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Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-126001
PROSPECTUS
2,118,619,000 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 under the
symbol "CNES." On July 12, 2005, 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 6.
_________________
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 July 18, 2005.
TABLE OF CONTENTS
Description Page No.
- ----------- --------
Prospectus Summary.........................................................3
Risk Factors...............................................................6
Special Note Regarding Forward-Looking Statements.........................15
Use of Proceeds...........................................................15
Price Range of Common Stock...............................................16
Dividend Policy...........................................................16
Capitalization............................................................17
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................18
Business..................................................................27
Management................................................................39
Certain Relationships and Related Transactions............................48
Principal and Selling Security Holders....................................50
Plan of Distribution......................................................54
Description of Capital Stock..............................................57
Legal Matters.............................................................58
Experts...................................................................58
Where You Can Find More Information.......................................58
Index to Financial Statements.............................................60
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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.
Our H-Net(TM) system is currently comprised of two principal components: our
H-Net(TM) 5.0 product, which itself is comprised of circuitry and
a radio transmitter, and our H- Net(TM) BaseStation. Our H-Net(TM)
5.0 product is a component that is designed to be part of a digital
energy meter to read and wirelessly transmit meter data to our H-
Net(TM) BaseStation. Our H-Net(TM) BaseStation is designed to receive and
relay the meter data over standard phone lines to a central location where the
data is compiled and utilized.
We are currently developing our H-Net(TM) system. Our development efforts
have recently been predominantly focused on increasing the data
transmission range of our H-Net(TM) 5.0 product over the data transmission
range of our H-Net(TM) 4.0 product. The development of our H-Net(TM)
system is also directed at curing certain radio frequency interference
experienced in our H-Net(TM) 4.0 product. In August 2004, we submitted to the
FCC our H-Net(TM) 5.0 product for approval for commercialization and sale
and received FCC certification for this product in December 2004. In December
2004, we submitted to the FCC our H-Net(TM) BaseStation for approval
for commercialization and sale and received FCC certification
for this product in March 2005.
Concurrently with the development of our H-Net(TM) BaseStation, which is a
single-channel design, we have been developing an eight-channel H-Net(TM)
BaseStation. Our eight-channel H-Net(TM) BaseStation is designed to
communicate with up to 7,500 H-Net(TM) 5.0 product installations per network
due to its multiple channel design and to deliver real-time energy consumption
data at low-cost. We have verified initial functionality and have undertaken
destructive testing of our eight-channel H-Net(TM) BaseStation hardware with
several units in inventory that are awaiting new software for additional field
testing. We anticipate submitting our eight-channel H-Net(TM) BaseStation for
FCC approval over the course of the next few months. We expect that this
approval by the FCC will occur within approximately 60 days following
submission to the FCC of our eight-channel H-Net(TM) BaseStation, but no
assurances can be made that this approval will be obtained or that it will not
be delayed. We do not expect that the eight- channel product enhancement will
prevent sales of our current H-Net(TM) system.
We have not yet sold any H-Net(TM) systems. However, we are actively
pursuing sales of our H-Net(TM) systems with meter manufacturers and other
companies in the energy industry. 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
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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
7,500 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 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
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The Offering
Common stock offered by selling security holders 2,118,619,000 (1)
Common stock outstanding prior to this offering 5,101,666,998 (2)
Common stock outstanding following this offering
if all shares are sold 7,220,285,998 (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 6, 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 on
June 16, 2005, the principal portions of the callable secured convertible
notes plus accrued interest and interest for one year following June 16,
2005, 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
2,107,869,000 shares of common stock. We have agreed to register for
resale by the selling security holders the shares of common stock
underlying warrants and the shares of common stock underlying
convertible notes that the selling security holders have
purchased. 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
11,837,330 shares of common stock and conversion of the principal
amount of all of the notes plus accrued interest into 2,106,781,670
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 5,101,666,998 shares outstanding as of July 12,
2005, and excludes the following:
o 69,602,215 shares of common stock issuable to executive officers for
accrued and unpaid bonus compensation and shares of common stock
issuable upon exercise of outstanding stock options, warrants and other
derivative securities, other than derivative securities covered by this
prospectus;
o shares of common stock issuable upon exercise of warrants or conversion
of debentures or notes whose underlying shares of common stock that are
not covered by this prospectus;
o approximately 13,393,654 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 July 12, 2005.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this prospectus, you should carefully
consider the following risk factors before deciding to invest in shares of our
common stock. If any of the following risks actually occurs, it is likely
that our business, financial condition and operating results would be
harmed. As a result, the trading price of our common stock could
decline, and you could lose part or all of your investment.
Risks Related to Our Business
Our default on the repayment of the convertible debentures or notes 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 and notes becomes immediately due and payable from one to two years
from their dates of issuance, depending on the debenture or note, or earlier in
the event of a default. The events of default under the convertible debentures
and notes 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 or failure to comply with the
conditions of listing on the OTC Bulletin Board.
As of July 12, 2005, we were in payment default under convertible
debentures in the aggregate principal amount of approximately $489,200 plus
related interest on those debentures. As of that date, we also were in default
under our obligations to register for resale shares of our common stock
underlying certain of our outstanding convertible debenture. In addition, as of
that date, we also were in default under our obligations to make quarterly
interest payments under all of our outstanding convertible debentures issued
prior to our convertible notes issued in March 2005. As of July 12, 2005, we
owed accrued and unpaid interest on our convertible debentures and notes in an
aggregate amount of approximately $225,000, net of approximately $73,000 of
prepaid interest.
As of July 12, 2005, as a result of the above defaults, the holders of our
secured convertible debentures and notes were entitled to pursue their rights
to foreclose upon their security interest in all of our assets. In the event
that the holders of our secured convertible debentures and notes foreclose upon
their security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H
- - Net(TM)system, which would have a material and adverse effect on our
business, prospects, results of operations and financial condition. In
addition, the holders of our secured convertible debentures and notes were
entitled to demand immediate repayment of the outstanding principal amounts of
the debentures and notes 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
or notes could have a material and adverse effect on our business, prospects,
results of operations or financial condition.
We have no history of revenues, have incurred significant losses, expect
continued losses and may never achieve profitability. 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
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incurred significant losses and experienced negative cash flow. As of March 31,
2005, we had an accumulated deficit of approximately $31.5 million. For our
fiscal year ended September 30, 2004, we incurred a net loss of
approximately $4.2 million and for our fiscal year ended September 30,
2003, we incurred a net loss of approximately $2.4 million. 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, 2004 and 2003 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.
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.
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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 will likely 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.
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.
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We have 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 products embodied in 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.
Our failure to attract and retain key personnel could adversely affect our
business, financial condition and results of operations.
Our future success is dependent in part on our ability to attract and
retain certain key personnel. We currently have few employees and need to
attract additional skilled technical, clerical and managerial personnel in all
areas of our business. The competition for such individuals is intense. There
can be no assurance that we will be able to retain our existing personnel
or attract additional qualified personnel in the future. If we are unable
to attract and retain key personnel, our business, financial condition and
results of operations could be adversely affected.
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 revenues and/or 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 revenues
and/or 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
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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.
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
<page>10
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 July 12, 2005, we had outstanding 5,101,666,998 shares of common
stock, of which approximately 2,382,000,000 shares were restricted under the
Securities Act of 1933. As of that date, we also had outstanding options,
warrants, convertible debentures and notes and preferred stock that were
exercisable for or convertible into approximately 7,721,000,000 shares of
common stock, approximately 7,638,000,000 of which are covered by registration
rights. Sales of a substantial number of shares of our common stock in the
public market, or the perception that sales could occur, could adversely affect
the market price of our common stock. Any adverse effect on the market price
of our common stock could make it difficult for us to raise additional
capital through sales of equity securities at a time and at a price that we
deem appropriate.
Conversion or exercise of our outstanding derivative securities could
substantially dilute your investment because the conversion and exercise
prices of those securities and/or the number of shares of common stock
issuable upon conversion or exercise of those securities are subject to
adjustment.
We have issued various debentures, notes 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 debentures, notes or
warrants. As of July 12, 2005, the closing price of a share of our common
stock on the OTC Bulletin Board was $.0006. On that date, our debentures,
notes and warrants outstanding with adjustable conversion and/or exercise
prices were convertible or exercisable into approximately 7,638,000,000
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 notes 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 notes 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 notes. The following table sets forth the number of shares
issuable upon conversion of the aggregate principal and all accrued and
unpaid interest on our convertible debentures and notes issued to certain
security holders and outstanding as of July 12, 2005, which amount was
approximately $1,525,000 and is based upon the indicated hypothetical
trading prices:
<page>11
Approximate Percentage of
Hypothetical Number of Shares Company's
Trading Price Conversion Price(1) Issuable(2) Common Stock (3)
____________ __________________ ________________ ________________
$.0020 $.0008 1,906,000,000 27%
$.0015 $.0006 2,542,000,000 33%
$.0010 $.0004 3,813,000,000 43%
$.0005 $.0002 7,625,000,000 60%
_______________
(1) The conversion price of our debentures and notes 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
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
March and May 2003 convertible debentures, or (c) $.005 for
the November and December 2003, and the February and March 2004
convertible debentures and the March, April and May 2005
convertible notes. As of July 12, 2005, the applicable
conversion price was approximately $.0002.
(2) Our current authorized capital allows us to issue a maximum of 7.5
billion shares of common stock; however, we have filed a
proxy statement with the Securities and Exchange Commission
covering, among other things, a proposal to be voted on by our
shareholders to increase our authorized shares of common stock
from 7.5 billion shares to 15 billion shares.
(3) Amounts are based on 5,101,666,998 shares of our common stock
outstanding as of July 12, 2005 plus the corresponding number of
shares issuable. Each of the holders of our convertible debentures
and notes may not convert our debentures or notes into more
than 4.9% of our then-outstanding common stock; however, the
holders may waive the 4.9% limitation, thus allowing the
conversion of their debentures or notes 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 and notes may elect to
receive payment for accrued and unpaid interest on our debentures and notes 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 and notes. As a result of conversions of the principal or interest
portion of our convertible debentures and notes and related sales of our
common stock by the holders of our convertible debentures and notes, 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 and notes. 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 and notes.
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
<page>12
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 and convertible note
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 six
months ended March 31, 2005, the high and low closing bid prices of our
common stock were $.0095 and $.0006, respectively. During the twelve months
ended September 30, 2004, the high and low closing bid prices of our common
stock were $.0069 and $.0005, respectively. The market price of our common
stock may exhibit significant fluctuations in the future response to
various factors, many of which are beyond our control and which include:
o variations in our quarterly operating results, which variations could
result from, among other things, changes in the needs of one or more of
our customers;
o changes in market valuations of similar companies and stock market price
and volume fluctuations generally;
o economic conditions specific to the industries in which we operate;
o announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions,
strategic relationships, joint ventures or capital commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity securities.
If our operating results in future quarters fall below the expectations of
market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities
class action litigation often has been brought against a company following
periods of volatility in the market price of its securities. We may in the
future be the target of similar litigation. Securities litigation could
result in substantial costs and liabilities and could divert management's
attention and resources. Consequently, the price at which you purchase
shares of our common stock may not be indicative of the price that will
prevail in the trading market. You may be unable to sell your shares of
common stock at or above your purchase price, which may result in
substantial losses to you.
<page>13
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. Because our stock trades on the OTC Bulletin Board 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.
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.
<page>14
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.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believe," "expect," "may," "will,"
"should," "could," "seek," "estimate," "continue," "anticipate," "intend,"
"future," "plan" or variations of those terms and other similar
expressions, including their use in the negative, or in discussions of
strategies, opportunities, plans or intentions. 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. In
addition, these forward-looking statements necessarily depend upon
assumptions, estimates and expectations that may prove to be incorrect.
Although we believe that the assumptions, estimates and expectations
reflected in these forward-looking statements are reasonable, actual
conditions in the AMR industry, and actual conditions and results in our
business, could differ materially from those expressed or implied in these
forward-looking statements. In addition, none of the events anticipated in the
forward-looking statements may actually occur and we cannot assure you that we
will achieve our plans, intentions or expectations. 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>15
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 under the symbol "CNES."
Price Range
-----------
High Low
---- ---
Year Ended September 30, 2003:
First Quarter (October 1 - December 31).... $ 0.0180 $ 0.0080
Second Quarter (January 1 - March 30)...... 0.0120 0.0030
Third Quarter (April 1 - June 30).......... 0.0070 0.0025
Fourth Quarter (July 1 - September 30)..... 0.0075 0.0025
Year Ended September 30, 2004:
First Quarter.............................. $ 0.0069 $0.0022
Second Quarter............................. 0.0055 0.0023
Third Quarter.............................. 0.0047 0.0012
Fourth Quarter............................. 0.0013 0.0005
Year Ending September 30, 2005:
First Quarter............................... $ 0.0095 $0.0006
Second Quarter.............................. $ 0.0066 $0.0015
As of July 12, 2005, we had 5,101,666,998 shares of common stock
outstanding and held of record by approximately 820 shareholders, and the
high and low sale prices of a share of our common stock on the OTC Bulletin
Board 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 and our callable secured
convertible notes. We currently anticipate that we will retain any earnings
for use in the continued development of our business.
<page>16
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2005. 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
2,356,000,000 shares of common stock that were issuable as of March 31,
2005 upon conversion or exercise of outstanding convertible debentures,
notes, options and warrants, and that were issuable as of that date in
connection with staying bonuses payable to certain of our officers.
March 31, 2005
--------------
Long-term debt, net of current portion......................... $ 251,500
==============
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. 7,500,000,000 shares authorized;
3,788,747,661 shares issued and outstanding................... 24,963,828
Additional paid in capital:
Class B Convertible Preferred Stock, $1.00 par value,
1,000,000 shares authorized; no shares issued and
outstanding; 1,000,000 stock options exercisable........ 100,000
Common stock, no par value. 17,959,720 stock options and
warrants exercisable..................................... 1,363,436
Accumulated deficit during development stage..................... (31,467,690)
------------
Total shareholders' equity (deficit)......................... $(4,824,561)
------------
Total capitalization......................................... $(4,573,061)
------------
<page>17
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. Our H-Net(TM) system
is currently comprised of two principal components: our H-Net(TM) 5.0 product,
which itself is comprised of circuitry and a radio transmitter, and our H-
Net(TM) BaseStation. Our H-Net(TM) 5.0 product is a component that is designed
to be part of a digital energy meter to read and wirelessly transmit meter data
to our H-Net(TM) BaseStation. Our H-Net(TM) BaseStation is designed to receive
and relay the meter data over standard phone lines to a central location where
the data is compiled and utilized.
We are currently developing our H-Net(TM) system. Our development efforts
have recently been predominantly focused on increasing the data transmission
range of our H-Net(TM) 5.0 product over the data transmission range of our H-
Net(TM) 4.0 product. The development of our H-Net(TM) system is also directed
at curing certain radio frequency interference experienced in our H-Net(TM) 4.0
product. In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received
FCC certification for this product in March 2005.
Concurrently with the development of our H-Net(TM) BaseStation, which is a
single-channel design, we have been developing an eight-channel H-Net(TM)
BaseStation. Our eight-channel H-Net(TM) BaseStation is designed to
communicate with up to 7,500 H-Net(TM) 5.0 product installations per network
due to its multiple channel design and to deliver real-time energy consumption
data at low-cost. We have verified initial functionality and have undertaken
destructive testing of our eight-channel H-Net(TM) BaseStation hardware with
several units in inventory that are awaiting new software for additional field
testing. We anticipate submitting our eight- channel H-Net(TM) BaseStation for
FCC approval over the course of the next few months. We expect that this
approval by the FCC will occur within approximately 60 days following
submission to the FCC of our eight-channel H-Net(TM) BaseStation, but no
assurances can be made that this approval will be obtained or that it will not
be delayed. We do not expect that the eight-channel product enhancement will
prevent sales of our current H- Net(TM) system.
We have not yet sold any H-Net(TM) systems. However, we are actively
pursuing sales of our H-Net(TM) systems with meter manufacturers and other
companies in the energy industry. We have no history of revenues and have
<page>18
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
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements.
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.
Going Concern Assumption
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. As of March 31, 2005, we had
a deficiency in working capital of approximately $4.6 million and had
incurred continual net losses since our return to the development stage in
fiscal 1994 of approximately $31.0 million, which raise substantial doubt
about our ability to continue as a going concern. Our plans for correcting
these deficiencies include the future sales and licensing of our products and
technologies, and the raising of capital through the issuance of common stock
and from continued officer advances, which are expected to help provide us
with the liquidity necessary to meet operating expenses. An investor group
has advanced us an aggregate amount of approximately $4.1 million. During
the six months ended March 31, 2005, the same investor group agreed to
advance us up to an additional $1.4 million in gross proceeds, payable in
twelve monthly installments. The investor group may terminate its
obligations to continue to advance funds by providing to us thirty days'
written notice. In March 2005, we received $158,033, including certain fees
payable, and subsequent to March 2005, we received an additional
$652,398 in connection with this financing. Over the longer -term, we
plan to achieve profitability through our operations from the sale and
licensing of our H-Net (TM) automatic meter-reading system. Our
condensed 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 we be unable to continue our existence.
Stock-Based Compensation
Our compensation of consultants and employees with our capital stock is
recorded and/or disclosed at estimated market value. The volatile nature of
the price of our common stock causes wide disparities in certain
valuations.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-based Compensation," 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. We 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. We have chosen to
<page>19
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 value of our common
stock at the date of grant over the amount an employee must pay to acquire the
stock. Also, in accordance with SFAS No. 123, we have provided footnote
disclosures in our financial statements 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.
Shares of our 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.
Results of Operations
Comparison of Results of Operations for the Six Months Ended March 31, 2005
and 2004
We did not generate any revenues for the six months ended March 31, 2005
and 2004. Cost of goods sold for the six months ended March 31, 2005 was
$103,674 as compared to $22,195 for the six months ended March 31, 2004, an
increase of $81,479. This increase in cost of goods sold primarily was due to
an increase in production of models and prototypes of our
H-Net(TM) products that are used for sales and marketing purposes.
General and administrative expenses increased by $467,587, or 74%, to
$1,099,937 for the six months ended March 31, 2005 as compared to $632,350 for
the same period in 2004. This increase was primarily due to increased
expenses associated with legal and consulting services. Our legal expenses
increased as a result of increased costs of compliance with securities laws and
regulations and in connection with legal fees accrued in relation to
financing transactions. Our consulting services expenses increased as a
result of technical consulting services rendered in connection with a
proposed relocation of our network operating center.
Interest expense decreased by $307,275, or 30%, to $730,214 during the six
months ended March 31, 2005 as compared to $1,037,489 for the same period in
2004. The decrease was primarily attributable to a decrease in the mark to
market of the derivative conversion option in the amount of approximately
$170,000 resulting from our issuance of a greater aggregate principal value of
convertible debentures during the six months ended March 31, 2004 as compared
to the aggregate principal value of our convertible debentures issued during
the six months ended March 31, 2005. The decrease was also attributable to
decreased amortization of convertible debt discount and prepaid interest in the
aggregate amount of approximately $130,000 resulting from an increase from one
to two years in the term of our convertible debentures issued during the six
months ended March 31, 2005 as compared to the term of our convertible
debentures issued during the six months ended March 31, 2004, which causes the
amortization of the convertible debt discount and prepaid interest over a
longer period of time, in turn reducing the amounts amortized in a particular
period.
Net loss for the six months ended March 31, 2005 increased by $91,791, or
5%, to $1,933,825 as compared to a net loss of $1,842,034 for the same period
in 2004. The increase in net loss primarily resulted from increased general and
administrative expenses which was partially offset by decreased interest
expense, as discussed above.
<page>20
Comparison of Results of Operations for the Fiscal Years Ended September
30, 2004 and 2003
We did not generate any revenues for the fiscal years ended September 30,
2004 and September 30, 2003. Cost of sales for fiscal 2004 was $95,879 as
compared to $148,675 for fiscal 2003, representing a decrease of $52,796 or
36%. This decrease in cost of sales primarily was due to a decrease in
production of models and prototypes of our H-Net(TM) products that are used for
sales and marketing purposes.
General and administrative expenses increased by $87,189 or 6% to
$1,459,844 for fiscal 2004 as compared to $1,372,655 for fiscal 2003. This
increase in general and administrative expenses primarily was due to increased
legal and accounting fees and the amortization of our officer staying bonuses.
Interest expense increased by $1,657,559, or 192%, to $2,523,105 during
fiscal 2004 as compared to $865,546 for fiscal 2003. This increase in interest
expense primarily was due to a substantial increase in borrowings under our
convertible debentures and other promissory notes during fiscal 2004.
Net loss for fiscal 2004 increased by $1,841,952 or 77%, to $4,228,827 as
compared to a net loss of $2,386,875 for fiscal 2003. The increase in net loss
was primarily due to the substantial increase in interest expense as described
above.
Liquidity and Capital Resources
During the twelve months ended September 30, 2004 and the six months ended
March 31, 2005, we financed our operations solely through private placements of
securities. We are actively pursuing sales of our H-Net(TM) systems with meter
manufacturers and other companies in the energy industry. However, we have not
yet sold any 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,
2004 and 2003 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 September 30, 2004, we had a working capital deficit of approximately
$3.9 million and an accumulated deficit of approximately $30.0 million. As of
that date, we had approximately $550,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately $1.7
million. We had other current liabilities, including amounts due to officers,
accrued interest, notes payable and current portion of long term debt of
approximately $2.9 million, including those issued prior to the beginning of
fiscal year 2004. As of March 31, 2005, we had a working capital deficit of
approximately $4.6 million and an accumulated deficit of approximately $31.5
million. As of that date, we had approximately $30,000 in cash and cash
equivalents. We had accounts payable and accrued compensation expenses of
approximately $1.9 million. To the extent convertible debentures or 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 $1.3 million
for the twelve months ended September 30, 2004 as compared to approximately
$800,000 for the twelve months ended September 30, 2003. Cash used in our
investing activities totaled approximately $8,000 for the twelve months ended
September 30, 2004 as compared to approximately $5,000 for the twelve months
ended September 30, 2003. Cash used in our operating activities totaled
approximately $636,000 for the six months ended March 31, 2005 as compared to
approximately $450,000 for the six months ended March 31, 2004. No cash was
<page>21
used in or provided by our investing activities in the six months ended March
31, 2005 or 2004.
Cash provided by our financing activities totaled approximately $1.9
million for the twelve months ended September 30, 2004 as compared to
approximately $740,000 for the twelve months ended September 30, 2003. We
raised all of the cash provided by financing activities during the twelve
months ended September 30, 2004 from the issuance of common stock, convertible
debentures and/or promissory notes. Cash provided by our financing activities
totaled approximately $116,000 for the six months ended March 31, 2005 as
compared to cash provided by our financing activities of approximately $491,000
for the six months ended March 31, 2004. We raised all of the cash provided by
our financing activities during the six months ended March 31, 2005 and 2004
from the issuance of common stock, convertible debentures and/or promissory
notes.
As of the following dates, we were in default in the repayment of principal
and interest in the corresponding amounts set forth below on our secured
convertible debentures due as of those dates:
Principal Current
Amount($) Principal
Default Date at Default Date Amount($)
------------ --------------- --------------
November 25, 2004... 100,000 100,000
December 3, 2004.... 50,000 50,000
December 31, 2004... 50,000 50,000
February 18, 2005... 50,000 50,000
March 4, 2005....... 250,000 239,200
--------- -----------
Total: $ 500,000 $ 489,200
========= ===========
As of July 12, 2005, each of these defaults, other than with respect to
payment of principal amounts which have been paid subsequent to the
corresponding default date, was continuing and we were in payment default under
convertible debentures in the aggregate principal amount of approximately
$489,200 plus related interest on those debentures. As of that date, we also
were in default under our obligations to register for resale shares of our
common stock underlying certain of our outstanding convertible debentures and
notes. In addition, as of that date, we also were in default under our
obligations to make quarterly interest payments under all of our outstanding
convertible debentures and notes issued prior to our convertible notes issued
in March 2005. As of that date, we owed accrued and unpaid interest on our
convertible debentures and notes in an aggregate amount of approximately
$225,000, net of approximately $73,000 of prepaid interest. As of July 12,
2005, as a result of the above defaults, the holders of our secured convertible
debentures and notes were entitled to pursue their rights to foreclose upon
their security interest in all of our assets. However, as of that date, other
than the receipt of a notice of default, we were not aware of any action taken
by the holders of our secured convertible debentures and notes to pursue such
rights, and as of that date we also were not aware of any other legal or
similar action taken by those holders to enforce their rights or as a result of
our defaults under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange Commission
a portion of the shares of common stock underlying the convertible debentures
and notes under which we are in default and expect that the convertible
debentures and notes ultimately will be converted into shares of our common
stock and that we therefore will not be obligated to repay the outstanding
principal and accrued and unpaid interest amounts on those debentures and
notes.
<page>22
As of July 12, 2005, we had issued the following secured convertible
debentures and notes, which provide for interest at the rate of 12% per annum,
except for the notes issued in 2005, which provide for interest at the rate of
8% per annum, and warrants to purchase common stock to various accredited
inventors in connection with debenture and note offering transactions:
<table>
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount ($) ConectiSys ($)(1) Amount ($) Interest ($)(2) Offering(#)
- --------------- ---------- ----------------- ---------- ---------------- -----------
March 29, 2002... $ 300,000 $ 225,000 $ - $ 27,300 1,500,000
May 10, 2002..... 150,000 125,000 - 36,000 750,000
June 17, 2002.... 300,000 238,000 - 72,000 1,500,000
November 27, 2002 200,000 144,000 - - 1,000,000
March 3, 2003.... 150,000 100,000 - 27,700 750,000
May 12, 2003..... 150,000 100,000 - 36,000 750,000
November 25, 2003 100,000 76,000 100,000 19,600 500,000
December 3, 2003 50,000 31,000 50,000 9,600 250,000
December 31, 2003 50,000 44,000 50,000 9,200 250,000
February 18, 2004 50,000 35,000 50,000 8,400 250,000
March 4, 2004.... 250,000 203,000 239,200 40,600 1,250,000
April 19, 2004... 250,000 165,000 - - 750,000
June 30, 2004.... 625,000 452,000 - - 1,875,000
September 9, 2004 625,000 482,000 - - 1,875,000
March 17, 2005 158,033 90,000 158,033 4,100 316,066
April 20, 2005 108,733 91,000 108,733 2,000 217,466
May 23, 2005 543,665 474,000 543,665 6,000 1,087,330
----------- ----------- ------------ ---------- ----------
Total: $4,060,431 $3,075,000 $1,299,631 $ 298,500 14,870,862
=========== =========== ============ =========== ==========
</table>
__________________
(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.
(2) Amounts are approximate and represent accrued and unpaid interest
outstanding as of July 12, 2005. The total amount of accrued and unpaid
interest does not account for approximately $73,200 of outstanding pre-
paid interest.
Each of the above secured convertible debentures or notes, except for the
convertible debentures issued in April, June and September 2004 and the
convertible notes issued in March, April and May 2005 are due one year
following their respective issuance dates. The convertible debentures issued
in April, June and September 2004 and March, April and May 2005 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 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, June and September 2004 convertible debentures and
March, April and May 2005 convertible notes. As of July 12, 2005, the
applicable conversion price was approximately $.0002 per share.
As of July 12, 2005, we had a loan outstanding and due on demand in an
amount equal to approximately $13,000 This loan accrues interest at an annual
rate of 18% and was made by Robert Spigno, our President and Chief Executive
Officer and a member of our board of directors. As of that date we also had a
<page>23
loan outstanding and due on demand in an amount equal to approximately $3,250.
This loan accrues interest at an annual rate of 18% and was made by Patricia
Spigno, our Chief Financial Officer and Secretary.
As of July 12, 2005, we had a promissory note outstanding and due September
1, 2005, payable in the approximate amount of $144,800. This note bears
interest at an annual rate of 18%.
Our continued operations are dependent on securing additional sources of
liquidity through debt and/or equity financing.
As indicated above, our consolidated financial statements as of and for the
years ended September 30, 2004 and 2003 have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As discussed in this document and
in Note 1 to our consolidated financial statements for the years ended
September 30, 2004 and 2003 included in this report, we have suffered recurring
losses from operations and at September 30, 2004 had substantial 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 and note investors
have provided us with an aggregate of approximately $4.1 million in financing
to date. No assurances can be given that they will provide any additional
financing in the future. Our current secured convertible debenture and note
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 and note 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.
Effect of Inflation
Inflation did not have any significant effect on our operations during the
twelve months ended September 30, 2004 or during the six months ended March 31,
2005. Further, inflation is not expected to have any significant effect on
our future operations.
<page>24
Impact of New Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, has established new
accounting pronouncements. We do not expect the adoption of these
pronouncements to have a material impact on our financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment" (SFAS No. 123R"). SFAS No. 123R is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
125, "Accounting for Stock issued to Employees," and its related
implementation guidelines. This Statement establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based
on the fair value of the entity's equity instruments or that may be settled
by the issuance of those equity instruments. This Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. Public entities are now required
to measure liabilities incurred to employees in share-based payment
transactions at fair value. Nonpublic entities may elect to continue to
measure their liabilities to employees incurred in share-based payment
transactions at their intrinsic value. This Statement does not change the
accounting guidance for share-based payment transactions with parties other
than employees provided in SFAS No. 123 as originally issued and EITF Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with selling, goods or
Services." This Statement is effective for public entities that file as
small business issuers as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The provisions of SFAS
No. 123R are not expected to have a material impact on our consolidated
financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets - an amendment of APB Opinion No. 29." SFAS No. 153 eliminates the
exception to account for non-monetary exchanges of similar productive
assets at carrying value and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance;
otherwise, the exchange principal of fair value applies. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for non-monetary exchanges occurring in fiscal periods beginning
after June 15, 2005. The provisions of SFAS No. 153 are not expected to
have a material impact on our consolidated financial statements.
In November 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 151, "Inventory Costs." SFAS No. 151 amends the guidance in
Accounting Research Bulletin 43, "Inventory Pricing" ("ARB 43") and
requires abnormal amounts of idle facility expense, freight handling costs and
wasted material (spoilage) to be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" as
previously defined in ARB 43. Furthermore, SFAS No. 151 requires that the
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The provisions of SFAS No. 151 will not have a significant
impact on our consolidated financial statements.
In September 2004, the Emerging Issue Task Force ("EITF") issued Topic No.
D-108, "Use of the Residual Method to Value Acquired Assets Other than
Goodwill." Topic D-108 requires the direct value method, rather than the
residual value method, be used to value intangible assets other than
goodwill for such assets acquired in business combinations completed after
September 29, 2004. Under the residual value method, the fair value of the
intangible asset is determined to be the difference between the enterprise
value and the fair value of all other separately identifiable assets;
whereas, under the direct valued method all intangible assets are valued
<page>25
separately and directly. Topic D-108 also requires that companies who have
applied the residual method to the valuation of intangible assets for
purposes of impairment testing shall perform an impairment test using the
direct value method on all intangible assets. The provisions of Topic D-108 did
not affect our consolidated financial statements.
<page>26
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. Our H-Net(TM) system
is currently comprised of two principal components: our H-Net(TM) 5.0 product,
which itself is comprised of circuitry and a radio transmitter, and our H-
Net(TM) BaseStation. Our H-Net(TM) 5.0 product is a component that is designed
to be part of a digital energy meter to read and wirelessly transmit meter data
to our H-Net(TM) BaseStation. Our H-Net(TM) BaseStation is designed to receive
and relay the meter data over standard phone lines to a central location where
the data is compiled and utilized.
We are currently developing our H-Net(TM) system. Our development efforts
have recently been predominantly focused on increasing the data transmission
range of our H-Net(TM) 5.0 product over the data transmission range of our H-
Net(TM) 4.0 product. The development of our H-Net(TM) system is also directed
at curing certain radio frequency interference experienced in our H-Net(TM) 4.0
product. In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received
FCC certification for this product in March 2005.
Concurrently with the development of our H-Net(TM) BaseStation, which is a
single-channel design, we have been developing an eight-channel H-Net(TM)
BaseStation. Our eight-channel H-Net(TM) BaseStation is designed to
communicate with up to 7,500 H-Net(TM) 5.0 product installations per network
due to its multiple channel design and to deliver real-time energy consumption
data at low-cost. We have verified initial functionality and have undertaken
destructive testing of our eight-channel H-Net(TM) BaseStation hardware with
several units in inventory that are awaiting new software for additional field
testing. We anticipate submitting our eight- channel H-Net(TM) BaseStation for
FCC approval over the course of the next few months. We expect that this
approval by the FCC will occur within approximately 60 days following
submission to the FCC of our eight-channel H-Net(TM) BaseStation, but no
assurances can be made that this approval will be obtained or that it will not
be delayed. We do not expect that the eight-channel product enhancement will
prevent sales of our current H- Net(TM) system.
We have not yet sold any H-Net(TM) systems. However, we are actively
pursuing sales of our H-Net(TM) systems with meter manufacturers and other
companies in the energy industry. 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:
<page>27
o a surge in demand for wireless data transmission services that increase
the efficiency of meter reading service companies;
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.
We estimate that 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.
<page>28
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 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.
<page>29
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
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 250,000 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 7,500 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
<page>30
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.
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 7,500 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 requires FCC approval for compliance and sales. In August 2004,
we submitted to the FCC our H-Net(TM) 5.0 product for approval for
commercialization and sale and received FCC certification for this product in
December 2004. In December 2004, we submitted to the FCC our H-Net(TM)
BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005.
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
<page>31
base to pursue this objective. Our product development efforts focus on the
following principles:
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 H-
Net(TM) system anywhere in the country.
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 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.
We are in the process of evaluating meter manufacturers as potential
business partners regarding the implementation of the H-Net(TM) system into
their meters.
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
with the first stages of sales or licensing of our H-Net(TM) system to utility
companies, energy service providers and other parties.
<page>32
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 an energy service provider 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 of two-way communications to
that they may determine which of their customers do 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 utility companies 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>33
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. 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.
In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received
FCC certification for this product in March 2005.
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.
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.
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
<page>34
fifteen minutes, twenty-four hours a day and nearly 3,000 times per month. We
estimate that 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 the 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. See "Risk Factors."
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 regulatory
agencies of 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
companies are automating numerous distinct processes within their operating
systems. Our H Net(TM) system is designed for and is expected to be 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.
<page>35
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>36
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. However, we are actively pursuing sales of our H-
Net(TM) systems with meter manufacturers and other companies in the energy
industry. 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>37
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
On or about August 18, 2004, Devon Investment Advisors, Ltd., or plaintiff,
filed a Complaint in the Arapahoe County District Court of the State of
Colorado against ConectiSys. The complaint sought repayment of amounts
allegedly loaned, plus interest and applicable attorneys' fees. We filed an
answer denying certain of plaintiff's claims and asserting defenses to
plaintiff's causes of action alleged in the complaint, including a defense
based on the expiration of the applicable statute of limitations. As of the
date of this report, Summary Judgment in this action has been granted in our
favor and we are awaiting the final order from the court formally
dismissing the case.
Except as described above, 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>38
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of ConectiSys and their ages,
positions, business experience and education as of July 12, 2005 are as
follows:
Name Age Position
---- --- --------
Robert A. Spigno(1)(2).. 51 Chairman of the Board, Chief
Executive Officer and Director
Lawrence Muirhead(1)(2). 45 Chief Technology Officer and Director
Patricia A. Spigno...... 47 Chief Financial Officer, Treasurer and
Secretary
Melissa McGough (1)..... 28 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>39
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.
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.
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
<page>40
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.
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.
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 2004, the Stock Option Committee held two
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 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, once we
are able to identify and attract a satisfactory candidate.
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
<page>41
independent members of our board of directors once we are able to identify and
attract a satisfactory candidate. 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.
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.
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 2004 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
2004 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; and Ms. Patricia Spigno - 1 report, 1 transaction.
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.
<page>42
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, 2004, 2003 and 2002. There were no other executive officers whose
annual salary and bonus compensation exceeded $100,000 during the year ended
September 30, 2004.
<table>
Summary Compensation Table
Long-Term
Compensation
------------
Awards
------------
Annual Compensation Securities
Name and Underlying All Other
Principal Position Year Salary($) Bonus($)(1) Options(#) Compensation ($)
------------------- ------- --------- ----------- ------------ ----------------
Robert A. Spigno, 2004 $160,000 $80,000 -- --
Chief Executive Officer 2003 $160,000 $80,000 -- --
2002 $160,000 $80,000 -- --
Lawrence Muirhead, 2004 $150,000 -- -- --
Chief Technology Officer 2003 $150,000 -- -- --
2002 $150,000 -- -- --
Patricia A. Spigno, 2004 $ 80,000 $40,000 -- --
Chief Financial Officer 2003 $ 80,000 $40,000 -- --
and Secretary 2002 $ 80,000 $40,000 -- --
_______________
</table>
(1) Amounts represent bonus earned, but deferred and recorded on the
books and records of ConectiSys as accrued compensation. Amounts are
payable in common stock of ConectiSys based on a conversion price
equivalent to 50% of the average of the closing bid and asked prices
of a share of ConectiSys common stock for the 30 days prior to the
end of the year in which such bonus was earned. Although our
agreements with Robert Spigno and with Patricia Spigno provide that
the conversion price is to be equal to 50% of the average of the
closing bid and asked prices of a share of our common stock for the
30 days prior to the end of the calendar year, Mr. Spigno and Ms.
Spigno both voluntarily relinquished their right to receive shares
for 2004, 2003 and 2002 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and
asked prices of a share of our common stock for the 30 days prior to
December 31, 2004, 2003 and 2002, respectively.
Stock Option Grants in 2004
In fiscal 2004, no options or stock appreciation rights were granted to the
named executives.
<page>43
Option Exercises and Fiscal Year-End Values
The following table sets forth the number of shares acquired and value
realized upon exercise of options during the fiscal year ended September 30,
2004 and the number of exercisable and unexercisable in-the-money stock options
and their values at September 30, 2004 for the named executives. An option is
"in-the-money" if the fair market value for the underlying securities exceeds
the exercise price of the option.
<table>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value ($)of Unexercised
Shares Unexercised Options In-the-Money Options at
Acquired on Value September 30, 2004 September 30, 2004 (1)
Name Exercise Realized ($) Exercisable(#) Unexercisable(#) Exercisable Unexercisable
--------------------- ------------ ------------ -------------- ---------------- -------------- ----------------
Robert A. Spigno --- --- 6,443,654 --- --- ---
Lawrence Muirhead --- --- --- 2,000,000 --- ---
Patricia Spigno --- --- 500,000 --- --- ---
_______________
</table>
(1) The closing sale price of our common stock on the OTC Bulletin Board
as of September 30, 2004 was $.0007.
Long-Term Incentive Plan Awards
In fiscal 2004, 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.
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
<page>44
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.
Report on Repricing of Options and SARs
No adjustments to or amendments of the exercise price of stock options or
stock appreciation rights previously awarded to the named executives occurred
in fiscal 2004, except as provided below.
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. The closing price of a share of our common stock on the OTC
Bulleting Board on January 6, 2004 was $.0033. This option expires on November
1, 2009. This option was repriced to maintain the viability of the incentives
provided to Mr. Spigno through the grant of the stock option. To achieve this
goal, we repriced the stock option to an exercise price per share more
reflective of the market price of a share of our common stock at the time of
repricing.
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, 2004.
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 4,493,654(2) $0.26 N/A
Total 4,493,654 $0.26 N/A
_______________
(1) Number of shares is subject to adjustment for changes in capitalization
for stock splits, stock dividends and similar events.
(2) Represents 4,493,654 shares of common stock underlying stock options,
warrants and rights issued under our Amended Non-Qualified Stock Option
and Stock Bonus Plan and no 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.
<page>45
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 July 12, 2005, options to purchase a total of 4,393,654 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 registration statements on Forms S-8 on December 6, 1999,
September 22, 2000 and September 21, 2001 covering the shares of common stock
subject to the Plan.
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.
<page>46
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.
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.
<page>47
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, 2004, 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;
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.
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>48
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, 2004, approximately $12,000 of principal and
accrued and unpaid interest under this note remained outstanding. As of July
12, 2005, approximately $13,000 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 $49,000 owed to Ms. Spigno as of September 30, 2004.
As of July 12, 2005, approximately $3,250 was owed to Ms. Spigno. The loan
balance is currently due on demand and accrues interest at an annual rate of
18%.
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. Although our agreement with Mr. Spigno
provides that the conversion price is to be 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, Mr. Spigno voluntarily relinquished his right to
receive shares for 2003 based on this conversion price in favor of a conversion
price equal to 100% 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 is 15,094,340.
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 the 30 days prior to December 31, 2003. Although our agreement with
Ms. Spigno provides that the conversion price is to be 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, Ms. Spigno voluntarily relinquished her
right to receive shares for 2003 based on this conversion price in favor of a
conversion price equal to 100% 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 is 7,547,170.
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
<page>49
price of $.50 per share, which was in excess of the price of our common stock
on that date. This option expires on November 1, 2009.
Effective December 31, 2004, 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, 2004. Although our agreement with Mr. Spigno
provides that the conversion price is to be 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, 2004, Mr. Spigno voluntarily relinquished his right to
receive shares for 2004 based on this conversion price in favor of a conversion
price equal to 100% 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, 2004. The
number of shares of common stock of ConectiSys issuable in connection with this
bonus is 27,586,207.
Effective December 31, 2004, 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, 2004. Although our agreement with
Ms. Spigno provides that the conversion price is to be 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, 2004, Ms. Spigno voluntarily relinquished her
right to receive shares for 2004 based on this conversion price in favor of a
conversion price equal to 100% 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,
2004. The number of shares of common stock of ConectiSys issuable in connection
with this bonus is 13,793,103.
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 July 12, 2005, a total of 5,101,666,998 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
<page>50
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 10,750,000 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, 333-102781 and 333- 116895, all of
the shares of common stock being offered under this prospectus are issuable
upon conversion of notes or upon exercise of warrants that were acquired by the
selling security holders from us in connection with a private placement that we
made effective as of May 23, 2005. In the private placement effective May 23,
2005, we issued $543,665 in principal amount of callable secured convertible
notes due May 23, 2007 to four accredited investors, or the note investors, in
exchange for gross proceeds of $543,665 in cash. In connection with that
private placement, we also issued warrants to purchase up to an aggregate of
1,087,330 shares of our common stock to the note investors.
The callable secured convertible notes bear interest at an initial rate of
8% per year. The initial conversion price of the notes 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.
The shares of common stock being offered under this prospectus include
shares of common stock issuable upon conversion of accrued and unpaid interest
on the above convertible notes outstanding as of June 16, 2005 and interest
that may accrue on the above convertible notes through June 15, 2006.
The shares of common stock being offered under this prospectus include
shares of common stock issuable upon conversion of the callable secured
convertible notes and upon exercise of the related warrants without regard to
the exercise limitations described below.
The terms of the callable secured convertible notes and the warrants
prohibit conversion of the notes or exercise of the warrants to the extent that
conversion of the notes would result in the note 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 note investor, together with its affiliates, beneficially owning in excess
of 4.9% of our outstanding shares of common stock. A note investor may waive
the 4.9% limitation upon 60 days' prior written notice to us. Also, these
limitations do not preclude a note investor from converting or exercising a
callable secured convertible note or warrant and selling shares underlying the
note 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 callable secured
convertible notes and warrants, the number of shares shown in the table as
beneficially owned by each note 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 note 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
<page>51
may be necessary under the rules and regulations of the Securities Act of 1933
to keep it effective until the earlier of:
o the date that all shares of common stock offered under this prospectus
may be resold by those holders in a public transaction without volume
limitations or other material restrictions without registration under the
Securities Act, including without limitation, under Rule 144 under the
Securities Act; and
o the date that all shares of common stock offered by those holders under
this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
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 57,837,687(4) -- 57,837,687 *
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 50.00%
Patricia A. Spigno........ Common 25,624,601(7) -- 25,624,601 *
Lawrence Muirhead......... Common 971,393 -- 971,393 *
Melissa McGough........... Common 354,138 -- 354,138 *
AJW Offshore, Ltd......... Common 952,095,980(8) 952,095,980(8) 372,023,148(8) 4.90%
AJW Qualified Partners, LLC. Common 783,190,123(8) 783,190,123(8) 372,023,148(8) 4.90%
AJW Partners, LLC......... Common 339,992,370(8) 339,992,370(8) 372,023,148(8) 4.90%
New Millennium Capital
Partners II, LLC....... Common 43,340,527(8) 43,340,527(8) 160,515,875(8) 2.17%
All directors and executive
officers as a group
(4 persons)............. Common 84,787,819(9) -- 84,787,819 2.17%
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 50.00%
_______________
* Less than 1.00%
</table>
(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
5,101,666,998 shares outstanding plus the 2,118,619,000 shares offered
and assumed sold under this prospectus.
(4) Includes (i) 4,992,556 shares held directly, (ii) 1,443,654 shares
underlying options, (iii) 5,000,000 shares issuable upon conversion of
Class B Preferred Stock, and (iv) 46,401,477 shares issuable in
connection with payment of annual bonuses for calendar years 2002 through
2004. Mr. Spigno holds an option to purchase up to 500,000 shares of
Class B Preferred Stock.
<page>52
(5) Includes (i) 215,865 shares held directly, and (ii) 234,155 shares
underlying an option to purchase Class A Preferred Stock.
(6) Represents an option to purchase up to 500,000 shares of Class B
Preferred Stock.
(7) Includes (i) 1,923,863 shares held directly, (ii) 500,000 shares
underlying options, and (iii) 23,200,738 shares issuable in connection
with payment of annual bonuses for calendar years 2002 through 2004.
(8) 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 notes 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
notes 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 and notes, if the debentures had actually been
converted on July 12, 2005, the conversion price would have been
approximately $.0002. Under the terms of the warrants, if the warrants
had actually been converted on July 12, 2005, the exercise price would
have been (i) $.002 for the warrants issued in April, June and September
2004 and March, April and May 2005, (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
$.0002 for the warrants issued in the March 2002 through June 2002
financing transactions.
(9) Includes (i) 8,241,950 shares held directly, (ii) 1,943,654 shares
underlying options, (iii) 5,000,000 shares issuable upon conversion of
Class B Preferred Stock, and (iv) 69,602,215 shares issuable in
connection with payment of annual bonuses for calendar years 2002 through
2004. Mr. Spigno holds an option to purchase up to 500,000 shares of
Class B Preferred Stock.
<page>53
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 disposing of 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 distribution of the shares by any selling security holder to its
partners, members or stockholders;
o broker-dealers may agree with the selling security holders to sell a
specified number of shares at a stipulated price per share;
o one or more underwritten public offerings on a firm commitment or best
efforts basis:
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.
<page>54
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 negotiated, which commissions as to a
particular broker or dealer may be in excess of customary commissions to the
extent permitted by applicable law.
If sales of shares offered under this prospectus are made to broker-dealers
as principals, we would be required to file a post-effective amendment to the
registration statement of which this prospectus is a part. In the post
- -effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to
such sales.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to
be "underwriters" within the meaning of the Securities Act in connection with
these sales. 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. Any broker
- -dealers or agents that are deemed to be underwriters may not sell shares
offered under this prospectus unless and until we set forth the names of
the underwriters and the material details of their underwriting arrangements
in a supplement to this prospectus or, if required, in a replacement
prospectus included in a post-effective amendment to the registration
statement of which this prospectus is a part.
The selling security holders may sell all or any part of the shares offered
under this prospectus through an underwriter. To our knowledge, no selling
security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If a selling security holder informs us that it has
entered into such an agreement or agreements, any material details will be set
forth in a supplement to this prospectus or, if required, in a
replacement prospectus included in a post-effective amendment to the
registration statement of which this prospectus is a part.
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 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, notes 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, notes or the warrants upon conversion or
exercise. If a selling security holder transfers its secured convertible
debentures, notes or warrants prior to conversion or exercise, the
transferee of the secured convertible debentures, notes or warrants may not
sell the shares of common stock issuable upon conversion of the secured
convertible debentures or notes or upon exercise of the warrants under this
prospectus unless we amend or supplement this prospectus to cover such
sales.
In addition, if any of the shares of common stock offered for sale pursuant
to this prospectus are transferred other than pursuant to a sale under this
prospectus, then subsequent holders could not use this prospectus until a
post-effective amendment or prospectus supplement is filed, naming such
holders. We offer no assurance as to whether any of the selling security
<page>55
holders will sell all or any portion of the shares offered under this
prospectus.
For the period a selling security holder holds the secured convertible
debentures, notes or the warrants, the selling security 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 notes or
upon exercise of the warrants. The terms on which we could obtain
additional capital during the period in which the secured convertible
debentures, notes or the warrants remain outstanding may be adversely
affected. The holders of the secured convertible debentures, notes and the
warrants are most likely to voluntarily convert their secured convertible
debentures and notes or exercise their warrants when the conversion or
exercise price is less than the market price of our common stock. However, we
offer no assurances as to whether any of those derivative securities will
be converted or exercised.
We have agreed to pay all fees and expenses incident to the registration of
the shares being offered under this prospectus. However, each selling
security holder and purchaser is responsible for paying any discounts,
concessions and similar selling expenses they incur.
We and certain of the selling security holders have agreed to indemnify one
another against certain losses, claims, damages and liabilities arising in
connection with this prospectus, including liabilities under the Securities
Act.
<page>56
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 7.5 billion shares of common
stock, no par value per share, and 50 million shares of preferred stock, $1.00
par value per share. Of the 50 million authorized shares of preferred stock,
one million shares have been designated as Class A Preferred Stock, or Class A
Preferred, one million shares have been designated as Class B Preferred Stock,
or Class B Preferred, and the remaining 48 million shares are undesignated. As
of July 12, 2005, there were 5,101,666,998 shares of common stock outstanding
held by approximately 820 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.
We have filed a proxy statement with the Securities and Exchange Commission
covering, among other things, a proposal to be voted on by our shareholders to
increase our authorized shares of common stock from 7.5 billion shares to 15
billion shares. Prior to the time that the registration statement of which this
prospectus forms a part is declared effective by the Securities and Exchange
Commission, we must duly increase our authorized shares of common stock to an
amount at least sufficient to cover the shares of common stock to be registered
for resale under the registration statement of which this prospectus forms a
part.
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.
<page>57
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.
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, 2004 and 2003 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.
<page>58
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>59
CONECTISYS CORPORATION
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Consolidated Financial Statements As Of And For The Years Ended
September 30, 2004 and 2003
- ---------------------------------------------------------------
Report of Independent Registered Public Accounting Firm.....................F-1
Consolidated Balance Sheet for the Year Ended September 30, 2004............F-3
Consolidated Statements of Operations for the Years
Ended September 30, 2004 and 2003......................................F-5
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended September 30, 2004 and 2003................................F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2004 and 2003........................................... F-13
Notes to Consolidated Financial Statements for the Years Ended
September 30, 2004 and 2003............................................F-16
Condensed Consolidated Financial Statements As Of And For The
Three and Six Months Ended March 31, 2005 and 2004
- -------------------------------------------------------------
Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited)
and September 30, 2003 (audited).......................................F-65
Consolidated Statements of Operations for the Three and Six
Months Ended March 31, 2005 and 2004 and the
Cumulative Period From December 31, 1990 (Inception)
Through March 31, 2005 (unaudited).....................................F-67
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through March 31, 2005 (unaudited).......F-68
Consolidated Statement of Cash Flows for the Six
Months Ended March 31, 2005 and 2004 and the Cumulative
Period From December 31, 1990 (Inception) Through
March 31, 2005 (unaudited).............................................F-77
Notes to Condensed Consolidated Financial Statements (unaudited)............F-80
<page>60
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related consolidated statements of operations,
changes in shareholders' equity (deficit), and cash flows for the years ended
September 30, 2004 and 2003, and the cumulative period from December 1, 1990
(inception of development stage) through September 30, 2004, 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 of the Public
Company Accounting Oversight Board (United States). 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, 2004, and the
results of their operations and their cash flows for the years ended September
30, 2004 and 2003, and the cumulative period from December 1, 1990 (inception
of development stage) through September 30, 2004, 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, 2004. 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
December 14, 2004
<page>F-2
CONECTISYS CORPORATION AND SUBSUDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2004
Assets
Current assets
Cash and cash equivalents $ 550,044
Due from officer 12,293
Prepaid expense 176,967
------------
Total current assets 739,304
Property and equipment, net of accumulated
depreciation of $321,560 23,357
License and technology, net of accumulated
amortization of $421,478 0
Loan fees, net of accumulated
amortization of $332,482 144,705
------------
Total assets $ 907,366
============
<page>F-3
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2004
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 256,180
Accrued compensation 1,458,236
Due to officers 43,058
Accrued interest payable 487,070
Other current liabilities 25,167
Notes payable and current potion of
long-term debt 2,326,852
------------
Total current liabilities 4,596,563
Long-term debt, net of current portion 3,475,609
------------
Total liabilities 8,072,172
============
Commitments and contingencies 0
Shareholders' equity (deficit)
Preferred stock - Class A 1,000,000 shares authorized
$1.00 par value, 215,865 issued and outstanding 215,865
Convertible preferred stock - Class B, 1,000,000
shares authorized, $1.00 par value; -0- shares
issued and outstanding 0
Common stock - 7,500,000,000 shares authorized,
no par value, 1,131,172,122 issued and outstanding 20,690,236
Additional paid in capital:
Common stock, no par value
17,743,654 stock options
and warrants exercisable, 1,362,958
Convertible preferred stock - Class B
$1.00 par value, 1,000,000 options exercisable 100,000
Accumulated loss during development stage (29,533,865)
--------------
Total shareholders' deficit (7,164,806)
--------------
Total liabilities and shareholders' equity $ 907,366
==============
<page>F-4
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2004
<table>
Dec. 1, 1990
(Inception)
Period
Year Ended Year Ended Through
September 30, September 30, September 30,
2004 2003 2004
-------------- -------------- --------------
<c> <c> <c>
Revenues $ 0 $ 0 $ 517,460
Cost of goods sold 95,879 148,675 885,942
Gross profit (95,879) (148,675) (368,482)
General and administrative 1,459,844 1,372,655 21,682,151
Loss from operations (1,555,723) (1,521,330) (22,050,633)
Non-operating income (expense) (150,000) 0 (1,350,289)
Interest Income 1 1 102,925
Interest expense (2,523,105) (865,546) (5,158,126)
------------ ------------ -------------
Net loss $ (4,228,827) $ (2,386,875) $ (28,456,123)
Weighted average shares outstanding 795,809,759 237,357,973
Net loss per share (0.01) (0.01)
====== ======
</table>
<page>F-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30,
2004
<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, 2004
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, 2004
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, 2004
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, 2004
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, 2004
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, 2004
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, 2004
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.
<page>F-13
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, 2004
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 2003 through
August 2004 valued from
$0.0008 to $0.0026 per share 0 $ 0 57,300,000 $ 78,400 $ 0 $ 0 $ 0 $ 78,400
Issuance of 7,000,000 warrants
November 2003 through
September 2004 at exercise
Prices ranging from $0.002 to
$0.005 per share, in
conjunction with $2,000,000
principal value of 12%
convertible debt 0 0 0 0 9,447 0 0 9,447
Debt and accrued liabilities
December 2003 with
preferred stock class A
valued at $1.00 per share 15,845 A 15,845 0 0 0 0 0 15,845
Debt and accrued liabilities
November 2003 to September
2004 with common shares
valued from $0.001 to $0.0025
per share 0 0 156,625,000 163,575 0 0 0 163,575
Cash, November 2003 through
March 2004 with prices of
approximately $0.0010 0 0 74,670,000 75,000 0 0 0 75,000
per share
Re-characterization of beneficial
conversion option as derivative
conversion option , October 2003
pertaining to $963,205 of
convertible debt at
September 30, 2003 0 0 0 0 (881,550) 0 0 (881,550)
Conversion of $218,115 principal
value of 12% convertible debt
$327,172 of derivative
conversion option
along with $49,008 accrued
interest, net of $28,571
convertible debt discount 0 0 352,352,250 565,724 0 0 565,724
Net loss for the year 0 0 0 0 0 0 (4,228,827) (4,228,827)
--------- ---------- ----------- ----------- ---------- ---------- ------------ -----------
Balance, September 30, 2004 215,865 $ 215,865 1,131,172,122$20,690,236 $1,462,958 $ 0 $(29,533,865)$(7,164,806)
========= ========== =========== =========== ========== ========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-14
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Years Ended September 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2004
<table>
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2004 2003 2004
-------------- ------------- --------------
Operating activities
Net (loss) $ (4,228,827) $ (2,386,875) $(28,456,123)
Adjustments to reconcile net loss
to net cash used by
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 17,007 24,180 1,711,161
Derivative conversion option 1,572,705 0 1,572,705
Stock issued for services 78,400 134,000 7,599,173
Stock issued for interest 0 0 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of loan fees
and note discounts 770,739 797,996 2,211,277
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses (176,967) 0 (176,967)
Interest receivable 0 0 (95,700)
Deposits and prepaids 0 0 182,346
Increase (decrease) in liabilities
Bank overdraft 0 0 0
Accounts payable 116,108 297,153 1,033,509
Accrued compensation 360,461 185,770 2,580,253
Due to/from officers (37,168) 70,179 706,803
Other current liabilities 206,870 92,314 756,027
------------- ------------- -------------
Net cash used by operating activities $ (1,320,672) $ (785,283) $ (7,209,384)
<page>F-15
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Years Ended September 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2004
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2004 2003 2004
-------------- ------------- --------------
Investing activities
Increase in notes receivable $ 0 $ 0 $ (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment (7,888) (5,317) (211,735)
Net cash provided by (used by) investing activities (7,888) (5,317) (1,628,292)
Financing activities
Common stock issued for cash 75,000 180,000 3,487,172
Stock warrants 9,447 9,816 196,578
Preferred stock issued for cash 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees (213,843) (83,069) (517,187)
Proceeds from debts
Related party 0 0 206,544
Other 2,073,218 679,163 6,236,261
Payments on debt
Related party 0 0 (53,172)
Other (67,500) (48,129) (502,036)
Decrease in subscription receivable 0 0 35,450
Contributed capital 515
------------- ------------- -------------
Net cash from (used by) financing activities 1,876,322 737,781 9,387,720
------------- ------------- -------------
Net increase (decrease) in cash 547,762 (52,819) 550,044
------------- ------------- -------------
Cash beginning of period 2,282 55,101 0
Cash end of period $ 550,044 $ 2,282 $ 550,044
<page>F-16
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Years Ended September 30, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2004
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2004 2003 2004
-------------- ------------- --------------
Cash paid during the year for
Interest $ 229,719 $ 50,979 $ 618,367
Income taxes 6,400 3,200 14,450
Non-cash activities
Common stock issued inn exchange for:
Note receivable 0 0 281,250
Prepaids 0 0 182,346
PP&E 0 0 130,931
License & technology 0 0 2,191,478
Minority interest 0 0 59,247
Repayment of debt and interest 729,300 1,215,611 6,300,967
Accrued services and interest 0 0 4,949,192
Preferred stock issued for
Accrued services 15,845 0 75,845
Repayment of debt 0 0 119,520
Preferred stock options issued for
Repayment of debt 0 0 100,000
Re-characterize beneficial conversion
option as debt 881,500 0 881,550
</table>
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 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-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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/from 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-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 2005.
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 September 30, 2004, no deferred
technology costs were recognized.
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
Accounting for stock-based compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-based Compensation," 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.
The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation:
Year Ended Year Ended
Sept. 30, 2004 Sept. 30, 2003
Net loss, as reported $ (4,228,827) $ (2,386,875)
Add: Total stock-based
compensation expense included
in net loss, as reported - -
Deduct: Total stock-based
compensation expense
determined under fair value based
method for all awards, net of
related tax effects - -
--------------- -----------------
Pro forma net loss $ (4,228,827) $ (2,386,875)
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.
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
Income taxes
The Company files a consolidated federal income tax return. The Company has
adopted 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, 2004, the Company had 1,131,172,122 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:
Class B preferred stock options 10,000,000
Convertible note holder common stock warrants 13,250,000
Common stock warrants - other 500,000
Common stock options - officers 4,043,654
Common stock options - other 2,450,000
-------------
Subtotal 30,243,654
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
($2,745,090), accrued interest (242,569)
and net of prepaid interest ($142,808),
assumed converted into common stock at
$0.0005 per share 5,689,702,000
-------------
Total potential common stock equivalents 5,749,476,085
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
Net loss per common share - basic and diluted (continued)
If all currently outstanding potential common stock equivalents were
exercised, the Company would receive proceeds of approximately $5,204,000
Advertising Costs
The Company expenses advertising cost in the year incurred.
Such costs amounted to $7,447 and $11,489 for the years
ended September 30, 2004 and 2003, respectively.
Recently issued accounting pronouncements
The Financial Accounting Standard Board (FASB) has established new
pronouncements. The Company does not expect the adoption of these
pronouncements to have a material impact on its financial position,
results of operations or cashflows. This includes SFAS No. 144,
Accounting for Impairment and Disposal of Long-Lived Assets
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.
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
Recently issued accounting pronouncements (continued)
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 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 16,
2003. The adoption of SFAS No. 150 did not have a material impact on the
Company's consolidated financial statements.
In December 2003, the FASB issued a revised Interpretation No. 46,
"Consolidation of Variable Interest Entities." The interpretation clarifies
the application of "Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain types of variable interest entities. The
Company does not expect the adoption of this interpretation to have any impact
on its financial statements.
NOTE 2. GOING CONCERN UNCERTAINTY
As of September 30, 2004, the Company had a deficiency in working capital of
approximately $3,850,000 and had incurred continual net losses since its return
to the development stage in fiscal 1996 of approximately $26,000,000, 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 $3,250,000,000 through fourteen
similar funding tranches occurring in April 2002, May 2002, June 2002, November
2002, March 2003, May 2003, November 2003, December 2003, December 2003,
February 2004, March 2004, April 2004, June 2004 and September 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-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 is being amortized over the
calendar year 2004. For the year ended September 30, 2004, $90,000 was
amortized as officer salaries with a balance of $30,000 at September 30, 2004.
In connection with the convertible debenture financing obtained in April 2004,
June 2004 and September 2004, the Company prepaid $30,000, $75,000 and $75,000
dollars in interest, respectively (see note 10). The prepaid interest is being
amortized over a one year period. For the year ended September 30, 2004,
$13,562, $19,110 and $4,520 were amortized, respectively, for a total of
$37,192. The balances at September 30, 2004 are $16,438, $55,890 and $70,480
for a total prepaid interest of $142,808.
Also included in prepaid expenses is a prepaid retainer in the amount of $4,159
to a law firm in connection with a suit brought forth by Devon Investment
Advisors Ltd. (see note 13). As of September 30, 2004, the balance in prepaid
expenses was $176,967.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2004 consisted of the following:
Office equipment $ 292,946
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 344,917
Accumulated depreciation (321,560)
-----------
Net book value $ 23,357
===========
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at September 30, 2004 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
===========
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 7. LOAN FEES
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, with the balances written-off at September 30, 2004 as a result of a
legal settlement.
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 the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. Loan fees 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. Loan fees
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 fees 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 loan fees
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 loan fees 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.
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 7. LOAN FEES (continued)
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 1,500,000 common stock warrants, exercisable
over a seven-year period at $0.005 per share. Loan fees associated with these
loans amounted to $33,778, consisting of $18,778 in finder's fees and $15,000
in legal costs.
In February 2004 and 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 $0.002 per share. Loan fees
associated with these loans amounted to $42,335, consisting of $35,335 in
finder's fees and $7,000 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. Loan fees associated with these loans amounted to $36,624,
consisting of $21,624 in finder's fees and $15,000 in legal costs. The Company
also prepaid $30,000 in interest.
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. Loan fees associated with these loans amounted to $52,653,
consisting of $47,653 in finder's fees and $5,000 in legal costs. The Company
also prepaid $75,000 in interest.
In September 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. Loan fees
associated with these loans amounted to $48,453, consisting of $46,953 in
finder's fees and $1,500 in legal costs. The Company also prepaid $75,000
in interest.
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 7. LOAN FEES (continued)
Total new loan fees during the year ended September 30 ,2004 amounted to
$213,843. Total amortization on the one and two-year lives of all loan fees
amounted to $97,034 during the year ended September 30, 2004, leaving an
unamortized balance at September 30, 2004 of $144,705.
NOTE 8. DUE TO/FROM 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 year ended September 30, 2004, the Company
repaid $32,673. Accrued interest of $3,558 during the period brought
the loan balance due the
CEO at September 30, 2004 to $7,805. The loan balance at September 30, 2004 is
currently due on demand and continues to accrue interest at the rate of 18%
per year.
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 8. DUE TO/FROM OFFICERS (continued)
At September 30, 2001, a promissory note agreement for $25,874 was drawn up,
due on demand, at an annual interest rate of 18 percent, for cumulative
advances (plus interest) made by the Company's Secretary/Treasurer. The
Secretary/Treasurer had also borrowed on a personal credit card for the
Company's behalf in the amount of $18,455, bringing the total obligation due
the Secretary/Treasurer at September 30, 2001 to $44,329. During the year
ended September 30, 2002, the personal credit card balance was virtually paid-
off. Additional loan advances were $19,500, loan repayments were $39,500, and
accrued interest was $2,269 during the year ended September 30, 2002, bringing
the aggregate loan balance due the Secretary/Treasurer at September 30, 2002
to $8,143. During the year ended September 30, 2003, additional cash advances
of $37,500 were made, and accrued interest was $6,522, resulting in a loan
balance due the secretary Treasurer at September 30, 2003 of $52,165. During
the year ended September 30, 2004, the Company repaid $25,655 and received
an additional $666 from the treasurer. Accrued interest
amounted to $8,077 during the period
bring the loan balance due the Secretary at September 30, 2004 to $35,253. The
loan balance at September 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 year ended September 30, 2004, the Company repaid $15,623. During the year
ended September 30, 2004, accrued interest amounted to $294 bringing the loan
balance due from the Chief Technical Officer at September 30, 2004 is $12,293.
The loan balance at September 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 September 30, 2004 and 2003 was $30,765 and
$92,121, respectively, and interest expense on the officer loans amounted
to $11,929 and $19,431 for the years ended September 30, 2004 and 2003,
respectively. For presentation purposes $12,293 due from the Chief Technical
Officer has been shown as a receivable and $43,058 has been shown as due to
officers at September 30, 2004.
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 8. DUE TO/FROM OFFICERS (continued)
As of September 30, 2004, the Company owed its officers $1,458,236 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 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 as of September 30, 2003 and
22,641,509 for the December 31, 2003, bringing the total to be issued
to 29,530,431 shares at September 30, 2004.
NOTE 9. NOTES PAYABLE
Notes payable at September 30, 2004 consisted of the following:
Registered Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $6,560
Accrued interest of $7,479 and principal
on Convertible Debenture convertible
into approximately 28,078,000
shares of common stock at the price
of $0.0005 at September 30, 2004 7,479 $ 14,039
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% $6,560
Accrued interest of $7,479 and principal
on Convertible Debenture convertible
into approximately 28,078,000
shares of common stock at the price
of $0.0005 at September 30, 2004 7,479 $ 14,039
-------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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% $8,740
Accrued interest of $8,673 and principal
on Convertible Debenture convertible
into approximately 34,826,000
shares of common stock at the price
of $0.0005 at September 30, 2004 8,673 $ 17,413
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $7,730
Accrued interest of $5,450 and principal
on Convertible Debenture convertible
into approximately 26,360,000
shares of common stock at the price
of $0.0005 at September 30, 2004 5,450 $ 13,180
-------
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 $11,507 and principal
on Convertible Debenture convertible
into approximately 103,014,000
shares of common stock at the price
of $0.0005 at September 30, 2004 11,507 $ 51,507
--------
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 $11,507 and principal
on Convertible Debenture convertible
into approximately 103,014,000
shares of common stock at the price
of $0.0005 at September 30, 2004 11,507 $ 51,507
-------
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 $12,945 and principal
on Convertible Debenture convertible
into approximately 115,890,000
shares of common stock at the price
of $0.0005 at September 30, 2004 12,945 $ 57,945
-------
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 $7,192 and principal
on Convertible Debenture convertible
into approximately 64,384,000
shares of common stock at the price
of $0.0005 at September 30, 2004 7,192 $ 32,192
-------
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-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Accrued interest of $22,014 and principal
on Convertible Debenture convertible
into approximately 204,028,000
shares of common stock at the price
of $0.0005 at September 30, 2004 22,014 $ 102,014
--------
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 $22,014 and principal
on Convertible Debenture convertible
into approximately 204,028,000
shares of common stock at the price
of $0.0005 at September 30, 2004 22,014 $ 102,014
-------
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 $24,766 and principal
on Convertible Debenture convertible
into approximately 229,532,000
shares of common stock at the price
of $0.0005 at September 30, 2004 24,766 $ 114,766
--------
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 $13,759 and principal
on Convertible Debenture convertible
into approximately 127,518,000
shares of common stock at the price
of $0.0005 at September 30, 2004 13,759 $ 63,759
--------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 $7,316 and principal
on Convertible Debenture convertible
into approximately 91,632,000
shares of common stock at the price
of $0.0005 at September 30, 2004 7,316 $ 45,816
-------
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 $7,316 and principal
on Convertible Debenture convertible
into approximately 91,632,000
shares of common stock at the price
of $0.0005 at September 30, 2004 7,316 $ 45,816
-------
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 $7,316 and principal
on Convertible Debenture convertible
into approximately 91,632,000
shares of common stock at the price
of $0.0005 at September 30, 2004 7,316 $ 45,816
-------
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 $8,351 and principal
on Convertible Debenture convertible
into approximately 116,702,000
shares of common stock at the price
of $0.0005 at September 30, 2004 8,351 $ 58,351
-------
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 $8,351 and principal
on Convertible Debenture convertible
into approximately 116,702,000
shares of common stock at the price
of $0.0005 at September 30, 2004 8,351 $ 58,351
-------
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 $8,351 and principal
on Convertible Debenture convertible
into approximately 116,702,000
shares of common stock at the price
of $0.0005 at September 30, 2004 8,351 $ 58,351
--------
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 $3,408 and principal
on Convertible Debenture convertible
into approximately 73,482,000
shares of common stock at the price
of $0.0005 at September 30, 2004 3,408 $ 36,741
--------
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 $3,408 and principal
on Convertible Debenture convertible
into approximately 73,482,000
shares of common stock at the price
of $0.0005 at September 30, 2004 3,408 $ 36,741
--------
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 $3,408 and principal
on Convertible Debenture convertible
into approximately 73,484,000
shares of common stock at the price
of $0.0005 at September 30, 2004 3,408 $ 36,742
--------
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 $1,660 and principal
on Convertible Debenture convertible
into approximately 36,654,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,660 $ 18,327
--------
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 $1,660 and principal
on Convertible Debenture convertible
into approximately 36,654,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,660 $ 18,327
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $1,660 and principal
on Convertible Debenture convertible
into approximately 36,654,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,661 $ 18,327
--------
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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% $16,667
Accrued interest of $1,507 and principal
on Convertible Debenture convertible
into approximately 36,348,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,507 $ 18,174
--------
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 $1,507 and principal
on Convertible Debenture convertible
into approximately 36,348,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,507 $ 18,174
--------
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 $1,507 and principal
on Convertible Debenture convertible
into approximately 36,346,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,507 $ 18,173
--------
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 $1,238 and principal
on Convertible Debenture convertible
into approximately 35,808,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,238 $ 17,904
--------
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 $1,238 and principal
on Convertible Debenture convertible
into approximately 35,810,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,238 $ 17,905
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,667
Accrued interest of $1,239 and principal
on Convertible Debenture convertible
into approximately 35,810,000
shares of common stock at the price
of $0.0005 at September 30, 2004 1,238 $ 17,905
--------
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 $5,780 and principal
on Convertible Debenture convertible
into approximately 178,230,000
shares of common stock at the price
of $0.0005 at September 30, 2004 5,781 $ 89,115
--------
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 $5,781 and principal
on Convertible Debenture convertible
into approximately 178,228,000
shares of common stock at the price
of $0.0005 at September 30, 2004 5,781 $ 89,114
--------
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 $5,781 and principal
on Convertible Debenture convertible
into approximately 178,228,000
shares of common stock at the price
of $0.0005 at September 30, 2004 5,781 $ 89,114
--------
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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% with one year interest prepaid $50,000
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 100,000,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 50,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
April 19, 2006 at an annual interest
rate of 12% with one year interest prepaid $88,700
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 177,400,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 88,700
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
April 19, 2006 at an annual interest
rate of 12% with one year interest prepaid $101,125
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 202,250,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 101,125
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on April 19, 2006 at an annual
interest rate of 12% with one year
interest prepaid $10,175
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 20,350,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 10,175
--------
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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% with one year
interest prepaid $125,000
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 250,000,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 125,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
June 30, 2006 at an annual interest
rate of 12% with one year
interest prepaid $221,750
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 443,500,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 221,750
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
June 30, 2006 at an annual interest
rate of 12% with one year
interest prepaid $252,813
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 505,626,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 252,813
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 30, 2006 at an annual
interest rate of 12% with one year
interest prepaid $25,437
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 50,874,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 25,437
--------
<page>F-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #14
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
September 9, 2006 at an annual interest
rate of 12% with one year
interest prepaid $125,000
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 250,000,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 125,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
September 9, 2006 at an annual interest
rate of 12% with one year
interest prepaid $221,750
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 443,500,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 221,750
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
September 9, 2006 at an annual interest
rate of 12% with one year
interest prepaid $252,813
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 505,626,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 252,813
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on September 9, 2006 at an annual
interest rate of 12% with one year
interest prepaid $25,437
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 50,874,000
shares of common stock at the price
of $0.0005 at September 30, 2004 0 $ 25,437
-------- --------
<page>F-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Subtotal of all Registered Convertible Debentures 2,987,659
Less reclassified accrued interest $ (242,569)
------------
Subtotal principal value 2,745,090
Derivative conversion option - 150% of principal 4,117,635
Less unamortized note discount (1,493,316)
-----------
Net carrying value of
Registered Convertible Debentures $ 5,369,409
Note payable to Devon Investment Advisors,
unsecured, due December 1, 1996, interest payable
at an annual rate of 10%. The Company is
currently in default. 241,824
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including interest
at an annual rate of 18%. 183,797
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. 7,431
-----------
Total notes payable $ 5,802,461
Current portion (2,326,852)
-----------
Long-term portion $ 3,475,609
===========
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 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
option to $155,027. Total amortization of interest on the discounted
convertible note during the year ended September 30, 2001 (including $32,775
in loan fees associated with the transaction) amounted to $265,030.
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 9. NOTES PAYABLE (continued)
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 year ended September 30, 2004 accrued interest amounted
to $580 resulting in a balance of $7,431 at September 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 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 its name
because the Company was in default on the balance of the loan.
<page>F-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 9. NOTES PAYABLE (continued)
Thereafter, on June 21, 2002, Mercator filed an action against Conectisys
Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court of
California, County of Los Angeles (Case No. BC276283) for breach of promissory
note, foreclosure of security interests, fraud and deceit. Mr. Spigno is the
Chairman of the Board and a director of the Company and is also the Company's
Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief
Financial Officer. On July 3, 2002, Mercator filed a first amended complaint
in the Superior Court of California, County of Los Angeles (Case No.
BC276283), adding a claim for common count for money lent. In March 2004, the
Company settled its suit with Mercator for $150,000.
NOTE 10. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's continued
research and development efforts as of March 29, 2002, the Company entered
into a securities purchase agreement and related agreements with four
accredited investors (the "Purchasers") for the purchase of up to $750,000 of
the Company's 12% Convertible Debentures due one year from their date of
issuance. The Company granted the holders of the debentures a continuing
security interest in all of the Company's assets to secure the Company's
obligations under the debentures and related agreements. The debentures bear
interest at a rate of 12% per annum, payable quarterly in common stock or cash
at the option of the Purchasers.
<page>F-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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.
<page>F-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
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.
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 Company prepaid one year's interest of $30,000 upon
receipt of the funds. 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 Company prepaid one year's interest of $75,000 upon
receipt of the funds. 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.
On September 30, 2004 the Company issued an aggregate of $625,000 of 12%
convertible debentures in a private offering to the three accredited
investors. The Company prepaid one year's interest of $75,000 upon
receipt of the funds. 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-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 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 $563,257 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 $2,000,000 of
convertible debt during the year ended September 30, 2004, the derivative
conversion option was increased by $3,000,000.
During the fiscal year ended September 30, 2002, the Company issued 12,667,178
shares of common stock in connection with interest payments and upon
conversion of an aggregate $93,130 of principal and $6,916 of related interest
on the Company's convertible debentures. A corresponding pro-rata reduction of
$80,702 to the beneficial conversion option was made. During the fiscal year
ended September 30, 2003, the Company issued another 103,778,301 shares of
common stock in connection with the conversion of another $193,665 of
principal and $34,355 of accrued interest on the Company's convertible
debentures,
<page>F-52
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 increased to 150% from 100%
resulting in an increase of $563,257 and a re-characterization of the
conversion option as additional debt.
During the year ended September 30, 2004, the Company issued an
additional $2,000,000 of 12% convertible debentures. Also, the Company issued
352,352,250 shares of common stock in connection with the conversion of
another $218,115 of principal and $49,008 of accrued interest on the Company's
convertible debentures, resulting in a convertible debt principal balance
at September 30, 2004 of $2,745,090 (net of an aggregate of $504,910 in
debt conversions through that date). In connection with the issuance of the
additional $2,000,000 convertible debt, the Company recorded a corresponding
derivative conversion option of $3,000,000. A corresponding pro-rata reduction
of $327,172 was made to the derivative conversion option during the year
ended September 30, 2004 (an aggregate of $585,720 since the inception
of the loans), bringing the derivative conversion option balance at
September 30, 2004 to $4,117,635.
The aggregate note discount of $3,250,000 is being amortized over the one-year
and two-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 $673,705 during the
fiscal year ended September 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 $218,115 of debt principal during the fiscal year
ended September 30, 2004, resulting in an unamortized convertible debt discount
balance of $1,493,316 at September 30, 2004.
As of September 30, 2004, the Company was indebted for an aggregate of
$2,987,659, including $2,745,090 of principal and $242,569 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-53
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's 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. On July 29, 2004, the Board of Directors
approved an increase in the amount of common shares authorized from
1,000,000,000 to 7,500,000,000. 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, 2004,
there were 1,131,172,122 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-54
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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-55
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 a per share price of $0.005. 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.
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.
<page>F-56
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
During the months October 2003 through September 30, 2004, the Company issued
352,352,250 shares of common stock to a convertible note holder in exchange
for $218,115 in debt reduction and $49,008 in accrued interest. In conjunction
with these transactions, the Company transferred $327,172 in derivative
conversion option, net of $28,571 convertible debt discount to common stock.
During the months November 2003 through September 2004, the Company issued
156,625,000 shares of its restricted common stock to a consultant for debt
reduction of $163,575.
During the months October 2003 through August 2004, the Company issued
57,300,000 shares of its restricted common stock to three consultants for
services rendered of $78,400.
During the months November 2003 through March 2004, the Company issued
74,670,000 shares of its common stock for $75,000 in cash.
In December 2003, the Company issued 15,845 convertible preferred A shares
to the President for a reduction $15,845 in accrued compensation.
In October 2003, $881,550 of beneficial conversion option (equity) was
re-characterized as derivative conversion option (debt).
During the months November 2003 through September 2004, the Company issued
7,000,000 in seven-year common stock warrants as part of a $2,000,000 12%
convertible debt issuance, exercisable at prices ranging from $0.002 to $0.005
per share through the date of exercise. The warrants were recorded at $9,447
and the debt at $1,990,553, based upon the relative fair values of each.
NOTE 12. INCOME TAXES
Deferred income taxes consisted of the following at September 30, 2004:
Deferred tax asset, benefit
of net operating loss
carryforward $ 9,600,000
Valuation allowance (9,600,000)
-----------
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
September 30, 2004, the deferred tax asset and valuation allowance were both
increased by $1,800,000.
The Company has approximately $23,500,000 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, $2,300,000 in 2021, $2,200,000 in 2022,
$2,100,000 in 2023 and $4,200,000 in 2024. The California net operating loss
carryforwards expire as follows: $2,700,000 in the year 2004, $5,300,000 in
2005, $1,200,000 in 2006, $3,500,000 in 2007, $2,300,000 in 2013 and $8,500,000
in 2014.
<page>57
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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, which was subsequently extended to
December 2, 2005.
<page>F-58
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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,
2004, none of the aforementioned milestones had been successfully completed.
Litigation
There have been two recent legal proceedings 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-59
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 for common count for money lent. In March 2004, the Company
settled its suit with Mercator for $150,000.
On or about August 18, 2004, Devon Investment Advisors, Ltd., or plaintiff,
filed a Complaint in the Arapahoe County District Court of the State of
Colorado against ConectiSys Corporation. The complaint seeks repayment of
amounts allegedly loaned, plus interest and applicable attorneys' fees. As of
the date of this report, the Company has filed an Answer denying certain of
plaintiff's claims and asserting defenses to plaintiff's causes of action
alleged in the complaint, including a defense based on the expiration of the
applicable statue of limitations. The outcome of this action is presently
uncertain. However, at this time, the Company does not expect the defense or
outcome of this action to have a material adverse affect on its business,
financial condition or results of operations. As of the date of this report, a
trial date has been set for July 6, 2005.
<page>F-60
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 shares issued to the same independent
consultant valued at $36,400.
In September 2004, the Company filed a registration statement on Form S-8
covering an additional 30,000,000 shares issued to the same independent
consultant valued at $33,000.
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. In June
2002, the exercise price on the Class B preferred stock options was adjusted to
$0.50 per share. In January 2004, the exercise price on the Class B preferred
stock options was adjusted to $0.05 per share and the exercise period extended
to November 1, 2009.
The Company's CEO currently owns 215,865 shares of the Company's Class A
preferred stock, of which 15,845 shares were purchased during the year ended
September 30, 2004, and has options to purchase another 234,155 shares for
$1.00 per share through November 1, 2005.
<page>F-61
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The Company has granted various common stock options and warrants to employees
and consultants. Generally, the options and warrants were granted at
approximately the fair market value of the Company's common stock at the date
of grant and vested immediately, except that when restricted rule 144 common
stock was issued, the options and warrants were granted at an average discount
to market of 50% (ranging from between 20% to 75%).
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. Accordingly,
compensation expense for common stock options and warrants issued to employees
for services have been recorded as the difference between the intrinsic value
of those services as measured by the (discounted) market value of the common
stock at the date of grant and the exercise price, with pro forma disclosure
of the excess market value as required by FASB No. 123. No common stock
options or warrants were granted to employees (including officers) and
directors of the Company during the years ended September 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 SFAS 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 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.
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-62
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 November 2002 through 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. During the year ended September 30, 2004,
4,352,205 of these non-valued options expired, leaving a balance at September
30, 2004 of 500,000 options, exercisable at $1.00 per share and expiring
January 16, 2005. The Company also granted a contingent issuance
to its Chief Technical Officer of 2,000,000 common stock options exercisable
at $0.50 per share and expiring December 31, 2004, which will not vest until
certain milestones have been attained. These respective common stock options
and contingent issuances have been excluded from the summarized table below.
In November 2003 through December 2003, 1,500,000 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.
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.
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.
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.
In September 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 September 30, 2004 of
$1,462,958 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
<page>F-63
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the fiscal years ended September 30,
2004 and 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 7,000,000 .003
Expired 563,500 2.00
----------
Balance outstanding, September 30, 2004 17,743,654 $.068
========== =====
The following table summarizes information about common stock options at
September 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
- --------------- --------- ------- -------- ---------- -------
$ .380 - $ .380 100,000 3 $ .380 100,000 $ .380
$ .192 - $ .192 1,000,000 6 $ .192 1,000,000 $ .192
$ .001 - $ .001 3,750,000 7 $ .001 3,750,000 $ .001
$ .130 - $ .130 1,450,000 11 $ .130 1,450,000 $ .130
$ .386 - $ .386 1,443,654 14 $ .386 1,443,654 $ .386
$ .380 - $ .380 500,000 14 $ .380 500,000 $ .380
$ .005 - $ .005 2,500,000 64 $ .005 2,500,000 $ .005
$ .005 - $ .005 500,000 74 $ .005 500,000 $ .005
$ .005 - $ .005 250,000 74 $ .005 250,000 $ .005
$ .005 - $ .005 250,000 74 $ .005 250,000 $ .005
$ .005 - $ .005 250,000 75 $ .005 250,000 $ .005
$ .005 - $ .005 1,250,000 77 $ .005 1,250,000 $ .005
$ .002 - $ .002 750,000 79 $ .002 750,000 $ .002
$ .002 - $ .002 1,875,000 81 $ .002 1,875,000 $ .002
$ .002 - $ .002 1,875,000 83 $ .002 1,875,000 $ .002
$ .001 - $0.386 17,743,654 45 $ .068 17,743,654 $ .068
=============== ========== == ======== ========== =======
NOTE 16. SUBSEQUENT EVENTS
(a) In December 2004, the Company issued 48,800,000 common shares to three
consultants for services rendered, valued at $88,500.
(b) Subsequent to September 30, 2004, the Company issued 418,801,782 shares
of common stock through December 17, 2004 in exchange for reduction of $208,000
in convertible debt and accrued interest.
<page>F-64
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2005
Mar. 31,
2005
Unaudited
-----------------
Assets
Current assets
Cash and cash equivalents $ 30,318
Due from officer 12,293
Prepaid expenses 127,241
----------------
Total current assets 169,852
Property and equipment, net of accumulated
depreciation of $334,444 10,473
Other assets
License and technology, net of accumulated
amortization of $421,478 0
Loan fees, net of accumulated
amortization of $442,932 66,255
----------------
Total assets $ 246,580
================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-65
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2005
Mar. 31,
2005
Unaudited
-----------------
Liabilities and shareholders' equity (deficit)
Current liabilities
Accounts payable $ 243,429
Accrued compensation 1,665,509
Due to officers 23,204
Accrued interest payable 492,569
Other current liabilities 2,875
Notes payable and current portion of
long-term debt 2,392,055
----------------
Total current liabilities 4,819,641
Long-term debt, net of current 251,500
----------------
Total liabilities 5,071,141
Shareholders' equity (deficit)
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized, 215,865 shares
issued and outstanding 215,865
Convertible preferred stock - Class B, $1.00
par value; 1,000,000 shares authorized,
-0- shares issued and outstanding 0
Common stock - 7,500,000,000 shares authorized,
no par value; 3,788,747,661
shares issued and outstanding 24,963,828
Additional paid-in capital:
Convertible preferred stock - Class B $1.00 par
value, 1,000,000 stock options exercisable 100,000
Common stock, no par value 17,959,720 stock
Options and warrants exercisable 1,363,436
Accumulated gain (deficit) during development stage (31,467,690)
----------------
Total shareholders' equity (deficit) (4,824,561)
----------------
Total liabilities and shareholders' equity $ 246,580
================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-66
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months and Six Months Ended March 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2005
<table> Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended Through
Mar. 31, Mar. 31, Mar. 31, Mar. 31, Mar. 31,
2005 2004 2005 2004 2005
Unaudited Unaudited Unaudited Unaudited Unaudited
----------------- ----------------- ----------------- ----------------- -------------
Revenues $ 0 $ 0 $ 0 $ 0 $ 517,460
Cost of goods sold 41,712 22,195 103,674 22,195 989,616
---------------- ---------------- ---------------- ---------------- ------------
Gross profit (41,712) (22,195) (103,674) (22,195) (472,156)
General and administrative 742,898 448,542 1,099,937 632,350 22,782,087
---------------- ---------------- ---------------- ---------------- ------------
Loss from operations (784,610) (470,737) (1,203,611) (654,545) (23,254,243)
Other income (expenses)
Settlement 0 0 0 (150,000) (125,000)
Other income 0 0 0 0 12,072
Interest income 0 0 0 0 102,924
Interest expense (364,949) (228,167) (730,214) (1,037,489) (5,908,340)
Write-off of intangible assets 0 0 0 0 (1,299,861)
Minority interest 0 0 0 0 62,500
---------------- ---------------- ---------------- ---------------- -----------
Net loss $ (1,149,559) $ (698,904) $ (1,933,825) $ (1,842,034) $ (30,409,948)
================ ================ ================ ================ ============
Weighted average shares outstanding 2,336,849,668 697,702,258 1,799,502,955 631,525,095
Net loss per share 0.00 0.00 0.00 0.00
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-67
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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 $ 0 $ 0 $(1,042,140) $ 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 0 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 0 0 515
Services, Mar. 1993 0 0 2,000 500 0 0 0 500
Services, Mar. 1993 0 0 1,200 600 0 0 0 600
Net loss for the year 0 0 0 0 0 0 (5,459) (5,459)
Balance, Sep. 30, 1993 0 0 16,809 1,044,755 0 0 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 0 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 0 0 23,655
Services, Sep. 1994 0 0 8,700 11,614 0 0 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 0 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 0 0 33,000
Net loss for the year 0 0 0 0 0 0 (32,544) (32,544)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, November
30, 1994 16,345 16,345 50,000 1,131,024 0 0 (1,080,143) 67,226
Shares issued in exchange for:
Cash, Feb. 1995 0 0 1,160 232,000 0 0 0 232,000
Debt repayment, Feb. 1995 0 0 2,040 408,000 0 0 0 408,000
Debt repayment, Feb. 1995 0 0 4,778 477,810 0 0 0 477,810
Acquisition of assets, CIPI
Feb. 1995 0 0 28,750 1,950,000 0 0 0 1,950,000
Acquisition of assets,
Apr. 1995 0 0 15,000 0 0 0 0 0
Cash and services, Apr.
and May 1995 0 0 16,000 800,000 0 0 0 800,000
Cash, Jun. 1995 0 0 500 30,000 0 0 0 30,000
Acquisition of assets and
services, Sep. 1995 0 0 4,000 200,000 0 0 0 200,000
Cash, Sep. 1995 0 0 41 3,000 0 0 0 3,000
Acquisition of assets,
Sep. 1995 0 0 35,000 1,750,000 0 0 0 1,750,000
Return of assets, CIPI
Sep. 1995 0 0 (27,700) (1,950,000) 0 0 0 (1,950,000)
Net loss for the year 0 0 0 0 0 0 (2,293,867) (2,293,867)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, November
30, 1995 16,345 16,345 129,569 5,031,834 0 0 (3,374,010) 1,674,169
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-68
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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 0 0 152,779
Debt repayment, Feb. 1996 0 0 10,000 612,000 0 0 0 612,000
Services, Feb. 1996 0 0 3,160 205,892 0 0 0 205,892
Cash, Mar. 1996 0 0 179 25,000 0 0 0 25,000
Shares returned and
canceled Mar. 1996 0 0 (15,000) 0 0 0 0 0
Services, Apr. 1996 0 0 13 2,069 0 0 0 2,069
Services, Sep. 1996 4,155 A 4,155 586 36,317 0 0 0 40,472
Services, Oct. 1996 0 0 6,540 327,000 0 0 0 327,000
Debt repayment, Nov. 1996 0 0 2,350 64,330 0 0 0 64,330
Net loss for the year 0 0 0 0 0 0 (2,238,933) (2,238,933)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, November 30, 1996 20,500 20,500 138,786 6,457,221 0 0 (5,612,943) 864,778
Shares issued in exchange for:
Services, Mar. 1997 0 0 228 6,879 0 0 0 6,879
Services, Apr. 1997 0 0 800 13,120 0 0 0 13,120
Services, Jul. 1997 0 0 1,500 16,200 0 0 0 16,200
Cash, Jul. 1997 0 0 15,000 300,000 0 0 0 300,000
Services, Aug. 1997 0 0 5,958 56,000 0 0 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, 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 condensed consolidated financial statements.
<page>F-69
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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, 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, 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
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, 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 condensed consolidated financial statements.
<page>F-70
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid-in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity (Deficit)
---------------------- -------------------------- ---------- ------------- ---------- ---------------
Shares issued in exchange for:
Services, October 1999 through (17,500) (12,000) (12,000)
September 2000, valued from
$.025 to $0.80 per 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 per 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 563,500 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 market 0 0 0 0 65,000 65,000
Net loss for the year 0 0 0 0 0 0 (3,812,140) (3,812,140)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) (869,868)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-71
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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 share 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 debt 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 $0.13 per
share 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 debt 0 0 0 0 155,027 0 0 155,027
Net loss for the year 0 0 0 0 0 0 (2,154,567) (2,154,567)
---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 0 (20,571,431) (1,489,032)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-72
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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
options 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
value of 12% convertible 0 0 0 0 649,913 0 0 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount 0 0 12,667,178 111,515 (80,702) 0 0 30,813
Net loss for the year 0 0 0 0 0 0 (2,346,732) (2,346,732)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2002 200,020 200,020 64,311,823 18,435,238 2,167,933 0 (22,918,163) (2,114,972)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-73
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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
principal 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
value of 12% convertible 0 0 0 0 490,184 0 0 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,335 accrued
interest, net of $52,340
convertible debt discount 0 0 103,778,301 353,525 (177,845) 0 0 175,680
Net loss for the year 0 0 0 0 0 0 (2,386,875) (2,386,875)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2003 200,020 200,020 490,224,872 19,807,537 2,335,061 0 (25,305,038) (2,962,420)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-74
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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 57,300,000 78,400 0 0 0 94,245
Issuance of 13,750,000 warrants
November 2003 through
June 2004 at an exercise
price of $0.005 per share, in
conjunction with $1,375,000
principal value of 12%
convertible debt 0 0 0 0 9,447 0 0 9,447
Debt and accrued liabilities
November 2003 to September
2004 with common shares
valued from $0.001 to $0.0512
per share 0 0 156,625,000 163,575 0 0 0 163,575
Cash, October 2003 through
September 2004 with prices
of approximately $0.001 0 0 74,670,000 75,000 0 0 0 75,000
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 $218,115 principal
value of 12% convertible debt
$327,172 of derivative
conversion option
along with $49,008 accrued
interest, net of $28,571
convertible debt discount 0 0 352,352,250 565,724 0 0 565,724
Net loss for the year 0 0 0 0 0 0 (4,228,827) (4,228,827)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, September 30, 2004 215,865 215,865 1,131,172,122 20,690,236 1,462,958 0 (29,533,865) (7,164,806)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-75
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period From December 1, 1990 (Inception) Through March 31, 2005
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, January 2005 with a price
of $0.00125 per share 0 0 4,000,000 5,000 0 0 0 5,000
Debt and accrued liabilities
November 2004 to March
2005 with common shares
valued from $0.001 to $0.0512
per share 0 0 64,500,000 52,000 0 0 0 52,000
Services, October 2004 through
March 2005 valued from
$0.0012 to $0.01 per share 0 0 296,800,000 351,862 0 0 0 351,862
Issuance of 316,066 warrants
March 2005 at an exercise
price of $0.0039 per share, in
conjunction with $158,033
principal value of 12%
convertible debt 0 0 0 0 478 0 0 478
Conversion of $1,784,110 principal
value of 12% convertible debt,
$2,676,165 of derivative
conversion option along
with $39,356 accrued
interest, net of $634,901
convertible debt discount 0 0 2,292,275,539 3,864,730 0 0 3,864,730
Net loss for the period 0 0 0 0 0 0 (1,933,825) (1,933,825)
----------- ----------- --------------- ----------- ----------- ----------- ------------ -----------
Balance, March 31, 2005 215,865 $ 215,865 3,788,747,661 $24,963,828 $ 1,463,436 $ 0 $(31,467,690) $(4,824,561)
=========== =========== ============== =========== =========== =========== -=========== ===========
</table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-76
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2005
<table>
Dec. 1, 1990
(Inception)
Through
Mar. 31, Mar. 31, Mar. 31,
2005 2004 2005
Unaudited Unaudited Unaudited
----------------- ----------------- --------------------
Operating activities
Net income (loss) $ (1,933,825) $ (1,842,034) $ (30,389,948)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 12,884 7,131 1,724,044
Derivative conversion option 0 815,620 1,572,705
Stock issued for services 351,862 69,245 7,951,035
Stock issued for interest 39,356 574,947
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of loan fees
and note discounts 686,581 303,398 2,897,858
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses 49,726 (90,000) 55,105
Interest receivable 0 0 (95,700)
Increase (decrease) in liabilities
Accounts payable (12,750) 6,934 1,020,759
Accrued compensation 207,273 217,774 2,787,526
Due to officers (19,853) (18,225) 686,949
Other current liabilities (16,794) 80,182 739,234
---------------- ---------------- ----------------
Net cash provided by (used by) operating activities (635,540) (449,975) (7,844,925)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-77
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2005
Dec. 1, 1990
(Inception)
Through
Mar. 31, Mar. 31, Mar. 31,
2005 2004 2005
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 (211,734)
---------------- ---------------- ----------------
Net cash provided by (used by) investing activities 0 0 (1,628,291)
Financing activities
Common stock issued for cash 5,000 50,000 3,492,172
Stock warrants 478 2,362 197,056
Preferred stock issued for cash 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees (32,000) (111,125) (549,187)
Proceeds from debts
Related party 0 0 206,544
Other 158,033 585,429 6,394,294
Payments on debt
Related party 0 (53,172)
Other (15,697) (35,704) (517,733)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
---------------- ---------------- ----------------
Net cash provided by (used by) financing activities 115,814 490,962 9,503,534
Net increase (decrease) in cash (519,726) 40,987 30,318
Cash beginning of period 550,044 2,282 0
---------------- ---------------- ----------------
Cash end of period $ 30,318 $ 43,269 $ 30,318
================ ================ ================
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-78
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2005
Dec. 1, 1990
(Inception)
Through
Mar. 31, Mar. 31, Mar. 31,
2005 2004 2005
Unaudited Unaudited Unaudited
----------------- ----------------- -------------------
Cash paid during the year for
Interest 14,653 0 633,020
Taxes 0 0 14,450
Non-cash activities
Common stock issued for
Note receivable 0 0 281,250
Prepaids 0 0 182,346
PP&E 0 0 130,931
Deposit 0 0 0
License & technology 0 0 2,191,478
Minority interest 0 0 59,247
Repayment of debt 3,868,374 285,567 10,169,341
Service & interest 391,218 12,136 5,340,410
Preferred stock issued for
Services 0 75,845
Repayment of debt 0 0 119,520
Preferred stock options issued for
Repayment of debt 0 0 100,000
Re-characterize beneficial
conversion option as debt 0 60,000 881,550
</table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-79
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's Annual Report on Form 10-KSB for the year ended September 30, 2004.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for the fair presentation have been included. The results
for the three and six months ended March 31, 2005 do not necessarily indicate
the results that may be expected for the full year.
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.
<page>F-80
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net loss per common share - basic and diluted
Net loss per common share - diluted is based on the weighted average number of
common and common equivalent shares outstanding for the periods presented.
Common equivalent shares representing the common shares that would be issued
on exercise of convertible securities and outstanding stock options and
warrants reduced by the number of shares which could be purchased from the
related exercise proceeds are not included since their effect would be anti-
dilutive.
As of March 31, 2005, the Company had 3,788,747,661 shares of common stock
outstanding. If all of 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:
Class B preferred stock options 10,000,000
Convertible note holder - common stock warrants 13,566,066
Common stock options - officers 1,943,654
Common stock options - other 2,450,000
-------------
Subtotal 27,959,720
Accrued officer compensation ($480,000),
convertible into common stock 69,602,215
Convertible note holder principal value
($1,119,013), accrued interest ($268,849)
less prepaid interest ($32,873),
assumed converted into common stock at
$0.0008 per share 1,693,736,250
-------------
Total potential common stock equivalents 1,791,298,185
<page>F-81
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table illustrates the effect on net loss if we had
applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation:
Six Months Ended Six Months Ended
3/31/2005 3/31/2004
------------------ ------------------
Net loss, as reported $ (1,933,825) $ (1,842,034)
Add: Total stock-based
compensation expense included
in net loss, as reported - -
Deduct: Total stock-based
compensation expense
determined under fair value based
method for all awards, net of
related tax effects - -
-------------- ---------------
Pro forma net loss $ (1,933,825) $ (1,842,034)
<page>F-82
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 2. GOING CONCERN UNCERTAINTY
As of March 31, 2005, the Company had a deficiency in working capital of
approximately $4,600,000 and had incurred continual net losses since its return
to the development stage in fiscal 1996, of approximately $31,000,000, 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 $3,250,000 through fourteen similar
funding tranches occurring in April 2002, May 2002, June 2002, November 2002,
March 2003, May 2003, November 2003, December 2003, December 2003, February
2004, March 2004, April 2004, June 2004 and September 2004. During the six
months ended March 31, 2005, the same investor group committed to advance the
Company and additional $1,400,000 payable in twelve monthly installments. In
March 2005, the Company received $158,033, including certain fees payable, in
connection with this additional financing. 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
condensed 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-83
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 3. PREPAID EXPENSES AND DEPOSITS
The Company has accrued a prepaid expense of $120,000 as a staying bonus for
its Chief Executive Officer and its Chief Financial Officer and Secretary as
per their employment contracts (see NOTE 5). The staying bonus is being
amortized over the calendar year 2005. For the year ended December 31, 2005,
$30,000 of this expense was amortized as officer salaries with a balance of
$90,000 at March 31, 2005.
In connection with the convertible debenture financing obtained in April 2004,
June 2004 and September 2004, the Company prepaid $30,000, $75,000 and $75,000
dollars in interest, respectively (see NOTE 7). The prepaid interest is being
amortized over a one year period. For the year ended September 30, 2004,
$13,562, $19,110 and $4,520 were amortized, respectively, related to this
prepaid interest for a total of $37,192. The balances at September 30, 2004
were $16,438, $55,890 and $70,480 for total prepaid interest of $142,808.
During the six months ended March 31, 2005, an additional $6,264, $33,190 and
$37,398 were amortized, respectively, related to this prepaid interest for a
total of $76,852. The balances at March 31, 2005 were $10,174, $22,700 and
$32,873 for a total prepaid interest of $65,747. During the six months ended
March 31, 2005, the Company converted all convertible debentures relating to
the $10,174 and $22,700 prepaid balances. These amounts are being applied to
the remaining accrued and unpaid interest on other debentures. Total remaining
prepaid interest consisted of $32,873 at March 31, 2005
Also included in prepaid expenses is a prepaid retainer in the amount of $4,159
to a law firm in connection with a suit brought forth by Devon Investment
Advisors Ltd. As of March 31, 2005, the balance in prepaid expenses was
$127,241.
<page>F-84
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 4. LOAN FEES
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, with the balances written-off at March 31, 2005 as a result of a
legal settlement.
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 the average of the lowest three
intra-day trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. Loan fees 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. Loan fees
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 fees 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 loan fees
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 loan fees 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.
<page>F-85
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 4. LOAN FEES (continued)
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 1,500,000 common stock warrants, exercisable
over a seven-year period at $0.005 per share. Loan fees associated with these
loans amounted to $33,778, consisting of $18,778 in finder's fees and $15,000
in legal costs.
In February 2004 and 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 $0.002 per share. Loan fees
associated with these loans amounted to $42,335, consisting of $35,335 in
finder's fees and $7,000 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. Loan fees associated with these loans amounted to $36,624,
consisting of $21,624 in finder's fees and $15,000 in legal costs. The Company
also prepaid $30,000 in interest.
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. Loan fees associated with these loans amounted to $52,653,
consisting of $47,653 in finder's fees and $5,000 in legal costs. The Company
also prepaid $75,000 in interest.
<page>F-86
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 4. LOAN FEES (continued)
In September 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. Loan fees associated with these loans amounted to
$48,453, consisting of $46,953 in finder's fees and $1,500 in legal costs. The
Company also prepaid $75,000 in interest.
Total new loan fees during the year ended September 30, 2004 amounted to
$213,843.
Total amortization on the one- and two-year lives of all loan fees amounted to
$97,034 during the year ended September 30, 2004, leaving an unamortized
balance at September 30, 2004 of $144,705. During the six months ended
March 31, 2005, total amortization of loan fees amounted to $109,792, leaving
an unamortized balance of $34,913.
In March 2005, the Company received another $158,033 from the above accredited
investor group in exchange for 8% 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 316,066 common stock warrants, exercisable over a seven-year period at
$0.002 per share. Loan fees associated with these loans amounted to $32,000,
consisting of $27,000 in finder's fees and $5,000 in legal costs. The Company
also paid $1,033 in prepaid interest.
There is no amortization on the new loan fees during the six months ended
March 31, 2005.
<page>F-87
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 5. DUE TO/FROM 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
year ended September 30, 2004, the Company repaid $32,673. Accrued interest of
$3,558 during the period brought the loan balance due the CEO at September 30,
2004 to $7,805. During the six months ended March 31, 2005, the Company
repaid $1,954. Accrued interest during the period amounted to $660 and brought
the balance at March 31, 2005 to $6,511. The loan balance at March 31, 2005
is currently due on demand and continues to accrue interest at the rate of
18% per year.
<page>F-88
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 5. DUE TO/FROM OFFICERS (continued)
At September 30, 2001, a promissory note agreement for $25,874 was drawn up,
due on demand, at an annual interest rate of 18 percent, for cumulative
advances (plus interest) made by the Company's Secretary/Treasurer. The
Secretary/Treasurer had also borrowed on a personal credit card for the
Company's behalf in the amount of $18,455, bringing the total obligation due
the Secretary/Treasurer at September 30, 2001 to $44,329. During the year
ended September 30, 2002, the personal credit card balance was virtually paid-
off. Additional loan advances were $19,500, loan repayments were $39,500, and
accrued interest was $2,269 during the year ended September 30, 2002, bringing
the aggregate loan balance due the Secretary/Treasurer at September 30, 2002 to
$8,143. During the year ended September 30, 2003, additional cash advances of
$37,500 were made, and accrued interest was $6,522, resulting in a loan balance
due the secretary Treasurer at September 30, 2003 of $52,165. During the year
ended September 30, 2004, the Company repaid $25,655 and received an additional
$666 from the treasurer. Accrued interest amounted to $8,077 during the period
bring the loan balance due the Secretary at September 30, 2004 to $35,253.
During the six months ended March 31, 2005, the Company repaid $21,090.
Accrued interest during the period amounted to $2,530 and brought the balance
at March 31, 2005 to $16,693. The loan balance at March 31, 2005 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 year ended September
30, 2004, the Company repaid $15,623. During the year ended September 30,
2004, accrued interest amounted to $294 and brought the loan balance due from
the Chief Technical Officer at March 31, 2005 to $12,293. The loan balance
at March 31, 2005 is currently due on demand and continues to accrue
interest at the rate of 18% per year.
<page>F-89
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 5. DUE TO/FROM OFFICERS (continued)
The aggregate amount due officers at March 31, 2005 and September 30, 2004
was $10,911 and $30,765, respectively and interest expense on the officer
loans amounted to $3,190 for the six months ended March 31, 2005 and
$11,929 for the year ended September 30, 2004. For presentation purposes
$12,293 due from the Chief Technical Officer has been shown as a receivable
and $23,204 has been shown as due to officers at March 31, 2005.
As of March 31, 2005, the Company owed its officers $1,665,509 in accrued
compensation. Of this amount, $480,000 was attributable to aggregate staying
bonuses payable to the President and Secretary/Treasurer of the Company as of
December 31, 2003. An additional $120,000 was accrued on December 31, 2004,
which will be amortized over the 2005 calendar year. The staying bonuses are
to be compensated for with the Company's common 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 29,530,431 shares at September 30, 2004 and 171,428,571 at
March 31, 2005.
<page>F-90
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE
Notes payable at March 31, 2005 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% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 8,843,750
shares of common stock at the price
of $0.0008 at March 31, 2005 7,075 $ 7,075
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 8,843,750
shares of common stock at the price
of $0.0008 at March 31, 2005 7,075 7,075
-------
<page>F-91
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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% $ 0
Accrued interest of $8,136 and principal
on Convertible Debenture convertible
into approximately 10,170,000
shares of common stock at the price
of $0.0008 at March 31, 2005 8,136 $ 8,136
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $4,975 and principal
on Convertible Debenture convertible
into approximately 6,218,750
shares of common stock at the price
of $0.0008 at March 31, 2005 4,975 $ 4,975
-------
Convertible Debenture #2
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $9,600 and principal
on Convertible Debenture convertible
into approximately 12,000,000
shares of common stock at the price
of $0.0008 at March 31, 2005 9,600 $ 9,600
<page>F-92 --------
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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% $ 0
Accrued interest of $9,600 and principal
on Convertible Debenture convertible
into approximately 12,000,000
shares of common stock at the price
of $0.0008 at March 31, 2005 9,600 $ 9,600
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $10,800 and principal
on Convertible Debenture convertible
into approximately 13,500,000
shares of common stock at the price
of $0.0008 at March 31, 2005 10,800 $ 10,800
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $6,000 and principal
on Convertible Debenture convertible
into approximately 7,500,000
shares of common stock at the price
of $0.0008 at March 31, 2005 6,000 $ 6,000
-------
<page>F-93
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #3
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 24,000,000
shares of common stock at the price
of $0.0008 at March 31, 2005 19,200 $ 19,200
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 24,000,000
shares of common stock at the price
of $0.0008 at March 31, 2005 19,200 $ 19,200
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
<page>F-94
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Accrued interest of $21,600 and principal
on Convertible Debenture convertible
into approximately 27,000,000
shares of common stock at the price
of $0.0008 at March 31, 2005 21,600 $ 21,600
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 15,000,000
shares of common stock at the price
of $0.0008 at March 31, 2005 12,000 $ 12,000
--------
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 $9,620 and principal
on Convertible Debenture convertible
into approximately 60,150,000
shares of common stock at the price
of $0.0008 at March 31, 2005 9,620 $ 48,120
-------
<page>F-95
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
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 $9,620 and principal
on Convertible Debenture convertible
into approximately 60,150,000
shares of common stock at the price
of $0.0008 at March 31, 2005 9,620 $ 48,120
-------
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 $9,620 and principal
on Convertible Debenture convertible
into approximately 60,150,000
shares of common stock at the price
of $0.0008 at March 31, 2005 9,620 48,120
-------
<page>F-96
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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 $11,342 and principal
on Convertible Debenture convertible
into approximately 76,677,500
shares of common stock at the price
of $0.0008 at March 31, 2005 11,342 $ 61,342
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $11,342 and principal
on Convertible Debenture convertible
into approximately 76,677,500
shares of common stock at the price
of $0.0008 at March 31, 2005 11,342 $ 61,342
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $11,343 and principal
on Convertible Debenture convertible
into approximately 76,678,750
shares of common stock at the price
of $0.0008 at March 31, 2005 11,343 $ 61,343
--------
<page>F-97
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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% $33,334
Accrued interest of $5,402 and principal
on Convertible Debenture convertible
into approximately 48,420,000
shares of common stock at the price
of $0.0008 at March 31, 2005 5,402 $ 38,736
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $33,333
Accrued interest of $5,403 and principal
on Convertible Debenture convertible
into approximately 48,420,000
shares of common stock at the price
of $0.0008 at March 31, 2005 5,403 $ 38,736
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $33,333
Accrued interest of $5,403 and principal
on Convertible Debenture convertible
into approximately 48,420,000
shares of common stock at the price
of $0.0008 at March 31, 2005 5,403 $ 38,736
--------
<page>F-98
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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 $2,657 and principal
on Convertible Debenture convertible
into approximately 24,155,000
shares of common stock at the price
of $0.0008 at March 31, 2005 2,657 $ 19,324
--------
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 $2,658 and principal
on Convertible Debenture convertible
into approximately 24,156,250
shares of common stock at the price
of $0.0008 at March 31, 2005 2,658 $ 19,325
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $2,658 and principal
on Convertible Debenture convertible
into approximately 24,155,000
shares of common stock at the price
of $0.0008 at March 31, 2005 2,658 $ 19,324
--------
<page>F-99
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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% $16,667
Accrued interest of $2,504 and principal
on Convertible Debenture convertible
into approximately 23,963,750
shares of common stock at the price
of $0.0008 at March 31, 2005 2,504 $ 19,171
--------
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 $2,504 and principal
on Convertible Debenture convertible
into approximately 23,963,750
shares of common stock at the price
of $0.0008 at March 31, 2005 2,504 $ 19,171
--------
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 $2,504 and principal
on Convertible Debenture convertible
into approximately 23,962,500
shares of common stock at the price
of $0.0008 at March 31, 2005 2,504 $ 19,170
--------
<page>F-100
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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 $2,236 and principal
on Convertible Debenture convertible
into approximately 23,627,500
shares of common stock at the price
of $0.0008 at March 31, 2005 2,236 $ 18,902
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,667
Accrued interest of $2,235 and principal
on Convertible Debenture convertible
into approximately 23,627,500
shares of common stock at the price
of $0.0008 at March 31, 2005 2,235 $ 18,902
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,667
Accrued interest of $2,236 and principal
on Convertible Debenture convertible
into approximately 23,628,750
shares of common stock at the price
of $0.0008 at March 31, 2005 2,236 $ 18,903
--------
<page>F-101
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #11
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $83,334
Accrued interest of $10,767 and principal
on Convertible Debenture convertible
into approximately 117,626,250
shares of common stock at the price
of $0.0008 at March 31, 2005 10,767 $ 94,101
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $10,767 and principal
on Convertible Debenture convertible
into approximately 117,625,000
shares of common stock at the price
of $0.0008 at March 31, 2005 10,767 $ 94,100
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $10,767 and principal
on Convertible Debenture convertible
into approximately 117,625,000
shares of common stock at the price
of $0.0008 at March 31, 2005 10,767 $ 94,100
--------
<page>F-102
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #14
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
September 9, 2006 at an annual interest
rate of 12% with one year
interest prepaid $ 78,420
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 98,025,000
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 78,420
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
September 9, 2006 at an annual interest
rate of 12% with one year
interest prepaid $ 69,096
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 86,370,000
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 69,096
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
September 9, 2006 at an annual interest
rate of 12% with one year
interest prepaid $ 39,096
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 48,870,000
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 39,096
--------
<page>F-103
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on September 9, 2006 at an annual
interest rate of 12% with one year
interest prepaid $ 8,868
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 11,085,000
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 8,868
--------
Convertible Debenture #15
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with one year
interest prepaid $ 25,285
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 31,606,250
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 25,285
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with one year
interest prepaid $ 71,115
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 88,893,750
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 71,115
--------
<page>F-104
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with one year
interest prepaid $ 58,472
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 73,090,000
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 58,472
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 17, 2007 at an annual
interest rate of 8% with one year
interest prepaid $3,161
Accrued interest of $0 and principal
on Convertible Debenture convertible
into approximately 3,951,250
shares of common stock at the price
of $0.0008 at March 31, 2005 0 $ 3,161
--------
<page>F-105
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Subtotal of all Convertible Debentures 1,387,862
Less reclassified accrued interest $ (301,722)
Less prepaid interest offset 32,873
------------
Subtotal principal value 1,119,013
Derivative conversion option - 150 percent of principal 1,678,520
Less unamortized note discount (519,485)
-----------
Net carrying value of
Convertible Debentures $ 2,278,048
Note payable to Devon Investment Advisors,
unsecured, due on December 1, 1996, interest payable
at an annual rate of 10%. The Company is
currently in default. 241,824
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including interest
at an annual rate of 18%. 115,950
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. 7,733
-----------
Total notes payable $ 2,643,555
Current portion (2,392,055
-----------
Long-term portion $ 251,500
===========
<page>F-106
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. 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 was 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
option to $155,027. Total amortization of interest on the discounted
convertible note during the year ended September 30, 2001 (including $32,775
in loan fees associated with the transaction) amounted to $265,030.
<page>F-107
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
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
year ended September 30, 2004 and the six months ended March 31,
2005, accrued interest amounted to $580 and $302, respectively, resulting in a
balance of $7,733 at March 31, 2005. 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 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 its name
because the Company was in default on the balance of the loan.
<page>F-108
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Thereafter, on June 21, 2002, Mercator filed an action against the Company,
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 7. 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-109
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. 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.
<page>F-110
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
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
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.
<page>F-111
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
On March 3, 2003 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to three accredited investors. The
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 May 12, 2003 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to 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 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.
<page>F-112
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
On December 3, 2003 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to 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 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 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 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-113
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. 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 four accredited investors.
The Company prepaid one year's interest of $30,000 upon receipt of the funds.
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 four accredited investors. The
Company prepaid one year's interest of $75,000 upon receipt of the funds. 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.
On September 9, 2004 the Company issued an aggregate of $625,000 of 12%
convertible debentures in a private offering to four accredited investors.
The Company prepaid one year's interest of $75,000 upon receipt of the funds.
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.
On March 17, 2005 the Company issued an aggregate of $158,033 of 8%
convertible debentures in a private offering to the four accredited investors.
The Company prepaid $1,033 interest upon receipt of the funds.
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 316,066 shares of common stock at a per share exercise
price equal to $.0039.
<page>F-114
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. 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 and/or warrants 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 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 $563,257 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 $2,000,000 of
convertible debt during the year ended September 30, 2004, the derivative
conversion option was increased by $3,000,000. During the six months ended
March 31, 2005, the derivative conversion interest was increased by $237,050
in connection with the issuance of an additional $158,033 of debt.
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,
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
<page>F-115
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
beneficial conversion option balance at September 30, 2003 to $881,550.
In October 2003, the conversion option was increased to 150% from 100%
resulting in an increase of $563,257 and a re-characterization of the
conversion option as additional debt.
During the year ended September 30, 2004, the Company issued an additional
$2,000,000 of 12% convertible debentures. Also, the Company issued 352,352,250
shares of common stock in connection with the conversion of another $218,115 of
principal and $49,008 of accrued interest on the Company's convertible
debentures, resulting in a convertible debt principal balance at September 30,
2004 of $2,745,090 (net of an aggregate of $504,910 in debt conversions through
that date). In connection with the issuance of the additional $2,000,000
convertible debt, the Company recorded a corresponding derivative conversion
option of $3,000,000. A corresponding pro-rata reduction of $327,172 was made
to the derivative conversion option during the year ended September 30, 2004
(an aggregate of $585,720 since the inception of the loans), bringing the
derivative conversion option balance at March 31, 2005 to $4,117,635.
During the six months ended March 31, 2005, the Company issued 2,292,275,539
shares of common stock in connection with the conversion of another $1,784,110
of principal and $39,356 of accrued interest on the Company's convertible
debentures, resulting in a convertible debt principal balance at March 31, 2005
of $1,119,013 (net of an aggregate of $2,289,020 in debt conversions through
that date). A corresponding pro-rata reduction of $2,676,165 was made to the
derivative conversion option during the six months ended March 31, 2005 (an
aggregate of $3,261,885 since the inception of the loans), bringing the
derivative conversion option balance at March 31, 2005 to $1,678,520.
The aggregate note discount of $3,408,087 is being amortized over the one-year
and two-year lives of the respective debt instruments. Of this amount,
$279,115 was amortized during the fiscal year ended September 30, 2002,
$653,720 was amortized during the year ended September 30, 2003, $673,705 was
amortized during the year ended September 30, 2004 and $496,962 was amortized
during the six months ended March 31, 2005, 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 in convertible bond
discount was transferred to equity upon conversion of $193,665 of debt
principal during the fiscal year ended September 30, 2003, $28,571 in
convertible bond discount was transferred to equity upon conversion of $218,115
of debt principal during the year ended September 30, 2004 and $634,901 in
convertible bond discount was transferred to equity upon conversion of
$1,784,110 of debt principal during the six months ended March 31, 2005,
resulting in an unamortized convertible debt discount balance of $519,485 at
March 31, 2005.
<page>F-116
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
As of March 31, 2005, the Company was indebted for an aggregate of
1,387,862 including $1,119,013 of principal and $268,849 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 amounts converted.
NOTE 8. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's 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. On July 29, 2004, the Board of Directors approved an
increase in the amount of common shares authorized from 1,000,000,000 to
7,500,000,000. Of the 50,000,000 authorized shares of preferred stock,
1,000,000 shares have been designated as Class A Preferred Stock and 1,000,000
shares have been designated as Class B Preferred Stock, and the remaining
48,000,000 shares are undesignated. As of March 31, 2005, there were
3,788,747,661 shares of the Company's common stock outstanding held by
approximately 800 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.
In March 2005, the Company issued 4,000,000 shares of common stock for $5,000
in cash.
During November 2004 through March 2005, the Company issued 64,500,000 shares
of its restricted common stock to a consultant for debt reduction of $52,000.
<page>F-117
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 9. FORM S-8 FILINGS
In April 2005, the Company filed a registration statement on Form S-8
covering 30,000,000 shares issued to the same independent consultant valued at
$57,000.
NOTE 10. STOCK OPTIONS AND WARRANTS
In March 2005, 316,066 five-year common stock warrants
were issued to an accredited investor group in connection with a $158,033 8%
convertible debenture financing arrangement (see NOTE 7). The
allocated cost of these warrants amounted to $478, resulting in a recorded
balance of stock options and warrants exercisable at March 31, 2005 of
$1,463,436 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
The common stock option activity during the fiscal year ended September
30, 2004 and the three months ended March 31, 2005 is summarized
as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2003 11,307,154 $.204
Granted 7,000,000 .003
Expired (563,500) 2.00
---------- -----
Balance outstanding, September 30, 2004 17,743,654 $.068
Granted 316,066 .004
Expired (100,000) .310
---------- -----
Balance outstanding, March 31, 2005 17,959,720 .065
========== =====
<page>F-118
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 10. STOCK OPTIONS AND WARRANTS (continued)
The following table summarizes information about common stock options at
March 31, 2005:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- --------------- --------- ------- -------- ---------- -------
$ .192 - $ .192 1,000,000 3 $ .192 1,000,000 $ .192
$ .001 - $ .001 3,750,000 1 $ .001 3,750,000 $ .001
$ .130 - $ .130 1,450,000 5 $ .130 1,450,000 $ .130
$ .386 - $ .386 1,443,654 8 $ .386 1,443,654 $ .386
$ .380 - $ .380 500,000 8 $ .380 500,000 $ .380
$ .002 - $ .002 2,500,000 58 $ .005 2,500,000 $ .005
$ .002 - $ .002 500,000 68 $ .005 500,000 $ .005
$ .002 - $ .002 250,000 68 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 68 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 69 $ .005 250,000 $ .005
$ .002 - $ .005 1,250,000 71 $ .005 1,250,000 $ .005
$ .002 - $ .005 750,000 73 $ .002 750,000 $ .002
$ .002 - $ .005 1,875,000 75 $ .002 1,875,000 $ .002
$ .002 - $ .005 1,875,000 77 $ .002 1,875,000 $ .002
$ .004 - $ .004 316,066 60 $ .004 316,066 $ .004
$ .001 - $0.386 17,959,720 39 $ .065 17,959,720 $ .065
=============== ========== == ======== ========== =======
NOTE 11. SUBSEQUENT EVENTS
Subsequent to March 31, 2005, the Company issued 170,000,000 shares of common
stock through April 14, 2005 in exchange for reduction of $251,500 in
convertible debt and accrued interest (which also includes the corresponding
derivative conversion option portion, net of convertible note discount).
<page>F-119