<pre>
Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-102781
CONECTISYS CORPORATION
PROSPECTUS SUPPLEMENT DATED AUGUST 21, 2003
The prospectus of ConectiSys Corporation dated May 12, 2003 is supplemented to
include information from the quarterly report on Form 10-QSB for the quarterly
period ended June 30, 2003 filed with the Securities and Exchange Commission
by ConectiSys Corporation on August 21, 2003 and to include other updated
information. Our condensed consolidated financial statements and related notes
for the quarterly period ended June 30, 2003 are included commencing on page
F-1 of this supplement.
THE FOLLOWING RISK FACTORS ARE UPDATED AS FOLLOWS:
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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 June 30,
2003, we had an accumulated deficit of approximately $25,100,000. 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
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planned activities. Even if we are able to achieve profitability, we may be
unable to sustain or increase our profitability on a quarterly or annual
basis.
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 August 18, 2003, we had outstanding 466,025,258 shares of common
stock, of which all but approximately 331,924,339 shares were unrestricted
under the Securities Act of 1933. As of August 18, 2003, we also had
outstanding options, warrants, promissory notes, convertible debentures and
preferred stock that were exercisable for or convertible into approximately
907,000,000 shares of common stock, approximately 862,000,000 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 August 18, 2003, the closing price of a share of our common
stock on the OTC Bulletin Board{R} was $.0067. On that date, our notes,
debentures and warrants outstanding with adjustable conversion and/or exercise
prices were convertible or exercisable into approximately 887,000,000 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 August 18, 2003,
based upon the indicated hypothetical trading prices:
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Approximate
Number of Percentage of
Hypothetical Shares Company's
Trading Price Conversion Price (1) Issuable (2) Common Stock (3)
- ------------- --------------------- ------------ -----------------
$.008 $.004 250,898,000 35%
$.006 $.003 334,530,000 42%
$.004 $.002 501,795,000 52%
$.002 $.001 1,003,590,000 68%
_______________
(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 August 18,
2003, the applicable conversion price was $.0013.
(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 466,025,258 shares of our common stock
outstanding as of August 18, 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.
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 June 30, 2003, the high and low closing prices of our common
stock were $.02 and $.0023, 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;
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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
0 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:
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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
Year Ended September 30, 2003:
First Quarter $0.036 $0.007
Second Quarter 0.012 0.003
Third Quarter 0.02 0.0023
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As of August 18, 2003, we had 466,025,258 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 $.013 and $.0066, 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:
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 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 919,000,000
shares of common stock that were issuable upon conversion or exercise of
outstanding convertible notes, debentures, options and warrants as of June 30,
2003.
June 30, 2003
-----------------
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 1,000,000,000 shares;
issued and outstanding, 373,656,710 shares.................... 19,446,408
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, 11,307,154 shares.............................. 1,346,081
Beneficial conversion option; debt instruments.................. 1,115,023
Accumulated deficit............................................. (25,111,174)
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Total shareholders' equity (deficit)......................... $ (2,903,642)
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Total capitalization......................................... $ (2,903,642)
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THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
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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 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 and employees with our
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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 June
30, 2003 and 2002
We did not generate any revenues for the three months ended June 30,
2003 and June 30, 2002. General and administrative expenses decreased by
$257,784 or 38.7% to $408,452 for the three months ended June 30, 2003 as
compared to $666,236 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 $282,131 or 2,542% to $293,230 during
the three months ended June 30, 2003 as compared to $11,099 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 June 30, 2003 increased by $66,108
or 9.8% to $743,443 as compared to a net loss of $677,335 for the same period
in 2002. This increase primarily was due to the increase in interest expense
as described above, but was partially offset by a decrease in general and
administrative expenses.
Comparison of Results of Operations for the Nine Months Ended June 30,
2003 and 2002
We did not generate any revenues for the nine months ended June 30,
2003 and June 30, 2002. General and administrative expenses decreased by
$210,123 or 14% to $1,295,568 for the nine months ended June 30, 2003 as
compared to $1,505,691 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 $590,283 or 256% to $820,668 during the
nine months ended June 30, 2003 as compared to $230,385 for the same period in
2002. This increase in interest expense was due to increased borrowings
between the periods reported.
Net loss for the nine months ended June 30, 2003 increased by $456,935
or 26.3% to $2,193,011 as compared to a net loss of $1,736,076 for the
same period in 2002. This increase primarily was due to the increase in
interest expense, which was partially offset by a decrease in general and
administrative expenses as described above.
Liquidity and Capital Resources
During the nine months ended June 30, 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 June 30, 2003, we had negative working capital of approximately
$2,944,000 and an accumulated deficit of approximately $25,111,000 As of that
date, we had approximately $57,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately
$1,468,000. We had other current liabilities, including amounts due to
officers, accrued interest, notes and convertible debts of approximately
$1,542,000 including those issued prior to the beginning of fiscal year 2003.
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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 $674,000
for the nine months ended June 30, 2003 as compared to approximately
$1,082,000 for the nine months ended June 30, 2002. No cash was provided by
our investing activities for the nine months ended June 30, 2003 and June 30,
2002.
Cash provided by our financing activities totaled approximately
$676,000 for the nine months ended June 30, 2003 as compared to approximately
$1,326,000 for the nine months ended June 30, 2002. We raised all of the cash
provided by financing activities during the nine months ended June 30, 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 August 18, 2003,
approximately $50,000 of principal and accrued and unpaid interest under this
note remained outstanding.
In February 2002, we borrowed $340,000 from the Mercator Momentum Fund
in order to make the initial $100,000 payment under our settlement arrangement
with Laurus and to fund continuing development of our H- Net(TM) system. This
loan from the Mercator Momentum Fund 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.
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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 August 18,
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 August 18, 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 August 18, 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 August 18, 2003, an aggregate of $140,000 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 offering, after payment of related
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expenses, were approximately $125,000. As of August 18, 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 August 18, 2003, the full amount
of the debentures issued in August 2003 remained outstanding.
As of August 18, 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, an aggregate of $150,000 of principal plus related accrued and
unpaid interest on our convertible debentures due May 10, 2003, and an
aggregate of $300,000 of principal plus related accrued and unpaid interest on
our convertible debentures due June 17, 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 August 18, 2003 we had an additional note due September 1, 2003
payable in the approximate amount of $176,000. 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
<page>10
would have a material adverse effect on our business, prospects, financial
condition, results of operations and cash flows.
If adequate funds are not available, we may be required to delay,
scale back or eliminate portions of our operations and product and service
development efforts or to obtain funds through arrangements with strategic
partners or others that may require us to relinquish rights to certain of our
technologies or potential products or other assets. Accordingly, the inability
to obtain such financing could result in a significant loss of ownership
and/or control of our proprietary technology and other important assets and
could also adversely affect our ability to fund our continued operations and
our product and service development efforts that historically have contributed
significantly to our competitiveness.
We 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 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.
Effect of Inflation
Inflation did not have any significant effect on the operations of the
Company during the quarter ended June 30, 2003. Further, inflation is not
expected to have any significant effect on future operations of the Company.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments", requires that we disclose
estimated fair values for our financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts. Fair value estimates are made at a specific point in time and
are based on relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties, matters
of judgment and, therefore, cannot be determined with precision. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time our entire holdings of a particular instrument.
Changes in assumptions could significantly affect the estimates.
Since the fair value is estimated at June 30, 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, other current
liabilities, and notes payable approximate fair value because of the short
maturity of these instruments. Long-term debt is recorded at face value
because the principal amount is convertible into common stock.
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
<page>11
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 June 30, 2003 was $0.
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 June 30, 2003 of $0. The loan
balance is due on demand and continues to accrue interest at the rate of 18%
per year.
THE PRINCIPAL AND SELLING SECURITY HOLDERS
SECTION IS REPLACED WITH THE FOLLOWING:
- ------------------------------------------
PRINCIPAL AND SELLING SECURITY HOLDERS
As of August 18, 2003, a total of 466,025,258 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,
<page>12
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.
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
<page>13
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.
<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 2.42%
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 61,529,094(9) 61,529,094(9) -- --
AJW Offshore, Ltd......... Common 61,529,094(9) 61,529,094(9) -- --
AJW Qualified Partners,
LLC....................... Common 61,530,010(9) 61,530,010(9) -- --
All directors and executive
officers
as a group (4 persons) Common 15,285,604(10) -- 15,285,604 3.23%
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.
<page>14
(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 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 August 18, 2003, the
conversion price would have been $.0013. Under the terms of
the warrants, if the warrants had actually been converted on
August 18, 2003, the exercise price would have been $.005.
(10) Includes 7,043,654 shares underlying options.
<page>15
CONECTISYS CORPORATION
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Financial Statements As Of And For The Three Months
Ended June 30, 2003 and 2002
- --------------------------------------------------------------------------
Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited)......F-1
Condensed Consolidated Statement of Operations for the Three
and nine Months Ended June 30, 2003 and 2002 and the
Cumulative Period From December 31, 1990 (Inception)
Through June 30, 2003 (unaudited).....................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through June 30, 2003...................F-4
Condensed Consolidated Statement of Cash Flows for the Nine
Months Ended June 30, 2003 and 2002 and the Cumulative
Period From December 31, 1990 (Inception) Through
June 30, 2003 (unaudited)............................................F-10
Notes to Condensed Consolidated Financial Statements (unaudited)..........F-13
<table>
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003
Jun. 30 Jun. 30 Sep. 30
2003 2002 2002
Unaudited Unaudited Audited
--------- --------- --------
Assets
Current assets
Cash and cash equivalents 56,901 250,075 55,101
Debt issuance cost - current, net of accumulated
amortization of $252,095, $0 and $131,172 8,180 639,863 89,103
Total current assets 65,081 889,938 144,204
Property and equipment, net of accumulated
depreciation of $291,070, $279,681 and $280,373 40,642 52,031 51,339
License and technology, net of accumulated
amortization of $421,478, $421,478 and $421,478 0 0 0
Total assets 105,723 941,969 195,543
<page>F-1
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003
Jun. 30 Jun. 30 Sep. 30
2003 2002 2002
Unaudited Unaudited Audited
--------- --------- --------
Liabilities and shareholders' equity
Current liabilities
Accounts payable 256,039 57,633 188,898
Accrued compensation 1,211,629 854,327 927,850
Due to officers 12,211 132,981 130,484
Accrued interest payable 214,274 0 206,476
Other current liabilities 62,803 198,314 11,928
Notes payable and current potion of
long-term debt 1,252,409 1,251,842 755,149
Total current liabilities 3,009,365 2,495,097 2,220,785
Long-term debt, net of current 0 0 89,730
Total liabilities 3,009,365 2,495,097 2,310,515
Shareholders' equity (deficit)
Preferred stock - Class A 1,000,000 shares authorized
$1.00 par value, 200,020 issued and outstanding 200,020 200,020 200,020
Convertible preferred stock - Class B 1,000,000 shares authorized
no par value, no shares issued and outstanding 0 0 0
Common stock - 250,000,000 shares authorized,
no par value, 373,656,710, 45,478,936 and 64,311,823
respectively shares issued and outstanding 19,446,408 18,337,422 18,435,238
Additional paid-in capital:
Convertible preferred stock - Class B
no par value, 1,000,000 options exercisable 100,000 100,000 100,000
Common stock
exercisable options and warrants
11,307,154, 8,807,154 and 3,207,154 respectively 1,346,081 1,346,570 1,343,695
Beneficial conversion option 1,115,023 770,367 724,238
Accumulated deficit during development stage (25,111,174) (22,307,507) (22,918,163)
Total shareholders' deficit (2,903,642) (1,553,128) (2,114,972)
Total liabilities and shareholders' deficit 105,723 941,969 195,543
</table>
<table>
<page>F-2
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2003
Dec. 1, 1990
(Inception)
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended Through
Jun. 30 Jun. 30 Jun. 30 Jun. 30 Jun. 30
2003 2002 2003 2002 2003
Unaudited Unaudited Unaudited Unaudited Unaudited
-------------- -------------- -------------- -------------- -----------
<c>
Revenues 0 0 0 0 517,460
Cost of goods sold 41,761 0 76,775 0 718,163
Gross profit (41,761) 0 (76,775) 0 (200,703)
General and administrative 408,452 666,236 1,295,568 1,505,691 20,745,220
Loss from operations (450,213) (666,236) (1,372,343) (1,505,691) (20,345,923)
Non-operating income (expense) 0 0 0 0 (1,097,366)
Interest expense (293,230) (11,099) (820,668) (230,385) (2,590,143)
Net loss (743,443) (677,335) (2,193,011) (1,736,076) (24,033,432)
Weighted average shares outstanding 291,442,286 37,165,770 172,676,136 35,727,303
Net loss per share (0.0026) (0.0182) (0.0127) (0.0486)
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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
Ser vices, 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)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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
cnaceled 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)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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 share 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 share 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)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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 share 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)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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 share 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 share 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)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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 2002 through
June 2003 valued from
$0.01 to $0.02 per share 0 0 37,880,468 325,305 0 0 0 325,305
Debt and accrued liabilities
October 2002 through June
2003 with common shares
valued from $0.005 to $0.02
per share 0 0 23,004,280 164,742 0 0 0 164,742
Cash, October 2002 through
June 2003 with prices
ranging from $0.001 to $0.01
per share 0 0 191,500,000 280,000 0 0 0 280,000
Beneficial conversion option
October 2002 through June 2003
pertaining to $500,000 principal
value of 12% convertible debt 500,000 500,000
Conversion of $123,280 principal
value of 12% convertible debt
along with $11,014 accrued
interest, net of $106,829
beneficial conversion option 0 0 56,960,139 241,123 (106,829) 0 0 134,294
Net loss for the period. 0 0 0 0 0 0 (2,193,011) (2,193,011)
Balance, June 30, 2003 200,020 200,020 373,656,710 19,446,408 2,561,104 0 (25,111,174) (2,903,642)
</table>
<table>
<page>F-9
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2003
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
Jun. 30 Jun. 30 Jun. 30
2003 2002 2003
Unaudited Unaudited Unaudited
--------------- -------------- --------------
Operating activities
Net (loss) \ (2,193,011) (1,736,076) (24,033,432)
Adjustments to reconcile net loss
to net cash used by
operating activities:
Provision for bad debt 1,422,401
Depreciation and amortization 10,696 19,930 1,680,670
Stock issued for services 325,305 330,488 7,712,078
Stock issued for interest 171,800 1,403 707,391
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 1,299,861
Amortization of debt issuance cost
and note discounts 771,525 0 1,414,067
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 67,141 (43,125) 687,389
Accrued compensation 283,779 313,148 2,317,801
Due to officers (118,273) 0 555,519
Other current liabilities 6,731 32,311 463,574
Net cash (used by) operating activities (674,307) (1,081,921) (5,777,736)
<page>F-10
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2003
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
Jun. 30 Jun. 30 Jun. 30
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)
Net cash used by investing activities 0 0 (1,615,087)
Financing activities
Common stock issued for cash 280,000 50,000 3,512,172
Stock warrants 1,655 0 178,970
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 25,000 206,544
Other 418,345 1,482,110 3,902,225
Payments on debt
Related party 0 (80,975) (53,172)
Other (23,893) (150,250) (410,300)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
Net cash from provided by financing activities 676,107 1,325,885 7,449,724
Net increase in cash and cash equivalents 1,800 243,964 56,901
Cash and cash equivalents at beginning of period 55,101 6,111 0
Cash and cash equivalents end of period 56,901 250,075 56,901
<page>F-11
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2003 and 2002
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2003
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
Jun. 30 Jun. 30 Jun. 30
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 331,694 541,250 4,687,750
Service & interest 280,305 330,488 5,229,497
Preferred stock issued for
Services 0 0 60,000
Repayment of debt 60,000 60,000 179,520
</table>
<page>F-12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and going concern uncertainty
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary
to present fairly its financial position and the results of its
operations and its cash flows for the periods shown.
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
The presentation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The results of operations for the
respective three and nine month periods are not necessarily indicative of the
results to be expected for a full year of operations.
As of June 30, 2003, the Company had a deficiency in working capital
of approximately $3,000,000, and had incurred continual net losses since
its return to the development stage in fiscal 1996 of approximately
$25,000,000, which raise substantial doubt about the Company's ability to
continue as a going concern.
Management's plans for correcting these deficiencies include the future
sales 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.
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.
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 June 30,
2003, no deferred technology costs were recognized.
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
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.
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. 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.
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.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 3. DEBT ISSUANCE COSTS (continued)
In March through June 2002, the Company received $750,000 from an
accredited investor group in exchange for 12% convertible debt, convertible at
the lesser of $0.06 per share and 50% of the average of the lowest three
intraday trading prices of a share of common stock during the 20 trading
days immediately preceding conversion, 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
exercise. 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 $89,103 has been amortized during the nine months ended June 30,
2003, leaving a balance of $0.
During November 2002 through June 30, 2003, the Company received $500,000 from
an accredited investor group in exchange for 12% convertible debt, convertible
at the lesser of $0.01 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, along with 2,500,000 common
stock warrants, exercisable over a four-year period at fixed price of $0.005
per share. 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 $31,820 through June 30, 2003, leaving an
unamortized balance of $8,180 at June 30, 2003.
Aggregate Amortization of the debt issuance cost over the nine months ended
June 30, 2003 was $120,923, leaving an unamortized balance of $8,180.
NOTE 4. 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 nine months ended June 30, 2003, the
Company paid back $25,764, 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 $0 at June 30, 2003.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 4. DUE TO OFFICERS (continued)
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 nine
months ended June 30, 2003 accrued interest of $1,165 increased this loan
bringing the balance outstanding to $9,308. The loan balance at June 30,
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 June 30, 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 nine months ended June 30,
2003, accrued interest of $1,193 was credited bringing the outstanding
balance to $2,903. The loan balance at June 30, 2003, is currently
due on demand and continues to accrue interest at the rate of 18% per year.
The aggregate amount due officers at June 30, 2003 was $12,211 and
interest expense on the officer loans amounted to $7,808 for the nine
months ended June 30, 2003.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 5. NOTES PAYABLE
Notes payable at June 30, 2003 consisted of the following:
Registered Convertible Debentures
Convertible Debenture #1
Note payable to AJW Partners, LLC $29,480
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12%
Accrued interest of $882 and principal
on Convertible Debenture convertible
into approximately 24,289,600
shares of common stock at the price
of $0.00125 at June 30, 2003 882 30,362
--------
Note payable to New Millennium Capital $29,480
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12%
Accrued interest of $882 and principal
on Convertible Debenture convertible
into approximately 24,289,600
shares of common stock at the price
of $0.00125 at June 30, 2003 882 30,362
--------
Note payable to AJW/New Millennium 33,900
Offshore, Ltd.(Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12%
Accrued interest of $1,014 and principal
on Convertible Debenture convertible
into approximately 27,931,200
shares of common stock at the price
of $0.00125 at June 30, 2003 1,014 34,914
--------
Note payable to Pegasus Capital Partners, 20,730
LLC. (Convertible Debenture) due
on March 29, 2003 at an annual
interest rate of 12%
Accrued interest of $620 and principal
on Convertible Debenture convertible
into approximately 17,080,000
shares of common stock at the price
of $0.00125 at June 30, 2003 620 21,350
--------
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 5. 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 $1,197 and principal
on Convertible Debenture convertible
into approximately 32,957,600
shares of common stock at the price
of $0.00125 at June 30, 2003 1,197 41,197
--------
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 $1,197 and principal
on Convertible Debenture convertible
into approximately 32,957,600
shares of common stock at the price
of $0.00125 at June 30, 2003 1,197 41,197
--------
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 $1,347 and principal
on Convertible Debenture convertible
into approximately 37,068,800
shares of common stock at the price
of $0.00125 at June 30, 2003 1,347 46,347
--------
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 $748 and principal
on Convertible Debenture convertible
into approximately 20,598,400
shares of common stock at the price
of $0.00125 at June 30, 2003 748 25,748
-------
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 5. 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 $2,393 and principal
on Convertible Debenture convertible
into approximately 65,914,400
shares of common stock at the price
of $0.00125 at June 30, 2003 2,393 82,393
-------
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 $2,393 and principal
on Convertible Debenture convertible
into approximately 65,914,400
shares of common stock at the price
of $0.00125 at June 30, 2003 2,393 82,393
--------
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 $2,693 and principal
on Convertible Debenture convertible
into approximately 74,154,400
shares of common stock at the price
of $0.00125 at June 30, 2003 2,693 92,693
--------
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 $1,496 and principal
on Convertible Debenture convertible
into approximately 41,196,800
shares of common stock at the price
of $0.00125 at June 30, 2003 1,496 51,496
--------
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 5. NOTES PAYABLE (continued)
Note payable to AJW Partners, LLC. 56,666
(Convertible Debenture) due on November
27, 2003 at an annual interest rate of 12%
Accrued interest of $1,695 and principal
on Convertible Debenture convertible
into approximately 46,688,800
shares of common stock at the price
of $0.00125 at June 30, 2003 1,695 58,361
--------
Note payable to AJW Offshore, Ltd. 56,666
(Convertible Debenture) due on
November 27, 2003 at an annual
interest rate of 12%
Accrued interest of $1,695 and principal
on Convertible Debenture convertible
into approximately 46,688,800
shares of common stock at the price
of $0.00125 at June 30, 2003 1,695 58,361
--------
Note payable to AJW Qualified Partners, 56,668
LLC. (Convertible
Debenture) due on November 27, 2003
at an annual interest rate of 12%
Accrued interest of $1,695 and principal
on Convertible Debenture convertible
into approximately 46,690,400
shares of common stock at the price
of $0.00125 at June 30, 2003 1,695 58,363
--------
Note payable to AJW Partners, LLC 50,000
Offshore, Ltd. Ltd. (Convertible
Debenture) due on March 3, 2004
at an annual interest rate of 12%
Accrued interest of $1,496 and principal
on Convertible Debenture convertible
into approximately 41,196,800
shares of common stock at the price
of $0.00125 at June 30, 2003 1,496 51,496
--------
Note payable to AJW Offshore, Ltd. 50,000
(Convertible Debenture) due on March 2,
2004
at an annual interest rate of 12%
Accrued interest of $1,496 and principal
on Convertible Debenture convertible
into approximately 41,196,800
shares of common stock at the price
of $0.00125 at June 30, 2003 1,496 51,496
--------
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 5. NOTES PAYABLE (continued)
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 $1,496 and principal
on Convertible Debenture convertible
into approximately 41,196,800
shares of common stock at the price
of $0.00125 at June 30, 2003 1,496 51,496
--------
Note payable to AJW Partners, LLC. 50,000
(Convertible
Debenture) due on March 3, 2004
at an annual interest rate of 12%
Accrued interest of $822 and principal
on Convertible Debenture convertible
into approximately 40,657,600
shares of common stock at the price
of $0.00125 at June 30, 2003 822 50,822
--------
Note payable to AJW Offshore, LTD. 50,000
(Convertible Debenture) due on March 2,
2004 at an annual interest rate of 12%
Accrued interest of $822 and principal
on Convertible Debenture convertible
into approximately 40,657,600
shares of common stock at the price
of $0.00125 at June 30, 2003 822 50,822
--------
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 $822 and principal
on Convertible Debenture convertible
into approximately 40,657,600
shares of common stock at the price
of $0.00125 at June 30, 2003 822 50,822
--------
Subtotal of Convertible Debentures 1,062,491
Less note discount (280,122)
---------
Net carrying value of Convertible Debentures 782,369
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%. 187,083
Convertible note payable to Laurus Master Fund, Ltd.,
secured by 3,293,944 shares of common stock
beneficially owned by officers, 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. 41,133
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 5. NOTES PAYABLE (continued)
----------
Total notes payable 1,252,409
Current portion (1,252,409)
---------
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 lesser of 80% of the average of the 3-lowest closing bid prices during
the 30 trading days prior to the closing date (April 12, 2001) or 80% of
the average of the 3-lowest closing bid prices during the 30 trading days
prior to the conversion date (assumed to be 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-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 5. 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 nine months ended June 30, 2003, the note
holder sold the remaining 3,293,944 pledged shares for net proceeds of
$67,144 and netted another $28,700 from the issuance of 11,500,000 new
Company shares. Accrued interest during the nine months ended June 30,
2003 was $7,763, bringing the total liability to $41,133.
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, it has 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-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 6. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's
continued research and development efforts as of March 29, 2002, the
Company entered into a securities purchase agreement and related agreements
with four accredited investors (the "Purchasers") for the purchase of up to
$750,000 of the Company's 12% Convertible Debentures due one year from
their date of issuance. The Company granted the holders of the debentures a
continuing security interest in all of the Company's assets to secure the
Company's obligations under the debentures and related agreements. The
debentures bear interest at a rate of 12% per annum, payable quarterly in
common stock or cash at the option of the Purchasers.
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-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 6. 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).
On June 26, 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 nine months ended June 30, 2003, the Company issued
56,960,139 shares of common stock in connection with regular interest
payments and upon conversion of an aggregate of $123,280 of principal and
$11,034 of related interest on the Company's convertible debentures. A
corresponding reduction of $106,829 to the beneficial conversion option was
made.
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 6. SECURED CONVERTIBLE DEBENTURES (continued)
As of June 30, 2003 the Company was indebted for an aggregate of
$1,033,590 of principal and $28,901 (for 3rd 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 for the fiscal
year ended September 30, 2002, 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 on November 27,
2002, 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. $153,151 was amortized through
June 30, 2003, resulting in an unamortized discount of $46,849 at June 30,
2003.
As part of the recording of the convertible debt transactions on March 3,
2003, 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. $41,629 was amortized through June
30, 2003 resulting in an unamortized discount of $108,371 at June 30,
2003.
As part of the recording of the convertible debt transactions on June 26,
2003, 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. $25,098 was amortized through June
30, 2003 resulting in an unamortized discount of $124,902 at June 30,
2003.
As noted above, $216,410 of the $1,250,000 principal value of convertible debt
at June 30, 2003 had been converted, leaving a principal balance of
$1,033,590 (plus accrued interest of $28,901 during the 3rd quarter 2003) at
June 30, 2003.
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 6. SECURED CONVERTIBLE DEBENTURES (continued)
During the nine months ended June 30, 2003, the Company issued 56,960,139
shares of common stock in connection with regular interest payments and
upon conversion of an aggregate of $121,280 of principal and $13,014 of
related interest on the Company's convertible debentures. A corresponding
reduction of $106,829 to the beneficial conversion option was made.
NOTE 7. 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 June 30, 2003,
373,356,710 shares of the Company's common stock was 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 June 2003, the Company issued 39,130,468
shares of its common stock consultants in exchange for $262,805 of services
rendered.
During October 2002 through June 2003, the Company issued a total of 1,000,000
shares of its common stock to four Advisory Board Members for
$10,000 of services rendered.
During October 2002 through June 2003, the Company issued 750,000
shares of its common stock to two employees for $7,500 in bonuses.
In October 2002 through June 2003, the Company issued 56,960,139 of its
common shares to an investor group in exchange for $121,280 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 June 2003, the Company issued 213,500,000 shares of
its common stock to investors for $280,000 in cash.
In October through June 2003, the Company issued 23,004,280 shares of
its common stock for a reduction in debt of $250,711.
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 8. INCOME TAXES
Deferred income taxes consisted of the following at June 30, 2003:
Deferred tax asset, benefit
of net operating loss
carry forward $ 7,800,000
Valuation allowance (7,800,000)
-----------
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 nine months
ended June 30, 2003, the deferred tax asset and valuation allowance were both
increased by $800,000.
The Company has approximately $19,500,000 in federal net operating loss
carryforwards and $16,000,000 in California net operating loss carryforwards.
The federal net operating loss carryforwards expire as follows:
$2,700,000 in the year 2012, $5,300,000 in 2018, $1,200,000 in 2019,
$3,500,000 in 2020, $2,400,000 in 2021, $2,300,000 in 2022 and $2,100,000
in 2023. 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 2011, $2,300,000 in 2012 and $1,300,000 in
2014 The latest federal and California corporate income tax returns filed
by the Company were for the tax year ended November 30, 2000.
NOTE 9. 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 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.
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
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-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 June 30, 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 June 30, 2003 was now $1,445,372.
In May 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 June 30, 2003 was now $1,446,081.
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 9. 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.
The common stock option activity during the nine months ended June 30, 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 2,500,000 .005
Exercised 0 .00
----------
Balance outstanding, June 30, 2003 11,307,154 $.25
========== ====
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
The following table summarizes information about common stock options at
June 30, 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 14 $ 2.00 563,500 $ 2.00
$ .38 - $ .38 100,000 18 $ .38 100,000 $ .38
$ .19 - $ .19 1,000,000 21 $ .19 1,000,000 $ .19
$ .05 - $ .05 3,750,000 22 $ .05 3,750,000 $ .05
$ .13 - $ .13 1,450,000 26 $ .13 1,450,000 $ .13
$ .39 - $ .39 1,443,654 29 $ .39 1,443,654 $ .39
$ .38 - $ .38 500,000 29 $ .38 500,000 $ .38
$ .005-.$.005 1,000,000 29 $ .005 1,000,000 $ .005
$ .005-.$.005 750,000 32 $ .005 750,000 $ .005
$ .005-.$.005 750,000 35 $ .005 750,000 $ .005
$ .05 - $2.00 11,307,154 25 $ .25 11,307,154 $ .25
============= ========= == ======= ========= =======
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-31