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Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-116895
PROSPECTUS
3,387,500,000 SHARES
CONECTISYS CORPORATION
Common Stock
The shares of our common stock being offered under this prospectus are being
offered by some of our security holders identified in this prospectus for their
own accounts. Our common stock trades on the OTC Bulletin Board(R) under the
symbol "CNES." On September 1, 2004, the high and low sale prices for a share of
our common stock were $.0007 and $.0006, respectively.
The mailing address and the telephone number of our principal executive
office is 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355, (661)
295-6763.
____________________
Investing in our common stock involves risks.
Please see "Risk Factors" beginning on page 5.
_________________
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus.
_________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is September 7, 2004.
TABLE OF CONTENTS
Description Page No.
- ----------- -------
Prospectus Summary..........................................................3
Risk Factors................................................................5
Special Note Regarding Forward-Looking Statements..........................13
Use of Proceeds............................................................13
Price Range of Common Stock................................................14
Dividend Policy............................................................14
Capitalization.............................................................15
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................16
Business...................................................................22
Management.................................................................34
Certain Relationships and Related Transactions.............................43
Principal and Selling Security Holders.....................................46
Plan of Distribution.......................................................51
Description of Capital Stock...............................................53
Legal Matters..............................................................54
Experts....................................................................54
Where You Can Find More Information........................................54
Index to Financial Statements..............................................55
<page>2
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because it is
a summary, it necessarily does not contain all of the information necessary to
your investment decision. To understand this offering fully, you should read
carefully the entire prospectus.
ConectiSys Corporation
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
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.
Our H-Net(TM) system has been developed as an AMR solution predominantly for
application by utility companies and energy service providers to assist in the
comprehensive, low-cost remote reading of electric energy meters in residential
structures and the transmission of that data on a frequent basis to a
centralized location where the data can be archived and further supplied to
utility companies and energy service providers for billing purposes, energy
usage tracking, energy consumption management and other uses.
Our H-Net(TM) system is comprised of the following three principal
components: H-Net(TM)-equipped meters, base stations and a network operating
center. H- Net(TM)- equipped meters are designed to communicate with one
another, relaying energy usage data back and forth, and ultimately communicate
with a base station where energy usage data is then transmitted to a network
operating center. Each base station is designed to service up to 20,000 H-
Net(TM)- equipped meters and to transmit energy usage data to the network
operating center in fifteen minute intervals, 24 hours per day. The network
operating center is designed to collect and archive energy usage data and then
distribute the data over the Internet to customers such as utility companies and
energy service providers.
We believe that our AMR solution in the form of our H-Net(TM) system is a
cost- effective and useful AMR solution for meter reading applications and that
its adoption will allow for new information regarding energy usage. We plan to
provide a variety of additional services to our customers including remote meter
<page>3
reading, complete billing solutions and remote access and control of energy
meters. We anticipate that our customers will include energy meter
manufacturers, energy service providers, utility companies and end-users of
energy
The Offering
Common stock offered by selling security holders 3,387,500,000 (1)
Common stock outstanding prior to this offering 1,031,432,178 (2)
Common stock outstanding following this offering
if all shares are sold 4,418,932,178 (1) (2)
Use of Proceeds All proceeds of this offering
will be received by selling
security holders for their own
accounts.
Risk Factors You should read the "Risk
Factors" section beginning on
page 5, as well as other
cautionary statements
throughout this prospectus,
before investing in shares of
our common stock.
_____________
(1) Based on the price of our common stock on the OTC Bulletin Board(R) on June
17, 2004, the principal portions of the secured convertible debentures and
the related warrants, and the other warrants, whose underlying shares of
common stock are covered by this prospectus were, or upon their issuance
would be, convertible into approximately 1,500,000,000 shares of common
stock. The purchasers of our secured convertible debentures have committed
to purchase, in two separate tranches, additional secured convertible
debentures and related warrants, the underlying shares of which are included
in such amount. We have agreed to register for resale by the selling
security holders 200% of the shares of common stock underlying all
convertible debentures and related warrants that the selling security
holders have purchased and that they are obligated to purchase. Accordingly,
the common stock offering by the selling security holders assumes exercise
of all of the warrants whose underlying shares of common stock are covered
by this prospectus in exchange for 17,000,000 shares of common stock and
conversion of the principal amount of all of the debentures plus accrued
interest into 1,676,750,000 shares of common stock, and the immediate resale
of all of those shares of common stock.
(2) The number of shares of common stock that will be outstanding after this
offering is based on the 1,031,432,178 shares outstanding as of September 1,
2004, and excludes the following:
o 16,432,154 shares of common stock issuable upon exercise of outstanding
stock options, at a weighted average exercise price of $.152;
o shares of common stock issuable upon exercise of warrants or conversion of
debentures whose underlying shares of common stock are covered by this
prospectus;
o approximately 6,240,000,000 shares of common stock issuable or to become
issuable upon exercise or conversion of outstanding warrants and other
convertible securities, other than the stock options identified above and
the warrants and other convertible securities whose underlying shares of
common stock are covered by this prospectus; and
o any additional shares of common stock we may issue from time to time after
September 1, 2004.
<page>4
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this prospectus, you should carefully
consider the following risk factors before deciding to invest in shares of our
common stock. If any of the following risks actually occurs, it is likely that
our business, financial condition and operating results would be harmed. As a
result, the trading price of our common stock could decline, and you could lose
part or all of your investment.
Risks Related to Our Business
We have no history of revenues, have incurred significant losses, expect
continued losses and may never achieve profitably. If we continue to incur
losses, we may have to curtail our operations, which may prevent us from
successfully deploying our H-Net(TM) wireless meter reading system.
We have no history of revenues, have not been profitable and expect
continued losses. Historically, we have relied upon cash from financing
activities to fund all of the cash requirements of our activities and have
incurred significant losses and experienced negative cash flow. As of September
30, 2003, we had an accumulated deficit of approximately $2,962,000. For our
fiscal year ended September 30, 2003, we incurred a net loss of approximately
$2,387,000 and for our fiscal year ended September 30, 2002, we incurred a net
loss of approximately $2,347,000. We cannot predict when we will become
profitable or if we ever will become profitable, and we may continue to incur
losses for an indeterminate period of time and may never achieve or sustain
profitability. An extended period of losses and negative cash flow may prevent
us from successfully deploying our H-Net(TM) wireless meter reading system, or
our H-Net(TM) system, and operating or expanding our business. As a result of
our financial condition, our independent auditors have issued a report
questioning our ability to continue as a going concern.
Our significant losses have resulted principally from costs incurred in
connection with the development of our H-Net(TM) system and from costs
associated with our administrative activities. We expect our operating expenses
to dramatically increase as a result of our planned deployment of our H-Net(TM)
system. Since we have only recently completed the development of our H-Net(TM)
system, have no operating history and no existing sources of revenues, we cannot
assure you that our business will ever become profitable or that we will ever
generate sufficient revenues to meet our expenses and support our planned
activities. Even if we are able to achieve profitability, we may be unable to
sustain or increase our profitability on a quarterly or annual basis.
Our independent auditors have issued a report questioning our ability to
continue as a going concern. This report may impair our ability to raise
additional financing and adversely affect the price of our common stock.
The report of our independent auditors contained in our financial statements
for the years ended September 30, 2003 and 2002 includes a paragraph that
explains that we have incurred substantial losses and have a working capital
deficit. This report raises substantial doubt about our ability to continue as a
going concern. Reports of independent auditors questioning a company's ability
to continue as a going concern are generally viewed unfavorably by analysts and
investors. This report may make it difficult for us to raise additional debt or
equity financing necessary to continue the development and deployment of our H-
Net(TM) system. We urge potential investors to review this report before making
a decision to invest in ConectiSys.
<page>5
Without substantial additional financing, we may be unable to achieve the
objectives of our current business strategy, which could force us to delay,
curtail or eliminate our product and service development programs.
We require additional financing to produce cost-reduced hardware for our H-
Net(TM) system capable of large-scale manufacturing and to complete the
development of our H-Net(TM) 5.0 wireless meter reading product. We also
require additional funding to obtain and implement contracts and joint venture
agreements with meter manufacturers. If we are unable to obtain this financing,
we could be forced to delay, curtail or eliminate certain product and service
development programs or entirely abandon our planned deployment of our H-Net(TM)
system. In addition, our inability to obtain financing could have such a
material adverse effect on our business, prospects, results of operations or
financial condition, that we may be forced to restructure, file for bankruptcy,
sell assets or cease operations entirely, any of which could jeopardize an
investment in our common stock.
We need and may be unable to obtain additional financing on satisfactory
terms, which may require us to accept financing on burdensome terms that may
cause substantial dilution to our shareholders and impose onerous financial
restrictions on our business.
We require additional financing. Deteriorating global economic conditions
may cause prolonged declines in investor confidence in and accessibility to
capital markets. Future financing may not be available on a timely basis, in
sufficient amounts or on terms acceptable to us. This financing may also dilute
existing shareholders' equity. Any debt financing or other financing of
securities senior to our common stock will likely include financial and other
covenants that will restrict our flexibility. At a minimum, we expect these
covenants to include restrictions on our ability to pay dividends on our common
stock. Any failure to comply with these covenants would have a material adverse
effect on our business, prospects, financial condition and results of operations
because we could lose any then-existing sources of financing and our ability to
secure new sources of financing may be impaired.
We are subject to an injunction imposed by a federal court for violating the
federal securities laws, which may make it more difficult to raise
financing.
In 1997, the Securities and Exchange Commission filed suit in the United
States District Court in the Central District of California against ConectiSys
and another individual seeking permanent injunctions and civil penalties based
on alleged violations of Sections 5(a), 5(c) and 17(a)(1)- (3) of the Securities
Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder in connection with the sale of common stock of ConectiSys in 1996. In
March 1999, we agreed with the Securities and Exchange Commission to the terms
of a settlement of its litigation against us. Under the terms of that
settlement, we dismissed our then- pending appeal of a judgment against us in
favor of the Securities and Exchange Commission and accepted a permanent
injunction against us prohibiting actions that would violate federal securities
laws in connection with the offer, purchase or sale of securities. The
Securities and Exchange Commission agreed to waive a requirement of the judgment
under appeal that we disgorge $175,000 of proceeds from the sale of our common
stock due to our inability to pay this amount. On March 9, 1999, an amended
final judgment of permanent injunction and other relief memorializing these
agreements was entered in connection with the execution by us of a consent to
entry of injunction. An injunction of this nature is viewed unfavorably by
analysts and investors and may make it more difficult for us to raise additional
debt or equity financing necessary to run our business.
<page>6
Our default on the repayment of the convertible debentures held by certain
security holders could have a material and adverse effect on our business,
prospects, results of operations or financial condition.
Unpaid principal and accrued and unpaid interest on our convertible
debentures becomes immediately due and payable from one to two years from their
date of issuance, depending on the debenture, or earlier in the event of a
default. The events of default under the convertible debentures are similar to
those customary for convertible debt securities, including breaches of material
terms, failure to pay amounts owed, delisting of our common stock from the OTC
Bulletin Board(R) or failure to comply with the conditions of listing on the OTC
Bulletin Board(R). If we default on our obligations under the convertible
debentures, we may be required to immediately repay the outstanding principal
amounts of the debentures and any accrued and unpaid interest. The cash required
to repay such amounts would likely have to be taken from our working capital.
Since we rely on our working capital to sustain our day to day operations and
the development of our H-Net(TM) system, a default on the convertible debentures
could have a material and adverse effect on our business, prospects, results of
operations or financial condition.
We rely heavily on our management, and the loss of their services could
materially and adversely affect our business.
Our success is highly dependent upon the continued services of key members
of our management, including our Chairman of the Board and Chief Executive
Officer, Robert A. Spigno, and our Chief Technology Officer, Lawrence Muirhead.
The loss of Messrs. Spigno or Muirhead or one or more other key members of
management could have a material adverse effect on us because each of these
individuals has experience and skills upon which we draw heavily in our day-to-
day operations, strategic planning or research and development activities. The
development and operation of our H-Net(TM) system is largely dependent upon the
skills and efforts of Mr. Muirhead. Although we have entered into employment
agreements with Messrs. Spigno and Muirhead, we cannot assure the continued
services of these key members of our management team. We do not maintain key-man
life insurance policies on any member of management.
We have a limited operating history of approximately eight years and very
limited operating experience; therefore, regardless of the viability or
market acceptance of our H-Net(TM) system, we may be unable to achieve
profitability or realize our other business goals.
Our H-Net(TM) system is the result of a new venture. We have been engaged in
research and development of automatic meter reading technologies since 1995, and
we have only recently completed limited pilot programs for our first and only
product, our H-Net(TM) automatic meter reading system. We have generated no
operating revenues from our H-Net(TM) system and have not commenced any of the
widespread marketing and other functions that we anticipate will be required for
successful deployment of our H-Net(TM) system. Deployment of our H-Net(TM)
system will involve large-scale cost- reduction manufacturing runs for the
production of the components employed in our H-Net(TM) system. Our success will
depend in large part on our ability to deal with the problems, expenses and
delays frequently associated with bringing a new product to market. Because we
have little experience in the deployment and operational aspects of automatic
meter reading technologies, we may be unable to successfully deploy and operate
our H- Net(TM) system even if our H-Net(TM) system proves to be a viable
automatic meter reading solution and achieves market acceptance. Consequently,
we may be unable to achieve profitability or realize our other business goals.
<page>7
Many companies with greater resources and operating experience are
developing technology similar to that employed in our H-Net(TM) system.
These companies could successfully compete with us and negatively affect the
deployment of our H-Net(TM) system and our opportunity to achieve
profitability.
We anticipate significant competition with our H-Net(TM) system from many
companies. Our H-Net(TM) system is designed to compete with companies such as
those that offer meter reading services utilizing modem and telephone line
communications or drive-by data collection capabilities. Our H-Net(TM) system
may compete with numerous companies, including Schlumberger Ltd., Itron, Inc.,
CellNet Data Systems, Hunt Technologies and Metricom Corporation, each of which
has significantly more resources and operational and product development
experience than we do. Some of our potential customers, namely, meter
manufacturers and utility companies, may decide to develop their own products or
service offerings that directly compete with our H-Net(TM) system. Although we
believe that our H-Net(TM) system will be competitive in the marketplace, we
cannot assure you that these or other companies with greater experience and
greater resources than ConectiSys will not negatively affect our business
prospects and impair our ability to achieve profitability.
We are targeting a new and evolving market and we cannot be certain that our
business strategy will be successful.
The automation of utility meter reading and data distribution is a
relatively new and rapidly changing market. We cannot accurately predict the
size of this market or its potential growth. Our system is one possible solution
for AMR and data distribution. It has not been adopted as an industry standard
and it may not be adopted on a broad scale. Competing systems have been and
likely will continue to be selected by utilities and other potential clients.
Participants in the utility industry have historically been cautious and
deliberate in making decisions concerning the adoption of new technology. This
process, which can take up to several years to complete, may include the
formation of evaluation committees, a review of different technical options,
technology trials, equipment testing and certification, performance and cost
justifications, regulatory review, one or more requests for vendor quotes and
proposals, budgetary approvals and other steps. Only a limited number of
utilities have made a commitment to purchase our products to date. Consequently,
if our H-Net(TM) system as an AMR solution is unsuccessful and we are unable to
enter into AMR or data distribution contracts on terms favorable to us, our
business, results of operations and financial condition could be materially and
adversely affected.
The new and evolving nature of the market that we intend to target makes an
accurate evaluation of our business prospects and the formulation of a viable
business strategy very difficult. Accordingly, our business strategy may be
faulty or even obsolete and as a result, we may not properly plan for or address
many obstacles to success, including the following:
o the timing and necessity of substantial expenditures for the development
and deployment of our H-Net(TM) system;
o the failure to strategically position ourselves in relation to joint
venture or strategic partners, and potential and actual competitors;
o the failure of our H-Net(TM) system to satisfy the needs of the market
that we intend to target and the resulting lack of widespread or adequate
acceptance of our H-Net(TM) system; and
o the difficulties in managing rapid growth of operations and personnel.
<page>8
Our failure to manage growth effectively could impair our business.
We do not currently have revenue-generating operations but our strategy
envisions a period of rapid growth that may impose a significant burden on our
administrative and operational resources. Our ability to effectively manage
growth will require us to substantially expand the capabilities of our
administrative and operational resources and to attract, train, manage and
retain qualified engineers, technicians, salespersons and other personnel. There
can be no assurance that we will be able to do so. If we are unable to
successfully manage our growth, our business, prospects, results of operations
and financial condition could be materially and adversely affected.
Because we believe that proprietary rights are material to our success,
misappropriation of those rights or claims of infringement or legal actions
related to intellectual property could adversely impact our financial
condition.
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary rights. However,
although our H-Net(TM) system and its constituent components could benefit from
patent protection, we have chosen to retain the proprietary rights associated
with our H-Net(TM) system predominantly as trade secrets. Although we currently
rely to a great extent on trade secret protection for much of our technology, we
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop comparable or
superior technologies or obtain unauthorized access to our proprietary
technology.
We own, license or have otherwise obtained the right to use certain
technologies incorporated in our H-Net(TM) system. We may receive infringement
claims from third parties relating to our products and technologies. In those
cases, we intend to investigate the validity of the claims and, if we believe
the claims have merit, to respond through licensing or other appropriate
actions. To the extent claims relate to technology included in components
purchased from third-party vendors for incorporation into our products, we would
forward those claims to the appropriate vendor. If we or our component
manufacturers are unable to license or otherwise provide any necessary
technology on a cost-effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs defending any
legal action taken against us.
Risks Related To This Offering
Shares of our common stock eligible or to become eligible for public sale
could adversely affect our stock price and make it difficult for us to raise
additional capital through sales of equity securities.
As of September 1, 2004, we had outstanding 1,031,432,178 shares of common
stock, of which approximately 410,000,000 shares were unrestricted under the
Securities Act of 1933. As of that date, we also had outstanding options,
warrants, promissory notes, convertible debentures and preferred stock that were
exercisable for or convertible into approximately 9,900,000,000 shares of common
stock, approximately 9,860,000,000 of which are covered by registration rights.
Sales of a substantial number of shares of our common stock in the public
market, or the perception that sales could occur, could adversely affect the
market price of our common stock. Any adverse effect on the market price of our
common stock could make it difficult for us to raise additional capital through
sales of equity securities at a time and at a price that we deem appropriate.
<page>9
Conversion or exercise of our outstanding derivative securities could
substantially dilute your investment because the conversion and exercise
prices of those securities and/or the number of shares of common stock
issuable upon conversion or exercise of those securities are subject to
adjustment.
We have issued various notes, debentures and warrants that are convertible
or exercisable at prices that are subject to adjustment due to a variety of
factors, including fluctuations in the market price of our common stock and the
issuance of securities at an exercise or conversion price less than the then-
current exercise or conversion price of those notes, debentures or warrants. As
of September 1, 2004, the closing price of a share of our common stock on the
OTC Bulletin Board(R) was $.0007. On that date, our notes, debentures and
warrants outstanding with adjustable conversion and/or exercise prices were
convertible or exercisable into approximately 9,880,000,000 shares of our common
stock. The number of shares of common stock that these adjustable securities
ultimately may be converted into or exercised for could prove to be greater than
this amount if the market price of our common stock declines. You could,
therefore, experience substantial dilution of your investment as a result of the
conversion or exercise of our outstanding derivative securities.
The applicable conversion price of our debentures and a convertible
promissory note issued to certain security holders is variable and does not have
a lower-limit, therefore the dilutive effect to our existing security holders is
theoretically limitless. However, because the variable conversion price of these
debentures and convertible promissory note has an upper limit, an increase in
the trading price of a share of our common stock will result in a limited
benefit to existing security holders with respect to the conversion of these
debentures and the convertible promissory note. The following table sets forth
the number of shares issuable upon conversion of the aggregate principal portion
of our convertible debentures issued to certain security holders and outstanding
as of September 1, 2004, which amount was $2,133,423, and is based upon the
indicated hypothetical trading prices:
Approximate
Number of Percentage of
Hypothetical Shares Company's
Trading Price Conversion Price (1) Issuable (2) Common Stock (3)
- ------------- --------------------- --------------- -----------------
$.0010 $.00040 5,334,000,000 83.8%
$.0008 $.00032 6,667,000,000 86.6%
$.0006 $.00024 8,889,000,000 89.6%
$.0004 $.00016 13,334,000,000 92.8%
_______________
(1) The conversion price of our debentures and the convertible promissory
note is the lower of 40% of the average of the three lowest intraday
trading prices of a share of our common stock on the OTC Bulletin Board(R)
during the twenty trading days immediately preceding the conversion date,
and either (a) $.06 for the March, May and June 2002 convertible
debentures, (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
September 1, 2004, the applicable conversion price was approximately
$.00024.
(2) Our current authorized capital allows us to issue a maximum of
7,500,000,000 shares of common stock.
(3) Amounts are based on 1,031,432,178 shares of our common stock
outstanding as of September 1, 2004 plus the corresponding number of
shares issuable. Each of the holders of our convertible debentures may not
convert our debentures into more than 4.9% of our then-outstanding common
<page>10
stock; however, the holders may waive the 4.9% limitation, thus allowing
the conversion of their debentures into a number of shares of common stock
in excess of 4.9% of our then-outstanding common stock.
The holders of certain of our convertible debentures may elect to receive
payment for accrued and unpaid interest on our convertible debentures in shares
of our common stock based on the conversion price and on the same terms
described above with respect to conversions of the principal portion of these
debentures. As a result of conversions of the principal or interest portion of
our convertible debentures and related sales of our common stock by the holders
of our convertible debentures, the market price of our common stock could be
depressed, thereby resulting in a significant increase in the number of shares
issuable upon conversion of the principal and interest portions of these
debentures. You could, therefore, experience substantial dilution of your
investment as a result of the conversion of the principal or interest portions
of our convertible debentures.
If our security holders engage in short sales of our common stock, including
sales of shares to be issued upon conversion or exercise of derivative
securities, the price of our common stock may decline.
Selling short is a technique used by a shareholder to take advantage of an
anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time
can create downward pressure on the market price of a security. The decrease in
market price would allow holders of our derivative securities that have
conversion or exercise prices based upon a discount on the market price of our
common stock to convert or exercise their derivative securities into or for an
increased number of shares of our common stock. Further sales of common stock
issued upon conversion or exercise of our derivative securities could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short sales
that could further undermine the value of our common stock. You could,
therefore, experience a decline in the value of your investment as a result of
short sales of our common stock.
Our current financing arrangements could prevent our common stock from being
listed on Nasdaq or other principal markets.
Nasdaq and other principal markets require that, to be eligible for
inclusion in the stock market, a company's common stock have a specified minimum
bid price per share. Convertible debenture financings, especially those with
variable conversion prices with low or no low-price limits, characteristically
exert downward pressure on the market for a company's common stock. This
pressure, if applied against the market for our common stock, may prevent our
common stock from being listed on Nasdaq or other principal markets.
Our common stock price is subject to significant volatility, which could
result in substantial losses for investors and in litigation against us.
The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. During the three
months ended June 30, 2004, the high and low closing bid prices of our common
stock were $.0047 and $.0012, respectively. The market price of our common stock
may exhibit significant fluctuations in the future response to various factors,
many of which are beyond our control and which include:
<page>11
o variations in our quarterly operating results, which variations could
result from, among other things, changes in the needs of one or more of
our customers;
o changes in market valuations of similar companies and stock market price
and volume fluctuations generally;
o economic conditions specific to the industries in which we operate;
o announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions, strategic
relationships, joint ventures or capital commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity securities.
If our operating results in future quarters fall below the expectations of
market makers, securities analysts and investors, the price of our common stock
likely will decline, perhaps substantially. In the past, securities class action
litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which you purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you.
Because we are subject to the "Penny Stock" rules, the level of trading
activity in our stock may be reduced.
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks, like shares of our common stock, generally are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on Nasdaq). The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and,
if the broker-dealer is the sole market maker, the broker-dealer must disclose
this fact and the broker-dealer's presumed control over the market, and monthly
account statements showing the market value of each penny stock held in the
customer's account. In addition, broker-dealers who sell these securities to
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.
Because our stock is not listed on a national securities exchange, you may
find it difficult to dispose of or obtain quotations for our common stock.
Our common stock trades under the symbol "CNES" on the OTC Bulletin
Board(R). Because our stock trades on the OTC Bulletin Board(R) rather than on a
national securities exchange, you may find it difficult to either dispose of, or
to obtain quotations as to the price of, our common stock.
<page>12
Our preferred stock may delay or prevent a takeover of ConectiSys, possibly
preventing you from obtaining higher stock prices for your shares.
Our board of directors has the authority to issue up to 50,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights of those shares, without any further vote or action by
our shareholders. Of these shares, 1,000,000 shares have been designated as
Class A Preferred Stock and 1,000,000 shares have been designated as Class B
Preferred Stock. The rights of the holders of our common stock are subject to
the rights of the holders of our outstanding preferred stock and will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that we may issue in the future. The issuance of preferred stock, while
providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, which would
delay, defer or prevent a change in control of ConectiSys. Furthermore,
preferred stock may have other rights, including economic rights senior to the
common stock, and, as a result, the issuance of preferred stock could adversely
affect the market value of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including among others:
o our product development activities;
o our business strategy for establishing a presence in the AMR market;
o anticipated trends in our financial condition and results of operations;
and
o our ability to distinguish ourselves from our current and future
competitors.
We use words like "believe," "expect," "may," "will," "could," "seek,"
"estimate," "continue," "anticipate," "intend," "future," "plan" or variations
of those terms and other similar expressions, including their use in the
negative, to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements, which speak only as to our
expectations as of the date of this prospectus. These forward- looking
statements are subject to a number of risks and uncertainties, including those
identified under "Risk Factors" and elsewhere in this prospectus. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, actual conditions in the data storage and digital entertainment
industries, and actual conditions and results in our business, could differ
materially from those expressed in these forward-looking statements. In
addition, none of the events anticipated in the forward-looking statements may
actually occur. Any of these different outcomes could cause the price of our
common stock to decline substantially. Except as required by law, we undertake
no duty to update any forward-looking statement after the date of this
prospectus, either to conform any statement to reflect actual results or to
reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus by the selling security holders.
Rather, the selling security holders will receive those proceeds directly.
<page>13
PRICE RANGE OF COMMON STOCK
The following table shows the high and low closing bid prices of our common
stock for the periods presented, as obtained from Pink Sheets LLC, a research
service that compiles quote information reported on the National Association of
Securities Dealers composite feed or other qualified interdealer quotation
medium. The quotations listed below reflect interdealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
Our common stock trades on the OTC Bulletin Board(R) under the symbol "CNES."
Price Range
-------------
High Low
---- ---
Year Ended September 30, 2002:
First Quarter (October 1 - December 31).... $ 0.19 $ 0.095
Second Quarter (January 1 - March 30)...... 0.105 0.07
Third Quarter (April 1 - June 30).......... 0.10 0.016
Fourth Quarter (July 1 - September 30)..... 0.036 0.007
Year Ended September 30, 2003
First Quarter.............................. $ 0.018 $0.008
Second Quarter............................. 0.012 0.003
Third Quarter.............................. 0.007 0.0025
Fourth Quarter............................. 0.0075 0.0025
Year Ending September 30, 2004
First Quarter.............................. $ 0.0069 $0.0022
Second Quarter............................. 0.0055 0.0023
Third Quarter.............................. 0.0047 0.0012
As of September 1, 2004, we had 1,031,432,178 shares of common stock
outstanding and held of record by approximately 800 shareholders, and the high
and low sale prices of a share of our common stock on the OTC Bulletin Board(R)
on that date were $.0007 and $.0006, respectively. Within the holders of
record of our common stock are depositories such as Cede & Co. that hold shares
of stock for brokerage firms which, in turn, hold shares of stock for beneficial
owners.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not currently
intend to pay cash dividends on our common stock in the foreseeable future. We
are restricted from paying dividends on our common stock under state law, and
the terms of our secured convertible debentures. We currently anticipate that we
will retain any earnings for use in the continued development of our business.
<page>14
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2004. You
should read this information together with our consolidated financial statements
and the notes relating to those statements appearing elsewhere in this
prospectus. The table excludes an aggregate of approximately 4,728,000,000
shares of common stock that were issuable upon conversion or exercise of
outstanding convertible notes, debentures, options and warrants as of June 30,
2004.
June 30, 2004
------------------
Cash.........................................................$ 406,085
==================
Long-term debt, net current portion..........................$ 8,613
==================
Shareholders' equity:
Preferred stock, $1.00 par value. 50,000,000 shares authorized.
Class A Preferred Stock, $1.00 par value, 1,000,000 shares
authorized, 215,865 shares issued and outstanding....... 215,865
Common stock, no par value. 1,000,000,000 shares authorized;
953,542,350 shares issued and outstanding.................... 20,549,507
Additional paid in capital
Class B Convertible Preferred Stock, $1.00 par value,
1,000,000 shares authorized, no shares issued
and outstanding.......................................... 100,000
Common stock, no par value. 16,432,154 stock options and
warrants exercisable...................................... 1,360,006
Accumulated deficit........................................... (28,296,181)
---------------
Total shareholders' equity (deficit)....................... $ (6,070,803)
---------------
Total capitalization....................................... $ (6,070,803)
---------------
<page>15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and notes and the information included under
the caption "Risk Factors" included elsewhere in this prospectus. Except for
historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions and our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies. See "Special Note Regarding Forward-Looking Statements" for further
information regarding forward-looking statements. Our actual results may differ
materially from the results discussed in the forward-looking statements as a
result of a number of factors, many of which are beyond our control, including
those factors discussed under "Risk Factors" and other headings in this
prospectus, which could, among other things, cause the price of our common stock
to fluctuate substantially.
Overview
Since 1995, we have been engaged in the development of a low-cost automatic
meter reading, or AMR, solution. We have developed a low-cost AMR solution that
includes a proprietary system employing specialized hardware and software that
will allow for residential and commercial applications. Our proprietary system
is called H-Net(TM), which is a trademark of ConectiSys.
We are currently 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
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.
<page>16
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.
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
<page>17
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 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
<page>18
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 September
1, 2004, each of these defaults was continuing and we were in payment default
under convertible debentures in the aggregate principal amount of approximately
$759,000 plus related interest on those debentures. As of September 1, 2004, we
also were in default under our obligations to register for resale shares of our
common stock underlying certain of our outstanding convertible debentures. In
addition, as of September 1, 2004, we also were in default under our obligations
to make quarterly interest payments under all of our outstanding convertible
debentures issued prior to March 31, 2004. As of September 1, 2004, as a result
of the above defaults, the holders of our secured convertible debentures were
entitled to pursue their rights to foreclose upon their security interest in all
of our assets. However, as of that date, we were not aware of any action taken
by the holders of our secured convertible debentures to pursue such rights, and
as of that date we also were not aware of any other legal or similar action
taken by those holders to enforce their rights or as a result of our defaults
under those secured convertible debentures.
We plan to register for resale with the Securities and Exchange Commission a
portion of the shares of common stock underlying the convertible debentures
under which we are in default and expect that the convertible debentures
ultimately will be converted into shares of our common stock and that we
therefore will not be obligated to repay the outstanding principal and accrued
and unpaid interest amounts on those debentures.
As of September 1, 2004, we had issued the following secured convertible
debentures, which provide for interest at the rate of 12% per annum, and
warrants to purchase common stock to various accredited inventors in connection
with debenture offering transactions:
<table>
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount($) ConectiSys($)(1) Amount($) Interest($)(2) Offering(#)
- ------------- --------- ---------------- ------------ -------------- -----------
March 29, 2002........$ 300,000 $ 225,000 $ 43,000 $ 29,500 1,500,000
May 10, 2002.......... 150,000 125,000 150,000 41,700 750,000
June 17, 2002......... 300,000 238,000 300,000 79,600 1,500,000
November 27, 2002..... 200,000 144,000 - - 1,000,000
March 3, 2003......... 150,000 100,000 116,000 20,800 750,000
May 12, 2003.......... 150,000 100,000 150,000 23,600 750,000
November 25, 2003..... 100,000 75,000 100,000 9,200 500,000
December 3, 2003...... 50,000 31,000 50,000 4,500 250,000
December 31, 2003..... 50,000 31,000 50,000 4,000 250,000
February 18, 2004..... 50,000 35,000 50,000 3,200 250,000
March 4, 2004......... 250,000 203,000 250,000 14,900 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 $ 2,134,000 $ 231,000 11,375,000
========== ============ =========== ============ ==========
__________________
(1) Amounts are approximate and 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
</table>
<page>19
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 are approximate and represent accrued and unpaid interest
outstanding as of September 1, 2004. Total amount of accrued and unpaid
interest does not account for approximately $81,000 of outstanding pre-
paid interest.
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 September 1,
2004, the applicable conversion price was approximately $.00024 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 September 1, 2004, we had a loan outstanding and due on demand in an
amount equal to approximately $36,400. This loan accrues interest at an annual
rate of 18% and was made by Robert Spigno, our President and Chief Executive
Officer and a member of our board of directors. As of that date we also had a
loan outstanding and due on demand in an amount equal to approximately $42,700.
This loan accrues interest at an annual rate of 18% and was made by Patricia
Spigno, our Chief Financial Officer and Secretary.
As of September 1, 2004, we had a promissory note outstanding and due
September 1, 2004, payable in the approximate amount of $294,000. 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 September 1, 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
<page>20
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
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 twelve months ended September 30, 2003 or the three or nine
months 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
<page>21
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.
BUSINESS
Overview
We were incorporated in Colorado on February 2, 1986 under the name Coastal
Financial Corp. On December 5, 1994, Coastal Financial Corp. changed its name to
BDR Industries, Inc. which changed its name on October 16, 1995, to ConectiSys
Corporation.
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
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.
Industry Overview
Over the past several years, the AMR industry has undergone tremendous
growth. Many factors have contributed to this growth, including:
o a surge in demand for wireless data transmission services that increase
the efficiency of meter reading service companies;
<page>22
o mandates by federal and state regulators requiring that the energy
industry utilize automatic meter reading technologies and read meters with
increased frequency;
o an apparent nation-wide trend toward deregulation of the energy industry,
which may enable a large number of new energy service providers to enter
the market who will require easily obtainable, accurate and comprehensive
data regarding their customers' energy usage; and
o a growing preference among commercial, industrial and governmental
enterprises for automation of remote data acquisition and collection
activities through wired and wireless communications technologies.
Although the need for a comprehensive, low-cost AMR solution has become
widespread, a viable solution remains unmet for many reasons, including the
following:
o the high cost of hardware and installation of traditional wireless data
collection processes employing technologies similar to cellular or other
wireless data transmission towers;
o the failure of existing AMR systems to satisfy the mandates imposed by
government regulations concerning the collection and transmission of data;
and
o the failure of existing AMR systems to provide true two-way data
communications, a result of which those systems are less accurate and do
not provide increases in efficiency allowed by two-way data communications
systems.
Responding to the growing demand for communications services and increased
competitive pressures, businesses and government organizations that rely heavily
on information technology are devoting significant resources to the evaluation
and purchase of data transmission products.
According to the Annual Electricity Utility Report for 2000 of the Energy
Information Administration, which compiles official energy statistics from the
United States government, there are approximately 125 million energy meters in
the United States, approximately 12.5 million of which are located in
California. Our goal is to achieve sufficient proliferation of our H- Net(TM)
system so that it is installed in one percent of the energy meters in the United
States or ten percent of the energy meters in the State of California.
Initially, we intend our principal efforts to be focused on the deployment of
our H-Net(TM) system in the State of California.
Our Strategy
We have strived to develop expertise relating to AMR systems and products.
Our goal is to become a leading provider of products and services relating to
data acquisition from remote locations and data collection at centralized
locations. Our business strategy to achieve this goal includes the following
elements:
o Develop strategic relationships. We have explored and intend to continue
to explore the possibility of entering into strategic relationships with
manufacturers of energy meters, utility companies, energy providers and
others in order to promote the adoption of our H-Net(TM) system within the
energy and AMR industries.
o Establish outsource manufacturing for full-scale commercial production.
We have the means of outsourcing small-scale production of the products
employed in our H-Net(TM) system. We intend to continue the cost-reduction
<page>23
phase of our H-Net(TM) system's development and in doing so, we intend to
examine various manufacturing alternatives, including strategic
relationships with manufacturers of energy meters and third-party
manufacturing of the products employed in our H-Net(TM) system for use in
energy meters.
o Build market share for our products. We intend to establish ourselves as
the source for comprehensive, low-cost AMR solutions and plan to focus on
building our own market share for our H-Net(TM) system and further develop
our H-Net(TM) system where market demand is identified. We also plan to
develop new products and enhancements to meet or exceed the evolving
requirements of both centralized and remote applications of our
technologies.
o Intensify our marketing activities. As funds become available, we intend
to invest in a comprehensive targeted, product-specific marketing program
to raise awareness of ConectiSys and our H-Net(TM) system and in order to
attract customers.
o Continue to develop wireless products. We intend to continue to invest in
research and development of wireless products to meet the needs of the AMR
industry. We believe that the expertise that we have developed in creating
our existing H-Net(TM) system will enable us to enhance our products,
develop new products and services and respond to emerging technologies in
a cost-effective and timely manner.
Our H-Net(TM) System
Our H-Net(TM) system is designed to enable users to remotely read electronic
energy usage meters without the necessity of someone traveling to and physically
reading the meter. The predominant method of reading electronic meters is for an
individual to travel to the site of the meter and make a record of the data
compiled by that meter, either manually as a notation in a log book or
electronically by inputting the data into a handheld or other electronic data
retention device. In the case of a log book, the information is then typically
recorded manually into a centralized database for energy usage tracking and
billing purposes. In the case of a electronic data retention device, the
information is typically downloaded to a centralized database for these
purposes. Residential meters are customarily read on a monthly basis, allowing
only a limited ability to track energy usage fluctuations over periods of less
than one month. In addition, physical reading of meters is accompanied by the
problem of reader error, causing inefficiencies resulting from necessary
corrective procedures. Our H-Net(TM) system is designed to provide continuous
meter-reading capabilities, address the inefficiencies that accompany physical
meter reading and provide additional benefits to its users.
We believe that the anticipated deployment costs of our H-Net(TM) system are
small compared to other AMR products because there are no cellular or other
telecommunications or wireless towers to erect or expensive hardware
infrastructure to install. We anticipate that all field installations and
deployment programs of our H-Net(TM) system will be administered by United
Telemetry Company, one of our two wholly-owned subsidiaries. The data collected
by H-Net(TM)-equipped meters will be transmitted over the unlicensed ISM 900 MHz
radio frequency band. Our H-Net(TM) system allows for high-density data
transmissions, which we believe makes it ideal for metropolitan and other
crowded areas where a large amount of data would normally be collected.
H-Net(TM)-Equipped Meters
Our H-Net(TM) system is comprised of the following three principal
components that operate together to provide what we believe to be a
comprehensive, low-cost AMR solution: H-Net(TM)-equipped meters, base stations
and a network operating center. The first component of our H- Net(TM) system is
<page>24
an electronic meter put into service at a residence that is equipped with a
circuit board that contains a memory module, microprocessor and a two-way radio
transmission and receiver device that operates in the ISM 900 MHz radio
frequency band. This circuit board may also be retrofitted to some existing
meters. We refer to each energy meter equipped with this circuit board and that
is connected to our AMR network as an H-Net(TM)-equipped meter or a "node." With
the installation of each H- Net(TM)-equipped meter, the existing installed H-
Net(TM)-equipped meters self-configure by transmitting configuration data to
other H-Net(TM)- equipped meters and receiving configuration data from other H-
Net(TM)- equipped meters.
Base Stations
Our AMR network, when it is operational, will be partially comprised of
these H-Net(TM)-equipped meters, each communicating to another with the final
communication of data in a given communication cycle being transmitted to the
second component of our H-Net(TM) system, a base station. We anticipate that a
base station will be housed in a small metal box, no larger than the size of a
shoe box, that contains a memory module, microprocessor, radio transmission and
receiver device and a modem. The node and base station configuration is similar
to a hub and spoke configuration, but rather than direct communication among
each of the nodes and the base station, numerous nodes will communicate with one
another in a web configuration with some nodes sending final transmission to the
base station of the data collected by many other nodes. The base station is
designed to receive data transmissions from various nodes in its local network
and use its modem to place a local telephone call and transmit the data it has
collected to the third component of our H-Net(TM) system, our network operating
center. We anticipate that the base stations will deliver energy meter data four
times an hour, twenty-four hours a day to our network operating center.
Network Operating Center
We plan to use a computer center located at our main office facility to
store the information gathered from the H-Net(TM)-equipped meters. We call this
computer center our network operating center. We have designed our network
operating center to support up to one million H-Net(TM)-equipped meters. We
anticipate that our network operating center will be the central control center
for our entire AMR network and will operate in a large geographic area. We plan
to use the network operating center to archive all data for future use and as a
protective measure against data loss or corruption. After the data archival
process, we expect that the network operating center will handle uploading of
the data to the Internet where it can be accessed by users directly and also
downloaded through an interpreter software program into a utility company's or
energy service provider's database. We anticipate that our network operating
center will be administered by our wholly-owned subsidiary, eEnergyServices.com,
Inc.
The H-Net(TM) Network
The H-Net(TM) network, once deployed, will be comprised of our network
operating center and local networks, which in turn are each comprised of a base
station and H-Net(TM)-equipped meters. Each H-Net(TM)-equipped meter can
communicate with other H-Net(TM)-equipped meters that are up to a distance of
approximately one-quarter mile away. We plan to install a base station for every
H-Net(TM)-equipped meter area. Our base stations are designed to receive data
transmissions from up to 20,000 H-Net(TM)-equipped meters. We have designed our
system so that a base station can transmit the accumulated data it has received
from the H-Net(TM)-equipped meters in its local network by telephone every
fifteen minutes by using its modem to communicate with our network operating
center. Once the data from the H- Net(TM)-equipped meters arrives from the base
stations at the network operating center, the data can be assembled into various
formats for billing customers as well as for management of energy purchasing and
energy conservation programs.
<page>25
Our H-Net(TM) system has certain limitations inherent in each local network,
each of which is comprised of H-Net(TM)-equipped meters and a base station. Each
local network has the following principal limitations:
o it can consist of a maximum of 20,000 H-Net(TM)-equipped meters;
o each H-Net(TM)-equipped meter must be within approximately one-quarter
mile of another H-Net(TM)-equipped meter in the same local network; and
o the maximum radius of a local network is five miles.
In addition to the limitations described above, our H-Net(TM)-equipped
meters transmit data using the ISM 900 MHz radio frequency band, which is an
unlicensed frequency band. Because this frequency band is regulated, the H-
Net(TM) system will require FCC approval for compliance and sales. 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. 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.
H-Net(TM) Services
We plan to offer a wide variety of services to utility companies and energy
service providers in addition to reading their customers' energy meters. We
anticipate that these services will include energy management, data storage and
archiving, and the provision of near real-time energy usage data in order to
evaluate energy consumption and determine cost savings procedures. We plan to
provide complete billing and accounting transaction services to utility
companies and energy providers as well as to end-users of energy.
Our H-Net(TM) system employs new technology developed to allow utility
companies and energy service providers to have a wireless network of intelligent
meters, with each meter communicating with another and passing data back and
forth, allowing near real-time energy consumption data to be collected. We
believe that energy service providers will have an opportunity to save money by
efficiently collecting accurate energy usage profiles and using this near real-
time energy usage data to competitively bid for energy in the newly deregulated
energy markets.
Our H-Net(TM) system has been designed so that an energy service provider
can determine exactly how much electric power a metropolitan area, a
neighborhood, or even an individual residence is using. Energy users who have H-
Net(TM)-equipped meters will have the ability to check their energy consumption
and billing rates in near real-time by obtaining this information over the
Internet, which we believe will promote energy conservation.
H-Net(TM) Product Development and Pilot Programs
Our product development efforts are directed toward developing an AMR
solution in the form of our H-Net(TM) system. We believe that our existing
expertise in data transmission devices provides us with a strong technology base
to pursue this objective. Our product development efforts focus on the following
principles:
<page>26
o Development of New Products and Technology. We plan to assess domestic and
international market trends, with the focus of developing new products
designed to meet emerging market demands. In developing new products, we
plan to attempt to combine our existing technology base with new
technologies to provide a broader range of automation and data
communications and data acquisition solutions to end users.
o Improvement of Existing Technology. We seek to expand the features and
functionality of our existing H-Net(TM) system technology through
modifications and enhancements to meet the changing needs of the
marketplace. We are reviewing the design of our products to determine
areas of potential cost savings or enhanced product quality and
reliability.
We believe our future success will depend, in part, upon our ability to
expand and enhance the features of our H-Net(TM) system and to develop and
introduce new products designed to meet changing customer needs on a cost-
effective and timely basis. Consequently, failure by us to respond on a timely
basis to technological developments, changes in industry standards or customer
requirements, or any significant delay in product development or introduction,
could have a material adverse effect on our business and results of operations.
We cannot assure you that we will respond effectively to technological changes
or new product announcements by others or that we will be able to successfully
develop and market new products or product enhancements.
On February 15, 2000, we successfully launched our H-Net(TM) pilot test
program in Los Angeles, California. Although this initial pilot program was
small, it was a working model of our first-generation H-Net(TM) system that
demonstrated the capabilities of our H-Net(TM) system as an AMR solution. This
initial pilot program demonstrated the technology of our H-Net(TM) system, which
remotely acquires near real-time data from an energy meter, processes this data
to show energy usage and cost, and can display this information on the Internet.
In September 2000, we successfully launched a second pilot test program for
which we developed a portable wireless network capable of demonstrating our
Based upon the success of our early-generation H-Net(TM) systems in our
first two pilot test programs in demonstrating our H-Net(TM) system as a viable
means of remotely reading energy meters and collecting the resulting data, we
successfully launched a third pilot test program in September 2001.
We are currently running a small residential pilot program of five meters in
Orange County, California with the cooperation of Southern California Edison.
Our H-Net(TM) meters were installed by Southern California Edison in July 2003
and the pilot program has been recording real-time meter data seamlessly and
error-free for the past eleven months. We are also running a pilot program in
Los Angeles County, California with the cooperation of Southern California
Edison. Our H-Net(TM) meters for this program were installed by Southern
California Edison in May 2004 and the pilot program has been recording real-time
meter data seamlessly and error-free since commencement. These working meters
can be viewed on our website at http://www.conectisys.com. In addition, we are
still actively pursuing and planning other field testing programs with various
other utility companies and energy service providers across the country.
We are in the process of evaluating with Lyndis & Gyr, a meter manufacture,
a potential business partnership regarding the implementation of the H- Net(TM)
system into its meters. We have used Lyndis & Gyr meters in all of our pilot
programs and continue to do so in our existing pilot programs.
We are actively pursuing and planning other field testing programs with
various utility companies and energy service providers across the country.
However, we expect that future field testing programs will be in conjunction
<page>27
with the first stages of sales or licensing of our H-Net(TM) system to utility
companies, energy service providers and other parties.
The H-Net(TM) Wireless Network Vision
We have designed and will continue to design our H-Net(TM) system to deliver
a comprehensive and robust AMR solution that enables the realization of
substantial efficiencies in the remote meter reading and centralized data
collection contexts and that provides numerous features and services. In
addition to its many other planned features and services, we are designing our
H-Net(TM) system to:
o constantly monitor an end-user's energy meter and gather meter data and
display it on the Internet in fifteen-minute intervals, twenty-four hours
a day;
o allow the end-user to access an information link on the Internet taking
them directly to the energy usage data transmitted by their H-Net(TM)-
equipped meter;
o provide utility companies, and energy service providers with reliable and
accurate electricity usage records;
o enable a utility company or energy service providers to supply to end-
users over the Internet information and special incentive offers regarding
the use of energy at off-peak times, thereby improving energy conservation
during critical peak periods. Other innovative offers may also be
implemented such as pre-payment plans and direct purchases of additional
energy over the Internet;
o allow an end-user to pay his or her energy bills over the Internet, at a
very low administrative cost to the utility company and reduce billing
delays;
o allow the monitoring of energy usage levels to ensure that utility
companies and energy service providers are aware of any delivery problems,
including power outages and energy thefts;
o provide utility companies with the ability to determine which of its
customers does not have power without the aid of customer service phone
calls, thereby allowing service crews to be dispatched more efficiently.
By using our H-Net(TM) system, we believe that a utility company will be
in a position to know precisely when each end-user's service is restored
and the exact duration of a power outage;
o enhance safety and convenience by allowing the remote delivery and
termination of electricity, with all billing transactions completely
automated. We plan to design our H-Net(TM) system to allow end-users to
request over the Internet the delivery of electricity;
o allow the distribution of electricity more efficiently and inexpensively
with energy usage and other vital data informing each decision through the
entire energy supply channel. We believe that by using our H-Net(TM)
system, energy purchasers can make precise forecasts of purchasing
requirements, eliminating much of the over- and under-purchasing of energy
that contributes to volatile wholesale energy prices;
o allow end-users who are preparing to terminate or switch energy service
providers to use the Internet to inform the current energy service
provider of the change. At a precise time, selected by the end-user, our
<page>28
H-Net(TM) system has the ability to read the end-user's H-Net(TM)-equipped
meter, pass the information to the current energy service provider's
system to produce a final bill, and disconnect the end-user's electricity.
In the case of a change in an energy service provider, the data from an H-
Net(TM)-equipped meter can automatically be routed to a new energy service
provider; and
o enable lower energy costs as a result of its efficiencies, quicker
transactions with less paperwork and reduced potential for error. Lower
energy and transaction costs will assist the transition to an open,
competitive market for energy.
Government Regulation
Our H-Net(TM) system is designed to comply with a significant number of
industry standards and regulations, some of which are evolving as new
technologies are deployed. In the United States, our H-Net(TM) system must
comply with various regulations defined by the FCC, and Underwriters
Laboratories, or other nationally-recognized test laboratories, as well as
industry standards.
The regulatory approval process can be time-consuming and can require the
expenditure of substantial resources.
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. We cannot assure
you that the FCC will grant the requisite approvals for our H-Net(TM) system on
a timely basis, or at all. The failure of our H-Net(TM) system to comply, or
delays in compliance, with the various existing and evolving standards could
negatively impact our ability to sell or license our H-Net(TM) system.
Government regulations regarding the manufacture, sale and implementation of
products and systems similar to our H-Net(TM) system and other data
communications devices are subject to future change. We cannot predict what
impact, if any, such changes may have upon our business.
We do not anticipate that any government regulations will hamper our efforts
to deploy our H-Net(TM) system. Rather, the restructuring of the energy market
in the United States has required the reading of energy meters much more
frequently than the current practice of once a month, thus making the physical
meter reading techniques currently in use inadequate. Our H-Net(TM) system is
designed to meet various government regulations mandating frequent meter
readings and we are attempting to position ourselves so that we will be a
beneficiary of these mandates. We have conducted pilot programs of our H-Net(TM)
system with the University of California, Irvine through its Advanced Power and
Energy Program. We believe that if we are able to preserve our relationship with
the University of California, Irvine, as a result of its Advanced Power and
Energy Program which we believe is a high- profile program, we may have a
significant opportunity to secure government recognition of our H-Net(TM)
system, and we hope that we can position our H- Net(TM) system to be referred to
in government regulations, or informally, as the standard in the AMR industry.
Operations
During the initial design and engineering phases for our H-Net(TM) system,
we maintained low overhead costs and we plan to continue to do so until
manufacturing and sales of our H-Net(TM) system are underway. We plan to hire
additional personnel as needed during the coming year, including managerial,
clerical, administration, sales, marketing, and customer service personnel.
<page>29
We plan to lease suitable office facilities for our operations within the
Southern California area. We plan to initially utilize existing manufacturers
to produce our products and will therefore likely not have a short-term need to
lease or build manufacturing facilities. We intend to operate not principally
as a manufacturer of products, but as a provider of comprehensive, cost-
effective AMR solutions, and we plan to outsource manufacturing of the hardware
employed in our H-Net(TM) system in order to achieve the highest cost-
efficiencies.
Anticipated Revenues and Marketing
Our H-Net(TM) system is designed to be a comprehensive, cost-effective AMR
solution and an alternative to other AMR technologies and physical reading of
meters. Our H-Net(TM) system is capable of providing meter data every fifteen
minutes, twenty-four hours a day and nearly 3,000 times per month. Physical
readings of a meter cost approximately $1.00 per reading. Our H- Net(TM) system
is designed to meet the relatively low cost of physical meter reading while
providing nearly 3,000 times more readings per month. We believe that our base
cost to operate a fully-deployed H-Net(TM) system is approximately $.20 per
meter per month, or approximately $.0000667 per reading.
We plan to license our H-Net(TM) system technology to meter manufacturers
so that they may incorporate it into their meters. We plan on deriving a small
royalty per meter sold for every H-Net(TM)-equipped meter. We anticipate that
the predominant source of any future revenues will be through recurring monthly
service charges for reading, archiving and supplying data from H-Net(TM)-
equipped meters and from providing other services described in more detail
above. However, despite our belief of the cost-effectiveness and significant
advantages of our H-Net(TM) system over physical meter reading practices and
other AMR technologies, there can be no assurances that the market we intent to
target will adopt or accept our H- Net(TM) system or that we will earn any
significant revenues.
We have developed a marketing plan that was formulated to help us achieve
the following objectives:
o acquisition and retention of strategic beta test placement locations for
H-Net(TM)-equipped meters;
o formation of synergistic partnerships with energy service providers,
utilities companies and internet service providers, including joint
ventures, license arrangements and strategic alliances;
o participation in H-Net(TM)-equipped meter manufacturing partnerships and
acquisition of Internet commerce sponsorship;
o promotion of unique features and specialized services of our H-Net(TM)
system; and
o creation of industry awareness by implementing a public relations and
marketing campaign along with establishing a relationship with the State
of California and other states in an attempt to facilitate a long-term
solution for the nation's energy needs.
The current principal target of our marketing and sales efforts is the
utility and energy service provider industries. These industries consist of a
wide variety of organizations that use data communications in an automated
process application, such as utilities and energy management companies.
Responding to deregulation and other major changes taking place within the
industry, electric power utility companies have become leading advocates in
promoting the implementation of automation and technological advancement as a
means of achieving cost savings as they enter the competitive arena. Utility
<page>30
companies are automating numerous distinct processes within their operating
systems. Our H Net(TM) system is designed for and sold for use in:
o the AMR context, which is intended primarily to eliminate the expense and
inefficiencies of human meter readers and also is intended to provide data
archival and delivery services as well as additional value-added services for
the end-user; and
o distribution automation, which is the remote monitoring and control of
power distribution networks. These control systems are often referred to as
SCADA systems. SCADA is an acronym for Supervisory Control and Data Acquisition.
If sufficient funds are not available for full deployment of our H-Net(TM)
system, it is our intention to license our H-Net(TM) technology to various
sectors of the energy industry, including meter manufacturers for integration
into their meters. We also may license our software and software systems for
archival of the data transmitted by H-Net(TM)-equipped meters to various utility
companies and energy service providers. Under this scenario, we would also
supply support and technical assistance to these various sectors of the energy
industry while collecting revenues solely in the form of fees for licensing and
support and technical assistance. We expect any revenue from this alternate
strategy to be far less than our active participation in the collecting and
archiving of meter data and the ancillary services described in greater detail
above.
Competition
Many companies have developed data transmission products designed to meet
the growing demand for AMR solutions. We anticipate that our H-Net(TM) system
will compete on the basis of features, price, quality, reliability, name
recognition, product breadth and technical support and service. We believe that
we generally will be competitive in each of these areas. However, many of our
existing and potential competitors have significantly more financial,
engineering, product development, manufacturing and marketing resources than we
have. We cannot assure you that our competitors will not introduce comparable or
superior products incorporating more advanced technology at lower prices, or
that other changes in market conditions or technology will not adversely affect
our ability to compete successfully in the future. We perceive the following
companies as being the principal competition to our AMR solution in the form of
our H-Net(TM) system:
Itron Inc. Itron provides and has installed AMR systems
worldwide. Itron provides "drive-by" automated
meter reading equipment.
CellNet Data Systems CellNet provides fixed-network wireless AMR systems
and has installed systems in Kansas City,
Minneapolis, San Francisco, Indianapolis, and
through Puget Sound Power. CellNet has technology
alliances with the major energy meter manufacturers
and was recently acquired by Schlumberger.
Schlumberger Ltd. Schlumberger's Resource Management Systems Division
has deployed meter reading systems that include
hand-held meter reading devices. Schlumberger
recently acquired CellNet and Metricom.
Hunt Technologies, Inc. Hunt provides power line carrier AMR systems with
capabilities including substation switching. The
market niche for Hunt's AMR systems is rural
electric cooperatives.
<page>
Metricom Corporation Metricom provides wireless communication networks with
fixed-wireless networks installed in the San Francisco Bay Area, Seattle,
Washington, D.C., and at universities. Metricom and Whisper Communications, Inc.
have formed an alliance to provide AMR systems. Their AMR systems are installed
at KN Energy and Pacific Gas & Electric Company. Metricom recently was acquired
by Schlumberger.
We believe that we will be the only company able to collect data transmitted
from H-Net(TM)-equipped meters, thereby ensuring our competitive advantage once
we are able to achieve sufficient proliferation of our H-Net(TM)- equipped
meters.
Customers
We do not currently have revenue-generating customers. 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. Accordingly, we have not earned any significant
revenues from the sale of our H-Net(TM) system. We anticipate that once we
commercially produce and install our H-Net(TM) system, our customers will
include energy meter manufacturers, energy service providers, utility companies
and end-users of energy.
Intellectual Property
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary rights. However,
although our H-Net(TM) system and its constituent components could benefit from
patent protection, we have chosen to retain the proprietary rights associated
with our H-Net(TM) system predominantly as trade secrets. Although we currently
rely to a great extent on trade secret protection for much of our technology, we
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop comparable or
superior technologies or obtain unauthorized access to our proprietary
technology.
We own, license or have otherwise obtained the right to use certain
technologies incorporated in our H-Net(TM) system. We may receive infringement
claims from third parties relating to our products and technologies. In those
cases, we intend to investigate the validity of the claims and, if we believe
the claims have merit, to respond through licensing or other appropriate
actions. To the extent claims relate to technology included in components
purchased from third-party vendors for incorporation into our products, we would
forward those claims to the appropriate vendor. If we or our component
manufacturers are unable to license or otherwise provide any necessary
technology on a cost-effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs defending any
legal action taken against us.
Employees
We have four full time employees and a six person advisory board. Our
employees are involved in executive, corporate administration, operations, and
sales and marketing functions. We also use the services of outside consultants
and experts on many of our projects to help reduce costs. We consider our
relations with our employees to be good. None of our employees is represented by
a labor union.
<page>32
Property
Our principal center of operations is located at 24730 Avenue Tibbitts,
Suite 130, Valencia, California 91355. This 1,000 square foot space is leased
for approximately $1,260 per month. We believe that our facilities are adequate
for our needs for the near future.
Legal Proceedings
We are not a party to any material pending legal proceedings. We are subject
to legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse effect on our financial position, results of operations or cash flows.
<page>33
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of ConectiSys and their ages,
positions, business experience and education as of September 1, 2004 are as
follows:
Name Age Position
---- --- --------
Robert A. Spigno (1)(2) 50 Chairman of the Board, Chief Executive Officer and
Director
Lawrence Muirhead (1)(2) 45 Chief Technology Officer and Director
Patricia A. Spigno 46 Chief Financial Officer, Treasurer and Secretary
Melissa McGough (1) 27 Corporate Administrator and Director
_______________
(1) Member of Stock Option Committee.
(2) Member of Nominating Committee.
All directors hold office until the next annual meeting of shareholders and
until their respective successors are elected or until their earlier death,
resignation or removal. Each officer of ConectiSys serves at the discretion of
the board of directors. Robert A. Spigno and Patricia A. Spigno were formerly
husband and wife. There are no other family relationships between or among any
other directors, director nominees or executive officers of ConectiSys.
Business Experience
Directors
Robert A. Spigno has served as our Chief Executive Officer, Chairman of the
Board and as a member of our board of directors since August 1995. Prior to that
time, Mr. Spigno was President, for more than a decade, of S.W. Carver Corp., a
company founded by he and his former wife, Patricia A. Spigno, that was a
commercial builder of residential homes. Mr. Spigno has over 25 years of
experience in executive management and majority ownership of several privately
held companies.
Lawrence Muirhead has served as our Chief Technical Officer and as a member
of our board of directors since October 1997. Prior to that time, Mr. Muirhead
worked for TRW. Mr. Muirhead has over 18 years of engineering and research and
development experience in the aerospace industry, including over 13 years of
experience with TRW, where helped lead new product development and deployment.
Mr. Muirhead holds a B.S. degree in physics and a B.A. degree in mathematics
from the University of California, Santa Barbara, and holds an M.S. degree in
physics from the California Institute of Technology.
Melissa McGough has served as a member of our board of directors since
November 1999. Ms. McGough has also been an employee since December 1998 and
whose current responsibilities include public relations and management of our
daily office activities. Prior to that time, Ms McGough was a student.
<page>34
Executive Officer
Patricia A. Spigno has served as our Chief Financial Officer and Secretary
since August 1995 and as a member of our board of directors from August 1995
until October 1997. Prior to that time, Ms. Spigno was Chief Financial Officer
and the head of administration of S.W. Carver Corp., a company founded by her
and her former husband, Robert A. Spigno. Ms. Spigno has over 22 years of
experience in accounting and asset management.
Advisors to Our Board of Directors
Rodney W. Lighthipe has served as an advisor to our board of directors since
April 2001. Mr. Lighthipe also served as our President from September 2000 until
his resignation in September 2001. Prior to that time, Mr. Lighthipe served as
Director of Research for San Diego Gas & Electric from 1992 until 1996 and was
responsible for the development and deployment of new technologies. Mr.
Lighthipe was Research Manager for Southern California Edison from 1980 to 1987
and organized an international consortium of companies for the design,
construction and operation of the world's largest coal gasification plant. Mr.
Lighthipe was also Power Contracts Manager for Southern California Edison from
1974 until 1980 during which he opened new transmission paths throughout the
Western United States and Canada for the purchase and sale of bulk electric
power. Some of Mr. Lighthipe's Major projects included the installation of
photovoltaics in remote areas and the launch of a "smart card" project employing
residential telephone systems. Mr. Lighthipe has also acted as a consulting
engineer in the energy and telecommunications industries and served two tours of
duty in Vietnam as a Lieutenant in the United States Navy.
Dr. Hugo Pomrehn has served as an advisor to our board of directors since
April 2001. On June 28, 1992, Dr. Pomrehn was nominated by former President
George Bush to serve as the Under Secretary of Energy, and was confirmed by the
United States Senate for that position on September 29, 1992. As Under Secretary
to Admiral James Watkins, Dr. Pomrehn was the third-ranking official at the U.S.
Department of Energy, which employed approximately 170,000 personnel and had an
annual budget of $20 billion. Dr. Pomrehn's professional career covers a broad
spectrum of involvement with energy and environmental technologies. He has been
engaged in engineering and management consulting in the energy and nuclear
fields for more than 30 years and was a Vice President of the Bechtel
Corporation.
Aaron R. Sokol has served as an advisor to our board of directors since
April 2001. Mr. Sokol is a Vice President at Deutsche Bank Alex Brown where his
responsibilities include providing innovative and customized solutions to
clients in order to preserve and enhance their wealth. He is also responsible
for new business development as well as global financial advisory services for
existing and prospective clients. Mr. Sokol joined Deutsche Bank Alex Brown from
Los Angeles-based Scudder Kemper Investments, Inc. Mr. Sokol has also served as
an Assistant Vice President at First Chicago Capital Markets, Inc., and prior to
that, worked in the corporate finance department at Nations Bank Capital
Markets, Inc. Mr. Sokol holds a J.D. degree from Boston University School of Law
and a M.B.A. in Finance and New Venture Management from the University of
Southern California.
Larry W. Siler has served as an advisor to our board of directors since
April 2001. Mr. Siler is currently Manager of Fuel Transportation for Edison
Mission Energy in Chicago, Illinois. Mr. Siler was the Coal Supply
Superintendent for Commonwealth Edison Company in Chicago from 1988 until 1999.
From 1986 until 1988 Mr. Siler was a management and engineering consultant in
Austin, Texas. He also held positions as the Fuels Manager, Engineering
Supervisor, Staff Engineer and Fuels Engineer for the Lower Colorado River
Authority from 1973 until 1986.
<page>35
Tod O'Connor has served as an advisor to our board of directors since April
2001. Mr. O'Connor was Director of Government Relations for two Edison
International Inc. subsidiaries, Southern California Edison RD&D Department and
Edison Technology Solutions from 1993 until 1999. Mr. O'Connor also was employed
by Pacific Enterprises and its subsidiary, Southern California Gas Co. from 1989
until 1993, and MARC Associates' Status Group in Washington, D.C. from 1988
until 1989. Mr. O'Connor was a Legislative Aide in the United States House of
Representatives where he advised House Speaker Thomas P. (Tip) O'Neill on
pending legislation and proposed federal regulations, as well as the Democratic
Steering and Policy Committee from 1980 until 1981. Mr. O'Connor is currently
President of O'Connor Consulting Services, Inc. in Woodland Hills, California.
Mr. O'Connor holds a L.L.M. degree in labor law from Georgetown University Law
Center, Washington, D.C., and a J.D. degree from Suffolk University Law School.
Dr. Fredric Brauner was appointed to serve as an advisor to our board of
directors in October 2003. Dr. Brauner is a doctor of medicine, specializing in
dermatology. He graduated from the University of Vienna and became a doctor in
1977. Dr. Brauner, took over his father's practice in 1983 at the University
Clinic of Dermatology in Vienna. Dr. Brauner is a key investor in ConectiSys and
is leading our efforts to expand our H-Net(TM) system to fit the European
marketplace.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive
officers and directors, and persons who beneficially own more than 10% of a
registered class of our common stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission.
These officers, directors and stockholders are required by the Securities and
Exchange Commission regulations to furnish us with copies of all such reports
that they file.
Based solely upon a review of copies of these reports furnished to us during
2003 and thereafter, or written representations received by us from reporting
persons that no other reports were required, we believe that all Section 16(a)
filing requirements applicable to our reporting persons during 2003 were
complied with, except as described below.
The following individuals did not timely file the following numbers of Forms
4 to report the following numbers of transactions: Mr. Robert Spigno - 2
reports, 2 transactions; Mr. Lawrence Muirhead - 1 report, 1 transaction; and
Melissa McGough - 1 report, 1 transaction.
Codes of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics
that applies to all of our directors, officers and employees and an additional
Code of Business Ethics that applies to our Chief Executive Officer and our
Senior Financial Officers.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K
relating to amendments to or waivers from provision of these codes that relate
to one or more of the items set forth in Item 406(b) of Regulation S- K, by
describing on our Internet website, within five business days following the date
of a waiver or a substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to whom the waiver
was granted.
Information on our Internet website is not, and shall not be deemed to be, a
part of this prospectus or incorporated into any other filings we make with the
Securities and Exchange Commission.
<page>36
Compensation of Executive Officers
The Summary Compensation Table below provides information concerning the
annual and long-term compensation for services in all capacities as an employee
of ConectiSys of our Chief Executive Officer, our Chief Technology Officer and
our Chief Financial Officer, or the named executives, during the years ended
September 30, 2003, 2002 and 2001. There were no other executive officers whose
annual salary and bonus compensation exceeded $100,000 during the year ended
September 30, 2003.
Summary Compensation Table
<table>
Long-Term
Compensation
------------
Awards
------------
Annual Compensation Securities
Name and -------------------- Underlying All Other
Principal Position Year Salary($) Bonus($)(1) Options(#) Compensation ($)
- ------------------- ------- --------- ----------- ------------ ----------------
Robert A. Spigno, 2003 $160,000 $80,000 -- --
Chief Executive Officer 2002 $160,000 $80,000 -- --
2001 $160,000 $80,000 6,453,654 --
Lawrence Muirhead, 2003 $150,000 -- -- --
Chief Technology Officer 2002 $150,000 -- -- --
2001 $150,000 -- 2,000,000 --
Patricia A. Spigno, 2003 $ 80,000 $40,000 -- --
Chief Financial Officer 2002 $ 80,000 $40,000 -- --
and Secretary 2001 $ 80,000 $40,000 500,000 --
_______________
</table>
(1) Amounts represent bonus earned, but deferred and recorded on the books and
records of ConectiSys as accrued compensation. Amounts are payable in
common stock of ConectiSys based on a conversion price equivalent to 50%
of the average of the closing bid and asked prices of a share of
ConectiSys common stock for the 30 days prior to the end of the year in
which such bonus was earned.
Stock Option Grants in 2003
In fiscal 2003, no options or stock appreciation rights were granted to the
named executives.
<page>37
Option Exercises and Fiscal Year-End Values
The following table sets forth the number of shares acquired and value
realized upon exercise of options during the fiscal year ended September 30,
2003 and the number of exercisable and unexercisable in-the-money stock options
and their values at September 30, 2003 for the named executives. An option is
"in-the-money" if the fair market value for the underlying securities exceeds
the exercise price of the option.
<table>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value ($)of Unexercised
Shares Unexercised Options In-the-Money Options at
Acquired on Value September 30, 2003 September 30, 2003 (1)
Name Exercise Realized ($) Exercisable(#) Unexercisable(#) Exercisable Unexercisable
--------------------- ------------ ------------ -------------- ---------------- -------------- ----------------
Robert A. Spigno --- --- 6,453,654 --- --- ---
Lawrence Muirhead --- --- --- 2,000,000 --- ---
Patricia Spigno --- --- 500,000 --- --- ---
_______________
</table>
(1) The closing sale price of our common stock on the OTC Bulletin Board(R) as
of September 30, 2003 was $.0044.
Long-Term Incentive Plan Awards
In fiscal 2003, no awards were given to named executives under long-term
incentive plans.
Compensation of Directors
Our directors do not receive any compensation in their capacity as members
of the board of directors, but may be reimbursed for reasonable expenses
incurred in connection with attendance of meetings of the board of directors.
Repricing of Options and SARs
Except as specified below, no adjustments to or repricing of stock options
or stock appreciation rights previously awarded to the named executives occurred
in fiscal 2003.
On December 30, 2003, we repriced Robert Spigno's fully-vested option to
purchase up to 500,000 shares of Class B Preferred Stock from $.50 per share to
$.05 per share.
<page>38
Equity Compensation Plan Information
The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under our Amended Non-
Qualified Stock Option and Stock Bonus Plan as well as stock options, warrants
and rights issued outside of any formal plan as of September 30, 2003.
Number of Securities Weighted Average Number of
to be Issued Upon Exercise Exercise Price of Securities
of Outstanding Options, Outstanding Remaining
Warrants Options, Warrants Available for
Plan Category and Rights(1) and Rights Future Issuance
- ------------------- -------------------- ------------------ -----------------
Equity compensation
plans approved by
security holders N/A N/A N/A
Equity compensation
plans not approved
by security holders 8,807,154(2) $0.28 N/A
Total 8,807,154 $0.28 N/A
_______________
(1) Number of shares is subject to adjustment for changes in capitalization
for stock splits, stock dividends and similar events.
(2) Represents 5,000,000 shares of common stock underlying stock options,
warrants and rights issued under our Amended Non-Qualified Stock Option
and Stock Bonus Plan and 3,807,154 shares of common stock underlying stock
options, warrants and rights issued outside of any formal plan.
Our Amended Non-Qualified Stock Option and Stock Bonus Plan permits grants
of stock bonuses and non-qualified stock options. Vesting periods under our
Amended Non-Qualified Stock Option and Stock Bonus Plan vary from person to
person, and options under the plan are exercisable subject to certain standard
conditions.
Stock Option Plans
General
Our Amended Non-Qualified Stock Option and Stock Bonus Plan, including the
Non-Qualified Stock Option and Stock Bonus Plans it amends, or the Plan, was
adopted and approved by our board of directors effective as of September 11,
2001. The Plan, is designed to enable us to grant compensation and offer an
incentive-based compensation system to consultants who do business with
ConectiSys. The Plan provides for the grant of nonqualified stock options. As of
September 1, 2004, options to purchase a total of 5,000,000 shares of common
stock were outstanding under the Plan, and no options to purchase shares of
common stock were available for issuance under the Plan.
We filed a registration statement on Form S-8 on September 21, 2001 covering
the shares of common stock subject to the Plan.
<page>39
Shares Subject to the Plan
A total of 5,000,000 shares of common stock are authorized for issuance
under the Plan. Any shares of common stock that are subject to an award but are
not used because the terms and conditions of the award are not met, or any
shares that are used by participants to pay all or part of the purchase price of
any option, may again be used for awards under the Plan.
Administration
The Plan is administered by a committee of not less than three persons
appointed by the board of directors, each of whom must be a director of
ConectiSys. The board of directors also may act as the committee at any time or
from time to time.
The committee is empowered to select those eligible persons to whom stock
and options shall be granted under the Plan, to determine the time or times at
which each option shall be granted and the number of shares to be subject to
each option, and to fix the time and manner in which each such option may be
exercised, including the exercise price and option period, and other terms and
conditions of such options, all subject to the terms and conditions of the Plan.
The committee has sole discretion to interpret and administer the Plan, and its
decisions regarding the Plan are final.
The Plan may be wholly or partially amended or otherwise modified, suspended
or terminated at any time and from time to time by the board of directors. The
board of directors may not materially impair any outstanding options without the
express consent of the optionee. No option may be granted under the Plan after
January 31, 2006.
Option Terms
Options granted under the Plan must have an exercise price of not less than
85% of the fair market value of the common stock on the date the option is
granted.
Options may be exercised during a period of time fixed by the committee
except that no option may be exercised more than five years after the date of
grant. In the discretion of the committee, payment of the purchase price for the
shares of stock acquired through the exercise of an option may be made in cash,
shares of our common stock or a combination of cash and shares of our common
stock.
Federal Income Tax Consequences
Holders of non-qualified options do not realize income as a result of a
grant of the option, but normally realize compensation income upon exercise of a
non-qualified option to the extent that the fair market value of the shares of
common stock on the date of exercise of the non-qualified option exceeds the
exercise price paid. ConectiSys will be required to withhold taxes on ordinary
income realized by an optionee upon the exercise of an option under the Plan.
In the case of an optionee subject to the "short-swing" profit recapture
provisions of Section 16(b) of the Exchange Act, the optionee realizes income
only upon the lapse of the six-month period under Section 16(b), unless the
optionee elects to recognize income immediately upon exercise of his or her
option.
<page>40
Indemnification of Directors and Officers
The Colorado Business Corporation Act, or CBCA, requires that each director
discharge his duties to ConectiSys in good faith, with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner that he reasonably believes to be in the best interests of
ConectiSys. Generally, a director will not be liable to ConectiSys or its
shareholders, for any action he takes or omits to take as a director if, in
connection with such action or omission, he performed the duties of his position
in compliance with the standards described above.
Our Articles of Incorporation provide that ConectiSys may indemnify any
director or officer of ConectiSys to the full extent permitted by Colorado law.
Under the CBCA, except for the situation described below, a corporation may
indemnify a person made a party to a proceeding because the person is or was a
director against liability incurred in the proceeding if:
o the person conducted himself in good faith;
o the person reasonably believed, in the case of conduct in an official
capacity with ConectiSys, that his conduct was in the best interests
of ConectiSys and, in all other cases, that his conduct was at least
not opposed to the best interests of ConectiSys; and
o in the case of any criminal proceeding, the person had no reasonable
cause to believe his conduct was unlawful.
Under the CBCA, ConectiSys may not indemnify a director as described above:
o in connection with a proceeding by or in the right of ConectiSys, in
which the director was adjudged liable to ConectiSys; or
o in connection with any other proceeding charging that the director
derived an improper personal benefit, whether or not involving action
in an official capacity, in which proceeding the director was adjudged
liable on the basis that he derived an improper personal benefit.
Under the CBCA, ConectiSys is required to indemnify any director who is
wholly successful on the merits or otherwise, in the defense of any proceeding
to which the director was a party because the person is or was a director,
against reasonable expenses incurred by him in connection with the proceeding.
Section 2115 of the California General Corporation Law, or the California
Corporations Code, provides that corporations such as ConectiSys that are
incorporated in jurisdictions other than California and that meet various tests
are subject to several provisions of the California Corporations Code, to the
exclusion of the law of the jurisdiction in which the corporation is
incorporated. We believe that as of September 30, 2003, we met the tests
contained in Section 2115. Consequently, we are subject to, among other
provisions of the California Corporations Code, Section 317 which governs
indemnification of directors, officers and others. Section 317 generally
eliminates the personal liability of a director for monetary damages in an
action brought by or in the right of ConectiSys for breach of a director's
duties to ConectiSys or our shareholders except for liability:
o for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
<page>41
o for acts or omissions that a director believes to be contrary to the best
interests of ConectiSys or our shareholders or that involve the absence of
good faith on the part of the director;
o for any transaction for which a director derived an improper personal
benefit;
o for acts or omissions that show a reckless disregard for the director's
duty to ConectiSys or our shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to ConectiSys
or our shareholders;
o for acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to ConectiSys or our
shareholders; and
o for engaging in transactions described in the California Corporations Code
or California case law which result in liability, or approving the same
kinds of transactions.
To the extent indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
ConectiSys under the above provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
Board Committees
Our board of directors has a Stock Option Committee and a Nominating
Committee. Our board of directors does not have an Audit Committee. In the
absence of an Audit Committee, the entire board of directors intends to satisfy
the duties of that committee.
Stock Option Committee. Our Stock Option Committee makes recommendations to
our board of directors concerning incentive compensation for employees and
consultants of ConectiSys and selects the persons entitled to receive options
under our stock option plans and establishes the number of shares, exercise
price, vesting period and other terms of the options granted under those plans.
The Stock Option Committee currently consists of Robert A. Spigno, Lawrence
Muirhead and Melissa McGough. During 2003, the Stock Option Committee held four
meetings and did not take action by written consent on any occasion. No
executive officer of ConectiSys has served as a director or member of the
compensation committee of any other entity whose executive officers served as a
director of ConectiSys.
Audit Committee. We do not currently have an Audit Committee. In addition,
having no Audit Committee, we do not have an Audit Committee financial expert.
As a small, development-stage company, it has been exceedingly difficult for
us to attract and retain an independent member of our board of directors, who
would qualify as an Audit Committee financial expert, to serve as the sole
member of the Audit Committee of our board of directors. We plan to form an
Audit Committee consisting solely of one or more independent members of our
board of directors, at least one of whom will qualify as an Audit Committee
financial expert under the rules and regulations of the Securities and
Exchange Commission, prior to the end of our current fiscal year in September
2004. Our Nominating Committee assists our board of directors in the selection
of nominees for election to the board. The committee determines the required
selection criteria and qualifications of director nominees based upon the needs
of ConectiSys at the time nominees are considered and recommends candidates to
be nominated for election to the board.
<page>42
Nominating Committee. Our Nominating Committee currently consists of two
directors, Mr. Robert A. Spigno, who serves as Chairman, and Mr. Lawrence
Muirhead, neither of whom is "independent" under the rules and regulations of
the Securities and Exchange Commission or under the current Nasdaq listing
standards. We intend to reconstitute our Nominating Committee with one or more
independent members of our board of directors prior to the end of our current
fiscal year in September 2004. Our Nominating Committee assists our board of
directors in the selection of nominees for election to the board. The committee
determines the required selection criteria and qualifications of director
nominees based upon the needs of ConectiSys at the time nominees are considered
and recommends candidates to be nominated for election to the board.
Compensation Committee Interlocks and Insider Participation
No member of our board of directors has a relationship that would constitute
an interlocking relationship with executive officers and directors of another
entity.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In October 1995, our board of directors set the compensation for Robert A.
Spigno, our Chairman of the Board and Chief Executive Officer. Mr. Spigno has
executed an employment agreement with ConectiSys effective October 2, 1995, as
amended by employment agreement amendments effective July 24, 1996, August 11,
1997, September 1, 1999 and March 27, 2000 that provide for annual salary of
$160,000 and a bonus of 50% of Mr. Spigno's annual salary, with the bonus
payable in common stock of ConectiSys.
In August 1998, our board of directors set the compensation for Lawrence
Muirhead, our Chief Technology Officer. Mr. Muirhead has executed an employment
agreement with ConectiSys effective August 1, 1998, that provides for annual
salary compensation of $150,000. On November 22, 1999, Mr. Muirhead was granted
an option initially expiring December 31, 2002 to purchase up to 2,000,000
shares of common stock at an exercise price of $.50 per share, which was the
closing price of a share of our common stock on that date. This option vests
upon the achievement of certain specified performance criteria. On January 6,
2003, we extended the expiration date of this option to December 31, 2004.
In October 1995, our board of directors set the compensation for Patricia A.
Spigno, our Chief Financial Officer and Secretary. Ms. Spigno has executed an
employment agreement with ConectiSys effective October 2, 1996, as amended by
employment agreement amendments effective July 24, 1996, September 1, 1999 and
March 27, 2000 that provide for annual salary of $80,000 and a bonus of 50% of
Ms. Spigno's annual salary, with the bonus payable in common stock of
ConectiSys.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, our board of directors set the compensation for Robert A.
Spigno, our Chairman of the Board and Chief Executive Officer. Mr. Spigno has
executed an employment agreement with ConectiSys effective October 2, 1995, as
amended by employment agreement amendments effective July 24, 1996, August 11,
1997, September 1, 1999 and March 27, 2000 that provide for annual salary of
$160,000 and a bonus of 50% of Mr. Spigno's annual salary, with the bonus
payable in common stock of ConectiSys.
In August 1998, our board of directors set the compensation for Lawrence
Muirhead, our Chief Technology Officer. Mr. Muirhead has executed an employment
agreement with ConectiSys effective August 1, 1998, that provides for annual
salary compensation of $150,000. On November 22, 1999, Mr. Muirhead was granted
an option initially expiring December 31, 2002 to purchase up to 2,000,000
shares of common stock at an exercise price of $.50 per share, which was the
closing price of a share of our common stock on that date. This option vests
upon the achievement of certain specified performance criteria. On January 6,
2003, we extended the expiration date of this option to December 31, 2004.
<page>43
In October 1995, our board of directors set the compensation for Patricia A.
Spigno, our Chief Financial Officer and Secretary. Ms. Spigno has executed an
employment agreement with ConectiSys effective October 2, 1996, as amended by
employment agreement amendments effective July 24, 1996, September 1, 1999 and
March 27, 2000 that provide for annual salary of $80,000 and a bonus of 50% of
Ms. Spigno's annual salary, with the bonus payable in common stock of
ConectiSys.
On September 1, 2002, we executed a promissory note due September 1, 2003 in
favor of Robert Spigno in the principal amount of $87,100 representing amounts
borrowed from Mr. Spigno prior to that date. On September 1, 2003 we executed a
replacement promissory note in favor of Mr. Spigno in the amount of $36,000. As
of September 30, 2003, approximately $36,920 of principal and accrued and unpaid
interest under this note remained outstanding. As of September 1, 2004,
approximately $36,400 of principal and accrued and unpaid interest under this
note remained outstanding. The loan balance is currently due on demand and
accrues interest at an annual rate of 18%.
On October 1, 2002, we owed Patricia A. Spigno approximately $8,140
resulting from cash advances, other borrowings and related accrued interest. On
September 1, 2003 we executed a replacement promissory note in favor of Ms.
Spigno in the amount of $50,000. We borrowed additional funds from Ms. Spigno
resulting in approximately $52,170 owed to Ms. Spigno as of September 30, 2003.
As of September 1, 2004, approximately $42,700 was owed to Ms. Spigno. The loan
balance is currently due on demand and accrues interest at an annual rate of
18%.
In October 2002, Laurus Master Fund transferred into its name 279,539 shares
of our common stock pledged by Robert Spigno as security for a loan made by
Laurus to us in April 2001 in the original principal amount of $300,000.
In October 2002, Laurus Master Fund transferred into its name 1,458,059
shares of our common stock pledged by Patricia Spigno as security for a loan
made by Laurus to us in April 2001 in the original principal amount of $300,000.
In November 2002, Laurus Master Fund transferred into its name 1,556,346
shares of our common stock pledged by Robert Spigno as security for a loan made
by Laurus to us in April 2001 in the original principal amount of $300,000.
In November 2002, we issued 636,886 shares of common stock to Lawrence
Muirhead to reimburse him for 636,886 shares pledged by him as security for a
loan made by Laurus Master Fund to us in April 2001 in the original principal
amount of $300,000, which pledged shares were transferred by Laurus into its
name in connection with a default on that loan.
In November 2002, we issued 2,630,742 shares of common stock to Robert
Spigno to reimburse him for 2,630,742 shares pledged by him as security for a
loan made by Laurus Master Fund to us in April 2001 in the original principal
amount of $300,000, which pledged shares were transferred by Laurus into its
name in connection with a default on that loan.
In November 2002, we issued 1,458,059 shares of common stock to Patricia
Spigno to reimburse her for 1,458,059 shares pledged by her as security for a
loan made by Laurus Master Fund to us in April 2001 in the original principal
amount of $300,000, which pledged shares were transferred by Laurus into its
name in connection with a default on that loan.
On December 12, 2002, we issued 250,000 shares of common stock valued at
$1,250 to Melissa McGough as bonus compensation.
<page>44
Effective December 31, 2002, Robert Spigno earned bonus compensation under
his employment arrangement with ConectiSys in the amount of $80,000 payable in
common stock of ConectiSys based on a conversion price equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2002. The number of shares of common stock of
ConectiSys issuable in connection with this bonus was 8,000,000.
Effective December 31, 2002, Patricia Spigno earned bonus compensation under
her employment arrangement with ConectiSys in the amount of $40,000 payable in
common stock of ConectiSys based on a conversion price equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2002. The number of shares of common stock of
ConectiSys issuable in connection with this bonus was 4,000,000.
In January 2003, we issued 2,361,814 shares of common stock to Robert Spigno
to reimburse him for 2,361,814 shares pledged by him as security for a loan made
by Mercator Momentum Fund to us in February 2002 in the original principal
amount of $340,000, which pledged shares were transferred by Mercator into its
name in connection with a default on that loan.
In January 2003, we issued 47,521 shares of common stock to Lawrence
Muirhead to reimburse him for 47,521 shares pledged by him as security for a
loan made by Laurus Master Fund to us in April 2001 in the original principal
amount of $300,000, which pledged shares were transferred by Laurus into its
name in connection with a default on that loan.
On January 6, 2003, we extended to December 31, 2004, the expiration date of
an option granted to Mr. Muirhead on November 22, 1999 that initially expired
December 31, 2002, to purchase up to 2,000,000 shares of common stock at an
exercise price of $.50 per share, which was the closing price of a share of our
common stock on the date of grant. This option vests upon the achievement of
certain specified performance criteria.
On January 6, 2003, we extended to December 31, 2004, the expiration date of
an option granted to Mr. Spigno on November 22, 1999 that initially expired
December 31, 2002, to purchase up to 500,000 shares of common stock at an
exercise price of $.15 per share, which was 50% of the closing price of a share
of our common stock on the date of grant. This option vested immediately.
On January 6, 2003, we extended to December 31, 2004, the expiration date of
an option granted to Ms. McGough on September 1, 1999 that initially expired
December 31, 2002, to purchase up to 100,000 shares of common stock at an
exercise price of $.38 per share, which was 50% of the closing price of a share
of our common stock on the date of grant. This option vested immediately.
On December 10, 2003, Mr. Spigno exercised a portion of an option to
purchase 15,845 shares of Class A Preferred Stock for $1.00 per share, which was
the estimated value on that date.
Effective December 31, 2003, Robert Spigno earned bonus compensation under
his employment arrangement with ConectiSys in the amount of $80,000 payable in
common stock of ConectiSys based on a conversion price equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2003. The number of shares of common stock of
ConectiSys issuable in connection with this bonus was 8,000,000.
Effective December 31, 2003, Patricia Spigno earned bonus compensation under
her employment arrangement with ConectiSys in the amount of $40,000 payable in
common stock of ConectiSys based on a conversion price equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
<page>45
the 30 days prior to December 31, 2003. The number of shares of common stock of
ConectiSys issuable in connection with this bonus was 4,000,000.
On January 6, 2004, we repriced Robert Spigno's fully-vested option to
purchase up to 500,000 shares of Class B Preferred Stock from an exercise price
of $0.50 per share to an exercise price of $.05 per share. The exercise price of
$.05 per share equates to $.005 per share of common stock if the Class B
Preferred Stock were converted, which was in excess of the price of our common
stock on that date. This option was granted on September 11, 2001 and vested
immediately with an initial exercise price of $2.50 per share which equaled $.25
per share of common stock if the Class B Preferred Stock were converted, which
was the price of our common stock on that date. On June 28, 2002 this option was
repriced from an exercise price of $2.50 per share to an exercise price of $.50
per share, which was in excess of the price of our common stock on that date.
We are or have been a party to various employment, consulting and
compensation arrangements with related parties, as more particularly described
above under the headings "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," "Compensation of Executive Officers" and
"Compensation of Directors."
PRINCIPAL AND SELLING SECURITY HOLDERS
As of September 1, 2004, a total of 1,031,432,178 shares of our common stock
were outstanding. The following table sets forth information as of that date
regarding the beneficial ownership of our common stock both before and
immediately after the offering by:
o each person known by us to own beneficially more than five percent, in the
aggregate, of the outstanding shares of our common stock as of the date of
the table;
o each selling security holder;
o each of our directors;
o each executive officer named in the Summary Compensation Table contained
elsewhere in this prospectus; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 promulgated
by the Securities and Exchange Commission, and generally includes voting or
investment power with respect to securities. Except as indicated in the
footnotes to the table, we believe each holder possesses sole voting and
investment power with respect to all of the shares of common stock owned by that
holder, subject to community property laws where applicable. In computing the
number of shares beneficially owned by a holder and the percentage ownership of
that holder, shares of common stock subject to options or warrants or underlying
notes or preferred stock held by that holder that are currently exercisable or
convertible or are exercisable or convertible within 60 days after the date of
the table are deemed outstanding. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person or group.
Other than 12,500,000 shares of common stock issuable in connection with the
exercise of certain warrants, which shares have previously been registered on
Registration Statements No. 333-87062 and 333-102781, all of the shares of
common stock being offered under this prospectus are issuable upon conversion of
debentures or upon exercise of warrants that were acquired by the selling
security holders from us in connection with private placements that we made
<page>46
effective as of April 19, 2004 and June 30, 2004 or in connection with an
additional funding tranche, as described below, that the debenture investors
have committed to make. In the private placement effective April 19, 2004, we
issued $250,000 in principal amount of secured convertible debentures due April
19, 2006 to four accredited investors, or the debenture investors, in exchange
for gross proceeds of $250,000 in cash. In connection with that private
placement, we also issued warrants to purchase up to an aggregate of 750,000
shares of our common stock to the debenture investors. In the private placement
effective June 30, 2004, we issued $625,000 in principal amount of secured
convertible debentures due June 30, 2006 to the debenture investors, in exchange
for gross proceeds of $625,000 in cash. In connection with that private
placement, we also issued warrants to purchase up to an aggregate of 1,875,000
shares of our common stock to the debenture investors. Upon declaration of the
effectiveness by the Securities and Exchange Commission of the registration
statement of which this prospectus is a part, the debenture investors have
committed to purchase an additional $625,000 of our secured convertible
debentures and related warrants to purchase up to an aggregate of 1,875,000
shares of our common stock.
The secured convertible debentures bear interest at an initial rate of 12%
per year. The initial conversion price of the debentures is equal to the lesser
of (i) 40% of the average of the three lowest intraday trading prices of a share
of our common stock for the twenty trading days immediately preceding a
conversion date, and (ii) $.005. The conversion price also is subject to
customary anti-dilution adjustments in connection with mergers, acquisitions,
stock splits, dividends and the like.
We agreed to register for resale a total of 200% of the shares of common
stock that may be issuable upon conversion of the convertible debentures and
related warrants. The shares of common stock being offered under this prospectus
include shares of common stock issuable upon conversion of the secured
convertible debentures and upon exercise of the related warrants without regard
to the exercise limitations described below.
The terms of the secured convertible debentures and the warrants prohibit
conversion of the secured convertible debentures or exercise of the warrants to
the extent that conversion of the debentures would result in the debenture
investor, together with its affiliates, beneficially owning in excess of 4.9% of
our outstanding shares of common stock, and to the extent that exercise of the
warrants would result in the debenture investor, together with its affiliates,
beneficially owning in excess of 4.9% of our outstanding shares of common stock.
A debenture investor may waive the 4.9% limitation upon 60 days' prior written
notice to us. Also, these limitations do not preclude a debenture investor from
converting or exercising a secured convertible debenture or warrant and selling
shares underlying the secured convertible debenture or warrant in stages over
time where each stage does not cause the investor and its affiliates to
beneficially own shares in excess of the limitation amounts. Despite the
limitations contained in the secured convertible debentures and warrants, the
number of shares shown in the table as beneficially owned by each debenture
investor prior to this offering is in excess of 4.9% of the shares of our common
stock outstanding based on the date of the table. The number of shares being
offered by each debenture investor under this prospectus is in excess of the
amount of shares issuable to that investor without such investor's waiver of the
conversion and exercise limitations discussed above.
We have agreed to pay expenses, other than broker discounts and commissions,
if any, in connection with this prospectus. We have agreed with some of the
selling security holders to prepare and file all amendments and supplements to
the registration statement of which this prospectus is a part as may be
necessary under the rules and regulations of the Securities Act of 1933 to keep
it effective until the earlier of:
o the date that all shares of common stock offered under this prospectus may
be resold by those holders in a public transaction without volume
limitations or other material restrictions without registration under the
<page>47
Securities Act, including without limitation, under Rule 144 under the
Securities Act; and
o the date that all shares of common stock offered by those holders under
this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
<page>48
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders listed in the table below.
<Table>
Name and Address of Title of Shares Beneficially Owned Shares Shares Beneficially
of Beneficial Owner (1)(2) Class Prior to the Offering Being Offered Owned After the Offering(3)
Number Number % of Class
__________________________ ________ _________________________ _____________ __________________________
Robert A. Spigno.......... Common 31,123,164(4) -- 31,123,164 *
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 100.00%
Patricia A. Spigno........ Common 12,267,340(7) -- 12,267,340 *
Lawrence Muirhead......... Common 971,393 -- 971,393 *
Melissa McGough........... Common 454,138(8) -- 454,138 *
AJW Qualified Partners, LLC. Common 1,368,104,180(9) 1,368,104,180(9) 227,684,202(9) 4.9%
New Millennium Capital
Partners II, LLC Common 1,199,450,000(9) 1,199,450,000(9) 227,684,202(9) 4.9%
AJW Partners, LLC Common 678,666,660(9) 678,666,660(9) 227,684,202(9) 4.9%
AJW Offshore, Ltd. Common 141,279,160(9) 141,279,160(9) 227,684,202(9) 4.9%
All directors and executive
officers
as a group (4 persons) Common 44,816,035(10) -- 44,816,035 *
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 100.00%
</table>
_______________
* Less than 1.00%
(1) The address of each director and executive officer named in this table
is c/o ConectiSys Corporation, 24730 Avenue Tibbitts, Suite 130,
Valencia, California 91355. Mr. Spigno and Mr. Muirhead are directors
and executive officers of ConectiSys. Ms. McGough is a director of
ConectiSys. Ms. Spigno is an executive officer of ConectiSys.
(2) The address of each of AJW Partners, LLC, New Millennium Capital
Partners II, LLC and AJW Qualified Partners, LLC and AJW Offshore, Ltd.
is 1044 Northern Boulevard, Suite 302, Roslyn, New York 11576. AJW
Offshore, Ltd. was formerly known as AJW/New Millennium Offshore, Ltd.
and AJW Qualified Partners, LLC was formerly known as Pegasus Capital
Partners, LLC.
(3) Assumes all shares of class being offered are sold and is based on
1,031,432,178 shares outstanding plus the 3,387,500,000 shares offered
and assumed sold under this prospectus.
(4) Includes 1,443,654 shares underlying options and 5,000,000 shares
issuable upon conversion of Class B Preferred Stock. Mr. Spigno holds an
option to purchase Class B Preferred Stock. Also includes 19,686,954
shares issuable in connection with payment of annual bonuses for fiscal
years 2000 through 2003.
(5) Includes an option to purchase up to 234,155 shares of Class A Preferred
Stock.
(6) Represents an option to purchase up to 500,000 shares of Class B
Preferred Stock.
(7) Includes 500,000 shares underlying options. Also includes 9,843,477
shares issuable in connection with payment of annual bonuses for fiscal
years 2000 through 2003.
<page>49
(8) Includes 100,000 shares underlying options.
(9) The number of shares set forth in the table for the selling security
holders represents an estimate of the number of shares of common stock
to be offered by the selling security holders. The actual number of
shares of common stock issuable upon conversion of the debentures and
exercise of the related warrants is indeterminate, is subject to
adjustment and could be materially less or more than such estimated
number depending on factors which cannot be predicted by us at this time
including, among other factors, the future market price of the common
stock. The actual number of shares of common stock offered in this
prospectus, and included in the registration statement of which this
prospectus is a part, includes such additional number of shares of
common stock as may be issued or issuable upon conversion of the
debentures and exercise of the related warrants by reason of any stock
split, stock dividend or similar transaction involving the common stock,
in accordance with Rule 416 under the Securities Act of 1933. Under the
terms of the debentures, if the debentures had actually been converted
on September 1, 2004, the conversion price would have been approximately
$.00024. Under the terms of the warrants, if the warrants had actually
been converted on September 1, 2004, the exercise price would have been
(i) $.002 for the warrants issued in April and June 2004 and to be
issued in connection with the related subsequent funding tranche, (ii)
$.005 for the warrants issued in the November 2003 to March 2004
financing transactions and the November 2002 through May 2003 financing
transactions, and (iii) approximately $.00024 for the warrants issued in
the March 2002 through June 2002 financing transactions.
(10)Includes 2,043,654 shares underlying options and 5,000,000 shares
issuable upon conversion of Class B Preferred Stock. Also includes
29,530,431 shares issuable in connection with payment of annual bonuses
for fiscal years 2000 through 2003.
<page>50
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of our common stock being offered under this prospectus on any
stock exchange, market or trading facility on which the shares are traded or in
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holders may use any one or
more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-
dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the broker-dealer
for its own account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of stock that the
seller does not own, or certificates for which are not within his control,
so as to be available for delivery at the time when, under applicable
rules, delivery must be made;
o transactions to cover short sales;
o broker-dealers may agree with the selling security holders to sell a
specified number of shares at a stipulated price per share;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to time.
The shares may also be sold under Rule 144 or Regulation S under the
Securities Act of 1933, if available, rather than under this prospectus. The
selling security holders have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling security holders may also engage in short sales against the box,
which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in securities of
ConectiSys or derivatives of ConectiSys securities and may sell or deliver
shares in connection with these trades. The selling security holders may pledge
their shares to their brokers under the margin provisions of customer
agreements. If a selling security holder defaults on a margin loan, the broker
may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling security holders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling security holders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
<page>51
negotiated. The selling security holders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In that event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The selling security holders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. To our knowledge, no
selling security holder has entered into any agreement with a prospective
underwriter, and there is no assurance that any such agreement will be entered
into. If a selling security holder enters into such an agreement or agreements,
the relevant details will be set forth in a supplement or revisions to this
prospectus.
The selling security holders and any other persons participating in the sale
or distribution of the shares offered under this prospectus will be subject to
applicable provisions of the Exchange Act and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
security holders or any other such person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of the secured
convertible debentures or the warrants held by the selling security holders or
the issuance of shares of common stock to the holders of the secured convertible
debentures or the warrants upon conversion or exercise. If a selling security
holder transfers its secured convertible debentures or warrants prior to
conversion or exercise, the transferee of the secured convertible debentures or
warrants may not sell the shares of common stock issuable upon conversion of the
secured convertible debentures or upon exercise of the warrants under the terms
of this prospectus unless this prospectus is appropriately amended or
supplemented by us.
For the period a holder holds the secured convertible debentures or the
warrants, the holder has the opportunity to profit from a rise in the market
price of our common stock without assuming the risk of ownership of the shares
of common stock issuable upon conversion of the secured convertible debentures
or upon exercise of the warrants. The terms on which we could obtain additional
capital during the period in which the secured convertible debentures or the
warrants remain outstanding may be adversely affected. The holders of the
secured convertible debentures and the warrants are most likely to voluntarily
convert their secured convertible debentures or exercise their warrants when the
conversion price or exercise price is less than the market price of our common
stock.
We have agreed to indemnify the selling security holders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling security holders or their respective pledgees, donees, transferees or
other successors in interest, may be required to make in respect of such
liabilities.
<page>52
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 7,500,000,000 shares of common
stock, no par value per share, and 50,000,000 shares of preferred stock, $1.00
par value per share. Of the 50,000,000 authorized shares of preferred stock,
1,000,000 shares have been designated as Class A Preferred Stock, or Class A
Preferred, 1,000,000 shares have been designated as Class B Preferred Stock, or
Class B Preferred, and the remaining 48,000,000 shares are undesignated. As of
September 1, 2004, there were 1,031,432,178 shares of common stock outstanding
held by approximately 800 shareholders of record, 215,865 shares of Class A
Preferred outstanding held by one holder of record and no shares of Class B
Preferred outstanding. The following is a summary description of our capital
stock.
Common Stock
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available at times and in amounts as the
board of directors may from time to time determine, subordinate to any
preferences that may be granted to the holders of preferred stock. Holders of
common stock are entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be
redeemed or converted. Upon our liquidation, dissolution or winding up, the
assets legally available for distribution to our shareholders are divided among
the holders of the common stock in proportion to the number of shares of common
stock held by each of them, after payment of all of our debts and liabilities
and fulfillment of the rights of any outstanding class or series of preferred
stock that has priority to distributed assets. The rights of holders of common
stock are subordinate to those of holders of any series of preferred stock.
Preferred Stock
Preferred stock may be issued from time to time in one or more series, and
our board of directors, without action by the holders of common stock, may fix
or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without shareholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. The
issuance of shares of preferred stock could adversely affect the voting power of
the holders of common stock and could have the effect of making it more
difficult for a third party to acquire, or could discourage or delay a third
party from acquiring, a majority of our outstanding common stock.
Class A Preferred
Each share of Class A Preferred is entitled to 100 votes per share on all
matters presented to our shareholders for action. The Class A Preferred does not
have any liquidation preference, additional voting rights, conversion rights,
anti-dilution rights or any other preferential rights.
Class B Preferred
Each share of Class B Preferred is convertible into 10 shares of our common
stock. The Class B Preferred does not have any liquidation preference, voting
rights, other conversion rights, anti-dilution rights or any other preferential
rights.
<page>53
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Signature Stock
Transfer, Inc. Its telephone number is (972) 788-4193.
LEGAL MATTERS
The validity of the shares of common stock offered under this prospectus
will be passed upon by Rutan & Tucker, LLP, Costa Mesa, California.
EXPERTS
The consolidated financial statements of ConectiSys as of and for the years
ended September 30, 2003 and 2002 included in this prospectus and in the
registration statement of which this prospectus is a part have been audited by
Hurley & Company, independent certified public accountants, to the extent and
for the periods set forth in their report, appearing elsewhere in this
prospectus and are incorporated in this prospectus in reliance upon the report
given upon the authority of Hurley & Company as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB 2 under the Securities Act, and the rules and regulations
promulgated under the Securities Act, with respect to the common stock offered
under this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information contained in the
registration statement and the exhibits and schedules to the registration
statement. While material elements of the contracts and documents referenced in
this prospectus are contained in this prospectus, statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the full
text of the contract or other document which is filed as an exhibit to the
registration statement.
For further information with respect to us and the common stock offered
under this prospectus, reference is made to the registration statement and its
exhibits and schedules. The registration statement, including its exhibits and
schedules, may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such documents may be obtained from the
Securities and Exchange Commission upon the payment of the charges prescribed by
the Securities and Exchange Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's web site address is
http://www.sec.gov. Our web site address is http://www.conectisys.com.
All trademarks or trade names referred to in this prospectus are the
property of their respective owners.
<page>54
CONECTISYS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements As Of And For The
- ---------------------------------------------------
Years Ended September 30, 2003 and 2002
---------------------------------------
Report of Independent Certified Public Accountants................... F-1
Consolidated Balance Sheet as of September 30, 2003...................F-3
Consolidated Statements of Operations for the Years
Ended September 30, 2003 and 2002 and the
Cumulative Period From December 31, 1990 (Inception)
Through September 30, 2003.......................................F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the
Cumulative Period From December 31, 1990 (Inception)
Through September 30, 2003.......................................F-6
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2003 and 2002 and the
Cumulative Period From December 31, 1990 (Inception)
Through September 30, 2003......................................F-14
Notes to Consolidated Financial Statements...........................F-17
Condensed Consolidated Financial Statements As Of And For The
- -------------------------------------------------------------
Three and Nine Months Ended June 30, 2004 and 2003
--------------------------------------------------
Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and September 30, 2003 (audited)................................F-58
Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2004 and 2003 (unaudited) and the
Cumulative Period From December 31, 1990 (Inception)
Through June 30, 2004 (unaudited )..............................F-60
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through June 30, 2004 (unaudited).F-61
Consolidated Statement of Cash Flows for the Nine
Months Ended June 30, 2004 and 2003 (unaudited) and the Cumulative
Period From December 31, 1990 (Inception) Through
June 30, 2004 (unaudited).......................................F-68
Notes to Condensed Consolidated Financial Statements (unaudited).....F-71
<page>55
INDEPENDENT AUDITORS' REPORT
Board of Directors
Conectisys Corporation and Subsidiaries
Valencia, California
We have audited the accompanying consolidated balance sheet of Conectisys
Corporation and Subsidiaries (a development stage company) (the "Company") as
of September 30, 2003, and the related consolidated statements of operations,
changes in shareholders' equity (deficit), and cash flows for the years ended
September 30, 2003 and 2002, and the cumulative period from December 1, 1990
(inception of development stage) through September 30, 2003, except that we
did not audit these financial statements for the period December 1, 1990
(inception of development stage) through November 30, 1997; these financial
statements were audited by other auditors, whose reports dated March 6, 1998
(for the period December 1, 1994 through November 30, 1997) and January 9,
1995 (for the period December 1, 1990 (inception of development stage) through
November 30, 1994), respectively, expressed a going concern uncertainty.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Conectisys Corporation and Subsidiaries as of September 30, 2003, and the
results of their operations and their cash flows for the years ended September
30, 2003 and 2002, and the cumulative period from December 1, 1990 (inception
of development stage) through September 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.
<page>F-1
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has a deficiency in working capital at September
30, 2003. These matters raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Hurley & Company
Granada Hills, California
January 6, 2004
<page>F-2
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET September 30, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 2,282
Debt issuance costs - current, net of
accumulated amortization of $275,448 27,896
-----------
Total current assets 30,178
Property and equipment, net of
accumulated depreciation of $304,553 32,476
Other assets:
License rights and technology, net of
accumulated amortization of $421,4 78 -
-----------
Total assets $ 62,654
===========
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET (continued)
September 30, 2003
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 274,746
Accrued compensation 1,113,620
Due to officers 92,121
Accrued interest 339,965
Other current liabilities 14,410
Notes payable and
current portion of long-term debt 1,090,597
------------
Total current liabilities 2,925,459
Long-term debt, net of current portion 99,615
Commitments and contingencies -
SHAREHOLDERS' DEFICIT:
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized, 200,020
shares issued and outstanding 200,020
Convertible preferred stock - Class B,
no par value; 1,000,000 shares
authorized, -0- shares issued and outstanding -
Common stock, no par value; 1,000,000,000
shares authorized, 490,224,872
shares issued and outstanding 19,807,537
Additional paid-in capital:
Convertible preferred stock - Class B, no
par value; 1,000,000 stock options exercisable 100,000
Common stock, no par value;
11,307,154 stock options and warrants exercisable 1,353,511
Beneficial conversion option, debt instruments 881,550
Deficit accumulated during the development stage (25,305,038)
------------
Total shareholders' deficit (2,962,420)
------------
Total liabilities and
shareholders' deficit $ 62,654
============
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ----------- --------------
Net revenues $ - $ - $ 517,460
Cost of sales 148,675 73,667 790,063
----------- ----------- --------------
Gross loss (148,675) (73,667) (272,603)
Operating expenses:
General and administrative 1,372,655 1,808,657 18,541,785
Bad debt expense - - 1,680,522
----------- ----------- --------------
Loss from operations (1,521,330) (1,882,324) (20,494,910)
Other income (expense):
Settled damages - - 25,000
Other income - - 12,072
Interest income 1 2 102,924
Interest expense (865,546) (464,410) (2,635,021)
Write-off of
intangible assets - - (1,299,861)
Minority interest - - 62,500
----------- ----------- --------------
Net loss $(2,386,875) $(2,346,732) $ (24,227,296)
=========== =========== ==============
Weighted average number
of shares outstanding -
basic and diluted 237,357,973 39,976,138
Net loss per share -
basic and diluted $ (.01) $ (.06)
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-5
CONECTISYS CORORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For the
Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
<table>
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
December 1, 1990
(re-entry
development stage) - $ - 10,609 $ 1,042,140 $ - $ - $ (1,042,140)$ -
Shares issued in exchange for:
Cash, May 31, 1993 - - 1,000 1,000 - - - 1,000
Capital contribution,
May 31, 1993 - - 2,000 515 - - - 515
Services, March 26, 1993 - - 2,000 500 - - - 500
Services, March 26, 1993 - - 1,200 600 - - - 600
Net loss for the year - - - - - - (5,459) (5,459)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1993 - - 16,809 1,044,755 - - (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1, 1994 - - 2,400 3,000 - - - 3,000
Cash, September 1, 1994 - - 17,771 23,655 - - - 23,655
Services, September 15, 1994 - - 8,700 11,614 - - - 11,614
Cash, September 26, 1994 - - 3,000 15,000 - - - 15,000
Cash, October 6, 1994 16,345 16,345 - - - - - 16,345
Cash, September and October,
1994 - - 1,320 33,000 - - - 33,000
Net loss for the year - - - - - - (32,544) (32,544)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1994 16,345 16,345 50,000 1,131,024 - - (1,080,143) 67,226
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, February 13, 1995 - $ - 1,160 $ 232,000 $ - $ - $ - $ 232,000
Debt repayment, February 13,
1995 - - 2,040 408,000 - - - 408,000
Debt repayment, February 20,
1995 - - 4,778 477,810 - - - 477,810
Acquisition of assets, CIPI
February, 1995 - - 28,750 1,950,000 - - - 1,950,000
Acquisition of assets, April 5,
1995 - - 15,000 - - - - -
Cash and services, April and
May 1995 - - 16,000 800,000 - - - 800,000
Cash, June 1, 1995 - - 500 30,000 - - - 30,000
Acquisition of assets and
services, September 26, 1995 - - 4,000 200,000 - - - 200,000
Cash, September 28, 1995 - - 41 3,000 - - - 3,000
Acquisition of assets,
September 1995 - - 35,000 1,750,000 - - - 1,750,000
Return of assets, CIPI
September, 1995 - - (27,700) (1,950,000) - - - (1,950,000)
Net loss for the year - - - - - - (2,293,867) (2,293,867)
--------- ----------- -------- ----------- -------- ------------ ---------- -----------
Balance,
November 30, 1995 16,345 16,345 129,569 5,031,834 - - (3,374,010) 1,674,169
Shares issued in exchange for:
Cash, February, 1996 - - 1,389 152,779 - - - 152,779
Debt repayment, February 1996 - - 10,000 612,000 - - - 612,000
Services, February, 1996 - - 3,160 205,892 - - - 205,892
Cash, March, 1996 - - 179 25,000 - - - 25,000
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares returned and canceled,
March, 1996 - $ - (15,000)$ - $ - $ - $ - $ -
Services, April, 1996 - - 13 2,069 - - - 2,069
Services, September, 1996 4,155 4,155 586 36,317 - - - 40,472
Services, October, 1996 - - 6,540 327,000 - - - 327,000
Debt repayment, November, 1996 - - 2,350 64,330 - - - 64,330
Net loss for the year - - - - - - (2,238,933) (2,238,933)
--------- ---------- ---------- ----------- ---------- --------- ------------ -----------
Balance,
November 30, 1996 20,500 20,500 138,786 6,457,221 - - (5,612,943) 864,778
Shares issued in exchange for:
Services, March, 1997 - - 228 6,879 - - - 6,879
Services, April, 1997 - - 800 13,120 - - - 13,120
Services, July, 1997 - - 1,500 16,200 - - - 16,200
Cash, July, 1997 - - 15,000 300,000 - - - 300,000
Services, August, 1997 - - 5,958 56,000 - - - 56,000
Adjustment for partial shares due
to reverse stock split (1:20) - - 113 - - - - -
Services, October, 1997 - - 1,469,666 587,865 - - - 587,865
Debt repayment, October, 1997 - - 1,540,267 620,507 - - - 620,507
Cash, October, 1997 - - 1,500,000 281,250 - - - 281,250
Services, November, 1997 - - 4,950 10,538 - - - 10,538
Net loss for the year - - - - - - (2,739,268) (2,739,268)
--------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Balance,
November 30, 1997 20,500 20,500 4,677,268 8,349,580 - - (8,352,211) 17,869
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, December, 1997
through November, 1998 - $ - 2,551,610 $ 2,338,264 $ - $ - - $ 2,338,264
Debt repayment, April, 1998
through September, 1998 - - 250,000 129,960 - - - 129,960
Cash, January, 1998 through
July, 1998 - - 4,833,334 1,139,218 - - - 1,139,218
Acquisition of assets,
July, 1998 - - 300,000 421,478 - - - 421,478
Acquisition of remaining 20%
minority interest in
subsidiary, July, 1998 - - 50,000 59,247 - - - 59,247
Services, November, 1998 60,000 60,000 - - - - - 60,000
Net loss for the year - - - - - - (4,928,682) (4,928,682)
--------- ---------- ---------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1998 80,500 80,500 12,662,212 12,437,747 - - (13,280,893) (762,646)
Shares issued in exchange for:
Shares returned and canceled,
December, 1998 - - (1,350,000) (814,536) - - - (814,536)
Services, December, 1998
through September, 1999 - - 560,029 349,454 150,000 - - 499,454
Cash, December, 1998
through September, 1999 - - 1,155,800 129,537 - - - 129,537
Debt repayment, Sept., 1999 39,520 39,520 960,321 197,500 100,000 - - 337,020
Net loss for the period - - - - - - (1,323,831) (1,323,831)
--------- ---------- ---------- ----------- -------- ------------ ---------- -----------
Balance,
September 30, 1999 120,020 120,020 13,988,362 12,299,702 250,000 - (14,604,724) (1,935,002)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares re-acquired and
canceled, October, 1999 - $ - (17,500)$ (12,000)$ - $ - $ - $ (12,000)
Shares issued in exchange for:
Services, October, 1999 through
September, 2000, valued from
$0.25 to $0.80 per share - - 2,405,469 990,949 - - - 990,949
Retainers, debt and accrued
liabilities, October, 1999
through September, 2000, valued
from $0.25 to $1.57 per share - - 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 - - 2,295,482 839,425 - (15,450) - 823,975
Issuance of 563,500 consultant
stock options, March, 2000,
at an exercise price of $2.00
per share - - - - 214,130 - - 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March, 2000,
to $0.38 and approximately $0.39
per share - - - - 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 market - - - - 65,000 - - 65,000
Net loss for the year - - - - - - (3,812,140) (3,812,140)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) ( 869,868)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-10
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2000 through
September, 2001, valued from
$0.11 to $0.40 per share - $ - 3,471,007 $ 572,790 $ - $ - $ - $ 572,790
Retainers, debt and accrued
liabilities, October, 2000
through September, 2001, valued
from $0.11 to $0.43 per share - - 3,688,989 487,121 - - - 487,121
Cash, October, 2000 through
March, 2001, with subscription
prices ranging from $0.075 to
$0.083 per share - - 1,045,500 78,787 - - - 78,787
Collection of stock subscription
receivable, October, 2000,
on 61,800 shares - - - - - 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 debt - - 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 - - - - 77,228 - - 77,228
Issuance of 2,000,000 consultant
stock options, September, 2001,
at a strike price of $0.13 per
share - - - - 115,000 - - 115,000
Beneficial conversion option,
April, 2001 through September,
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible debt - - - - 155,027 - - 155,027
Net loss for the year - - - - - - (2,154,567) (2,154,567)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 - (20,571,431) (1,489,032)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-11
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2001 through
September, 2002, valued from
$0.02 to $0.25 per share - $ - 2,180,000 $ 179,916 $ - $ - $ - $ 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 - - - 488,563
Cash, October, 2001 through
September, 2001, with prices
ranging from $0.01 to $0.083
per share - - 5,833,334 200,000 - - - 200,000
Exercise of 550,000 common stock
options by a consultant at a
strike price of $0.13 per share,
in exchange for debt - - 550,000 103,125 (31,625) - - 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 - - - - 100,087 - - 100,087
Beneficial conversion option,
April 2002, through June, 2002,
pertaining to $750,000 principal
value of 12% convertible debt - - - - 649,913 - - 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 - - 12,667,178 111,515 (80,702) - - 30,813
Net loss for the year - - - - - - (2,346,732) (2,346,732)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2002 200,020 200,020 64,311,823 18,435,238 2,167,933 $ - (22,918,163) (2,114,972)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2002 through
July, 2003, valued from
$0.0012 to $0.0100 share - $ - 31,500,000 $ 134,000 $ - $ - $ - $ 134,000
Debt and accrued liabilities,
October, 2002 through September,
2003, valued from $0.0010 to
$0.0512 per share, including
transfer of $155,027
beneficial conversion option 162,134,748 704,774 (155,027) - - 549,747
Cash, November, 2002 through
September, 2003, with prices
ranging from $0.0010 to $0.100
per share - - 128,500,000 180,000 - - - 180,000
Issuance of 2,500,000 warrants,
November, 2002 through May, 2003,
at an exercise price of $0.005
per share, in conjunction with
$500,000 principal value of 12%
convertible debt - - - - 9,816 - - 9,816
Beneficial conversion option,
November, 2002, through May, 2003,
pertaining to $500,000 principal
value of 12% convertible debt - - - - 490,184 - - 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,355 accrued
interest, net of $52,340
convertible debt discount - - 103,778,301 353,525 (177,845) - - 175,680
Net loss for the year - - - - - - (2,386,875) (2,386,875)
--------- ---------- ----------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2003 200,020 $ 200,020 490,224,872 $19,807,537 $2,335,061 $ - $(25,305,038)$(2,962,420)
========= ========== =========== =========== ========== ========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ------------ -------------
Cash flows from operating
activities:
Net loss $(2,386,875) $ (2,346,732) $(24,227,296)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Stock issued for services 134,000 179,916 7,520,773
Stock issued for interest - - 535,591
Provision for bad debt
write-offs - - 1,422,401
Minority interest - - (62,500)
Settled damages - - (25,000)
Write-off of intangible
assets - - 1,299,861
Depreciation and
amortization of property 24,180 27,309 1,694,154
Amortization of debt issuance
costs and note discount 797,996 377,512 1,440,538
Changes in:
Accounts receivable - - (4,201)
Accrued interest
receivable - - (95,700)
Prepaid exp. and deposits - 48,800 182,346
Accounts payable 297,153 308,251 917,401
Accrued compensation 185,770 394,459 2,219,792
Due to officers 70,179 (62,293) 743,971
Accrued interest and
other current liabilities 92,314 61,078 549,157
----------- ------------ -------------
Total adjustments 1,601,592 1,335,032 18,338,584
----------- ------------ -------------
Net cash used in
operating activities (785,283) (1,011,700) (5,888,712)
----------- ------------ -------------
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ------------ -------------
Cash flows from investing
activities:
Issuance of
notes receivable $ - $ - $ (1,322,500)
Costs of license rights
and technology - - (94,057)
Purchase of equipment (5,317) (6,687) (203,847)
----------- ----------- -------------
Net cash used in
investing activities (5,317) (6,687) (1,620,404)
----------- ----------- -------------
Cash flows from financing
activities:
Common stock issuance 180,000 200,000 3,412,172
Stock warrant issuance 9,816 100,087 187,131
Preferred stock issuance - - 16,345
Proceeds from debt, other 679,163 1,244,790 4,163,043
Debt issuance costs from
debt, other (83,069) (187,500) (303,344)
Proceeds from debt, related - - 206,544
Proceeds from stock purchase - - 281,250
Payments on debt, other (48,129) (290,000) (434,536)
Payments on debt, related - - (53,172)
Decrease in stock
subscription receivable - - 35,450
Contributed capital - - 515
----------- ----------- -------------
Net cash provided by
financing activities 737,781 1,067,377 7,511,398
----------- ----------- -------------
Net increase (decrease) in
cash and cash equivalents (52,819) 48,990 2,282
Cash and cash equivalents
at beginning of period 55,101 6,111 -
------------ ----------- -------------
Cash and cash equivalents
at end of period $ 2,282 $ 55,101 $ 2,282
============ =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ----------- -------------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 50,979 $ 127,868 $ 388,648
=========== =========== =============
Cash paid for income taxes$ 3,200 $ 800 $ 8,050
=========== =========== =============
Non-cash investing and financing activities:
Common stock issued
in exchange for:
Note receivable $ - $ - $ 281,250
Prepaid expenses $ - $ - $ 182,346
Property and equipment $ - $ - $ 130,931
Licenses and technology $ - $ - $ 2,191,478
Acquisition of remaining
minority interest in
subsidiary $ - $ - $ 59,247
Repayment of debt and
interest $ 1,215,611 $ 530,876 $ 5,571,667
Accrued services
and interest $ - $ - $ 4,949,192
Preferred stock issued
in exchange for:
Accrued services $ - $ - $ 60,000
Repayment of debt $ - $ 60,000 $ 119,520
Preferred stock options
issued in exchange for:
Repayment of debt $ - $ - $ 100,000
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company") was
incorporated under the laws of Colorado on February 3, 1986, to analyze and
invest in business opportunities as they may occur. The Company is a
development-stage entity developing automatic meter reading technologies and
products for remote reading of electronic energy meters located in residential
structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the State
of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc., was
formed 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 consolidated financial statements include the accounts and
transactions of Conectisys Corporation, its wholly-owned subsidiaries
TechniLink, Inc., eEnergyServices.com, Inc., and United Telemetry Company,
Inc., and its 80% owned subsidiary PrimeLink, Inc. All material intercompany
transactions and balances have been eliminated in the accompanying
consolidated financial statements. Certain prior period balances 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-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 September 30, 2003, the amounts that will
actually be realized or paid at settlement of the instruments could be
significantly different. The carrying amount of cash and cash equivalents is
assumed to be the fair value because of the liquidity of these instruments.
Accounts payable, accrued compensation, due to officer, 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-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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.
Licensing agreements
The costs of acquiring license rights are capitalized and amortized over the
shorter of the estimated useful life of the license or the term of the license
agreement. The company's current licenses have been amortized over a period
of five years. During the year ended November 30, 1998, the Company acquired
additional license rights in the amount of $421,478 from TechniLink. Although
the license remains viable, the Company currently lacks the resources to
develop and market it. Accordingly, during the ten month period ended
September 30, 1999, the Company accelerated amortization on this asset by
writing it down to its net realizable value of $40,000, incurring a charge of
$283,133. The balance was fully amortized at September 30, 2000.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on
property and equipment using the straight-line method over the expected useful
lives of the assets, which are generally three years for computer software,
five years for vehicles and office equipment, and seven years for furniture
and fixtures.
Technology
Deferred technology costs include capitalized product development and product
improvement costs incurred after achieving technological feasibility and are
amortized over a period of five years. At September 30, 2003, no deferred
technology costs were recognized.
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Accounting for stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation" (SFAS No. 123) establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS No. 123 also encourages, but does not require, companies to record
compensation cost for stock-based employee compensation. The Company has
chosen to account for stock-based compensation utilizing the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation cost for stock
options is measured as the excess, if any, of the fair market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock. Also, in accordance with SFAS No. 123, the Company has
provided footnote disclosures with respect to stock-based employee
compensation. The cost of stock-based compensation is measured at the grant
date on the value of the award, and this cost is then recognized as
compensation expense over the service period. The value of the stock-based
award is determined using a pricing model whereby compensation cost is the
excess of the fair market value of the stock as determined by the model at the
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
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-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for goods
or services are valued at the cost of the goods or services received or at the
market value of the shares issued, depending on the ability to estimate the
value of the goods or services received.
Income taxes
The Company files a consolidated 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 September 30, 2003, the Company had 490,224,872 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-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Net loss per common share - basic and diluted (continued)
Class B preferred stock options 10,000,000
Convertible note holder common stock warrants 6,250,000
Common stock warrants - other 3,215,705
Common stock options - officers 4,043,654
Common stock options - other 4,650,000
-----------
Subtotal 28,159,359
Accrued officer compensation ($360,000),
assumed converted into common stock at
prices ranging from $0.0215 to $0.2250
per share 6,888,922
Convertible note holder principal value
($963,205) and accrued interest ($119,645),
assumed converted into common stock at
$0.002 per share 541,425,000
-----------
Total potential common stock equivalents 576,473,281
If all currently outstanding potential common stock equivalents were
exercised, the Company would receive proceeds of approximately $11,060,000.
Recently issued accounting pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," effective for financial
statements issued after May 25, 2002, which effectively amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency involving sale-
leaseback transactions and also gives clarity to other existing authoritative
pronouncements. The adoption of SFAS No. 145 did not have a material effect
on the company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," effective for exit or disposal activities
after December 15, 2002, which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issue Task Force
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 September 30, 2003, the Company had a deficiency in working capital of
approximately $2,900,000, and had incurred continual net losses since its
return to the development stage in fiscal 1996 of almost $22,000,000, which
raise substantial doubt about the Company's ability to continue as a going
concern.
Management's plans for correcting these deficiencies include the future sales
and licensing of the Company's products and technologies, the raising of
capital through the issuance of common stock and from continued officer
advances, which will help provide the Company with the liquidity necessary to
meet operating expenses. Subsequent to the end of fiscal year 2003, the
Company has received $200,000 in funding from an accredited investor group,
through the issuance of 12% convertible debt, along with 1,000,000 detachable
stock warrants (see Note 16(b)). This same investor group had previously
advanced the Company an aggregate amount of $1,250,000 through six similar
funding tranches occurring in April 2002, May 2002, June 2002, November 2002,
March 2003, and May 2003. Over the longer term, the Company plans to achieve
profitability through its operations from the sale and licensing of its H-Net
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-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A
Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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
386,584 shares of common stock (valued at $43,800) were issued to a consultant
as a retainer at September 30, 2001, for cash payments that were subsequently
made by the consultant to other vendors in October 2001. An attorney was paid
a retainer in September 2001 for services not yet rendered, bringing the total
prepaid expense balance at September 30, 2001 to $48,800. These costs were
fully expensed during the year ended September 30, 2002.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2003 consisted of the following:
Office equipment $ 285,058
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 337,029
Accumulated depreciation (304,553)
-----------
Net book value $ 32,476
===========
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at September 30, 2003 consisted of the following:
License rights $ 421,478
Accumulated amorttion (421,478)
-----------
Net book value $ -
===========
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 debt, along with 3,750,000
common stock warrants, exercisable over a four-year period at the lesser of
$0.045 per share and 50% of the average of the lowest three 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. Amortization of these fees over the pro-rata portion
of the one-year term of the loans amounted to $58,397 through September 30,
2002, leaving an unamortized balance of $89,103 at September 30, 2002. Total
amortization of all debt issuance costs during the year ended September 30,
2002 amounted to $98,397.
In November 2002 through May 2003, the Company received another $500,000 from
the above accredited investor group in exchange for 12% convertible debt,
along with 2,500,000 common stock warrants, exercisable over a seven-year
period at the lesser of $0.005 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 $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
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 7. DEBT ISSUANCE COSTS (continued)
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.
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. The loan balance at September 30, 2003 is currently due on
demand and continues to accrue interest at the rate of 18% per year.
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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%, for cumulative advances
(plus interest) made by the Company's Secretary/Treasurer. The
Secretary/Treasurer had also borrowed on a personal credit card for the
Company's behalf in the amount of $18,455, bringing the total obligation due
the Secretary/Treasurer at September 30, 2001 to $44,329. During the year
ended September 30, 2002, the personal credit card balance was virtually paid-
off. Additional loan advances were $19,500, loan repayments were $39,500, and
accrued interest was $2,269 during the year ended September 30, 2002, bringing
the aggregate loan balance due the Secretary/Treasurer at September 30, 2002
to $8,143. During the year ended September 30, 2003, additional cash advances
of $37,500 were made, and accrued interest was $6,522, resulting in a loan
balance due the secretary Treasurer at September 30, 2003 of $52,165. The loan
balance at September 30, 2003 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. The loan balance at
September 30, 2003 is currently due on demand and continues to accrue interest
at the rate of 18% per year.
The aggregate amount due officers at September 30, 2003 and 2002 was $92,121
and $130,484, respectively, and interest expense on the officer loans amounted
to $17,800 and $11,013 for the years ended September 30, 2003 and 2002,
respectively.
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 8. DUE TO OFFICERS (continued)
As of September 30, 2003, the Company owed its officers $1,113,620 in accrued
compensation. Of this amount, $360,000 was attributable to aggregate staying
bonuses payable to the President and Secretary/Treasurer of the Company. The
staying bonuses are to be compensated for with Conectisys Corp. restricted
stock, valued at the average bid and ask price for the stock for the 30 days
prior to each respective year-end issuance date. The total common stock to be
issued as staying bonuses amounted to 6,888,922 shares at September 30, 2003.
NOTE 9. NOTES PAYABLE
Notes payable at September 30, 2003 consisted of the following:
Registered Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $29,480
Accrued interest of $5,340 and principal
on Convertible Debenture convertible
into approximately 17,410,000
shares of common stock at the price
of $0.002 at September 30, 2003 5,340 $ 34,820
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% 29,480
Accrued interest of $5,340 and principal
on Convertible Debenture convertible
into approximately 17,410,000
shares of common stock at the price
of $0.002 at September 30, 2003 5,340 34,820
-------
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12% $33,900
Accrued interest of $6,141 and principal
on Convertible Debenture convertible
into approximately 20,020,500
shares of common stock at the price
of $0.002 at September 30, 2003 6,141 $ 40,041
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% 20,730
Accrued interest of $3,756 and principal
on Convertible Debenture convertible
into approximately 12,243,000
shares of common stock at the price
of $0.002 at September 30, 2003 3,756 24,486
-------
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 $6,694 and principal
on Convertible Debenture convertible
into approximately 23,347,000
shares of common stock at the price
of $0.002 at September 30, 2003 6,694 46,694
--------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 $6,694 and principal
on Convertible Debenture convertible
into approximately 23,347,000
shares of common stock at the price
of $0.002 at September 30, 2003 6,694 $ 46,694
-------
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 $7,530 and principal
on Convertible Debenture convertible
into approximately 26,265,000
shares of common stock at the price
of $0.002 at September 30, 2003 7,530 52,530
-------
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 $4,183 and principal
on Convertible Debenture convertible
into approximately 14,591,500
shares of common stock at the price
of $0.002 at September 30, 2003 4,183 29,183
-------
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-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Accrued interest of $12,388 and principal
on Convertible Debenture convertible
into approximately 46,194,000
shares of common stock at the price
of $0.002 at September 30, 2003 $12,388 $ 92,388
-------
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 $12,388 and principal
on Convertible Debenture convertible
into approximately 46,194,000
shares of common stock at the price
of $0.002 at September 30, 2003 12,388 92,388
-------
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 $13,936 and principal
on Convertible Debenture convertible
into approximately 51,968,000
shares of common stock at the price
of $0.002 at September 30, 2003 13,936 103,936
--------
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 $7,743 and principal
on Convertible Debenture convertible
into approximately 28,871,500
shares of common stock at the price
of $0.002 at September 30, 2003 7,743 57,743
--------
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #4
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
November 27, 2003 at an annual interest
rate of 12% $33,204
Accrued interest of $3,351 and principal
on Convertible Debenture convertible
into approximately 18,277,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,351 $ 36,555
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 27, 2003 at an annual interest
rate of 12% 33,204
Accrued interest of $3,351 and principal
on Convertible Debenture convertible
into approximately 18,277,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,351 36,555
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 27, 2003 at an annual interest
rate of 12% 33,207
Accrued interest of $3,352 and principal
on Convertible Debenture convertible
into approximately 18,279,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,352 36,559
-------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #5
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $3,485 and principal
on Convertible Debenture convertible
into approximately 26,742,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,485 $ 53,485
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $3,485 and principal
on Convertible Debenture convertible
into approximately 26,742,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,485 53,485
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $3,485 and principal
on Convertible Debenture convertible
into approximately 26,742,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,485 53,485
-------
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 $2,334 and principal
on Convertible Debenture convertible
into approximately 26,167,000
shares of common stock at the price
of $0.002 at September 30, 2003 2,334 $ 52,334
-------
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 $2,334 and principal
on Convertible Debenture convertible
into approximately 26,167,000
shares of common stock at the price
of $0.002 at September 30, 2003 2,334 52,334
-------
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 $2,335 and principal
on Convertible Debenture convertible
into approximately 26,167,500
shares of common stock at the price
of $0.002 at September 30, 2003 2,335 52,335
------- -----------
Subtotal of all Registered Convertible Debentures 1,082,850
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Less reclassified accrued interest $ (119,645)
------------
Subtotal principal value 963,205
Less unamortized note discount (195,592)
-----------
Net carrying value of
Registered Convertible Debentures $ 767,613
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%. 173,924
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. 6,851
-----------
Total notes payable $ 1,190,212
Current porti (1,090,597)
-----------
Long-term porn $ 99,615
===========
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
On April 12, 2001, the Company received $300,000 in proceeds from Laurus
Master Fund, Ltd. ("Laurus") and issued a $300,000 principal value 8%
convertible note due on October 12, 2001, along with 1,000,000 common stock
warrants, exercisable at $0.192 per share over a four-year period. $77,228 of
the proceeds was allocated to the cost of the warrants, with the remaining
$222,772 allocated to the cost of the debt instrument, based on the relative
fair market values of the note and the warrants at the date of issuance.
A convertible note discount of $77,228 was also recognized, which was
effectively fully amortized at September 30, 2002 as interest expense.
The note is convertible (at the option of the holder) into common stock at the
lesser of 80% of the average of the 3-lowest closing bid prices during the 30
trading days prior to the closing date (April 12, 2001) or 80% of the average
of the 3-lowest closing bid prices during the 30 trading days prior to the
conversion date (assumed to be September 30, 2002). At April 12, 2001, the
note was convertible into approximately 2,181,500 common shares at an exercise
price of approximately $0.1021 per share, and at September 30, 2002, the note
was convertible into approximately 20,189,875 common shares at an exercise
price of approximately $0.0064 per share. In either instance, the fair value
of the debt instrument (due to the 80% pricing advantage) was $375,000 (a 25%
premium on the principal value), resulting in a further convertible debt
discount of $152,228, representing the difference between the note's fair
value of $375,000 and the allocated proceeds at issuance of $222,772. This
discount was also fully amortized at September 30, 2001.
A corresponding $152,228 credit was made to additional paid-in capital for the
conversion benefit option, i.e., the intrinsic value of the matured debt
instrument. Interest accrued at 8% on the $300,000 note principal through
September 30, 2002 was $17,168; for presentation purposes, this interest was
added to the principal value of the note at the year-end balance sheet date.
The holder can also convert the accrued interest into common stock at a 25%
premium ($4,292), bringing the total conversion benefit
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
option to $155,027. Total amortization of interest on the discounted
convertible note during the year ended September 30, 2001 (including $32,775
in debt issuance costs associated with the transaction) amounted to $265,030.
The maturity date on the $300,000 principal value 8% convertible note,
initially October 12, 2001, was extended to December 1, 2001. Because of the
inherent conversion benefit feature, the aggregate note with accrued interest,
totaling $311,194 at September 30, 2001, was classified as a long-term
liability.
The Company was unable to pay-off the note at maturity. However, after
receiving bridge financing from another investment group in February 2002, the
Company subsequently repaid $150,000 of the obligation, as the note holder
elected to not convert the debt to shares. Consequently, the note holder sold
1,479,264 of the 4,773,208 shares of the Company's common stock that had been
pledged by officers of the Company as collateral, resulting in net proceeds of
$49,148. Adding accrued interest of $17,168 at an annual rate of 8%, brought
the loan balance at September 30, 2002 to $129,214. During the year ended
September 30, 2003, the note holder sold the remaining 3,293,944 pledged
shares for net proceeds of $67,144. The note holder elected to convert
essentially all the remaining debt for common stock of the Company, receiving
26,000,000 newly issued Company shares valued at $58,400, and bringing the
tentative liability down to $3,670. Accrued interest amounted to $3,183,
resulting in a total liability to the note holder at September 30, 2003 of
$6,851. In connection with the pay-down of the debt, the $155,027 beneficial
conversion option noted above was reduced to zero through transference to
common stock.
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund ("Mercator"). This loan from Mercator was a short-term loan due May 15,
2002 and accrues interest at an annual rate of 18%. The loan was secured by
shares of the Company's common stock. In April and May of 2002, the Company
paid Mercator an aggregate of $100,000. On June 14, 2002 Mercator transferred
collateral in the form of 5,861,814 shares of common stock to their name
because the Company was in default on the balance of the loan.
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Thereafter, on June 21, 2002, Mercator filed an action against Conectisys
Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court of
California, County of Los Angeles (Case No. BC276283) for breach of promissory
note, foreclosure of security interests, fraud and deceit. Mr. Spigno is the
Chairman of the Board and a director of the Company and is also the Company's
Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief
Financial Officer. On July 3, 2002, Mercator filed a first amended complaint
in the Superior Court of California, County of Los Angeles (Case No.
BC276283), adding a claim for common count for money lent.
Mercator seeks damages of approximately $243,000 plus approximately $66 in
interest per day commencing June 21, 2002 and other compensatory and punitive
damages of unspecified amount. The Company believes that Mercator's claims are
without merit because, among other factors, they have affirmative defenses to
those claims, including usury and the satisfaction of amounts owed under loan
from Mercator as a result of the enforcement by Mercator of its security
interest in shares of common stock. The Company intends to vigorously defend
against these claims and to pursue appropriate counterclaims against Mercator.
The Court is tentatively scheduled to hear the matter on March 1, 2004.
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-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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. The debentures were accompanied by warrants
to purchase up to an aggregate of 1,500,000 shares of common stock at a per
share exercise price equal to the lesser of $.045 and the average of the
lowest three intra-day trading prices during the 20 trading days immediately
preceding an exercise.
On May 10, 2002 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to four accredited investors. Three of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of the Company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the
lesser of $.06 per share and 50% of the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. The debentures were accompanied by warrants
to purchase up to an aggregate of 750,000 shares of common stock at a per
share exercise price equal to the lesser of $.045 and the average of the
lowest three intra-day trading prices during the 20 trading days immediately
preceding an exercise.
On June 17, 2002 the Company issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded, are
beneficial owners of 5% or more of the company's outstanding shares of common
stock. The debentures initially were convertible into shares of common stock
at the lesser of $.06 per share and 50% of the average of the lowest three
intra-day trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. The debentures were accompanied by warrants
to purchase up to an aggregate of 1,500,000 shares of common stock at a per
share exercise price equal to the lesser of $.045 and the average of the
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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. The debentures were accompanied by warrants
to purchase up to an aggregate of 1,000,000 shares of common stock at a per
share exercise price equal to the lesser of $.005 and the average of the
lowest three intra-day trading prices during the 20 trading days immediately
preceding an exercise.
On March 3, 2003 the Company issued an aggregate of $150,000 of 12%
convertible debentures in a private offering to these same three accredited
investors. The debentures initially were convertible into shares of common
stock at the lesser of $.01 per share and 50% of the average of the lowest
three intra-day trading prices of a share of common stock during the 20
trading days immediately preceding conversion. The debentures were accompanied
by warrants to purchase up to an aggregate of 750,000 shares of common stock
at a per share exercise price equal to the lesser of $.005 and the average of
the lowest three intra-day trading prices during the 20 trading days
immediately preceding an exercise.
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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. The debentures were accompanied by warrants
to purchase up to an aggregate of 750,000 shares of common stock at a per
share exercise price equal to the lesser of $.005 and the average of the
lowest three intra-day trading prices during the 20 trading days immediately
preceding an exercise.
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 twenty-one debt instruments issued totaling
$1,250,000 in principal value was $2,500,000 in aggregate, representing a 100%
premium on the principal value (due to the 100% pricing advantage) and making
the beneficial conversion option $1,140,097 at the inception of the loans
($1,250,000 proceeds less $109,903 allocated to the issuance of the 6,250,000
related warrants).
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-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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.
The aggregate note discount of $1,250,000 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 and another $653,720
during the year ended September 30, 2003, 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 plus another $52,340
upon conversion of $193,665 of debt principal during the fiscal year ended
September 30, 2003, resulting in an unamortized convertible debt discount
balance of $195,592 at September 30, 2003.
As of September 30, 2003, the Company was indebted for an aggregate of
$1,082,850, including $963,205 of principal and $119,645 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. Of the remaining principal amount
at September 30, 2003, $99,615 has been classified as long-term, based upon
additional principal conversions made subsequent to the end of the fiscal
year.
<page>F-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's authorized capital stock consists of 1,000,000,000 shares of
common stock, no par value per share, and 50,000,000 shares of preferred
stock, $1.00 par value per share. Of the 50,000,000 authorized shares of
preferred stock, 1,000,000 shares have been designated as Class A Preferred
Stock and 1,000,000 shares have been designated as Class B Preferred Stock,
and the remaining 48,000,000 shares are undesignated. As of September 30,
2003, there were 490,224,872 shares of the Company's common stock outstanding
held by approximately 750 holders of record and 200,020 shares of the
Company's Class A Preferred Stock outstanding held by one holder of record and
no shares of Class B Preferred Stock outstanding.
Each share of Class A Preferred Stock is entitled to 100 votes per share on
all matters presented to the Company's shareholders for action. The Class A
Preferred Stock does not have any liquidation preference, additional voting
rights, conversion rights, anti-dilution rights or any other preferential
rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the
Company's common stock. The Class B Preferred Stock does not have any
liquidation preference, voting rights, other conversion rights, anti-dilution
rights or any other preferential rights.
During the months October 2001 through January 2002, the Company issued a
total of 2,333,334 shares of its restricted common stock for cash of $145,000
in private placements. In conjunction with these stock issuances, the Company
issued 700,000 common stock warrants at an exercise price of $1.00 per share,
expiring November 2003 through January 2005.
During the period October 2001 through September 2002, the Company issued
5,300,000 shares of its common stock (of which 4,100,000 shares were
restricted) to a consultant in exchange for accrued consulting services of
$203,566. In September 2002, 1,000,000 common stock options were also issued
to the consultant at an exercise price of $0.50 until September 2004. The
common stock options were not recorded in the financial statements, as they
had nominal value.
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In October 2001 through November 2001, the Company issued 60,000 shares of its
Class A preferred stock to its CEO for a $60,000 reduction of debt. An
additional 109,980 of Class A preferred stock options were issued to the CEO
at an exercise price per share of $1.00 through November 2005.
In December 2001 and January 2002, the Company issued 500,000 shares of its
restricted common stock to a consultant in exchange for media services
rendered in the amount of $87,500.
In December 2001 and January 2002, a consultant exercised 550,000 common stock
options at $0.13 per share in exchange for debt of $71,500. As part of the
transaction, $31,625 in stock options exercisable was transferred to common
stock.
In January 2002, the Company issued 192,100 common stock warrants to investors
at an exercise price of $2.00 per share, expiring in September 2004.
During the months February 2002 through August 2002, the Company issued
1,680,000 shares of its common stock (including 50,000 restricted shares) in
exchange for $85,500 in consulting services.
During the months March 2002 through June 2002, the Company issued 3,750,000
in three-year common stock warrants as part of a $750,000 12% convertible debt
issuance, exercisable at the lower of $0.045 and 50% of the market price of
the common stock (as defined) through the date of exercise. The warrants were
recorded at $100,087 and the debt at $649,913, based upon the relative fair
values of each, and a beneficial conversion option for an additional $649,913
was also recognized.
In May 2002 and June 2002, the Company issued a total of 500,000 shares of its
restricted common stock for cash of $25,000 (net of $25,000 in fees) in
private placements. In conjunction with these issuances, the Company issued
500,000 common stock options at an exercise price of $0.50 per share, expiring
April 2004 through June 2004. The common stock options were not recorded in
the financial statements, as they had nominal value.
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In May 2002, the Company issued 100,000 shares of its restricted common stock
to an engineering consultant in exchange for $5,000 in accrued services.
In June 2002 through September 2002, the Company issued 12,667,178 of its
common shares to an investor group in exchange for $93,130 in convertible debt
and $6,916 in interest (considered services). In conjunction with these
transactions, $80,702 of the Company's beneficial conversion option was also
transferred to common stock, and $69,233 in convertible note discounts was
applied against common stock as a result of debt conversion.
In June 2002, the Company issued 48,077 shares of its common stock to its
former Acting President for $7,788 in accrued compensation. In June 2002, the
Company issued 3,500,000 shares of its common stock valued at $179,125 in
partial settlement of a $300,000 note.
In June 2002, the Company issued 1,000,000 restricted common shares to an
outside accountant in exchange for $30,000 in accrued services rendered.
In September 2002, the Company issued 4,000,000 shares of its restricted
common stock to a consultant/investor for $30,000 in cash and reduction of
debt of $10,000. 1,000,000 common stock options were also issued to the
consultant at an exercise price of $0.50 until September 2004. The common
stock options were not recorded in the financial statements, as they had
nominal value.
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-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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.
NOTE 12. INCOME TAXES
Deferred income taxes consisted of the following at September 30, 2003:
Deferred tax asset, benefit
of net operating loss
carryforward $ 7,800,000
Valuation allowance (7,800,000)
-----------
Net deferred taxes $ -
===========
The valuation allowance offsets the net deferred tax asset, since it is more
likely than not that it would not be recovered. During the year ended
September 30, 2003, the deferred tax asset and valuation allowance were both
increased by $900,000.
The Company has approximately $19,400,000 in both federal and California net
operating loss carryforwards. The federal net operating loss carryforwards
expire as follows: $2,700,000 in the year 2012, $5,300,000 in 2018, $1,200,000
in 2019, $3,500,000 in 2020, $2,400,000 in 2021, $2,300,000 in 2022, and
$2,000,000 in 2023. The California net operating loss carryforwards expire as
follows: $2,700,000 in the year 2002, $5,300,000 in 2003, $1,200,000 in 2004,
$3,500,000 in 2005, $2,400,000 in 2006, $2,300,000 in 2007, and $2,000,000 in
2008. The latest federal and California corporate income tax returns filed by
the Company were for the tax year ended November 30, 2000.
<page>F-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
3) The Chief Technical Officer of the Company entered into an agreement
dated August 1, 1998 for an initial term of three years (extended through
August 1, 2003 and again through January 19, 2009), and he is entitled to
receive a base salary of $150,000 per year, with a minimum of $90,000 to be
paid annually in cash and the balance paid (at the option of the Company) in
cash or restricted common stock under rule 144. The employee shall receive a
hire-on bonus of $75,000 worth of the Company's restricted common stock under
rule 144, at one-half market price. The employee shall further receive
performance bonuses (paid in restricted common stock, as above) upon
successful completion of specific milestones pertaining to the implementation
and deployment of certain software (up to $862,500). If substantially all
performance milestones are met, he is also granted an option to purchase up to
500,000 shares of the Company's restricted common stock at a price equal to
60% of the average market value at the date of purchase. As of September 30,
2003, none of the aforementioned milestones had been successfully completed.
Litigation
There has been one recent legal proceeding in which the Company has been a
party:
In February 2002, the Company borrowed $340,000 from the Mercator Momentum
Fund ("Mercator") in order to make an initial $100,000 payment to Laurus
Master Fund, Ltd. and to fund continuing development of the Company's H-
Net(TM) system. This loan from Mercator was a short-term loan due May 15, 2002
and accrues interest at an annual rate of 18%. The loan was secured by shares
of the Company's common stock. As of June 13, 2002, the Company owed Mercator
approximately $243,000 of principal and accrued and unpaid interest under this
loan and was in default in the repayment of this debt.
<page>F-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
On June 14, 2002, Mercator transferred collateral in the form of 5,861,814
shares of the Company's common stock into its name as a result of the
Company's default on Mercator's loan. Of the 5,861,814 shares of common stock
transferred into the name of Mercator 3,500,000 shares of the Company's common
stock were issued and pledged as collateral by the Company in February 2002,
and 2,361,814 shares of the Company's common stock were issued and pledged as
collateral by Robert Spigno, the Company's Chief Executive Officer, in
February 2002.
On June 21, 2002 Mercator filed an action against Conectisys Corporation,
Robert A. Spigno and Patricia A. Spigno in the Superior Court of California,
County of Los Angeles (Case No. BC276283) for breach of promissory note,
foreclosure of security interests and fraud and deceit. Mr. Spigno is the
Chairman of the Board and a director of the Company and is also the Company's
Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief
Financial Officer. On July 3, 2002, Mercator filed a first amended complaint
in the Superior Court of California, County of Los Angeles (Case No. BC276283)
adding a claim for common count for money lent. Mercator seeks damages of
approximately $243,000 plus approximately $66 in interest per day commencing
June 21, 2002 and other compensatory and punitive damages of unspecified
amount. The Company believes that Mercator's claims are without merit because,
among other factors, they have affirmative defenses to those claims, including
usury and the satisfaction of amounts owed under loan from Mercator Momentum
Fund as a result of the enforcement by Mercator of its security interest in
shares of common stock. The Company intends to vigorously defend against these
claims and to pursue appropriate counterclaims against Mercator. The Court is
tentatively scheduled to hear the matter on March 1, 2004.
<page>F-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
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 October 2002, March 2003, and July 2003, the Company filed registration
statements on Forms S-8 covering an aggregate of 15,000,000 shares issued to
an independent consultant to the Company, which authorized the re-sale of the
15,000,000 shares of common stock valued at $65,000.
NOTE 15. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note
holder options to purchase 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share. As consideration, the Company
reduced its debt to the note holder by $50,000 and received an extension of
time to pay-off its promissory note. The Company also issued to its CEO
options to purchase another 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share in exchange for a reduction in
debt of $50,000. Total consideration received on the above issued options, as
evidenced by debt reduction, was $100,000. These options can be exercised
through November 1, 2002 and can also be converted into common stock at the
rate of 10 common shares for each Class B preferred share. In September 2001,
the exercise price on the Class B preferred stock options was adjusted to
$2.50 per share and the exercise period extended to November 1, 2005.
The Company's CEO currently owns 200,020 shares of the Company's Class A
preferred stock, of which 60,000 shares were purchased during the year ended
September 30, 2002, and has options to purchase another 250,000 shares for
$1.00 per share through November 1, 2005.
<page>F-52
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The Company has granted various common stock options and warrants to employees
and consultants. Generally, the options and warrants were granted at
approximately the fair market value of the Company's common stock at the date
of grant and vested immediately, except that when restricted rule 144 common
stock was issued, the options and warrants were granted at an average market
discount of 50% (ranging from between 20% to 75%).
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. Accordingly,
compensation expense for common stock options and warrants issued to employees
for services have been recorded as the difference between the intrinsic value
of those services as measured by the (discounted) market value of the common
stock at the date of grant and the exercise price, with pro forma disclosure
of the excess market value as required by FASB No. 123. No common stock
options or warrants wee granted to employees (including officers) and
directors of the Company during the years ended September 30, 2003 or 2002.
All common stock options and warrants issued to consultants and other non-
employees have been recorded at the fair value of the services rendered and
equivalent to the market value (as discounted, if applicable) of the equity
instruments received as per FASB No. 123. The market value was determined by
utilizing an averaging convention of between 5 to 30 days of the closing price
of the Company's common shares as traded on the over-the-counter bulletin
board (stock symbol CNES) through the grant date and applying certain
mathematical assumptions as required under the Black-Scholes model. Such
assumptions, pertaining to the risk-free annual rate of return and stock
volatility, were generally the same as those mentioned above when making fair
value disclosures for the issuance of officer and employee stock options,
except that the risk-free annual rate of return during the latter half of
fiscal 2001 and subsequent was assumed to be 5% (rather than 6%) due to the
general decline of interest rates occurring throughout the economy and the
world.
At September 30, 2001, the Company had an aggregate of 5,607,154 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 $1,375,233. Of the common stock
options and warrants, 2,043,654
<page>F-53
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 15. STOCK OPTIONS (continued)
had been issued to officers and employees and the remaining 3,563,500 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.
<page>F-54
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the fiscal years ended September 30,
2003 and September 30, 2002 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2001 5,607,154 $.420
Granted 3,750,000 .050
Exercised (550,000) .130
----------
Balance outstanding, September 30, 2002 8,807,154 .280
Granted 2,500,000 .010
----------
Balance outstanding, September 30, 2003 11,307,154 $.204
========== =====
The following table summarizes information about common stock options at
September 30, 2003:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- --------------- --------- ------- -------- ---------- -------
$2.000 - $2.000 563,500 11 $ 2.000 563,500 $ 2.000
$ .380 - $ .380 100,000 15 $ .380 100,000 $ .380
$ .192 - $ .192 1,000,000 6 $ .192 1,000,000 $ .190
$ .050 - $ .050 3,750,000 19 $ .002 3,750,000 $ .050
$ .130 - $ .130 1,450,000 23 $ .130 1,450,000 $ .130
$ .386 - $ .386 1,443,654 26 $ .386 1,443,654 $ .386
$ .380 - $ .380 500,000 26 $ .380 500,000 $ .380
& .002 - $ .002 2,500,000 76 $ .002 2,500,000 $ .002
$ .002 - $2.000 11,307,154 33 $ .204 11,307,154 $ .204
=============== ========== == ======== ========== =======
<page>F-55
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 16. SUBSEQUENT EVENTS
(a) In November 2003, the Company filed a registration statement on Form
S-8 covering 12,000,000 shares issued to an independent consultant,
authorizing the re-sale of the 12,000,000 shares of common stock valued at
$25,000.
(b) During the months of October 2003 through December 2003, the Company
received funding of another $200,000 (net proceeds of $138,722) from an
investor group in exchange for one-year 12% convertible debt and 1,000,000
common stock warrants, with such warrants exercisable at $0.005 per share over
a seven-year period.
During the subsequent period October 1, 2003 through January 8, 2004, this
same investor group also converted approximately $92,000 of debt principal
along with accrued interest into 84,651,456 shares of the Company's common
stock. Effective October 2003, as an inducement for this investor group's
continued funding of the Company's operations, the Company agreed to allow
prospective conversions of issued convertible debt instruments into freely-
trading shares of the Company's common stock at the lower of 40% (from 50%
previously) of the average of the three lowest intra-day trading prices of a
share of the Company's common stock on the OTC Bulletin Board during the
twenty trading days immediately preceding the conversion date, and either (a)
$.06 for the March, May, and June 2002 convertible debentures, or (b) $.01 for
the November 2002, March and May 2003 convertible debentures. The effect on
the Company's future operations would be a charge to earnings of approximately
$500,000 (including accrued interest).
(c) Through January 8, 2004, in addition to the common share issuances
described in Notes 16(a) and 16(b) above, the Company has issued restricted
common stock in the aggregate of 116,400,000 shares, valued at approximately
$118,500. Of the aggregate amount, 65,100,000 shares were issued to a
consultant as debt reduction of $65,100, 50,000,000 shares were issued in a
private placement for $50,000 in cash, and 1,300,000 shares were issued to a
consultant for services rendered of $3,400. In addition, 15,845 Class A
preferred stock options were exercised by the Company's CEO at $1.00 per share
against a reduction of accrued compensation of $15,845.
<page>F-56
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 16. SUBSEQUENT EVENTS (continued)
(d) As of January 1, 2004, the President and Secretary/Treasurer of the
Company had earned additional annual staying bonuses of $80,000 and $40,000,
respectively, payable in restricted shares of the Company's common stock.
Based upon the average bid and ask price of the Company's common stock during
the prior 30 days of trading of approximately $0.0053 per share, this equates
to the issuance of 22,641,509 shares of common stock to satisfy the additional
liability.
<page>F-57
<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-58
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-59
<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-60
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-61
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-62
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-63
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-64
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-65
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-66
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-67
<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-68
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-69
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-70
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-71
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-72
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-73
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-74
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-75
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-76
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-77
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-78
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-79
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-80
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-81
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-82
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-83
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-84
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-85
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-86
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-87
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-88
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-89
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-90
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-91
--------
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-92
--------
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-93
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-94
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-95
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-96
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-97
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-98
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-99
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-100
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-101
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-102
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-103
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-104
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-105
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-106
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-107
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-108
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-109
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-110
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-111
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-112
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-113
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-114
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-115
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-116