<pre>
Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-102781
CONECTISYS CORPORATION
PROSPECTUS SUPPLEMENT DATED MAY 30, 2003
The prospectus of ConectiSys Corporation dated May 12, 2002 is supplemented
to include information from the quarterly report on Form 10-QSB for the
quarterly period ended March 31, 2003 filed with the Securities and
Exchange Commission by ConectiSys Corporation on May 29, 2003 and to
include other updated information. Our condensed consolidated financial
statements and related notes for the quarterly period ended March 31, 2003
are included commencing on page F-1 of this supplement.
THE FOLLOWING RISK FACTORS ARE UPDATED AS FOLLOWS:
- -------------------------------------------------------------------------------
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this prospectus, 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.
Risks Related to Our Business
We have no history of revenues, have incurred significant losses,
expect continued losses and may never achieve profitably. 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 March
31, 2003, we had an accumulated deficit of approximately $24,368,000. For
our fiscal year ended September 30, 2002, we incurred a net loss of
approximately $2,347,000 and for our fiscal year ended September 30, 2001,
we incurred a net loss of approximately $2,154,000. 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.
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 only recently completed the
development of our H-Net(TM) system, have no operating history and no existing
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
<page>1
achieve profitability, we may be unable to sustain or increase our
profitability on a quarterly or annual basis.
Risks Related To This Offering
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 May 20, 2003, we had outstanding 279,689,959 shares of common
stock, of which all but approximately 200,200,000 shares were unrestricted
under the Securities Act of 1933. As of May 20, 2003, we also had
outstanding options, warrants, promissory notes, convertible debentures and
preferred stock that were exercisable for or convertible into approximately
550,000,000 shares of common stock, approximately 510,000,000 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 May 20, 2003, the closing price of a
share of our common stock on the OTC Bulletin Board(r) was $.0042. On that
date, our notes, debentures and warrants outstanding with adjustable
conversion and/or exercise prices were convertible or exercisable into
approximately 530,000,000 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.
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 May 20, 2003, based upon the indicated hypothetical
trading prices:
<page>2
Approximate
Number of Percentage of
Hypothetical Shares Company's
Trading Price Conversion Price (1) Issuable (2) Common Stock (3)
- ------------- --------------------- ------------ -----------------
$.008 $.004 264,000,000 49%
$.006 $.003 352,000,000 56%
$.004 $.002 528,000,000 65%
$.002 $.001 1,100,000,000 80%
_______________
(1) The conversion price of our debentures is the lower of 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
either (a) $.06 for the March, May and June 2002 convertible
debentures, or (b) $.01 for the November 2002, March and May 2003
convertible debentures. As of May 20, 2003, the applicable
conversion price was $.00225.
(2) Our current authorized capital allows us to issue a maximum
of 1,000,000,000 shares of common stock.
(3) Amounts are based on 279,689,959 shares of our common stock
outstanding as of May 20, 2003 plus the corresponding number of
shares issuable. Each of the holders of our convertible debentures
may not convert our debentures into more than 4.9% of our then-
outstanding common stock; however, the 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 holders of our convertible debentures 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 holders of our convertible debentures, 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.
<page>3
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 three
months ended March 31, 2003, the high and low closing bid prices of our
common stock were $.012 and $.003, 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;
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.
THE PRICE RANGE OF COMMON STOCK
TABLE IS REPLACED WITH THE FOLLOWING:
- ----------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
The following table shows the high and low closing bid prices of
our common stock for the periods presented, as obtained from Pink Sheets
LLC, a research service that compiles quote information reported on the
National Association of Securities Dealers composite feed or other
qualified interdealer quotation medium. The quotations listed below reflect
interdealer prices, without retail mark-up, mark-down or commissions, and
may not represent actual transactions. Our common stock trades on the OTC
Bulletin Board(R) under the symbol "CNES."
Price Range
High Low
Year Ended September 30, 2001:
First Quarter (October 1 - December 31) $0.325 $0.09
Second Quarter (January 1 - March 30) 0.55 0.09
Third Quarter (April 1 - June 30) 0.36 0.16
Fourth Quarter (July 1 - September 30) 0.23 0.11
Year Ended September 30, 2002:
First Quarter $0.19 $0.095
Second Quarter 0.105 0.07
Third Quarter 0.10 0.016
Fourth Quarter 0.036 0.007
<page>4
Year Ended September 30, 2003:
First Quarter $0.036 $0.007
Second Quarter 0.012 0.003
As of May 20, 2003, we had 279,689,959 shares of common stock
outstanding and held of record by approximately 820 shareholders, and the
high and low sale prices of a share of our common stock on the OTC Bulletin
Board(R) on that date were $.005 and $.0042, respectively. Within the holders
of record of our common stock are depositories such as Cede & Co. that hold
shares of stock for brokerage firms which, in turn, hold shares of stock
for beneficial owners.
THE CAPITALIZATION TABLE
IS REPLACED WITH THE FOLLOWING:
- -------------------------------------------------------------------------------
CAPITALIZATION
The following table sets forth our capitalization as of March 31,
2003. You should read this information together with our consolidated
financial statements and the notes relating to those statements appearing
elsewhere in this prospectus. The table excludes an aggregate of
approximately 550,000,000 shares of common stock that were issuable upon
conversion or exercise of outstanding convertible notes, debentures,
options and warrants as of March 31, 2003.
March 31, 2002
-----------------
Long-term debt, less current portion......................... --
============
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 50,000,000 shares.
Class A Preferred Stock, $1.00 par value, 1,000,000 shares
authorized, 200,020 shares issued and outstanding.......... 200,020
Common stock, no par value. Authorized 250,000,000 shares;
issued and outstanding, 88,837,163 shares..................... 19,112,932
Additional paid in capital
Class B Preferred Stock, $1.00 par value, 1,000,000 shares
authorized, no shares issued and outstanding............... 100,000
Common stock, no par value. Stock options and warrants
exercisable, 9,807,154 shares............................... 1,344,663
Beneficial conversion option; debt instruments.................. 994,827
Accumulated deficit............................................. (24,367,730)
---------------
Total shareholders' equity (deficit)......................... $ (2,614,601)
---------------
Total capitalization......................................... $ (2,614,601)
<page>5
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes and the information
included under the caption "Risk Factors" included elsewhere in this
prospectus. Except for historical information, the following discussion
contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and intentions
and our current beliefs regarding revenues we might earn if we are
successful in implementing our business strategies. See "Special Note
Regarding Forward-Looking Statements" for further information regarding
forward-looking statements. Our actual results may differ materially from
the results discussed in the forward-looking statements as a result of a
number of factors, many of which are beyond our control, including those
factors discussed under "Risk Factors" and other headings in this
prospectus, which could, among other things, cause the price of our common
stock to fluctuate substantially.
Overview
Since 1995, we have been 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 mid to late 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.
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.
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
<page>6
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 Results of Operations for the Three Months Ended
March 31, 2003 and 2002
We did not generate any revenues for the three months ended March
31, 2003 and March 31, 2002. General and administrative expenses increased
by $109,836 or 38% to $398,884 for the three months ended March 31, 2003 as
compared to $289,048 for the same period in 2002. This increase was
primarily due to an increase in our H-Net(TM) system's development costs.
Interest expense increased by $235,889 or 787% to $265,848 during
the three months ended March 31, 2003 as compared to $29,959 for the same
period in 2002. This increase in interest expense was due to increased
borrowings between the periods reported.
Net loss for the three months ended March 31, 2003 increased by
$380,739 or 119% to $699,746 as compared to a net loss of $319,007 for the
same period in 2002. This increase primarily was due to the increase in
general and administrative expenses and increase in interest expense as
described above.
Comparison of Results of Operations for the Six Months Ended March
31, 2003 and 2002
We did not generate any revenues for the six months ended March 31,
2003 and March 31, 2002. General and administrative expenses decreased by
$131,008 or 13% to $887,116 for the six months ended March 31, 2003 as
compared to $1,018,124 for the same period in 2002. This decrease was
primarily due to a decrease in our H-Net(TM) system's development costs.
Interest expense increased by $470,825 or 832% to $527,438 during
the six months ended March 31, 2003 as compared to $56,613 for the same
period in 2002. This increase in interest expense was due to increased
borrowings between the periods reported.
Net loss for the six months ended March 31, 2003 increased by
$374,831 or 35% to $1,449,568 as compared to a net loss of $1,074,737 for
the same period in 2002. This increase primarily was due to the increase in
interest expense, which was partially offset by the decrease in general and
administrative expenses as described above.
Liquidity and Capital Resources
During the six months ended March 31, 2003 we financed our
operations solely through private placements of securities. Because we have
only recently completed the development of our H-Net(TM) system for commercial
production and are in a cost-reduction phase of development, we have never
generated any revenue from operations. Our consolidated financial
statements as of and for the years ended September 30, 2002 and 2001 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 March 31, 2003, we had negative working capital of
approximately $2,659,000 and an accumulated deficit of approximately
$24,368,000. As of that date, we had approximately $67,000 in cash and cash
equivalents. We had accounts payable and accrued compensation expenses of
approximately $1,357,000. We had other current liabilities, including
amounts due to officers, accrued interest, notes and convertible debts of
approximately $1,386,000, including those issued prior to the beginning of
<page>7
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 approximately
$536,000 for the six months ended March 31, 2003 as compared to
approximately $594,000 for the six months ended March 31, 2002. No cash was
provided by our investing activities for the six months ended March 31,
2003 and March 31, 2002.
Cash provided by our financing activities totaled approximately
$548,000 for the six months ended March 31, 2003 as compared to
approximately $591,000 for the six months ended March 31, 2002. We raised
all of the cash provided by financing activities during the six months
ended March 31, 2003 from the issuance of convertible debentures,
promissory notes and/or stock subscriptions.
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 terms with Laurus regarding our obligations under this
note. Under the terms of this agreement, we paid to Laurus $100,000 in cash
on February 19, 2002 and $50,000 in cash on April 5, 2002. However, we have
not met all the terms of the February 15, 2002 agreement, as well as, the
original terms under the April 2001 Convertible Note. We are currently
working with Laurus to pay down the remaining balance of the original April
2001 Convertible Note. As of September 30, 2002, approximately $129,000 of
principal and accrued and unpaid interest under the original note remained
outstanding. As of May 20, 2003, approximately $62,500 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-NetTM
system. This loan from the Mercator Momentum Fund is 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 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.
<page>8
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. This case is currently in the
pre-trial and discovery phases.
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 deployment of our H-Net(TM) system.
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 May 20,
2003, an aggregate of $113,590 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 May 20,
2003, an aggregate of $150,000 of principal plus related accrued and unpaid
interest relating to the debentures issued in March 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 May 20,
2003, an aggregate of $300,000 of principal plus related accrued and unpaid
interest relating to the debentures issued in June 2002 remained
outstanding.
In November 2002, we issued $200,000 of our secured convertible
debentures to three accredited investors in the first stage of a three-
stage offering. The secured convertible debentures are due November 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 1,000,000 shares of common stock. The net proceeds of that
offering, after payment of related expenses, were approximately $225,000.
The investors are obligated to purchase an additional $150,000 of our
secured convertible debentures and warrants to purchase up to 750,000
shares of common stock within 5 days after the effective date of the
registration statement of which this prospectus is a part. As of May 20,
2003, an aggregate of $192,500 of principal plus related accrued and unpaid
interest relating to the debentures issued in November 2002 remained
outstanding.
In March 2003, we issued $150,000 of our secured convertible
debentures to three accredited investors in the second stage of a three-
stage offering. The secured convertible debentures are due March 3, 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
<page>9
offering, after payment of related expenses, were approximately $125,000.
As of May 20, 2003, the full amount of the debentures issued in February
2003 remained outstanding.
In May 2003, we issued $150,000 of our secured convertible
debentures to three accredited investors in the third stage of a three-
stage offering. The secured convertible debentures are due May 12, 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 $125,000. As of May 20,
2003, the full amount of the debentures issued in May 2003 remained
outstanding.
As of May 20, 2003, we were in default under our obligations to
register for resale shares of our common stock underlying certain of our
outstanding convertible debentures. In addition, as of that date, we also
were in default under our obligations to make quarterly interest payments
under all of our outstanding convertible debentures. Also, as of that date,
we were in default under our obligations to repay an aggregate of $113,590
of principal plus related accrued and unpaid interest on our convertible
debentures due March 29, 2003. As of that date we were also in default
under our obligations to repay an aggregate of $150,000 of principal plus
related accrued and unpaid interest on our convertible debentures due May
10, 2003. We anticipate that these convertible debentures ultimately will
be converted into shares of our common stock and that we therefore will not
be obligated to repay the outstanding principal and accrued and unpaid
interest amounts on those debentures.
As of May 20, 2003 we had an additional note due September 1, 2003
payable in the approximate amount of $195,000. This note bears 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, 2002 and 2001 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
in this document and in Note 1 to our consolidated financial statements for
the years ended September 30, 2002 and 2001, we have suffered recurring
losses from operations and at September 30, 2002 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.
We have been, and currently are, working toward identifying and
obtaining new sources of financing. Deteriorating global economic
conditions 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.
<page>10
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 have recently completed development of our H-Net(TM) system for
commercial production and are now in a cost-reduction phase of development
with the goal of deployment of our H-Net(TM) system in mid to late 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.
THE FIFTH AND SIXTH PARAGRAPHS OF THE CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS SECTION ARE REPLACED WITH THE FOLLOWING:
- ----------------------------------------------------------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At September 30, 2000, Robert Spigno 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 we 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, we executed a new
promissory note due September 1, 2002 initially in that amount. For the
year ended September 30, 2000, we 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. On September 1, 2002, we executed a new promissory note due September
1, 2003 initially in the aggregate amounts owed to Mr. Spigno as of that
date. The aggregate amounts due Mr. Spigno under these arrangements as of
March 31, 2003 was $7,753.33.
At September 30, 2000, Patricia Spigno 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, we 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, we executed a new promissory note due September 1, 2002 initially in
that amount. Ms. Spigno also borrowed on a personal credit card for our
benefit in the amount of $18,455, bringing our total obligation due Ms.
Spigno at September 30, 2001 to $44,329. During the year ended September
30, 2002, additional loan advances from Ms. Spigno were $19,500 and accrued
interest was $2,269. We repaid certain amounts resulting in an aggregate
loan balance due at March 31, 2003 of $8,902. The loan balance is due on
demand and continues to accrue interest at the rate of 18% per year.
<page>11
THE PRINCIPAL AND SELLING SECURITY HOLDERS
SECTION IS REPLACED WITH THE FOLLOWING:
- ----------------------------------------------------------------------------
PRINCIPAL AND SELLING SECURITY HOLDERS
As of May 20, 2003, a total of 279,689,959 shares of our common
stock were outstanding. The following table sets forth information as of
that date regarding the beneficial ownership of our common stock both
before and immediately after the offering by:
o each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our
common stock as of the date of the table;
o each selling security holder;
o each of our directors;
o each executive officer named in the Summary Compensation
Table contained elsewhere in this prospectus; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Securities and Exchange Commission, and generally
includes voting or investment power with respect to securities. Except as
indicated in the footnotes to the table, we believe each holder possesses
sole voting and investment power with respect to all of the shares of
common stock owned by that holder, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a
holder and the percentage ownership of that holder, shares of common stock
subject to options or warrants or underlying notes or preferred stock held
by that holder that are currently exercisable or convertible or are
exercisable or convertible within 60 days after the date of the table are
deemed outstanding. Those shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of any other person or
group.
All of the shares of common stock being offered under this
prospectus are issuable upon conversion of debentures or upon exercise of
warrants that were acquired by the selling security holders from us in
connection with a private placement that we made effective as of November
27, 2002, March 3, 2003 and May 12, 2003. In the private placement
effective November 27, 2002, we issued $200,000 in principal amount of
secured convertible debentures due November 27, 2003 to three accredited
investors, or the debenture investors, in exchange for gross proceeds of
$200,000 in cash. In connection with that private placement, we also issued
warrants to purchase up to an aggregate of 1,000,000 shares of our common
stock to the debenture investors. In the private placement effective March
3, 2003, we issued $150,000 in principal amount of secured convertible
debentures due March 3, 2004 to the debenture investors in exchange for
gross proceeds of $150,000 in cash. In connection with that private
placement, we also issued warrants to purchase up to an aggregate of
750,000 shares of our common stock to the debenture investors. In the
private placement effective May 12, 2003, we issued $150,000 in principal
amount of secured convertible debentures due May 12, 2004 to the debenture
investors in exchange for gross proceeds of $150,000 in cash. In connection
with that private placement, we also issued warrants to purchase up to an
aggregate of 750,000 shares of our common stock to the debenture investors.
<page>12
The secured convertible debentures bear interest at an initial rate
of 12% per year. The initial conversion price of the debentures is equal to
the lesser of (i) 50% of the average of the three lowest intraday trading
prices of a share of our common stock for the twenty trading days
immediately preceding a conversion date, and (ii) $.01. The conversion
price also is subject to customary anti- dilution adjustments in connection
with mergers, acquisitions, stock splits, dividends and the like.
We agreed to register for resale a total of 200% of the shares of
common stock that may be issuable upon conversion of the convertible
debentures and related warrants. The shares of common stock being offered
under this prospectus include shares of common stock issuable upon
conversion of the secured convertible debentures and upon exercise of the
related warrants without regard to the exercise limitations described
below.
The terms of the secured convertible debentures and the warrants
prohibit conversion of the secured convertible debentures or exercise of
the warrants to the extent that conversion of the debentures would result
in the debenture investor, together with its affiliates, beneficially
owning in excess of 4.9% of our outstanding shares of common stock, and to
the extent that exercise of the warrants would result in the debenture
investor, together with its affiliates, beneficially owning in excess of
4.9% of our outstanding shares of common stock. A debenture investor may
waive the 4.9% limitation upon 60 days' prior written notice to us. Also,
these limitations do not preclude a debenture investor from converting or
exercising a secured convertible debenture or warrant and selling shares
underlying the secured convertible debenture or warrant in stages over time
where each stage does not cause the investor and its affiliates to
beneficially own shares in excess of the limitation amounts. Despite the
limitations contained in the secured convertible debentures and warrants,
the number of shares shown in the table as beneficially owned by each
debenture investor prior to this offering is in excess of 4.9% of the
shares of our common stock outstanding based on the date of the table. The
number of shares being offered by each debenture investor under this
prospectus is in excess of the amount of shares issuable to that investor
without such investor's waiver of the conversion and exercise limitations
discussed above.
We have agreed to pay expenses, other than broker discounts and
commissions, if any, in connection with this prospectus. We have agreed
with some of the selling security holders to prepare and file all
amendments and supplements to the registration statement of which this
prospectus is a part as may be necessary under the rules and regulations of
the Securities Act of 1933 to keep it effective until the earlier of:
O the date that all shares of common stock offered under this
prospectus may be resold by those holders in a public
transaction without volume limitations or other material
restrictions without registration under the Securities Act,
including without limitation, under Rule 144 under the
Securities Act; and
O the date that all shares of common stock offered by those
holders under this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares
of common stock offered by the selling security holders.
<page>13
<Table>
Name and Address of Title of Shares Beneficially Owned Shares Shares Beneficially
of Beneficial Owner (1)(2) Class Prior to the Offering Being Offered Owned After the Offering(3)
Number Number % of Class
__________________________ ________ _________________________ _____________ __________________________
Robert A. Spigno.......... Common 11,436,210(4) -- 11,436,210 4.00%
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 100.00%
Patricia A. Spigno........ Common 2,423,863(7) -- 2,423,863 *
Lawrence Muirhead......... Common 971,393 -- 971,393 *
Melissa McGough........... Common 454,138(8) -- 454,138 *
AJW Partners, LLC Common 74,307,527(9) 74,307,527(9) -- --
AJW Offshore, Ltd......... Common 74,307,527(9) 74,307,527(9) -- --
AJW Qualified Partners,
LLC....................... Common 74,308,443(9) 74,308,443(9) -- --
All directors and executive
officers
as a group (4 persons) Common 15,285,604(10) -- 15,285,604 5.33%
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 100.00%
</table>
_______________
* Less than 1.00%
(1) The address of each director and executive officer named in
this table is c/o ConectiSys Corporation, 24730 Avenue
Tibbitts, Suite 130, Valencia, California 91355. Mr. Spigno
and Mr. Muirhead are directors and executive officers of
ConectiSys. Ms. McGough is a director of ConectiSys. Ms.
Spigno is an executive officer of ConectiSys.
(2) The address of each of AJW Partners, LLC, AJW Offshore,
Ltd. and AJW Qualified Partners, LLC is 1044 Northern
Boulevard, Suite 302, Roslyn, New York 11576. AJW Offshore,
Ltd. was formerly known as AJW/New Millennium Offshore,
Ltd. AJW Qualified Partners was formerly known as Pegasus
Capital Partners, LLC.
(3) Assumes all shares of class being offered are sold.
(4) Includes 1,443,654 shares underlying options and 5,000,000
shares issuable upon conversion of Class B Preferred Stock.
Mr. Spigno holds an option to purchase Class B Preferred
Stock.
(5) Includes an option to purchase up to 250,000 shares of
Class A Preferred Stock.
(6) Represents an option to purchase up to 500,000 shares of
Class B Preferred Stock.
(7) Includes 500,000 shares underlying options.
(8) Includes 100,000 shares underlying options.
(9) The number of shares set forth in the table for the selling
security holders represents an estimate of the number of
shares of common stock to be offered by the selling
security holders. The number of shares set forth in the
table for the selling security holders does not include
shares of common stock issuable upon conversion of any
debentures or exercise of related warrants issued to the
selling security holders in connection with the debenture
financing transactions of ConectiSys Corporation that
occurred in March 2002, May 2002 and June 2002. The actual
number of shares of common stock issuable upon conversion
<page>14
of the debentures and exercise of the related warrants is
indeterminate, is subject to adjustment and could be
materially less or more than such estimated number
depending on factors which cannot be predicted by us at
this time including, among other factors, the future market
price of the common stock. The actual number of shares of
common stock offered in this prospectus, and included in
the registration statement of which this prospectus is a
part, includes such additional number of shares of common
stock as may be issued or issuable upon conversion of the
debentures and exercise of the related warrants by reason
of any stock split, stock dividend or similar transaction
involving the common stock, in accordance with Rule 416
under the Securities Act of 1933. Under the terms of the
debentures, if the debentures had actually been converted
on May 20, 2003, the conversion price would have been
$.00225. Under the terms of the warrants, if the warrants
had actually been converted on May 20, 2003, the exercise
price would have been $.005.
(10) Includes 7,043,654 shares underlying options.
<page>15
CONECTISYS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited)....F-1
Condensed Consolidated Statement of Operations for the Three
and six Months Ended March 31, 2003 and 2002 and the
Cumulative Period From December 31, 1990 (Inception)
Through March 31, 2003 (unaudited)...................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through March 31, 2003.................F-4
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended March 31, 2003 and 2002 and the Cumulative
Period From December 31, 1990 (Inception) Through
March 31, 2003 (unaudited)...........................................F-10
Notes to Condensed Consolidated Financial Statements (unaudited)..........F-13
<page>16
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, 2003
Mar. 31
2003
Unaudited
Assets
Current assets
Cash 66,895
Debt issuance cost - current, net of accumulated
amortization of $242,232, $0 and $131,172 18,043
Total current assets 84,938
Property and equipment, net of accumulated
depreciation of $287,504, $273,041 and $280,373 44,208
License and technology, net of accumulated
amortization of $421,478, $421,478 and $421,478 0
Total assets 129,146
<page>F-1
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, 2003
Mar. 31
2003
Unaudited
Liabilities and shareholders' equity
Current liabilities
Accounts payable 337,802
Accrued compensation 1,019,588
Due to officers 19,431
Accrued interest payable 264,941
Other current liabilities 10,903
Notes payable and current potion of
long-term debt 1,091,082
Total current liabilities 2,743,747
Long-term debt, net of current 0
Total liabilities 2,743,747
Shareholders' equity
Preferred stock - Class A 1,000,000 shares authorized
$1.00 par value, 200,020 issued and outstanding 200,020
Convertible preferred stock - Class B 1,000,000 shares
authorized $1.00 par value, no shares issued
and outstanding 0
Common stock - 1,000,000,000 shares authorized,
no par value, 213,952,135, 36,746,568 and 64,311,823
respectively shares issued and outstanding 19,112,932
Additional paid-in-capital:
Stock options exercisable,
Convertible preferred stock - Class B
1,000,000 stock options issued and outstanding, common 100,000
Common stock - 10,557,154; 8,807,154
and 3,207,154 respectively 1,345,350
Beneficial conversion option 994,827
Accumulated gain (deficit) during development stage (24,367,730)
Total shareholders' deficit (2,614,601)
Total liabilities and shareholders' equity 129,146
<page>F-2
<table>
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three and Six Months Ended March 31, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2003
Dec. 1, 1990
(Inception)
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended Through
Mar. 31 Mar. 31 Mar. 31 Mar. 31 Mar. 31
2003 2002 2003 2002 2003
Unaudited Unaudited Unaudited Unaudited Unaudited
Revenues 0 0 0 0 517,460
Cost of goods sold 35,014 0 35,014 0 676,402
Gross profit (35,014) 0 (35,014) 0 (158,942)
General and administrative 398,884 289,048 887,116 1,018,124 19,248,536
Loss from operations (433,898) (289,048) (922,130) (1,018,124) (19,407,478)
Non-operating income (expense) 0 0 0 0 (835,776)
Interest expense (265,848) (29,959) (527,438) (56,613) (2,296,913)
Net loss (699,746) (319,007) (1,449,568) (1,074,737) (22,540,167)
Weighted average shares outstanding 93,438,124 35,701,769 104,251,198 35,003,564
Net loss per share (0.01) (0.01) (0.01) (0.03)
<page>F-3
</table>
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2003
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Balance, Dec. 1, 1990
(re-entry
development stage) 0 0 10,609 1,042,140 (1,042,140) 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 515
Services, Mar. 1993 0 0 2,000 500 0 500
Services, Mar. 1993 0 0 1,200 600 0 600
Net loss for the year 0 0 0 0 (5,459) (5,459)
Balance, Nov. 30, 1993 0 0 16,809 1,044,755 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 23,655
Services, Sep. 1994 0 0 8,700 11,614 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 33,000
Net loss for the year 0 0 0 0 (32,544) (32,544)
Balance, Nov. 30, 1994 16,345 16,345 50,000 1,131,024 (1,080,143) 67,226
Shares issued in exchange for:
Cash, Feb. 1995 0 0 1,160 232,000 0 232,000
Debt repayment, Feb. 1995 0 0 2,040 408,000 0 408,000
Debt repayment, Feb. 1995 0 0 4,778 477,810 0 477,810
Acquisition of assets, CIPI
Feb. 1995 0 0 28,750 1,950,000 0 1,950,000
Acquisition of assets,
Apr. 1995 0 0 15,000 0 0 0
Cash and services, Apr.
and May 1995 0 0 16,000 800,000 0 800,000
Cash, Jun. 1995 0 0 500 30,000 0 30,000
Acquisition of assets and
services, Sep. 1995 0 0 4,000 200,000 0 200,000
Cash, Sep. 1995 0 0 41 3,000 0 3,000
Acquisition of assets,
Sep. 1995 0 0 35,000 1,750,000 0 1,750,000
Return of assets, CIPI
Sep. 1995 0 0 (27,700) (1,950,000) 0 (1,950,000)
Net loss for the year 0 0 0 0 (2,293,867) (2,293,867)
Balance, Nov. 30, 1995 16,345 16,345 129,569 5,031,834 (3,374,010) 1,674,169
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2003
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Cash, Feb. 1996 0 0 1,389 152,779 0 152,779
Debt repayment, Feb. 1996 0 0 10,000 612,000 0 612,000
Services, Feb. 1996 0 0 3,160 205,892 0 205,892
Cash, Mar. 1996 0 0 179 25,000 0 25,000
Shares returned and
canceled Mar. 1996 0 0 (15,000) 0 0 0
Services, Apr. 1996 0 0 13 2,069 0 2,069
Services, Sep. 1996 4,155 A 4,155 586 36,317 0 40,472
Services, Oct. 1996 0 0 6,540 327,000 0 327,000
Debt repayment, Nov. 1996 0 0 2,350 64,330 0 64,330
Net loss for the year 0 0 0 0 (2,238,933) (2,238,933)
Balance, Nov. 30, 1996 20,500 20,500 138,786 6,457,221 (5,612,943) 864,778
Shares issued in exchange for:
Services, Mar. 1997 0 0 228 6,879 0 6,879
Services, Apr. 1997 0 0 800 13,120 0 13,120
Services, Jul. 1997 0 0 1,500 16,200 0 16,200
Cash, Jul. 1997 0 0 15,000 300,000 0 300,000
Services, Aug. 1997 0 0 5,958 56,000 0 56,000
Adjustment for partial
shares due to reverse
stock split (1:20) 0 0 113 0 0 0
Services, Oct. 1997 0 0 1,469,666 587,865 0 587,865
Debt repayment, Oct 1997 0 0 1,540,267 620,507 0 620,507
Cash, Oct. 1997 0 0 1,500,000 281,250 0 281,250
Services, Nov. 1997 0 0 4,950 10,538 0 10,538
Net loss for the year 0 0 0 0 (2,739,268) (2,739,268)
Balance, Nov. 30, 1997 20,500 20,500 4,677,268 8,349,580 (8,352,211) 17,869
Shares issued in exchange for:
Services, Dec. 1997
through Nov. 1998 0 0 2,551,610 2,338,264 0 2,338,264
Debt repayment, Apr. 1998
through Sep. 1998 0 0 250,000 129,960 0 129,960
Cash, Jan. 1998 through
Jul. 1998 0 0 4,833,334 1,139,218 0 1,139,218
Acquisition of assets,
Jul. 1998 0 0 300,000 421,478 0 421,478
Acquisition of 20% minority
interest in subsidiary,
Jul. 1998 0 0 50,000 59,247 0 59,247
Services, Nov. 1998 60,000 A 60,000 0 0 0 60,000
Net loss for the year 0 0 0 0 (4,928,682) (4,928,682)
Balance, Nov. 30, 1998 80,500 80,500 12,662,212 12,437,747 (13,280,893) (762,646)
<page>F-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2003
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Shares returned and canceled
Dec. 1998 0 0 (1,350,000) (814,536) (814,536)
Services, Dec. 1998
through Sep. 1999 0 0 560,029 349,454 150,000 499,454
Cash, Dec. 1998
through Sep. 1999 0 0 1,155,800 129,537 129,537
Debt repayment, Sep. 1999 39,520 A 39,520 960,321 197,500 100,000 337,020
Net loss for the year 0 0 0 0 (1,323,831) (1,323,831)
Balance, Sep. 30, 1999 120,020 120,020 13,988,362 12,299,702 250,000 (14,604,724) (1,935,002)
Shares issued in exchange for:
Services, October 1999 through (17,500) (12,000) (12,000)
September 2000, valued from
$.025 to $0.80 per shares 0 0 2,405,469 990,949 990,949
Retainers, debt and accrued
liabilities, October 1999
through September 2000 valued
from $0.25 to $1.57 shares 0 0 2,799,579 1,171,638 1,171,638
Cash, October 1999 through
September 2000, with subscription
prices ranging from $0.25 to
$0.66 per share 0 0 2,295,482 839,425 (15,450) 823,975
Issuance of $63,500 consultant
stock options, March, 2000
at an exercise price of $2.00
per share 0 0 0 0 214,130 0 0 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March 2000
to $0.38 and approx.$0.39
per share 0 0 0 0 1,113,610 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May 2000, with
common stock strike prices
ranging from $0.15 to approx.
$0.39 per share, in exchange for
officer debt 20,000 20,000 2,056,346 897,707 (407,735) 509,972
Issuance of $500,000 consultant
stock options, September 2000
with floating exercise prices
set at 15% below current 0 0 0 0 65,000 65,000
Net loss for the year 0 0 0 0 0 0 (3,812,140) (3,812,140)
Balance, September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) (869,868)
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2003
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Services, October 2000 through
September 2001 valued from
$0.11 to $0.40 per shares 0 0 3,471,007 572,790 0 0 0 73,790
Retainers, debt and accrued
liabilities October 2000
through September 2001, valued
from $0.11 to $0.43 per 0 0 3,688,989 487,121 0 0 0 487,121
Cash, October 2000 through
March 2001 with subscription
prices ranging from $0.075 to
$0.083 per share 0 0 1,045,500 78,787 0 0 0 78,787
Collection of stock subscription
receivable, October 2000
on 61,800 shares 0 0 0 0 0 15,450 15,450
Exercise of 400,000 common
stock options, January, 2001
at a strike price of $0.085 per
share, in exchange for 0 0 400,000 86,000 (52,000) 34,000
Issuance of 1,000,000 common
stock warrants, April 2001
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt 0 0 0 0 77,228 0 0 77,228
Issuance of 2,000,000 consultant
stock options, September 2001
at a strike price of $0 0 0 0 0 115,000 0 0 115,000
Beneficial conversion options
April 2001 through September
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible 0 0 0 0 155,027 0 0 155,027
Net loss for the year 0 0 0 0 0 0 (2,154,567) (2,154,567)
Balance, September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 0 (20,571,431) (1,489,032)
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2003
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Services, October 2001 through
September 2002 valued from
$0.02 to $0.25 per shares 0 0 2,180,000 179,916 0 0 0 179,916
Debt and accrued liabilities
October 2001 through September
2002 with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per shares 60,000 60,000 10,948,077 428,563 0 0 0 488,563
Cash, October 2001 through
September 2002 with prices
ranging from $0.01 to $0.083
per share 0 0 5,833,334 200,000 0 0 0 200,000
Exercise of 550,000 common stock
option by a consultant at a
strike price of $0.13 per share
in exchange for debt 0 0 550,000 103,125 (31,625) 0 0 71,500
Issuance of 3,750,000 warrants
April 2002 through June 2002
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt 0 0 0 0 100,087 0 0 100,087
Beneficial conversion option
April 2002 through June 2002
pertaining to $750,000 principal
valued of 12% convertible 0 0 0 0 649,913 0 0 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount 0 0 12,667,178 111,515 (80,702) 0 0 30,813
Net loss for the year 0 0 0 0 0 0 (2,346,732) (2,346,732)
Balance, September 30, 2002 200,020 200,020 64,311,823 18,435,238 2,167,933 0 (22,918,163) (2,114,972)
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2003
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Services, October 2001 through
March 2003 valued from
$0.01 to $0.02 per shares 0 0 16,880,468 136,305 0 0 0 136,305
Debt and accrued liabilities
October 2001 through March
2003 with common shares
valued from $0.005 to $0.02
per share 0 0 12,004,280 225,211 0 0 0 225,211
Cash, October 2001 through
March 31, 2003 with prices
ranging from $0.005 to $0.01
per share 0 0 88,500,000 140,000 0 0 0 140,000
Beneficial conversion option
October 2002 through March 2003
pertaining to $350,000 principal
valued of 12% convertible debt 350,000 350,000
Conversion of $89,730 principal
value of 12% convertible debt
along with $8,692 accrued
interest, net of $77,755
convertible debt discount 0 0 32,255,564 176,178 (77,755) 0 0 98,423
Net loss for the year 0 0 0 0 0 0 (1,449,568) (1,449,568)
Balance, March 31, 2003 200,020 200,020 213,952,135 19,112,932 2,440,178 0 (24,367,731) (2,614,601)
<page>F-9
</table>
<table>
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended March 31, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2003
Dec. 1, 1990
(Inception)
6 Months Ended 6 Months Ended Through
Mar. 31 Mar. 31 Mar. 31
2003 2002 2003
Unaudited Unaudited Unaudited
Operating activities
Net income (loss) (1,449,568) (1,074,737) (23,289,989)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Provision for bad debt 1,422,401
Depreciation and amortization 7,131 13,290 1,677,105
Stock issued for services 181,305 214,700 7,568,078
Stock issued for interest 91,339 0 626,930
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 1,299,861
Amortization of debt issuance cost
and note discounts 503,770 0 1,146,312
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses 0 0
Interest receivable 0 0 (95,700)
Deposits and prepaids 0 0 182,346
Increase (decrease) in liabilities
Bank overdraft 0 0 0
Accounts payable 148,904 (34,886) 769,152
Accrued compensation 91,738 270,865 2,125,760
Due to officers (111,053) 0 562,739
Other current liabilities 728 16,981 457,571
Net cash provided by (used by) operating activities (535,706) (593,787) (5,639,135)
<page>F-10
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended March 31, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2003
Dec. 1, 1990
(Inception)
6 Months Ended 6 Months Ended Through
Mar. 31 Mar. 31 Mar. 31
2003 2002 2003
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 (198,530)
0 0 (1,615,087)
Financing activities
Common stock issued for cash 140,000 3,372,172
Stock warrants 0 0 177,315
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Debt issuance cost 0 0 (220,275)
Proceeds from debts
Related party 0 206,544
Other 420,000 732,110 3,903,880
Payments on debt
Related party 0 (52,623) (53,172)
Other (12,500) (88,000) (398,907)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
Net cash from (used by) financing activities 547,500 591,487 7,321,117
Net increase (decrease) in cash 11,794 (2,300) 66,895
Cash beginning of period 55,101 6,111 0
Cash end of period 66,895 3,811 66,895
<page>F-11
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended March 31, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2003
Dec. 1, 1990
(Inception)
6 Months Ended 6 Months Ended Through
Mar. 31 Mar. 31 Mar. 31
2003 2002 2003
Unaudited Unaudited Unaudited
Cash paid during the year for
Interest 0 0 337,669
Taxes 0 0 4,850
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 309,803 301,250 4,665,859
Service & interest 272,644 214,700 5,221,836
Preferred stock issued for
Services 0 0 60,000
Repayment of debt 60,000 60,000 179,520
Preferred stock options issued for
Repayment of debt 0 0 100,000
<page>F-12
</table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
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.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the
State of Nevada as a wholly owned subsidiary of the Company.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc.,
was formed, which has no net assets and which has not, as yet, commenced
operations.
Basis of presentation and going concern uncertainty
The accompanying consolidated financial statements include the accounts and
transactions of Conectisys Corporation, its wholly owned subsidiaries
eEnergyServices.com, Inc., and United Telemetry Company, Inc. All material
intercompany transactions and balances have been eliminated in the
accompanying consolidated financial statements. Certain prior period
balances have been reclassified to conform to the current years
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 March 31, 2003, the Company had a deficiency in working capital
of approximately $2,700,000, and had incurred continual net losses since
its return to the development stage in fiscal 1996 of approximately
$21,000,000, which raise substantial doubt about the Company's ability to
continue as a going concern.
<page>13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
Basis of presentation and going concern uncertainty (continued)
Management's plans for correcting these deficiencies include the future
sales and licensing of the Company's products and technologies the raising
of capital through the issuance of common stock and from continued officer
advances, which will help provide the Company with the liquidity necessary
to retire its outstanding debt and meet operating expenses. Over the
longer term, the Company plans to achieve profitability through the
operations of its subsidiaries. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability
and classification of the recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to
determine such amounts.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
Fair value of financial instruments (continued)
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 March 31, 2003, 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,
accrued interest, other current liabilities, and notes payable approximate
fair value because of the short maturity of these instruments. Also,
market rates of interest apply on all officer advances and short-term
promissory notes. Long-term debt is recorded at face value because the
principal amount is convertible into common stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from
November 30 to September 30.
Research and development costs
The Company has been engaged in researching, engineering, and developing
its H-Net(TM) technologies since August 1995, and did not generate
any revenue during the past fiscal year. The Company hopes to complete
large-scale cost reduction runs for the production and subsequent sale of
the H -Net TM system in 2003.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
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.
Licensing agreements
The costs of acquiring license rights are capitalized and amortized over
the shorter of the estimated useful life of the license or the term of the
license agreement. The licenses are being amortized over a period of five
years. During the year ended November 30, 1998, the Company acquired
additional license rights in the amount of $421,478 from TechniLink.
Although the license remains viable, the Company currently lacks the
resources to develop and market it. Accordingly, during the ten month
period ended September 30, 1999, the Company accelerated amortization on
this asset by writing it down to its net realizable value of $40,000,
incurring a charge of $283,133. The balance was fully amortized at
September 30, 2000.
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 three years for computer
software, five years for vehicles and office equipment, and seven years for
furniture and fixtures.
Technology
Deferred technology costs include capitalized product development and
product improvement costs incurred after achieving technological
feasibility and are amortized over a period of five years. At March 31,
2003, no deferred technology costs were recognized.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
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-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for
goods or services are valued at the cost of the goods or services received
or at the market value of the shares issued, depending on the ability to
estimate the value of the goods or services received.
Income taxes
The Company files a consolidated income tax return. The Company has
adopted Statement of Financial Accounting Standards ("SFAS") No. 109, which
requires the Company to recognize deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis
of assets using the enacted rates in effect in the years in which the
differences are expected to reverse. The Company has recognized a
valuation allowance covering 100% of the net deferred tax assets (primarily
tax benefits from net operating loss carryforwards), because it is more
likely than not that the tax benefits attributable to the deferred tax
assets will not be realized in the future.
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-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 2. RELATED PARTY TRANSACTIONS
The Company previously leased office space in Agua Dulce, California from
S.W. Carver Corporation, a company owned by a major shareholder of the
Company. Around September 1, 2000, the lease was terminated due to the
sale of the building. At that time the Company moved certain property and
equipment to its Valencia locations.
The officers of the Company have continually advanced funds to the Company.
These advances have generally been in the form of revolving short-term
promissory notes at an annual interest rate of 18% (see Note 7 below).
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. These costs were fully expensed during the
year ended September 30, 2002.
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2003 consisted of the following:
Office equipment $ 279,741
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 331,712
Accumulated depreciation (287,504)
-----------
Net book value $ 44,208
===========
NOTE 5. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at March 31, 2003 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
NOTE 6. DEBT ISSUANCE COSTS
In April 2001, the Company received proceeds of $300,000 from an investor
in return for a six-month 8% convertible note and 1,000,000 common stock
warrants, exercisable at $0.192 per share over a four-year period. Debt
issuance costs on this transaction amounted to $32,775, and consisted of
$24,000 in finder's fees, $8,000 in legal fees, and $775 in other costs.
These debt issuance costs were fully amortized at September 30, 2001.
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 6. DEBT ISSUANCE COSTS (continued)
In February 2002, the Company received $340,000 in short-term financing
from an investment group through the issuance of a promissory note maturing
on May 15, 2002 and accruing interest at an annual rate of 18%. Included
in the loan was $40,000 in fees, consisting specifically of a $30,000
finder's fee and a $10,000 legal fee. These loan fees were fully amortized
at September 30, 2002.
In March through June 2002, the Company received $750,000 from an
accredited investor group in exchange for 12% convertible debt, along with
3,750,000 common stock warrants, exercisable over a four-year period at the
lesser of $0.045 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. Debt issuance costs associated with
these loans amounted to $147,500, of which $90,000 represented finder's
fees and $57,500 represented legal costs. Amortization of these fees over
the pro-rata portion of the one-year term of the loans amounted to $58,397
through September 30, 2002, leaving an unamortized balance of $89,103 at
September 30, 2002. An additional $83,369 has been amortized during
the six months ended March 31, 2003, leaving a balance of $5,734.
During November 2002 through March 31, 2003, the Company received $350,000
from an accredited investor group in exchange for 12% convertible debt,
along with 1,750,000 common stock warrants, exercisable over a four-year
period at the lesser of $0.005 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. Debt issuance costs
associated with these loans amounted to $40,000. Amortization of these
fees over the pro-rata portion of the one-year term of the loans amounted
to $13,699 through March 31, 2003, leaving an unamortized balance of
$26,301 at March 31, 2003.
Amortization of this debt issuance cost over the six months ended March 31,
2003 was $97,068, leaving an unamortized balance of $32,035.
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 7. DUE TO OFFICERS
At September 30, 2000, the Company's CEO had made cumulative advances to
the Company of $75,000. On October 1, 2000, these advances were rolled
into a revolving promissory note, due on demand, at an annual interest rate
of 18%. During the year ended September 30, 2001, additional advances were
made in the amount of $20,000 and note repayments totaled $50,000. Accrued
interest was determined to be $11,880, bringing the loan balance at
September 30, 2001 to $56,880. A new promissory note agreement for this
amount was drawn up at the close of business on September 30, 2001,
expiring September 1, 2002. During the year ended September 30, 2002, cash
advances of $31,500 were made. Additionally, the loan account was
increased by $120,875, representing the value of 2,361,814 restricted
shares of the Company's common stock held by the CEO, which were used as
collateral and transferred to a note holder in June of 2002 to partially
cover a $300,000 debt, and by $16,202, representing the value of 794,857
restricted shares of the Company's common stock held by the CEO, which were
pledged to and sold by a convertible note holder on a Company obligation in
and accrued interest amounted to $6,913 during the year ended default.
Repayments of debt by the Company amounted to $144,806 for the year ended
September 30, 2002, resulting in a loan balance due the CEO at September
30, 2002 of $87,564. During the six months ended March 31, 2003, the
Company paid back $18,011, including $1,808 of personal expenses charged on
the Company credit card. The Company issued 2,361,814 shares of common
stock to replace the ones transferred to the convertible debt holder, thus
decreasing the loan by $120,875. Also, $53,625 was credited to the loan for
the common stock of the Company transferred to the CEO in November 2002 for
partial payment against the outstanding balance and $5,450 was credited for
interest payments bringing the balance outstanding to $7,753. The loan
balance at March 31, 2003 is currently due September 1, 2003 and continues
to accrue interest at the rate of 18% per year.
The Company's Secretary/Treasurer advanced the Company approximately
$61,945 during the year ended September 30, 2001, under a separate
revolving promissory note agreement effective October 1, 2000. The note is
a demand note, which accrues interest at an annual rate of 18%. Total
repayments of the note amounted to $40,681. Accrued interest was $4,610
during the year ended September 30, 2001, bringing the loan balance at
year-end to $25,874. A new promissory note agreement for this amount was
drawn up at the close of business on September 30, 2001, expiring September
1, 2002. The Secretary/Treasurer also borrowed on a personal credit card
for the Company's behalf in the amount of $18,455, bringing the total
obligation due the Secretary/Treasurer at September 30, 2001 to $44,329.
During the year ended September 30, 2002, the personal credit card balance
was virtually paid-off. Additional loan advances were $19,500, loan
repayments were $39,500, and accrued interest was $2,269 during the year
ended September 30, 2002, bringing the aggregate loan balance due
the Secretary/Treasurer at September 30, 2002 to $8,143. During the six
months ended March 31, 2003 accrued interest of $759 increased this loan
bringing the balance outstanding to $8,902. The loan balance at March 31,
2003 is currently due September 1, 2003 and continues to accrue interest at
the rate of 18% per year.
During the period May through September 2002, the Company's Chief Technical
Officer advanced the Company $32,946, corresponding to 684,407 restricted
shares of the Company's common stock held by the officer, which were
pledged to and sold by a convertible note holder on a Company obligation in
default. Accrued interest at the annual rate of 18% was $1,831 through the
end of the fiscal year, bringing the total loan amount to $34,777 at
September 30, 2002. During the three months ended March 31, 2003, the
Company issued 731,928 shares of the Company common stock to replace the
one transferred to the convertible note holder, thus decreasing the balance
of the note by $32,946. Also, during the six months ended March 31,
2003, accrued interest of $945 was credited bringing the outstanding
balance to $2,776. The loan balance at March 31, 2003, is currently due
?on demand and continues to accrue interest at the rate of 18% per year.
The aggregate amount due officers at March 31, 2003 was $19,431 and
interest expense on the officer loans amounted to $7,154 for the six
months ended March 31, 2003.
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 8. NOTES PAYABLE
Notes payable at March 31, 2003 consisted of the following:
Registered Convertible Debentures
Convertible Debenture #1
Note payable to AJW Partners, LLC $30,060
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12%
Accrued interest of $889 and principal
on Convertible Debenture convertible
into approximately 24,759,200
shares of common stock at the price
of $0.00125 at March 31, 2003 889 30,949
--------
Note payable to New Millennium Capital $30,060
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12%
Accrued interest of $889 and principal
on Convertible Debenture convertible
into approximately 24,759,200
shares of common stock at the price
of $0.00125 at March 31, 2003 889 30,949
--------
Note payable to AJW/New Millennium 34,870
Offshore, Ltd.(Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12%
Accrued interest of $1,032 and principal
on Convertible Debenture convertible
into approximately 28,721,600
shares of common stock at the price
of $0.00125 at March 31, 2003 1,032 35,902
--------
Note payable to Pegasus Capital Partners, 22,150
LLC. (Convertible Debenture) due
on March 29, 2003 at an annual
interest rate of 12%
Accrued interest of $655 and principal
on Convertible Debenture convertible
into approximately 18,244,000
shares of common stock at the price
of $0.00125 at March 31, 2003 655 22,805
--------
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 8. NOTES PAYABLE (continued)
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 $1,184 and principal
on Convertible Debenture convertible
into approximately 32,947,200
shares of common stock at the price
of $0.00125 at March 31, 2003 1,184 41,184
--------
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 $1,210 and principal
on Convertible Debenture convertible
into approximately 32,947,200
shares of common stock at the price
of $0.00125 at March 31, 2003 1,184 41,184
--------
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 $1,332 and principal
on Convertible Debenture convertible
into approximately 37,065,600
shares of common stock at the price
of $0.00125 at March 31, 2003 1,332 46,332
--------
Note payable to Pegasus Capital Partners, $25,000
LLC. (Convertible Debenture) due
on May 10, 2003 at an annual
interest rate of 12%
Accrued interest of $740 and principal
on Convertible Debenture convertible
into approximately 20,592,000
shares of common stock at the price
of $0.00125 at March 31, 2003 740 25,740
-------
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 8. NOTES PAYABLE (continued)
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 $2,367 and principal
on Convertible Debenture convertible
into approximately 65,893,600
shares of common stock at the price
of $0.00125 at March 31, 2003 2,367 82,367
-------
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 $2,367 and principal
on Convertible Debenture convertible
into approximately 65,893,600
shares of common stock at the price
of $0.00125 at March 31, 2003 2,367 82,367
--------
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 $2,663 and principal
on Convertible Debenture convertible
into approximately 74,130,400
shares of common stock at the price
of $0.00125 at March 31, 2003 2,663 92,663
--------
Note payable to Pegasus Capital Partners, 50,000
LLC. (Convertible
Debenture) due on June 17, 2003
at an annual interest rate of 12%
Accrued interest of $1,479 and principal
on Convertible Debenture convertible
into approximately 41,183,200
shares of common stock at the price
of $0.00125 at March 31, 2003 1,479 51,479
--------
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 8. NOTES PAYABLE (continued)
Note payable to AJW Capital Partners, LLC 66,666
(Convertible Debenture) due on November
27, 2003
at an annual interest rate of 12%
Accrued interest of $1,973 and principal
on Convertible Debenture convertible
into approximately 54,911,200
shares of common stock at the price
of $0.00125 at March 31, 2003 1,973 68,639
--------
Note payable to AJW Offshore, Ltd. 66,666
(Convertible Debenture) due on
November 27, 2003 at an annual
interest rate of 12%
Accrued interest of $1,973 and principal
on Convertible Debenture convertible
into approximately 54,911,200
shares of common stock at the price
of $0.00125 at March 31, 2003 1,973 68,639
--------
Note payable to AJW Qualified Partners, 66,668
LLC. (Convertible
Debenture) due on November 27, 2003
at an annual interest rate of 12%
Accrued interest of $1,973 and principal
on Convertible Debenture convertible
into approximately 54,912,800
shares of common stock at the price
of $0.00125 at March 31, 2003 1,973 68,641
--------
Note payable to AJW Capital Partners, LLC 50,000
Offshore, Ltd. Ltd. (Convertible
Debenture) due on March 3, 2004
at an annual interest rate of 12%
Accrued interest of $477 and principal
on Convertible Debenture convertible
into approximately 40,381,600
shares of common stock at the price
of $0.00125 at March 31, 2003 477 50,477
--------
Note payable to AJW Capital Partners, LLC 50,000
(Convertible Debenture) due on March 2,
2004
at an annual interest rate of 12%
Accrued interest of $477 and principal
on Convertible Debenture convertible
into approximately 40,381,600
shares of common stock at the price
of $0.00125 at March 31, 2003 477 50,477
--------
Note payable to AJW Qualified Partners, LLC 50,000
(Convertible Debenture) due on March 3, 2004
at an annual interest rate of 12%
Accrued interest of $477 and principal
on Convertible Debenture convertible
into approximately 40,381,600
shares of common stock at the price
of $0.00125 at March 31, 2003 477 50,477
--------
Subtotal of Convertible Debentures 941,271
Less note discount (358,944)
---------
Net carrying value of Convertible Debentures 582,327
Note payable to Devon Investment Advisors,
unsecured, due on demand, interest payable
at an annual rate of 10%. 241,824
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including interest
at an annual rate of 18%. 193,567
Convertible note payable to Laurus Master Fund, Ltd.,
with interest payable at an annual rate of 8%, conversion
premium of 25% based on current market price of
the Company's common stock (as defined), initially
due October 12, 2001 and extended to
December 1, 2001. Currently in default. 61,971
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 8. NOTES PAYABLE (continued)
Convertible note payable to Rowell A. McHatten, Jr.,
unsecured, with interest payable at an annual rate
of 14%, convertible into restricted common stock of
the Company at $0.06 per share, due April 24, 2003. 11,393
----------
Total notes payable 1,091,082
Current portion (1,091,082)
---------
Long-term portion $ 0
=========
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.
A convertible note discount of $77,228 was also recognized, which was
effectively fully amortized at September 30, 2002 as interest expense.
The note is convertible (at the option of the holder) into common stock at
the littlest 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 September 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
September 30, 2002, the note was convertible into approximately 20,189,875
common shares at an exercise price of approximately $0.0064 per share. In
either instance, the fair value of the debt instrument (due to the 80%
pricing advantage) was $375,000 (a 25% premium on the principal value),
resulting in a further convertible debt discount of $152,228, representing
the difference between the note's fair value of $375,000 and the allocated
proceeds at issuance of $222,772. This discount was also fully amortized
at September 30, 2001.
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 8. NOTES PAYABLE (continued)
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 September 30, 2002 was $17,168; 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 ($4,292), 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.
The maturity date on the $300,000 principal value 8% convertible note,
initially October 12, 2001, was extended to December 1, 2001. Because of
the inherent conversion benefit feature, the aggregate note with accrued
interest, totaling $311,194 at September 30, 2001, was classified as a
long-term liability.
The Company was unable to pay-off the note at maturity. However, after
receiving bridge financing from another investment group in February 2002,
the Company subsequently repaid $150,000 of the obligation, as the note
holder elected to not convert the debt to shares. Consequently, the note
holder sold 1,479,264 of the 4,773,208 shares of the Company's common stock
that had been pledged by officers of the Company as collateral, resulting
in net proceeds of $49,148. Adding accrued interest of $17,168 at an
annual rate of 12%, brought the loan balance at September 30, 2002 to
$129,214. During the six months ended March 31, 2003, the note
holder sold the remaining 3,293,944 pledged shares for net proceeds of
$67,144 and netted another $3,200 from the issuance of 500,000 new
Company shares. Accrued interest during the six months ended March 31, 2003
was $3,101, bringing the total liability to $61,971.
In February 2002, the Company 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, 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 the Company's 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.
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 9. 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.
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.
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.
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 9. SECURED CONVERTIBLE DEBENTURES (continued)
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).
On November 27, 2002 the Company issued an aggregate of $200,000 of 12%
convertible debentures in a private offering to three accredited investors.
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 $.01 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 1,000,000 shares
of common stock at a per share exercise price equal to $.005.
The fair value of the three debt instruments (due to the 100% pricing
advantage) in aggregate was $400,000 (a 100% premium on the principal
value) making the beneficial conversion option $199,054 at inception
($200,000 less the $946 allocated to the issuance of the 1,000,000
related warrants).
On March 3, 2003, the Company issued an aggregate of $150,000 of 12%
convertible debentures in a private offering to three accredited investors.
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 $.01 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 $.005.
The fair value of the three debt instruments (due to the 100% pricing
advantage) in aggregate was $300,000 (a 100% premium on the principal
value) making the beneficial conversion option $149,291 at inception
($200,000 less the $709 allocated to the issuance of the 750,000
related warrants).
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.
During the six months ended March 31, 2003, the Company issued
32,255,564 shares of common stock in connection with regular interest
payments and upon conversion of an aggregate of $87,730 of principal and
$8,692 of related interest on the Company's convertible debentures. A
corresponding reduction of $77,755 to the beneficial conversion option was
made.
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 9. SECURED CONVERTIBLE DEBENTURES (continued)
As of March 31, 2003 the Company was indebted for an aggregate of
$917,140 of principal and $24,131 (for 2nd quarter 2003) 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.
As part of the recording of the convertible debt transactions, a beneficial
conversion option for $649,913 was recognized, along with a corresponding
debt discount. The total debt discount of $750,000, including $100,087
attributable to the stock warrants, is being amortized over the one-year
life of the debt instruments. $279,115 was amortized through September 30,
2002, resulting in an unamortized discount of $401,652 at September 30,
2002, which was net of $69,233 in convertible bond discount that was
transferred to equity upon the conversion of $93,130 principal value of
debt, along with $6,916 in accrued interest. Accordingly, the $80,702 pro
- -rata portion of the beneficial conversion option attributable to the
$93,130 in debt principal converted, was also transferred to common stock,
leaving a balance $724,238 at September 30, 2002. The conversion of the
Purchaser debt and accrued interest during the period resulted in the
issuance of 12,667,178 shares of the Company's common stock.
As part of the recording of the convertible debt transactions, a beneficial
conversion option for $199,054 was recognized, along with a corresponding
debt discount. The total debt discount of $200,000, including $946
attributable to the stock warrants, is being amortized over the one-year
life of the debt instruments. $53,151 was amortized through March 31, 2003,
resulting in an unamortized discount of $146,849 at March 31, 2003.
As part of the recording of the convertible debt transactions, a beneficial
conversion option for $149,291 was recognized, along with a corresponding
debt discount. The total debt discount of $150,000, including $709
attributable to the stock warrants, is being amortized over the one-year
life of the debt instruments. $4,129 was amortized through March 31, 2003
resulting in an unamortized discount of $145,871 at March 31, 2003.
As noted above, $182,860 of the $1,100,000 principal value of convertible debt
at March 31, 2003 had been converted, leaving a principal balance of
$917,140 (plus accrued interest of $24,131 for 2nd quarter 2003).
NOTE 10. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's authorized capital stock consists of 1,000,000,000 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 March 31, 2003,
213,952,135 shares of the Company's common stock outstanding held by
approximately 800 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.
During October 2002 through March 2003, the Company issued 15,130,468
shares of its common stock consultants in exchange for $118,805 of services
rendered.
During October 2002 through March 2003, the Company issued 1,000,000
shares of its common stock in exchange for four Advisory Board Members for
$10,000 of services rendered.
During October 2002 through March 2003, the Company issued 750,000
shares of its common stock to two employees for $7,500 in bonuses.
In October 2002 through March 2003, the Company issued 32,255,564 of its
common shares to an investor group in exchange for $89,730 in convertible
debt and $8,692 in interest (considered services). In conjunction with
these transactions, $77,775 of the Company's beneficial conversion option
was also transferred to common stock.
In October through March 2003, the Company issued 88,500,000 shares of
its common stock to investors for $140,000 in cash.
In October through March 2003, the Company issued 12,004,280 shares of
its common stock for a reduction in debt of $225,211.
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 11. INCOME TAXES
Deferred income taxes consisted of the following at March 31, 2003:
Deferred tax asset, benefit
of net operating loss
carryforward $ 7,600,000
Valuation allowance (7,600,000)
-----------
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. During the six
months ended March 31, 2003, the deferred tax asset and valuation
allowance were both increased by $600,000.
The Company has approximately $19,700,000 in both federal and California
net operating loss carryforwards. The federal net operating loss
carryforwards expire as follows: $2,700,000 in the year 2012, $5,300,000 in
2018, $1,200,000 in 2019, $3,500,000 in 2020, $2,400,000 in 2021 and
$2,300,000 in 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 $2,300,000 in 2007. The
latest federal and California corporate income tax returns filed by the
Company were for the tax year ended November 30, 2000.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into four employment agreements with key
individuals, the terms of the agreements are as follows:
1) The CEO (and again President) of the Company entered into an
agreement dated October 2, 1995 (which was subsequently amended September
1, 1997, September 1, 1999, and March 27, 2000) for a period of five years
(to April 1, 2005), and he is entitled to receive a base salary of $160,000
per year. The employee shall further receive a bonus, paid at year-end,
equal to 50% of the employee's salary, for continued employment. The
staying bonus will be compensated for with the Company's restricted common
stock. He is also granted an option to purchase up to 2,000,000 shares of
the Company's
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
restricted common stock at a price equal to 50% of the average market value
for the prior 30 trading days before exercise. On March 27, 2000, the
exercise price was adjusted to a flat $0.3864 per share, with an expiration
date of December 2, 2003.
2) The Acting President of the Company entered into an agreement
dated September 11, 2000 for a period of six months through March 11,
2001. On March 1, 2001 the agreement was extended through
September 30, 2001. He is entitled to receive a base salary
(consulting fees) of $120,000 per year, of which 50% shall be paid in
cash and 50% shall be paid in restricted common stock at a rate equal to
50% of the average market closing price for the last 5 trading days of
each quarter. He shall be issued 100,000 shares of restricted common stock
as a hiring bonus, at a per share price of $0.28415, equivalent to 50% of
the average market closing price for the prior 30 trading days before
the agreement date. He shall further receive performance bonuses (paid
in restricted common stock) upon successful completion of specific
milestones pertaining to the implementation and deployment of the HNET
System. The incentive package could net him up to 650,000 shares of
restricted common stock. As of September 30, 2002, none of these
milestones were met. He is also granted an option through March 11, 2001
to purchase up to 100,000 shares of the Company's restricted common stock
at a price of $0.38 per share. This option has since expired. The
Acting President no longer works for the Company in this capacity, but
remains as a member of the Advisory Board.
3) The Secretary and Treasurer of the Company entered into an
Agreement dated October 2, 1995 (which was subsequently amended September
1, 1997, September 1, 1999, and March 27, 2000), for a period of five years
(extended through April 1, 2005), and she is entitled to receive a base
salary of $80,000 per year. The employee shall further receive a bonus,
paid at year-end, equal to 50% of the employee's
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
salary, for continued employment. The staying bonus shall be compensated
for with the Company's restricted common stock. She is also granted an
option to purchase up to 500,000 shares of the Company's restricted common
stock at a price equal to 60% of the average market value for the prior 180
trading days before exercise. On March 27, 2000, the exercise price was
adjusted to a flat $0.38 per share, with an expiration date of December 31,
2004.
4) The Chief Technical Officer of the Company entered into an
agreement dated August 1, 1998 for an initial term of three years (extended
through August 1, 2003), and he is entitled to receive a base salary of
$150,000 per year, with a minimum of $90,000 to be paid annually in cash
and the balance paid (at the option of the Company) in cash or restricted
common stock under rule 144. The employee shall receive a hire-on bonus of
$75,000 worth of the Company's restricted common stock under rule 144, at
one-half market price. The employee shall further receive performance
bonuses (paid in restricted common stock, as above) upon successful
completion of specific milestones pertaining to the implementation and
deployment of certain software (up to $862,500). If substantially all
performance milestones are met, he is also granted an option to purchase up
to 500,000 shares of the Company's restricted common stock at a price equal
to 60% of the average market value at the date of purchase. As of
March 31, 2003, none of the aforementioned milestones had been
successfully completed.
Litigation
There has been one recent legal proceeding in which the Company has been a
party:
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund in order to make an initial $100,000 payment to Laurus Master Fund,
Ltd. and to fund continuing development of the Company's H-Net(TM) system.
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 the Company's common stock. As of June 13, 2002, the
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 12. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
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.
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 the Company's 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 13. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a
note holder options to purchase 500,000 shares of the Company's Class B
preferred stock at an exercise price of $5.00 per share. As consideration,
the Company reduced its debt to the note holder by $50,000 and received an
extension of time to pay-off its promissory note. The Company also issued
to its CEO options to purchase another 500,000 shares of the Company's
Class B preferred stock at an exercise price of $5.00 per share in exchange
for a reduction in debt of $50,000. Total consideration
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 13. STOCK OPTIONS AND WARRANTS (continued)
received on the above issued options, as evidenced by debt reduction, was
$100,000. These options can be exercised through November 1, 2002 and can
also be converted into common stock at the rate of 10 common shares for
each Class B preferred share. In September 2001, the exercise price on the
Class B preferred stock options was adjusted to $2.50 per share and the
exercise period extended to November 1, 2004.
The Company's CEO currently owns 200,020 shares of the Company's Class A
preferred stock, of which 60,000 shares were purchased during the year
ended September 30, 2002, and has options to purchase another 250,000
shares for $1.00 per share through November 1, 2005.
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. No common
stock options or warrants were granted to officers and directors of the
Company during the years ended September 30, 2002 or 2001. During the
year ended September 30, 2000, the Company had issued 100,000 common stock
options to its Acting President at an exercise price of $0.38 per share,
exercisable over a six-month period. As the exercise price approximated
the market price of the common stock on the date of grant and the term of
the options was short, no compensation cost had to be recorded in the
financial statements under the Black-Scholes call option pricing model.
These common stock options expired on March 11, 2001.
The total balance of stock options and warrants exercisable at September
30, 2000 was $1,235,005, including $100,000 attributable to the Company's
Class B preferred stock, as noted above.
In January 2001, a consultant exercised 400,000 out of 500,000 common stock
options that had been granted in September 2000, at an exercise price of
$0.085 per share. The $34,000 proceeds were applied to an outstanding note
due the consultant. Additionally, $52,000 of additional paid-in capital
(recorded as stock options exercisable) was reclassified to common stock.
This was because an aggregate fair value amount of $65,000 had been
recognized in the financial statements when these options were granted in
September 2000 at an exercise price set at 15% below market. The fair
value was determined utilizing the Black-Scholes call option
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 13. STOCK OPTIONS AND WARRANTS (continued)
pricing model, assuming a 6% risk free rate of return and a volatility
factor of 50%. The remaining 100,000 common stock options expired in
September 2001.
In March 2001, 45,500 common stock warrants were issued to common stock
subscribers, exercisable at $2.00 per share through March 3, 2003. These
warrants had no material value upon issuance.
In April 2001, 1,000,000 common stock warrants were issued to an investor
in conjunction with a $300,000 principal value 8% convertible note. The
warrants are exercisable at $0.192 per share over a four-year period, and
were valued at $77,228 (see Note 8 above).
In September 2001, 2,000,000 common stock options were issued to a
consultant. The options are exercisable at $0.13 per share over a four
- -year period and were valued under the Black-Scholes call option pricing
model (assuming a 50% volatility factor and a 5% risk-free rate of return)
at $115,000, bringing the balance of stock options and warrants exercisable
at the September 30, 2001 fiscal year-end to $1,375,233.
In December 2001 and January 2002, the consultant exercised 550,000 of the
above common stock options, applying the $71,500 cost of exercise against
an outstanding note payable. Stock options exercisable were also reduced
and transferred to common stock in the amount of $31,625.
In March 2002 through June 2002, 3,750,000 three-year common stock
warrants were issued to an accredited investor group in connection with a
$750,000 12% convertible debenture financing arrangement (see Note 8
above). The allocated cost of these warrants amounted to $100,087, so
that the total stock options and warrants exercisable at September 30,
2002 was now $1,443,695.
During the year ended September 30, 2002, an additional 6,852,205 common
stock options were granted to consultants and investors, at exercise prices
ranging from $0.50 to $2.00 per share, and over terms expiring from
November 1, 2003 through January 16, 2005. Because these strike prices
were substantially above the market price of the Company's common stock, no
value was attributed to these options at the time of grant.
In November 2002, 1,000,000 three-year common stock warrants
were issued to an accredited investor group in connection with a $200,000
12% convertible debenture financing arrangement (see Note 8 above). The
allocated cost of these warrants amounted to $968, so that the total
stock options and warrants exercisable at March 31, 2003 was now
$1,444,663.
In March 2003, 750,000 three-year common stock warrants
were issued to an accredited investor group in connection with a $150,000
12% convertible debenture financing arrangement (see Note 8 above). The
allocated cost of these warrants amounted to $709, so that the total
stock options and warrants exercisable at March 31, 2003 was now
$1,445,372.
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 13. STOCK OPTIONS AND WARRANTS (continued)
The Company has granted various common stock options and warrants to
employees and consultants. Generally, the options and warrants were
granted at approximately the fair market value of the Company's common
stock at the date of grant and vested immediately, except that when
restricted rule 144 common stock was issued, the options and warrants were
granted at an average market discount of 50% (ranging from between 20% to
75%). Compensation expense for options and warrants issued to employees
for services were recorded as the difference between the intrinsic value of
those services as measured by the (discounted) market value of the common
stock at the date of grant and the exercise price in accordance with APB
Opinion No. 25, with pro forma disclosure of the excess market value as
required by FASB No. 123. All options and warrants issued to consultants
and other non-employees were recorded at the fair value of the services
rendered and equivalent to the market value (as discounted, if applicable)
of the equity instruments received as per FASB No. 123. The market value
was determined by utilizing an averaging convention of between 5 to 30 days
of the closing price of the Company's common shares as traded on the over
- -the-counter bulletin board (stock symbol CNES) through the grant date and
applying certain mathematical assumptions as required under the Black
- -Scholes model. Such assumptions, pertaining to the risk-free annual rate
of return and stock volatility, were generally the same as those mentioned
above when making fair value disclosures for the issuance of officer and
employee stock options, except that the risk-free annual rate of return
during the latter half of fiscal 2001 and subsequent was assumed to be 5%
(rather than 6%) due to the general decline of interest rates occurring
throughout the economy and the world.
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 13. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the six months ended March
31, 2003 and the fiscal years ended September 30, 2002 and September 30,
2001 was as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2000 3,207,154 $.69
Granted 3,000,000 .15
Exercised (400,000) .09
Expired (200,000) .23
----------
Balance outstanding, September 30, 2001 5,607,154 .42
Granted 3,750,000 .05
Exercised (550,000) .13
----------
Balance outstanding, September 30, 2002 8,807,154 $.28
Granted 1,750,000 .005
Exercised 0 .00
----------
Balance outstanding, March 31, 2003 10,557,154 $.25
========== ====
The following table summarizes information about common stock options at
March 31, 2003:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- ------------- --------- ------- ------- --------- -------
$2.00 - $2.00 563,500 17 $ 2.00 563,500 $ 2.00
$ .38 - $ .38 100,000 21 $ .38 100,000 $ .38
$ .19 - $ .19 1,000,000 24 $ .19 1,000,000 $ .19
$ .05 - $ .05 3,750,000 25 $ .05 3,750,000 $ .05
$ .13 - $ .13 1,450,000 29 $ .13 1,450,000 $ .13
$ .39 - $ .39 1,443,654 32 $ .39 1,443,654 $ .39
$ .38 - $ .38 500,000 32 $ .38 500,000 $ .38
$ .005-.$.005 1,000,000 32 $ .005 1,000,000 $ .005
$ .005-.$.005 750,000 35 $ .005 750,000 $ .005
$ .05 - $2.00 10,557,154 27 $ .25 10,557,154 $ .25
============= ========= == ======= ========= =======
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
NOTE 13. STOCK OPTIONS AND WARRANTS (continued)
The above tables exclude 4,852,205 warrants exercisable at prices ranging
from $0.50 to $2.00 per share, which have nominal value and which were
issued to certain stock subscription investors and consultants. These
warrants will all expire during the period November 1, 2003 through January
16, 2005. The tables also exclude a contingent issuance to the Company's
Chief Technical Officer of 2,000,000 common stock options exercisable at
$0.50 per share and expiring December 31, 2004. These common stock options
will not vest until certain milestones have been attained.
<page>F-40