in exchange for an aggregate of $30,000 in cash.
In June 2002, the Company issued 1,098,707 shares of common stock to three
consultants for $42,789 of services.
In June 2002, the Company issued an aggregate of 2,903,661 shares of common
stock to four accredited investors upon conversion of an aggregate of
$53,250 in principal plus related interest on our convertible debentures.
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 8. INCOME TAXES
Deferred income taxes consisted of the following:
Deferred tax asset, benefit
of net operating loss carryforward $ 6,700,000
Valuation allowance (6,700,000)
-----------
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 $16,800,000 in federal and $16,800,000 in
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, $2,400,000 in 2021 and
$1,700,000 in the year 2022. 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, $2,400,000 in 2006 and
$1,700,000 in 2007.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Litigation
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund in order to make the initial $100,000 payment under a settlement
arrangement with Laurus and to fund continuing development of our H-Net(TM)
system. This loan from the Mercator Momentum Fund was a short-term loan due
May 15, 2002 and accrues interest an annual rate of 18%. The loan was
secured by shares of our common stock. As of June 13, 2002, the Company
owed Mercator Momentum Fund approximately $243,000 of principal and accrued
and unpaid interest under this loan and were in default in the repayment of
this debt.
On June 14, 2002, Mercator Momentum Fund transferred collateral in the form
of 5,861,814 shares of the Company's common stock into its name as a result
of the Company's default on Mercator's loan. Of the 5,861,814 shares of
common stock transferred into the name of Mercator Momentum Fund, 3,500,000
shares of the Company's common stock were issued and pledged as collateral
by the Company in February 2002, and 2,361,814 shares of the Company's
common stock were issued and pledged as collateral by Robert Spigno, the
Company's Chief Executive Officer, in February 2002.
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 9. COMMITMENTS AND CONTINGENCIES (continued)
On June 21, 2002 Mercator Momentum Fund filed an action against Conectisys
Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court
of California, County of Los Angeles (Case No. BC276283) for breach of
promissory note, foreclosure of security interests and fraud and deceit.
Mr. Spigno is the Chairman of the Board and a director of the Company and
is also our Chief Executive Officer. Ms. Spigno is the Company's Secretary
and Chief Financial Officer. On July 3, 2002, Mercator Momentum Fund filed
a first amended complaint in the Superior Court of California, County of
Los Angeles (Case No. BC276283) adding a claim for common count for money
lent. Mercator Momentum Fund seeks damages of approximately $243,000 plus
approximately $66 in interest per day commencing June 21, 2002 and other
compensatory and punitive damages of unspecified amount. The Company
believes that Mercator Momentum Fund's claims are without merit because,
among other factors, they have affirmative defenses to those claims,
including usury and the satisfaction of amounts owed under loan from
Mercator Momentum Fund as a result of the enforcement by Mercator Momentum
Fund of its security interest in shares of common stock. The Company
intends to vigorously defend against these claims and to pursue appropriate
counterclaims against Mercator Momentum Fund.
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 10. FORM S-8 FILINGS
In September 2001, the Company filed a registration statement on Form S-8
covering its amended Non-Qualified Stock Option and Stock Bonus Plan for
independent consultants to the Company, which authorizes the issuance of an
additional 3,000,000 shares of common stock. 1,000,000 of these shares
valued at $113,300 were issued to a consultant as a retainer in September
2001. Another 1,500,000 shares valued at $226,200 were issued to
consultants during the three months ended December 31, 2002. During the
three months ended June 30, 2002, 450,000 shares valued at $51,000 were
issued to consultants for services leaving an unissued balance of 50,000
shares under the Company's amended Non-Qualified Stock Option and Stock
Bonus Plan.
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 11. STOCK OPTIONS AND WARRANTS
The total outstanding options and warrants represented in the balance sheet
at June 30, 2002 is 8,857,154. This includes the 500,000 exercised at $0.13
and 3,750,000 issued with an exercise price of $0.045 subject to re-pricing
issued in conjunction with convertible debentures during the nine-month
period ending June 30, 2002. This excludes 2,852,205 warrants and options
which have nominal value and which were issued to certain stock
subscription investors. This 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, which common
stock options will not vest until certain milestones have been attained.
NOTE 12. SUBSEQUENT EVENTS
In August 2002, the Company issued an aggregate of 1,650,182 shares of
common stock to four accredited investors upon conversion of an aggregate
of $9,970 in principal plus related interest on the Company's convertible
debentures.
In August 2002, the Company issued 1,000,000 shares of common stock valued
at $20,000 to a consultant for services rendered. In August 2002 the
Company filed a registration statement on Form S-8 covering the resale of
the 1,000,000 shares of common stock issued to that consultant.
<page>F-37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read with our
condensed consolidated financial statements and notes to condensed
consolidated financial statements included elsewhere in this document. This
document and our condensed consolidated financial statements and notes to
condensed consolidated financial statements contain forward-looking
statements, which generally include the plans and objectives of our
management for future operations, including plans and objectives relating
to our future economic performance and our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies. The forward-looking statements and associated risks may
include, relate to or be qualified by other important factors, including,
without limitation:
o our product development activities;
o our business strategy for establishing a presence in the AMR
market;
o anticipated trends in our financial condition and results of
operations;
o the impact of the continuing threat of terrorism and the
responses to such threat by military, government, business
and the public; and
o our ability to distinguish ourselves from our current and
future competitors.
We do not undertake to update, revise or correct any forward-looking
statements.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. You may find these forward-looking statements under the captions
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as captions elsewhere
in this document. A number of factors could cause results to differ materially
from those anticipated by forward-looking statements, including those discussed
under "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the forward-
looking statements.
The information contained in this document is not a complete
description of our business or the risks associated with an investment in
our common stock. Before deciding to buy or maintain a position in our
common stock, you should carefully review and consider the various
disclosures we made in this report and in our other materials filed with
the Securities and Exchange Commission that discuss our business in greater
detail and that disclose various risks, uncertainties and other factors
that may affect our business, results of operations or financial condition.
Any of the factors described above or in the "Risk Factors"
section below could cause our financial results, including our net income
(loss) or growth in net income (loss) to differ materially from prior
results, which in turn could, among other things, cause the price of our
common stock to fluctuate significantly.
OVERVIEW
Since 1995, we have been a development-stage company engaged in
the development of a low-cost automatic meter reading, or AMR, solution. We
have developed a low-cost AMR solution that includes a proprietary system
employing specialized hardware and software that will allow for residential
and commercial applications. Our proprietary system is called H-Net(TM),
which is a trademark of ConectiSys.
We are currently in a cost-reduction phase of the development of
our H-Net(TM) system and have completed the development for commercial
production of our H-Net(TM) 4.0 wireless meter reading product. We have not
yet sold any H-Net(TM) systems and we do not expect any significant sales
of our H-Net(TM) systems until late 2002 to early 2003. Accordingly, we
have not earned any significant revenues from the sale of H-Net(TM)
systems. We have no history of revenues and have incurred significant
losses since the beginning of the development of our H-Net(TM) system. We
have a significant accumulated deficit and negative working capital. As a
result of our financial condition, our independent auditors have issued an
opinion questioning our ability to continue as a going- concern.
4
We are establishing pilot programs employing our H-Net(TM) system
for testing purposes. We anticipate that the operators of these pilot
programs will be regional utility companies and other parties such as the
University of California, Irvine through its Advanced Power and Energy
Program. We believe that these pilot programs will provide third-party
verification, for the utility industry and government agencies, of the
effectiveness of our H- Net(TM) system and our unique AMR solution.
Our H-Net(TM) system has been developed as an AMR solution
predominantly for application by utility companies and energy service
providers to assist in the comprehensive, low-cost remote reading of
electric energy meters in residential structures and the transmission of
that data on a frequent basis to a centralized location where the data can
be archived and further supplied to utility companies and energy service
providers for billing purposes, energy usage tracking, energy consumption
management and other uses.
Our H-Net(TM) system is comprised of the following three principal
components: H-Net(TM)-equipped meters, base stations and a network
operating center. H-Net(TM)-equipped meters are designed to communicate
with one another, relaying energy usage data back and forth, and ultimately
communicate with a base station where energy usage data is then transmitted
to a network operating center. Each base station is designed to service up
to 20,000 H- Net(TM)-equipped meters and to transmit energy usage data to
the network operating center in fifteen minute intervals, 24 hours per day.
The network operating center is designed to collect and archive energy
usage data and then distribute the data over the Internet to customers such
as utility companies and energy service providers.
We believe that our AMR solution in the form of our H-Net(TM)
system is a cost-effective and useful AMR solution for meter reading
applications and that its adoption will allow for a wealth of new
information regarding energy usage. We plan to provide a variety of
additional services to our customers including remote meter reading,
complete billing solutions and remote access and control of energy meters.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis is based upon our financial
statements, which have been prepared using accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses, and assets and
liabilities, during the periods reported. Estimates are used when
accounting for certain items such as depreciation, likelihood of
realization of certain assets, employee compensation programs and valuation
of intangible assets. We base our estimates on historical experience and
other assumptions that we believe are reasonable under the circumstances.
Actual results may differ from our estimates.
5
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
financial statements. We have based our financial statements on the
assumption of our operations continuing as a going concern. As a result,
we continue to depreciate fixed assets and show certain debts as long-term.
We have written-off the value of technology in prior periods because the
realization of that value was doubtful. Our compensation of consultants
and employees with our capital stock is recorded at estimated market value.
The volatile nature of the price of our common stock causes wide
disparities in certain valuations.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND THREE MONTHS
ENDED JUNE 30, 2001
We did not generate any revenues for the three months ended June
30, 2002 and June 30, 2001. General and administrative expenses decreased
by $341,444 or 41.2% to $487,567 for the three months ended June 30, 2002
as compared to $829,011 for the same period in 2001. This decrease was due
to a decrease in our H-Net(TM) system's development costs.
Interest expense increased by $280,780 or 1,723.3% to $297,073
during the three months ended June 30, 2002 as compared to $16,293 for the
same period in 2001. This increase in interest expense was due to increased
borrowings between the periods reported.
Net loss for the three months ended June 30, 2002 decreased by
$159,583 or 16.9% to $784,640 as compared to a net loss of $944,223 for the
same period in 2001.This decrease primarily was due to the decrease in
general and administrative expenses as described above.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 2002 AND NINE MONTHS ENDED
JUNE 30, 2001
We did not generate any revenues for the nine months ended June
30, 2002 and June 30, 2001. General and administrative expenses decreased
by $18,302 or 1.2% to $1,505,691 for the nine months ended June 30, 2002
as compared to $1,523,993 for the same period in 2001.
Interest expense increased by $280,780 or 885.4% to $312,493
during the nine months ended June 30, 2002 as compared to $31,713 for the
same period in 2001. This increase in interest expense was due to increased
borrowings between the periods reported.
Net loss for the nine months ended June 30, 2002 increased by
$163,559 or 9.9% to $1,818,184 compared to a net loss of $1,654,625 for
the same period in 2001. This increase in net loss primarily was due to an
increase in expenses as described above.
6
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended June 30, 2002 we financed our
operations solely through private placements of securities. Because we are
a development-stage company with only one product in development, we have
never generated any revenue from operations. Our consolidated financial
statements as of and for the years ended September 30, 2001 and 2000 have
been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business.
As of June 30, 2002, we had working capital deficit of
approximately $2,327,130 and an accumulated deficit of $22,389,615. As of
that date, we had approximately $250,075 in cash and cash equivalents. We
had accounts payable and accrued compensation expenses of approximately
$911,960. We had other current liabilities, including amounts due to
officers, notes and convertible debts of approximately $1,665,245,
including those issued prior to the beginning of fiscal year 2002. To the
extent convertible debentures or promissory notes that we have issued are
converted into shares of common stock, we will not be obligated to repay
the converted amounts.
Cash used in our operating activities totaled $1,133,387 for the
nine months ended June 30, 2002 as compared to $459,744 for the nine
months ended June 30, 2001.
Cash provided by our financing activities totaled $1,377,351 for
the nine months ended June 30, 2002 as compared to $478,843 for the
nine months ended June 30, 2001. We raised all of the cash provided by
financing activities during the three months ended June 30, 2002 from the
issuance of convertible debentures and/or promissory notes.
In April 2001, we issued an 8% Convertible Note to Laurus Master
Fund, Ltd., or Laurus, in the principal amount of $300,000. We have been
unable to repay the amounts owed under this note and we have failed to
satisfy our obligation to register for resale the shares of common stock
underlying this note. On February 15, 2002, and as amended on April 2,
2002, we agreed to settlement terms with Laurus regarding our obligations
under this note. Under the terms of this settlement arrangement, we paid to
Laurus $100,000 in cash on February 19, 2002, $50,000 in cash on April 5,
2002 and $25,000 in cash on June 5, 2002. We also agreed with Laurus that
our obligations under a registration rights agreement would terminate, and
that we would make payments in an aggregate of $75,000 by August 15, 2002.
Further, we agreed with Laurus that the principal balance of the 8%
Convertible Promissory Note would be reduced to $250,000, the interest rate
would be increased to 14%, and that the $75,000 to be received by August
15, 2002 would further reduce the principal balance of this note. We also
agreed with Laurus that under the note, we would make minimum monthly
payments commencing September 1, 2002 of $14,583 plus accrued and unpaid
interest until all amounts owed under the note have been repaid in full.
Laurus also agreed to a modification of their agreements with us that
limits the amount of our common stock that they may own at any time to
4.99%.
7
In connection with our arrangement with Laurus regarding the
repayment of its note, Laurus agreed that 500,000 warrants of the 1,000,000
warrants originally issued in connection with the 8% Convertible Note,
would be cancelled. Laurus further agreed that upon receipt of payments in
the aggregate amount of $225,000, it would return all shares of common
stock of ConectiSys held as security with the exception of 2,335,885 shares
which would remain outstanding as security for the full satisfaction of our
obligations to Laurus. Finally, we agreed to re-price 250,000 warrants held
by Laurus from an exercise price of $0.192 per share to an exercise price
of $0.10 per share and also agreed to re- price another 250,000 warrants
held by Laurus from an exercise price of $0.192 per share to an exercise
price of $0.15 per share. As of June 30, 2002, approximately $233,000 of
principal and accrued and unpaid interest under this note remained
outstanding and as of August 12, 2002, approximately $237,000 of principal
and accrued and unpaid interest under this note remained outstanding
In February 2002, we borrowed $340,000 from the Mercator Momentum
Fund in order to make the initial $100,000 payment under our settlement
arrangement with Laurus and to fund continuing development of our H-Net(TM)
system. This loan from the Mercator Momentum Fund was a short-term loan due
May 15, 2002 and accrues interest an annual rate of 18%. The loan was
secured by shares of our common stock. As of June 13, 2002, we owed
Mercator Momentum Fund approximately $243,000 of principal and accrued and
unpaid interest under this loan and were in default in the repayment of
this debt.
On June 14, 2002, Mercator Momentum Fund transferred collateral in
the form of 5,861,814 shares of our common stock into its name as a result
of our default on its loan. Of the 5,861,814 shares of common stock
transferred into the name of Mercator Momentum Fund, 3,500,000 shares of
our common stock were issued and pledged as collateral by us in February
2002, and 2,361,814 shares of our common stock were issued and pledged as
collateral by Robert Spigno, our Chief Executive Officer, in February 2002.
On June 21, 2002, Mercator Momentum Fund filed an action against
Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in the
Superior Court of California, County of Los Angeles (Case No. BC276283) for
breach of promissory note, foreclosure of security interests and fraud and
deceit. Mr. Spigno is the Chairman of the Board and a director of our
company and is also our Chief Executive Officer. Ms. Spigno is our
Secretary and Chief Financial Officer. On July 3, 2002, Mercator Momentum
Fund filed a first amended complaint in the Superior Court of California,
County of Los Angeles (Case No. BC276283) adding a claim for common count
for money lent. Mercator Momentum Fund seeks damages of approximately
$243,000 plus approximately $66 in interest per day commencing June 21,
2002 and other compensatory and punitive damages of unspecified amount. The
complaint relates to the loan in February 2002 from Mercator Momentum Fund
of $340,000, as more particularly described above. We believe that Mercator
Momentum Fund's claims are without merit because, among other factors, we
have affirmative defenses to those claims, including usury and the
satisfaction of amounts owed under loan from Mercator Momentum Fund as a
result of the enforcement by Mercator Momentum Fund of its security
interest in shares of our common stock. We intend to vigorously defend
against these claims and to pursue appropriate counterclaims against
Mercator Momentum Fund. Due to the size of the amount owed to Mercator
Momentum Fund and our poor financial condition, an adverse decision in the
litigation against us could have a materially negative impact on our
financial condition and business prospects, including the development of
our H-Net(TM) system.
8
In March 2002, we issued $300,000 of our secured convertible
debentures to four accredited investors in the first stage of a three-stage
offering. The secured convertible debentures are due March 29, 2003 and
provide for interest at the rate of 12% per annum. The secured convertible
debentures were accompanied by warrants to purchase up to an aggregate of
1,500,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $225,000. As of August 12,
2002, an aggregate of $236,780 of principal plus related accrued and unpaid
interest relating to the debentures issued in March 2002 remained
outstanding.
In May 2002, we issued $150,000 of our secured convertible
debentures to four accredited investors in the second stage of a three-
stage offering. The secured convertible debentures are due May 10, 2003 and
provide for interest at the rate of 12% per annum. The secured convertible
debentures were accompanied by warrants to purchase up to an aggregate of
750,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $140,000. As of August 12,
2002, an aggregate of $150,000 of principal plus related accrued and unpaid
interest relating to the debentures issued in May 2002 remained
outstanding.
In June 2002, we issued $300,000 of our secured convertible
debentures to four accredited investors in the third stage of a three-stage
offering. The secured convertible debentures are due June 17, 2003 and
provide for interest at the rate of 12% per annum. The secured convertible
debentures were accompanied by warrants to purchase up to an aggregate of
1,500,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $237,500. As of August 12,
2002, an aggregate of $300,000 of principal plus related accrued and unpaid
interest relating to the debentures issued in June 2002 remained
outstanding.
As of August 12, 2002 we had two additional notes due September 1,
2002 payable in the approximate aggregate amount of $258,500, of which one
note in the approximate amount of $114,600 was held by Robert Spigno, our
Chairman of the Board and Chief Executive Officer. These notes bear
interest at an annual rate of 18%.
Our continued operations are dependent on securing additional
sources of liquidity through debt and/or equity financing.
As indicated above, our consolidated financial statements as of
and for the years ended September 30, 2001 and 2000 have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As discussed
elsewhere in this document and in Note 1 to our consolidated financial
statements for the years ended September 30, 2001 and 2000, we have
suffered recurring losses from operations and at September 30, 2001 had net
capital and working capital deficiencies. These factors, among others,
raised substantial doubt about our ability to continue as a going concern
and led our independent certified public accountants to modify their
unqualified opinion to include an explanatory paragraph related to our
ability to continue as a going concern. The consolidated financial
statements included in this document do not include any adjustments that
might result from the outcome of this uncertainty.
9
We have been, and currently are, working toward identifying and
obtaining new sources of financing. Deteriorating global economic
conditions and the effects of ongoing military actions against terrorists
may cause prolonged declines in investor confidence in and accessibility to
capital markets. Further, our current secured convertible debenture
financing documents contain notice and right of first refusal provisions
and the grant of a security interest in substantially all of our assets in
favor of the convertible debenture investors, all of which provisions will
restrict our ability to obtain debt and/or equity financing.
Any future financing that we may obtain may cause significant
dilution to existing stockholders. Any debt financing or other financing of
securities senior to common stock that we are able to obtain will likely
include financial and other covenants that will restrict our flexibility.
At a minimum, we expect these covenants to include restrictions on our
ability to pay dividends on our common stock. Any failure to comply with
these covenants would have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.
If adequate funds are not available, we may be required to delay,
scale back or eliminate portions of our operations and product and service
development efforts or to obtain funds through arrangements with strategic
partners or others that may require us to relinquish rights to certain of
our technologies or potential products or other assets. Accordingly, the
inability to obtain such financing could result in a significant loss of
ownership and/or control of our proprietary technology and other important
assets and could also adversely affect our ability to fund our continued
operations and our product and service development efforts that
historically have contributed significantly to our competitiveness.
We are completing research and development of our H-Net(TM)system
with the goal of deployment of the H-Net(TM)system in late 2002 or early
2003. We believe that if we are successful in deploying our H-
Net(TM)system, we will begin to generate revenues from our business
activities.
EFFECT OF INFLATION
Inflation did not have any significant effect on the operations of
the Company during the quarter ended June 30, 2002. Further, inflation is
not expected to have any significant effect on future operations of the
Company.
10
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments", requires that we disclose
estimated fair values for our 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 our entire holdings of a
particular instrument. Changes in assumptions could significantly affect
the estimates.
Since the fair value is estimated at June 30, 2002, 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. Long-term debt is recorded at
face value because the principal amount is convertible into common stock.
RISK FACTORS
An investment in our common stock involves a high degree of risk.
In addition to the other information in this document, you should carefully
consider the following risk factors before deciding to invest in shares of
our common stock. If any of the following risks actually occurs, it is
likely that our business, financial condition and operating results would
be harmed. As a result, the trading price of our common stock could
decline, and you could lose part or all of your investment.
WE HAVE NO HISTORY OF REVENUES, HAVE INCURRED SIGNIFICANT LOSSES,
EXPECT CONTINUED LOSSES AND MAY NEVER ACHIEVE PROFITABILITY. IF WE
CONTINUE TO INCUR LOSSES, WE MAY HAVE TO CURTAIL OUR OPERATIONS, WHICH
MAY PREVENT US FROM SUCCESSFULLY DEPLOYING OUR H-NET(TM) WIRELESS
METER READING SYSTEM.
We have no history of revenues, have not been profitable and
expect continued losses. Historically, we have relied upon cash from
financing activities to fund all of the cash requirements of our activities
and have incurred significant losses and experienced negative cash flow. As
of June 30, 2002, we had an accumulated deficit of approximately
$22,390,000. For our fiscal year ended September 30, 2001, we incurred a
net loss of $2,154,367 and for our fiscal year ended September 30, 2000, we
incurred a net loss of $3,812,140. We cannot predict when we will become
profitable or if we ever will become profitable, and we may continue to
incur losses for an indeterminate period of time and may never achieve or
sustain profitability. An extended period of losses and negative cash flow
may prevent us from successfully deploying our H-Net(TM) wireless meter
reading system, or our H- Net(TM) system, and operating or expanding our
business. As a result of our financial condition, our independent auditors
have issued an opinion questioning our ability to continue as a going-
concern.
11
Our significant losses have resulted principally from costs
incurred in connection with the development of our H-Net(TM) system and
from costs associated with our administrative activities. We expect our
operating expenses to dramatically increase as a result of our planned
deployment of our H-Net(TM) system. Since we have not yet completed the
development of our H- Net(TM) system, have no operating history and no
sources of revenues, we cannot assure you that our business will ever
become profitable or that we will ever generate sufficient revenues to meet
our expenses and support our planned activities. Even if we are able to
achieve profitability, we may be unable to sustain or increase our
profitability on a quarterly or annual basis.
OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT QUESTIONING OUR ABILITY
TO CONTINUE AS A GOING-CONCERN. THIS REPORT MAY IMPAIR OUR ABILITY TO
RAISE ADDITIONAL FINANCING AND ADVERSELY AFFECT THE PRICE OF OUR
COMMON STOCK.
The report of our independent auditors contained in our financial
statements for the years ended September 30, 2001 and 2000 includes a
paragraph that explains that we have incurred substantial losses and have a
working capital deficit. This report raises substantial doubt about our
ability to continue as a going- concern. Reports of independent auditors
questioning a company's ability to continue as a going-concern are
generally viewed unfavorably by analysts and investors. This report may
make it difficult for us to raise additional debt or equity financing
necessary to continue the development and deployment of our H- Net(TM)
system. We urge potential investors to review this report before making a
decision to invest in ConectiSys.
WITHOUT SUBSTANTIAL ADDITIONAL FINANCING, WE MAY BE UNABLE TO ACHIEVE
THE OBJECTIVES OF OUR CURRENT BUSINESS STRATEGY, WHICH COULD FORCE US
TO DELAY, CURTAIL OR ELIMINATE OUR PRODUCT AND SERVICE DEVELOPMENT
PROGRAMS.
We require additional financing to:
o produce cost-reduced hardware for our H-Net(TM) system
capable of large-scale manufacturing;
o promulgate and complete final beta testing of our H-Net(TM)
system;
o market and commercially deploy a large-scale pilot test
program of our H-Net(TM) system; and
o obtain and implement contracts and joint venture agreements
with meter manufacturers.
If we are unable to obtain this financing, we could be forced to
delay, curtail or eliminate certain product and service development
programs or entirely abandon our planned deployment of our H-Net(TM)
system. In addition, our inability to obtain financing could have such a
material adverse effect on our business, prospects, results of operations
or financial condition, that we may be forced to restructure, file for
bankruptcy, sell assets or cease operations entirely, any of which could
jeopardize an investment in our common stock.
12
WE NEED AND MAY BE UNABLE TO OBTAIN ADDITIONAL FINANCING ON
SATISFACTORY TERMS, WHICH MAY REQUIRE US TO ACCEPT FINANCING ON
BURDENSOME TERMS THAT MAY CAUSE SUBSTANTIAL DILUTION TO OUR
SHAREHOLDERS AND IMPOSE ONEROUS FINANCIAL RESTRICTIONS ON OUR
BUSINESS.
We require additional financing. Deteriorating global economic
conditions may cause prolonged declines in investor confidence in and
accessibility to capital markets. Future financing may not be available on
a timely basis, in sufficient amounts or on terms acceptable to us. This
financing may also dilute existing shareholders' equity. Any debt financing
or other financing of securities senior to our common stock will likely
include financial and other covenants that will restrict our flexibility.
At a minimum, we expect these covenants to include restrictions on our
ability to pay dividends on our common stock. Any failure to comply with
these covenants would have a material adverse effect on our business,
prospects, financial condition and results of operations because we could
lose any then-existing sources of financing and our ability to secure new
sources of financing may be impaired.
WE ARE SUBJECT TO AN INJUNCTION IMPOSED BY A FEDERAL COURT FOR
VIOLATING THE FEDERAL SECURITIES LAWS, WHICH MAY MAKE IT MORE
DIFFICULT TO RAISE FINANCING.
In 1997, the Securities and Exchange Commission filed suit in the
United States District Court in the Central District of California against
ConectiSys and another individual seeking permanent injunctions and civil
penalties based on alleged violations of Sections 5(a), 5(c) and 17(a)(1)-
(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 thereunder in connection with the sale of common
stock of ConectiSys in 1996. In March 1999, we agreed with the Securities
and Exchange Commission to the terms of a settlement of its litigation
against us. Under the terms of that settlement, we dismissed our then-
pending appeal of a judgment against us in favor of the Securities and
Exchange Commission and accepted a permanent injunction against us
prohibiting actions that would violate federal securities laws in
connection with the offer, purchase or sale of securities. The Securities
and Exchange Commission agreed to waive a requirement of the judgment under
appeal that we disgorge $175,000 of proceeds from the sale of our common
stock due to our inability to pay this amount. On March 9, 1999, an amended
final judgment of permanent injunction and other relief memorializing these
agreements was entered in connection with the execution by us of a consent
to entry of injunction. An injunction of this nature is viewed unfavorably
by analysts and investors and may make it more difficult for us to raise
additional debt or equity financing necessary to run our business.
13
OUR DEFAULT ON THE REPAYMENT OF THE CONVERTIBLE DEBENTURES HELD BY
CERTAIN SECURITY HOLDERS COULD HAVE A MATERIAL AND ADVERSE EFFECT ON
OUR BUSINESS, PROSPECTS, RESULTS OF OPERATIONS OR FINANCIAL CONDITION.
Unpaid principal and accrued and unpaid interest on our
convertible debentures becomes immediately due and payable one year from
their date of issuance, or earlier in the event of a default. The events of
default under the convertible debentures are similar to those customary for
convertible debt securities, including breaches of material terms, failure
to pay amounts owed, delisting of our common stock from the OTC Bulletin
Board(R) or failure to comply with the conditions of listing on the OTC
Bulletin Board(R). If we default on our obligations under the convertible
debentures, we may be required to immediately repay the outstanding
principal amounts of the debentures and any accrued and unpaid interest.
The cash required to repay such amounts would likely have to be taken from
our working capital. Since we rely on our working capital to sustain our
day to day operations and the development of our H-Net(TM) system, a
default on the convertible debentures could have a material and adverse
effect on our business, prospects, results of operations or financial
condition.
WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES
COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board and Chief
Executive Officer, Robert A. Spigno, and our Chief Technology Officer,
Lawrence Muirhead. The loss of Messrs. Spigno or Muirhead or one or more
other key members of management could have a material adverse effect on us
because each of these individuals has experience and skills upon which we
draw heavily in our day-to-day operations, strategic planning or research
and development activities. The development and operation of our H- Net(TM)
system is largely dependent upon the skill and efforts of Mr. Muirhead.
Although we have entered into employment agreements with Messrs. Spigno and
Muirhead, we cannot assure the continued services of these key members of
our management team. We do not maintain key-man life insurance policies on
any member of management.
14
WE HAVE A LIMITED OPERATING HISTORY OF FIVE YEARS AND VERY LIMITED
OPERATING EXPERIENCE; THEREFORE, REGARDLESS OF THE VIABILITY OR MARKET
ACCEPTANCE OF OUR H-NET(TM) SYSTEM, WE MAY BE UNABLE TO ACHIEVE
PROFITABILITY OR REALIZE OUR OTHER BUSINESS GOALS.
Our H-Net(TM) system is the result of a new venture. We have been
engaged in research and development of automatic meter reading technologies
since 1995, and we have only recently completed limited pilot programs for
our first and only product, our H- Net(TM) automatic meter reading system.
We have generated no operating revenues from our H-Net(TM) system and have
not commenced any of the widespread marketing and other functions that we
anticipate will be required for successful deployment of our H- Net(TM)
system. Deployment of our H-Net(TM) system will involve large-scale cost-
reduction manufacturing runs for the production of the components employed
in our H-Net(TM) system. Our success will depend in large part on our
ability to deal with the problems, expenses and delays frequently
associated with bringing a new product to market. Because we have little
experience in the deployment and operational aspects of automatic meter
reading technologies, we may be unable to successfully deploy and operate
our H-Net(TM) system even if our H-Net(TM) system proves to be a viable
automatic meter reading solution and achieves market acceptance.
Consequently, we may be unable to achieve profitability or realize our
other business goals.
MANY COMPANIES WITH GREATER RESOURCES AND OPERATING EXPERIENCE ARE
DEVELOPING TECHNOLOGY SIMILAR TO THAT EMPLOYED IN OUR H-NET(TM)
SYSTEM. THESE COMPANIES COULD SUCCESSFULLY COMPETE WITH US AND
NEGATIVELY AFFECT THE DEPLOYMENT OF OUR H-NET(TM) SYSTEM AND OUR
OPPORTUNITY TO ACHIEVE PROFITABILITY.
We anticipate significant competition with our H-Net(TM) system
from many companies. Our H-Net(TM) system is designed to compete with
companies such as those that offer meter reading services utilizing modem
and telephone line communications or drive-by data collection capabilities.
Our H-Net(TM) system may compete with numerous companies, including
Schlumberger Ltd., Itron, Inc., CellNet Data Systems, Hunt Technologies and
Metricom Corporation, each of which has significantly more resources and
operational and product development experience than we do. Some of our
potential customers, namely, meter manufacturers and utility companies, may
decide to develop their own products or service offerings that directly
compete with our H-Net(TM) system. Although we believe that our H-Net(TM)
system will be competitive in the marketplace, we cannot assure you that
these or other companies with greater experience and greater resources than
ConectiSys will not negatively affect our business prospects and impair our
ability to achieve profitability.
15
WE ARE TARGETING A NEW AND EVOLVING MARKET AND WE CANNOT BE CERTAIN
THAT OUR BUSINESS STRATEGY WILL BE SUCCESSFUL.
The automation of utility meter reading and data distribution is a
relatively new and rapidly changing market. We cannot accurately predict
the size of this market or its potential growth. Our system is one possible
solution for AMR and data distribution. It has not been adopted as an
industry standard and it may not be adopted on a broad scale. Competing
systems have been and likely will continue to be selected by utilities and
other potential clients. Participants in the utility industry have
historically been cautious and deliberate in making decisions concerning
the adoption of new technology. This process, which can take up to several
years to complete, may include the formation of evaluation committees, a
review of different technical options, technology trials, equipment testing
and certification, performance and cost justifications, regulatory review,
one or more requests for vendor quotes and proposals, budgetary approvals
and other steps. Only a limited number of utilities have made a commitment
to purchase our products to date. Consequently, if our H-Net(TM) system as
an AMR solution is unsuccessful and we are unable to enter into AMR or data
distribution contracts on terms favorable to us, our business, results of
operations and financial condition could be materially and adversely
affected.
We are completing the final phase of the development of our H-
Net(TM) system. The new and evolving nature of the market that we intend to
target makes an accurate evaluation of our business prospects and the
formulation of a viable business strategy very difficult. Accordingly, our
business strategy may be faulty or even obsolete and as a result, we may
not properly plan for or address many obstacles to success, including the
following:
o the timing and necessity of substantial expenditures for
the development and deployment of our H-Net(TM) system;
o the failure to strategically position ourselves in
relation to joint venture or strategic partners, and
potential and actual competitors;
o the failure of our H-Net(TM) system to satisfy the needs
of the market that we intend to target and the resulting
lack of widespread or adequate acceptance of our H-Net(TM)
system; and
o the difficulties in managing rapid growth of operations and
personnel.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
Although we currently are a development-stage company with no
revenue-generating operations, our strategy envisions a period of rapid
growth that may impose a significant burden on our administrative and
operational resources. Our ability to effectively manage growth will
require us to substantially expand the capabilities of our administrative
and operational resources and to attract, train, manage and retain
qualified engineers, technicians, salespersons and other personnel. There
can be no assurance that we will be able to do so. If we are unable to
successfully manage our growth, our business, prospects, results of
operations and financial condition could be materially and adversely
affected.
16
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR
SUCCESS, MISAPPROPRIATION OF THOSE RIGHTS OR CLAIMS OF INFRINGEMENT OR
LEGAL ACTIONS RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT
OUR FINANCIAL CONDITION.
We currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights.
However, although our H-Net(TM) system and its constituent components could
benefit from patent protection, we have chosen to retain the proprietary
rights associated with our H-Net(TM) system predominantly as trade secrets.
Although we currently rely to a great extent on trade secret protection for
much of our technology, we cannot assure you that our means of protecting
our proprietary rights will be adequate or that our competitors will not
independently develop comparable or superior technologies or obtain
unauthorized access to our proprietary technology.
We own, license or have otherwise obtained the right to use
certain technologies incorporated in our H-Net(TM) system. We may receive
infringement claims from third parties relating to our products and
technologies. In those cases, we intend to investigate the validity of the
claims and, if we believe the claims have merit, to respond through
licensing or other appropriate actions. To the extent claims relate to
technology included in components purchased from third-party vendors for
incorporation into our products, we would forward those claims to the
appropriate vendor. If we or our component manufacturers are unable to
license or otherwise provide any necessary technology on a cost-effective
basis, we could be prohibited from marketing products containing that
technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action
taken against us.
17
SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC
SALE COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR
US TO RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of August 12, 2002, we had outstanding 48,534,286 shares of
common stock, of which all but approximately 19,849,000 shares were
unrestricted under the Securities Act of 1933. As of August 12, 2002, we
also had outstanding options, warrants, promissory notes, convertible
debentures and preferred stock that were exercisable for or convertible
into approximately 194,337,000 shares of common stock, approximately
145,255,000 of which are covered by registration rights. Sales of a
substantial number of shares of our common stock in the public market, or
the perception that sales could occur, could adversely affect the market
price of our common stock. Any adverse effect on the market price of our
common stock could make it difficult for us to raise additional capital
through sales of equity securities at a time and at a price that we deem
appropriate.
CONVERSION OR EXERCISE OF OUR OUTSTANDING DERIVATIVE SECURITIES COULD
SUBSTANTIALLY DILUTE YOUR INVESTMENT BECAUSE THE CONVERSION AND
EXERCISE PRICES OF THOSE SECURITIES AND/OR THE NUMBER OF SHARES OF
COMMON STOCK ISSUABLE UPON CONVERSION OR EXERCISE OF THOSE SECURITIES
ARE SUBJECT TO ADJUSTMENT.
We have issued various notes, debentures and warrants that are
convertible or exercisable at prices that are subject to adjustment due to
a variety of factors, including fluctuations in the market price of our
common stock and the issuance of securities at an exercise or conversion
price less than the then- current exercise or conversion price of those
notes, debentures or warrants. As of August 12, 2002, the closing price of
a share of our common stock on the OTC Bulletin Board(R) was $0.025. On
that date, our notes, debentures and warrants outstanding with adjustable
conversion and/or exercise prices were convertible or exercisable into
approximately 174,877,000 shares of our common stock. The number of shares
of common stock that these adjustable securities ultimately may be
converted into or exercised for could prove to be greater than this amount
if the market price of our common stock declines. You could, therefore,
experience substantial dilution of your investment as a result of the
conversion or exercise of our outstanding derivative securities.
18
The applicable conversion price of our debentures issued to
certain security holders is variable and does not have a lower- limit,
therefore the dilutive effect to our existing security holders is
theoretically limitless. Conversely, because the variable conversion price
of these debentures has an upper limit, an increase in the trading price of
a share of our common stock will result in a limited benefit to existing
security holders with respect to the conversion of these debentures. The
following table sets forth the number of shares issuable upon conversion of
the principal portion of the debentures issued to certain security holders
and outstanding as of August 12, 2002, based upon the indicated
hypothetical trading prices:
Number of Percentage
Hypothetical Conversion Shares of Company's
Trading Price Price (1) Issuable(2) Common Stock (3)
- ------------- ----------------- ----------------- ---------------
$0.1600 $.0600 11,446,333 19.08%
$0.1200 $.0600 11,446,333 19.08%
$0.0800 $.0400 17,169,500 26.13%
$0.0400 $.0200 34,339,000 41.44%
$0.0200 $.0100 68,678,000 58.59%
$0.0100 $.0050 137,356,000 73.89%
$0.0075 $.00375 183,141,333 79.05%
$0.0050 $.00250 274,712,000 84.99%
$0.0025 $.00125 549,424,000 91.88%
- --------------------
(1) The conversion price of our debentures is the lower of (a) 50% of
the average of the three lowest intraday trading prices of a share
of our common stock on the OTC Bulletin Board(R) during the twenty
trading days immediately preceding the conversion date, and (b)
$0.06. As of August 12, 2002, the applicable conversion price was
$0.005.
(2) Our current authorized capital allows us to issue a maximum of
250,000,000 shares of common stock.
(3) Amounts are based on 48,534,286 shares of our common stock
outstanding as of August 12, 2002 plus the corresponding number of
shares issuable. Each of the security holders may not convert our
debentures into more than 4.9% of our then-outstanding common
stock; however, the security holders may waive the 4.9% limitation,
thus allowing the conversion of their debentures into a number of
shares of common stock in excess of 4.9% of our then-outstanding
common stock.
The security holders referenced above may elect to receive payment
for accrued and unpaid interest on our convertible debentures in shares of
our common stock based on the conversion price and on the same terms
described above with respect to conversions of the principal portion of
these debentures. As a result of conversions of the principal or interest
portion of our convertible debentures and related sales of our common stock
by the security holders referenced above, the market price of our common
stock could be depressed, thereby resulting in a significant increase in
the number of shares issuable upon conversion of the principal and interest
portions of these debentures. You could, therefore, experience substantial
dilution of your investment as a result of the conversion of the principal
or interest portions of our convertible debentures.
19
IF OUR SECURITY HOLDERS ENGAGE IN SHORT SALES OF OUR COMMON STOCK,
INCLUDING SALES OF SHARES TO BE ISSUED UPON CONVERSION OR EXERCISE OF
DERIVATIVE SECURITIES, THE PRICE OF OUR COMMON STOCK MAY DECLINE.
Selling short is a technique used by a shareholder to take
advantage of an anticipated decline in the price of a security. A
significant number of short sales or a large volume of other sales within a
relatively short period of time can create downward pressure on the market
price of a security. The decrease in market price would allow holders of
our derivative securities that have conversion or exercise prices based
upon a discount on the market price of our common stock to convert or
exercise their derivative securities into or for an increased number of
shares of our common stock. Further sales of common stock issued upon
conversion or exercise of our derivative securities could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short
sales that could further undermine the value of our common stock. You
could, therefore, experience a decline in the value of your investment as a
result of short sales of our common stock.
OUR CURRENT FINANCING ARRANGEMENTS COULD PREVENT OUR COMMON STOCK FROM
BEING LISTED ON NASDAQ OR OTHER PRINCIPAL MARKETS.
Nasdaq and other principal markets require that, to be eligible
for inclusion in the stock market, a company's common stock have a
specified minimum bid price per share. Convertible debenture financings,
especially those with variable conversion prices with low or no low-price
limits, characteristically exert downward pressure on the market for a
company's common stock. This pressure, if applied against the market for
our common stock, may prevent our common stock from being listed on Nasdaq
or other principal markets, but we do not currently satisfy various other
listing requirements and thus are not in a position to have our common
stock listed on any of those markets.
OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH
COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS AND IN LITIGATION
AGAINST US.
The stock market as a whole and individual stocks historically
have experienced extreme price and volume fluctuations, which often have
been unrelated to the performance of the related corporations. During the
quarter ended June 30, 2002, the high and low closing sale prices for a
share of our common stock were $0.13 and $0.018, respectively. The market
price of our common stock may exhibit significant fluctuations in the
future response to various factors, many of which are beyond our control
and which include:
o variations in our quarterly operating results, which
variations could result from, among other things,
changes in the needs of one or more of our customers;
o changes in market valuations of similar companies and
stock market price and volume fluctuations generally;
o economic conditions specific to the industries in which
we operate;
20
o announcements by us or our competitors of new or
enhanced products, technologies or services or
significant contracts, acquisitions, strategic
relationships, joint ventures or capital commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity
securities.
If our operating results in future quarters fall below the
expectations of market makers, securities analysts and investors, the price
of our common stock likely will decline, perhaps substantially. In the
past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources. Consequently, the price
at which you purchase shares of our common stock may not be indicative of
the price that will prevail in the trading market. You may be unable to
sell your shares of common stock at or above your purchase price, which may
result in substantial losses to you.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF
TRADING ACTIVITY IN OUR STOCK MAY BE REDUCED.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock,
generally are equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or quoted on
Nasdaq). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information
about penny stocks and the nature and level of risks in the penny stock
market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-
dealer and its salesperson in the transaction, and, if the broker-dealer is
the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market, and monthly account
statements showing the market value of each penny stock held in the
customer's account. In addition, broker-dealers who sell these securities
to persons other than established customers and "accredited investors" must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement
to the transaction. Consequently, these requirements may have the effect of
reducing the level of trading activity, if any, in the secondary market for
a security subject to the penny stock rules, and investors in our common
stock may find it difficult to sell their shares.
BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU
MAY FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR
COMMON STOCK.
Our common stock trades under the symbol "CNES" on the OTC
Bulletin Board(R). Because our stock trades on the OTC Bulletin Board(R)
rather than on a national securities exchange, you may find it difficult to
either dispose of, or to obtain quotations as to the price of, our common
stock.
21
OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF CONECTISYS,
POSSIBLY PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR
SHARES.
Our board of directors has the authority to issue up to 50,000,000
shares of preferred stock and to fix the rights, preferences, privileges
and restrictions, including voting rights of those shares, without any
further vote or action by our shareholders. Of these shares, 1,000,000
shares have been designated as Class A Preferred Stock and 1,000,000 shares
have been designated as Class B Preferred Stock. The rights of the holders
of our common stock are subject to the rights of the holders of our
outstanding preferred stock and will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that we may
issue in the future. The issuance of preferred stock, while providing
desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, which
would delay, defer or prevent a change in control of ConectiSys.
Furthermore, preferred stock may have other rights, including economic
rights senior to the common stock, and, as a result, the issuance of
preferred stock could adversely affect the market value of our common
stock.
CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS ALLOW
CONCENTRATION OF VOTING POWER IN ONE INDIVIDUAL, WHICH MAY, AMONG
OTHER THINGS, DELAY OR FRUSTRATE THE REMOVAL OF INCUMBENT DIRECTORS OR
A TAKEOVER ATTEMPT, EVEN IF SUCH EVENTS MAY BE BENEFICIAL TO OUR
SHAREHOLDERS
Provisions of our articles of incorporation and bylaws may delay
or frustrate the removal of incumbent directors and may prevent or delay a
merger, tender offer or proxy contest involving ConectiSys that is not
approved by our board of directors, even if those events may be beneficial
to the interests of our shareholders. For example, as of August 12, 2002,
Robert A. Spigno, our Chairman of the Board and Chief Executive Officer,
was the holder of 200,020 shares of our Class A Preferred Stock. As of that
date, Mr. Spigno also held an option, exercisable at $1.00 per share until
its expiration on December 1, 2003, to purchase up to 250,000 additional
shares of our Class A Preferred Stock. Under our articles of incorporation,
each share of Class A Preferred Stock is entitled to 100 votes per share on
all matters presented to our shareholders for action. Consequently, Mr.
Spigno may have sufficient voting power to control the outcome of all
corporate matters submitted to the vote of our common shareholders. Those
matters could include the election of directors, changes in the size and
composition of the board of directors, and mergers and other business
combinations involving ConectiSys. In addition, through his control of the
board of directors and voting power, Mr. Spigno may be able to control
certain decisions, including decisions regarding the qualification and
appointment of officers, dividend policy, access to capital (including
borrowing from third-party lenders and the issuance of additional equity
securities), and the acquisition or disposition of assets by ConectiSys.
Also, the concentration of voting power in the hands of Mr. Spigno could
have the effect of delaying or preventing a change in control of
ConectiSys, even if the change in control would benefit our shareholders,
and may adversely affect the market price of our common stock.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2002, we borrowed $340,000 from the Mercator Momentum
Fund. This loan from the Mercator Momentum Fund was a short-term loan due
May 15, 2002 and accrues interest an annual rate of 18%. The loan was
secured by shares of our common stock. As of June 13, 2002, we owed
Mercator Momentum Fund approximately $243,000 of principal and accrued and
unpaid interest under this loan and were in default in the repayment of
this debt.
On June 14, 2002, Mercator Momentum Fund transferred collateral in
the form of 5,861,814 shares of our common stock into its name as a result
of our default on its loan. Of the 5,861,814 shares of common stock
transferred into the name of Mercator Momentum Fund, 3,500,000 shares of
our common stock were issued and pledged as collateral by us in February
2002, and 2,361,814 shares of our common stock were issued and pledged as
collateral by Robert Spigno, our Chief Executive Officer, in February 2002.
On June 21, 2002, Mercator Momentum Fund filed an action against
Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in the
Superior Court of California, County of Los Angeles (Case No. BC276283) for
breach of promissory note, foreclosure of security interests and fraud and
deceit. Mr. Spigno is the Chairman of the Board and a director of our
company and is also our Chief Executive Officer. Ms. Spigno is our
Secretary and Chief Financial Officer. On July 3, 2002, Mercator Momentum
Fund filed a first amended complaint in the Superior Court of California,
County of Los Angeles (Case No. BC276283) adding a claim for common count
for money lent. Mercator Momentum Fund seeks damages of approximately
$243,000 plus approximately $66 in interest per day commencing June 21,
2002 and other compensatory and punitive damages of unspecified amount. The
complaint relates to the loan in February 2002 from Mercator Momentum Fund
of $340,000, as more particularly described above. We believe that Mercator
Momentum Fund's claims are without merit because, among other factors, we
have affirmative defenses to those claims, including usury and the
satisfaction of amounts owed under loan from Mercator Momentum Fund as a
result of the enforcement by Mercator Momentum Fund of its security
interest in shares of our common stock. We intend to vigorously defend
against these claims and to pursue appropriate counterclaims against
Mercator Momentum Fund. Due to the size of the amount owed to Mercator
Momentum Fund and our poor financial condition, an adverse decision in the
litigation against us could have a materially negative impact on our
financial condition and business prospects, including the development of
our H-Net(TM) system.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In April 2002, we issued an aggregate of 630,000 shares of common
stock valued at $63,000 to a consultant for services rendered.
In April 2002, we granted an option to purchase 500,000 shares of
common stock to an investor, having an exercise price of $.10 per share
with respect to 250,000 shares of common stock and $.15 per share with
respect to the other 250,000 shares of common stock.
In May 2002, we issued 100,000 shares of common stock valued at
$5,000 to a consultant for services rendered.
II-1
In May 2002, we issued 200,000 shares of common stock and an
option to purchase 200,000 shares of common stock at an exercise price of
$.50 per share in a private placement transaction to one accredited
investor in exchange for $20,000 in cash.
On May 10, 2002 we issued an aggregate of $150,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of our outstanding shares of common
stock. The debentures initially were convertible into shares of common
stock at the lesser of $.06 per share and 50% of the average of the lowest
three intraday trading prices of a share of common stock during the 20
trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 750,000 shares of
common stock at a per share exercise price equal to the lesser of $.045 and
the average of the lowest three intraday trading prices during the 20
trading days immediately preceding an exercise.
In June 2002, we issued an aggregate of 300,000 shares of common
stock and an option to purchase 300,000 shares of common stock at an
exercise price of $.50 per share in a private placement transaction to two
accredited investors in exchange for $30,000 in cash.
In June 2002, we issued an aggregate of 2,903,661 shares of common
stock to four accredited investors upon conversion of an aggregate of
$53,250 in principal plus related interest on our convertible debentures.
In June 2002, we issued an aggregate of 1,098,707 shares of common
stock valued at $42,789 to three consultants for services rendered.
On June 17, 2002 we issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded,
are beneficial owners of 5% or more of our outstanding shares of common
stock. The debentures initially were convertible into shares of common
stock at the lesser of $.06 per share and 50% of the average of the lowest
three intraday trading prices of a share of common stock during the 20
trading days immediately preceding conversion. The debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares
of common stock at a per share exercise price equal to the lesser of $.045
and the average of the lowest three intraday trading prices during the 20
trading days immediately preceding an exercise.
Exemption from the registration provisions of the Securities Act
of 1933 for the transactions described above is claimed under Section 4(2)
of the Securities Act of 1933, among others, on the basis that such
transactions did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would
provide.
II-2
DIVIDEND POLICY
---------------
We have never paid cash dividends on our common stock and do not
currently intend to pay cash dividends on our common stock in the
foreseeable future. We are restricted from paying dividends on our common
stock under state law, and the terms of our secured convertible debentures.
We currently anticipate that we will retain any earnings for use in the
continued development of our business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In February 2002, we borrowed $340,000 from the Mercator Momentum
Fund. This loan from the Mercator Momentum Fund was a short-term loan due
May 15, 2002 and accrues interest an annual rate of 18%. The loan was
secured by shares of our common stock. As of June 13, 2002, we owed
Mercator Momentum Fund approximately $243,000 of principal and accrued and
unpaid interest under this loan and were in default in the repayment of
this debt.
On June 14, 2002, Mercator Momentum Fund transferred collateral in
the form of 5,861,814 shares of our common stock into its name as a result
of our default on its loan. Of the 5,861,814 shares of common stock
transferred into the name of Mercator Momentum Fund, 3,500,000 shares of
our common stock were issued and pledged as collateral by us in February
2002, and 2,361,814 shares of our common stock were issued and pledged as
collateral by Robert Spigno, our Chief Executive Officer, in February 2002.
On June 21, 2002, Mercator Momentum Fund filed an action against
Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in the
Superior Court of California, County of Los Angeles (Case No. BC276283) for
breach of promissory note, foreclosure of security interests and fraud and
deceit. Mr. Spigno is the Chairman of the Board and a director of our
company and is also our Chief Executive Officer. Ms. Spigno is our
Secretary and Chief Financial Officer. On July 3, 2002, Mercator Momentum
Fund filed a first amended complaint in the Superior Court of California,
County of Los Angeles (Case No. BC276283) adding a claim for common count
for money lent. Mercator Momentum Fund seeks damages of approximately
$243,000 plus approximately $66 in interest per day commencing June 21,
2002 and other compensatory and punitive damages of unspecified amount. The
complaint relates to the loan in February 2002 from Mercator Momentum Fund
of $340,000, as more particularly described above. We believe that Mercator
Momentum Fund's claims are without merit because, among other factors, we
have affirmative defenses to those claims, including usury and the
satisfaction of amounts owed under loan from Mercator Momentum Fund as a
result of the enforcement by Mercator Momentum Fund of its security
interest in shares of our common stock. We intend to vigorously defend
against these claims and to pursue appropriate counterclaims against
Mercator Momentum Fund. Due to the size of the amount owed to Mercator
Momentum Fund and our poor financial condition, an adverse decision in the
litigation against us could have a materially negative impact on our
financial condition and business prospects, including the development of
our H-Net(TM) system.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
II-3
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description
- ----------- -----------
10.1 Form of Secured Convertible Debenture due May 10, 2003 (1)
10.2 Form of Common Stock Purchase Warrant dated as of
May 10, 2002 (1)
10.3 Consulting Agreement dated as of June 1, 2002 by and between
Conectisys Corporation and Clifford Mastricola (2)
10.4 Form of Secured Convertible Debenture due June 17, 2003
10.5 Form of Common Stock Purchase Warrant dated as of
June 17, 2002
10.6 Consulting Agreement dated as of April 1, 2002 by and between
Conectisys Corporation and The N.I.R. Group, LLC
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act Of 2002
- ----------
(1) Filed as an exhibit to the Registrant's Form 10-QSB for the quarter
ended March 31, 2002 and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Form S-8 filed with the
Securities and Exchange Commission on August 5, 2001 (Registration No.
333-97673) and incorporated herein by reference.
(b) Reports on Form 8-K
-------------------
None.
II-4
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CONECTISYS CORPORATION
Dated: August 22, 2002 By: /s/ ROBERT A. SPIGNO
---------------------------------------
Robert A. Spigno
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ PATRICIA A. SPIGNO
---------------------------------------
Patricia A. Spigno
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBITS
Exhibit No. Description
- ----------- -----------
10.4 Form of Secured Convertible Debenture due June 17, 2003
10.5 Form of Common Stock Purchase Warrant dated as of
June 17, 2002
10.6 Consulting Agreement dated as of April 1,2002 by and between
Conectisys Corporation and The N.I.R. Group, LLC
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act Of 2002