<pre>
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended JUNE 30, 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 August 17, 2004, there were 1,013,965,475 shares of the issuer's common
stock, no par value, outstanding.
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PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and September 30, 2003 (audited)....................................F-1
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2004 (unaudited) and 2003 (unaudited) and the
Cumulative Period From December 31, 1990 (Inception)
Through June 30, 2004 (unaudited)...................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through June 30, 2004 (unaudited).....F-4
Condensed Consolidated Statement of Cash Flows for the Nine
Months Ended June 30, 2004 (unaudited) and 2003 (unaudited) and
the Cumulative Period From December 31, 1990 (Inception) Through
June 30, 2004 (unaudited)..........................................F-11
Notes to Condensed Consolidated Financial Statements (unaudited)......F-14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................2
Item 3. Controls and Procedures...........................................8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................9
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities....................................9
Item 3. Defaults Upon Senior Securities..................................10
Item 4. Submission of Matters to a Vote of Security Holders..............10
Item 5. Other Information................................................10
Item 6. Exhibits and Reports on Form 8-K.................................11
Signatures................................................................12
Exhibits Filed with this Report on Form 10-QSB............................13
ITEM 1. FINANCIAL STATEMENTS.
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 and September 30, 2003
Jun. 30, Sep. 30,
2004 2003
Unaudited Audited
Assets
Current assets
Cash and cash equivalents 406,085 2,282
Prepaid expenses 165,000 0
Debt issuance cost - current, net of accumulated
amortization of $347,201 and $275,448 219,544 27,896
Total current assets 790,629 30,178
Property and equipment, net of accumulated
depreciation of $315,250 and $304,553 21,779 32,476
License and technology, net of accumulated
amortization of $421,478 and $421,478 0 0
Total assets 812,408 62,654
<page>F-1
CONECTISYS CORPORATION AND SUBSIDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 and September 30, 2003
Jun. 30, Sep. 30,
2004 2003
Unaudited Audited
Liabilities and shareholders' deficit
Current liabilities
Accounts payable 245,687 274,746
Accrued compensation 1,416,980 1,113,620
Due to officers 68,047 92,121
Accrued interest payable 438,452 339,965
Other current liabilities 19,061 14,410
Notes payable and current potion of
long-term debt 4,686,371 1,090,597
Total current liabilities 6,874,598 2,925,459
Long-term debt, net of current 8,613 99,615
Total liabilities 6,883,211 3,025,074
Shareholders' deficit
Preferred stock - Class A 1,000,000 shares authorized,
$1.00 par value, 215,865 and 200,020 shares issued
and outstanding, respectively 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, 953,542,350 and 490,224,872 shares
issued and outstanding, respectively 20,549,507 19,807,537
Additional paid in capital:
Convertible preferred stock - Class B
$1.00 par value, 1,000,000 stock options exercisable 100,000 100,000
Common stock, no par value
16,432,154 and 11,307,154 stock options
and warrants exercisable, respectively 1,360,006 1,353,511
Beneficial conversion option, debt instruments 0 881,550
Accumulated deficit during development stage (28,296,181) (25,305,038)
Total shareholders' deficit (6,070,803) (2,962,420)
Total liabilities and shareholders' deficit 812,408 62,654
</table>
<page>F-2
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2004
Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended Through
Jun. 30, Jun. 30, Jun. 30, Jun. 30, Jun. 30,
2004 2003 2004 2003 2004
Unaudited Unaudited Unaudited Unaudited Unaudited
Revenues 0 0 0 0 517,460
Cost of goods sold 26,583 41,761 48,778 76,775 838,841
Gross profit (26,583) (41,761) (48,778) (76,775) (321,381)
General and administrative 331,056 408,452 963,406 1,295,568 21,185,713
Loss from operations (357,639) (450,213) (1,012,184) (1,372,343) (21,507,094)
Non-operating income (expense) 0 0 (150,000) 0 (1,247,365)
Interest expense (791,470) (293,230) (1,828,959) (820,668) (4,463,980)
Net loss (1,149,109) (743,443) (2,991,143) (2,193,011) (27,218,439)
Weighted average shares outstanding 846,374,982 291,442,286 660,024,294 172,676,136
Net loss per share (0.00) (0.00) (0.00) (0.01)
</table>
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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, Nov. 30, 1993 0 0 16,809 1,044,755 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 23,655
Services, Sep. 1994 0 0 8,700 11,614 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 33,000
Net loss for the year 0 0 0 0 (32,544) (32,544)
Balance, Nov. 30, 1994 16,345 16,345 50,000 1,131,024 (1,080,143) 67,226
Shares issued in exchange for:
Cash, Feb. 1995 0 0 1,160 232,000 0 232,000
Debt repayment, Feb. 1995 0 0 2,040 408,000 0 408,000
Debt repayment, Feb. 1995 0 0 4,778 477,810 0 477,810
Acquisition of assets, CIPI
Feb. 1995 0 0 28,750 1,950,000 0 1,950,000
Acquisition of assets,
Apr. 1995 0 0 15,000 0 0 0
Cash and services, Apr.
and May 1995 0 0 16,000 800,000 0 800,000
Cash, Jun. 1995 0 0 500 30,000 0 30,000
Acquisition of assets and
services, Sep. 1995 0 0 4,000 200,000 0 200,000
Cash, Sep. 1995 0 0 41 3,000 0 3,000
Acquisition of assets,
Sep. 1995 0 0 35,000 1,750,000 0 1,750,000
Return of assets, CIPI
Sep. 1995 0 0 (27,700) (1,950,000) 0 (1,950,000)
Net loss for the year 0 0 0 0 (2,293,867) (2,293,867)
Balance, Nov. 30, 1995 16,345 16,345 129,569 5,031,834 (3,374,010) 1,674,169
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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. 1996 0 0 1,389 152,779 0 152,779
Debt repayment, Feb. 1996 0 0 10,000 612,000 0 612,000
Services, Feb. 1996 0 0 3,160 205,892 0 205,892
Cash, Mar. 1996 0 0 179 25,000 0 25,000
Shares returned and
canceled Mar. 1996 0 0 (15,000) 0 0 0
Services, Apr. 1996 0 0 13 2,069 0 2,069
Services, Sep. 1996 4,155 A 4,155 586 36,317 0 40,472
Services, Oct. 1996 0 0 6,540 327,000 0 327,000
Debt repayment, Nov. 1996 0 0 2,350 64,330 0 64,330
Net loss for the year 0 0 0 0 (2,238,933) (2,238,933)
Balance, Nov. 30, 1996 20,500 20,500 138,786 6,457,221 (5,612,943) 864,778
Shares issued in exchange for:
Services, Mar. 1997 0 0 228 6,879 0 6,879
Services, Apr. 1997 0 0 800 13,120 0 13,120
Services, Jul. 1997 0 0 1,500 16,200 0 16,200
Cash, Jul. 1997 0 0 15,000 300,000 0 300,000
Services, Aug. 1997 0 0 5,958 56,000 0 56,000
Adjustment for partial
shares due to reverse
stock split (1:20) 0 0 113 0 0 0
Services, Oct. 1997 0 0 1,469,666 587,865 0 587,865
Debt repayment, Oct 1997 0 0 1,540,267 620,507 0 620,507
Cash, Oct. 1997 0 0 1,500,000 281,250 0 281,250
Services, Nov. 1997 0 0 4,950 10,538 0 10,538
Net loss for the year 0 0 0 0 (2,739,268) (2,739,268)
Balance, Nov. 30, 1997 20,500 20,500 4,677,268 8,349,580 (8,352,211) 17,869
Shares issued in exchange for:
Services, Dec. 1997
through Nov. 1998 0 0 2,551,610 2,338,264 0 2,338,264
Debt repayment, Apr. 1998
through Sep. 1998 0 0 250,000 129,960 0 129,960
Cash, Jan. 1998 through
Jul. 1998 0 0 4,833,334 1,139,218 0 1,139,218
Acquisition of assets,
Jul. 1998 0 0 300,000 421,478 0 421,478
Acquisition of 20% minority
interest in subsidiary,
Jul. 1998 0 0 50,000 59,247 0 59,247
Services, Nov. 1998 60,000 A 60,000 0 0 0 60,000
Net loss for the year 0 0 0 0 (4,928,682) (4,928,682)
Balance, Nov. 30, 1998 80,500 80,500 12,662,212 12,437,747 (13,280,893) (762,646)
<page>F-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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:
Shares returned and canceled
Dec. 1998 0 0 (1,350,000) (814,536) (814,536)
Services, Dec. 1998
through Sep. 1999 0 0 560,029 349,454 150,000 499,454
Cash, Dec. 1998
through Sep. 1999 0 0 1,155,800 129,537 129,537
Debt repayment, Sep. 1999 39,520 A 39,520 960,321 197,500 100,000 337,020
Net loss for the year 0 0 0 0 (1,323,831) (1,323,831)
Balance, Sep. 30, 1999 120,020 120,020 13,988,362 12,299,702 250,000 (14,604,724) (1,935,002)
Shares issued in exchange for:
Services, October 1999 through (17,500) (12,000) (12,000)
September 2000, valued from
$.025 to $0.80 per share 0 0 2,405,469 990,949 990,949
Retainers, debt and accrued
liabilities, October 1999
through September 2000 valued
from $0.25 to $1.57 share 0 0 2,799,579 1,171,638 1,171,638
Cash, October 1999 through
September 2000, with subscription
prices ranging from $0.25 to
$0.66 per share 0 0 2,295,482 839,425 (15,450) 823,975
Issuance of $63,500 consultant
stock options, March, 2000
at an exercise price of $2.00
per share 0 0 0 0 214,130 0 0 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March 2000
to $0.38 and approx.$0.39
per share 0 0 0 0 1,113,610 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May 2000, with
common stock strike prices
ranging from $0.15 to approx.
$0.39 per share, in exchange for
officer debt 20,000 20,000 2,056,346 897,707 (407,735) 509,972
Issuance of $500,000 consultant
stock options, September 2000
with floating exercise prices
set at 15% below current 0 0 0 0 65,000 65,000
Net loss for the year 0 0 0 0 0 0 (3,812,140) (3,812,140)
Balance, September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) (869,868)
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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 d 0 0 400,000 86,000 (52,000) 34,000
Issuance of 1,000,000 common
stock warrants, April 2001
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt 0 0 0 0 77,228 0 0 77,228
Issuance of 2,000,000 consultant
stock options, September 2001
at a strike price of $0. 0 0 0 0 115,000 0 0 115,000
Beneficial conversion options
April 2001 through September
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible 0 0 0 0 155,027 0 0 155,027
Net loss for the year 0 0 0 0 0 0 (2,154,567) (2,154,567)
Balance, September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 0 (20,571,431) (1,489,032)
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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)
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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)
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through June 30, 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
December 2003 valued from
$0.002 to $0.003 per share 15,845 15,845 27,300,000 53,400 0 0 0 69,245
Issuance of 5,125,000 warrants
November 2003 through June 2004
at exercise prices ranging from
$0.002 to $0.005 per share, in
conjunction with $1,375,000
principal value of 12%
convertible debt 0 0 0 0 6,495 0 0 6,495
Debt and accrued liabilities
November 2003 to June
2004 with common shares
valued from $0.001 to $0.0512
per share 0 0 156,625,000 158,575 0 0 0 158,575
Cash, October 2003 through
December 2003 with prices
ranging from $0.001 to $ 0 0 50,000,000 50,000 0 0 0 50,000
per share
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 $184,782 principal
value of 12% convertible debt
$277,173 of derivative
conversion option
along with $46,611 accrued
interest, net of $28,571
convertible debt discount 0 0 229,392,478 479,995 0 0 479,995
Net loss for the period 0 0 0 0 0 0 (2,991,143) (2,991,143)
Balance, June 30, 2004 215,865 215,865 953,542,350 20,549,507 1,460,006 0 (28,296,181) (6,070,803)
</table>
<page>F-10
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOW
For the Nine Months Ended June 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2004
Dec. 1, 1990
(Inception)
Through
Jun. 30, Jun. 30, Jun. 30,
2004 2003 2004
Unaudited Unaudited Unaudited
Operating activities
Net loss (2,991,143) (2,193,011) (27,218,439)
Adjustments to reconcile net loss
to net cash used by
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 10,697 10,696 1,704,851
Derivative conversion option 1,320,257 0 1,320,257
Stock issued for services 69,245 325,305 7,590,018
Stock issued for interest 0 171,800 535,591
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 459,254 771,525 1,899,792
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses (165,000) 0 (165,000)
Interest receivable 0 0 (95,700)
Deposits and prepaids 0 0 182,346
Increase (decrease) in liabilities
Bank overdraft 0 0 0
Accounts payable (29,059) 67,141 888,342
Accrued compensation 303,360 283,779 2,523,152
Due to officers (24,074) (118,273) 719,897
Other current liabilities 103,281 6,731 652,438
Net cash used by operating activities (943,182) (674,307) (6,831,894)
<page>F-11
CONECTISYS CORPORATION AND SUBSIDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOW
For the Nine Months Ended June 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2004
Dec. 1, 1990
(Inception)
Through
Jun. 30, Jun. 30, Jun. 30,
2004 2003 2004
Unaudited Unaudited Unaudited
Investing activities
Collection of notes receivable 0 0 0
Increase in notes receivable 0 0 (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment 0 0 (203,847)
Net cash used by investing activities 0 0 (1,620,404)
Financing activities
Common stock issued for cash 50,000 280,000 3,462,172
Stock warrants 6,495 1,655 193,626
Preferred stock issued for cash 0 16,345
Proceeds from stock purchase 0 0 281,250
Debt issuance cost (943,182) (674,307) (6,831,894)
Proceeds from debts
Related party 0 0 206,544
Other 1,607,095 418,345 5,770,138
Payments on debt
Related party 0 (53,172)
Other (53,204) (23,893) (487,740)
Decrease in subscription receivable 0 0 35,450
Contributed capital 515
Net cash provided by financing activities 1,346,985 676,107 8,858,383
Net increase in cash and cash equivalents 403,803 1,800 406,085
Cash and cash equivalents, beginning of period 2,282 55,101 0
Cash and cash equivalents, end of period 406,085 56,901 406,085
<page>F-12
CONECTISYS CORPORATION AND SUBSIDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOW
For the Nine Months Ended June 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2004
Dec. 1, 1990
(Inception)
Through
Jun. 30, Jun. 30, Jun. 30,
2004 2003 2004
Unaudited Unaudited Unaudited
Cash paid during the period for
Interest 105,000 0 493,6480
Taxes 0 0 8,050
Non-cash activities
Common stock issued for
Purchase of stock 0 0 0
Prepaids 0 0 182,346
PP&E 0 0 130,931
Deposit 0 0 0
License & technology 0 0 2,191,478
Minority interest 0 0 59,247
Repayment of debt 343,357 331,694 5,919,024
Service & interest 100,011 280,305 5,049,203
Preferred stock issued for
Services 15,845 0 15,845
Repayment of debt 0 0 0
Preferred stock options issued for
Services 0 0 60,000
Repayment of debt 0 60,000 119,520
</table>
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company") was
incorporated under the laws of Colorado on February 3, 1986, to analyze and
invest in business opportunities as they may occur. The Company is a
development-stage entity developing automatic meter reading technologies and
products for remote reading of electronic energy meters located in residential
structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the State
of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc., was
formed 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 nine
months ended June 30, 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, 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-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004
Research and development costs
The Company has been engaged in researching, engineering, and developing its H-
Net(TM) technologies since August 1995, and did not generate any revenue during
the past fiscal year. The Company hopes to complete 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 June 30, 2004, no deferred technology
costs were recognized.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 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-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 June 30, 2004, the Company had 953,542,350 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-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
Net loss per common share - basic and diluted (continued)
Class B preferred stock options 10,000,000
Convertible note holder common stock warrants 11,375,000
Common stock warrants - other 3,215,705
Common stock options - officers 4,043,654
Common stock options - other 4,150,000
-------------
Subtotal 32,784,359
Accrued officer compensation ($480,000),
assumed converted into common stock at
prices ranging from $0.0215 to $0.2250
per share 29,530,431
Convertible note holder principal value
($2,153,423) and accrued interest ($199,996),
assumed converted into common stock at
$0.0005 per share 4,706,840,000
-------------
Total potential common stock equivalents 4,769,154,790
If all currently outstanding potential common stock equivalents were
exercised, the Company would receive proceeds of approximately $8,547,000.
Advertising Costs
The Company expenses advertising cost in the year incurred.
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-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2004, the Company had a deficiency in working capital of
approximately $6,100,000 and had incurred continual net losses since its
return to the development stage in fiscal 1996 of almost $25,000,000, which
raise substantial doubt about the Company's ability to continue as a going
concern.
Management's plans for correcting these deficiencies include the future sales
and licensing of the Company's products and technologies, the raising of capital
through the issuance of common stock and from continued officer advances, which
are expected to help provide the Company with the liquidity necessary to meet
operating expenses. An investor group had previously advanced the Company an
aggregate amount of $2,625,000 through thirteen similar funding tranches
occurring in April 2002, May 2002, June 2002, November 2002, March 2003, May
2003, November 2003, December 2003, February 2004, March 2004, April 2004 and
June 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-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004
NOTE 3. RELATED PARTY TRANSACTIONS
The officers of the Company have continually advanced funds to the Company.
These advances have generally been in the form of revolving short-term
promissory notes at an annual interest rate of 18% (see Note 8 below).
NOTE 4. PREPAID EXPENSES AND DEPOSITS
The Company has accrued a prepaid expense of $120,000 as a staying bonus
for the Chief Executive Officer and the Secretary as per their employment
contracts (see note 8). The staying bonus will be amortized over
calendar year 2004. For the six months ended June 30, 2004, $60,000 was
amortized as officer salaries with a balance of $60,000 at June 30, 2004.
Additionally, the Company pre-paid interest in the amount of $105,000 on its
secured convertible debentures issued during the quarter ended June 30, 2004,
bringing the total pre-paid expenses balance to $165,000.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2004 consisted of the following:
Office equipment $ 285,058
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 337,029
Accumulated depreciation (315,250)
-----------
Net book value $ 21,779
===========
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at June 30, 2004 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
===========
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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. Amortization of these costs 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.
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 December 2003, the Company received another $200,000
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 1,000,000 common stock warrants,
exercisable over a seven-year period at $0.005 per share. Debt issuance costs
associated with these loans amounted to $42,421, consisting of $12,421 in
finder's fees and $30,000 in legal costs.
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 7. DEBT ISSUANCE COSTS (continued)
In February 2004 through March 2004, the Company received another $300,000
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 1,500,000 common stock warrants,
exercisable over a seven-year period at $0.005 per share. Debt issuance costs
associated with these loans amounted to $68,703, consisting of $41,703 in
finder's fees and $27,000 in legal costs.
In April 2004, the Company received another $250,000 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 750,000
common stock warrants, exercisable over a seven-year period at $0.002 per share.
Debt issuance costs associated with these loans amounted to $54,624, consisting
of $21,624 in finder's fees and $33,000 in legal costs.
In June 2004, the Company received another $625,000 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 1,875,000
common stock warrants, exercisable over a seven-year period at $0.002 per share.
Debt issuance costs associated with these loans amounted to $97,653, consisting
of $47,653 in finder's fees and $50,000 in legal costs.
Amortization of these costs 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 nine months ended June 30, 2004 was $71,753, leaving an
unamortized balance of $219,544.
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 nine months ended June 30, 2004, the Company
repaid $22,504. Accrued interest of $2,964 during the period brought
the loan balance due the CEO at June 30, 2004 to $17,380. The loan balance at
June 30, 2004 is currently due on demand and continues to accrue interest at the
rate of 18% per year.
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 substantially 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 nine
months ended June 30, 2004, the Company repaid $12,653 and received an
additional $666 from the treasurer. Accrued interest amounted to $7,018 during
the period bring the loan balance due the Secretary at June 30, 2004 to $47,196.
The loan balance at June 30, 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 nine months ended June 30, 2004,
accrued interest amounted to $435 bringing the loan balance due the Chief
Technical Officer at June 30, 2004 to $3,471. The loan balance at June 30, 2004
is currently due on demand and continues to accrue interest at the rate of 18%
per year.
The aggregate amount due officers at June 30, 2004 and 2003 was $68,047 and
$92,121, respectively, and interest expense on the officer loans amounted
to $10,417 and $19,431 for the nine months ended June 30, 2004 and 2003,
respectively.
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 8. DUE TO OFFICERS (continued)
As of June 30, 2004, the Company owed its officers $1,416,980 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 common stock of the Company, 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 June
30, 2004.
NOTE 9. NOTES PAYABLE
Notes payable at June 30, 2004 consisted of the following:
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% $15,693
Accrued interest of $4,257 and principal
on Convertible Debenture convertible
into approximately 39,900,000
shares of common stock at the price
of $0.0005 at June 30, 2004 4,257 $ 19,950
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% $15,693
Accrued interest of $4,257 and principal
on Convertible Debenture convertible
into approximately 39,900,000
shares of common stock at the price
of $0.0005at June 30, 2004 4,257 $ 19,950
-------
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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% $18,807
Accrued interest of $5,101 and principal
on Convertible Debenture convertible
into approximately 47,816,000
shares of common stock at the price
of $0.0005 at June 30, 2004 5,101 $ 23,908
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $12,730
Accrued interest of $3,453 and principal
on Convertible Debenture convertible
into approximately 32,366,000
shares of common stock at the price
of $0.0005 at June 30, 2004 3,453 $ 16,183
-------
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 $10,297 and principal
on Convertible Debenture convertible
into approximately 100,594,000
shares of common stock at the price
of $0.0005 at June 30, 2004 10,297 $ 50,297
--------
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $10,297 and principal
on Convertible Debenture convertible
into approximately 100,594,000
shares of common stock at the price
of $0.0005 at June 30, 2004 10,297 $ 50,297
-------
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 $11,584 and principal
on Convertible Debenture convertible
into approximately 113,168,000
shares of common stock at the price
of $0.0005 at June 30, 2004 11,584 $ 56,584
-------
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 $6,436 and principal
on Convertible Debenture convertible
into approximately 62,872,000
shares of common stock at the price
of $0.0005 at June 30, 2004 6,436 $ 31,436
-------
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-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Accrued interest of $19,595 and principal
on Convertible Debenture convertible
into approximately 199,190,000
shares of common stock at the price
of $0.0005 at June 30, 2004 19,595 $ 99,595
--------
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 $19,595 and principal
on Convertible Debenture convertible
into approximately 199,190,000
shares of common stock at the price
of $0.0005 at June 30, 2004 19,595 $ 99,595
-------
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 $22,044 and principal
on Convertible Debenture convertible
into approximately 224,088,000
shares of common stock at the price
of $0.0005 at June 30, 2004 22,044 $ 112,044
--------
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 $12,247 and principal
on Convertible Debenture convertible
into approximately 124,494,000
shares of common stock at the price
of $0.0005 at June 30, 2004 12,247 $ 62,247
--------
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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% $38,500
Accrued interest of $6,152 and principal
on Convertible Debenture convertible
into approximately 89,304,000
shares of common stock at the price
of $0.0005 at June 30, 2004 6,152 $ 44,652
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $38,500
Accrued interest of $6,152 and principal
on Convertible Debenture convertible
into approximately 89,304,000
shares of common stock at the price
of $0.0005 at June 30, 2004 6,152 $ 44,652
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $38,500
Accrued interest of $6,152 and principal
on Convertible Debenture convertible
into approximately 89,304,000
shares of common stock at the price
of $0.0005 at June 30, 2004 6,152 $ 44,652
-------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $6,838 and principal
on Convertible Debenture convertible
into approximately 113,676,000
shares of common stock at the price
of $0.0005 at June 30, 2004 6,838 $ 56,838
-------
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 $6,838 and principal
on Convertible Debenture convertible
into approximately 113,676,000
shares of common stock at the price
of $0.0005 at June 30, 2004 6,838 $ 56,838
-------
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 $6,838 and principal
on Convertible Debenture convertible
into approximately 113,676,000
shares of common stock at the price
of $0.0005 at June 30, 2004 6,838 $ 56,838
--------
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $2,400 and principal
on Convertible Debenture convertible
into approximately 71,466,000
shares of common stock at the price
of $0.0005 at June 30, 2004 2,400 $ 35,733
--------
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 $2,400 and principal
on Convertible Debenture convertible
into approximately 71,466,000
shares of common stock at the price
of $0.0005 at June 30, 2004 2,400 $ 35,733
--------
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 $2,400 and principal
on Convertible Debenture convertible
into approximately 71,468,000
shares of common stock at the price
of $0.0005 at June 30, 2004 2,400 $ 35,734
--------
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $1,156 and principal
on Convertible Debenture convertible
into approximately 35,646,000
shares of common stock at the price
of $0.0005 at June 30, 2004 1,156 $ 17,823
--------
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 $1,156 and principal
on Convertible Debenture convertible
into approximately 35,646,000
shares of common stock at the price
of $0.0005 at June 30, 2004 1,156 $ 17,823
--------
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 $1,156 and principal
on Convertible Debenture convertible
into approximately 35,646,000
shares of common stock at the price
of $0.0005 at June 30, 2004 1,156 $ 17,823
--------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $1,003 and principal
on Convertible Debenture convertible
into approximately 35,338,000
shares of common stock at the price
of $0.0005 at June 30, 2004 1,003 $ 17,669
--------
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 $1,003 and principal
on Convertible Debenture convertible
into approximately 35,340,000
shares of common stock at the price
of $0.0005 at June 30, 2004 1,003 $ 17,670
--------
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 $1,003 and principal
on Convertible Debenture convertible
into approximately 35,338,000
shares of common stock at the price
of $0.0005 at June 30, 2004 1,003 $ 17,669
<page>F-34
--------
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $734 and principal
on Convertible Debenture convertible
into approximately 34,800,000
shares of common stock at the price
of $0.0005 at June 30, 2004 734 $ 17,400
--------
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 $734 and principal
on Convertible Debenture convertible
into approximately 34,802,000
shares of common stock at the price
of $0.0005 at June 30, 2004 734 $ 17,401
--------
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 $734 and principal
on Convertible Debenture convertible
into approximately 34,800,000
shares of common stock at the price
of $0.0005 at June 30, 2004 734 $ 17,400
<page>F-35
--------
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #11
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $83,334
Accrued interest of $3,260 and principal
on Convertible Debenture convertible
into approximately 173,188,000
shares of common stock at the price
of $0.0005 at June 30, 2004 3,260 $ 86,594
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $3,260 and principal
on Convertible Debenture convertible
into approximately 173,186,000
shares of common stock at the price
of $0.0005 at June 30, 2004 3,260 $ 86,593
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $3,260 and principal
on Convertible Debenture convertible
into approximately 173,186,000
shares of common stock at the price
of $0.0005 at June 30, 2004 3,260 $ 86,593
--------
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #12
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
April 19, 2006 at an annual interest
rate of 12% $50,000
Accrued interest of $1,200 and principal
on Convertible Debenture convertible
into approximately 102,400,000
shares of common stock at the price
of $0.0005 at June 30, 2004 1,200 $ 51,200
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
April 19, 2006 at an annual interest
rate of 12% $88,700
Accrued interest of $2,129 and principal
on Convertible Debenture convertible
into approximately 181,658,000
shares of common stock at the price
of $0.0005 at June 30, 2004 2,129 $ 90,829
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
April 19, 2006 at an annual interest
rate of 12% $101,125
Accrued interest of $2,427 and principal
on Convertible Debenture convertible
into approximately 207,104,000
shares of common stock at the price
of $0.0005 at June 30, 2004 2,427 $ 103,552
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on April 19, 2006 at an annual
interest rate of 12% $10,175
Accrued interest of $224 and principal
on Convertible Debenture convertible
into approximately 20,838,000
shares of common stock at the price
of $0.0005 at June 30, 2004 244 $ 10,419
--------
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #13
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 30, 2006 at an annual interest
rate of 12% $125,000
Accrued interest of $41 and principal
on Convertible Debenture convertible
into approximately 250,082,000
shares of common stock at the price
of $0.0005 at June 30, 2004 41 $ 125,041
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
June 30, 2006 at an annual interest
rate of 12% $221,750
Accrued interest of $73 and principal
on Convertible Debenture convertible
into approximately 443,646,000
shares of common stock at the price
of $0.0005 at June 30, 2004 73 $ 221,823
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
June 30, 2006 at an annual interest
rate of 12% $252,813
Accrued interest of $83 and principal
on Convertible Debenture convertible
into approximately 505,792,000
shares of common stock at the price
of $0.0005 at June 30, 2004 83 $ 252,896
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 30, 2006 at an annual
interest rate of 12% $25,437
Accrued interest of $8 and principal
on Convertible Debenture convertible
into approximately 50,890,000
shares of common stock at the price
of $0.0005 at June 30, 2004 8 $ 25,445
-------- --------
Subtotal of all Convertible Debentures 2,353,419
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Less reclassified accrued interest $ (199,996)
------------
Subtotal principal value 2,153,423
Derivative conversion option - 150% of principal 3,230,134
Less unamortized note discount (1,154,520)
-----------
Net carrying value of
Convertible Debentures $ 4,229,037
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%. 216,839
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. 7,284
-----------
Total notes payable $ 4,694,984
Current portion (4,686,371
-----------
Long-term portion $ 8,613
===========
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 three lowest closing bid prices during the
30 trading days prior to the closing date (April 12, 2001) or 80% of the average
of the three 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-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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. For the nine months ended June 30, 2004 accrued interest amounted
to $433 resulting in a balance of $7,284 at June 30, 2004.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 accrued 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-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 of 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-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
Three of the investors, if certain conversion limitations are disregarded, are
beneficial owners of 5% or more of the company's outstanding shares of common
stock. The debentures initially were convertible into shares of common stock
at the lesser of $.06 per share and 50% of the average of the lowest three
intra-day trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. In October 2003, the conversion rate was
changed 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. Three of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of the Company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the
lesser of $.06 per share and 50% of the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. In October 2003, the conversion rate was
changed 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.
Three of the investors, if certain conversion limitations are disregarded, are
beneficial owners of 5% or more of the company's outstanding shares of common
stock. The debentures initially were convertible into shares of common stock
at the lesser of $.06 per share and 50% of the average of the lowest three
intra-day trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. In October 2003, the conversion rate was
changed 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-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 conversion rate was changed 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 $.005.
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 conversion rate was changed 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 $.005.
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 conversion rate was changed 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 $.005.
On November 25, 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
$.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 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 $.005.
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
$.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 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.
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
$.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 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.
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
$.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 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.
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 $.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 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.
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On April 19, 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
$.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 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 $.002.
On June 30, 2004 the Company issued an aggregate of $625,000 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 $.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 debentures were accompanied
by warrants to purchase up to an aggregate of 1,875,000 shares of common stock
at a per share exercise price equal to $.002.
<page>F-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 conversion option was increased to 150%
from 100% 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 $1,375,000
of convertible debt during the nine months ended June 30, 2004, the
derivative conversion option was increased by $2,062,500.
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-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 conversion option was increase to 150% from 100%
resulting in an increase of $563,258 and a re-characterization of the
conversion option as additional debt.
During the nine months ended June 30, 2004, the Company issued an
additional $1,375,000 of 12% convertible debentures. Also, the Company issued
229,392,478 shares of common stock in connection with the conversion of
another $184,782 of principal and $46,611 of accrued interest on the Company's
convertible debentures, resulting in a convertible debt principal balance
at June 30, 2004 of $2,153,423 (net of an aggregate of $471,577 in
debt conversions through that date). In connection with the issuance of the
additional $1,375,000 convertible debt, the Company recorded a corresponding
derivative conversion option of $2,062,500. A corresponding pro-rata reduction
of $277,173 was made to the derivative conversion option during the nine
months ended June 30, 2004 (an aggregate of $535,720 since the inception
of the loans), bringing the derivative conversion option balance at
June 30, 2004 to $3,230,135.
The aggregate note discount of $2,625,000 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 $387,501 during the nine months
ended June 30, 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 nine months ended June 30, 2004, resulting in an unamortized
convertible debt discount balance of $1,154,520 at June 30, 2004.
As of June 30, 2004, the Company was indebted for an aggregate of $2,353,419,
including $2,153,423 of principal and $199,996 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-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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. On July 29, 2004, the shareholders of the Company
approved an increase in the Company's authorized capital stock to 7,500,000,000
shares of common stock. Of the 50,000,000 authorized shares of preferred stock,
1,000,000 shares have been designated as Class A Preferred Stock and 1,000,000
shares have been designated as Class B Preferred Stock, and the remaining
48,000,000 shares are undesignated. As of June 30, 2004, there were 953,542,350
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-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 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 staff consultants as a $7,500 bonus.
<page>F-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2004, the Company issued
229,392,478 shares of common stock to holders of convertible debentures in
exchange for $184,782 in debt reduction and $46,611 in accrued interest. In
conjunction with these transactions, the Company transferred $277,173 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
156,625,000 shares of its restricted common stock to a consultant for debt
reduction of $158,575.
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 June 30, 2004:
Deferred tax asset, benefit
of net operating loss
carryforward $ 8,600,000
Valuation allowance (8,600,000)
-----------
Net deferred taxes $ -
===========
The valuation allowance offsets the net deferred tax asset, since it is more
likely than not that it would not be recovered. During the year ended
June 30, 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 2013, and $4,300,000 in 2014. The Company is
now current in filing its federal and California corporate income tax returns
through the tax year ended November 30, 2003.
<page>F-52
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-53
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 to 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-54
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 of common count for money lent. In March 2004, the Company
settled its suit with Mercator for $150,000.
<page>F-55
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 shares 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 could 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 was extended to November 1, 2005.
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 at an
exercise price of $1.00 per share through November 1, 2005.
<page>F-56
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
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 nine months ended June 30, 2004 or 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 stock as traded on the OTC 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-57
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (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 note 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 trough 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 2004 and 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 June 30, 2004 of
$1,455,873 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
In April 2004, 750,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $250,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $1,181, resulting in a recorded
balance of stock options and warrants exercisable at June 30, 2004 of
$1,457,054 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
In June 2004, 1,875,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $625,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $2,952, resulting in a recorded
balance of stock options and warrants exercisable at June 30, 2004 of
$1,460,006 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
<page>F-58
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the nine months ended June 30, 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 5,125,000 .003
----------
Balance outstanding, June 30, 2004 16,432,154 $.152
========== =====
The following table summarizes information about common stock options at
June 30, 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 2 $ 2.000 563,500 $ 2.000
$ .380 - $ .380 100,000 6 $ .380 100,000 $ .380
$ .192 - $ .192 1,000,000 9 $ .192 1,000,000 $ .192
$ .050 - $ .050 3,750,000 10 $ .045 3,750,000 $ .045
$ .130 - $ .130 1,450,000 14 $ .130 1,450,000 $ .130
$ .386 - $ .386 1,443,654 17 $ .386 1,443,654 $ .386
$ .380 - $ .380 500,000 17 $ .380 500,000 $ .380
$ .002 - $ .002 2,500,000 67 $ .005 2,500,000 $ .005
$ .002 - $ .002 1,000,000 77 $ .005 1,000,000 $ .005
$ .002 - $ .002 1,500,000 80 $ .005 1,000,000 $ .005
$ .002 - $ .002 750,000 83 $ .002 750,000 $ .002
$ .002 - $ .002 1,875,000 84 $ .002 1,875,000 $ .002
$ .002 - $2.000 16,432,154 42 $ .152 16,432,154 $ .152
=============== ========== == ======== ========== =======
NOTE 16. SUBSEQUENT EVENTS
On July 29, 2004, the shareholders of the Company approved an increase in the
Company's authorized capital stock from 1,000,000,000 shares of common stock to
7,500,000,000 shares of common stock.
Subsequent to June 30, 2004, the Company issued an aggregate of 34,624,506
shares of common stock in exchange for reduction of an aggregate $15,000 in
convertible debt plus related interest.
<page>F-59
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 our ability to obtain FCC approval of our H-Net(TM) wireless meter reading
product;
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 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 developing our H-Net(TM) 5.0 wireless meter reading product
which is designed to increase the data transmission range of our H-Net(TM)
system over the data transmission range of our existing H-Net(TM) 4.0 product.
The development of our H-Net(TM) 5.0 product is also directed at curing certain
radio frequency interference experienced in our H-Net(TM) 4.0 product. On August
16, 2004, we submitted to the FCC our H-Net(TM) 5.0 wireless meter reading
product for approval for commercialization and sale. We expect that this
approval by the FCC will occur within approximately 60 days following submission
<page>2
to the FCC of our H-Net(TM) 5.0 wireless meter reading product, but no
assurances can be made that this approval will be obtained or that it will not
be delayed. Once FCC approval is obtained, we expect that our H-Net(TM) 5.0
wireless meter reading product will be ready for full-scale commercial
production.
We have not yet sold any H-Net(TM) systems and we do not expect any
significant sales of our H-Net(TM) systems until after FCC approval is obtained.
Accordingly, we have not earned any significant revenues from the sale of our H-
Net(TM) system. 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 a report questioning
our ability to continue as a going concern.
Critical Accounting Policies and Estimates
The following discussion and analysis is based upon our financial
statements, which have been prepared using accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires management to make estimates and assumptions that affect the
reported amounts of revenue and expenses, and assets and liabilities, during the
periods reported. Estimates are used when accounting for certain items such as
depreciation, likelihood of realization of certain assets, employee compensation
programs and valuation of intangible assets. We base our estimates on
historical experience and other assumptions that we believe are reasonable under
the circumstances. Actual results may differ from our estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements. We have based our financial statements on the assumption of our
operations continuing as a going concern. As a result, we continue to
depreciate fixed assets and show certain debts as long-term. We have written-
off the value of technology in prior periods because the realization of that
value was doubtful. Our compensation of consultants and employees with our
capital stock is recorded at estimated market value. The volatile nature of the
price of our common stock causes wide disparities in certain valuations.
Results of Operations
Comparison of Results of Operations for the Three Months Ended June 30, 2004
and 2003
We did not generate any revenues for the three months ended June 30, 2004
and June 30, 2003. Cost of sales for the three months ended June 30, 2004 was
$26,583 as compared to $41,761 for the three months ended June 30, 2003, a
decrease of $15,178 or 36.3%. 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 $77,396 or 19.0% to
$331,056 for the three months ended June 30, 2004 as compared to $408,452 for
the same period in 2003. This decrease was primarily due to decreased expenses
associated with legal and consulting services.
Interest expense increased by $498,240 or 170% to $791,470 during the three
months ended June 30, 2004, as compared to $293,230 for the same period in
2003. This increase was primarily attributable to the mark to market of the
derivative conversion option in the amount of approximately $437,500 associated
with new convertible debt issued during the quarter ended June 30, 2004.
Net loss for the three months ended June 30, 2004 increased by $405,666 or
54.6% to $1,149,109 as compared to a net loss of $743,443 for the same period in
2003. The increase in net loss primarily resulted from increased interest
expense, which was partially offset by decreased general and administrative
expenses, as discussed above.
<page>3
Comparison of Results of Operations for the Nine Months Ended June 30, 2004
and 2003
We did not generate any revenues for the nine months ended June 30, 2004 and
June 30, 2003. Cost of sales for the nine months ended June 30, 2004 was $48,778
as compared to $76,775 for the nine months ended June 30, 2003, a decrease of
$27,997 or 36.5%. 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 $332,162 or 25.6% to
$963,406 for the nine months ended June 30, 2004 as compared to $1,295,568 for
the nine months ended June 30, 2003. This decrease was primarily due to
decreased expenses associated with legal and consulting services.
Interest expense increased by $1,008,291 or 123% to $1,828,959 for the nine
months ended June 30, 2004, as compared to $820,668 for the nine months ended
June 30, 2003. This increase was primarily due to an expense in the amount of
$563,258 resulting from the reduction in October 2003 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 conversion, along with the
mark to market of the derivative conversion option in the amount of
approximately $687,500 associated with new convertible debt issued during the
nine months ended June 30, 2004, net of decreased amortization of convertible
debt discount of approximately $250,000 during the period.
Net loss for the nine months ended June 30, 2004 increased by $798,132 or
36.4% to $2,991,143 as compared to a net loss of $2,193,011 for the nine months
ended June 30, 2003. The increase in net loss primarily resulted from increased
interest expense, which was partially offset by decreased general and
administrative expenses, as discussed above.
Liquidity and Capital Resources
During the twelve months ended September 30, 2003 and the three and nine
months ended June 30, 2004, we financed our operations solely through private
placements of securities. We are currently developing our H-Net(TM) 5.0 wireless
meter reading product. On August 16, 2004, we submitted to the FCC our H-Net(TM)
5.0 wireless meter reading product for approval for commercialization and sale.
We expect that this approval by the FCC will occur within approximately 60 days
following submission to the FCC of our H-Net(TM) 5.0 wireless meter reading
product, but no assurances can be made that this approval will be obtained or
that it will not be delayed.
We have not yet sold any H-Net(TM) systems and we do not expect any
significant sales of our H-Net(TM) systems until after FCC approval is obtained.
Accordingly, we have not earned any significant revenues from the sale of our 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 a report questioning
our ability to continue as a going concern. 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 June 30, 2004, we had a working capital deficit of approximately
$6,084,000 and an accumulated deficit of approximately $28,296,000. As of that
date, we had approximately $406,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately $1,663,000.
We had other current liabilities, including amounts due to officers, accrued
interest, notes payable and current portion of long term debt of approximately
$5,212,000, 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
<page>4
into shares of common stock, we will not be obligated to repay the converted
amounts.
Cash used in our operating activities totaled approximately $943,000 for the
nine months ended June 30, 2004 as compared to approximately $674,000 for the
nine months ended June 30, 2003. No cash was provided by our investing
activities for the nine months ended June 30, 2004 and 2003.
Cash provided by our financing activities totaled $1,347,000 for the nine
months ended June 30, 2004 as compared to $676,000 for the nine months ended
June 30, 2003. We raised all of the cash provided by financing activities during
the nine months ended June 30, 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; 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 August
17, 2004, each of these defaults was continuing and we were in payment default
under convertible debentures in the aggregate principal amount of approximately
$763,423 plus related interest on those debentures. As of August 17, 2004, we
also were in default under our obligations to register for resale shares of our
common stock underlying certain of our outstanding convertible debentures. In
addition, as of August 17, 2004, we also were in default under our obligations
to make quarterly interest payments under all of our outstanding convertible
debentures issued prior to March 31, 2004. As of August 17, 2004, as a result of
the above defaults, the holders of our secured convertible debentures were
entitled to pursue their rights to foreclose upon their security interest in all
of our assets. However, as of that date, we were not aware of any action taken
by the holders of our secured convertible debentures to pursue such rights, and
as of that date we also were not aware of any other legal or similar action
taken by those holders to enforce their rights or as a result of our defaults
under those secured convertible debentures.
We plan to register for resale with the Securities and Exchange Commission a
portion of the shares of common stock underlying the convertible debentures
under which we are in default and expect that the convertible debentures
ultimately will be converted into shares of our common stock and that we
therefore will not be obligated to repay the outstanding principal and accrued
and unpaid interest amounts on those debentures.
<page>5
As of August 17, 2004, we had issued the following secured convertible
debentures, which provide for interest at the rate of 12% per annum, and
warrants to purchase common stock to various accredited inventors in connection
with debenture offering transactions:
<table>
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount ($) ConectiSys($)(1) Amount ($) Interest($)(2) Offering (#)
- --------------- ---------- ---------------- ---------- -------------- ------------
March 29, 2002 $ 300,000 $ 225,000 $ 48,000 $ 13,000 1,500,000
May 10, 2002 150,000 125,000 150,000 38,600 750,000
June 17, 2002 300,000 238,000 300,000 73,500 1,500,000
November 27, 2002 200,000 144,000 - - 1,000,000
March 3, 2003 150,000 100,000 116,000 18,500 750,000
May 12, 2003 150,000 100,000 150,000 20,500 750,000
November 25, 2003 100,000 75,000 100,000 7,200 500,000
December 3, 2003 50,000 31,000 50,000 3,500 250,000
December 31, 2003 50,000 31,000 50,000 3,000 250,000
February 18, 2004 50,000 35,000 50,000 2,200 250,000
March 4, 2004 250,000 203,000 250,000 9,800 1,250,000
April 19, 2004 250,000 165,000 250,000 - 750,000
June 30, 2004 625,000 452,000 625,000 - 1,875,000
--------- ---------- ----------- ---------- ----------
Total: $ 2,625,000 $ 1,924,000 $ 2,139,000 $ 189,800 11,375,000
=========== =========== =========== ========== ==========
_________________
(1) Amounts represent net proceeds after deducting expenses incurred in
connection with the offering as well as expenses for legal fees incurred
in connection with preparation of reports and statements filed with the
Securities and Exchange Commission. Amounts for April and June 2004
offerings also represent net proceeds after deducting one year of
interest paid in advance in the amounts of $30,000 and $75,000,
respectively.
(2) Amounts represents accrued and unpaid interest outstanding as of June 30,
2004. Total amount of accrued and unpaid interest does not account for
approximately $100,000 of interest paid in advance.
</table>
Each of the above secured convertible debentures, except for the convertible
debentures issued in April and June 2004, are due one year following their
respective issuance dates. The convertible debentures issued in April and June
2004 are due two years following their respective issuance dates. The conversion
price of our secured convertible debentures is the lower of 40% of the average
of the three lowest intra-day trading prices of a share of our common stock on
the OTC Bulletin Board(R) during the twenty trading days immediately preceding
the conversion date, and either (a) $.06 for the March, May and June 2002
convertible debentures, (b) $.01 for the November 2002, March and May 2003
convertible debentures, or (c) $.005 for the November and December 2003 and the
February, March, April and June 2004 convertible debentures. As of August 17,
2004, the applicable conversion price was approximately $.00032 per share.
In October 2003, in consideration for certain bridge financing which later
was incorporated into the November 2003 convertible debenture offering described
above, 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.
As of August 17, 2004, we had a loan outstanding and due on demand in an
amount equal to approximately $36,000. 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
<page>6
loan outstanding and due on demand in an amount equal to approximately $42,000.
This loan accrues interest at an annual rate of 18% and was made by Patricia
Spigno, our Chief Financial Officer and Secretary.
As of August 17, 2004, we had a promissory note outstanding and due
September 1, 2004, payable in the approximate amount of $291,000. This note
bears interest at an annual rate of 18%.
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 under the original note
remained outstanding. As of August 17, 2004, approximately $7,300 of principal
and accrued and unpaid interest under this note remained outstanding.
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 in our Annual Report on Form 10-K for 2003, 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 report 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. Our current convertible debenture investors have
provided us with an aggregate of $2,625,000 in financing to date. No assurances
can be given that they will provide any additional financing in the future. 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 from any investor other than our current investors.
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
<page>7
or potential products or other assets. Accordingly, the inability to obtain such
financing could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also adversely
affect our ability to fund our continued operations and our product and service
development efforts that historically have contributed significantly to our
competitiveness.
We have not yet sold any H-Net(TM) systems and we do not expect any
significant sales of our H-Net(TM) systems until after FCC approval of our H-
Net(TM) 5.0 wireless meter reading product is obtained. We expect that this
approval will be obtained prior to the end of 2004, but no assurances can be
made that this approval will be obtained or that it will not be delayed. Once
FCC approval is obtained, we expect that our H-Net(TM) 5.0 wireless meter
reading product will be ready for full-scale commercial production. We believe
that if we are successful in deploying our H-Net(TM) system, we will begin to
generate revenues from our business activities.
Effect of Inflation
Inflation did not have any significant effect on the operations of the
Company during the quarter ended June 30, 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 as of the effective date of the relevant
financial statements, 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 June 30, 2004 (the "Evaluation Date"), 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.
<page>8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
On April 19, 2004, we issued $250,000 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
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
1,250,000 shares of common stock at a per share exercise price equal to $.005.
In April 2004, we issued an aggregate of 52,123,755 shares of common stock
to three accredited investors upon conversion of an aggregate of $30,000 in
principal and related interest on our convertible debentures.
In May 2004, we issued an aggregate of 32,288,408 shares of common stock to
four accredited investors upon conversion of an aggregate of $18,500 in
principal and related interest on our convertible debentures.
In May 2004, we issued 80,625,000 shares of common stock to an accredited
investor and a creditor in consideration for a reduction in debt in the amount
of $82,125.
On June 30, 2004, we issued $625,000 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
1,875,000 shares of common stock at a per share exercise price equal to $.005.
In June 2004, we issued an aggregate of 51,298,628 shares of common stock to
four accredited investors upon conversion of an aggregate of $36,667 in
principal and related interest on our convertible debentures.
In June 2004, we issued 90,000 shares of common stock to an accredited
investor and a creditor in consideration for a reduction in debt in the amount
of $1,350.
The issuances of our securities described above were made in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act of 1933, as amended, as transactions not involving a public offering. This
exemption was claimed on the basis that these transactions did not involve any
public offering and the purchasers in each offering were sophisticated and had
sufficient access to the kind of information registration would provide,
including our most recent Annual Report on Form 10-KSB and our most recent
Quarterly Report on Form 10-QSB.
<page>9
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 August
17, 2004, each of these defaults was continuing and we were in payment default
under convertible debentures in the aggregate principal amount of approximately
$763,423 plus related interest on those debentures. As of August 17, 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 August 17, 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 August 17, 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. However, as of that date, we were not aware of any action taken
by the holders of our secured convertible debentures to pursue such rights, and
as of that date we also were not aware of any other legal or similar action
taken by those holders to enforce their rights or as a result of our defaults
under those secured convertible debentures.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended June 30, 2004, no matters were submitted to a vote
of the holders of our securities.
ITEM 5. OTHER INFORMATION.
None.
<page>10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
3.1 Articles of Amendment to the Articles of Incorporation of
the Issuer filed August 3, 2004
10.1 Securities Purchase Agreement dated as of April 19, 2004
by and between the Issuer and the purchasers named therein
(1)
10.2 Form of Secured Convertible Debenture due April 19, 2006
(1)
10.3 Form of Common Stock Purchase Warrant dated as of April
19, 2004 (1)
10.4 Registration Rights Agreement dated as of April 19, 2004
by and between the Issuer and the investors named therein
(1)
10.5 Security Agreement dated as of April 19, 2004 between the
Issuer and the secured parties named therein (1)
10.6 Intellectual Property Security Agreement dated as of April
19, 2004 between the Issuer and the secured parties named
therein (1)
10.7 Form of Secured Convertible Debenture due June 30, 2006
10.8 Form of Common Stock Purchase Warrant dated as of
June 30, 2004
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 Registration Statement on Form
SB-2 filed with the Securities and Exchange Commission on June 25,
2004 (Registration No. 333-116895) and incorporated herein by
reference.
(b) Reports on Form 8-K
-------------------
None.
11
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: August 20, 2004 By: /s/ ROBERT A. SPIGNO
------------------------
Robert A. Spigno,
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: August 20, 2004 By: /s/ PATRICIA A. SPIGNO
--------------------------
Patricia A. Spigno,
Chief Financial Officer and
Secretary (principal financial and
accounting officer)
<<page>12
EXHIBITS FILED WITH THIS REPORT ON FORM 10-QSB
Exhibit No. Description
----------- -----------
3.1 Articles of Amendment to the Articles of Incorporation of the
Issuer filed August 3, 2004
10.7 Form of Secured Convertible Debenture due June 30, 2006
10.8 Form of Common Stock Purchase Warrant dated as of June 30,
2004
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