<pre>
Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-126001
CONECTISYS CORPORATION
PROSPECTUS SUPPLEMENT DATED AUGUST 16, 2005
The prospectus of ConectiSys Corporation dated July 18, 2005 is
supplemented to include information from the quarterly report on Form 10 -QSB
for the quarterly period ended June 30, 2005 filed with the Securities and
Exchange Commission by ConectiSys Corporation on August 15, 2005, and to
include other updated information.
Our consolidated financial statements and related notes for the quarterly
period ended August 15, 2005 are included commencing on page F-1 of this
supplement.
THE FOLLOWING RISK FACTORS ARE REPLACED AS FOLLOWS:
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Risks Related To This Offering
Shares of our common stock eligible or to become eligible for public sale
could adversely affect our stock price and make it difficult for us to
raise additional capital through sales of equity securities.
As of August 12, 2005, we had outstanding 6,353,666,998 shares of common
stock, of which approximately 2,632,000,000 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 11,600,000,000 shares of
common stock, approximately 11,500,000,000 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 August 15, 2005, the closing price of a share of our common stock on the OTC
Bulletin Board was $.0004. On that date, our debentures, notes and warrants
outstanding with adjustable conversion and/or exercise prices were convertible
or exercisable into approximately 11,500,000,000 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.
<page>1
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 August 15, 2005,
which amount was approximately $1,383,000 and is based upon the indicated
hypothetical trading prices:
Approximate Percentage of
Hypothetical Number of Shares Company's
Trading Price Conversion Price(1) Issuable(2) Common Stock (3)
____________ __________________ ________________ ________________
$.0008 $.00032 4,322,000,000 40%
$.0006 $.00024 5,763,000,000 48%
$.0004 $.00016 8,644,000,000 58%
$.0002 $.00008 17,288,000,000 73%
_______________
(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 August 15, 2005, the
applicable conversion price was approximately $.00012.
(2) Our current authorized capital allows us to issue a maximum of 15
billion shares of common stock.
(3) Amounts are based on 6,353,666,998 shares of our common stock
outstanding as of August 15, 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.
<page>2
THE CAPITALIZATION TABLE IS REPLACED WITH THE FOLLOWING:
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 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 7,700,000,000
shares of common stock that were issuable as of June 30, 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.
June 30, 2005
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Long-term debt, net of current portion...........................$ 1,390,445
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;
5,104,464,998 shares issued and outstanding...................25,864,023
Additional paid in capital:
Class B Convertible Preferred Stock, $1.00 par value,
1,000,000 shares authorized; no shares issued and
outstanding; 1,000,000 stock options exercisable................100,000
Common stock, no par value. 14,514,516 stock options and
warrants exercisable..........................................1,363,412
Accumulated deficit during development stage..................(32,447,131)
------------
Total shareholders' equity (deficit)........................$(4,903,831)
------------
Total liabilities and shareholders' equity..................$ 444,928
------------
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes and the information included
under the caption "Risk Factors" included elsewhere in this prospectus. Except
for historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions and our current beliefs
regarding revenues we might earn if we are successful in implementing our
business strategies. See "Special Note Regarding Forward-Looking Statements"
for further information regarding forward-looking statements. Our actual
results may differ materially from the results discussed in the forward-looking
<page>3
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
incurred significant losses since the beginning of the development of our H-
Net(TM) system. We have a significant accumulated deficit and a deficiency in
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
<page>4
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 June 30, 2005, we had a
deficiency in working capital of approximately $3.6 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 nine months ended
June 30, 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 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.
<page>5
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 Nine Months Ended June 30, 2005
and 2004
We did not generate any revenues for the nine months ended June 30, 2005
and 2004. Cost of goods sold for the nine months ended June 30, 2005 was
$135,795 as compared to $48,778 for the nine months ended June 30, 2004, an
increase of $87,017. This increase in cost of sales 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 $534,183, or 55.4%, to
$1,497,589 for the nine months ended June 30, 2005 as compared to $963,406 for
the same period in 2004. This increase was primarily due to increased expenses
associated with legal and consulting services.
Interest expense decreased by $549,077 or 30.0%, to $1,279,882 during the
nine months ended June 30, 2005 as compared to $1,828,959 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
$263,000 resulting from our issuance of greater aggregate principal value of
convertible debentures during the nine months ended June 30, 2004 as compared
to the aggregate principal value of our convertible debentures issued during
the nine months ended June 30, 2005. The decrease was also attributable to
decreased amortization of convertible debt discount and prepaid interest in the
aggregate amount of approximately $276,000 resulting from an increase from one
to two years in the term of our convertible debentures issued during the nine
months ended June 30, 2005 versus the comparable period ended June 30, 2004.
Net loss for the nine months ended June 30, 2005 decreased by $77,877 or
2.6%, to $2,913,266 as compared to a net loss of $2,991,143 for the same period
in 2004. The decrease in net loss primarily resulted from increased general and
administrative expenses which were more than offset by decreased interest
expense, as discussed above.
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.
<page>6
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 nine months ended June 30, 2005, we financed our operations
solely from cash on hand and 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 a deficiency in 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 June 30, 2005, we had a working capital deficit of approximately $3.6
million and an accumulated deficit of approximately $32.4 million. As of that
date, we had approximately $332,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately $2.0
million. We had other current liabilities, including amounts due to officers,
accrued interest, notes payable and current portion of long term debt of
approximately $2.0 million, including those issued prior to the beginning of
fiscal year 2004. To the extent convertible debentures or promissory notes that
we have issued are converted into shares of common stock, we will not be
obligated to repay the converted amounts.
Cash used in our operating activities totaled approximately $979,000 for
the nine months ended June 30, 2005 as compared to approximately $943,000 for
the nine months ended June 30, 2004. No cash was used in or provided by our
investing activities in the nine months ended June 30, 2005 or 2004.
Cash provided by our financing activities totaled approximately $762,000
for the nine months ended June 30, 2005 as compared to cash provided by our
financing activities of approximately $1.3 million for the nine months ended
June 30, 2004. We raised all of the cash provided by our financing activities
during the nine months ended June 30, 2005 and 2004 from the issuance of common
stock, convertible notes and/or promissory notes.
As of the following dates, we were in default in the repayment of principal
and interest in the corresponding amounts set forth below on our secured
convertible debentures due as of those dates:
Principal Current
Amount($) 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
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Total: $ 500,000 $ 489,200
============ ===========
As of August 10, 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
<page>7
$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
$235,000, net of approximately $72,000 of prepaid interest. As of August 10,
2005, as a result of the above defaults, the holders of our secured convertible
debentures and notes were entitled to pursue their rights to foreclose upon
their security interest in all of our assets. However, as of that date, other
than the receipt of a notice of default, we were not aware of any action taken
by the holders of our secured convertible debentures and notes to pursue such
rights, and as of that date we also were not aware of any other legal or
similar action taken by those holders to enforce their rights or as a result of
our defaults under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange Commission
a portion of the shares of common stock underlying the convertible debentures
and notes under which we are in default and expect that the convertible
debentures and notes ultimately will be converted into shares of our common
stock and that we therefore will not be obligated to repay the outstanding
principal and accrued and unpaid interest amounts on those debentures and
notes.
As of August 10, 2005, we had issued the following secured convertible
debentures and notes, which provide for interest at the rate of 12% per annum,
except for the notes issued in 2005, which provide for interest at the rate of
8% per annum, and warrants to purchase common stock to various accredited
inventors in connection with debenture and note offering transactions:
<table>
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount ($) ConectiSys ($)(1) Amount ($) Interest ($)(2) Offering(#)
- --------------- ---------- ----------------- ---------- ---------------- -----------
March 29, 2002... $ 300,000 $ 225,000 $ - $ 27,300 -
May 10, 2002..... 150,000 125,000 - 36,000 -
June 17, 2002.... 300,000 238,000 - 72,000 -
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 20,600 500,000
December 3, 2003 50,000 31,000 50,000 10,200 250,000
December 31, 2003 50,000 44,000 50,000 9,700 250,000
February 18, 2004 50,000 35,000 50,000 8,900 250,000
March 4, 2004.... 250,000 203,000 239,200 41,400 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 5,100 316,066
April 20, 2005 108,733 91,000 108,733 2,700 217,466
May 23,2005 543,665 474,000 411,665 7,300 1,087,330
----------- ----------- ------------ ----------- ----------
Total: $4,060,431 $3,075,000 $1,167,631 $ 304,900 11,120,862
=========== =========== ============= ============ ==========
</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.
<page>8
(2) Amounts are approximate and represent accrued and unpaid interest
outstanding as of August 10, 2005. The total amount of accrued and unpaid
interest does not account for approximately $71,300 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 August 10, 2005, the
applicable conversion price was approximately $.00012 per share.
As of August 10, 2005, we had a promissory note outstanding and due
September 1, 2005, payable in the approximate amount of $147,000. This note
bears interest at an annual rate of 18%.
Our continued operations are dependent on securing additional sources of
liquidity through debt and/or equity financing.
As indicated above, our consolidated financial statements as of and for the
years ended September 30, 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
<page>9
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 the operations of the
Company during the three and nine months ended June 30, 2005. Further,
inflation is not expected to have any significant effect on future operations
of the Company.
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 June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which will require entities that voluntarily make a change in
accounting principle to apply that change retroactively to prior periods'
financial statements unless this would be impracticable. SFAS No. 154
supersedes Accounting Principles Board Opinion No. 20, "Accounting Changes"
("APB No. 20"), which previously required that most voluntary changes in
accounting principle be recognized by including in the current period's net
income the cumulative effect of changing to the new accounting principle. SFAS
No. 154 also makes a distinction between "retrospective application" of an
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. Another significant change in practice under SFAS
No. 154 will be that if an entity changes its method of depreciation,
amortization, or depletion for long-lived, non-financial assets, the change
must be accounted for as a change in accounting estimate. Under APB No. 20,
such a change would have been reported as a change in accounting principle.
SFAS No. 154 applies to accounting changes and error corrections that are made
in fiscal years beginning after December 15, 2005. The provisions of SFAS No.
154 did not affect our consolidated financial statements.
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.
<page>10
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.
THE PRINCIPAL AND SELLING SECURITY HOLDERS
SECTION IS REPLACED WITH THE FOLLOWING:
- ------------------------------------------------------------------------
PRINCIPAL AND SELLING SECURITY HOLDERS
As of August 12, 2005, a total of 6,353,666,998 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
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
<page>11
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
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.
<page>12
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 574,095,980(8) 574,095,980(8) 393,251,329(8) 4.90%
AJW Qualified Partners, LLC. Common 472,390,123(8) 472,390,123(8) 393,251,329(8) 4.90%
AJW Partners, LLC......... Common 205,592,370(8) 205,592,370(8) 393,251,329(8) 4.90%
New Millennium Capital
Partners II, LLC....... Common 26,540,527(8) 26,540,527(8) 388,031,000(8) 4.84%
All directors and executive
officers as a group
(4 persons)............. Common 84,787,819(9) -- 84,787,819 1.10%
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
6,353,666,998 shares outstanding plus the 1,278,619,000 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.
(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 August 12, 2005, the conversion price would have been
approximately $.00012. Under the terms of the warrants, if the warrants
<page>13
had actually been converted on August 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
$.00012 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.
THE DESCRIPTION OF CAPITAL STOCK SECTION IS REPLACED WITH THE FOLLOWING:
- -------------------------------------------------------------------------------
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 15 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 August 12, 2005, there were 6,353,666,998 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.
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
<page>14
it more difficult for a third party to acquire, or could discourage or delay a
third party from acquiring, a majority of our outstanding common stock.
Class A Preferred
Each share of Class A Preferred is entitled to 100 votes per share on all
matters presented to our shareholders for action. The Class A Preferred does
not have any liquidation preference, additional voting rights, conversion
rights, anti-dilution rights or any other preferential rights.
Class B Preferred
Each share of Class B Preferred is convertible into 10 shares of our common
stock. The Class B Preferred does not have any liquidation preference, voting
rights, other conversion rights, anti-dilution rights or any other preferential
rights.
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.
<page>15
CONECTISYS CORPORATION
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Financial Statements As Of And For The
Nine Months Ended June 30, 2005 and 2004
Condensed Consolidated Balance Sheet as of June 30, 2005 (unaudited).....F-1
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2005 (unaudited) and 2004 (unaudited)
and the Cumulative Period From December 31, 1990 (Inception)
Through June 30, 2005 (unaudited)...................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through June 30, 2005 (unaudited).....F-4
Condensed Consolidated Statements of Cash Flow for the Nine
Months Ended June 30, 2005 (unaudited) and 2004 (unaudited) and
the Cumulative Period From December 31, 1990 (Inception) Through
June 30, 2005 (unaudited)...........................................F-13
Notes to Condensed Consolidated Financial Statements (unaudited).........F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2005
Jun. 30,
2005
Unaudited
-------------------
Assets
Current assets
Cash and cash equivalents $ 332,284
Prepaid expenses 64,159
------------------
Total current assets 396,443
Property and equipment, net of accumulated
depreciation of $341,018 3,899
Other assets
License and technology, net of accumulated
amortization of $421,478 0
Loan fees, net of accumulated
amortization of $448,601 44,586
------------------
Total assets $ 444,928
==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-1
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2005
Jun. 30,
2005
Unaudited
-------------------
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 257,603
Accrued compensation 1,682,937
Due to officers 4,485
Accrued interest payable 483,994
Other current liabilities 5,500
Notes payable and current potion of
long-term debt 1,523,795
------------------
Total current liabilities 3,958,314
Long-term debt, net of current 1,390,445
------------------
Total liabilities 5,348,759
Shareholders' equity
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; 5,104,464,998 shares issued
and outstanding 25,864,023
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 14,514,516 stock
options and warrants exercisable 1,363,412
Deficit accumulated during development stage (32,447,131)
------------------
Total shareholders' equity (deficit) (4,903,831)
------------------
Total liabilities and shareholders' equity $ 444,928
==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-2
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2005
<table>
Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended Through
Jun. 30, Jun. 30, Jun. 30, Jun. 30, Jun. 30,
2005 2004 2005 2004 2005
Unaudited Unaudited Unaudited Unaudited Unaudited
------------------ ------------------ ------------------ ------------------- -------------
Revenues $ 0 $ 0 $ 0 $ 0 $ 517,460
Cost of goods sold 32,121 26,583 135,795 48,778 1,021,737
------------------ ------------------ ------------------ ------------------- -------------
Gross profit (32,121) (26,583) (135,795) (48,778) (504,277)
General and administrative 397,652 331,056 1,497,589 963,406 23,179,739
------------------ ------------------ ------------------ ------------------- -------------
Loss from operations (429,773) (357,639) (1,633,384) (1,012,184) (23,684,016)
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 (549,666) (791,470) (1,279,882) (1,828,959) (6,438,008)
Write-off of intangible assets 0 0 0 0 (1,299,861)
Minority interest 0 0 0 0 62,500
------------------ ------------------ ------------------ ------------------- -------------
Net loss $ (979,439) $ (1,149,109) $ (2,913,266) $ (2,991,143) $(31,369,389)
================== ================== ================== =================== =============
Weighted average shares
outstanding 4,606,915,696 846,374,982 2,743,784,176 660,024,294
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.
<page>F-3
</table>
<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 June 30,
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-4
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 June 30, 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-5
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 June 30, 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-6
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 June 30, 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-7
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 June 30, 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-8
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 June 30, 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-9
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 June 30, 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-10
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 June 30, 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-11
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 June 30, 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 2003 to June
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
June 2005 valued from
$0.0012 to $0.01 per share 0 0 326,800,000 408,862 0 0 0 408,862
Issuance of 1,620,862 warrants
March 2005 through
June 2005 at an exercise
price of $0.0039 per share, in
conjunction with $810,431
principal value of 8%
convertible debt 0 0 0 0 454 0 0 454
Conversion of $2,255,890 principal
value of 12% convertible debt,
$3,383,835 of derivative
conversion option
along with $41,765 accrued
interest, net of $973,565
convertible debt discount 0 0 3,577,992,876 4,707,925 0 0 0 4,707,925
Net loss for the period 0 0 0 0 0 0 (2,913,266) (2,913,266)
----------- --------- ------------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2005 215,865 $ 215,865 5,104,464,998 $ 25,864,023 $ 1,463,412 $ 0 $( 32,447,131) $ (4,903,831)
=========== ======== ============= =========== =========== =========== ============ ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-12
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended June 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2005
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
Jun. 30, Jun. 30, Jun. 30,
2005 2004 2005
Unaudited Unaudited Unaudited
------------------- ------------------- --------------------
Operating activities
Net (loss) $ (2,913,266) $ (2,991,143) $ (31,369,389)
Adjustments to reconcile net (loss)
to net cash provided by (used by)
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 19,459 10,697 1,730,619
Derivative conversion option 0 1,320,257 1,572,705
Stock issued for services 408,862 69,245 8,008,035
Stock issued for interest 41,764 577,355
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of loan fees
and note discounts 1,173,898 459,254 3,385,175
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses 112,808 (165,000) 118,187
Interest receivable 0 0 (95,700)
Increase (decrease) in liabilities
Accounts payable 1,423 (29,059) 1,034,932
Accrued compensation 224,701 303,360 2,804,954
Due to officers (26,280) (24,074) 680,522
Other current liabilities (22,743) 103,281 733,285
----------------- ------------------ ------------------
Net cash (used by) operating activities (979,374) (943,182) (8,188,759)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended June 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2005
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
Jun. 30, Jun. 30, Jun. 30,
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 454 6,495 197,032
Preferred stock issued for cash 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees (26,000) (263,401) (543,187)
Proceeds from debts
Related party 0 0 206,544
Other 810,431 1,607,095 7,046,692
Payments on debt
Related party 0 (53,172)
Other (28,271) (53,204) (530,307)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
------------------ ----------------- -----------------
Net cash provided by (used by) financing
activities 761,614 1,346,985 10,149,334
----------------- ------------------ ------------------
Net increase (decrease) in cash (217,760) 403,803 332,284
Cash beginning of period 550,044 2,282 0
----------------- ------------------ ------------------
Cash end of period $ 332,284 $ 406,085 $ 332,284
================= ================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Three and Nine Months Ended June 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2005
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
Jun. 30, Jun. 30, Jun. 30,
2005 2004 2005
Unaudited Unaudited Unaudited
------------------ ------------------- --------------------
Cash paid during the year for
Interest 14,653 105,000 633,020
Taxes 0 0 14,450
Non-cash investing and financing 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 4,718,160 343,357 11,019,127
Service & interest 450,626 100,011 5,399,818
Preferred stock issued for
Services 15,845 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 0 881,550
</table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 nine months ended June 30, 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-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2005, the Company had 5,104,464,998 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 11,120,862
Common stock options - officers 1,943,654
Common stock options - other 1,450,000
-------------
Subtotal 24,514,516
Accrued officer compensation ($480,000),
convertible into common stock 69,602,215
Convertible note holder principal value
($1,299,631), accrued interest ($294,598)
less prepaid interest ($73,242),
assumed converted into common stock at
$0.0002 per share 7,604,935,000
-------------
Total potential common stock equivalents 7,699,051,731
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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:
Nine Months Ended Nine Months Ended
6/30/2005 6/30/2004
------------------ ------------------
Net loss, as reported $ (2,913,266) $ (2,991,143)
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 $ (2,913,266) $ (2,991,143)
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 2. GOING CONCERN UNCERTAINTY
As of June 30, 2005, the Company had a deficiency in working capital of
approximately $3,600,000 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 nine
months ended June 30, 2005, the same investor group committed to advance the
Company up to an additional $1,400,000 payable in twelve monthly installments.
The Company received $158,033 in March 2005, $108,733 in April 2005 and $543,665
in June 2005, 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-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 calendar year ended December
31, 2005, $60,000 of this expense was amortized as officer salaries with a
balance of $60,000 at June 30, 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 nine months ended June 30, 2005, an additional $6,264, $33,190 and
$37,343 were amortized, respectively, related to this prepaid interest for a
total of $76,797. The balances at June 30, 2005 tentatively were $10,174,
$22,700 and $33,137 for a total prepaid interest of $66,011. During the nine
months ended June 30, 2005, the Company converted all convertible debentures
relating to the $10,174, $22,700 and $33,137 prepaid balances. These amounts
are being applied to the remaining accrued and unpaid interest on other
debentures, and as a result, there is no prepaid interest recorded at June 30,
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 June 30, 2005, the balance in prepaid expenses was
$64,159.
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 nine months ended
June 30, 2005, total amortization of loan fees amounted to $123,398, leaving
an unamortized balance of $21,307.
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 five-year period at
$0.0039 per share. Loan fees associated with these loans amounted to $14,000,
consisting of $9,000 in finder's fees and $5,000 in legal costs. The Company
also paid $1,033 in prepaid interest.
In April 2005, the Company received another $108,733 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 217,466 common stock warrants, exercisable over a five-year period at
$0.0039 per share. Loan fees associated with these loans amounted to $2,000 in
finder's fees. The Company also paid $1,033 in prepaid interest.
In May 2005, the Company received another $543,665 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 1,087,330 common stock warrants, exercisable over a five-year period at
$0.0039 per share. Loan fees associated with these loans amounted to $10,000,
in finder's fees. The Company also paid $5,165 in prepaid interest.
During the nine months ended June 30, 2005, total amortization of current
year's loan fees amounted to $2,721, leaving an unamortized balance of $23,279.
Total unamortized loan fees at June 30, 2005 is $44,586.
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 nine months ended June 30, 2005, the Company
repaid $8,465 including accrued interest during the period of to $660. There is
no amount due to the CEO at June 30, 2005.
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 nine months ended June 30, 2005, the Company repaid $33,744.
Accrued interest during the period amounted to $2,976, bringing the loan balance
at June 30, 2005 to $4,485. The loan balance at June 30, 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, which brought the tentative balance
due from the Chief Technical Officer to $12,293. This amount has been applied
against the accrued compensation owed the Chief Technical Officer,
resulting in a net amount due to/from the officer at June 30, 2005 of $0.
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 5. DUE TO/FROM OFFICERS (continued)
The aggregate amount due officers at June 30, 2005 and September 30, 2004
was $4,485 and $30,765, respectively and interest expense on the officer
loans amounted to $3,636 for the nine months ended June 30, 2005 and
$11,929 for the year ended September 30, 2004. For presentation purposes
$26,097 due from the Chief Executive Officer and $12,293 due from the
Chief Technical Officer for a total of $38,390 has been shown as a receivable
and $4,485 has been shown as due to officers at June 30, 2005.
As of June 30, 2005, the Company owed its officers $1,721,327 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 69,602,215 at
June 30, 2005.
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE
Notes payable at June 30, 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 35,375,000
shares of common stock at the price
of $0.0002 at June 30, 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 35,375,000
shares of common stock at the price
of $0.0002 at June 30, 2005 7,075 7,075
-------
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 40,680,000
shares of common stock at the price
of $0.0002 at June 30, 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 24,875,000
shares of common stock at the price
of $0.0002 at June 30, 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 48,000,000
shares of common stock at the price
of $0.0002 at June 30, 2005 9,600 $ 9,600
--------
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 48,000,000
shares of common stock at the price
of $0.0002 at June 30, 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 54,000,000
shares of common stock at the price
of $0.0002 at June 30, 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 30,000,000
shares of common stock at the price
of $0.0002 at June 30, 2005 6,000 $ 6,000
-------
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 96,000,000
shares of common stock at the price
of $0.0002 at June 30, 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 96,000,000
shares of common stock at the price
of $0.0002 at June 30, 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-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE (continued)
Accrued interest of $21,600 and principal
on Convertible Debenture convertible
into approximately 108,000,000
shares of common stock at the price
of $0.0002 at June 30, 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 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 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% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 46,200,000
shares of common stock at the price
of $0.0002 at June 30, 2005 9,240 $ 9,240
-------
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 46,200,000
shares of common stock at the price
of $0.0002 at June 30, 2005 9,240 $ 9,240
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 46,200,000
shares of common stock at the price
of $0.0002 at June 30, 2005 9,240 9,240
-------
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 2005 12,000 $ 12,000
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 2005 12,000 $ 12,000
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 2005 12,000 $ 12,000
--------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $6,400 and principal
on Convertible Debenture convertible
into approximately 198,670,000
shares of common stock at the price
of $0.0002 at June 30, 2005 6,400 $ 39,734
--------
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 $6,400 and principal
on Convertible Debenture convertible
into approximately 198,665,000
shares of common stock at the price
of $0.0002 at June 30, 2005 6,400 $ 39,733
--------
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 $6,400 and principal
on Convertible Debenture convertible
into approximately 198,665,000
shares of common stock at the price
of $0.0002 at June 30, 2005 6,400 $ 39,733
--------
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $3,156 and principal
on Convertible Debenture convertible
into approximately 99,115,000
shares of common stock at the price
of $0.0002 at June 30, 2005 3,156 $ 19,823
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $3,156 and principal
on Convertible Debenture convertible
into approximately 99,115,000
shares of common stock at the price
of $0.0002 at June 30, 2005 3,156 $ 19,823
--------
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 $3,156 and principal
on Convertible Debenture convertible
into approximately 99,110,000
shares of common stock at the price
of $0.0002 at June 30, 2005 3,156 $ 19,822
--------
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $3,003 and principal
on Convertible Debenture convertible
into approximately 98,350,000
shares of common stock at the price
of $0.0002 at June 30, 2005 3,003 $ 19,670
--------
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 $3,003 and principal
on Convertible Debenture convertible
into approximately 98,350,000
shares of common stock at the price
of $0.0002 at June 30, 2005 3,003 $ 19,670
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $3,003 and principal
on Convertible Debenture convertible
into approximately 98,345,000
shares of common stock at the price
of $0.0002 at June 30, 2005 3,003 $ 19,669
--------
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $2,735 and principal
on Convertible Debenture convertible
into approximately 97,005,000
shares of common stock at the price
of $0.0002 at June 30, 2005 2,735 $ 19,401
--------
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 $2,734 and principal
on Convertible Debenture convertible
into approximately 97,005,000
shares of common stock at the price
of $0.0002 at June 30, 2005 2,734 $ 19,401
--------
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 $2,734 and principal
on Convertible Debenture convertible
into approximately 97,005,000
shares of common stock at the price
of $0.0002 at June 30, 2005 2,734 $ 19,401
--------
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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% $79,734
Accrued interest of $13,234 and principal
on Convertible Debenture convertible
into approximately 464,840,000
shares of common stock at the price
of $0.0002 at June 30, 2005 13,234 $ 92,968
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $79,733
Accrued interest of $13,234 and principal
on Convertible Debenture convertible
into approximately 464,835,000
shares of common stock at the price
of $0.0002 at June 30, 2005 13,234 $ 92,967
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $79,733
Accrued interest of $13,234 and principal
on Convertible Debenture convertible
into approximately 464,835,000
shares of common stock at the price
of $0.0002 at June 30, 2005 13,234 $ 92,967
--------
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #12
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 $587 and principal
on Convertible Debenture convertible
into approximately 129,360,000
shares of common stock at the price
of $0.0002 at June 30, 2005 587 $ 25,872
--------
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 $1,652 and principal
on Convertible Debenture convertible
into approximately 363,835,000
shares of common stock at the price
of $0.0002 at June 30, 2005 1,652 $ 72,767
--------
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $1,359 and principal
on Convertible Debenture convertible
into approximately 299,155,000
shares of common stock at the price
of $0.0002 at June 30, 2005 1,359 $ 59,831
--------
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 $74 and principal
on Convertible Debenture convertible
into approximately 16,175,000
shares of common stock at the price
of $0.0002 at June 30, 2005 74 $ 3,235
--------
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #13
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
April 20, 2007 at an annual interest
rate of 8% with one year
interest prepaid $ 17,397
Accrued interest of $275 and principal
on Convertible Debenture convertible
into approximately 88,360,000
shares of common stock at the price
of $0.0002 at June 30, 2005 275 $ 17,672
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
April 20, 2007 at an annual interest
rate of 8% with one year
interest prepaid $ 48,930
Accrued interest of $772 and principal
on Convertible Debenture convertible
into approximately 248,510,000
shares of common stock at the price
of $0.0002 at June 30, 2005 772 $ 49,702
--------
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE (continued)
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
April 20, 2007 at an annual interest
rate of 8% with one year
interest prepaid $ 40,231
Accrued interest of $635 and principal
on Convertible Debenture convertible
into approximately 204,330,000
shares of common stock at the price
of $0.0002 at June 30, 2005 635 $ 40,866
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on April 20, 2007 at an annual
interest rate of 8% with one year
interest prepaid $2,175
Accrued interest of $34 and principal
on Convertible Debenture convertible
into approximately 11,045,000
shares of common stock at the price
of $0.0002 at June 30, 2005 34 $ 2,209
--------
<page>F-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #14
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 23, 2007 at an annual interest
rate of 8% with one year
interest prepaid $ 86,987
Accrued interest of $744 and principal
on Convertible Debenture convertible
into approximately 438,655,000
shares of common stock at the price
of $0.0002 at June 30, 2005 744 $ 87,731
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 23, 2007 at an annual interest
rate of 8% with one year
interest prepaid $244,649
Accrued interest of $2,091 and principal
on Convertible Debenture convertible
into approximately 1,233,700,000
shares of common stock at the price
of $0.0002 at June 30, 2005 2,091 $ 246,740
--------
<page>F-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #15
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 23, 2007 at an annual interest
rate of 8% with one year
interest prepaid $201,156
Accrued interest of $1,719 and principal
on Convertible Debenture convertible
into approximately 1,014,375,000
shares of common stock at the price
of $0.0002 at June 30, 2005 1,719 $ 202,875
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on May 23, 2007 at an annual
interest rate of 8% with one year
interest prepaid $10,873
Accrued interest of $93 and principal
on Convertible Debenture convertible
into approximately 54,830,000
shares of common stock at the price
of $0.0002 at June 30, 2005 93 $ 10,966
--------
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 6. NOTES PAYABLE (continued)
Subtotal of all Convertible Debentures 1,594,229
Less reclassified accrued interest $ (221,356)
Less prepaid interest offset (73,242)
------------
Subtotal principal value 1,299,631
Derivative conversion option - 150 percent of principal 1,949,446
Less unamortized note discount (687,925)
-----------
Net carrying value of
Convertible Debentures $ 2,561,152
Note payable to Devon Investment Advisors,
unsecured, due on December 1, 1996, interest payable
at an annual rate of 10%. Currently in default. 241,824
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including interest
at an annual rate of 18%. 103,375
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. 7,889
-----------
Total notes payable $ 2,914,240
Current portion 1,523,795
-----------
Long-term portion $ 1,390,445
===========
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 nine months ended June 30,
2005, accrued interest amounted to $580 and $302, respectively, resulting in a
balance of $7,733 at June 30, 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-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-52
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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-53
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
On April 20, 2005 the Company issued an aggregate of $108,733 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 217,466 shares of common stock at a per share exercise
price equal to $.0039.
On May 23, 2005 the Company issued an aggregate of $543,665 of 8%
convertible debentures in a private offering to the four accredited investors.
The Company prepaid $5,165 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 1,087,330 shares of common stock at a per share exercise
price equal to $.0039.
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.
<page>F-54
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
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 nine months ended
June 30, 2005, the derivative conversion interest was increased by $1,215,646
in connection with the issuance of an additional $810,431 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
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.
<page>F-55
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
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 June 30, 2005 to $4,117,635.
During the nine months ended June 30, 2005, the Company issued an additional
$810,431 of 8% convertible debentures. Also, the Company issued 3,577,992,876
shares of common stock in connection with the conversion of $2,255,890
of principal and $41,765 of accrued interest on the Company's convertible
debentures, resulting in a convertible debt principal balance at June 30, 2005
of $1,299,631 (net of an aggregate of $2,760,800 in debt conversions through
that date). A corresponding pro-rata reduction of $3,383,835 was made to the
derivative conversion option during the nine months ended June 30, 2005 (an
aggregate of $3,969,555 since the inception of the loans), bringing the
derivative conversion option balance at June 30, 2005 to $1,949,446.
The aggregate note discount of $4,060,431 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 $642,257 was amortized
during the nine months ended June 30, 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 $973,565 in
convertible bond discount was transferred to equity upon conversion of
$2,255,890 of debt principal during the nine months ended June 30, 2005,
resulting in an unamortized convertible debt discount balance of $687,925 at
June 30, 2005.
<page>F-56
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
As of June 30, 2005, the Company was indebted for an aggregate of
$1,520,987 including $1,299,631 of principal and $221,356 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 June 30, 2005, there were
5,104,464,998 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.
During November 2004 through June 2005, the Company issued 326,800,000 shares
of its restricted common stock to several consultants for services rendered
having a value of $408,862.
<page>F-57
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 an independent consultant valued at
$57,000.
NOTE 10. STOCK OPTIONS AND WARRANTS
In March through May 2005, 1,620,862 five-year common stock warrants
were issued to an accredited investor group in connection with a $810,431 8%
convertible debenture financing arrangement (see NOTE 7). The
allocated cost of these warrants amounted to $454, resulting in a recorded
balance of stock options and warrants exercisable at June 30, 2005 of
$1,465,409 (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 nine months ended June 30, 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 1,620,862 .004
Expired (4,850,000) .048
---------- -----
Balance outstanding, June 30, 2005 14,514,516 .067
========== =====
<page>F-58
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 10. STOCK OPTIONS AND WARRANTS (continued)
The following table summarizes information about common stock options at
June 30, 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
- --------------- --------- ------- -------- ---------- -------
$ .130 - $ .130 1,450,000 2 $ .130 1,450,000 $ .130
$ .380 - $ .380 500,000 5 $ .380 500,000 $ .380
$ .386 - $ .386 1,443,654 5 $ .386 1,443,654 $ .386
$ .002 - $ .002 2,500,000 55 $ .005 2,500,000 $ .005
$ .002 - $ .002 500,000 65 $ .005 500,000 $ .005
$ .002 - $ .002 250,000 65 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 65 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 66 $ .005 250,000 $ .005
$ .002 - $ .005 1,250,000 68 $ .005 1,250,000 $ .005
$ .002 - $ .005 750,000 70 $ .002 750,000 $ .002
$ .002 - $ .005 1,875,000 72 $ .002 1,875,000 $ .002
$ .002 - $ .005 1,875,000 74 $ .002 1,875,000 $ .002
$ .004 - $ .004 316,066 57 $ .004 316,066 $ .004
$ .004 - $ .004 217,466 58 $ .004 217,466 $ .004
$ .004 - $ .004 1,087,330 59 $ .004 1,087,330 $ .004
$ .001 - $0.386 14,514,516 51 $ .067 14,514,516 $ .067
=============== ========== == ======== ========== =======
NOTE 11. SUBSEQUENT EVENTS
Subsequent to June 30, 2005, the Company issued 840,000,000 shares of common
stock through August 9, 2005 in exchange for reduction of $132,000 in principal
and $198,000 in derivative conversion option, totaling approximately $330,000 in
convertible debt.
Subsequent to June 30, 2005, the Company issued 250,000,000 shares of restricted
Common stock in exchange for services valued at $90,000.
<page>F-59