<pre>
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2004 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 33-3560D
---------------------------------
CONECTISYS CORPORATION
(Name of small business issuer in its charter)
COLORADO 84-1017107
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24730 AVENUE TIBBITTS, SUITE 130
VALENCIA, CALIFORNIA 91355
(Address of principal executive offices)
661-295-6763
(Issuer's telephone number)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No |
|
As of May 19, 2004, there were 934,205,220 shares of the issuer's
common stock, no par value, outstanding.
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited)and
September 30, 2003 (audited).........................................F-1
Condensed Consolidated Statement of Operations for the Three and Six
Months Ended March 31, 2004 and 2003 and the
Cumulative Period From December 31, 1990 (Inception)
Through March 31, 2004 (unaudited)...................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through March 31, 2004.................F-4
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended March 31, 2004 and 2003 and the Cumulative
Period From December 31, 1990 (Inception) Through
March 31, 2004 (unaudited)..........................................F-12
Notes to Condensed Consolidated Financial Statements (unaudited).........F-15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................2
Item 3. Controls and Procedures............................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................8
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities....................................10
Item 3. Defaults Upon Senior Securities...................................11
Item 4. Submission of Matters to a Vote of Security Holders...............12
Item 5. Other Information.................................................12
Item 6. Exhibits and Reports on Form 8-K..................................13
Signatures.................................................................14
Exhibits Filed with this Report on Form 10-QSB.............................15
ITEM 1. FINANCIAL STATEMENTS.
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 and September 30, 2003
<table>
Mar. Sep. 30
2004 2003
Unaudited Audited
Assets
Current assets
Cash and cash equivalents 43,269 2,282
Prepaid staying bonus 90,000 0
Debt issuance cost - current, net of accumulated
amortization of $316,345, and $275,448 98,124 27,896
Total current assets 231,393 30,178
Property and equipment, net of accumulated
depreciation of $311,684, and $304,553 25,345 32,476
License and technology, net of accumulated
amortization of $421,478, and $421,478 0 0
Total assets 256,738 62,654
The accompanying notes are an integral part of these financial statements.
<page>F-1
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 and September 30, 2003
Mar. Sep. 30
2004 2003
Unaudited Audited
Liabilities and shareholders' equity
Current liabilities
Accounts payable 281,680 274,746
Accrued compensation 1,331,394 1,113,620
Due to officers 73,896 92,121
Accrued interest payable 404,661 339,965
Other current liabilities 17,760 14,410
Notes payable and current potion of
long-term debt 3,365,541 1,090,597
Total current liabilities 5,474,932 2,925,459
Long-term debt, net of current 48,500 99,615
Total liabilities 5,523,432 3,025,074
Shareholders' equity
Preferred stock - Class A, 1,000,000 shares authorized
$1.00 par value, 215,865, and 200,020 issued and outstanding 215,865 200,020
Convertible preferred stock - Class B, 1,000,000
shares authorized, $1.00 par value; -0- shares
issued and outstanding 0 0
Common stock - 1,000,000,000 shares authorized,
no par value, 726,799,714, and 490,224,872
issued and outstanding 20,208,640 19,807,537
Additional paid in capital:
Common stock, no par value
13,807,154 and 11,307,154
exercisable options and warrants 1,355,873 1,353,511
Convertible preferred stock - Class B
$1.00 par value, 1,000,000 options exercisable 100,000 100,000
Beneficial conversion option 0 881,550
Accumulated gain (deficit) during development stage (27,147,072) (25,305,038)
Total shareholders' equity (5,266,694) (2,962,420)
Total liabilities and shareholders' equity 256,738 62,654
</table>
The accompanying notes are an integral part of these financial statements.
<page>F-2
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended March 31, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2004
<table>
Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended Through
Mar. 31 Mar. 31 Mar. 31 Mar. 31 Mar. 31
2004 2003 2004 2003 2004
Unaudited Unaudited Unaudited Unaudited Unaudited
Revenues 0 0 0 0 517,460
Cost of goods sold 22,195 35,014 22,195 35,014 812,258
Gross profit (22,195) (35,014) (22,195) (35,014) (294,798)
General and administrative 448,542 398,884 632,350 887,116 20,854,657
Loss from operations (470,737) (433,898) (654,545) (922,130) (21,149,455)
Non-operating income (expense) 0 0 (150,000) 0 (1,247,365)
Interest expense (228,167) (265,848) (1,037,489) (527,438) (3,672,510)
Net loss (698,904) (699,746) (1,842,034) (1,449,568) (26,069,330)
Weighted average shares outstanding 697,702,258 93,438,124 631,525,095 104,251,198
Net loss per share (0.00) (0.01) (0.00) (0.01)
</table>
The accompanying notes are an integral part of these financial statements.
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
<table>
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Balance, Dec. 1, 1990
(re-entry
development stage) 0 0 10,609 1,042,140 (1,042,140) 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 515
Services, Mar. 1993 0 0 2,000 500 0 500
Services, Mar. 1993 0 0 1,200 600 0 600
Net loss for the year 0 0 0 0 (5,459) (5,459)
Balance, Sep. 30, 1993 0 0 16,809 1,044,755 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 23,655
Services, Sep. 1994 0 0 8,700 11,614 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 33,000
Net loss for the year 0 0 0 0 (32,544) (32,544)
Balance, Sep. 30, 1994 16,345 16,345 50,000 1,131,024 (1,080,143) 67,226
The accompanying notes are an integral part of these financial statements.
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
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. 1995 0 0 1,160 232,000 0 232,000
Debt repayment, Feb. 1995 0 0 2,040 408,000 0 408,000
Debt repayment, Feb. 1995 0 0 4,778 477,810 0 477,810
Acquisition of assets, CIPI
Feb. 1995 0 0 28,750 1,950,000 0 1,950,000
Acquisition of assets,
Apr. 1995 0 0 15,000 0 0 0
Cash and services, Apr.
and May 1995 0 0 16,000 800,000 0 800,000
Cash, Jun. 1995 0 0 500 30,000 0 30,000
Acquisition of assets and
services, Sep. 1995 0 0 4,000 200,000 0 200,000
Cash, Sep. 1995 0 0 41 3,000 0 3,000
Acquisition of assets,
Sep. 1995 0 0 35,000 1,750,000 0 1,750,000
Return of assets, CIPI
Sep. 1995 0 0 (27,700) (1,950,000) 0 (1,950,000)
Net loss for the year 0 0 0 0 (2,293,867) (2,293,867)
Balance, Sep. 30, 1995 16,345 16,345 129,569 5,031,834 (3,374,010) 1,674,169
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, Sep. 30, 1996 20,500 20,500 138,786 6,457,221 (5,612,943) 864,778
The accompanying notes are an integral part of these financial statements.
<page>F-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
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, Mar. 1997 0 0 228 6,879 0 6,879
Services, Apr. 1997 0 0 800 13,120 0 13,120
Services, Jul. 1997 0 0 1,500 16,200 0 16,200
Cash, Jul. 1997 0 0 15,000 300,000 0 300,000
Services, Aug. 1997 0 0 5,958 56,000 0 56,000
Adjustment for partial
shares due to reverse
stock split (1:20) 0 0 113 0 0 0
Services, Oct. 1997 0 0 1,469,666 587,865 0 587,865
Debt repayment, Oct 1997 0 0 1,540,267 620,507 0 620,507
Cash, Oct. 1997 0 0 1,500,000 281,250 0 281,250
Services, Nov. 1997 0 0 4,950 10,538 0 10,538
Net loss for the year 0 0 0 0 (2,739,268) (2,739,268)
Balance, Sep. 30, 1997 20,500 20,500 4,677,268 8,349,580 (8,352,211) 17,869
Shares issued in exchange for:
Services, Dec. 1997
through Nov. 1998 0 0 2,551,610 2,338,264 0 2,338,264
Debt repayment, Apr. 1998
through Sep. 1998 0 0 250,000 129,960 0 129,960
Cash, Jan. 1998 through
Jul. 1998 0 0 4,833,334 1,139,218 0 1,139,218
Acquisition of assets,
Jul. 1998 0 0 300,000 421,478 0 421,478
Acquisition of 20% minority
interest in subsidiary,
Jul. 1998 0 0 50,000 59,247 0 59,247
Services, Nov. 1998 60,000 A 60,000 0 0 0 60,000
Net loss for the year 0 0 0 0 (4,928,682) (4,928,682)
Balance, Sep. 30, 1998 80,500 80,500 12,662,212 12,437,747 (13,280,893) (762,646)
Shares issued in exchange for:
Shares returned and canceled
Dec. 1998 0 0 (1,350,000) (814,536) (814,536)
Services, Dec. 1998
through Sep. 1999 0 0 560,029 349,454 150,000 499,454
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)
The accompanying notes are an integral part of these financial statements.
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
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 1999 through (17,500) (12,000) (12,000)
September 2000, valued from
$.025 to $0.80 per shar 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 sha 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)
The accompanying notes are an integral part of these financial statements.
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
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% converti 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)
The accompanying notes are an integral part of these financial statements.
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
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)
The accompanying notes are an integral part of these financial statements.
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
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
September 2003 valued from
$0.0012 to $0.01 per share 0 0 31,500,000 134,000 0 0 0 134,000
Debt and accrued liabilities
October 2002 through September
2003 with common shares
valued from $0.001 to $0.0512
per share 0 0 162,134,748 704,774 (155,027) 0 0 549,747
Cash, October 2002 through
September 2003 with prices
ranging from $0.001 to $0.10
per share 0 0 128,500,000 180,000 0 0 0 180,000
Issuance of 2,500,000 warrants
November 2002 through
September 2003 at an exercise
price of $0.005 per share, in
conjunction with $500,000
principle value of 12%
convertible debt 0 0 0 0 9,816 0 0 9,816
Beneficial conversion option
October 2002 through June 2003
pertaining to $350,000 principal
valued of 12% convertible 0 0 0 0 490,184 0 0 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,335 accrued
interest, net of $52,340
convertible debt discount 0 0 103,778,301 353,525 (177,845) 0 0 175,680
Net loss for the year 0 0 0 0 0 0 (2,386,875) (2,386,875)
Balance, September 30, 2003 200,020 200,020 490,224,872 19,807,537 2,335,061 0 (25,305,038) (2,962,420)
The accompanying notes are an integral part of these financial statements.
<page>F-10
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
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 2003 through
March 2004
Common stock valued from
$0.002 to $0.003 per share 0 0 27,300,000 53,400 0 0 0 53,400
Class A Preferred Stock valued
at $1.00 per share 15,845 15,845 0 0 0 0 0 15,845
Issuance of 1,000,000 warrants
November 2003 through
March 2004 at an exercise
price of $0.005 per share, in
conjunction with $200,000
principal value of 12%
Convertible debt 0 0 0 0 2,362 0 0 2,362
Debt reduction, October 2003 through
March 2004 with common shares
valued at $0.001 per share 0 0 65,100,000 65,100 0 0 0 65,100
Cash, October 2003 through
March 2004 with a price
of $0.001 per share 0 0 50,000,000 50,000 0 0 0 50,000
Re-characterization of beneficial
conversion option as derivative
conversion option, October 2003
pertaining to $881,550 of
convertible debt at
September 30, 2003 0 0 0 0 (881,550) 0 0 (881,550)
Conversion of $99,615 principal
value of 12% convertible debt
$149,423 of derivative
conversion option along with
$12,136 accrued interest,
net of $28,571 convertible
debt discount 0 0 94,174,842 232,603 0 0 0 232,603
Net loss for the period 0 0 0 0 0 0 (1,842,034) (1,842,034)
Balance, March 31, 2004 215,865 215,865 726,799,714 20,208,640 1,455,873 0 (27,147,072) (5,266,694)
</Table>
The accompanying notes are an integral part of these financial statements.
<page>F-11
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Six Months Ended March 31, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2004
<table>
Dec. 1, 1990
(Inception)
Through
Mar. Mar. Mar.
2004 2003 2004
Unaudited Unaudited Unaudited
Operating activities
Net income (loss) (1,842,034) (1,449,568) (26,069,330)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 7,131 7,131 1,701,285
Derivative conversion option 815,620 0 815,620
Stock issued for services 69,245 181,305 7,590,018
Stock issued for interest 0 91,339 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of debt issuance cost
and note discounts 303,398 503,770 1,743,936
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses (90,000) 0 (90,000)
Interest receivable 0 0 (95,700)
Deposits and prepaids 0 0 182,346
Increase (decrease) in liabilities
Accounts payable 6,934 148,904 924,335
Accrued compensation 217,774 91,738 2,437,566
Due to officers (18,225) (111,053) 725,746
Other current liabilities 80,182 728 629,339
Net cash (used by) operating activities (449,975) (535,706) (6,338,687)
The accompanying notes are an integral part of these financial statements.
<page>F-12
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Six Months Ended March 31, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2004
Dec. 1, 1990
(Inception)
Through
Mar. 31 Mar. 31 Mar. 31
2004 2003 2004
Unaudited Unaudited Unaudited
Investing activities
Increase in notes receivable 0 0 (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment 0 0 (203,847)
Net cash provided by (used by) investing activities 0 0 (1,620,404)
Financing activities
Common stock issued for cash 50,000 140,000 3,462,172
Stock warrants 2,362 0 189,493
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Debt issuance cost (111,125) 0 (414,469)
Proceeds from debts
Related party 0 0 206,544
Other 585,429 420,000 4,748,472
Payments on debt
Related party 0 (53,172)
Other (35,704) (12,500) (470,240)
Decrease in subscription receivable 0 0 35,450
Contributed capital 515
Net cash from financing activities 490,962 547,500 8,002,360
Net increase (decrease) in cash and cash equivalents 40,987 11,794 43,269
Cash and cash equivalents at beginning of period 2,282 55,101 0
Cash and cash equivalents at end of period 43,269 66,895 43,269
</table>
The accompanying notes are an integral part of these financial statements.
<page>F-13
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Six Months Ended March 31, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2004
<table>
Dec. 1, 1990
(Inception)
Through
Mar. Mar. Mar.
2004 2003 2004
Unaudited Unaudited Unaudited
Cash paid during the period for
Interest 0 0 388,648
Taxes 0 0 8,050
Non-cash activities
Common stock issued for
Prepaids 0 0 182,346
PP&E 0 0 130,931
License & technology 0 0 2,191,478
Minority interest 0 0 59,247
Repayment of debt 285,567 309,803 5,857,234
Service & interest 12,136 272,644 4,961,328
Preferred stock options issued for
Services 0 0 60,000
Repayment of debt 0 60,000 119,520
</table>
The accompanying notes are an integral part of these financial statements.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company") was
incorporated under the laws of the State of Colorado on February 3, 1986, to
analyze and invest in business opportunities as they may occur. The Company is
a development-stage entity developing automatic meter reading technologies and
products for remote reading of electronic energy meters located in residential
structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the State
of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, eEnergyServices.com, Inc. was incorporated in the State
of Nevada as a wholly-owned subsidiary of the Company, which, as yet, has no
net assets and has not commenced operations.
Basis of presentation
The accompanying financial statements have been prepared by the Company without
audit, and reflect all adjustments that are, in the opinion of management,
necessary for the fair statement of the results for the interim periods. The
statements have been prepared in accordance with generally accepted accounting
principles for the interim financial reporting and Securities and Exchange
Commission regulations. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect all
adjustments (of a normal and recurring nature) that are necessary for the fair
presentation of the financial position, results of operations and cash flows for
the interim periods. The results of operations for both the three and six
months ended March 31, 2004 are not necessarily indicative of the results to be
expected for the entire year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on
Form 10-KSB for the fiscal year ended September 30, 2003.
The accompanying consolidated financial statements include the accounts and
transactions of Conectisys Corporation, and its wholly-owned subsidiaries,
eEnergyServices.com, Inc. and United Telemetry Company, Inc. All material
intercompany transactions and balances have been eliminated in the
accompanying consolidated financial statements. Certain prior period balances
have been reclassified to conform to the current year's presentation.
The Company returned to the development stage in accordance with SFAS No. 7 on
December 1, 1990 and during the fiscal year ended November 30, 1995. The
Company has completed two mergers and is in the process of developing its
technology and product lines.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires that the Company disclose estimated
fair values for its financial instruments. The following summary presents a
description of the methodologies and assumptions used to determine such
amounts.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of judgment
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect the estimates.
Since the fair value is estimated at March 31, 2004, the amounts that will
actually be realized or paid at settlement of the instruments could be
significantly different. The carrying amount of cash and cash equivalents is
assumed to be the fair value because of the liquidity of these instruments.
Accounts payable, accrued compensation, due to officer, accrued interest,
other current liabilities, and notes payable approximate fair value because of
the short maturity of these instruments. Also, market rates of interest apply
on all officer advances and short-term promissory notes. Long-term debt is
recorded at face value because the principal amount is convertible into common
stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from
November 30 to September 30.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Research and development costs
The Company has been engaged in researching, engineering, and developing its H-
Net(TM) system technologies since August 1995, and did not generate any
revenue during the past fiscal year. The Company hopes to complete additional
large- scale cost reduction runs for the production and subsequent sale of the
H-Net(TM) system in 2004.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit and highly
liquid debt instruments with original maturities of three months or less. All
funds on deposit are with one financial institution.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on
property and equipment using the straight-line method over the expected useful
lives of the assets, which are generally three years for computer software,
five years for vehicles and office equipment, and seven years for furniture
and fixtures.
Technology
Deferred technology costs include capitalized product development and product
improvement costs incurred after achieving technological feasibility and are
amortized over a period of five years. At March 31, 2004, no deferred
technology costs were recognized.
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123," effective for fiscal years ending after December 15, 2002, which
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
adoption of SFAS No. 148 did not have a material impact on the Company's
consolidated financial statements, as the adoption of this standard did not
require the Company to change, and the Company did not change, to the fair
value based method of accounting for stock-based compensation.
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for goods
or services are valued at the cost of the goods or services received or at the
market value of the shares issued, depending on the ability to estimate the
value of the goods or services received.
Income taxes
The Company files a consolidated federal income tax return. The Company has
adopted Statement of Financial Accounting Standards("SFAS") No. 109, which
requires the Company to recognize deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets using the enacted rates in effect in the years in which the differences
are expected to reverse. The Company has recognized a valuation allowance
covering 100% of the net deferred tax assets (primarily tax benefits from net
operating loss carryforwards), because it is more likely than not that the tax
benefits attributable to the deferred tax assets will not be realized in the
future.
Net loss per common share - basic and diluted
Net loss per common share - diluted is based on the weighted average number of
common and common equivalent shares outstanding for the periods presented.
Common equivalent shares representing the common shares that would be issued
on exercise of convertible securities and outstanding stock options and
warrants reduced by the number of shares which could be purchased from the
related exercise proceeds are not included since their effect would be anti-
dilutive.
As of March 31, 2004, the Company had 726,799,714 shares of common stock
outstanding. If all the Company's unexpired stock warrants and options
(including contingent issuances) were exercised, and all the principal value
and accrued interest on its outstanding convertible debentures were converted,
the Company's incremental common shares (not included in the denominator of
diluted earnings (loss) per share because of their anti-dilutive nature) would
be as follows:
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Net loss per common share - basic and diluted (continued)
Class B preferred stock options 10,000,000
Convertible note holder common stock warrants 8,750,000
Common stock warrants - other 3,215,705
Common stock options - officers 4,043,654
Common stock options - other 4,650,000
-----------
Subtotal 30,659,359
Accrued officer compensation ($480,000),
assumed converted into common stock at
prices ranging from $0.0215 to $0.2250
per share 36,419,353
Convertible note holder principal value
($1,363,590) and accrued interest ($172,250),
assumed converted into common stock at
$0.002 per share 767,920,000
-----------
Total potential common stock equivalents 834,998,712
If all currently outstanding potential common stock equivalents were
exercised, the Company would receive proceeds of approximately $8,615,000.
Recently issued accounting pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," effective for financial
statements issued after May 25, 2002, which effectively amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency involving sale-
leaseback transactions and also gives clarity to other existing authoritative
pronouncements. The adoption of SFAS No. 145 did not have a material effect
on the company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," effective for exit or disposal activities
after December 15, 2002, which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issue Task Force
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Recently issued accounting pronouncements (continued)
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring." The adoption of the provisions of this SFAS did not have
a material impact on the Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and
FASB Interpretation No. 9," applicable for acquisitions on or after October 1,
2002, which generally removes acquisitions of financial institutions from the
scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with FASB Statements No. 141,
Business Combinations, and No. 142, "Goodwill and Other Intangible Assets,"
and amends FASB Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," to include in its scope certain long-term customer-
relationship intangible assets of financial institutions. The adoption of
SFAS No. 147 did not have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 clarified the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," and applies immediately to any variable interest entities created
after January 31, 2003 and to variable interest entities in which an interest
is obtained after that date. The Company holds no interest in variable
interest entities.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the
accounting and reporting for derivative instruments, including certain
derivative instruments imbedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In particular, SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment met the characteristic of a derivative
as described in SFAS No. 133. SFAS No. 149 also clarifies when a derivative
contains a financing component. SFAS No. 149 is generally effective for
derivative instruments entered
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Recently issued accounting pronouncements (continued)
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The Company holds no derivative instruments and does not
engage in hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No.
150 requires certain financial instruments that have both equity and liability
characteristics to be classified as a liability on the balance sheet. SFAS
No. 150 is effective for the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on the
Company's consolidated financial statements.
NOTE 2. GOING CONCERN UNCERTAINTY
As of March 31, 2004, the Company had a deficiency in working capital of
approximately $5,300,000 and had incurred continual net losses since its
return to the development stage in fiscal 1996 of approximately $24,000,000,
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
meet operating expenses. An investor group has previously advanced the Company
an aggregate amount of $1,750,000 through March 2004. Over the longer term, the
Company plans to achieve profitability through its operations from the sale and
licensing of its H-Net(TM) automatic meter-reading system. 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.
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A
Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 3. RELATED PARTY TRANSACTIONS
The officers of the Company have often advanced funds to the Company. These
advances have generally been in the form of short-term promissory notes at an
annual interest rate of 18% (see Note 8 below).
NOTE 4. PREPAID EXPENSES AND DEPOSITS
The Company has accrued a prepaid expense for $120,000 as a staying bonus
for the Chief Executive Officer and the Secretary as per their employment
contract (see note 8). The staying bonus will be amortized over the
calendar year 2004. For the three months ended March 31, 2004, $30,000 was
amortized as officer salaries with a balance of $90,000 at March 31, 2004.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2004 consisted of the following:
Office equipment $ 285,058
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 337,029
Accumulated depreciation (311,684)
-----------
Net book value $ 25,345
===========
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at March 31, 2004 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
===========
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 7. 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.
In March through June 2002, the Company received $750,000 from an accredited
investor group in exchange for 12% convertible debentures, convertible at the
lesser of $0.06 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 convertible debentures were accompanied
by 3,750,000 common stock warrants, exercisable over a three year period at
the lesser of $0.045 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. 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. These loan fees were fully amortized at
September 30, 2003.
In November 2002 through May 2003, the Company received another $500,000 from
the above accredited investor group in exchange for 12% convertible
debentures, convertible at the lesser of $0.01 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
convertible debentures were accompanied by 2,500,000 common stock warrants,
exercisable over a seven-year period at $0.005 per share. Debt issuance costs
associated with these loans amounted to $83,069, consisting of $66,069 in
finder's fees and $17,000 in legal costs.
In October 2003, the variable conversion price of the 12% convertible
debentures issued from March through June 2002 and from November 2002 through
May 2003 was reduced from 50% to 40% 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.
In November 2003 through March 2004, the Company received another $500,000
from the above accredited investor group in exchange for 12% convertible
debentures, convertible at the lesser of $0.005 per share and 40% 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
convertible debentures were accompanied by 2,500,000 common stock warrants,
exercisable over a seven-year period at $0.005 per share. Debt issuance costs
associated with these loans amounted to $111,125, consisting of $54,125 in
finder's fees and $57,000 in legal costs.
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 7. DEBT ISSUANCE COSTS (continued)
Amortization of the costs associated with these loans over the pro-rata portion
of the one-year term of the loans amounted to $55,173 through September 30,
2003. Total amortization of all debt issuance costs during the year ended
September 30, 2003 amounted to $144,276, including $89,103 attributable to the
unamortized balance at September 30, 2002. The unamortized balance of the debt
issuance costs at September 30, 2003 was $27,896. Total amortization of all
debt issuance cost during the six months ended March 31, 2004 was $40,897,
leaving an unamortized balance of $98,124.
NOTE 8. DUE TO OFFICERS
At September 30, 2001, a revolving promissory note agreement for $56,880 was
drawn up, due on demand, at an annual interest rate of 18%, for unpaid
cumulative advances (plus interest) made by the Company's CEO. 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 default. Repayments of debt by the Company amounted to $144,806
and accrued interest amounted to $6,913 during the year ended September 30,
2002, resulting in a loan balance due the CEO at September 30, 2002 of
$87,564. During the year ended September 30, 2003, additional cash advances
totaling $37,869 were made, along with $37,423, representing another 1,835,885
restricted shares of the Company's common stock pledged and sold by the above
note holder. Repayments of debt by the Company amounted to $136,009,
including re-issuance of 2,361,814 restricted shares of the Company's common
stock valued at $120,875 that had been transferred to a note holder during the
previous fiscal year. Accrued interest during the year ended September 30,
2003 was $10,073, bringing the loan balance due the CEO at September 30, 2003
to $36,920. During the six months ended March 31, 2004, the Company
repaid $21,151. Accrued interest of $2,165 during the period brought
the loan balance due the
CEO at March 31, 2004 to $17,934. The loan balance at March 31, 2004 is
currently due on demand and continues to accrue interest at the rate of 18%
per year.
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 8. DUE TO OFFICERS (continued)
At September 30, 2001, a promissory note agreement for $25,874 was drawn up,
due on demand, at an annual interest rate of 18 percent, for cumulative
advances (plus interest) made by the Company's Secretary/Treasurer. The
Secretary/Treasurer had 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 year ended September 30, 2003, additional cash advances
of $37,500 were made, and accrued interest was $6,522, resulting in a loan
balance due the secretary Treasurer at September 30, 2003 of $52,165. During
the six months ended March 31, 2004, the Company repaid $4,218. Accrued
interest amounted to $4,695 during the period bring the loan balance due the
Secretary at March 31, 2004 to $52,642. The loan balance at March 31, 2004 is
currently due on demand 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.
In November 2002, the Company re-issued the 684,407 restricted shares to the
Chief Technical Officer (valued at $32,946) that had been pledged to and sold
by the convertible note holder during the previous fiscal year. Accrued
interest amounted to $1,205 during the year ended September 30, 2003,
resulting in a loan balance of $3,036 as of that date. During the six months
ended March 31, 2004, accrued interest amounted to $284 bringing the loan
balance due the Chief Technical Officer at March 31, 2004 to $3,320.The loan
balance at March 31, 2004 is currently due on demand and continues to
accrue interest at the rate of 18% per year.
The aggregate amount due officers at March 31, 2004 and 2003 was $73,896 and
$92,121, respectively, and interest expense on the officer loans amounted
to $7,143 and $19,431 for the six months ended March 31, 2004 and 2003,
respectively.
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 8. DUE TO OFFICERS (continued)
As of March 31, 2004, the Company owed its officers $1,331,394 in accrued
compensation. Of this amount, $360,000 was attributable to aggregate staying
bonuses payable to the President and Secretary/Treasurer of the Company as of
September 30, 2003. An additional $120,000 was accrued on December 31, 2003
which will be amortized over the 2004 calendar year. The staying bonuses are
to be compensated for with the Company's restricted stock, valued at the
average bid and ask price for the stock for the 30 days prior to each
respective year-end issuance date. The total common stock to be issued as
staying bonuses amounted to 6,888,922 as of September 30, 2003 and 29,530,431
for the December 31, 2003 accrual bringing the total to be issued to 36,419,353
shares at March 31, 2004.
NOTE 9. NOTES PAYABLE
Notes payable at March 31, 2004 consisted of the following:
Registered Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $29,480
Accrued interest of $7,114 and principal
on Convertible Debenture convertible
into approximately 18,297,000
shares of common stock at the price
of $0.002 at March 31, 2004 7,114 $ 36,594
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% 29,480
Accrued interest of $7,114 and principal
on Convertible Debenture convertible
into approximately 18,297,000
shares of common stock at the price
of $0.002 at March 31, 2004 7,114 36,594
-------
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12% $33,900
Accrued interest of $8,181 and principal
on Convertible Debenture convertible
into approximately 21,040,500
shares of common stock at the price
of $0.002 at March 31, 2004 8,181 $ 42,081
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% 20,730
Accrued interest of $5,002 and principal
on Convertible Debenture convertible
into approximately 12,866,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,002 25,732
-------
Convertible Debenture #2
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12% 40,000
Accrued interest of $9,100 and principal
on Convertible Debenture convertible
into approximately 24,550,000
shares of common stock at the price
of $0.002 at March 31, 2004 9,100 49,100
--------
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $40,000
Accrued interest of $9,100 and principal
on Convertible Debenture convertible
into approximately 24,550,000
shares of common stock at the price
of $0.002 at March 31, 2004 9,100 $ 49,100
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% 45,000
Accrued interest of $10,238 and principal
on Convertible Debenture convertible
into approximately 27,619,000
shares of common stock at the price
of $0.002 at March 31, 2004 10,238 55,238
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% 25,000
Accrued interest of $5,688 and principal
on Convertible Debenture convertible
into approximately 15,344,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,688 30,688
-------
Convertible Debenture #3
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12% 80,000
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Accrued interest of $17,201 and principal
on Convertible Debenture convertible
into approximately 48,600,500
shares of common stock at the price
of $0.002 at March 31, 2004 $17,201 $ 97,201
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% 80,000
Accrued interest of $17,201 and principal
on Convertible Debenture convertible
into approximately 48,600,500
shares of common stock at the price
of $0.002 at March 31, 2004 17,201 97,201
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% 90,000
Accrued interest of $19,351 and principal
on Convertible Debenture convertible
into approximately 54,675,500
shares of common stock at the price
of $0.002 at March 31, 2004 19,351 109,351
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% 50,000
Accrued interest of $10,751 and principal
on Convertible Debenture convertible
into approximately 30,375,500
shares of common stock at the price
of $0.002 at March 31, 2004 10,751 60,751
--------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #5
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $6,493 and principal
on Convertible Debenture convertible
into approximately 28,246,500
shares of common stock at the price
of $0.002 at March 31, 2004 6,493 $ 56,493
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $6,493 and principal
on Convertible Debenture convertible
into approximately 28,246,500
shares of common stock at the price
of $0.002 at March 31, 2004 6,493 $ 56,493
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $6,493 and principal
on Convertible Debenture convertible
into approximately 28,246,500
shares of common stock at the price
of $0.002 at March 31, 2004 6,493 $ 56,493
-------
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #6
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $5,342 and principal
on Convertible Debenture convertible
into approximately 27,671,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,342 $ 55,342
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $5,342 and principal
on Convertible Debenture convertible
into approximately 27,671,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,342 $ 55,342
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $5,342 and principal
on Convertible Debenture convertible
into approximately 27,671,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,342 $ 55,342
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #7
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $33,333
Accrued interest of $1,403 and principal
on Convertible Debenture convertible
into approximately 17,368,000
shares of common stock at the price
of $0.002 at March 31, 2004 1,403 $ 34,736
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% 33,333
Accrued interest of $1,403 and principal
on Convertible Debenture convertible
into approximately 17,368,000
shares of common stock at the price
of $0.002 at March 31, 2004 1,403 $ 34,736
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% 33,334
Accrued interest of $1,404 and principal
on Convertible Debenture convertible
into approximately 17,369,000
shares of common stock at the price
of $0.002 at March 31, 2004 1,404 $ 34,738
-------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #8
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $658 and principal
on Convertible Debenture convertible
into approximately 8,662,500
shares of common stock at the price
of $0.002 at March 31, 2004 658 $ 17,325
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $658 and principal
on Convertible Debenture convertible
into approximately 8,662,500
shares of common stock at the price
of $0.002 at March 31, 2004 658 $ 17,325
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $658 and principal
on Convertible Debenture convertible
into approximately 8,662,500
shares of common stock at the price
of $0.002 at March 31, 2004 658 $ 17,325
-------
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #9
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $504 and principal
on Convertible Debenture convertible
into approximately 8,585,000
shares of common stock at the price
of $0.002 at March 31, 2004 504 $ 17,170
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $504 and principal
on Convertible Debenture convertible
into approximately 8,585,000
shares of common stock at the price
of $0.002 at March 31, 2004 504 17,170
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $504 and principal
on Convertible Debenture convertible
into approximately 8,585,000
shares of common stock at the price
of $0.002 at March 31, 2004 504 17,170
-------
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #10
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,666
Accrued interest of $236 and principal
on Convertible Debenture convertible
into approximately 8,451,000
shares of common stock at the price
of $0.002 at March 31, 2004 236 $ 16,902
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,667
Accrued interest of $236 and principal
on Convertible Debenture convertible
into approximately 8,4,51,500
shares of common stock at the price
of $0.002 at March 31, 2004 236 16,903
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,666
Accrued interest of $236 and principal
on Convertible Debenture convertible
into approximately 8,451,000
shares of common stock at the price
of $0.002 at March 31, 2004 236 16,902
--------
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #11
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
Mardch 4, 2005 at an annual interest
rate of 12% $83,334
Accrued interest of $767 and principal
on Convertible Debenture convertible
into approximately 42,050,500
shares of common stock at the price
of $0.002 at March 31, 2004 767 $ 84,101
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $767 and principal
on Convertible Debenture convertible
into approximately 42,050,000
shares of common stock at the price
of $0.002 at March 31, 2004 767 84,100
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $767 and principal
on Convertible Debenture convertible
into approximately 42,050,000
shares of common stock at the price
of $0.002 at March 31, 2004 767 84,100
------- ----------
Subtotal of all Registered Convertible Debentures 1,535,840
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Less reclassified accrued interest $ (172,250)
------------
Subtotal principal value 1,363,590
Derivative conversion option 150 percent of principal 2,045,385
Less unamortized note discount (404,520)
-----------
Net carrying value of
Registered Convertible Debentures $ 3,004,455
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%. 160,621
Convertible note payable to Laurus Master Fund, Ltd.,
unsecured, 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. 7,141
-----------
Total notes payable $ 3,414,041
Current portion (3,365,541)
-----------
Long-term portion $ 48,500
===========
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
On April 12, 2001, the Company received $300,000 in proceeds from Laurus
Master Fund, Ltd. ("Laurus") and issued a $300,000 principal value 8%
convertible note due on October 12, 2001, along with 1,000,000 common stock
warrants, exercisable at $0.192 per share over a four-year period. $77,228 of
the proceeds was allocated to the cost of the warrants, with the remaining
$222,772 allocated to the cost of the debt instrument, based on the relative
fair market values of the note and the warrants at the date of issuance.
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.
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
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
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 8%, brought
the loan balance at September 30, 2002 to $129,214. During the year ended
September 30, 2003, the note holder sold the remaining 3,293,944 pledged
shares for net proceeds of $67,144. The note holder elected to convert
essentially all the remaining debt for common stock of the Company, receiving
26,000,000 newly issued Company shares valued at $58,400, and bringing the
tentative liability down to $3,670. Accrued interest amounted to $3,183,
resulting in a total liability to the note holder at September 30, 2003 of
$6,851. In connection with the pay-down of the debt, the $155,027 beneficial
conversion option noted above was reduced to zero through transference to
common stock.
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund ("Mercator"). This loan from Mercator was a short-term loan due May 15,
2002 and accrues interest at an annual rate of 18%. The loan was secured by
shares of the Company's common stock. In April and May of 2002, the Company
paid Mercator an aggregate of $100,000. On June 14, 2002 Mercator transferred
collateral in the form of 5,861,814 shares of common stock to their name
because the Company was in default on the balance of the loan.
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Thereafter, on June 21, 2002, Mercator 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, 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 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. In March 2004, the
Company settled its suit with Mercator for $150,000.
NOTE 10. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's continued
research and development efforts as of March 29, 2002, the Company entered
into a securities purchase agreement and related agreements with four
accredited investors (the "Purchasers") for the purchase of up to $750,000 of
the Company's 12% Convertible Debentures due one year from their date of
issuance. The Company granted the holders of the debentures a continuing
security interest in all of the Company's assets to secure the Company's
obligations under the debentures and related agreements. The debentures bear
interest at a rate of 12% per annum, payable quarterly in common stock or cash
at the option of the Purchasers.
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On March 29, 2002 the Company issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors. 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. In October 2003, the variable conversion price was
reduced from 50% to 40% 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. 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. In October 2003, the variable conversion price was reduced from
50% to 40% 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. 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. In October 2003, the variable conversion price was reduced from
50% to 40% 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
<page>F-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
lowest three intra-day trading prices during the 20 trading days immediately
preceding an exercise.
The Company entered into another securities purchase agreement plus related
agreements with three accredited investors on November 27, 2002 (essentially
the same re-organized investor group delineated above) for the purchase of up
to $500,000 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 November 27, 2002 the Company issued an aggregate of $200,000 of 12%
convertible debentures in a private offering to three accredited investors
who, if certain conversion limitations are disregarded, would be deemed
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. In October 2003, the variable conversion
price was reduced from 50% to 40% 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 the lesser of $.005 and the average of the lowest
three intra-day trading prices during the 20 trading days immediately preceding
an exercise.
On March 3, 2003 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to these same three accredited investors. 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. In October 2003, the variable conversion price was
reduced from 50% to 40% 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 $.005 and the average of the lowest three intra-
day trading prices during the 20 trading days immediately preceding an
exercise.
<page>F-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On May 12, 2003 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to the three accredited investors. 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. In October 2003, the variable conversion price was
reduced from 50% to 40% 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 $.005 and the average of the lowest three intra-
day trading prices during the 20 trading days immediately preceding an
exercise.
On November 18, 2003 the Company issued an aggregate of $100,000 of 12%
convertible debentures in a private offering to the three accredited investors.
The debentures were convertible into shares of common stock at the lesser of
$.01 per share and 40% 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 500,000 shares of common stock at a per share exercise
price equal to the lesser of $.005 and the average of the lowest three intra-
day trading prices during the 20 trading days immediately preceding an
exercise.
On December 3, 2003 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to the three accredited
investors. The debentures were convertible into shares of common
stock at the lesser of $.01 per share and 40% 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 250,000 shares of common stock
at a per share exercise price equal to the lesser of $.005 and the average of
the lowest three intra-day trading prices during the 20 trading days
immediately preceding an exercise.
On December 31, 2003 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to the three accredited
investors. The debentures were convertible into shares of common
stock at the lesser of $.01 per share and 40% 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 250,000 shares of common stock
at a per share exercise price equal to the lesser of $.005 and the average of
the lowest three intra-day trading prices during the 20 trading days
immediately preceding an exercise.
On February 18, 2004 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to the three accredited
investors. The debentures were convertible into shares of common
stock at the lesser of $.01 per share and 40% 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 250,000 shares of common stock
at a per share exercise price equal to the lesser of $.005 and the average of
the lowest three intra-day trading prices during the 20 trading days
immediately preceding an exercise.
On March 4, 2004 the Company issued an aggregate of $250,000 of 12%
convertible debentures in a private offering to the three accredited
investors. The debentures were convertible into shares of common
stock at the lesser of $.01 per share and 40% 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 1,250,000 shares of common stock
at a per share exercise price equal to the lesser of $.005 and the average of
the lowest three intra-day trading prices during the 20 trading days
immediately preceding an exercise.
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
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.
As part of the recording of the convertible debt transactions, a beneficial
conversion option was recognized, along with a corresponding convertible debt
discount. The fair value of the thirty three debt instruments issued totaling
$1,750,000 in principal value was $3,500,000 in aggregate, representing a 100%
premium on the principal value (due to the 100% pricing advantage) and making
the beneficial conversion option $1,637,735 at the inception of the loans
($1,750,000 proceeds less $112,265 allocated to the issuance of the 8,750,000
related warrants). In October 2003, the variable conversion price was reduced
from 50% to 40% 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. Accordingly, in October 2003, the beneficial conversion option was
increased from 100% to 150% which resulted in an increase of $563,258 in the
conversion interest and a corresponding expense in the current period. Due to
the nature of the debt instrument and its repayment terms, the beneficial
conversion option has been re-characterized as derivative conversion option and
reclassified as additional debt. In connection with the issuance of an
additional $500,000 of convertible debt during the six months ended March 31,
2004, the derivative conversion option was increased by $750,000.
During the fiscal year ended September 30, 2002, the Company issued 12,667,178
shares of common stock in connection with interest payments and upon
conversion of an aggregate $93,130 of principal and $6,916 of related interest
on the Company's convertible debentures. A corresponding pro-rata reduction of
$80,702 to the beneficial conversion option was made. During the fiscal year
ended September 30, 2003, the Company issued another 103,778,301 shares of
common stock in connection with the conversion of another $193,665 of
principal and $34,355 of accrued interest on the Company's convertible
debentures,
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
resulting in a convertible debt principal balance at September 30, 2003 of
$963,205 (net of an aggregate of $286,795 in debt conversions through that
date). A corresponding pro-rata reduction of $177,845 was made to the
beneficial conversion option during the fiscal year ended September 30, 2003
(an aggregate of $258,547 since the inception of the loans), bringing the
beneficial conversion option balance at September 30, 2003 to $881,550. In
October 2003, the variable conversion price was reduced from 50% to 40% 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. Accordingly in
October 2003, the beneficial conversion option was increased from 100% to 150%
resulting in an increase of $563,258 and a re-characterization of the
conversion option as additional debt.
During the six months ended December 31, 2003, the Company issued an
additional $500,000 of 12% convertible debentures. Also, the Company issued
94,174,842 shares of common stock in connection with the conversion of
another $99,615 of principal and $12,136 of accrued interest on the Company's
convertible debentures, resulting in a convertible debt principal balance
at March 31, 2004 of $1,363,590 (net of an aggregate of $386,410 in
debt conversions through that date). In connection with the issuance of the
additional $500,000 convertible debt, the Company recorded a corresponding
derivative conversion option of $750,000. A corresponding pro-rata reduction
of $149,423 was made to the derivative conversion option during the six
months ended March 31, 2004 (an aggregate of $407,970 since the inception
of the loans), bringing the derivative conversion option balance at
March 31, 2004 to $2,045,385.
The aggregate note discount of $1,750,000 is being amortized over the one-year
lives of the respective debt instruments. Of this amount, $279,115 was
amortized during the fiscal year ended September 30, 2002, another $653,720
during the year ended September 30, 2003 and $262,501 during the six months
ended March 31, 2004, while $69,233 in convertible bond
discount was transferred to equity upon conversion of $93,130 in debt
principal during the fiscal year ended September 30, 2002, $52,340
upon conversion of $193,665 of debt principal during the fiscal year ended
September 30, 2003 and $28,571 upon conversion of $99,616 of debt principal
during the six months ended March 31, 2004, resulting in an unamortized
convertible debt discount balance of $404,520 at March 31, 2004.
As of March 31, 2004, the Company was indebted for an aggregate of
$1,535,840, including $1,363,590 of principal and $172,250 of accrued 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.
<page>F-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. 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 December 31,
2003, there were 680,013,310 shares of the Company's common stock outstanding
held by approximately 750 holders of record and 215,865 shares of the
Company's Class A Preferred Stock outstanding held by one holder of record and
no shares of Class B Preferred Stock outstanding.
Each share of Class A Preferred Stock is entitled to 100 votes per share on
all matters presented to the Company's shareholders for action. The Class A
Preferred Stock does not have any liquidation preference, additional voting
rights, conversion rights, anti-dilution rights or any other preferential
rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the
Company's common stock. The Class B Preferred Stock does not have any
liquidation preference, voting rights, other conversion rights, anti-dilution
rights or any other preferential rights.
<page>F-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
During the months October 2002 through July 2003, the Company issued
15,000,000 shares of its restricted common stock to a consultant in exchange
for promotional services valued at $65,000.
During the months October 2002 through September 2003, the Company issued
119,630,468 shares of its restricted common stock to a consultant for debt
reduction of $162,500 and accrued fees of $91,305.
During the months October 2002 through September 2003, the Company issued
103,778,301 of its common shares to an investor group in exchange for $193,665
principal value of convertible debt and $34,355 in accrued interest. In
conjunction with these transactions, $177,845 of the Company's beneficial
conversion
<page>F-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
option was also transferred to common stock, and $52,340 in convertible note
discounts was applied against common stock as a result of debt conversion.
During the months November 2002 through May 2003, the Company issued
14,500,000 shares of its restricted common stock to consultants in exchange
for media services rendered valued of $49,000.
During the months November 2002 through September 2003, the Company issued
128,500,000 shares of its restricted common stock for cash of $180,000 in
private placements.
During the months November 2002 through May 2003, the Company issued 2,500,000
in seven-year common stock warrants as part of a $500,000 12% convertible debt
issuance, exercisable at the lower of $0.01 and 50% of the market price of the
common stock (as defined) through the date of exercise. The warrants were
recorded at $9,816 and the debt at $490,184, based upon the relative fair
values of each, and a beneficial conversion option for an additional $490,184
was also recognized.
During the months November 2002 through January 2003, the Company issued
4,504,280 shares of its restricted common stock to its corporate officers in
exchange for a net reduction of debt of $183,542.
During the months December 2002 through September 2003, the Company issued
26,000,000 shares of its common stock to a convertible note holder in exchange
for $58,400 in debt reduction. In conjunction with these transactions, the
Company transferred a beneficial conversion option valued at $155,027 to
common stock.
In December 2002 and January 2003, the Company issued its advisory board
members 1,250,000 shares of its restricted common stock in exchange for
$12,500 in services.
In December 2002, the Company issued 750,000 shares of its restricted common
stock to certain consultants as a $7,500 bonus.
<page>F-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued
In January 2003, the Company received back 1,000,000 restricted common shares
held by a former director as collateral on a $75,000 loan and re-issued the
shares as interest (valued at $9,000). The $75,000 loan (previously recorded
as an addition to capital) was paid-off by and recorded as a new loan to the
Company's CEO and Secretary/Treasurer.
In May 2003, the Company issued 12,000,000 shares of its restricted common
stock to an outside accountant in exchange for $120,000 in accrued services
rendered.
During the months October 2003 through March 31, 2004, the Company issued
94,174,842 shares of common stock to a convertible note holder in exchange
for $99,615 in debt reduction and $12,136 in accrued interest. In conjunction
with these transactions, the Company transferred $149,423 in derivative
conversion option, net of $28,571 convertible debt discount to common stock.
During the months October 2003 through December 2003, the Company issued
65,100,000 shares of its restricted common stock to a consultant for debt
reduction of $65,100.
During the months October 2003 through March 2004, the Company issued
27,300,000 shares of its restricted common stock to three consultants for
services rendered of $53,400.
During the months October 2003 through December 2003, the Company issued
50,000,000 shares of its common stock for $50,000 in cash.
In December 2003, the Company issued 15,845 convertible preferred A shares
to its President for a reduction $15,845 in accrued compensation.
NOTE 12. INCOME TAXES
Deferred income taxes consisted of the following at March 31, 2004:
Deferred tax asset, benefit
of net operating loss
carryforward $ 8,300,000
Valuation allowance (8,300,000)
-----------
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 year ended
March 31, 2004, the deferred tax asset and valuation allowance were both
increased by $500,000.
The Company has approximately $19,400,000 in both federal and California net
operating loss carryforwards. The federal net operating loss carryforwards
expire as follows: $2,700,000 in the year 2012, $5,300,000 in 2018, $1,200,000
in 2019, $3,500,000 in 2020, $2,400,000 in 2021, $2,300,000 in 2022, and
$2,000,000 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 2006, $2,300,000 in 2007, and $2,000,000 in
2008. The latest federal and California corporate income tax returns filed by
the Company were for the tax year ended November 30, 2000.
<page>F-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into three employment agreements with key individuals,
the terms of the agreements are as follows:
1) The CEO (and President) of the Company entered into an agreement dated
October 2, 1995 (which was subsequently amended September 1, 1997, September
1, 1999, and March 27, 2000) for a period of five years (to April 1, 2005),
and he is entitled to receive a base salary of $160,000 per year. The
employee shall further receive a bonus, paid at year-end, equal to 50% of the
employee's salary, for continued employment. The staying bonus will be
compensated for with the Company's restricted common stock. He is also
granted an option to purchase up to 2,000,000 shares of the Company's
restricted common stock at a price equal to 50% of the average market value
for the prior 30 trading days before exercise. On March 27, 2000, the
exercise price was adjusted to a flat $0.3864 per share, with an expiration
date of December 2, 2003, which, in turn, has subsequently been extended to
December 2, 2005.
2) The Secretary and Treasurer of the Company entered into an Agreement
dated October 2, 1995 (which was subsequently amended September 1, 1997,
September 1, 1999, and March 27, 2000), for a period of five years (extended
through April 1, 2005), and she is entitled to receive a base salary of
$80,000 per year. The employee shall further receive a bonus, paid at year-
end, equal to 50% of the employee's salary, for continued employment. The
staying bonus shall be compensated for with the Company's restricted common
stock. She is also granted an option to purchase up to 500,000 shares of the
Company's restricted common stock at a price equal to 60% of the average
market value for the prior 180 trading days before exercise. On March 27,
2000, the exercise price was adjusted to a flat $0.38 per share, with an
expiration date of December 31, 2004.
<page>F-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
3) The Chief Technical Officer of the Company entered into an agreement
dated August 1, 1998 for an initial term of three years (extended through
August 1, 2003 and again through January 19, 2009), and he is entitled to
receive a base salary of $150,000 per year, with a minimum of $90,000 to be
paid annually in cash and the balance paid (at the option of the Company) in
cash or restricted common stock under rule 144. The employee shall receive a
hire-on bonus of $75,000 worth of the Company's restricted common stock under
rule 144, at one-half market price. The employee shall further receive
performance bonuses (paid in restricted common stock, as above) upon
successful completion of specific milestones pertaining to the implementation
and deployment of certain software (up to $862,500). If substantially all
performance milestones are met, he is also granted an option to purchase up to
500,000 shares of the Company's restricted common stock at a price equal to
60% of the average market value at the date of purchase. As of September 30,
2003, none of the aforementioned milestones had been successfully completed.
Litigation
There has been one recent legal proceeding in which the Company has been a
party:
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund ("Mercator") in order to make an initial $100,000 payment to Laurus
Master Fund, Ltd. and to fund continuing development of the Company's H-
Net(TM) system. This loan from Mercator was a short-term loan due May 15, 2002
and accrues interest at an annual rate of 18%. The loan was secured by shares
of the Company's common stock. As of June 13, 2002, the Company owed Mercator
approximately $243,000 of principal and accrued and unpaid interest under this
loan and was in default in the repayment of this debt.
<page>F-52
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
On June 14, 2002, Mercator transferred collateral in the form of 5,861,814
shares of the Company's common stock into its name as a result of the
Company's default on Mercator's loan. Of the 5,861,814 shares of common stock
transferred into the name of Mercator 3,500,000 shares of the Company's common
stock were issued and pledged as collateral by the Company in February 2002,
and 2,361,814 shares of the Company's common stock were issued and pledged as
collateral by Robert Spigno, the Company's Chief Executive Officer, in
February 2002.
On June 21, 2002 Mercator 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 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. In March 2004, the Company
settled its suit with Mercator for $150,000.
<page>F-53
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
The Company, during its normal course of business, may be subject from time to
time to disputes and to legal proceedings against it. Both counsel and
management do not expect that the ultimate outcome of any current claims will
have a material adverse effect on the Company's financial statements.
NOTE 14. FORM S-8 FILINGS
In November 2003, the Company filed a registration statement on Form S-8
covering 12,000,000 share issued to an independent consultant to the Company,
which authorized the re-sale of the 12,000,000 shares of common stock valued at
$46,800. In March 2004, the Company filed another registration statement on
Form S-8 covering an additional 14,000,000 share issued to the same independent
consultant valued at $36,400.
NOTE 15. 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, 2005. In January
2004, the exercise price on the Class B preferred stock options was adjusted to
$0.05 per share.
The Company's CEO currently own 215,865 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 234,155 shares for
$1.00 per share through November 1, 2005.
<page>F-54
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 15. 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 is to be issued, the options and warrants were granted at an average
market discount of 50% (ranging from between 20% to 75%).
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. Accordingly,
compensation expense for common stock options and warrants issued to employees
for services have been 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, with pro forma disclosure of
the excess market value as required by FASB No. 123. No common stock options
or warrants were granted to employees (including officers) and directors of the
Company during the six months ended March 31, 2004 and the year ended
September 30, 2003.
All common stock options and warrants issued to consultants and other non-
employees have been 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.
At September 30, 2002, the Company had an aggregate of 8,807,154 common stock
options and a total of 1,000,000 Class B preferred stock options recorded as
additional paid-in capital at a value of $1,443,695. Of the common stock
options and warrants, 2,043,654
<page>F-55
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 15. STOCK OPTIONS (continued)
had been issued to officers and employees and the remaining 6,763,500 had been
issued to consultants and investors.
In December 2001 and January 2002, a consultant exercised 550,000 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 trough 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 10 above). The
allocated cost of these warrants amounted to $100,087, so that the total stock
options and warrants exercisable at September 30, 2002 became $1,443,695.
In November 2002 trough May 2003, 2,500,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $500,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $9,816, resulting in a recorded
balance of stock options and warrants exercisable at September 30, 2003 of
$1,453,511 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
As of September 30, 2003, the Company had an additional 4,852,205 common stock
options that had been granted to consultants and investors at exercise prices
ranging from $0.50 to $2.00 per share, 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. The Company also granted a contingent issuance
to its Chief Technical Officer of 2,000,000 common stock options exercisable
at $0.50 per share and expiring December 31, 2004, which will not vest until
certain milestones have been attained. These respective common stock options
and contingent issuances have been excluded from the summarized table below.
In November 2003 through December 2003, 1,000,000 seven-year common stock
warrants were issued to an accredited investor group in connection with a
$200,000 12% convertible debenture financing arrangement (see Note 10 above).
The allocated cost of these warrants amounted to $945, resulting in a recorded
balance of stock options and warrants exercisable at December 31, 2003 of
$1,454,456 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
In February through March 2004, 1,500,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $300,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $1,417, resulting in a recorded
balance of stock options and warrants exercisable at March 31, 2004 of
$1,455,873 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
<page>F-56
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the six months ended March 31, 2004 and
the fiscal year ended September 30, 2003 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2002 8,807,154 .280
Granted 2,500,000 .010
----------
Balance outstanding, September 30, 2003 11,307,154 $.204
Granted 2,500,000 .002
----------
Balance outstanding, March 31, 2004 13,807,154 $.167
========== =====
The following table summarizes information about common stock options at
March 31, 2004:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- --------------- --------- ------- -------- ---------- -------
$2.000 - $2.000 563,500 5 $ 2.000 563,500 $ 2.000
$ .380 - $ .380 100,000 9 $ .380 100,000 $ .380
$ .192 - $ .192 1,000,000 12 $ .192 1,000,000 $ .192
$ .050 - $ .050 3,750,000 13 $ .002 3,750,000 $ .050
$ .130 - $ .130 1,450,000 17 $ .130 1,450,000 $ .130
$ .386 - $ .386 1,443,654 20 $ .386 1,443,654 $ .386
$ .380 - $ .380 500,000 20 $ .380 500,000 $ .380
& .002 - $ .002 2,500,000 70 $ .002 2,500,000 $ .002
& .002 - $ .002 1,000,000 80 $ .002 1,000,000 $ .002
& .002 - $ .002 1,500,000 83 $ .002 1,000,000 $ .002
$ .002 - $2.000 13,807,154 37 $ .167 13,807,154 $ .167
=============== ========== == ======== ========== =======
NOTE 16. SUBSEQUENT EVENTS
(a) Subsequent to March 31, 2004, the Company issued 84,412,161 shares of
common stock in exchange for reduction of $48,500 in convertible debt and
payment of related accrued interested.
(b) In April 2004, the Company received $250,000 from an accredited
investor group in exchange for 12% convertible debentures, convertible at the
lesser of $0.005 per share and 40% 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 convertible debentures were accompanied
by 1,250,000 common stock warrants, exercisable over a three year period at
$0.002 per share. Debt issuance costs associated with these loans amounted to
$84,624, of which $21,624 represented finder's fees and $33,000 represented
legal costs and $30,000 represented pre-paid interest on these loans.
<page>F-57
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. We intend that those forward-looking statements be subject to the
safe harbors created by those sections. These forward-looking statements
generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance, and
can generally be identified by the use of the words "believe," "intend,"
"plan," "expect," "forecast," "project," "may," "should," "could," "seek," "pro
forma," "estimates," "continues," "anticipate" and similar words. The forward-
looking statements and associated risks may include, relate to, or be qualified
by other important factors, including, without limitation:
o the projected growth in the automated meter reading markets;
o our business strategy for establishing and expanding our
presence in these markets;
o our ability to successfully implement our future business
plans;
o our ability to hire and retain qualified personnel;
o anticipated trends in our financial condition and results of
operations;
o our ability to distinguish ourselves from our competitors; and
o uncertainties relating to economic conditions in the markets in
which we currently operate and in which we intend to operate in
the future.
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the forward-
looking statements. We do not undertake to update, revise or correct any
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section of
our most recent annual report on Form 10-KSB could cause our financial results,
including our net income (loss) or growth in net income (loss) to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate 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 in the near future. 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.
<page>2
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
capital stock is recorded at estimated market value. The volatile nature of
the price of our common stock causes wide disparities in certain valuations.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March
31, 2004 and 2003
We did not generate any revenues for the three months ended March 31,
2004 and March 31, 2003. Cost of sales for the three months ended March 31,
2004 was $22,195 as compared to $35,014 for the three months ended March 31,
2003, a decrease of $12,819 or 36.6%. This decrease in cost of sales primarily
was due to a decrease in production of models and prototypes of our H-Net(TM)
products that are used for sales and marketing purposes.
General and administrative expenses increased by $49,658 or 12.4% to
$448,542 for the three months ended March 31, 2004 as compared to $398,884 for
the same period in 2003. This increase was primarily due to increased expenses
associated with legal and consulting services.
Interest expense decreased by $37,681 or 14.2% to $228,167 during the
three months ended March 31, 2004 as compared to $265,848 for the same period
in 2003. This decrease was primarily due to reduced amortization of convertible
debt discount.
Net loss for the three months ended March 31, 2004 decreased by $842 or
less than 1% to $698,904 as compared to a net loss of $699,746 for the same
period in 2003.
Comparison of Results of Operations for the Six Months Ended March 31,
2004 and 2003
We did not generate any revenues for the six months ended March 31,
2004 and March 31, 2003. Cost of sales for the six months ended March 31, 2004
was $22,195 as compared to $35,014 for the six months ended March 31, 2003, a
decrease of $12,819 or 36.6%. This decrease in cost of sales primarily was due
to a decrease in production of models and prototypes of our H-Net(TM) products
that are used for sales and marketing purposes.
General and administrative expenses decreased by $254,766 or 28.7% to
$632,350 for the six months ended March 31, 2004 as compared to $887,116 for
the six months ended March 31, 2003. This decrease was primarily due to
decreased expenses associated with legal and consulting services.
<page>3
Interest expense increased by $510,051 or 96.7% to $1,037,489 for the
six months ended March 31, 2004 as compared to $527,438 for the six months
ended March 31, 2003. This increase was primarily due to the recognition of a
derivative conversion option in October 2003 of $563,258 related to the
reduction of the variable conversion price of our outstanding convertible
debentures from 50% to 40% of the average of the lowest three intra-day
trading prices of a share of our common stock during the twenty trading days
immediately preceding the conversion.
Net loss for the six months ended March 31, 2004 increased by $392,466
or 27.1% to $1,842,034 as compared to a net loss of $1,449,568 for the six
months ended March 31, 2003.
Liquidity and Capital Resources
During the six months ended March 31, 2004 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, 2003 and 2002 have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business.
As of March 31, 2004, we had negative working capital of approximately
$5,270,000 and an accumulated deficit of approximately $27,147,000. As of that
date, we had approximately $43,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately $1,613,000.
We had other liabilities, including amounts due to officers, accrued interest,
notes payable and current portion of long term debt of approximately
$3,910,000, including those issued prior to the beginning of fiscal year 2004.
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 $450,000
for the six months ended March 31, 2004 as compared to approximately $536,000
for the six months ended March 31, 2003. No cash was provided by our investing
activities for the six months ended March 31, 2004 and March 31, 2003.
Cash provided by our financing activities totaled $491,000 for the six
months ended March 31, 2004 as compared to $548,000 for the six months ended
March 31, 2003. We raised all of the cash provided by financing activities
during the six months ended March 31, 2004 from the issuance of common stock,
convertible debentures and/or promissory notes.
As of March 29, 2003, we were in default in the repayment of principal
of approximately $114,000 plus related interest on our secured convertible
debentures due March 29, 2003; as of May 10, 2003, we were in default in the
repayment of principal of approximately $150,000 plus related interest on our
secured convertible debentures due May 10, 2003; as of June 17, 2003, we were
in default in the repayment of principal of approximately $300,000 plus related
interest on our secured convertible debentures due June 17, 2003; and as of
November 27, 2003 we were in default in the repayment of principal of
approximately $200,000 plus related interest on our secured convertible
debentures due November 27, 2003; as of March 3, 2004, we were in default in
the repayment of principal of approximately $123,000 plus related interest on
our secured convertible debentures due March 3, 2004; and as of May 12, 2004,
we were in default in the repayment of principal of approximately $150,000 plus
related interest on our secured convertible debentures due May 12, 2004. As of
May 19, 2004, each of these defaults was continuing and we were in payment
default under convertible debentures in the aggregate principal amount of
approximately $849,590 plus related interest on those debentures. As of May 19,
2004, we also 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 May 19, 2004, we also were in default under our
<page>4
obligations to make quarterly interest payments under all of our outstanding
convertible debentures issued prior to March 31, 2004. As of May 19, 2004, as a
result of the above defaults, the holders of our secured convertible debentures
were entitled to pursue their rights to foreclose upon their security interest
in all of our assets.
We plan to register for resale with the Securities and Exchange
Commission a portion of the shares of common stock underlying the convertible
debentures under which we are in default and expect that the 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.
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 one of our lenders, Laurus Master Fund, Ltd., and to fund continuing
development of our H-Net(TM) system. This loan from the Mercator Momentum Fund
was a short-term loan due May 15, 2002 and accrued 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 related to the loan in February 2002 from
Mercator Momentum Fund of $340,000, as more particularly described above.
On March 9, 2004, we entered into a settlement agreement settling all
claims with Mercator Momentum Fund. Under our settlement agreement, we paid
$150,000 to Mercator Momentum Fund and all parties to the litigation were
released from any and all claims arising out of the transactions involving
Mercator Momentum Fund.
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, 2003, approximately $6,850 of principal and accrued and unpaid interest
<page>5
under the original note remained outstanding. As of May 19, 2004, approximately
$7,200 of principal and accrued and unpaid interest under this note remained
outstanding.
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 were due March 29, 2003 and provide for interest
at the rate of 12% per annum. The secured convertible debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of
common stock. The net proceeds of that offering, after payment of related
expenses, were approximately $225,000. As of May 19, 2004, an aggregate of
$99,590 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 were due May 10, 2003 and provide for interest
at the rate of 12% per annum. The secured convertible debentures were
accompanied by warrants to purchase up to an aggregate of 750,000 shares of
common stock. The net proceeds of that offering, after payment of related
expenses, were approximately $140,000. As of May 19, 2004, an aggregate of
$150,000 of principal plus related accrued and unpaid interest relating to the
debentures issued in May 2002 remained outstanding.
In June 2002, we issued $300,000 of our secured convertible debentures
to four accredited investors in the third stage of a three-stage offering. The
secured convertible debentures were due June 17, 2003 and provide for interest
at the rate of 12% per annum. The secured convertible debentures were
accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of
common stock. The net proceeds of that offering, after payment of related
expenses, were approximately $237,500. As of May 19, 2004, 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 were due November 27, 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 $145,000. As of May 19, 2004,
an aggregate of $0 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, 2004 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 $100,000. As of May 19, 2004, an aggregate of
$123,000 of principal plus related accrued and unpaid interest relating to the
debentures issued in March 2003 remained outstanding.
In May 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 May 12, 2004 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 $100,000. As of May 19, 2004, an aggregate of
$150,000 of principal plus related accrued and unpaid interest relating to the
debentures issued in May 2003 remained outstanding.
<page>6
In October 2003, in consideration for certain bridge financing which
later was incorporated into the November 2003 convertible debenture offering
described below, the variable conversion price of our outstanding 12%
convertible debentures issued from March 2002 through June 2002 and from
November 2002 through May 2003 was reduced from 50% to 40% 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.
In November 2003, we issued $100,000 of our secured convertible
debentures to three accredited investors in the first stage of a five- stage
offering. The secured convertible debentures are due November 25, 2004 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
500,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $75,000. As of May 19, 2004, an
aggregate of approximately $100,000 of principal plus related accrued and
unpaid interest relating to the debentures issued in November 2003 remained
outstanding.
On December 3, 2003, we issued $50,000 of our secured convertible
debentures to three accredited investors in the second stage of a five- stage
offering. The secured convertible debentures are due December 3, 2004 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
250,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $31,000. As of May 19, 2004, an
aggregate of $50,000 of principal plus related accrued and unpaid interest
relating to the debentures issued on December 3, 2003 remained outstanding.
On December 31, 2003, we issued $50,000 of our secured convertible
debentures to three accredited investors in the third stage of a five- stage
offering. The secured convertible debentures are due December 31, 2004 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
250,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $39,000. As of May 19, 2004, an
aggregate of $50,000 of principal plus related accrued and unpaid interest
relating to the debentures issued on December 31, 2003 remained outstanding.
In February 2004, we issued $50,000 of our secured convertible
debentures to three accredited investors in the fourth stage of a five- stage
offering. The secured convertible debentures are due February 18, 2005 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
250,000 shares of common stock. The net proceeds of that offering, after
payment of related expenses, were approximately $35,000. As of May 19, 2004, an
aggregate of $50,000 of principal plus related accrued and unpaid interest
relating to the debentures issued on February 18, 2004 remained outstanding.
In March 2004, we issued $250,000 of our secured convertible debentures
to three accredited investors in the fourth stage of a five-stage offering. The
secured convertible debentures are due March 4, 2005 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 1,250,000 shares of
common stock. The net proceeds of that offering, after payment of related
expenses, were approximately $203,000. As of May 19, 2004, an aggregate of
$250,000 of principal plus related accrued and unpaid interest relating to the
debentures issued on March 4, 2004 remained outstanding.
In April 2004, we issued $250,000 of our secured convertible debentures
to four accredited investors in the first stage of a three-stage offering. The
secured convertible debentures are due April 19, 2004 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, including prepayment of interest, were approximately $165,000. As of
<page>7
May 19, 2004 an aggregate of $250,000 of principal plus related accrued and
unpaid interest relating to the debentures issued in April 2004 remained
outstanding.
As of May 19, 2004, we had a loan outstanding and due on demand in an
amount equal to approximately $34,500. This loan accrues interest at an annual
rate of 18% and was made by Robert Spigno, our President and Chief Executive
Officer and a member of our board of directors. As of that date we also had a
loan outstanding and due on demand in an amount equal to approximately $40,500.
This loan accrues interest at an annual rate of 18% and was made by Patricia
Spigno, our Chief Financial Officer and Secretary.
As of May 19, 2004, we had a promissory note outstanding and due
September 1, 2004, payable in the approximate amount of $281,100. 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, 2003 and 2002 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, 2003 and 2002, we have suffered recurring losses from operations
and at September 30, 2003 had net capital and working capital deficiencies.
These factors, among others, raised substantial doubt about our ability to
continue as a going concern and led our independent certified public
accountants to modify their unqualified opinion to include an explanatory
paragraph related to our ability to continue as a going concern. The
consolidated financial statements included in this document do not include any
adjustments that might result from the outcome of this uncertainty.
We have been, and currently are, working toward identifying and
obtaining new sources of financing. Deteriorating global economic conditions
may cause prolonged declines in investor confidence in and accessibility to
capital markets. Further, our current secured convertible debenture financing
documents contain notice and right of first refusal provisions and the grant of
a security interest in substantially all of our assets in favor of the
convertible debenture investors, all of which provisions will restrict our
ability to obtain debt and/or equity financing.
Any future financing that we may obtain may cause significant dilution
to existing stockholders. Any debt financing or other financing of securities
senior to common stock that we are able to obtain will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition, results of
operations and cash flows.
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.
<page>8
We have not yet sold any H-Net(TM) systems and we do not expect any
significant sales of our H-Net(TM) systems in the near future. 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 March 31, 2004. 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 March 31, 2004, 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.
ITEM 3. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have
concluded, based on their evaluations as of March 31, 2004 and May 14, 2004
("Evaluation Dates"), that the design and operation of our "disclosure controls
and procedures" (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to
ensure that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding whether or not disclosure is required.
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
Evaluation Date, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions were
required or undertaken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 one of our lenders, Laurus Master Fund, Ltd., and to fund continuing
development of our H-Net(TM) system. This loan from the Mercator Momentum Fund
was
<page>9
a short-term loan due May 15, 2002 and accrued 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 related to the loan in February 2002 from
Mercator Momentum Fund of $340,000, as more particularly described above.
On March 9, 2004, we entered into a settlement agreement settling all
claims with Mercator Momentum Fund. Under our settlement agreement, we paid
$150,000 to Mercator Momentum Fund and all parties to the litigation were
released from any and all claims arising out of the transactions involving
Mercator Momentum Fund.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
In January 2004, the we issued an aggregate of 18,891,327 shares of
common stock to three accredited investors upon conversion of an aggregate of
$15,000 in principal and related interest on our convertible debentures.
On February 18, 2004, we issued $50,000 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
our outstanding shares of common stock. The debentures initially were
convertible into shares of common stock at the lesser of $.005 per share and
40% of the average of the lowest three intraday trading prices of a share of
common stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
250,000 shares of common stock at a per share exercise price equal to $.005.
In February 2004, we issued an aggregate 24,670,000 shares of
restricted common stock to six accredited investors for cash in the aggregate
amount of $25,000.
On March 4, 2004, we issued $250,000 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
our outstanding shares of common stock. The debentures initially were
convertible into shares of common stock at the lesser of $.005 per share and
40% of the average of the lowest three intraday trading prices of a share of
common stock during the 20 trading days immediately preceding conversion. The
<page>10
debentures were accompanied by warrants to purchase up to an aggregate of
1,250,000 shares of common stock at a per share exercise price equal to $.005.
In March 2004, we issued an aggregate of 9,465,852 shares of common
stock to three accredited investors upon conversion of an aggregate of $7,500
in principal and related interest on our convertible debentures.
In March 2004, the Company issued 14,000,000 shares of common stock
valued at $25,000 to a consultant for services rendered.
Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide.
Dividend Policy
We have never paid cash dividends on our common stock and do not
currently intend to pay cash dividends on our common stock in the foreseeable
future. We are restricted from paying dividends on our common stock under state
law, and the terms of our secured convertible debentures. We currently
anticipate that we will retain any earnings for use in the continued
development of our business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of March 29, 2003, we were in default in the repayment of principal
of approximately $114,000 plus related interest on our secured convertible
debentures due March 29, 2003; as of May 10, 2003, we were in default in the
repayment of principal of approximately $150,000 plus related interest on our
secured convertible debentures due May 10, 2003; as of June 17, 2003, we were
in default in the repayment of principal of approximately $300,000 plus related
interest on our secured convertible debentures due June 17, 2003; as of
November 27, 2003 we were in default in the repayment of principal of
approximately $200,000 plus related interest on our secured convertible
debentures due November 27, 2003; as of March 3, 2004, we were in default in
the repayment of principal of approximately $123,000 plus related interest on
our secured convertible debentures due March 3, 2004; and as of May 12, 2004,
we were in default in the repayment of principal of approximately $150,000 plus
related interest on our secured convertible debentures due May 12, 2004. As of
May 19, 2004, each of these defaults was continuing and we were in payment
default under convertible debentures in the aggregate principal amount of
approximately $849,590 plus related interest on those debentures. As of May 19,
2004, we also 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 May 19, 2004, we also were in default under our
obligations to make quarterly interest payments under all of our outstanding
convertible debentures issued prior to March 31, 2004. As of May 19, 2004, as a
result of the above defaults, the holders of our secured convertible debentures
were entitled to pursue their rights to foreclose upon their security interest
in all of our assets.
We plan to register for resale with the Securities and Exchange
Commission a portion of the shares of common stock underlying the convertible
debentures under which we are in default and expect that the 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.
<page>11
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 one of our lenders, Laurus Master Fund, Ltd., and to fund continuing
development of our H-Net(TM) system. This loan from the Mercator Momentum Fund
was a short-term loan due May 15, 2002 and accrued 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 related to the loan in February 2002 from
Mercator Momentum Fund of $340,000, as more particularly described above.
On March 9, 2004, we entered into a settlement agreement settling all
claims with Mercator Momentum Fund. Under our settlement agreement, we paid
$150,000 to Mercator Momentum Fund and all parties to the litigation were
released from any and all claims arising out of the transactions involving
Mercator Momentum Fund.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended March 31, 2004, no matters were submitted to a
vote of the holders of our securities.
ITEM 5. OTHER INFORMATION.
None.
<page>12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
10.1 Form of Secured Convertible Debenture due
February 18, 2005 (1)
10.2 Form of Common Stock Purchase Warrant dated as
of February 18, 2004 (1)
10.3 Form of Secured Convertible Debenture due March
4, 2005 (1)
10.4 Form of Common Stock Purchase Warrant dated as
of March 4, 2004 (1)
31 Certifications Required by Rule 13a-14(a) of
the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
_______________
(1) Filed as an exhibit to the Registrant's Form 10-QSB for the
quarterly period ended December 31, 1003 (File No. 33-3560D)
(b) Reports on Form 8-K
--------------------
None.
<page>13
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CONECTISYS CORPORATION
Date: May 21, 2004 By: /s/ ROBERT A. SPIGNO
----------------------
Robert A. Spigno,
Chairman of the Board,
President and Chief
Executive Officer
(principal executive officer)
Date: May 21, 2004 By: /s/ PATRICIA A. SPIGNO
------------------------
Patricia A. Spigno,
Chief Financial Officer and
Secretary (principal financial
and accounting officer)
<page>14
EXHIBITS FILED WITH THIS REPORT ON FORM 10-QSB
Exhibit No. Description
----------- -----------
31 Certifications Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
<page>15