<pre>
================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended DECEMBER 31, 2005 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 33-3560D
---------------------------------
CONECTISYS CORPORATION
(Name of small business issuer in its charter)
COLORADO 84-1017107
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24730 AVENUE TIBBITTS, SUITE 130
VALENCIA, CALIFORNIA 91355
(Address of principal executive offices)
661-295-6763
(Issuer's telephone number)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
---------------------------------
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes | | No |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No | |
As of February 8, 2006, there were 10,101,811,233 shares of the issuer's
common stock, no par value per share, outstanding.
===============================================================================
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet as of December 31,
2005 (unaudited)................................................F-1
Condensed Consolidated Statements of Operations for the Three
Months Ended December 31, 2005 (unaudited) and 2004 (unaudited)
and the Cumulative Period From December 31, 1990 (Inception)
Through December 31, 2005 (unaudited)..................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through December 31, 2005 (unaudited)....F-4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 2005 (unaudited) and 2004 (unaudited) and
the Cumulative Period From December 31, 1990 (Inception) Through
December 31, 2005 (unaudited)..........................................F-15
Notes to Condensed Consolidated Financial Statements (unaudited)............F-18
Item 2. Management's Discussion and Analysis or Plan of Operation.............2
Item 3. Controls and Procedures...............................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........10
Item 3. Defaults Upon Senior Securities......................................10
Item 4. Submission of Matters to a Vote of Security Holders..................11
Item 5. Other Information....................................................11
Item 6. Exhibits.............................................................11
Signatures....................................................................12
Exhibits Filed with this Report on Form 10-QSB................................13
ITEM 1. FINANCIAL STATEMENTS.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2005
Dec. 31
2005
Unaudited
Assets
Current assets
Cash and cash equivalents $ 103,296
Prepaid expenses 99,822
-----------------
Total current assets 203,118
Property and equipment, net of accumulated
depreciation of $342,175 36,412
Other assets
License and technology, net of accumulated
amortization of $421,478 0
Loan fees, net of accumulated
amortization of $484,996 34,559
-----------------
Total assets $ 274,089
=================
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
December 31, 2005
Dec. 31
2005
Unaudited
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 221,746
Accrued compensation 1,704,439
Due to officers 403
Accrued interest payable 249,413
Other current liabilities 17,038
Notes payable and current potion of
long-term debt 816,210
-----------------
Total current liabilities 3,009,249
Long-term debt, net of current 1,979,733
-----------------
Total liabilities 4,988,982
Commitments and contingencies 0
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 - 15,000,000,000 shares authorized,
no par value; 8,221,319,732 shares issued
and outstanding 26,872,103
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 12,300,000 stock
options and warrants exercisable 1,366,714
Accumulated gain (deficit) during development stage (33,269,575)
-----------------
Total shareholders' equity (deficit) (4,714,893)
-----------------
Total liabilities and shareholders' equity $ 274,089
=================
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 Months Ended December 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2005
<table>
Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended Through
Dec. 31 Dec. 31 Dec. 31
2005 2004 2005
Unaudited Unaudited Unaudited
Revenues $ 0 $ 0 $ 517,460
Cost of goods sold 74,846 61,962 1,206,215
----------------- ----------------- -----------------
Gross profit (74,846) (61,962) (688,755)
General and administrative expenses 314,286 357,039 21,992,434
Bad debt 0 0 1,680,522
Write-off of intangible assets 0 0 1,299,861
----------------- ----------------- -----------------
Loss from operations (389,132) (419,001) (25,661,572)
Other income (expenses)
Forgiveness of debt 0 0 504,462
Settlement 0 0 (125,000)
Other income 0 0 12,072
Interest income 0 0 102,924
Interest expense (213,895) (385,265) (7,087,219)
Minority interest 0 0 62,500
----------------- ----------------- -----------------
Net loss $ (603,027)$ (804,266)$ (32,191,833)
================= ================= =================
Weighted average shares outstanding 8,021,520,957 1,274,924,649
Net loss per share (0.00) (0.00)
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through December
31, 2005
<table>
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
December 1, 1990
(re-entry
development stage) - $ - 10,609 $ 1,042,140 $ - $ - $ (1,042,140)$ -
Shares issued in exchange for:
Cash, May 31, 1993 - - 1,000 1,000 - - - 1,000
Capital contribution,
May 31, 1993 - - 2,000 515 - - - 515
Services, March 26, 1993 - - 2,000 500 - - - 500
Services, March 26, 1993 - - 1,200 600 - - - 600
Net loss for the year - - - - - - (5,459) (5,459)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1993 - - 16,809 1,044,755 - - (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1, 1994 - - 2,400 3,000 - - - 3,000
Cash, September 1, 1994 - - 17,771 23,655 - - - 23,655
Services, September 15, 1994 - - 8,700 11,614 - - - 11,614
Cash, September 26, 1994 - - 3,000 15,000 - - - 15,000
Cash, October 6, 1994 16,345 16,345 - - - - - 16,345
Cash, September and October,
1994 - - 1,320 33,000 - - - 33,000
Net loss for the year - - - - - - (32,544) (32,544)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1994 16,345 16,345 50,000 1,131,024 - - (1,080,143) 67,226
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, February 13, 1995 - $ - 1,160 $ 232,000 $ - $ - $ - $ 232,000
Debt repayment, February 13,
1995 - - 2,040 408,000 - - - 408,000
Debt repayment, February 20,
1995 - - 4,778 477,810 - - - 477,810
Acquisition of assets, CIPI
February, 1995 - - 28,750 1,950,000 - - - 1,950,000
Acquisition of assets, April 5,
1995 - - 15,000 - - - - -
Cash and services, April and
May 1995 - - 16,000 800,000 - - - 800,000
Cash, June 1, 1995 - - 500 30,000 - - - 30,000
Acquisition of assets and
services, September 26, 1995 - - 4,000 200,000 - - - 200,000
Cash, September 28, 1995 - - 41 3,000 - - - 3,000
Acquisition of assets,
September 1995 - - 35,000 1,750,000 - - - 1,750,000
Return of assets, CIPI
September, 1995 - - (27,700) (1,950,000) - - - (1,950,000)
Net loss for the year - - - - - - (2,293,867) (2,293,867)
--------- ----------- -------- ----------- -------- ------------ ---------- -----------
Balance,
November 30, 1995 16,345 16,345 129,569 5,031,834 - - (3,374,010) 1,674,169
Shares issued in exchange for:
Cash, February, 1996 - - 1,389 152,779 - - - 152,779
Debt repayment, February 1996 - - 10,000 612,000 - - - 612,000
Services, February, 1996 - - 3,160 205,892 - - - 205,892
Cash, March, 1996 - - 179 25,000 - - - 25,000
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares returned and canceled,
March, 1996 - $ - (15,000)$ - $ - $ - $ - $ -
Services, April, 1996 - - 13 2,069 - - - 2,069
Services, September, 1996 4,155 4,155 586 36,317 - - - 40,472
Services, October, 1996 - - 6,540 327,000 - - - 327,000
Debt repayment, November, 1996 - - 2,350 64,330 - - - 64,330
Net loss for the year - - - - - - (2,238,933) (2,238,933)
--------- ---------- ---------- ----------- ---------- --------- ------------ -----------
Balance,
November 30, 1996 20,500 20,500 138,786 6,457,221 - - (5,612,943) 864,778
Shares issued in exchange for:
Services, March, 1997 - - 228 6,879 - - - 6,879
Services, April, 1997 - - 800 13,120 - - - 13,120
Services, July, 1997 - - 1,500 16,200 - - - 16,200
Cash, July, 1997 - - 15,000 300,000 - - - 300,000
Services, August, 1997 - - 5,958 56,000 - - - 56,000
Adjustment for partial shares due
to reverse stock split (1:20) - - 113 - - - - -
Services, October, 1997 - - 1,469,666 587,865 - - - 587,865
Debt repayment, October, 1997 - - 1,540,267 620,507 - - - 620,507
Cash, October, 1997 - - 1,500,000 281,250 - - - 281,250
Services, November, 1997 - - 4,950 10,538 - - - 10,538
Net loss for the year - - - - - - (2,739,268) (2,739,268)
--------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Balance,
November 30, 1997 20,500 20,500 4,677,268 8,349,580 - - (8,352,211) 17,869
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, December, 1997
through November, 1998 - $ - 2,551,610 $ 2,338,264 $ - $ - - $ 2,338,264
Debt repayment, April, 1998
through September, 1998 - - 250,000 129,960 - - - 129,960
Cash, January, 1998 through
July, 1998 - - 4,833,334 1,139,218 - - - 1,139,218
Acquisition of assets,
July, 1998 - - 300,000 421,478 - - - 421,478
Acquisition of remaining 20%
minority interest in
subsidiary, July, 1998 - - 50,000 59,247 - - - 59,247
Services, November, 1998 60,000 60,000 - - - - - 60,000
Net loss for the year - - - - - - (4,928,682) (4,928,682)
--------- ---------- ---------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1998 80,500 80,500 12,662,212 12,437,747 - - (13,280,893) (762,646)
Shares issued in exchange for:
Shares returned and canceled,
December, 1998 - - (1,350,000) (814,536) - - - (814,536)
Services, December, 1998
through September, 1999 - - 560,029 349,454 150,000 - - 499,454
Cash, December, 1998
through September, 1999 - - 1,155,800 129,537 - - - 129,537
Debt repayment, Sept., 1999 39,520 39,520 960,321 197,500 100,000 - - 337,020
Net loss for the period - - - - - - (1,323,831) (1,323,831)
--------- ---------- ---------- ----------- -------- ------------ ---------- -----------
Balance,
September 30, 1999 120,020 120,020 13,988,362 12,299,702 250,000 - (14,604,724) (1,935,002)
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares re-acquired and
canceled, October, 1999 - $ - (17,500)$ (12,000)$ - $ - $ - $ (12,000)
Shares issued in exchange for:
Services, October, 1999 through
September, 2000, valued from
$0.25 to $0.80 per share - - 2,405,469 990,949 - - - 990,949
Retainers, debt and accrued
liabilities, October, 1999
through September, 2000, valued
from $0.25 to $1.57 per share - - 2,799,579 1,171,638 - - - 1,171,638
Cash, October, 1999 through
September, 2000, with subscription
prices ranging from $0.25 to
$0.66 per share - - 2,295,482 839,425 - (15,450) - 823,975
Issuance of 563,500 consultant
stock options, March, 2000,
at an exercise price of $2.00
per share - - - - 214,130 - - 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March, 2000,
to $0.38 and approximately $0.39
per share - - - - 1,113,610 - 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May, 2000, with
common stock strike prices
ranging from $0.15 to approx.
$0.39 per share, in exchange
for officer debt 20,000 20,000 2,056,346 897,707 (407,735) - - 509,972
Issuance of 500,000 consultant
stock options, September, 2000,
with floating exercise prices
set at 15% below current market - - - - 65,000 - - 65,000
Net loss for the year - - - - - - (3,812,140) (3,812,140)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) ( 869,868)
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2000 through
September, 2001, valued from
$0.11 to $0.40 per share - $ - 3,471,007 $ 572,790 $ - $ - $ - $ 572,790
Retainers, debt and accrued
liabilities, October, 2000
through September, 2001, valued
from $0.11 to $0.43 per share - - 3,688,989 487,121 - - - 487,121
Cash, October, 2000 through
March, 2001, with subscription
prices ranging from $0.075 to
$0.083 per share - - 1,045,500 78,787 - - - 78,787
Collection of stock subscription
receivable, October, 2000,
on 61,800 shares - - - - - 15,450 - 15,450
Exercise of 400,000 common
stock options, January, 2001,
at a strike price of $0.085 per
share, in exchange for debt - - 400,000 86,000 (52,000) - - 34,000
Issuance of 1,000,000 common
stock warrants, April, 2001,
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt - - - - 77,228 - - 77,228
Issuance of 2,000,000 consultant
stock options, September, 2001,
at a strike price of $0.13 per
share - - - - 115,000 - - 115,000
Beneficial conversion option,
April, 2001 through September,
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible debt - - - - 155,027 - - 155,027
Net loss for the year - - - - - - (2,154,567) (2,154,567)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 - (20,571,431) (1,489,032)
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2001 through
September, 2002, valued from
$0.02 to $0.25 per share - $ - 2,180,000 $ 179,916 $ - $ - $ - $ 179,916
Debt and accrued liabilities,
October, 2001 through September,
2002, with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per share 60,000 60,000 10,948,077 428,563 - - - 488,563
Cash, October, 2001 through
September, 2001, with prices
ranging from $0.01 to $0.083
per share - - 5,833,334 200,000 - - - 200,000
Exercise of 550,000 common stock
options by a consultant at a
strike price of $0.13 per share,
in exchange for debt - - 550,000 103,125 (31,625) - - 71,500
Issuance of 3,750,000 warrants,
April, 2002 through June, 2002,
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt - - - - 100,087 - - 100,087
Beneficial conversion option,
April 2002, through June, 2002,
pertaining to $750,000 principal
value of 12% convertible debt - - - - 649,913 - - 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount - - 12,667,178 111,515 (80,702) - - 30,813
Net loss for the year - - - - - - (2,346,732) (2,346,732)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2002 200,020 200,020 64,311,823 18,435,238 2,167,933 $ - (22,918,163) (2,114,972)
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2002 through
July, 2003, valued from
$0.0012 to $0.0100 share - $ - 31,500,000 $ 134,000 $ - $ - $ - $ 134,000
Debt and accrued liabilities,
October, 2002 through September,
2003, valued from $0.0010 to
$0.0512 per share, including
transfer of $155,027
beneficial conversion option 162,134,748 704,774 (155,027) - - 549,747
Cash, November, 2002 through
September, 2003, with prices
ranging from $0.0010 to $0.100
per share - - 128,500,000 180,000 - - - 180,000
Issuance of 2,500,000 warrants,
November, 2002 through May, 2003,
at an exercise price of $0.005
per share, in conjunction with
$500,000 principal value of 12%
convertible debt - - - - 9,816 - - 9,816
Beneficial conversion option,
November, 2002, through May, 2003,
pertaining to $500,000 principal
value of 12% convertible debt - - - - 490,184 - - 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,355 accrued
interest, net of $52,340
convertible debt discount - - 103,778,301 353,525 (177,845) - - 175,680
Net loss for the year - - - - - - (2,386,875) (2,386,875)
--------- ---------- ----------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2003 200,020 $ 200,020 490,224,872 $19,807,537 $2,335,061 $ - $(25,305,038)$(2,962,420)
========= ========== =========== =========== ========== ========== ============ ===========
The accompanying notes are an integral part of these 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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 2003 through
August 2004 valued from
$0.0008 to $0.0026 per share 0 $ 0 57,300,000 $ 78,400 $ 0 $ 0 $ 0 $ 78,400
Issuance of 7,000,000 warrants
November 2003 through
September 2004 at exercise
Prices ranging from $0.002 to
$0.005 per share, in
conjunction with $2,000,000
principal value of 12%
convertible debt 0 0 0 0 9,447 0 0 9,447
Debt and accrued liabilities
December 2003 with
preferred stock class A
valued at $1.00 per share 15,845 A 15,845 0 0 0 0 0 15,845
Debt and accrued liabilities
November 2003 to September
2004 with common shares
valued from $0.001 to $0.0025
per share 0 0 156,625,000 163,575 0 0 0 163,575
Cash, November 2003 through
March 2004 with prices of
approximately $0.0010 0 0 74,670,000 75,000 0 0 0 75,000
per share
Re-characterization of beneficial
conversion option as derivative
conversion option , October 2003
pertaining to $963,205 of
convertible debt at
September 30, 2003 0 0 0 0 (881,550) 0 0 (881,550)
Conversion of $218,115 principal
value of 12% convertible debt
$327,172 of derivative
conversion option
along with $49,008 accrued
interest, net of $28,571
convertible debt discount 0 0 352,352,250 565,724 0 0 565,724
Net loss for the year 0 0 0 0 0 0 (4,228,827) (4,228,827)
--------- ---------- ----------- ----------- ---------- ---------- ------------ -----------
Balance, September 30, 2004 215,865 $ 215,865 1,131,172,122$20,690,236 $1,462,958 $ 0 $(29,533,865)$(7,164,806)
========= ========== =========== =========== ========== ========== ============ ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-12
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 December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ----------- ------------
Shares issued in exchange for:
Cash, January 2005 with a price
of $0.00125 per share 0 0 4,000,000 5,000 0 0 0 5,000
Debt, accrued liabilities
and prepaid retianer
October 2004 to September
2005 with common shares
valued from $0.0004 to $0.0010
per share 0 0 591,300,000 473,362 0 0 0 473,362
Services, December 2004 through
August 2005 valued from
$0.0006 to $0.0010 per share 0 0 52,000,000 46,200 0 0 0 46,200
Issuance of 2,800,000 warrants
November 2004 through
September 2005 at an exercise
price of $0.0039 per share, in
conjunction with $1,400,000
principle value of 12%
convertible debt 0 0 0 0 3,756 0 0 3,756
Conversion of $2,529,378 principal
value of convertible debt,
$3,794,067 of derivative
conversion option
along with $104,410 accrued
interest, net of $973,565
convertible debt discount 0 0 5,610,392,876 5,454,290 0 0 5,454,290
Net loss for the year 0 0 0 0 0 0 (3,132,683) (3,132,683)
----------- -------- ------------- ----------- --------- ---------- ---------- -----------
Balance, September 30, 2005 215,865 215,865 7,388,864,998 26,669,088 1,466,714 0 (32,666,548) (4,314,881)
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 CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through December 31, 2005
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ----------- ------------
Shares issued in exchange for:
Conversion of $80,891 principal
value of convertible debt,
$121,336 of derivative
conversion option
along with $788 accrued
interest 0 0 832,454,734 203,015 0 0 203,015
Net loss for the period 0 0 0 0 0 0 (603,027) (603,027)
---------- ---------- ------------- ------------ ----------- ---------- ------------ -----------
Balance, December 31, 2005 215,865 $215,865 8,221,319,732 $ 26,872,103 $ 1,466,714 $ 0 $(33,269,575)$(4,714,893)
========== ========== ============= ============ =========== ========== ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2005
<table>
Dec. 1, 1990
(Inception)
3 Months Ended 3 Months Ended Through
Dec. 31 Dec. 31 Dec. 31
2005 2004 2005
Unaudited Unaudited Unaudited
Operating activities
Net (loss) $ (603,027)$ (804,266)$ (32,191,833)
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 2,845 6,442 1,731,775
Stock issued for services 0 73,000 7,645,373
Stock issued for interest 0 13,170 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of loan fees
and note discounts 187,081 321,429 3,234,221
Mark-to-market of derivative
conversion option 0 0 2,276,461
Forgiveness of debt 0 (504,462)
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses 54,362 (44,630) 164,926
Interest receivable 0 0 (95,700)
Increase (decrease) in liabilities
Accounts payable (94,471) (85,445) 1,289,872
Accrued compensation 21,248 151,456 2,876,447
Due to officers 18 (7,372) 631,164
Other current liabilities 16,475 25,841 878,240
----------------- ----------------- -----------------
Total adjustments 187,558 453,891 23,294,469
----------------- ----------------- -----------------
Net cash provided by (used by)
operating activities (415,469) (350,375) (8,897,364)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2005
Dec. 1, 1990
(Inception)
3 Months Ended 3 Months Ended Through
Dec. 31 Dec. 31 Dec. 31
2005 2004 2005
Unaudited Unaudited Unaudited
Investing activities
Collection of notes receivable $ 0 $ 0 $ 0
Increase in notes receivable 0 0 (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment 0 0 (245,405)
----------------- ----------------- -----------------
Net cash provided by (used by)
investing activities 0 0 (1,661,962)
Financing activities
Common stock issued for cash 0 0 3,492,172
Stock warrants 0 0 200,334
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees 0 0 (559,555)
Proceeds from debts
Related party 0 0 206,544
Other 0 0 7,647,275
Payments on debt
Related party 0 0 (53,172)
Other 0 (7,259) (604,536)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
----------------- ----------------- -----------------
Net cash provided by (used by)
financing activities 0 (7,259) 10,662,622
----------------- ----------------- -----------------
Net increase (decrease) in cash (415,469) (357,634) 103,296
Cash beginning of period 518,765 550,044 0
----------------- ----------------- -----------------
Cash end of period $ 103,296 $ 192,410 $ 103,296
================= ================= =================
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through December 31, 2005
Dec. 1, 1990
(Inception)
3 Months Ended 3 Months Ended Through
Dec. 31 Dec. 31 Dec. 31
2,005 2004 2005
Unaudited Unaudited Unaudited
Cash paid during the year for
Interest 0 0 699,490
Taxes 0 0 14,450
Non-cash investing and financing activities
Common stock issued for
Note receivable 0 0 281,250
Prepaids 0 0 264,748
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 202,226 455,465 12,090,433
Accrued services & interest 788 0 5,207,990
Preferred stock issued for
Services 0 75,845
Repayment of debt 0 0 119,520
Preferred stock options issued for
Repayment of debt 0 0 100,000
Re-characterize beneficial
conversion option as debt 0 0 881,550
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's Annual Report on Form 10-KSB for the year ended September 30, 2005.
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 months ended December 31, 2005 do not necessarily indicate
the results that may be expected for the full year.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
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 December 31, 2005, the Company had 8,221,319,732 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 12,300,000
--------------
Subtotal 22,300,000
Accrued officer compensation ($440,000),
convertible into common stock 358,758,842
Convertible note holder principal value
($1,534,822), accrued interest ($249,413)
assumed converted into common stock at
$0.00008 per share 22,302,937,500
--------------
Total potential common stock equivalents 22,683,996,342
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table illustrates the effect on net loss if we had
applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation:
Three Months Ended Three Months Ended
12/31/2005 12/31/2004
------------------ ------------------
Net loss, as reported $ (603,027) $ (804,266)
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 $ (603,027) $ (804,266)
NOTE 2. GOING CONCERN UNCERTAINTY
As of December 31, 2005, the Company had a deficiency in working capital of
approximately $2,800,000 and had incurred continual net losses since its return
to the development stage in fiscal 1996, of approximately $32,000,000, 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 year
ended September 30, 2005, the same investor group advanced the Company an
additional $1,400,000. The Company received $158,033 in March 2005, $108,733 in
April 2005, $543,665 in June 2005 and $589,569 in September 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
December 31, 2005
NOTE 3. PREPAID EXPENSES AND DEPOSITS
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 year ended September 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 December 31, 2005 tentatively were $10,174,
$22,700 and $33,137 for a total prepaid interest of $66,011. As of December
31, 2005, the Company had 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. In March
2005, April 2005, May 2005 and September 2005, the Company prepaid $1,033,
$1,033, $5,165 and $36,665 respectively for a total of $43,896 in interest in
connection with the convertible debenture financing. These amount were either
fully amortized or are being applied against the accrued interest liability.
As a result, there is no prepaid interest included in prepaid expenses.
Included in prepaid expenses is $20,000 in an escrow account designated for key
man life insurance. Also included are prepaid retainers to a consultant for
$52,402 and a law firm for $27,420.
As of December 31, 2005, the balance in prepaid expenses was $99,822.
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 December 31, 2005 as a result of a
legal settlement.
In March through June 2002, the Company received $750,000 from an accredited
investor group in exchange for 12% convertible debentures, convertible at the
lesser of $0.06 per share and 50% of the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. The convertible debentures were accompanied
by 3,750,000 common stock warrants, exercisable over a three year period at the
lesser of $0.045 per share and the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. Loan fees associated with these loans
amounted to $147,500, of which $90,000 represented finder's fees and $57,500
represented legal costs. These loan fees were fully amortized at September 30,
2003.
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 4. LOAN FEES (continued)
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.
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-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 4. LOAN FEES (continued)
In September 2004, the Company received another $625,000 from the above
accredited investor group in exchange for 12% convertible debentures,
convertible at the lesser of $0.005 per share and 40% of the average of the
lowest three intra-day trading prices of a share of common stock during the 20
trading days immediately preceding conversion. The convertible debentures were
accompanied by 1,875,000 common stock warrants, exercisable over a seven-year
period at $0.002 per share. Loan fees associated with these loans amounted to
$48,453, consisting of $46,953 in finder's fees and $1,500 in legal costs. The
Company also prepaid $75,000 in interest.
Total new loan fees during the year ended September 30, 2004 amounted to
$213,843.
Total amortization on the one- and two-year lives of all loan fees amounted to
$97,034 during the year ended September 30, 2004, leaving an unamortized
balance at September 30, 2004 of $144,705. During the year ended September 30,
2005, total amortization of loan fees amounted to $129,505, leaving an
unamortized balance of $15,200. During the three months ended December 31,
2005, total amortization of loan fees amounted to $6,106, leaving an
unamortized balance of $9,094.
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 $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.
In June 2005, the Company incurred an additional $6,368 in finder fees in
connection with a prior issuance of convertible debt from the above accredited
investor group.
In September 2005, the Company received another $589,569 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 1,179,138 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 $36,665 in prepaid interest.
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 4. LOAN FEES (continued)
Total new loan fees during the year ended September 30, 2005 amounted to
$42,368. During the year ended September 30, 2005, total amortization of the
loan fees amounted to $12,366, leaving an unamortized balance of $30,002.
During the three months ended December 31, 2005, total amortization of the loan
fees amounted to $4,537, leaving an unamortized balance of $25,465. Total
unamortized loan fees at December 31, 2005 was $34,559.
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 year ended September 30, 2005, the Company
repaid $45,715 including accrued interest during the period of $212 creating
a balance due from officer of $37,698 which has been applied to accrued
compensation due to the CEO. There was no amount due to the CEO at December
31, 2005.
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
bringing the loan balance due the Secretary at September 30, 2004 to $35,253.
During the year ended September 30, 2005, the Company repaid $37,962. Accrued
interest during the period amounted to $3,094, bringing the loan balance at
September 30, 2005 to $385. Accrued interest for three months amounted to $18,
bringing the loan balance at December 31, 2005 to $403. The loan balance at
December 31, 2005 is due on demand and continues to accrue interest at the rate
of 18% per year.
The Secretary/Treasurer employment contract was not extended beyond the April
1, 2005 expiration date. She currently is Acting Secretary/Treasurer on a
consulting basis.
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 5. DUE TO/FROM OFFICERS (continued)
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 December 31, 2005 of $0.
The aggregate amount due officers at December 31, 2005 was $403 and interest
expense on the officer loans amounted to $18 for the three months ended
December 31, 2005.
As of December 31, 2005, the Company owed its officers $1,784,439 in accrued
compensation. Of this amount, $440,000 was attributable to aggregate staying
bonuses payable to the President and Acting Secretary/Treasurer of the Company
as of December 31, 2005. 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 358,758,842 at
December 31, 2005, including 289,156,627 shares attributable to the staying
bonus earned as of December 31, 2005.
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE
Notes payable at December 31, 2005 consisted of the following:
Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 88,437,500
shares of common stock at the price
of $0.00008 at December 31, 2005 7,075 $ 7,075
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 88,437,500
shares of common stock at the price
of $0.00008 at December 31, 2005 7,075 7,075
-------
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 101,700,000
shares of common stock at the price
of $0.00008 at December 31, 2005 8,136 $ 8,136
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $4,975 and principal
on Convertible Debenture convertible
into approximately 62,187,500
shares of common stock at the price
of $0.00008 at December 31, 2005 4,975 $ 4,975
-------
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
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 120,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 9,600 $ 9,600
--------
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 120,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 9,600 $ 9,600
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $10,800 and principal
on Convertible Debenture convertible
into approximately 135,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 10,800 $ 10,800
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $6,000 and principal
on Convertible Debenture convertible
into approximately 75,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 6,000 $ 6,000
-------
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #3
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 240,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 19,200 $ 19,200
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 240,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 19,200 $ 19,200
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $21,600 and principal
on Convertible Debenture convertible
into approximately 270,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 21,600 $ 21,600
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 150,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 12,000 $ 12,000
--------
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #5
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 115,500,000
shares of common stock at the price
of $0.00008 at December 31, 2005 9,240 $ 9,240
-------
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 115,500,000
shares of common stock at the price
of $0.00008 at December 31, 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 115,500,000
shares of common stock at the price
of $0.00008 at December 31, 2005 9,240 $ 9,240
-------
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #6
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 150,000,000
shares of common stock at the price
of $0.00008 at December 31, 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 150,000,000
shares of common stock at the price
of $0.00008 at December 31, 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 150,000,000
shares of common stock at the price
of $0.00008 at December 31, 2005 12,000 $ 12,000
--------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #7
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 8,353
Accrued interest of $8,105 and principal
on Convertible Debenture convertible
into approximately 205,725,000
shares of common stock at the price
of $0.00008 at December 31, 2005 8,105 $ 16,458
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 8,354
Accrued interest of $8,104 and principal
on Convertible Debenture convertible
into approximately 205,725,000
shares of common stock at the price
of $0.00008 at December 31, 2005 8,104 $ 16,458
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 8,353
Accrued interest of $8,105 and principal
on Convertible Debenture convertible
into approximately 205,725,000
shares of common stock at the price
of $0.00008 at December 31, 2005 8,105 $ 16,458
--------
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #8
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $4,164 and principal
on Convertible Debenture convertible
into approximately 260,387,500
shares of common stock at the price
of $0.00008 at December 31, 2005 4,164 $ 20,831
--------
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 $4,164 and principal
on Convertible Debenture convertible
into approximately 260,387,500
shares of common stock at the price
of $0.00008 at December 31, 2005 4,164 $ 20,831
--------
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 $4,165 and principal
on Convertible Debenture convertible
into approximately 260,387,500
shares of common stock at the price
of $0.00008 at December 31, 2005 4,165 $ 20,831
--------
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #9
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $4,011 and principal
on Convertible Debenture convertible
into approximately 258,475,000
shares of common stock at the price
of $0.00008 at December 31, 2005 4,011 $ 20,678
--------
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 $4,011 and principal
on Convertible Debenture convertible
into approximately 258,475,000
shares of common stock at the price
of $0.00008 at December 31, 2005 4,011 $ 20,678
--------
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 $4,011 and principal
on Convertible Debenture convertible
into approximately 258,462,500
shares of common stock at the price
of $0.00008 at December 31, 2005 4,011 $ 20,677
--------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #10
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,666
Accrued interest of $3,743 and principal
on Convertible Debenture convertible
into approximately 255,112,500
shares of common stock at the price
of $0.00008 at December 31, 2005 3,743 $ 20,409
--------
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 $3,742 and principal
on Convertible Debenture convertible
into approximately 255,112,500
shares of common stock at the price
of $0.00008 at December 31, 2005 3,742 $ 20,409
--------
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 $3,742 and principal
on Convertible Debenture convertible
into approximately 255,112,500
shares of common stock at the price
of $0.00008 at December 31, 2005 3,742 $ 20,409
--------
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #11
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $79,734
Accrued interest of $18,057 and principal
on Convertible Debenture convertible
into approximately 1,222,387,500
shares of common stock at the price
of $0.00008 at December 31, 2005 18,057 $ 97,791
--------
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 $18,058 and principal
on Convertible Debenture convertible
into approximately 1,222,387,500
shares of common stock at the price
of $0.00008 at December 31, 2005 18,058 $ 97,791
--------
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 $18,058 and principal
on Convertible Debenture convertible
into approximately 1,222,387,500
shares of common stock at the price
of $0.00008 at December 31, 2005 18,058 $ 97,791
--------
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 $1,607 and principal
on Convertible Debenture convertible
into approximately 336,150,000
shares of common stock at the price
of $0.00008 at December 31, 2005 1,607 $ 26,892
--------
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 $4,520 and principal
on Convertible Debenture convertible
into approximately 945,437,500
shares of common stock at the price
of $0.00008 at December 31, 2005 4,520 $ 75,635
--------
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 $3,717 and principal
on Convertible Debenture convertible
into approximately 777,362,500
shares of common stock at the price
of $0.00008 at December 31, 2005 3,717 $ 62,189
--------
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 $201 and principal
on Convertible Debenture convertible
into approximately 42,025,000
shares of common stock at the price
of $0.00008 at December 31, 2005 201 $ 3,362
--------
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #13
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 $ 17,397
Accrued interest of $976 and principal
on Convertible Debenture convertible
into approximately 229,662,500
shares of common stock at the price
of $0.00008 at December 31, 2005 976 $ 18,373
--------
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 $ 48,930
Accrued interest of $2,746 and principal
on Convertible Debenture convertible
into approximately 645,950,000
shares of common stock at the price
of $0.00008 at December 31, 2005 2,746 $ 51,676
--------
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 $ 40,231
Accrued interest of $2,257 and principal
on Convertible Debenture convertible
into approximately 531,100,000
shares of common stock at the price
of $0.00008 at December 31, 2005 2,257 $ 42,488
--------
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 $ 2,175
Accrued interest of $122 and principal
on Convertible Debenture convertible
into approximately 28,712,500
shares of common stock at the price
of $0.00008 at December 31, 2005 122 $ 2,297
--------
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #14
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 $ 42,276
Accrued interest of $2,066 and principal
on Convertible Debenture convertible
into approximately 554,275,000
shares of common stock at the price
of $0.00008 at December 31, 2005 2,066 $ 44,342
--------
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 $118,902
Accrued interest of $5,811 and principal
on Convertible Debenture convertible
into approximately 1,558,912,500
shares of common stock at the price
of $0.00008 at December 31, 2005 5,811 $ 124,713
--------
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 $ 97,764
Accrued interest of $4,778 and principal
on Convertible Debenture convertible
into approximately 1,281,775,000
shares of common stock at the price
of $0.00008 at December 31, 2005 4,778 $ 102,542
--------
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 $ 5,285
Accrued interest of $258 and principal
on Convertible Debenture convertible
into approximately 69,287,500
shares of common stock at the price
of $0.00008 at December 31, 2005 258 $ 5,543
--------
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #16
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 $ 94,331
Accrued interest of $1,923 and principal
on Convertible Debenture convertible
into approximately 1,203,175,000
shares of common stock at the price
of $0.00008 at December 31, 2005 1,923 $ 96,254
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 17, 2007 at an annual
interest rate of 8% with one year
interest prepaid $265,306
Accrued interest of $5,408 and principal
on Convertible Debenture convertible
into approximately 3,383,925,000
shares of common stock at the price
of $0.00008 at December 31, 2005 5,408 $ 270,714
--------
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 $218,141
Accrued interest of $4,447 and principal
on Convertible Debenture convertible
into approximately 2,782,350,000
shares of common stock at the price
of $0.00008 at December 31, 2005 4,447 $ 222,588
--------
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 $ 11,791
Accrued interest of $240 and principal
on Convertible Debenture convertible
into approximately 150,387,500
shares of common stock at the price
of $0.00008 at December 31, 2005 240 $ 12,031
--------
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
Subtotal of all Convertible Debentures 1,889,120
Less reclassified accrued interest $ (249,413)
Less prepaid interest offset (104,885)
------------
Subtotal principal value 1,534,822
Derivative conversion option - 150 percent of principal 2,302,232
Less unamortized note discount (1,049,321)
-----------
Net carrying value of
Convertible Debentures $ 2,787,733
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. 8,210
-----------
Total notes payable $ 2,795,943
Current portion $ 816,210
-----------
Long-term portion $ 1,979,733
===========
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.
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6. NOTES PAYABLE (continued)
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.
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
years ended September 30, 2005 and 2004, accrued interest amounted to $617 and
$580, respectively, resulting in a balance of $8,048 at September 30, 2005.
During the three months ended December 31, 2005, an additional $162 of interest
was accrued bringing the balance at December 31, 2005 to $8,120. 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.
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.
As of December 31, 2005, five-year maturities of the notes payable are as
follows:
<table>
Derivative Unamortized Subsequent
Conversion Note Conversion Total
Principal Option Discount to Equity Due
Year ended December 31, 2006 $ 422,470 $ 621,390 $ 0 $(227,650) $ 816,210
Year ended December 31, 2007 1,120,562 1,680,842 (1,049,321) 0 1,752,083
Subsequent conversions to equity 0 0 0 227,650 227,650
---------- ---------- ---------- -------- ----------
Total notes payable $ 1,543,032 $ 2,302,232 $(1,049,321) $ 0 $ 2,795,943
========== ========== ========== ======== ==========
</table>
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
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.
On March 29, 2002 the Company issued an aggregate of $300,000 of 12%
convertible debentures in a private offering to four accredited investors.
Three of the investors, if certain conversion limitations are disregarded, are
beneficial owners of 5% or more of the company's outstanding shares of common
stock. The debentures initially were convertible into shares of common stock
at the lesser of $.06 per share and 50% of the average of the lowest three
intra-day trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. In October 2003, the conversion rate was
changed from 50% to 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. The debentures were accompanied by warrants
to purchase up to an aggregate of 1,500,000 shares of common stock at a per
share exercise price equal to the lesser of $.045 and the average of the
lowest three intra-day trading prices during the 20 trading days immediately
preceding an exercise.
On May 10, 2002 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to four accredited investors. Three of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of the Company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the
lesser of $.06 per share and 50% of the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. In October 2003, the conversion rate was
changed from 50% to 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. The debentures were accompanied by warrants
to purchase up to an aggregate of 750,000 shares of common stock at a per
share exercise price equal to the lesser of $.045 and the average of the
lowest three intra-day trading prices during the 20 trading days immediately
preceding an exercise.
On June 17, 2002 the Company issued an aggregate of $300,000 of 12% convertible
debentures in a private offering to four accredited investors. Three of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of the company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the lesser
of $.06 per share and 50% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. In October 2003, the conversion rate was changed from
50% to 40% of the average of the lowest three intra-day trading prices of a
share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,500,000 shares of common stock at a per share exercise price
equal to the lesser of $.045 and the average of the lowest three intra-day
trading prices during the 20 trading days immediately preceding an exercise.
<page>F-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
The Company entered into another securities purchase agreement plus related
agreements with three accredited investors on November 27, 2002 (essentially
the same re-organized investor group delineated above) for the purchase of up
to $500,000 of the Company's 12% Convertible Debentures due one year from
their date of issuance. The Company granted the holders of the debentures a
continuing security interest in all of the Company's assets to secure the
Company's obligations under the debentures and related agreements. The
debentures bear interest at a rate of 12% per annum, payable quarterly in
common stock or cash at the option of the Purchasers.
On November 27, 2002 the Company issued an aggregate of $200,000 of 12%
convertible debentures in a private offering to three accredited investors
who, if certain conversion limitations are disregarded, would be deemed
beneficial owners of 5% or more of the Company's outstanding shares of common
stock. The debentures initially were convertible into shares of common stock
at the lesser of $.01 per share and 50% of the average of the lowest three
intra-day trading prices of a share of common stock during the 20 trading days
immediately preceding conversion. In October 2003, the conversion rate was
changed from 50% to 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. The debentures were accompanied by warrants
to purchase up to an aggregate of 1,000,000 shares of common stock at a per
share exercise price equal to $.005.
On March 3, 2003 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to 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-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
On December 3, 2003 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to three accredited investors.
The debentures were convertible into shares of common stock at the lesser of
$.005 per share and 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. The debentures were accompanied by warrants to purchase
up to an aggregate of 250,000 shares of common stock at a per share exercise
price equal to $.005.
On December 31, 2003 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to three accredited investors.
The debentures were convertible into shares of common stock at the lesser of
$.005 per share and 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. The debentures were accompanied by warrants to purchase
up to an aggregate of 250,000 shares of common stock at a per share exercise
price equal to $.005.
On February 18, 2004 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to three accredited investors.
The debentures were convertible into shares of common stock at the lesser of
$.005 per share and 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. The debentures were accompanied by warrants to purchase
up to an aggregate of 250,000 shares of common stock at a per share exercise
price equal to $.005.
On March 4, 2004 the Company issued an aggregate of $250,000 of 12% convertible
debentures in a private offering to three accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices
of a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,250,000 shares of common stock at a per share exercise price
equal to $.005.
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.
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
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 in 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.
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 in 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 in 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.
On September 30, 2005 the Company issued an aggregate of $589,569 of 8%
convertible debentures in a private offering to the four accredited investors.
The Company prepaid $36,665 in 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 1,179,138 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.
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 year ended September
30, 2005, the derivative conversion interest was increased by $2,800,000 in
connection with the issuance of an additional $1,400,000 of debt.
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
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.
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 $613,967 since the inception of the loans), bringing the
derivative conversion option balance at September 30, 2004 to $4,117,635.
During the year ended September 30, 2005, the Company issued an additional
$1,400,000 of 8% convertible debentures. Also, the Company issued
5,610,392,876 shares of common stock in connection with the conversion of
$2,529,378 of principal and $104,410 of accrued interest on the Company's
convertible debentures, resulting in a convertible debt principal balance at
September 30, 2005 of $1,615,712 (net of an aggregate of $3,034,288 in debt
conversions through that date). A corresponding pro-rata reduction of
$3,794,067 was made to the derivative conversion option during the year ended
September 30, 2005 (an aggregate of $4,408,034 since the inception of the
loans), bringing the derivative conversion option balance at September 30, 2005
to $2,423,568.
During the three months ended December 31, 2005, the Company issued 832,454,734
shares common stock in connection with the conversion of $80,891 of principal
and $788 of accrued interest on the Company's convertible debentures, resulting
in a convertible debt principal balance at December 31, 2005 of $1,534,821
(net of an aggregate of $3,115,179 in debt conversions through that date). A
corresponding pro-rata reduction of $121,336 was made during the three months
ended December 31, 2005(an aggregate of $4,529,370 since the inception of the
loans), bringing the derivative conversion option balance at December 31, 2005
to $2,302,232.
<page>F-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
The aggregate note discount of $4,650,000 is being amortized over the one-year
and two-year lives of the respective debt instruments. Of this amount,
$279,115 was amortized during the fiscal year ended September 30, 2002,
$653,720 was amortized during the year ended September 30, 2003, $673,705 was
amortized during the year ended September 30, 2004, $693,992 was amortized
during the year ended September 30, 2005 and $176,438 was amortized during
the three months ended December 31, 2005, while $69,233 in convertible bond
discount was transferred to equity upon conversion of $93,130 in debt principal
during the fiscal year ended September 30, 2002, $52,340 in convertible bond
discount was transferred to equity upon conversion of $193,665 of debt
principal during the fiscal year ended September 30, 2003, $28,571 in
convertible bond discount was transferred to equity upon conversion of $218,115
of debt principal during the year ended September 30, 2004 and $973,565 in
convertible bond discount was transferred to equity upon conversion of
$2,529,378 of debt principal during the year ended September 30, 2005,
resulting in an unamortized convertible debt discount balance of $1,049,321 at
December 31, 2005.
As of December 31, 2005, the Company was indebted for an aggregate of
$1,784,235 including $1,534,822 of principal and $354,298 of accrued interest,
net of prepaid interest of $104,885, 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 15,000,000,000 shares of
common stock, no par value per share and 50,000,000 shares of preferred stock,
$1.00 par value per share. On August 10, 2005, the Board of Directors and
stockholders approved an increase in the amount of common shares from
7,500,000,000 to 15,000,000,000. 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 December 31, 2005,
there were 8,221,319,732 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 October 2004 through September 2005, the Company issued 591,300,000
shares of its restricted common stock to several consultants for retainers,
reduction of debt and accrued liabilities of $473,362.
During December 2004 through August 2005, the Company issued 52,000,000 shares
of its restricted common stock to several consultants for services rendered
having a value of $46,200.
During March 2005 through September 2005, the Company received $1,400,000 in
exchange for 8% convertible debentures. The debentures were accompanied by
2,800,000 common stock warrants, exercisable over a five year period at $0.0039
per share. The common stock warrants were valued at $3,756.
<page>F-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005
NOTE 8 SHAREHOLDERS' EQUITY (DEFICIT)(continued)
During October 2004 through September 2005, the Company issued 5,610,392,876
shares of common stock in connection with the conversion of $2,529,378 of
principal of the 8% convertible debenture, 3,794,067 of derivative conversion
option and $104,410 of accrued interest, net of $973,565 in convertible debt
discount, for total conversion of $5,454,290 of the Company's convertible
debentures.
During October 2005 through December 2005, the Company issued 832,454,734
shares of common stock in connection with the conversion of $80,891 of
principal, $121,336 of derivative conversion option and $788 of accrued
interest, for total conversion of $203,015 of the Company's convertible
debentures.
<page>F-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 9. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note
holder options to purchase 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share. As consideration, the Company
reduced its debt to the note holder by $50,000 and received an extension of
time to pay-off its promissory note. The Company also issued to its CEO
options to purchase another 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share in exchange for a reduction in
debt of $50,000. Total consideration received on the above issued options, as
evidenced by debt reduction, was $100,000. These options could have been
exercised through November 1, 2002 and could have been converted into common
stock at the rate of 10 common shares for each Class B preferred share. In
September 2001, the exercise price on the Class B preferred stock options was
adjusted to $2.50 per share and the exercise period was extended to November 1,
2005. In June 2002, the exercise price on the Class B preferred stock options
was adjusted to $0.50 per share. In January 2004, the exercise price on the
Class B preferred stock options was adjusted to $0.05 per share and the
exercise period extended to November 1, 2009.
The Company's CEO currently owns 215,865 shares of the Company's Class A
preferred stock, of which 15,845 shares were purchased during the year ended
September 30, 2004, and has options to purchase another 234,155 shares for
$1.00 per share through November 1, 2009.
The Company has granted various common stock options and warrants to employees
and consultants. Generally, the options and warrants were granted at
approximately the fair market value of the Company's common stock at the date
of grant and vested immediately, except that when restricted Rule 144 common
stock was issued, the options and warrants were granted at an average discount
to market of 50% (ranging from between 20% to 75%).
<page>F-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. Accordingly,
compensation expense for common stock options and warrants issued to employees
for services have been recorded as the difference between the intrinsic value
of those services as measured by the (discounted) market value of the common
stock at the date of grant and the exercise price, with pro forma disclosure
of the excess market value as required by FASB No. 123. No common stock
options or warrants were granted to employees (including officers) and
directors of the Company during the years ended September 30, 2005 or 2004.
All common stock options and warrants issued to consultants and other non-
employees have been recorded at the fair value of the services rendered and
equivalent to the market value (as discounted, if applicable) of the equity
instruments received as per SFAS No. 123. The market value was determined by
utilizing an averaging convention of between 5 to 30 days of the closing price
of the Company's common shares as traded on the OTC Bulletin Board (stock
symbol CNES) through the grant date and applying certain mathematical
assumptions as required under the Black-Scholes model. Such assumptions were
generally the same as those mentioned above when making fair value disclosures
for the issuance of officer and employee stock options. These included the
risk-free annual rate of return, which ranged from 5% to 6% during the years
ended September 30, 2005 and 2004, and stock volatility, which is now estimated
to be 190%.
At September 30, 2002, the Company had an aggregate of 8,807,154 common stock
options and a total of 1,000,000 Class B preferred stock options recorded as
additional paid-in capital at a value of $1,443,695. Of the common stock
options and warrants, 2,043,654 had been issued to officers and employees and
the remaining 6,763,500 had been issued to consultants and investors.
In November 2002 through May 2003, 2,500,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $500,000 12%
convertible debenture financing arrangement (see Note 7 above). The
allocated cost of these warrants amounted to $9,816, resulting in a recorded
balance of stock options and warrants exercisable at September 30, 2003 of
$1,453,511 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
As of September 30, 2003, the Company had an additional 4,852,205 common stock
options that had been granted to consultants and investors at exercise prices
ranging from $0.50 to $2.00 per share, expiring from November 1, 2003 through
January 16, 2005. Because these strike prices were substantially above the
market price of the Company's common stock, no value was attributed to these
options at the time of grant. During the year ended September 30, 2004,
4,352,205 of these non-valued options expired, leaving a balance at September
30, 2004 of 500,000 options, exercisable at $1.00 per share and expiring
January 16, 2005. The Company also granted a contingent issuance
to its Chief Technical Officer of 2,000,000 common stock options exercisable
at $0.50 per share and expiring December 31, 2004, which would not have vested
until certain milestones have been attained. These respective common stock
options and contingent issuances have been excluded from the summarized table
below.
<page>F-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
In November 2003 through December 2003, 1,000,000 seven-year common stock
warrants were issued to an accredited investor group in connection with a
$200,000 12% convertible debenture financing arrangement (see Note 7 above).
The allocated cost of these warrants amounted to $945.
In February 2004 and March 2004, 1,500,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $300,000 12%
convertible debenture financing arrangement (see Note 7 above). The
allocated cost of these warrants amounted to $1,417.
In April 2004, 750,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $250,000 12%
convertible debenture financing arrangement (see Note 7 above). The
allocated cost of these warrants amounted to $1,181.
In June 2004, 1,875,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $625,000 12%
convertible debenture financing arrangement (see Note 7 above). The
allocated cost of these warrants amounted to $2,952.
In September 2004, 1,875,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $625,000 12%
convertible debenture financing arrangement (see Note 7 above). The
allocated cost of these warrants amounted to $2,952, resulting in a recorded
balance of stock options and warrants exercisable at September 30, 2004 of
$1,462,958 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
In March 2005 through September 2005, 2,800,000 five-year common stock warrants
were issued to an accredited investor group in connection with a $1,400,000 8%
convertible debenture financing arrangement (see Note 7 above). The allocated
cost of these warrants amounted to $3,756, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2005 of $1,466,714
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
During the year ended September 30, 2005, the 500,000 non-valued common stock
options and the 2,000,000 contingently issuable common stock options noted
above both expired. In addition, 6,300,000 previously-valued common stock
options and warrants expired, consisting of 4,750,000 warrants issued to
convertible note holders at exercise prices ranging from $0.045 to $0.192 per
share, 1,450,000 common stock options issued to a consultant at an exercise
price of $0.13 per share, and 100,000 common stock options issued to a director
at an exercise price of $0.38 per share.
During the three months ended December 31, 2005, the 500,000 common stock
options issued to the Acting Secretary/Treasurer and 1,443,654 common stock
options issued to the CEO expired.
No common stock options or warrants were granted to employees (including
officers) and directors of the Company during the three months ended December
31, 2005, and the years ended September 30, 2005 and 2004.
<page>F-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the fiscal year ended September 30,
2005 and the three months ended December 31, 2005 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2004 17,743,654 $.068
Granted 2,800,000 .004
Expired (563,500) .038
---------- -----
Balance outstanding, September 30, 2005 14,243,654 .056
Granted 0 .000
Expired (1,943,654) .380
---------- -----
Balance outstanding, December 31, 2005 12,300,000 .004
========== =====
The following table summarizes information about common stock options at
December 31, 2005:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- --------------- --------- ------- -------- ---------- -------
$ .002 - $ .002 2,500,000 49 $ .005 2,500,000 $ .005
$ .002 - $ .002 500,000 59 $ .005 500,000 $ .005
$ .002 - $ .002 250,000 59 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 59 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 60 $ .005 250,000 $ .005
$ .002 - $ .005 1,250,000 62 $ .005 1,250,000 $ .005
$ .002 - $ .005 750,000 64 $ .002 750,000 $ .002
$ .002 - $ .005 1,875,000 66 $ .002 1,875,000 $ .002
$ .002 - $ .005 1,875,000 68 $ .002 1,875,000 $ .002
$ .004 - $ .004 316,066 51 $ .004 316,066 $ .004
$ .004 - $ .004 217,466 51 $ .004 217,466 $ .004
$ .004 - $ .004 1,087,330 51 $ .004 1,087,330 $ .004
$ .004 - $ .004 1,179,138 51 $ .004 1,179,138 $ .004
$ .002 - $0.004 12,300,000 58 $ .004 12,300,000 $ .004
=============== ========== == ======== ========== =======
NOTE 10. SUBSEQUENT EVENTS
Subsequent to December 31, 2005, the Company issued approximately 1,500,000,000
shares of common stock through February 3, 2006 in exchange for reduction of
approximately $92,000 in principal and approximately $138,000 in derivative
conversion option, totaling approximately $230,000 in convertible debt.
The Company will be accruing a prepaid expense of $80,000 as a staying bonus
for its Chief Executive Officer as per his employment contract (see NOTE 5).
The staying bonus will be amortized over the calendar year 2006.
<page>F-52
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. We intend that those forward-looking statements be subject to the
safe harbors created by those sections. These forward- looking statements
generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance, and
can generally be identified by the use of the words "believe," "intend,"
"plan," "expect," "forecast," "project," "may," "should," "could," "seek," "pro
forma," "estimates," "continues," "anticipate" and similar words. The forward-
looking statements and associated risks may include, relate to, or be qualified
by other important factors, including, without limitation:
o our ability to obtain FCC approval of our H-Net(TM) wireless meter reading
products;
o the projected growth in the automated meter reading markets;
o our business strategy for establishing and expanding our presence in
these markets;
o our ability to successfully implement our business plans;
o our ability to hire and retain qualified personnel;
o anticipated trends in our financial condition and results of operations;
o our ability to distinguish ourselves from our competitors; and
o uncertainties relating to economic conditions in the markets in which we
currently operate and in which we intend to operate in the future.
These forward-looking statements necessarily depend upon assumptions and
estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the forward-
looking statements. We do not undertake to update, revise or correct any
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section of our
most recent annual report on Form 10-KSB could cause our financial results,
including our net income (loss) or growth in net income (loss) to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate substantially.
Overview
Since 1995, we have been engaged in the development of a low-cost automatic
meter reading, or AMR, solution. We have developed a low-cost AMR solution that
includes a proprietary system employing specialized hardware and software that
will allow for residential and commercial applications. Our proprietary system
is called H-Net(TM), which is a trademark of ConectiSys. 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 continuing the development of our H-Net(TM) system. Our recent
development efforts have focused on redesigning our H-Net(TM) circuitry from a
three-board circuit to a two-board circuit. This redesign was completed in
November 2005 and testing of our new H-Net(TM) circuitry has begun. We
<page>2
anticipate that production units with this new circuitry will be available by
March 2006. We redesigned our H-Net(TM) circuitry to respond to redesigns of
meter products by meter manufacturers. These redesigns by meter manufacturers
were directed at reducing costs and resulted in reduced available space for
integration of circuitry from third-party technology providers such as
ConectiSys.
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. In July
2005, we submitted to the FCC our eight-channel H-Net(TM) BaseStation product
for approval for commercialization and sale and received FCC certification for
this product in January 2006.
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
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 December 31, 2005, we had a
deficiency in working capital of approximately $2.8 million and had incurred
continual net losses since our return to the development stage in fiscal 1994
of approximately $32.0 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 $4.7 million. 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 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.
<page>3
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.
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 Three Months Ended December 31,
2005 and 2004
We did not generate any revenues for the three months ended December 31,
2005 and 2004. Cost of goods sold for the three months ended December 31, 2005
was $74,846 as compared to $61,962 for the three months ended December 31,
2004, representing an increase of $12,884,or 21%. 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 decreased by $42,753,or 12.0% to
$314,286 for the three months ended December 31, 2005 as compared to $357,039
for the same period in 2004. This decrease was primarily due to decreased
expenses associated with legal and consulting services.
Interest expense decreased by $171,370,or 44.5%, to $213,895 during the
three months ended December 31, 2005 as compared to $385,265 for the same
period in 2004. The decrease in interest expense was primarily attributable to
decreased amortization of convertible debt discount and prepaid interest in the
aggregate amount of approximately $156,391.
Net loss for the three months ended December 31, 2005 decreased by
$201,239, or 25.0%, to $603,027 as compared to a net loss of $804,266 for the
same period in 2004. The decrease in net loss primarily resulted from the
decrease in general and administrative expenses and the decrease in interest
expense, as discussed above.
<page>4
Liquidity and Capital Resources
During the three months ended December 31, 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
significant accumulated and working capital deficits. 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, 2005 and 2004 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 December 31, 2005, we had a working capital deficit of approximately
$2.8 million and an accumulated deficit of approximately $33.3 million. As of
that date, we had approximately $103,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately $1.9
million. We had other current liabilities, including amounts due to officers,
accrued interest, notes payable and current portion of long term debt of
approximately $1.1 million, including those issued prior to the beginning of
fiscal year 2005. 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 $415,000 for
the three months ended December 31, 2005 as compared to approximately $350,000
for the three months ended December 31, 2004. No cash was used in or provided
by our investing activities in the three months ended December 31, 2005 or
2004.
No cash was provided by our financing activities for the three months ended
December 31, 2005 as compared to cash used in our financing activities of
approximately $7,000 for the three months ended December 31, 2004.
As of the following dates, we were in default in the repayment of principal
and interest in the corresponding amounts set forth below on our secured
convertible debentures due as of those dates:
Principal Current
Amount($) Principal
Default Date at Default Date Amount($)
----------------- --------------- -----------
December 31, 2004 50,000 34,000
February 18, 2005 50,000 50,000
March 4, 2005 250,000 239,200
------------- -----------
Total: $ 350,000 $ 323,200
============= ===========
As of February 6, 2006, 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
$323,200 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
$261,000 net of approximately $105,000 of prepaid interest. As of February 6,
<page>5
2006, as a result of the above defaults, the holders of our secured convertible
debentures and notes were entitled to pursue their rights to foreclose upon
their security interest in all of our assets. However, as of that date, other
than the receipt of a notice of default, we were not aware of any action taken
by the holders of our secured convertible debentures and notes to pursue such
rights, and as of that date we also were not aware of any other legal or
similar action taken by those holders to enforce their rights or as a result of
our defaults under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange Commission
a portion of the shares of common stock underlying the convertible debentures
and notes under which we are in default and expect that the convertible
debentures and notes ultimately will be converted into shares of our common
stock and that we therefore will not be obligated to repay the outstanding
principal and accrued and unpaid interest amounts on those debentures and
notes.
As of February 6, 2006, we had issued the following secured convertible
debentures and notes, which provide for interest at the rate of 12% per annum,
except for the notes issued in March 2005, which provide for interest at the
rate of 8% per annum, and warrants to purchase common stock to various
accredited inventors in connection with debenture and note offering
transactions:
<table>
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount ($) 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 - 24,000 500,000
December 3, 2003 50,000 31,000 - 12,000 250,000
December 31, 2003 50,000 44,000 34,000 12,400 250,000
February 18, 2004 50,000 35,000 50,000 11,800 250,000
March 4, 2004.... 250,000 203,000 239,200 56,800 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 1,400,000 1,148,000 1,120,561 46,400 2,800,000
----------- ----------- ------------ ---------- ----------
Total: $4,650,000 $3,568,000 $1,443,761 $365,400 12,300,000
============ ============ ============ ========== ==========
</table>
__________________
(1) Amounts are approximate and represent net proceeds after deducting
expenses incurred in connection with the offering as well as expenses
for legal fees incurred in connection with preparation of reports and
statements filed with the Securities and Exchange Commission.
(2) Amounts are approximate and represent accrued and unpaid interest
outstanding as of February 6, 2006. The total amount of accrued and
unpaid interest does not account for approximately $105,000 of
outstanding pre- paid interest.
Each of the above outstanding secured convertible debentures or notes,
except for the convertible notes issued in March 2005, are due one year
following their respective issuance dates. The convertible notes issued in
March 2005 are due two years following their 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
<page>6
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 the
March 2005 convertible notes. As of February 6, 2006, the applicable conversion
price was approximately $.00004 per share.
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, 2005 and 2004 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 report and
in Note 2 to our condensed consolidated financial statements included in this
report, we have suffered recurring losses from operations and at December 31,
2005 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 $4.7 million in financing
to date. No assurances can be given that they will provide any additional
financing in the future. Our current secured convertible debenture and note
financing documents contain notice and right of first refusal provisions and
the grant of a security interest in substantially all of our assets in favor of
the convertible debenture and note investors, all of which provisions will
restrict our ability to obtain debt and/or equity financing from any investor
other than our current investors.
Any future financing that we may obtain may cause significant dilution to
existing stockholders. Any debt financing or other financing of securities
senior to common stock that we are able to obtain will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition, results of
operations and cash flows.
If adequate funds are not available, we may be required to delay, scale
back or eliminate portions of our operations and product and service
development efforts or to obtain funds through arrangements with strategic
partners or others that may require us to relinquish rights to certain of our
technologies or potential products or other assets. Accordingly, the inability
to obtain such financing could result in a significant loss of ownership and/or
control of our proprietary technology and other important assets and could also
adversely affect our ability to fund our continued operations and our product
and service development efforts that historically have contributed
significantly to our competitiveness.
Effect of Inflation
Inflation did not have any significant effect on the operations of the
Company during the three months ended December 31, 2005. Further, inflation is
not expected to have any significant effect on future operations of the
Company.
<page>7
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 are not expected to affect our consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations"("FIN 47"), which is an interpretation
of SFAS 143, "Accounting for Asset Retirement Obligations." FIN 47 clarifies
terminology within SFAS 143 and requires an entry to recognize a liability for
the fair value of a conditional asset retirement obligation when incurred if
the liability's fair value can be reasonably estimated. FIN 47 is effective
for fiscal years ending after December 15, 2005. We do not expect the adoption
of this statement to have a material impact on our 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.
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.
<page>8
ITEM 3. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Acting Chief Financial Officer (our
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluations as of December 31, 2005 (the "Evaluation
Date"), that the design and operation of our "disclosure controls and
procedures" (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is accumulated, recorded, processed, summarized and
reported to our management, including our Chief Executive Officer and Acting
Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
Evaluation Date, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions were
required or undertaken.
<page>9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In October 2005, we issued an aggregate of 74,381,500 shares of common
stock to three accredited investors upon conversion of an aggregate of $5,950
in principal on our convertible debentures.
In November 2005, we issued an aggregate of 365,240,000 shares of common
stock to three accredited investors upon conversion of an aggregate of $43,829
in principal including related interest on our convertible debentures.
In December 2005, we issued an aggregate of 392,833,233 shares of common
stock to three accredited investors upon conversion of an aggregate of $31,427
in principal including related interest on our convertible debentures.
The issuances of our securities described above were made in reliance upon
the exemption from registration available under Section 4(2) of the Securities
Act of 1933, as amended, as transactions not involving a public offering. This
exemption was claimed on the basis that these transactions did not involve any
public offering and the purchasers in each offering were sophisticated and had
sufficient access to the kind of information registration would provide,
including our most recent Annual Report on Form 10-KSB and our most recent
Quarterly Report on Form 10-QSB.
Dividend Policy
We have never paid cash dividends on our common stock and do not currently
intend to pay cash dividends on our common stock in the foreseeable future. We
are restricted from paying dividends on our common stock under state law, and
the terms of our secured convertible debentures. We currently anticipate that
we will retain any earnings for use in the continued development of our
business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of the following dates, we were in default in the repayment of principal
and interest in the corresponding amounts set forth below on our secured
convertible debentures due as of those dates:
Principal Current
Amount($) Principal
Default Date at Default Date Amount($)
----------------- --------------- -----------
December 31, 2004 50,000 34,000
February 18, 2005 50,000 50,000
March 4, 2005 250,000 239,200
------------- -----------
Total: $ 350,000 $ 323,200
============= ===========
As of February 6, 2006, 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
$323,200 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
<page>10
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
$261,000 net of approximately $105,000 of prepaid interest. As of February 6,
2006, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the three months ended December 31, 2005, no matters were submitted
to a vote of the holders of our securities.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibits
--------
Exhibit No. Description
----------- -----------
31 Certifications Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
<page>11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CONECTISYS CORPORATION
Date: February 13, 2006 By: /s/ ROBERT A. SPIGNO
-----------------------
Robert A. Spigno,
Chairman of the Board,
President and Chief
Executive Officer
(principal executive
officer)
Date: February 13, 2006 By: /s/ PATRICIA A. SPIGNO
------------------------
Patricia A. Spigno,
Acting Chief Financial
Officer and Secretary
(principal financial and
accounting officer)
<page>12
EXHIBITS FILED WITH THIS REPORT ON FORM 10-QSB
Exhibit No. Description
- ----------- -----------
31 Certifications Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
<page>13