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PROSPECTUS
4,225,836,000 Shares
CONECTISYS CORPORATION
Common Stock
The shares of our common stock being offered under this prospectus are
being offered by some of our security holders identified in this prospectus for
their own accounts. Our common stock trades on the OTC Bulletin Board under the
symbol "CNES." On November 8, 2006, the high and low sale prices for a share of
our common stock were $.0004 and $.0003, respectively.
The mailing address and the telephone number of our principal executive
office is 24307 Magic Mountain Parkway, Suite 41, Valencia, California 91355,
(661) 295-6763.
____________________
Investing in our common stock involves risks.
Please see "Risk Factors" beginning on page 5.
_________________
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus.
_________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is November 13, 2006
TABLE OF CONTENTS
Description Page No.
- ----------- --------
Prospectus Summary.........................................................3
Risk Factors...............................................................5
Special Note Regarding Forward-Looking Statements.........................14
Use of Proceeds...........................................................14
Price Range of Common Stock...............................................15
Dividend Policy...........................................................15
Capitalization............................................................16
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................17
Business..................................................................26
Management................................................................37
Certain Relationships and Related Transactions............................48
Principal and Selling Security Holders....................................50
Plan of Distribution......................................................54
Description of Capital Stock..............................................57
Legal Matters.............................................................58
Experts...................................................................58
Where You Can Find More Information.......................................58
Index to Financial Statements.............................................60
<page>2
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because
it is a summary, it necessarily does not contain all of the information
necessary to your investment decision. To understand this offering fully, you
should read carefully the entire prospectus.
ConectiSys Corporation
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-Net(TM), which is a trademark of ConectiSys. 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
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.
<page>3
The Offering
Common stock offered by selling security holders 4,225,836,000 (1)
Common stock outstanding prior to this offering 14,385,996,783 (2)
Common stock outstanding following this offering
if all shares are sold 18,611,832,783 (1) (2)
Use of Proceeds All proceeds of this
offering will be received
by selling security
holders for their own
accounts.
Risk Factors You should read the "Risk
Factors" section
beginning on page 5, as
well as other cautionary
statements throughout
this prospectus, before
investing in shares of
our common stock.
_____________
(1) Based on the closing price of our common stock on the OTC Bulletin Board
on November 8, 2006, the principal portions of the callable secured
convertible notes plus interest for two years following their original
issuance dates, and the related warrants, whose underlying shares of
common stock are covered by this prospectus were, or upon their issuance
would be, convertible or exercisable into approximately 11,875,000,000
shares of common stock, of which 4,225,836,000 shares of common stock,
which amount represents approximately 29% of our currently outstanding
shares of common stock, are being registered for resale by the selling
security holders hereunder. The common stock offered by the selling
security holders assumes exercise of all of the warrants whose
underlying shares of common stock are covered by this prospectus in
exchange for 20,320,000 shares of common stock and the partial
conversion of the principal amount of all of the notes and accrued and
unpaid interest into 4,205,516,000 shares of common stock, and the
immediate resale of all of those shares of common stock.
(2) The number of shares of common stock that will be outstanding after this
offering is based on the 14,385,996,783 shares of common stock
outstanding as of November 8, 2006, and excludes the following:
o 10,000,000 shares of common stock issuable upon exercise
of outstanding options to purchase up to 1,000,000
shares of Class B Preferred Stock, each of which shares
is convertible into 10 shares of our common stock;
o 358,758,842 shares of common stock issuable to executive
officers for accrued and unpaid bonus compensation and
shares of common stock issuable upon exercise of
outstanding stock options, warrants and other derivative
securities, other than derivative securities covered by
this prospectus;
o approximately 18,200,000,000 shares of common stock
issuable upon exercise of warrants or conversion of
related debentures or notes whose underlying shares of
common stock are not covered by this prospectus;
o any additional shares of common stock we may issue from
time to time after November 8, 2006.
<page>4
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this prospectus, you should carefully
consider the following risk factors before deciding to invest in shares of our
common stock. If any of the following risks actually occurs, it is likely that
our business, financial condition and operating results would be harmed. As a
result, the trading price of our common stock could decline, and you could lose
part or all of your investment.
Risks Related to Our Business
We are in default on the repayment of convertible debentures or notes
held by certain security holders, which could have a material and
adverse effect on our business, prospects, results of operations or
financial condition.
Unpaid principal and accrued and unpaid interest on our convertible
debentures and notes becomes immediately due and payable from one to three years
from their dates of issuance, depending on the debenture or note, or earlier in
the event of a default. The events of default under the convertible debentures
and notes are similar to those customary for convertible debt securities,
including breaches of material terms, failure to pay amounts owed, delisting of
our common stock from the OTC Bulletin Board or failure to comply with the
conditions of listing on the OTC Bulletin Board and cross-defaults on other debt
securities.
As of November 8, 2006, we were in default under our obligations to
register for resale shares of our common stock underlying certain of our
outstanding convertible debentures and notes due to our failure to timely
register for resale a sufficient number of shares of our common stock upon
conversion of those convertible debentures and notes. In addition, as of that
date, we were also in default under our obligations to make interest payments
under nearly all of our outstanding convertible debentures and notes due to our
lack of sufficient capital resources to fund those interest payments. As of
that date, we owed principal and unpaid interest on our convertible debentures
and notes in an aggregate amount of approximately $2,701,000, net of
approximately $104,000 of prepaid interest, all of which we believe would be
immediately due and payable upon demand by the holders of our secured
convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H-
Net(TM) system, which would have a material and adverse effect on our business,
prospects, results of operations and financial condition. In addition, the
holders of our secured convertible debentures and notes were entitled to demand
immediate repayment of the outstanding principal amounts of the debentures and
notes and any accrued and unpaid interest. The cash required to repay such
amounts would likely have to be taken from our working capital. Since we rely on
our working capital to sustain our day to day operations and the development of
our H-Net(TM) system, a default on the convertible debentures or notes could
have a material and adverse effect on our business, prospects, results of
operations or financial condition.
<page>5
We have no history of revenues, have incurred significant losses, expect
continued losses and may never achieve profitability. If we continue to
incur losses, we may have to curtail our operations, which may prevent
us from successfully deploying our H-Net(TM) wireless meter reading
system.
We have no history of revenues, have not been profitable and expect
continued losses. Historically, we have relied upon cash from financing
activities to fund all of the cash requirements of our activities and have
incurred significant losses and experienced negative cash flow. As of June 30,
2006, we had an accumulated deficit of approximately $34.8 million. For our
fiscal year ended September 30, 2005, we incurred a net loss of approximately
$3.1 million and for our fiscal year ended September 30, 2004, we incurred a net
loss of approximately $4.2 million. We cannot predict when we will become
profitable or if we ever will become profitable, and we may continue to incur
losses for an indeterminate period of time and may never achieve or sustain
profitability. An extended period of losses and negative cash flow may prevent
us from successfully deploying our H-Net(TM) wireless meter reading system, or
our H-Net(TM) system, and operating or expanding our business. As a result of
our financial condition, our independent auditors have issued a report
questioning our ability to continue as a going concern.
Our significant losses have resulted principally from costs incurred in
connection with the development of our H-Net(TM) system and from costs
associated with our administrative activities. We expect our operating expenses
to dramatically increase as a result of our planned deployment of our H-Net(TM)
system. Since we have only recently completed the development of our H-Net(TM)
system, have no operating history and no existing sources of revenues, we cannot
assure you that our business will ever become profitable or that we will ever
generate sufficient revenues to meet our expenses and support our planned
activities. Even if we are able to achieve profitability, we may be unable to
sustain or increase our profitability on a quarterly or annual basis.
Our independent auditors have issued a report questioning our ability to
continue as a going concern. This report may impair our ability to raise
additional financing and adversely affect the price of our common stock.
The report of our independent auditors contained in our financial
statements for the years ended September 30, 2005 and 2004 includes a paragraph
that explains that we have incurred substantial losses and have a working
capital deficit. This report raises substantial doubt about our ability to
continue as a going concern. Reports of independent auditors questioning a
company's ability to continue as a going concern are generally viewed
unfavorably by analysts and investors. This report may make it difficult for us
to raise additional debt or equity financing necessary to continue the
development and deployment of our H- Net(TM) system. We urge potential investors
to review this report before making a decision to invest in ConectiSys.
Without substantial additional financing, we may be unable to achieve
the objectives of our current business strategy, which could force us to
delay, curtail or eliminate our product and service development
programs.
We require additional financing to produce cost-reduced hardware for our
H-Net(TM) system capable of large-scale manufacturing and to complete the
development of our H-Net(TM) system. We also require additional funding to
obtain and implement contracts and joint venture agreements with meter
manufacturers. If we are unable to obtain this financing, we could be forced to
delay, curtail or eliminate certain product and service development programs or
entirely abandon our planned deployment of our H-Net(TM) system. In addition,
our inability to obtain financing could have such a material adverse effect on
our business, prospects, results of operations or financial condition, that we
<page>6
may be forced to restructure, file for bankruptcy, sell assets or cease
operations entirely, any of which could jeopardize an investment in our common
stock.
We need and may be unable to obtain additional financing on satisfactory
terms, which may require us to accept financing on burdensome terms that
may cause substantial dilution to our shareholders and impose onerous
financial restrictions on our business.
We require additional financing. Deteriorating global economic
conditions may cause prolonged declines in investor confidence in and
accessibility to capital markets. Future financing may not be available on a
timely basis, in sufficient amounts or on terms acceptable to us. This financing
will likely dilute existing shareholders' equity. Any debt financing or other
financing of securities senior to our common stock will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition and results of
operations because we could lose any then-existing sources of financing and our
ability to secure new sources of financing may be impaired.
We are subject to an injunction imposed by a federal court for violating
the federal securities laws, which may make it more difficult to raise
financing.
In 1997, the Securities and Exchange Commission filed suit in the United
States District Court in the Central District of California against ConectiSys
and another individual seeking permanent injunctions and civil penalties based
on alleged violations of Sections 5(a), 5(c) and 17(a)(1)-(3) of the Securities
Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder in connection with the sale of common stock of ConectiSys in 1996. In
March 1999, we agreed with the Securities and Exchange Commission to the terms
of a settlement of its litigation against us. Under the terms of that
settlement, we dismissed our then-pending appeal of a judgment against us in
favor of the Securities and Exchange Commission and accepted a permanent
injunction against us prohibiting actions that would violate federal securities
laws in connection with the offer, purchase or sale of securities. The
Securities and Exchange Commission agreed to waive a requirement of the judgment
under appeal that we disgorge $175,000 of proceeds from the sale of our common
stock due to our inability to pay this amount. On March 9, 1999, an amended
final judgment of permanent injunction and other relief memorializing these
agreements was entered in connection with the execution by us of a consent to
entry of injunction. An injunction of this nature is viewed unfavorably by
analysts and investors and may make it more difficult for us to raise additional
debt or equity financing necessary to run our business.
We rely heavily on our management, and the loss of their services could
materially and adversely affect our business.
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board and Chief
Executive Officer, Robert A. Spigno, and our Chief Technology Officer, Lawrence
Muirhead. The loss of Messrs. Spigno or Muirhead or one or more other key
members of management could have a material adverse effect on us because each of
these individuals has experience and skills upon which we draw heavily in our
day-to-day operations, strategic planning or research and development
activities. The development and operation of our H-Net(TM) system is largely
dependent upon the skills and efforts of Mr. Muirhead. Although we have entered
into employment agreements with Messrs. Spigno and Muirhead, we cannot assure
the continued services of these key members of our management team. We do not
maintain key-man life insurance policies on any member of management.
<page>7
We have very limited operating experience; therefore, regardless of the
viability or market acceptance of our H-Net(TM) system, we may be unable
to achieve profitability or realize our other business goals.
Our H-Net(TM) system is the result of a new venture. We have been
engaged in research and development of automatic meter reading technologies
since 1995, and we have only recently completed limited pilot programs for our
first and only products embodied in our H-Net(TM) automatic meter reading
system. We have generated no operating revenues from our H-Net(TM) system and
have not commenced any of the widespread marketing and other functions that we
anticipate will be required for successful deployment of our H-Net(TM) system.
Deployment of our H- Net(TM) system will involve large-scale cost-reduction
manufacturing runs for the production of the components employed in our H-
Net(TM) system. Our success will depend in large part on our ability to deal
with the problems, expenses and delays frequently associated with bringing a new
product to market. Because we have little experience in the deployment and
operational aspects of automatic meter reading technologies, we may be unable to
successfully deploy and operate our H- Net(TM) system even if our H-Net(TM)
system proves to be a viable automatic meter reading solution and achieves
market acceptance. Consequently, we may be unable to achieve profitability or
realize our other business goals.
Our failure to attract and retain key personnel could adversely affect
our business, financial condition and results of operations.
Our future success is dependent in part on our ability to attract and
retain certain key personnel. We currently have few employees and need to
attract additional skilled technical, clerical and managerial personnel in all
areas of our business. The competition for such individuals is intense. There
can be no assurance that we will be able to retain our existing personnel or
attract additional qualified personnel in the future. If we are unable to
attract and retain key personnel, our business, financial condition and results
of operations could be adversely affected.
Many companies with greater resources and operating experience are
developing technology similar to that employed in our H-Net(TM) system.
These companies could successfully compete with us and negatively affect
the deployment of our H-Net(TM) system and our opportunity to achieve
revenues and/or profitability.
We anticipate significant competition with our H-Net(TM) system from
many companies. Our H-Net(TM) system is designed to compete with companies such
as those that offer meter reading services utilizing modem and telephone line
communications or drive-by data collection capabilities. Our H-Net(TM) system
may compete with numerous companies, including Schlumberger Ltd., Itron, Inc.,
CellNet Data Systems, Hunt Technologies and Metricom Corporation, each of which
has significantly more resources and operational and product development
experience than we do. Some of our potential customers, namely, meter
manufacturers and utility companies, may decide to develop their own products or
service offerings that directly compete with our H-Net(TM) system. Although we
believe that our H-Net(TM) system will be competitive in the marketplace, we
cannot assure you that these or other companies with greater experience and
greater resources than ConectiSys will not negatively affect our business
prospects and impair our ability to achieve revenues and/or profitability.
We are targeting a new and evolving market and we cannot be certain that
our business strategy will be successful.
The automation of utility meter reading and data distribution is a
relatively new and rapidly changing market. We cannot accurately predict the
size of this market or its potential growth. Our system is one possible solution
for AMR and data distribution. It has not been adopted as an industry standard
<page>8
and it may not be adopted on a broad scale. Competing systems have been and
likely will continue to be selected by utilities and other potential clients.
Participants in the utility industry have historically been cautious and
deliberate in making decisions concerning the adoption of new technology. This
process, which can take up to several years to complete, may include the
formation of evaluation committees, a review of different technical options,
technology trials, equipment testing and certification, performance and cost
justifications, regulatory review, one or more requests for vendor quotes and
proposals, budgetary approvals and other steps. Consequently, if our H-Net(TM)
system as an AMR solution is unsuccessful and we are unable to enter into AMR or
data distribution contracts on terms favorable to us, our business, results of
operations and financial condition could be materially and adversely affected.
The new and evolving nature of the market that we intend to target makes
an accurate evaluation of our business prospects and the formulation of a viable
business strategy very difficult. Accordingly, our business strategy may be
faulty or even obsolete and as a result, we may not properly plan for or address
many obstacles to success, including the following:
o the timing and necessity of substantial expenditures for the
development and deployment of our H-Net(TM) system;
o the failure to strategically position ourselves in relation to
joint venture or strategic partners, and potential and actual
competitors;
o the failure of our H-Net(TM) system to satisfy the needs of the
market that we intend to target and the resulting lack of
widespread or adequate acceptance of our H-Net(TM) system; and
o the difficulties in managing rapid growth of operations and
personnel.
Our failure to manage growth effectively could impair our business.
We do not currently have revenue-generating operations but our strategy
envisions a period of rapid growth that may impose a significant burden on our
administrative and operational resources. Our ability to effectively manage
growth will require us to substantially expand the capabilities of our
administrative and operational resources and to attract, train, manage and
retain qualified engineers, technicians, salespersons and other personnel. There
can be no assurance that we will be able to do so. If we are unable to
successfully manage our growth, our business, prospects, results of operations
and financial condition could be materially and adversely affected.
Because we believe that proprietary rights are material to our success,
misappropriation of those rights or claims of infringement or legal
actions related to intellectual property could adversely impact our
financial condition.
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary rights. However,
although our H-Net(TM) system and its constituent components could benefit from
patent protection, we have chosen to retain the proprietary rights associated
with our H-Net(TM) system predominantly as trade secrets. Although we currently
rely to a great extent on trade secret protection for much of our technology, we
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop comparable or
superior technologies or obtain unauthorized access to our proprietary
technology.
We own, license or have otherwise obtained the right to use certain
technologies incorporated in our H-Net(TM) system. We may receive infringement
claims from third parties relating to our products and technologies. In those
cases, we intend to investigate the validity of the claims and, if we believe
the claims have merit, to respond through licensing or other appropriate
actions. To the extent claims relate to technology included in components
purchased from third-party vendors for incorporation into our products, we would
<page>9
forward those claims to the appropriate vendor. If we or our component
manufacturers are unable to license or otherwise provide any necessary
technology on a cost- effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs defending any
legal action taken against us.
Risks Related to This Offering
Shares of our common stock eligible or to become eligible for public
sale could adversely affect our stock price and make it difficult for us
to raise additional capital through sales of equity securities.
As of November 8, 2006, we had outstanding 14,385,996,783 shares of
common stock, of which approximately 1,232,702,205 shares were restricted under
the Securities Act of 1933. As of that date, we also had outstanding options,
warrants, convertible debentures and notes and preferred stock that were
exercisable for or convertible into approximately 22,500,000,000, nearly all of
which are covered by registration rights. Sales of a substantial number of
shares of our common stock in the public market, or the perception that sales
could occur, could adversely affect the market price of our common stock. Any
adverse effect on the market price of our common stock could make it difficult
for us to raise additional capital through sales of equity securities at a time
and at a price that we deem appropriate.
Conversion or exercise of our outstanding derivative securities could
substantially dilute your investment because the conversion and exercise
prices of those securities and/or the number of shares of common stock
issuable upon conversion or exercise of those securities are subject to
adjustment.
We have issued various debentures, notes and warrants that are
convertible or exercisable at prices that are subject to adjustment due to a
variety of factors, including fluctuations in the market price of our common
stock and the issuance of securities at an exercise or conversion price less
than the then-current exercise or conversion price of those debentures, notes
or warrants. As of November 8, 2006, the closing price of a share of our common
stock on the OTC Bulletin Board was $.0003. On that date, our debentures, notes
and warrants outstanding with adjustable conversion and/or exercise prices were
convertible or exercisable into approximately 22,500,000,000 shares of our
common stock. The number of shares of common stock that these adjustable
securities ultimately may be converted into or exercised for could prove to be
greater than this amount if the market price of our common stock declines. You
could, therefore, experience substantial dilution of your investment as a result
of the conversion or exercise of our outstanding derivative securities.
The applicable conversion price of our debentures and notes issued to
certain security holders is variable and does not have a lower-limit, therefore
the dilutive effect to our existing security holders is theoretically limitless.
However, because the variable conversion price of these debentures and notes has
an upper limit, an increase in the trading price of a share of our common stock
will result in a limited benefit to existing security holders with respect to
the conversion of these debentures and notes. The following table sets forth the
number of shares issuable upon conversion of the aggregate principal and all
accrued and unpaid interest on our convertible debentures and notes issued to
certain security holders and outstanding as of November 8, 2006, which amount
was approximately $2,701,000, net of prepaid interest, and is based upon the
indicated hypothetical trading prices:
<page>10
Approximate Percentage of
Hypothetical Number of Shares Company's
Trading Price Conversion Price(1) Issuable(2) Common Stock (3)
____________ __________________ ________________ ________________
$.0008 $.00032 8,400,000,000 37%
$.0004 $.00016 16,800,000,000 54%
$.0002 $.00008 33,600,000,000 70%
$.0001 $.00004 67,200,000,000 82%
_______________
(1) The conversion price of our debentures and notes is the lower of
40% of the average of the three lowest intraday trading prices
of a share of our common stock on the OTC Bulletin Board during
the twenty trading days immediately preceding the conversion
date, and either (a) $.06 for the March, May and June 2002
convertible debentures, (b) $.01 for the March and May 2003
convertible debentures, (c) $.005 for the November and December
2003, and the February and March 2004 convertible debentures and
the March 2005 convertible notes, or (d) $.03 for the March 2006
convertible notes. As of November 8, 2006, the applicable
conversion price was approximately $.00012.
(2) Our current authorized capital allows us to issue a maximum of
50 billion shares of common stock.
(3) Amounts are based on 14,385,996,783 shares of our common stock
outstanding as of November 8, 2006 plus the corresponding number
of shares issuable. Each of the holders of our convertible
debentures and notes may not convert our debentures or notes
into more than 4.9% of our then-outstanding common stock;
however, the holders may waive the 4.9% limitation, thus
allowing the conversion of their debentures or notes into a
number of shares of common stock in excess of 4.9% of our then-
outstanding common stock.
The holders of certain of our convertible debentures and notes may elect
to receive payment for accrued and unpaid interest on our debentures and notes
in shares of our common stock based on the conversion price and on the same
terms described above with respect to conversions of the principal portion of
these debentures and notes. As a result of conversions of the principal or
interest portion of our convertible debentures and notes and related sales of
our common stock by the holders of our convertible debentures and notes, the
market price of our common stock could be depressed, thereby resulting in a
significant increase in the number of shares issuable upon conversion of the
principal and interest portions of these debentures and notes. You could,
therefore, experience substantial dilution of your investment as a result of the
conversion of the principal or interest portions of our convertible debentures
and notes.
If our security holders engage in short sales of our common stock,
including sales of shares to be issued upon conversion or exercise of
derivative securities, the price of our common stock may decline.
Selling short is a technique used by a shareholder to take advantage of
an anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time
can create downward pressure on the market price of a security. The decrease in
market price would allow holders of our derivative securities that have
conversion or exercise prices based upon a discount on the market price of our
common stock to convert or exercise their derivative securities into or for an
increased number of shares of our common stock. Further sales of common stock
issued upon conversion or exercise of our derivative securities could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short sales
that could further undermine the value of our common stock. You could,
<page>11
therefore, experience a decline in the value of your investment as a result of
short sales of our common stock.
Our current financing arrangements could prevent our common stock from
being listed on Nasdaq or other principal markets.
Nasdaq and other principal markets require that, to be eligible for
inclusion in the stock market, a company's common stock have a specified minimum
bid price per share. Convertible debenture and convertible note financings,
especially those with variable conversion prices with low or no low-price
limits, characteristically exert downward pressure on the market for a company's
common stock. This pressure, if applied against the market for our common stock,
may prevent our common stock from being listed on Nasdaq or other principal
markets.
Our common stock price is subject to significant volatility, which could
result in substantial losses for investors and in litigation against us.
The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. During the twelve
months ended September 30, 2005, the high and low closing bid prices of our
common stock were $.0095 and $.0002, respectively. The market price of our
common stock may exhibit significant fluctuations in the future response to
various factors, many of which are beyond our control and which include:
o variations in our quarterly operating results, which variations
could result from, among other things, changes in the needs of
one or more of our customers;
o changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
o economic conditions specific to the industries in which we
operate;
o announcements by us or our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or capital
commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity
securities.
If our operating results in future quarters fall below the expectations
of market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities class
action litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which you purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you.
Because we are subject to the "Penny Stock" rules, the level of trading
activity in our stock may be reduced.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
<page>12
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, broker-dealers who sell these securities to
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.
Because our stock is not listed on a national securities exchange, you
may find it difficult to dispose of or obtain quotations for our common
stock.
Our common stock trades under the symbol "CNES" on the OTC Bulletin
Board. Because our stock trades on the OTC Bulletin Board rather than on a
national securities exchange, you may find it difficult to either dispose of, or
to obtain quotations as to the price of, our common stock.
Our preferred stock may delay or prevent a takeover of ConectiSys,
possibly preventing you from obtaining higher stock prices for your
shares.
Our board of directors has the authority to issue up to 50,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our shareholders. Of these shares, 1,000,000 shares have been
designated as Class A Preferred Stock and 1,000,000 shares have been designated
as Class B Preferred Stock. The rights of the holders of our common stock are
subject to the rights of the holders of our outstanding preferred stock and will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that we may issue in the future. The issuance of preferred
stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, which would delay, defer or prevent a change in control of ConectiSys.
Furthermore, preferred stock may have other rights, including economic rights
senior to the common stock, and, as a result, the issuance of preferred stock
could adversely affect the market value of our common stock.
<page>13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including among
others:
o our product development activities;
o our business strategy for establishing a presence in the AMR
market;
o anticipated trends in our financial condition and results of
operations; and
o our ability to distinguish ourselves from our current and future
competitors.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believe," "expect," "may," "will,"
"should," "could," "seek," "estimate," "continue," "anticipate," "intend,"
"future," "plan" or variations of those terms and other similar expressions,
including their use in the negative, or in discussions of strategies,
opportunities, plans or intentions. You should not place undue reliance on these
forward-looking statements, which speak only as to our expectations as of the
date of this prospectus. These forward-looking statements are subject to a
number of risks and uncertainties, including those identified under "Risk
Factors" and elsewhere in this prospectus. In addition, these forward-looking
statements necessarily depend upon assumptions, estimates and expectations that
may prove to be incorrect. Although we believe that the assumptions, estimates
and expectations reflected in these forward- looking statements are reasonable,
actual conditions in the AMR industry, and actual conditions and results in our
business, could differ materially from those expressed or implied in these
forward- looking statements. In addition, none of the events anticipated in the
forward-looking statements may actually occur and we cannot assure you that we
will achieve our plans, intentions or expectations. Any of these different
outcomes could cause the price of our common stock to decline substantially.
Except as required by law, we undertake no duty to update any forward-looking
statement after the date of this prospectus, either to conform any statement to
reflect actual results or to reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus by the selling security holders.
Rather, the selling security holders will receive those proceeds directly.
<page>14
PRICE RANGE OF COMMON STOCK
The following table shows the high and low closing bid prices of our
common stock for the periods presented, as obtained from Pink Sheets LLC, a
research service that compiles quote information reported on the National
Association of Securities Dealers composite feed or other qualified interdealer
quotation medium. The quotations listed below reflect interdealer prices,
without retail mark-up, mark-down or commissions, and may not represent actual
transactions. Our common stock trades on the OTC Bulletin Board under the symbol
"CNES."
Price Range
-----------
High Low
---- ---
Year Ended September 30, 2004:
First Quarter (October 1 - December 31).... $ 0.0069 $ 0.0022
Second Quarter (January 1 - March 30)...... 0.0055 0.0023
Third Quarter (April 1 - June 30).......... 0.0047 0.0012
Fourth Quarter (July 1 - September 30)..... 0.0013 0.0005
Year Ended September 30, 2005:
First Quarter.............................. $ 0.0095 $0.0006
Second Quarter............................. 0.0066 0.0015
Third Quarter.............................. 0.0020 0.0005
Fourth Quarter............................. 0.0006 0.0002
Year Ending September 30, 2006:
First Quarter............................... $ 0.0003 $0.0002
Second Quarter.............................. $ 0.0020 $0.0001
Third Quarter............................... $ 0.0014 $0.0004
Fourth Quarter (Through November 8, 2006) $ 0.0005 $0.0003
As of November 8, 2006, we had 14,385,996,783 shares of common stock
outstanding and held of record by approximately 775 shareholders, and the high
and low sale prices of a share of our common stock on the OTC Bulletin Board on
that date were $0.0004 and $0.0003, respectively. Within the holders of record
of our common stock are depositories such as Cede & Co. that hold shares of
stock for brokerage firms which, in turn, hold shares of stock for beneficial
owners.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not
currently intend to pay cash dividends on our common stock in the foreseeable
future. We are restricted from paying dividends on our common stock under state
law, and the terms of our secured convertible debentures and our callable
secured convertible notes. We currently anticipate that we will retain any
earnings for use in the continued development of our business.
<page>15
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2006.
You should read this information together with our consolidated financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus. The table excludes an aggregate of approximately 17,600,000,000
shares of common stock that were issuable as of June 30, 2006 upon conversion or
exercise of outstanding convertible debentures, notes, options and warrants, and
that were issuable as of that date in connection with staying bonuses payable to
certain of our officers.
June 30, 2006
-------------
Long-term debt..........................................$ 3,074,998
============
Shareholders' equity:
Preferred stock, $1.00 par value. 50,000,000
shares authorized
Class A Preferred Stock, $1.00 par value,
1,000,000 shares authorized; 215,865 shares
issued and outstanding........................... 215,865
Class B Preferred Stock, $1.00 par value,
1,000,000 shares authorized; no shares
issued and outstanding........................... -
Common stock, no par value. 50,000,000,000 shares
authorized; 13,909,025,887 shares issued
and outstanding...................................... 28,079,735
Additional paid in capital:
Class B Convertible Preferred Stock, $1.00 par value,
1,000,000 shares authorized; no shares issued and
outstanding; 1,000,000 stock options exercisable..... 100,000
Common stock, no par value. 23,020,000 stock options and
warrants exercisable................................. 1,369,815
Accumulated deficit during development stage............ (34,833,128)
------------
Total shareholders' equity (deficit)................. $(5,067,713)
------------
Total capitalization................................. $(1,992,715)
------------
<page>16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes and the information included
under the caption "Risk Factors" included elsewhere in this prospectus. Except
for historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions and our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies. See "Special Note Regarding Forward-Looking Statements" for further
information regarding forward-looking statements. Our actual results may differ
materially from the results discussed in the forward-looking statements as a
result of a number of factors, many of which are beyond our control, including
those factors discussed under "Risk Factors" and other headings in this
prospectus, which could, among other things, cause the price of our common stock
to fluctuate substantially.
Overview
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-Net(TM), which is a trademark of ConectiSys. Our
H-Net(TM) system is currently comprised of two principal components: our H-
Net(TM) 5.0 product, which itself is comprised of circuitry and a radio
transmitter, and our H-Net(TM) BaseStation. Our H-Net(TM) 5.0 product is a
component that is designed to be part of a digital energy meter to read and
wirelessly transmit meter data to our H-Net(TM) BaseStation. Our H-Net(TM)
BaseStation is designed to receive and relay the meter data over standard phone
lines to a central location where the data is compiled and utilized.
We are 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
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
<page>17
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 June 30,
2006, we had a deficiency in working capital of approximately $4.0 million and
had incurred continual net losses since our return to the development stage in
fiscal 1994 of approximately $34.0 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 $5.9 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.
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 adopted the provisions of SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123R"), on January 1, 2006. Accordingly, compensation costs for
all share-based awards to employees are measured based on the grant date fair
value of those awards and recognized over the period during which the employee
is required to perform service in exchange for the award (generally over the
vesting period of the award). We have no awards with market or performance
conditions. Excess tax benefits as defined by SFAS 123R (when applicable) will
be recognized as an addition to additional paid-in capital. Effective January
<page>18
1, 2006 and for all periods subsequent to that date, SFAS 123R supersedes our
previous accounting under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123R. We have applied the provisions of SAB 107 in
its adoption of SFAS 123R.
We adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions of SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the modified prospective transition method, our consolidated
financial statements for prior periods were not restated to reflect, and do not
include, the effect of SFAS 123R.
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 Nine Months Ended June 30,
2006 and 2005
We did not generate any revenues for the nine months ended June 30, 2006
and 2005. Cost of prototypes and samples sold for the nine months ended June 30,
2006 was $188,563 as compared to $135,795 for the nine months ended June 30,
2005, representing an increase of $52,768, or 39%. This increase in cost of
prototypes and samples 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 $523,129, or 35%, to
$974,460 for the nine months ended June 30, 2006 as compared to $1,497,589 for
the same period in 2005. This decrease was primarily due to decreased expenses
associated with legal and consulting services.
Interest expense decreased by $275,683, or 22%, to $1,004,199 during the
nine months ended June 30, 2006 as compared to $1,279,882 for the same period in
2005. The decrease in interest expense was primarily attributable to decreased
amortization of convertible debt discount.
Net loss for the nine months ended June 30, 2006 decreased by $746,686,
or 26%, to $2,166,580 as compared to a net loss of $2,913,266 for the same
period in 2005. The decrease in net loss primarily resulted from the decrease in
general and administrative expenses and amortization of convertible debt
discount, as discussed above.
Comparison of Results of Operations for the Fiscal Years Ended September
30, 2005 and 2004
We did not generate any revenues for the fiscal years ended September
30, 2005 and September 30, 2004. Cost of sales for fiscal 2005 was $245,427 as
compared to $95,879 for fiscal 2004, representing an increase of $149,548, or
156%. This increase in cost of sales primarily was due to an increase in
<page>19
production of models and prototypes of our H- Net(TM) products that are used for
sales and marketing purposes.
General and administrative expenses increased by $216,676, or 15%, to
$1,676,520 for fiscal 2005 as compared to $1,459,844 for fiscal 2004. This
increase in general and administrative expenses primarily was due to increased
legal and accounting fees.
Interest expense decreased by $807,907, or 32%, to $1,715,198 during
fiscal 2005 as compared to $2,523,105 for fiscal 2004. This decrease in interest
expense primarily was due to a decrease in net borrowings under our convertible
debentures and other debt during fiscal 2005.
Net loss for fiscal 2005 decreased by $1,096,144, or 26%, to $3,132,683
as compared to a net loss of $4,228,827 for fiscal 2004. The decrease in net
loss was primarily due to the decrease in interest expense as described above
and $504,462 in debt forgiveness income recognized in fiscal 2005 as compared to
a $150,000 legal settlement expense incurred in fiscal 2004. These amounts were
partially offset by increased general and administrative expenses as described
above.
Liquidity and Capital Resources
During the twelve months ended September 30, 2005 and the nine months
ended June 30, 2006, 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 June 30, 2006, we had a working capital deficit of approximately
$4.0 million and an accumulated deficit of approximately $34.8 million. As of
that date, we had approximately $148,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately $2.0
million. We had other current liabilities, including amounts due to officers,
accrued interest, notes payable and current portion of long term debt of
approximately $2.4 million, including those issued prior to the beginning of
fiscal year 2006. As of September 30, 2005, we had a working capital deficit of
approximately $2.8 million and an accumulated deficit of approximately $32.7
million. As of that date, we had approximately $519,000 in cash and cash
equivalents. We had accounts payable and accrued compensation expenses of
approximately $2.0 million. We had other current liabilities, including amounts
due to officers, accrued interest, notes payable and current portion of long
term debt of approximately $1.5 million, including debts incurred 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 $1,043,000
for the nine months ended June 30, 2006 as compared to cash used in our
operating activities of approximately $979,000 for the nine months ended June
30, 2005. Cash used in our investing activities totaled approximately $54,000 in
the nine months ended June 30, 2006 as compared to no cash used in or provided
by our investing activities in the nine months ended June 30, 2005. Cash used in
our operating activities totaled approximately $1.3 million for both the twelve
months ended September 30, 2005 and the twelve months ended September 30, 2004.
Cash used in our investing activities totaled approximately $34,000 for the
<page>20
twelve months ended September 30, 2005 as compared to approximately $8,000 for
the twelve months ended September 30, 2004.
Cash provided by our financing activities totaled approximately $725,000
for the nine months ended June 30, 2006 as compared to cash provided by our
financing activities of approximately $761,000 for the nine months ended June
30, 2005. Cash provided by our financing activities totaled approximately $1.3
million for the twelve months ended September 30, 2005 as compared to
approximately $1.9 million for the twelve months ended September 30, 2004. We
raised all of the cash provided by financing activities during the twelve months
ended September 30, 2005 from the issuance of common stock, convertible
debentures and/or promissory notes.
Unpaid principal and accrued and unpaid interest on our convertible
debentures and notes becomes immediately due and payable from one to three years
from their dates of issuance, depending on the debenture or note, or earlier in
the event of a default. The events of default under the convertible debentures
and notes are similar to those customary for convertible debt securities,
including breaches of material terms, failure to pay amounts owed, delisting of
our common stock from the OTC Bulletin Board or failure to comply with the
conditions of listing on the OTC Bulletin Board and cross-defaults on other debt
securities.
As of November 8, 2006, we were in default under our obligations to
register for resale shares of our common stock underlying certain of our
outstanding convertible debentures and notes due to our failure to timely
register for resale a sufficient number of shares of our common stock upon
conversion of those convertible debentures and notes. Our registration
obligations require us to register for resale 200% of all registrable
securities, which are largely comprised of the shares of common stock issuable
upon conversion or exercise of our outstanding convertible debentures, notes and
warrants. We have historically been unable to register for resale the full
required amounts of shares of common stock due in part to limitations in our
available authorized capital. As we have increased our authorized capital from
time to time, we have often been reluctant to utilize all or nearly all
available authorized capital to satisfy our registration obligations. This
reluctance arises from our need to maintain available authorized capital for
other potential financing transactions that we may need to conduct to fund our
research and development and otherwise maintain sufficient capital resources to
fund our operations. In addition, because the number of registrable securities
is calculated based on a discount to the prevailing market price of our common
stock, and market prices for our common stock have generally declined throughout
the duration of our convertible debenture and note financings, the number of
registrable securities has substantially increased. Accordingly, although we
may have been in compliance initially, the decline in market prices for our
common stock has caused us to fall out of compliance with our registration
obligations.
As of November 8, 2006, we were also in default under our obligations to
make interest payments under nearly all of our outstanding convertible
debentures and notes due to our lack of liquidity to fund those interest
payments. Although we received substantial cash investments in connection with
our convertible debenture and note financing transactions, we have been
reluctant to make quarterly cash interest payments to our investors. This
reluctance arises from our need to maintain sufficient capital resources to fund
our research and development and our operations. However, on various occasions,
we have prepaid certain interest amounts in connection with convertible
debenture and note financing transactions. In these instances, we were able to
at least temporarily, and on occasion fully, comply with our interest payment
obligations until the convertible debentures or notes were fully converted into
shares of our common stock. In our most recent March 2006 convertible note
financing transaction, we did not prepay any interest amounts and we expect to
continue indefinitely to be in default of our obligations to make quarterly
<page>21
interest payments under those convertible notes as well as numerous other
convertible debentures and notes outstanding from prior financing transactions.
As of November 8, 2006, we owed principal and unpaid interest on our
convertible debentures and notes in an aggregate amount of approximately
$2,701,000, net of approximately $104,000 of prepaid interest, all of which we
believe would be immediately due and payable upon demand by the holders of our
secured convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our
H-Net(TM) system, which would have a material and adverse effect on our
business, prospects, results of operations and financial condition. In addition,
the holders of our secured convertible debentures and notes were entitled to
demand immediate repayment of the outstanding principal amounts of the
debentures and notes and any accrued and unpaid interest. The cash required to
repay such amounts would likely have to be taken from our working capital.
Since we rely on our working capital to sustain our day to day operations and
the development of our H-Net(TM)system, a default on the convertible debentures
or notes could have a material and adverse effect on our business, prospects,
results of operations or financial condition. However, as of that date, other
than the receipt of a notice of default, we were not aware of any action taken
by the holders of our secured convertible debentures and notes to pursue such
rights, and as of that date we also were not aware of any other legal or similar
action taken by those holders to enforce their rights or as a result of our
defaults under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange
Commission a portion of the shares of common stock underlying the convertible
debentures and notes under which we are in default and expect that the
convertible debentures and notes ultimately will be converted into shares of our
common stock and that we therefore will not be obligated to repay the
outstanding principal and accrued and unpaid interest amounts on those
debentures and notes.
<page>22
As of November 8, 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 the notes issued in March 2006, which provide for
interest at the rate of 6% 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 - 12,000 250,000
February 18, 2004 50,000 35,000 - 12,000 250,000
March 4, 2004.... 250,000 203,000 - 59,000 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 1,068,336 115,100 2,800,000
March 8, 2006 1,270,000 1,250,000 1,270,000 33,800 20,320,000
----------- ----------- ------------ ---------- ----------
Total: $5,920,000 $4,818,000 $2,338,336 $ 466,900 32,620,000
=========== =========== ============ =========== ==========
</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 November 8, 2006. The total amount of accrued and
unpaid interest does not account for approximately $104,000 of
outstanding pre-paid interest.
Each of the above outstanding secured convertible debentures or notes,
except for the convertible notes issued in March 2005 and March 2006, 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
convertible notes issued in March 2006 are due three 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 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, (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, or (d) $.03 for the
March 2006 convertible notes. As of November 8, 2006, the applicable
conversion price was approximately $0.00012 per share.
<page>23
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 June 30, 2006
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 $5.9 million in
financing to date. No assurances can be given that they will provide any
additional financing in the future. Our current secured convertible debenture
and note financing documents contain notice and right of first refusal
provisions and the grant of a security interest in substantially all of our
assets in favor of the convertible debenture and note investors, all of which
provisions will restrict our ability to obtain debt and/or equity financing from
any investor other than our current investors.
Any future financing that we may obtain may cause significant dilution
to existing stockholders. Any debt financing or other financing of securities
senior to common stock that we are able to obtain will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition, results of
operations and cash flows.
If adequate funds are not available, we may be required to delay, scale
back or eliminate portions of our operations and product and service development
efforts or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain of our technologies
or potential products or other assets. Accordingly, the inability to obtain such
financing could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also adversely
affect our ability to fund our continued operations and our product and service
development efforts that historically have contributed significantly to our
competitiveness.
Effect of Inflation
Inflation did not have any significant effect on our operations during
the twelve months ended September 30, 2005 or during the nine months ended June
30, 2006. Further, inflation is not expected to have any significant effect on
our future operations.
<page>24
Impact of New Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, has established new
accounting pronouncements. We do not expect the adoption of these
pronouncements to have a material impact on our financial position, results of
operations or cash flows.
In June 2006, the FASB released FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. A company must determine whether it is
"more-likely-than-not" that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation procedures, based on
the technical merits of the position. Once it is determined that a position
meets the more-likely-than-not recognition threshold, the position is measured
to determine the amount of benefit to recognize in the financial statements.
This interpretation is effective for fiscal years beginning after December 15,
2006. Earlier application of the provisions of this interpretation is
encouraged if the enterprise has not yet issued financial statements, including
interim financial statements, in the period this interpretation is adopted.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets," which provides an approach to simplify efforts to obtain
hedge-like (offset) accounting. This Statement amends FASB SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", with respect to the accounting for separately recognized
servicing assets and servicing liabilities. The Statement (1) requires an entity
to recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract in
certain situations; (2) requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable; (3)
permits an entity to choose either the amortization method or the fair value
method for subsequent measurement for each class of separately recognized
servicing assets or servicing liabilities; (4) permits at initial adoption a
one-time reclassification of available- for-sale securities to trading
securities by an entity with recognized servicing rights, provided the
securities reclassified offset the entity's exposure to changes in the fair
value of the servicing assets or liabilities; and (5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all separately
recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
for all separately recognized servicing assets and liabilities as of the
beginning of an entity's fiscal year that begins after September 15, 2006, with
earlier adoption permitted in certain circumstances. The Statement also
describes the manner in which it should be initially applied.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", which amends SFAS No. 133, "Accounting for
Derivatives Instruments and Hedging Activities" and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to include only such
strips representing rights to receive a specified portion of the contractual
interest or principal cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instrument. This statement shall be effective for all financial instruments
acquired, issued or subject to a remeasurement (new basis) event occurring after
the beginning of an entity's first fiscal year that begins after September 15,
2006.
<page>25
BUSINESS
Overview
We were incorporated in Colorado on February 2, 1986 under the name
Coastal Financial Corp. On December 5, 1994, Coastal Financial Corp. changed its
name to BDR Industries, Inc. which changed its name on October 16, 1995, to
ConectiSys Corporation.
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-Net(TM), which is a trademark of ConectiSys. Our
H-Net(TM) system is currently comprised of two principal components: our H-
Net(TM) 5.0 product, which itself is comprised of circuitry and a radio
transmitter, and our H-Net(TM) BaseStation. Our H-Net(TM) 5.0 product is a
component that is designed to be part of a digital energy meter to read and
wirelessly transmit meter data to our H-Net(TM) BaseStation. Our H-Net(TM)
BaseStation is designed to receive and relay the meter data over standard phone
lines to a central location where the data is compiled and utilized.
We are 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
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 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.
Industry Overview
Over the past several years, the AMR industry has undergone tremendous
growth. Many factors have contributed to this growth, including:
o a surge in demand for wireless data transmission services that
increase the efficiency of meter reading service companies;
<page>26
o mandates by federal and state regulators requiring that the
energy industry utilize automatic meter reading technologies and
read meters with increased frequency;
o an apparent nation-wide trend toward deregulation of the energy
industry, which may enable a large number of new energy service
providers to enter the market who will require easily
obtainable, accurate and comprehensive data regarding their
customers' energy usage; and
o a growing preference among commercial, industrial and
governmental enterprises for automation of remote data
acquisition and collection activities through wired and wireless
communications technologies.
Although the need for a comprehensive, low-cost AMR solution has become
widespread, a viable solution remains unmet for many reasons, including the
following:
o the high cost of hardware and installation of traditional
wireless data collection processes employing technologies
similar to cellular or other wireless data transmission towers;
o the failure of existing AMR systems to satisfy the mandates
imposed by government regulations concerning the collection and
transmission of data; and
o the failure of existing AMR systems to provide true two-way data
communications, as a result of which those systems are less
accurate and do not provide increases in efficiency allowed by
two-way data communications systems.
Responding to the growing demand for communications services and
increased competitive pressures, businesses and government organizations that
rely heavily on information technology are devoting significant resources to the
evaluation and purchase of data transmission products.
We estimate that there are approximately 125 million energy meters in
the United States, approximately 12.5 million of which are located in
California. Our goal is to achieve sufficient proliferation of our H- Net(TM)
system so that it is installed in one percent of the energy meters in the United
States or ten percent of the energy meters in the State of California.
Initially, we intend our principal efforts to be focused on the deployment of
our H-Net(TM) system in the State of California.
Our Strategy
We have strived to develop expertise relating to AMR systems and
products. Our goal is to become a leading provider of products and services
relating to data acquisition from remote locations and data collection at
centralized locations. Our business strategy to achieve this goal includes the
following elements:
o Develop strategic relationships. We have explored and intend to
continue to explore the possibility of entering into strategic
relationships with manufacturers of energy meters, utility
companies, energy providers and others in order to promote the
adoption of our H- Net(TM) system within the energy and AMR
industries.
o Establish outsource manufacturing for full-scale commercial
production. We have the means of outsourcing small-scale
production of the products employed in our H-Net(TM) system. We
intend to continue the cost-reduction phase of our H-Net(TM)
system's development and in doing so, we intend to examine
various manufacturing alternatives, including strategic
<page>27
relationships with manufacturers of energy meters and third-
party manufacturing of the products employed in our H-Net(TM)
system for use in energy meters.
o Build market share for our products. We intend to establish
ourselves as the source for comprehensive, low-cost AMR
solutions and plan to focus on building our own market share for
our H-Net(TM) system and further develop our H-Net(TM) system
where market demand is identified. We also plan to develop new
products and enhancements to meet or exceed the evolving
requirements of both centralized and remote applications of our
technologies.
o Intensify our marketing activities. As funds become available,
we intend to invest in a comprehensive targeted, product-
specific marketing program to raise awareness of ConectiSys and
our H-Net(TM) system and in order to attract customers.
o Continue to develop wireless products. We intend to continue to
invest in research and development of wireless products to meet
the needs of the AMR industry. We believe that the expertise
that we have developed in creating our existing H-Net(TM) system
will enable us to enhance our products, develop new products and
services and respond to emerging technologies in a cost-
effective and timely manner.
Our H-Net(TM) System
Our H-Net(TM) system is designed to enable users to remotely read
electronic energy usage meters without the necessity of someone traveling to and
physically reading the meter. The predominant method of reading electronic
meters is for an individual to travel to the site of the meter and make a record
of the data compiled by that meter, either manually as a notation in a log book
or electronically by inputting the data into a handheld or other electronic data
retention device. In the case of a log book, the information is then typically
recorded manually into a centralized database for energy usage tracking and
billing purposes. In the case of a electronic data retention device, the
information is typically downloaded to a centralized database for these
purposes. Residential meters are customarily read on a monthly basis, allowing
only a limited ability to track energy usage fluctuations over periods of less
than one month. In addition, physical reading of meters is accompanied by the
problem of reader error, causing inefficiencies resulting from necessary
corrective procedures. Our H-Net(TM) system is designed to provide continuous
meter-reading capabilities, address the inefficiencies that accompany physical
meter reading and provide additional benefits to its users.
We believe that the anticipated deployment costs of our H-Net(TM) system
are small compared to other AMR products because there are no cellular or other
telecommunications or wireless towers to erect or expensive hardware
infrastructure to install. We anticipate that all field installations and
deployment programs of our H-Net(TM) system will be administered by United
Telemetry Company, one of our two wholly-owned subsidiaries. The data collected
by H-Net(TM)-equipped meters will be transmitted over the unlicensed ISM 900 MHz
radio frequency band. Our H- Net(TM) system allows for high-density data
transmissions, which we believe makes it ideal for metropolitan and other
crowded areas where a large amount of data would normally be collected.
H-Net(TM)-Equipped Meters
Our H-Net(TM) system is comprised of the following two principal
components that operate together to provide what we believe to be a
comprehensive, low-cost AMR solution: our H-Net(TM) 5.0 product, which itself
is comprised of circuitry and a radio transmitter, and our H- Net(TM)
BaseStation. In addition to these two principal components, our H-Net(TM) system
utilizes a network operating center. The first component of our H-Net(TM) system
is an electronic meter put into service at a residence that is equipped with a
<page>28
circuit board that contains a memory module, microprocessor and a two-way radio
transmission and receiver device that operates in the ISM 900 MHz radio
frequency band. This circuit board may also be retrofitted to some existing
meters. We refer to each energy meter equipped with this circuit board and that
is connected to our AMR network as an H-Net(TM)- equipped meter or a "node."
With the installation of each H-Net(TM)- equipped meter, the existing installed
H-Net(TM)-equipped meters self- configure by transmitting configuration data to
other H-Net(TM)-equipped meters and receiving configuration data from other H-
Net(TM)-equipped meters.
Base Stations
Our AMR network, when it is operational, will be partially comprised of
these H-Net(TM)-equipped meters, each communicating to another with the final
communication of data in a given communication cycle being transmitted to the
second component of our H-Net(TM) system, a base station. We anticipate that a
base station will be housed in a small metal box, no larger than the size of a
shoe box, that contains a memory module, microprocessor, radio transmission and
receiver device and a modem. The node and base station configuration is similar
to a hub and spoke configuration, but rather than direct communication among
each of the nodes and the base station, numerous nodes will communicate with one
another in a web configuration with some nodes sending final transmission to the
base station of the data collected by many other nodes. The base station is
designed to receive data transmissions from various nodes in its local network
and use its modem to place a local telephone call and transmit the data it has
collected to the third component of our H-Net(TM) system, our network operating
center. We anticipate that the base stations will deliver energy meter data four
times an hour, twenty-four hours a day to our network operating center.
Network Operating Center
We plan to use a computer center located at our main office facility to
store the information gathered from the H-Net(TM)-equipped meters. We call this
computer center our network operating center. We have designed our network
operating center to support up to 250,000 H- Net(TM)-equipped meters. We
anticipate that our network operating center will be the central control center
for our entire AMR network and will operate in a large geographic area. We plan
to use the network operating center to archive all data for future use and as a
protective measure against data loss or corruption. After the data archival
process, we expect that the network operating center will handle uploading of
the data to the Internet where it can be accessed by users directly and also
downloaded through an interpreter software program into a utility company's or
energy service provider's database. We anticipate that our network operating
center will be administered by our wholly-owned subsidiary, eEnergyServices.com,
Inc.
The H-Net(TM) Network
The H-Net(TM) network, once deployed, will be comprised of our network
operating center and local networks, which in turn are each comprised of a base
station and H-Net(TM)-equipped meters. Each H-Net(TM)-equipped meter can
communicate with other H-Net(TM)-equipped meters that are up to a distance of
approximately one-quarter mile away. We plan to install a base station for every
H-Net(TM)-equipped meter area. Our base stations are designed to receive data
transmissions from up to 7,500 H- Net(TM)-equipped meters. We have designed our
system so that a base station can transmit the accumulated data it has received
from the H- Net(TM)-equipped meters in its local network by telephone every
fifteen minutes by using its modem to communicate with our network operating
center. Once the data from the H-Net(TM)-equipped meters arrives from the base
stations at the network operating center, the data can be assembled into various
formats for billing customers as well as for management of energy purchasing and
energy conservation programs.
<page>29
Our H-Net(TM) system has certain limitations inherent in each local
network, each of which is comprised of H-Net(TM)-equipped meters and a base
station. Each local network has the following principal limitations:
o it can consist of a maximum of 7,500 H-Net(TM)-equipped meters;
o each H-Net(TM)-equipped meter must be within approximately one-
quarter mile of another H-Net(TM)-equipped meter in the same
local network; and
o the maximum radius of a local network is five miles.
In addition to the limitations described above, our H-Net(TM)-equipped
meters transmit data using the ISM 900 MHz radio frequency band, which is an
unlicensed frequency band. Because this frequency band is regulated, the H-
Net(TM) system requires FCC approval for compliance and sales. In August 2004,
we submitted to the FCC our H-Net(TM) 5.0 product for approval for
commercialization and sale and received FCC certification for this product in
December 2004. In December 2004, we submitted to the FCC our H-Net(TM)
BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. 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.
H-Net(TM) Services
We plan to offer a wide variety of services to utility companies and
energy service providers in addition to reading their customers' energy meters.
We anticipate that these services will include energy management, data storage
and archiving, and the provision of near real- time energy usage data in order
to evaluate energy consumption and determine cost savings procedures. We plan
to provide complete billing and accounting transaction services to utility
companies and energy providers as well as to end-users of energy.
Our H-Net(TM) system employs new technology developed to allow utility
companies and energy service providers to have a wireless network of intelligent
meters, with each meter communicating with another and passing data back and
forth, allowing near real-time energy consumption data to be collected. We
believe that energy service providers will have an opportunity to save money by
efficiently collecting accurate energy usage profiles and using this near real-
time energy usage data to competitively bid for energy in the newly deregulated
energy markets.
Our H-Net(TM) system has been designed so that an energy service
provider can determine exactly how much electric power a metropolitan area, a
neighborhood, or even an individual residence is using. Energy users who have H-
Net(TM)-equipped meters will have the ability to check their energy consumption
and billing rates in near real-time by obtaining this information over the
Internet, which we believe will promote energy conservation.
H-Net(TM) Product Development and Pilot Programs
Our product development efforts are directed toward developing an AMR
solution in the form of our H-Net(TM) system. We believe that our existing
expertise in data transmission devices provides us with a strong technology base
to pursue this objective. Our product development efforts focus on the following
principles:
<page>30
o Development of New Products and Technology. We plan to assess
domestic and international market trends, with the focus of
developing new products designed to meet emerging market
demands. In developing new products, we plan to attempt to
combine our existing technology base with new technologies to
provide a broader range of automation and data communications
and data acquisition solutions to end users.
o Improvement of Existing Technology. We seek to expand the
features and functionality of our existing H-Net(TM) system
technology through modifications and enhancements to meet the
changing needs of the marketplace. We are reviewing the design
of our products to determine areas of potential cost savings or
enhanced product quality and reliability.
We believe our future success will depend, in part, upon our ability to
expand and enhance the features of our H-Net(TM) system and to develop and
introduce new products designed to meet changing customer needs on a cost-
effective and timely basis. Consequently, failure by us to respond on a timely
basis to technological developments, changes in industry standards or customer
requirements, or any significant delay in product development or introduction,
could have a material adverse effect on our business and results of operations.
We cannot assure you that we will respond effectively to technological changes
or new product announcements by others or that we will be able to successfully
develop and market new products or product enhancements.
Beginning in 2000, we successfully launched and completed H-Net(TM)
demonstration programs at various locations in southern California. In 2004, we
began a similar program in Los Angeles County, California at various sites in
the Southern California Edison service territory. Our H-Net(TM) meters for this
program were installed by Southern California Edison in May 2004 and the program
recorded and continues to record real-time meter data seamlessly and error-free.
We are expanding this demonstration program during 2006 and expect that it will
continue to grow with additional commercial and residential clients.
We are in the process of evaluating meter manufacturers as potential
business partners for the installation of the H-Net(TM) system into their
meters.
We are actively pursuing and planning other field testing programs with
various utility companies and energy service providers across the country.
However, we expect that future field testing programs will be in conjunction
with the first stages of sales or licensing of our H- Net(TM) system to utility
companies, energy service providers and other industry-related parties.
The H-Net(TM) Wireless Network Vision
We have designed and will continue to design our H-Net(TM) system to
deliver a comprehensive and robust AMR solution that enables the realization of
substantial efficiencies in the remote meter reading and centralized data
collection contexts and that provides numerous features and services. In
addition to its many other planned features and services, we are designing our
H-Net(TM) system to:
o constantly monitor an end-user's energy meter and gather meter
data and display it on the Internet in fifteen-minute intervals,
twenty- four hours a day;
o allow the end-user to access an information link on the Internet
taking them directly to the energy usage data transmitted by
their H- Net(TM)-equipped meter;
o provide utility companies, and energy service providers with
reliable and accurate electricity usage records;
<page>31
o enable a utility company or an energy service provider to supply
to end-users over the Internet information and special incentive
offers regarding the use of energy at off-peak times, thereby
improving energy conservation during critical peak periods.
Other innovative offers may also be implemented such as pre-
payment plans and direct purchases of additional energy over the
Internet;
o allow an end-user to pay his or her energy bills over the
Internet, at a very low administrative cost to the utility
company and reduce billing delays;
o allow the monitoring of energy usage levels to ensure that
utility companies and energy service providers are aware of any
delivery problems, including power outages and energy thefts;
o provide utility companies with the ability of two-way
communications to that they may determine which of their
customers do not have power without the aid of customer service
phone calls, thereby allowing service crews to be dispatched
more efficiently. By using our H-Net(TM) system, we believe that
utility companies will be in a position to know precisely when
each end-user's service is restored and the exact duration of a
power outage;
o enhance safety and convenience by allowing the remote delivery
and termination of electricity, with all billing transactions
completely automated. We plan to design our H-Net(TM) system to
allow end-users to request over the Internet the delivery of
electricity;
o allow the distribution of electricity more efficiently and
inexpensively with energy usage and other vital data informing
each decision through the entire energy supply channel. We
believe that by using our H-Net(TM) system, energy purchasers
can make precise forecasts of purchasing requirements,
eliminating much of the over- and under- purchasing of energy
that contributes to volatile wholesale energy prices;
o allow end-users who are preparing to terminate or switch energy
service providers to use the Internet to inform the current
energy service provider of the change. At a precise time,
selected by the end- user, our H-Net(TM) system has the ability
to read the end-user's H- Net(TM)-equipped meter, pass the
information to the current energy service provider's system to
produce a final bill, and disconnect the end-user's electricity.
In the case of a change in an energy service provider, the data
from an H-Net(TM)-equipped meter can automatically be routed to
a new energy service provider; and
o enable lower energy costs as a result of its efficiencies,
quicker transactions with less paperwork and reduced potential
for error. Lower energy and transaction costs will assist the
transition to an open, competitive market for energy.
Government Regulation
Our H-Net(TM) system is designed to comply with a significant number of
industry standards and regulations, some of which are evolving as new
technologies are deployed. In the United States, our H-Net(TM) system must
comply with various regulations defined by the FCC, and Underwriters
Laboratories, or other nationally-recognized test laboratories, as well as
industry standards.
The regulatory approval process can be time-consuming and can require
the expenditure of substantial resources. The failure of our H-Net(TM) system to
comply, or delays in compliance, with the various existing and evolving
<page>32
standards could negatively impact our ability to sell or license our H-Net(TM)
system. Government regulations regarding the manufacture, sale and
implementation of products and systems similar to our H-Net(TM) system and other
data communications devices are subject to future change. We cannot predict what
impact, if any, such changes may have upon our business.
In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. 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 do not anticipate that any government regulations will hamper our
efforts to deploy our H-Net(TM) system. Rather, the restructuring of the energy
market in the United States has required the reading of energy meters much more
frequently than the current practice of once a month, thus making the physical
meter reading techniques currently in use inadequate. Our H-Net(TM) system is
designed to meet various government regulations mandating frequent meter
readings and we are attempting to position ourselves so that we will be a
beneficiary of these mandates.
Operations
During the initial design and engineering phases for our H-Net(TM)
system, we maintained low overhead costs and we plan to continue to do so until
manufacturing and sales of our H-Net(TM) system are underway. We plan to hire
additional personnel as needed during the coming year, including managerial,
clerical, administration, sales, marketing, and customer service personnel.
We plan to lease suitable office facilities for our operations within
the Southern California area. We plan to initially utilize existing
manufacturers to produce our products and will therefore likely not have a
short-term need to lease or build manufacturing facilities. We intend to
operate not principally as a manufacturer of products, but as a provider of
comprehensive, cost-effective AMR solutions, and we plan to outsource
manufacturing of the hardware employed in our H-Net(TM) system in order to
achieve the highest cost-efficiencies.
Anticipated Revenues and Marketing
Our H-Net(TM) system is designed to be a comprehensive, cost-effective
AMR solution and an alternative to other AMR technologies and physical reading
of meters. Our H-Net(TM) system is capable of providing meter data every fifteen
minutes, twenty-four hours a day and nearly 3,000 times per month. We estimate
that physical readings of a meter cost approximately $1.00 per reading. Our H-
Net(TM) system is designed to meet the relatively low cost of physical meter
reading while providing nearly 3,000 times more readings per month. We believe
that the base cost to operate a fully-deployed H-Net(TM) system is approximately
$.20 per meter per month, or approximately $.0000667 per reading.
We plan to license our H-Net(TM) system technology to meter
manufacturers so that they may incorporate it into their meters. We plan on
deriving a small royalty per meter sold for every H-Net(TM)-equipped meter. We
anticipate that the predominant source of any future revenues will be through
recurring monthly service charges for reading, archiving and supplying data from
H-Net(TM)-equipped meters and from providing other services described in more
detail above. However, despite our belief of the cost-effectiveness and
significant advantages of our H- Net(TM) system over physical meter reading
practices and other AMR technologies, there can be no assurances that the market
we intend to target will adopt or accept our H-Net(TM) system or that we will
earn any significant revenues. See "Risk Factors."
<page>33
We have developed a marketing plan that was formulated to help us
achieve the following objectives:
o acquisition and retention of strategic beta test placement
locations for H-Net(TM)-equipped meters;
o formation of synergistic partnerships with energy service
providers, utilities companies and internet service providers,
including joint ventures, license arrangements and strategic
alliances;
o participation in H-Net(TM)-equipped meter manufacturing
partnerships and acquisition of Internet commerce sponsorship;
o promotion of unique features and specialized services of our H-
Net(TM) system; and
o creation of industry awareness by implementing a public
relations and marketing campaign along with establishing a
relationship with regulatory agencies of the State of California
and other states in an attempt to facilitate a long-term
solution for the nation's energy needs.
The current principal target of our marketing and sales efforts is the
utility and energy service provider industries. These industries consist of a
wide variety of organizations that use data communications in an automated
process application, such as utilities and energy management companies.
Responding to deregulation and other major changes taking place within the
industry, electric power utility companies have become leading advocates in
promoting the implementation of automation and technological advancement as a
means of achieving cost savings as they enter the competitive arena. Utility
companies are automating numerous distinct processes within their operating
systems. Our H Net(TM) system is designed for and is expected to be sold for use
in:
o the AMR context, which is intended primarily to eliminate the
expense and inefficiencies of human meter readers and also is
intended to provide data archival and delivery services as well
as additional value-added services for the end-user; and
o distribution automation, which is the remote monitoring and
control of power distribution networks. These control systems
are often referred to as SCADA systems. SCADA is an acronym for
Supervisory Control and Data Acquisition.
If sufficient funds are not available for full deployment of our H-
Net(TM) system, it is our intention to license our H-Net(TM) technology to
various sectors of the energy industry, including meter manufacturers for
integration into their meters. We also may license our software and software
systems for archival of the data transmitted by H-Net(TM)- equipped meters to
various utility companies and energy service providers. Under this scenario, we
would also supply support and technical assistance to these various sectors of
the energy industry while collecting revenues solely in the form of fees for
licensing and support and technical assistance. We expect any revenue from this
alternate strategy to be far less than our active participation in the
collecting and archiving of meter data and the ancillary services described in
greater detail above.
Competition
Many companies have developed data transmission products designed to
meet the growing demand for AMR solutions. We anticipate that our H- Net(TM)
system will compete on the basis of features, price, quality, reliability, name
recognition, product breadth and technical support and service. We believe that
<page>34
we generally will be competitive in each of these areas. However, many of our
existing and potential competitors have significantly more financial,
engineering, product development, manufacturing and marketing resources than we
have. We cannot assure you that our competitors will not introduce comparable or
superior products incorporating more advanced technology at lower prices, or
that other changes in market conditions or technology will not adversely affect
our ability to compete successfully in the future. We perceive the following
companies as being the principal competition to our AMR solution in the form of
our H-Net(TM) system:
Itron Inc. Itron provides and has installed AMR systems worldwide.
Itron provides "drive-by" automated meter reading
equipment.
CellNet Data
Systems CellNet provides fixed-network wireless AMR systems and
has installed systems in Kansas City, Minneapolis, San
Francisco, Indianapolis, and through Puget Sound Power.
CellNet has technology alliances with the major energy
meter manufacturers and was recently acquired by
Schlumberger.
Schlumberger
Ltd. Schlumberger's Resource Management Systems Division has
deployed meter reading systems that include hand-held
meter reading devices. Schlumberger recently acquired
CellNet and Metricom.
Hunt Technologies,
Inc. Hunt provides power line carrier AMR systems with
capabilities including substation switching. The market
niche for Hunt's AMR systems is rural electric
cooperatives.
Metricom Corporation
Metricom provides wireless communication networks with
fixed-wireless networks installed in the San Francisco
Bay Area, Seattle, Washington, D.C., and at
universities. Metricom and Whisper Communications, Inc.
have formed an alliance to provide AMR systems. Their
AMR systems are installed at KN Energy and Pacific Gas &
Electric Company. Metricom recently was acquired by
Schlumberger.
We believe that we will be the only company able to collect data
transmitted from H-Net(TM)-equipped meters, thereby ensuring our competitive
advantage once we are able to achieve sufficient proliferation of our H-Net(TM)-
equipped meters.
Customers
We do not currently have revenue-generating customers. We have not yet
sold any H-Net(TM) systems. However, we are actively pursuing sales of our H-
Net(TM) systems with meter manufacturers and other companies in the energy
industry. We anticipate that once we commercially produce and install our H-
Net(TM) system, our customers will include energy meter manufacturers, energy
service providers, utility companies and end-users of energy.
Intellectual Property
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary rights. However,
although our H-Net(TM) system and its constituent components could benefit from
patent protection, we have chosen to retain the proprietary rights associated
with our H-Net(TM) system predominantly as trade secrets. Although we currently
<page>35
rely to a great extent on trade secret protection for much of our technology, we
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop comparable or
superior technologies or obtain unauthorized access to our proprietary
technology.
We own, license or have otherwise obtained the right to use certain
technologies incorporated in our H-Net(TM) system. We may receive infringement
claims from third parties relating to our products and technologies. In those
cases, we intend to investigate the validity of the claims and, if we believe
the claims have merit, to respond through licensing or other appropriate
actions. To the extent claims relate to technology included in components
purchased from third-party vendors for incorporation into our products, we would
forward those claims to the appropriate vendor. If we or our component
manufacturers are unable to license or otherwise provide any necessary
technology on a cost- effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs defending any
legal action taken against us.
Employees
We have three full time employees and a five person advisory board. Our
employees are involved in executive, corporate administration, operations, and
sales and marketing functions. We also use the services of outside consultants
and experts on many of our projects to help reduce costs. We consider our
relations with our employees to be good. None of our employees is represented by
a labor union.
Property
Our principal center of operations is located at 25115 Avenue Stanford,
Suite 320, Valencia, California 91355. This 1,500 square foot space is leased
for approximately $2250 per month. We believe that our facilities are adequate
for our needs for the near future.
Legal Proceedings
We are not a party to any material pending legal proceedings. We are
subject to legal proceedings, claims and litigation arising in the ordinary
course of business. While the amounts claimed may be substantial, the ultimate
liability cannot presently be determined because of considerable uncertainties
that exist. Therefore, it is possible the outcome of such legal proceedings,
claims and litigation could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period. However, based
on facts currently available, management believes such matters will not have a
material adverse effect on our financial position, results of operations or cash
flows.
<page>36
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of ConectiSys and their ages,
positions, business experience and education as of November 8, 2006 are as
follows:
Name Age Position
---- --- --------
Robert A. Spigno(1)(2).. 51 Chairman of the Board, Chief
Executive Officer, Chief Financial
Officer and Director
Lawrence Muirhead(1)(2). 47 Chief Technology Officer and Director
Rodney w. Lighthipe..... 59 Treasurer and Secretary
Melissa McGough (1)..... 29 Director
_______________
(1) Member of Stock Option Committee.
(2) Member of Nominating Committee.
Business Experience
Directors
Robert A. Spigno has served as our Chief Executive Officer, Chairman of
the Board and as a member of our board of directors since August 1995. Prior to
that time, Mr. Spigno was President, for more than a decade, of S.W. Carver
Corp., a company founded by him and his former wife, Patricia A. Spigno, that
was a commercial builder of residential homes. Mr. Spigno has over 25 years of
experience in executive management and majority ownership of several privately
held companies.
Lawrence Muirhead has served as our Chief Technical Officer and as a
member of our board of directors since October 1997. Prior to that time, Mr.
Muirhead worked for TRW. Mr. Muirhead has over 18 years of engineering and
research and development experience in the aerospace industry, including over 13
years of experience with TRW, where helped lead new product development and
deployment. Mr. Muirhead holds a B.S. degree in physics and a B.A. degree in
mathematics from the University of California, Santa Barbara, and holds an M.S.
degree in physics from the California Institute of Technology.
Melissa McGough has served as a member of our board of directors since
November 1999. Ms. McGough was also our Corporate Administrator from December
1998 until March 2005. Her responsibilities as Corporate Administrator included
public relations and management of our daily office activities. Prior to that
time, Ms McGough was a student.
Executive Officer
Rodney W. Lighthipe has served as our Treasurer and Secretary since May
2006 and previously served as an advisor to our board of directors from April
2001 through April 2006. Mr. Lighthipe also served as our President from
September 2000 until his resignation in September 2001. Prior to that time, Mr.
Lighthipe served as Director of Research for San Diego Gas & Electric from 1992
<page>37
until 1996 and was responsible for the development and deployment of new
technologies. Mr. Lighthipe was Research Manager for Southern California Edison
from 1980 to 1987 and organized an international consortium of companies for the
design, construction and operation of the world's largest coal gasification
plant. Mr. Lighthipe was also Power Contracts Manager for Southern California
Edison from 1974 until 1980 during which he opened new transmission paths
throughout the Western United States and Canada for the purchase and sale of
bulk electric power. Some of Mr. Lighthipe's major projects included the
installation of photovoltaics in remote areas and the launch of a "smart card"
project employing residential telephone systems. Mr. Lighthipe has also acted as
a consulting engineer in the energy and telecommunications industries and served
two tours of duty in Vietnam as a Lieutenant in the United States Navy.
All directors hold office until the next annual meeting of shareholders
and until their respective successors are elected or until their earlier death,
resignation or removal. Each officer of ConectiSys serves at the discretion of
the board of directors. There are no other family relationships between or among
any directors or executive officers of ConectiSys.
Advisors to Our Board of Directors
Dr. Hugo Pomrehn has served as an advisor to our board of directors
since April 2001. On June 28, 1992, Dr. Pomrehn was nominated by former
President George Bush to serve as the Under Secretary of Energy, and was
confirmed by the United States Senate for that position on September 29, 1992.
As Under Secretary to Admiral James Watkins, Dr. Pomrehn was the third-ranking
official at the U.S. Department of Energy, which employed approximately 170,000
personnel and had an annual budget of $20 billion. Dr. Pomrehn's professional
career covers a broad spectrum of involvement with energy and environmental
technologies. He has been engaged in engineering and management consulting in
the energy and nuclear fields for more than 30 years and was a Vice President of
the Bechtel Corporation.
Aaron R. Sokol has served as an advisor to our board of directors since
April 2001. Mr. Sokol is a Vice President at Deutsche Bank Alex Brown where his
responsibilities include providing innovative and customized solutions to
clients in order to preserve and enhance their wealth. He is also responsible
for new business development as well as global financial advisory services for
existing and prospective clients. Mr. Sokol joined Deutsche Bank Alex Brown from
Los Angeles-based Scudder Kemper Investments, Inc. Mr. Sokol has also served as
an Assistant Vice President at First Chicago Capital Markets, Inc., and prior to
that, worked in the corporate finance department at Nations Bank Capital
Markets, Inc. Mr. Sokol holds a J.D. degree from Boston University School of Law
and a M.B.A. in Finance and New Venture Management from the University of
Southern California.
Larry W. Siler has served as an advisor to our board of directors since
April 2001. Mr. Siler is currently Manager of Fuel Transportation for Edison
Mission Energy in Chicago, Illinois. Mr. Siler was the Coal Supply
Superintendent for Commonwealth Edison Company in Chicago from 1988 until 1999.
From 1986 until 1988 Mr. Siler was a management and engineering consultant in
Austin, Texas. He also held positions as the Fuels Manager, Engineering
Supervisor, Staff Engineer and Fuels Engineer for the Lower Colorado River
Authority from 1973 until 1986.
Tod O'Connor has served as an advisor to our board of directors since
April 2001. Mr. O'Connor was Director of Government Relations for two Edison
International Inc. subsidiaries, Southern California Edison RD&D Department and
Edison Technology Solutions from 1993 until 1999. Mr. O'Connor also was employed
by Pacific Enterprises and its subsidiary, Southern California Gas Co. from 1989
until 1993, and MARC Associates' Status Group in Washington, D.C. from 1988
until 1989. Mr. O'Connor was a Legislative Aide in the United States House of
Representatives where he advised House Speaker Thomas P. (Tip) O'Neill on
pending legislation and proposed federal regulations, as well as the Democratic
Steering and Policy Committee from 1980 until 1981. Mr. O'Connor is currently
<page>38
President of O'Connor Consulting Services, Inc. in Woodland Hills, California.
Mr. O'Connor holds a L.L.M. degree in labor law from Georgetown University Law
Center, Washington, D.C., and a J.D. degree from Suffolk University Law School.
Dr. Fredric Brauner was appointed to serve as an advisor to our board of
directors in October 2003. Dr. Brauner is a doctor of medicine, specializing in
dermatology. He graduated from the University of Vienna and became a doctor in
1977. Dr. Brauner, took over his father's practice in 1983 at the University
Clinic of Dermatology in Vienna. Dr. Brauner is a key investor in ConectiSys and
is leading our efforts to expand our H-Net(TM) system to fit the European
marketplace.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than 10%
of a registered class of our common stock to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission.
These officers, directors and stockholders are required by the Securities and
Exchange Commission regulations to furnish us with copies of all such reports
that they file.
Based solely upon a review of copies of these reports furnished to us
during 2005 and thereafter, or written representations received by us from
reporting persons that no other reports were required, we believe that all
Section 16(a) filing requirements applicable to our reporting persons during
2005 were complied with, except as described below.
The following individuals did not timely file the following numbers of
Forms 4 to report the following numbers of transactions: Mr. Robert Spigno - 1
report, 1 transaction; and Ms. Patricia Spigno, our former Chief Financial
Officer, Treasurer and Secretary - 1 report, 1 transaction.
Board Committees
Our board of directors has a Stock Option Committee and a Nominating
Committee. Our board of directors does not have an Audit Committee. In the
absence of an Audit Committee, the entire board of directors intends to satisfy
the duties of that committee. Our Nominating Committee has a written charter.
During fiscal 2005, our board of directors held twelve meetings and took
action by written consent on ten occasions. During fiscal 2005, no incumbent
director attended fewer than 75% of the aggregate of the total number of
meetings of the board of directors held during the period for which he or she
has been a director and the total number of meetings held by all committees of
the board on which he or she served during the periods that he or she served.
Stock Option Committee. Our Stock Option Committee makes recommendations
to our board of directors concerning incentive compensation for employees and
consultants of ConectiSys and selects the persons entitled to receive options
under our stock option plans and establishes the number of shares, exercise
price, vesting period and other terms of the options granted under those plans.
The Stock Option Committee currently consists of Robert A. Spigno, Lawrence
Muirhead and Melissa McGough. During fiscal 2005, the Stock Option Committee
held one meeting and did not take action by written consent on any occasion. No
executive officer of ConectiSys has served as a director or member of the
compensation committee of any other entity whose executive officers served as a
director of ConectiSys.
Audit Committee. We do not currently have an Audit Committee. In
addition, having no Audit Committee, we do not have an Audit Committee financial
expert. As a small, development-stage company, it has been exceedingly
difficult for us to attract an independent member of our board of directors, who
<page>39
would qualify as an Audit Committee financial expert, to serve as the sole
member of the Audit Committee of our board of directors. We plan to form an
Audit Committee consisting solely of one or more independent members of our
board of directors, at least one of whom will qualify as an Audit Committee
financial expert under the rules and regulations of the Securities and Exchange
Commission, once we are able to identify and attract a satisfactory candidate.
Nominating Committee. Our Nominating Committee currently consists of two
directors, Robert A. Spigno, who serves as Chairman, and Lawrence Muirhead,
neither of whom is "independent" under the rules and regulations of the
Securities and Exchange Commission or under the current Nasdaq listing
standards. We intend to reconstitute our Nominating Committee with one or more
independent members of our board of directors once we are able to identify and
attract a satisfactory candidate.
Our Nominating Committee assists our board of directors in the selection
of nominees for election to the board. The committee determines the required
selection criteria and qualifications of director nominees based upon the needs
of ConectiSys at the time nominees are considered and recommends candidates to
be nominated for election to the board. The Nominating Committee was
constituted, and our board of directors adopted a written charter for the
Nominating Committee, in June 2004. A copy of the current charter is available
on our website at http://www.conectisys.com under the headings "Investor
Relations" and "Corporate Governance." During fiscal 2005, our Nominating
Committee held no meetings and took action by written consent on one occasion.
Our Nominating Committee considered and nominated candidates for directorship in
connection with our 2006 annual meeting. No candidates for director nominations
were submitted to our board of directors by any shareholder in connection with
the election of directors at our 2006 annual meeting.
Criteria for Director Nominees. Our board of directors believes that it
should be comprised of directors with varied, complementary backgrounds, and
that directors should, at a minimum, exhibit proven leadership capabilities and
experience at a high level of responsibility within their chosen fields, and
have the ability to quickly grasp complex principles of business, finance and
automatic meter reading technologies. Directors should possess the highest
personal and professional ethics, integrity and values and should be committed
to representing the long-term interests of our shareholders.
When considering a candidate for director, the Nominating Committee
intends to take into account a number of factors, including the following:
o independence from management;
o depth of understanding of technology, manufacturing, sales and
marketing, finance and/or other elements directly relevant to
the technology and business of ConectiSys;
o education and professional background;
o judgment, skill, integrity and reputation;
o existing commitments to other businesses as a director,
executive or owner;
o personal conflicts of interest, if any; and
o the size and composition of our existing board of directors.
Prior to nominating a sitting director for re-election at an annual
meeting of shareholders, the Nominating Committee intends to consider the
director's past attendance at, and participation in, meetings of our board of
directors and its committees and the director's formal and informal
contributions to his or her respective activities.
When seeking candidates for director, the Nominating Committee may
solicit suggestions from incumbent directors, management, shareholders and
others. Additionally, the Nominating Committee may use the services of third
<page>40
party search firms to assist in the identification of appropriate candidates.
After conducting an initial evaluation of a prospective candidate, the
Nominating Committee may interview that candidate if it believes the candidate
might be suitable to be a director. The Nominating Committee may also ask the
candidate to meet with management. If the Nominating Committee believes a
candidate would be a valuable addition to our board of directors, it may
recommend to the full board of directors that candidate's appointment or
election.
Shareholder Recommendations for Nominations to the Board of Directors.
The Nominating Committee will consider candidates for director recommended by
any shareholder that is the beneficial owner of shares representing more than
one percent of the then-outstanding shares of common stock of ConectiSys and
that has beneficially owned those shares for at least one year. The Nominating
Committee will evaluate such recommendations applying its regular nominee
criteria and considering the additional information set forth below. Eligible
shareholders wishing to recommend a candidate for nomination as a director are
to send the recommendation in writing to the Chairman of the Nominating
Committee, ConectiSys Corporation, 24307 Magic Mountain Parkway, Suite 41,
Valencia, California 91355. A shareholder recommendation must contain the
following information:
o documentation supporting that the writer is a shareholder of
ConectiSys and has been a beneficial owner of shares
representing more than one percent of the then-outstanding
shares of common stock of ConectiSys for at least one year and a
statement that the writer is recommending a candidate for
nomination as a director;
o a resume of the candidate's business experience and educational
background that also includes the candidate's name, business and
residence addresses, and principal occupation or employment and
an explanation of how the candidate's background and
qualifications are directly relevant to the business of
ConectiSys;
o the number of shares of common stock of ConectiSys beneficially
owned by the candidate;
o a statement detailing any relationship, arrangement or
understanding, formal or informal, between or among the
candidate, any affiliate of the candidate, and any customer,
supplier or competitor of ConectiSys, or any other relationship,
arrangement or understanding that might affect the independence
of the candidate as a member of our board of directors;
o detailed information describing any relationship, arrangement or
understanding, formal or informal, between or among the
proposing shareholder, the candidate, and any affiliate of the
proposing shareholder or the candidate;
o any other information that would be required under SEC rules in
a proxy statement soliciting proxies for the election of such
candidate as a director; and
o a signed consent of the candidate to serve as a director, if
nominated and elected.
In connection with its evaluation, the Nominating Committee may request
additional information from the candidate or the recommending shareholder and
may request an interview with the candidate. The Nominating Committee has
discretion to decide which individuals to recommend for nomination as directors.
<page>41
Codes of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics
that applies to all of our directors, officers and employees and an additional
Code of Business Ethics that applies to our Chief Executive Officer and our
Senior Financial Officers.
The Code of Ethics, as applied to our principal financial officers,
constitutes our "code of ethics" within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002 and would also constitute our "code of conduct"
within the meaning of the listing standards of Nasdaq.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-
K relating to amendments to or waivers from provision of these codes that relate
to one or more of the items set forth in Item 406(b) of Regulation S-K, by
describing on our Internet website, within five business days following the date
of a waiver or a substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to whom the waiver
was granted.
Information on our Internet website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Securities and Exchange Commission.
Compensation Committee Interlocks and Insider Participation
No member of our board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity.
Compensation of Executive Officers
The Summary Compensation Table below provides information concerning the
annual and long-term compensation for services in all capacities as an employee
of ConectiSys of our Chief Executive Officer, our Chief Technology Officer and
our former Chief Financial Officer, Treasurer and Secretary, or the named
executives, during the years ended September 30, 2005, 2004 and 2003. There were
no other executive officers whose annual salary and bonus compensation exceeded
$100,000 during the year ended September 30, 2005.
<table>
Summary Compensation Table
Long-Term
Compensation
------------
Awards
------------
Annual Compensation Securities
Name and Underlying All Other
Principal Position Year Salary($) Bonus($)(1) Options(#) Compensation ($)
------------------- ------- --------- ----------- ------------ ----------------
Robert A. Spigno, 2005 $160,000 $80,000 -- --
Chief Executive Officer 2004 $160,000 $80,000 -- --
2003 $160,000 $80,000 -- --
Lawrence Muirhead, 2005 $150,000 -- -- --
Chief Technology Officer 2004 $150,000 -- -- --
2003 $150,000 -- -- --
Patricia A. Spigno, 2005 $ 80,000 $10,000 -- --
Chief Financial Officer 2004 $ 80,000 $40,000 -- --
and Secretary 2003 $ 80,000 $40,000 -- --
_______________</table>
(1) Amounts represent bonus earned, but deferred and recorded on the
books and records of ConectiSys as accrued compensation. Amounts
are payable in common stock of ConectiSys based on a conversion
price equivalent to 50% of the average of the closing bid and
asked prices of a share of ConectiSys common stock for the 30
<page>42
days prior to the end of the year in which such bonus was
earned. Although our agreements with Robert Spigno and with
Patricia Spigno provide that the conversion price is to be equal
to 50% of the average of the closing bid and asked prices of a
share of our common stock for the 30 days prior to the end of
the calendar year, Mr. Spigno and Ms. Spigno both voluntarily
relinquished their right to receive shares for 2005, 2004 and
2003 based on this conversion price in favor of a conversion
price equal to approximately 100% of the average of the closing
bid and asked prices of a share of our common stock for the 30
days prior to the end of the applicable calendar year.
Stock Option Grants in 2005
In fiscal 2005, no options or stock appreciation rights were granted to
the named executives.
Option Exercises and Fiscal Year-End Values
The following table sets forth the number of shares acquired and value
realized upon exercise of options during the fiscal year ended September 30,
2005 and the number of exercisable and unexercisable in-the-money stock options
and their values at September 30, 2005 for the named executives. An option is
"in-the-money" if the fair market value for the underlying securities exceeds
the exercise price of the option.
<table>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value ($)of Unexercised
Shares Unexercised Options In-the-Money Options at
Acquired on Value September 30, 2005 September 30, 2005 (1)
Name Exercise Realized ($) Exercisable(#) Unexercisable(#) Exercisable Unexercisable
--------------------- ------------ ------------ -------------- ---------------- -------------- ----------------
Robert A. Spigno --- --- 6,443,654 --- --- ---
Lawrence Muirhead --- --- --- --- --- ---
Patricia Spigno --- --- 500,000 --- --- ---
_______________</table>
(1) The closing sale price of our common stock on the OTC Bulletin
Board(R) as of September 30, 2005 was $.0003.
Long-Term Incentive Plan Awards
In fiscal 2005, no awards were given to named executives under long-term
incentive plans.
Compensation of Directors
Our directors do not receive any compensation in their capacity as
members of the board of directors, but may be reimbursed for reasonable expenses
incurred in connection with attendance of meetings of the board of directors.
The advisors to our board of directors each initially received 250,000
shares of common stock as compensation for their advisory services. No
additional compensation has been paid and any future compensation will be in the
discretion of our board of directors.
<page>43
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In October 1995, our board of directors set the compensation for Robert
A. Spigno, our Chairman of the Board, Chief Executive Officer and Chief
Financial Officer. Mr. Spigno has executed an employment agreement with
ConectiSys effective October 2, 1995, as amended by employment agreement
amendments effective July 24, 1996, August 11, 1997, September 1, 1999 and March
27, 2000 that provide for annual salary of $160,000 and a bonus of 50% of Mr.
Spigno's annual salary, with the bonus payable in common stock of ConectiSys.
In August 1998, our board of directors set the compensation for Lawrence
Muirhead, our Chief Technology Officer. Mr. Muirhead has executed an employment
agreement with ConectiSys effective August 1, 1998, that provides for annual
salary compensation of $150,000. On November 22, 1999, Mr. Muirhead was granted
an option initially expiring December 31, 2002 to purchase up to 2,000,000
shares of common stock at an exercise price of $.50 per share, which was the
closing price of a share of our common stock on that date. This option vests
upon the achievement of certain specified performance criteria. On January 6,
2003, we extended the expiration date of this option to December 31, 2004.
In October 1995, our board of directors set the compensation for Patricia A.
Spigno, our former Chief Financial Officer, Treasurer and Secretary. Ms. Spigno
executed an employment agreement with ConectiSys effective October 2, 1996, as
amended by employment agreement amendments effective July 24, 1996, September 1,
1999 and March 27, 2000 that provide for annual salary of $80,000 and a bonus of
50% of Ms. Spigno's annual salary, with the bonus payable in common stock of
ConectiSys. In May 2006, Ms. Spigno resigned her position as Acting Chief
Financial Officer, Treasurer and Secretary.
Report on Repricing of Options and SARs
No adjustments to or amendments of the exercise price of stock options
or stock appreciation rights previously awarded to the named executives occurred
in fiscal 2005.
Indemnification of Directors and Officers
The Colorado Business Corporation Act, or CBCA, requires that each
director discharge his duties to ConectiSys in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances, and in a manner that he reasonably believes to be in the best
interests of ConectiSys. Generally, a director will not be liable to ConectiSys
or its shareholders, for any action he takes or omits to take as a director if,
in connection with such action or omission, he performed the duties of his
position in compliance with the standards described above.
Our Articles of Incorporation provide that ConectiSys may indemnify any
director or officer of ConectiSys to the full extent permitted by Colorado law.
Under the CBCA, except for the situation described below, a corporation may
indemnify a person made a party to a proceeding because the person is or was a
director against liability incurred in the proceeding if:
o the person conducted himself in good faith;
o the person reasonably believed, in the case of conduct
in an official capacity with ConectiSys, that his
conduct was in the best interests of ConectiSys and, in
all other cases, that his conduct was at least not
opposed to the best interests of ConectiSys; and
<page>44
o in the case of any criminal proceeding, the person had
no reasonable cause to believe his conduct was unlawful.
Under the CBCA, ConectiSys may not indemnify a director as described
above:
o in connection with a proceeding by or in the right of
ConectiSys, in which the director was adjudged liable to
ConectiSys; or
o in connection with any other proceeding charging that
the director derived an improper personal benefit,
whether or not involving action in an official capacity,
in which proceeding the director was adjudged liable on
the basis that he derived an improper personal benefit.
Under the CBCA, ConectiSys is required to indemnify any director who is
wholly successful on the merits or otherwise, in the defense of any proceeding
to which the director was a party because the person is or was a director,
against reasonable expenses incurred by him in connection with the proceeding.
To the extent indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of ConectiSys under the above provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
Equity Compensation Plan Information
The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under our Amended Non-
Qualified Stock Option and Stock Bonus Plan as well as stock options, warrants
and rights issued outside of any formal plan as of September 30, 2005.
Number of Securities Weighted Average Number of
to be Issued Upon Exercise Exercise Price of Securities
of Outstanding Options, Outstanding Remaining
Warrants Options, Warrants Available for
Plan Category and Rights(1) and Rights Future Issuance
- ------------------- -------------------- ------------------ -----------------
Equity compensation
plans approved by
security holders N/A N/A N/A
Equity compensation
plans not approved
by security holders 1,943,654(2) $0.38 N/A
Total 1,943,654 $0.38 N/A
_______________
(1) Number of shares is subject to adjustment for changes in capitalization
for stock splits, stock dividends and similar events.
(2) Represents 1,943,654 shares of common stock underlying stock options,
warrants and rights issued under our Amended Non-Qualified Stock Option
and Stock Bonus Plan and no shares of common stock underlying stock
options, warrants and rights issued outside of any formal plan.
Our Amended Non-Qualified Stock Option and Stock Bonus Plan permits
grants of stock bonuses and non-qualified stock options. Vesting periods under
<page>45
our Amended Non-Qualified Stock Option and Stock Bonus Plan vary from person to
person, and options under the plan are exercisable subject to certain standard
conditions.
Stock Option Plans
General
Our Amended Non-Qualified Stock Option and Stock Bonus Plan, including
the Non-Qualified Stock Option and Stock Bonus Plans it amends, or the Plan, was
adopted and approved by our board of directors effective as of September 11,
2001. The Plan, is designed to enable us to grant compensation and offer an
incentive-based compensation system to consultants who do business with
ConectiSys. The Plan provides for the grant of nonqualified stock options. As of
January 23, 2006, options to purchase a total of 1,943,654 shares of common
stock were outstanding under the Plan, and, as no option may be granted under
the Plan after January 31, 2006, our board of directors does not consider any
options to purchase shares of common stock currently available for issuance
under the Plan.
We filed registration statements on Forms S-8 on December 6, 1999,
September 22, 2000 and September 21, 2001 covering the shares of common stock
subject to the Plan.
Shares Subject to the Plan
A total of 5,000,000 shares of common stock are authorized for issuance
under the Plan. Any shares of common stock that are subject to an award but are
not used because the terms and conditions of the award are not met, or any
shares that are used by participants to pay all or part of the purchase price of
any option, may again be used for awards under the Plan.
Administration
The Plan is administered by a committee of not less than three persons
appointed by the board of directors, each of whom must be a director of
ConectiSys. The board of directors also may act as the committee at any time or
from time to time.
The committee is empowered to select those eligible persons to whom
stock and options shall be granted under the Plan, to determine the time or
times at which each option shall be granted and the number of shares to be
subject to each option, and to fix the time and manner in which each such option
may be exercised, including the exercise price and option period, and other
terms and conditions of such options, all subject to the terms and conditions of
the Plan. The committee has sole discretion to interpret and administer the
Plan, and its decisions regarding the Plan are final.
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time and from time to time by the board of
directors. The board of directors may not materially impair any outstanding
options without the express consent of the optionee. No option may be granted
under the Plan after January 31, 2006.
Option Terms
Options granted under the Plan must have an exercise price of not less
than 85% of the fair market value of the common stock on the date the option is
granted.
Options may be exercised during a period of time fixed by the committee
except that no option may be exercised more than five years after the date of
grant. In the discretion of the committee, payment of the purchase price for the
<page>46
shares of stock acquired through the exercise of an option may be made in cash,
shares of our common stock or a combination of cash and shares of our common
stock.
Federal Income Tax Consequences
Holders of non-qualified options do not realize income as a result of a
grant of the option, but normally realize compensation income upon exercise of a
non-qualified option to the extent that the fair market value of the shares of
common stock on the date of exercise of the non- qualified option exceeds the
exercise price paid. ConectiSys will be required to withhold taxes on ordinary
income realized by an optionee upon the exercise of an option under the Plan.
In the case of an optionee subject to the "short-swing" profit recapture
provisions of Section 16(b) of the Exchange Act, the optionee realizes income
only upon the lapse of the six-month period under Section 16(b), unless the
optionee elects to recognize income immediately upon exercise of his or her
option.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, our board of directors set the compensation for Robert
A. Spigno, our Chairman of the Board, Chief Executive Officer and Chief
Financial Officer. Mr. Spigno has executed an employment agreement with
ConectiSys effective October 2, 1995, as amended by employment agreement
amendments effective July 24, 1996, August 11, 1997, September 1, 1999 and March
27, 2000 that provide for annual salary of $160,000 and a bonus of 50% of Mr.
Spigno's annual salary, with the bonus payable in common stock of ConectiSys.
In August 1998, our board of directors set the compensation for Lawrence
Muirhead, our Chief Technology Officer. Mr. Muirhead has executed an employment
agreement with ConectiSys effective August 1, 1998, that provides for annual
salary compensation of $150,000. On November 22, 1999, Mr. Muirhead was granted
an option initially expiring December 31, 2002 to purchase up to 2,000,000
shares of common stock at an exercise price of $.50 per share, which was the
closing price of a share of our common stock on that date. This option vests
upon the achievement of certain specified performance criteria. On January 6,
2003, we extended the expiration date of this option to December 31, 2004.
In October 1995, our board of directors set the compensation for
Patricia A. Spigno, our former Chief Financial Officer, Treasurer and Secretary.
Ms. Spigno executed an employment agreement with ConectiSys effective October 2,
1996, as amended by employment agreement amendments effective July 24, 1996,
September 1, 1999 and March 27, 2000 that provide for annual salary of $80,000
and a bonus of 50% of Ms. Spigno's annual salary, with the bonus payable in
common stock of ConectiSys. In May 2006, Ms. Spigno resigned her position as
Acting Chief Financial Officer, Treasurer and Secretary.
On September 1, 2002, we executed a promissory note due September 1,
2003 in favor of Robert Spigno in the principal amount of $87,100 representing
amounts borrowed from Mr. Spigno prior to that date. On September 1, 2003 we
executed a replacement promissory note in favor of Mr. Spigno in the amount of
$36,000. As of September 30, 2005, approximately $12,000 of principal and
accrued and unpaid interest under this note remained outstanding. During fiscal
2005, we borrowed various amounts from time to time from Mr. Spigno and as of
May 18, 2006, no principal or accrued and unpaid interest under this note
remained outstanding. Under the note, any outstanding principal and accrued and
unpaid interest is due on demand and any outstanding principal accrues interest
at an annual rate of 18%.
On October 1, 2002, we owed Patricia A. Spigno approximately $8,140
resulting from cash advances, other borrowings and related accrued interest. On
September 1, 2003 we executed a replacement promissory note in favor of Ms.
<page>47
Spigno in the amount of $50,000. We borrowed additional funds from Ms. Spigno
resulting in approximately $49,000 owed to Ms. Spigno as of September 30, 2005.
During fiscal 2005, we borrowed various amounts from time to time from Ms.
Spigno and as of May 18, 2006, no principal or accrued and unpaid interest under
this note remained outstanding. Under the note, any outstanding principal and
accrued and unpaid interest is due on demand and any outstanding principal
accrues interest at an annual rate of 18%.
On December 10, 2003, Mr. Spigno exercised a portion of an option to
purchase 15,845 shares of Class A Preferred Stock for $1.00 per share, which was
the estimated value on that date.
Effective December 31, 2003, Robert Spigno earned bonus compensation
under his employment arrangement with ConectiSys in the amount of $80,000
payable in common stock of ConectiSys based on a conversion price equal to 50%
of the average of the closing bid and asked prices of a share of our common
stock for the 30 days prior to December 31, 2003. Although our agreement with
Mr. Spigno provides that the conversion price is to be equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2003, Mr. Spigno voluntarily relinquished his
right to receive shares for 2003 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and asked
prices of a share of our common stock for the 30 days prior to December 31,
2003. The number of shares of common stock of ConectiSys issuable in connection
with this bonus is 15,094,340.
Effective December 31, 2003, Patricia Spigno earned bonus compensation
under her employment arrangement with ConectiSys in the amount of $40,000
payable in common stock of ConectiSys based on a conversion price equal to 50%
of the average of the closing bid and asked prices of a share of our common
stock for the 30 days prior to December 31, 2003. Although our agreement with
Ms. Spigno provided that the conversion price was to be equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2003, Ms. Spigno voluntarily relinquished her
right to receive shares for 2003 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and asked
prices of a share of our common stock for the 30 days prior to December 31,
2003. The number of shares of common stock of ConectiSys issuable in connection
with this bonus is 7,547,170.
On January 6, 2004, we repriced Robert Spigno's fully-vested option to
purchase up to 500,000 shares of Class B Preferred Stock from an exercise price
of $0.50 per share to an exercise price of $.05 per share. The exercise price of
$.05 per share equates to $.005 per share of common stock if the Class B
Preferred Stock were converted, which was in excess of the price of our common
stock on that date. This option was granted on September 11, 2001 and vested
immediately with an initial exercise price of $2.50 per share which equaled $.25
per share of common stock if the Class B Preferred Stock were converted, which
was the price of our common stock on that date. On June 28, 2002 this option was
repriced from an exercise price of $2.50 per share to an exercise price of $.50
per share, which was in excess of the price of our common stock on that date.
This option expires on November 1, 2009.
Effective December 31, 2004, Robert Spigno earned bonus compensation
under his employment arrangement with ConectiSys in the amount of $80,000
payable in common stock of ConectiSys based on a conversion price equal to 50%
of the average of the closing bid and asked prices of a share of our common
stock for the 30 days prior to December 31, 2004. Although our agreement with
Mr. Spigno provides that the conversion price is to be equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2004, Mr. Spigno voluntarily relinquished his
right to receive shares for 2004 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and asked
prices of a share of our common stock for the 30 days prior to December 31,
<page>48
2004. The number of shares of common stock of ConectiSys issuable in connection
with this bonus is 27,586,207.
Effective December 31, 2004, Patricia Spigno earned bonus compensation
under her employment arrangement with ConectiSys in the amount of $40,000
payable in common stock of ConectiSys based on a conversion price equal to 50%
of the average of the closing bid and asked prices of a share of our common
stock for the 30 days prior to December 31, 2004. Although our agreement with
Ms. Spigno provided that the conversion price was to be equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2004, Ms. Spigno voluntarily relinquished her
right to receive shares for 2004 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and asked
prices of a share of our common stock for the 30 days prior to December 31,
2004. The number of shares of common stock of ConectiSys issuable in
connection with this bonus is 13,793,103.
Effective December 31, 2005, Robert Spigno earned bonus compensati
on under his employment arrangement with ConectiSys in the amount of $80,000
payable in common stock of ConectiSys based on a conversion price equal to 50%
of the average of the closing bid and asked prices of a share of our common
stock for the 30 days prior to December 31, 2005. Although our agreement with
Mr. Spigno provides that the conversion price is to be equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2005, Mr. Spigno voluntarily relinquished his
right to receive shares for 2005 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and asked
prices of a share of our common stock for the 30 days prior to December 31,
2005. The number of shares of common stock of ConectiSys issuable in connection
with this bonus is 289,156,627.
In May 2006, Rodney W. Lighthipe was appointed as Treasurer and
Secretary of Conectisys at an initial monthly salary of $4,000. Prior to his
appointment and since February 2006, Mr. Lighthipe received monthly consulting
fees of $4,000 in connection with consulting services rendered to ConectiSys.
We are or have been a party to various employment, consulting and
compensation arrangements with related parties, as more particularly described
above under the headings "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements," "Compensation of Executive Officers" and
"Compensation of Directors."
PRINCIPAL AND SELLING SECURITY HOLDERS
As of November 8, 2006, a total of 14,385,996,783 shares of our common
stock were outstanding. The following table sets forth information as of that
date regarding the beneficial ownership of our common stock both before and
immediately after the offering by:
o each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our
common stock as of the date of the table;
o each selling security holder;
o each of our directors;
o each executive officer named in the Summary Compensation Table
contained elsewhere in this prospectus; and
o all of our directors and executive officers as a group.
<page>49
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Securities and Exchange Commission, and generally includes
voting or investment power with respect to securities. Except as indicated in
the footnotes to the table, we believe each holder possesses sole voting and
investment power with respect to all of the shares of common stock owned by that
holder, subject to community property laws where applicable. In computing the
number of shares beneficially owned by a holder and the percentage ownership of
that holder, shares of common stock subject to options or warrants or underlying
notes or preferred stock held by that holder that are currently exercisable or
convertible or are exercisable or convertible within 60 days after the date of
the table are deemed outstanding. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person or group.
All of the shares of common stock being offered under this prospectus
are issuable upon conversion of the principal and accrued and unpaid interest on
the notes or upon exercise of warrants that were acquired by the selling
security holders from us in connection with a private placement that we made
effective on March 8, 2006, in which we issued an aggregate of $1.27 million in
principal amount of callable secured convertible notes due March 8, 2009 to four
accredited investors in exchange for aggregate gross proceeds of $1.27 million
in cash and we also issued warrants to purchase up to an aggregate of 20,320,000
shares of our common stock. An aggregate of 4,205,516,000 shares issuable upon
conversion of the principal and accrued and unpaid interest on the callable
secured convertible notes and an aggregate of 20,320,000 shares underlying the
warrants are offered for resale under this prospectus.
The callable secured convertible notes bear interest at an initial rate
of 6% per year. The initial conversion price of the notes is equal to the lesser
of (i) 40% of the average of the three lowest intraday trading prices of a share
of our common stock for the twenty trading days immediately preceding a
conversion date, and (ii) $.03. The conversion price also is subject to
customary anti-dilution adjustments in connection with mergers, acquisitions,
stock splits, dividends and the like.
The shares of common stock being offered under this prospectus include
shares of common stock issuable upon conversion of interest on the above
convertible notes that may accrue up to two years after their initial issuance.
The warrants are exercisable at a price per share equal to $0.0009
through March 8, 2011 and also contain standard cashless exercise provisions in
the event the resale of the shares of common stock issuable upon exercise of the
warrants is not registered under an effective registration statement. The
warrants contain customary representations, warranties and covenants.
The shares of common stock being offered under this prospectus include
shares of common stock issuable upon conversion of the callable secured
convertible notes and upon exercise of the related warrants without regard to
the exercise limitations described below.
The terms of the callable secured convertible notes and the warrants
prohibit conversion of the notes or exercise of the warrants to the extent that
conversion of the notes would result in the note investor, together with its
affiliates, beneficially owning in excess of 4.9% of our outstanding shares of
common stock, and to the extent that exercise of the warrants would result in
the note investor, together with its affiliates, beneficially owning in excess
of 4.9% of our outstanding shares of common stock. A note investor may waive the
4.9% limitation upon 60 days' prior written notice to us. Also, these
limitations do not preclude a note investor from converting or exercising a
callable secured convertible note or warrant and selling shares underlying the
note or warrant in stages over time where each stage does not cause the investor
and its affiliates to beneficially own shares in excess of the limitation
amounts. Despite the limitations contained in the callable secured convertible
<page>50
notes and warrants, the number of shares shown in the table as beneficially
owned by each note investor prior to this offering is in excess of 4.9% of the
shares of our common stock outstanding based on the date of the table. The
number of shares being offered by each note investor under this prospectus is in
excess of the amount of shares issuable to that investor without such investor's
waiver of the conversion and exercise limitations discussed above.
We have agreed to pay expenses, other than broker discounts and
commissions, if any, in connection with this prospectus. We have agreed with
some of the selling security holders to prepare and file all amendments and
supplements to the registration statement of which this prospectus is a part as
may be necessary under the rules and regulations of the Securities Act of 1933
to keep it effective until the earlier of:
o the date that all shares of common stock offered under this
prospectus may be resold by those holders in a public
transaction without volume limitations or other material
restrictions without registration under the Securities Act,
including without limitation, under Rule 144 under the
Securities Act; and
o the date that all shares of common stock offered by those
holders under this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
<page>51
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders listed in the table below.
<Table>
Name and Address of Title of Shares Beneficially Owned Shares Shares Beneficially
of Beneficial Owner (1)(2) Class Prior to the Offering Being Offered Owned After the Offering(3)
Number Number % of Class
__________________________ ________ _________________________ _____________ __________________________
Robert A. Spigno........... Common 345,550,660(4) -- 345,550,660 1.82%
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 50.00%
Lawrence Muirhead......... Common 971,393 -- 971,393 *
Rodney W. Lighthipe....... Common 852,388 -- 852,393 *
Melissa McGough........... Common 354,138 -- 354,138 *
AJW Offshore, Ltd......... Common 2,577,759,960(7) 2,577,759,960(7) 958,969,302(7) 4.90%
AJW Qualified Partners, LLC. Common 1,140,975,720(7) 1,140,975,720(7) 958,969,302(7) 4.90%
AJW Partners, LLC......... Common 464,841,960(7) 464,841,960(7) 958,969,302(7) 4.90%
New Millennium Capital
Partners II, LLC....... Common 42,258,360(7) 42,258,360(7) 533,638,390(7) 2.79%
All directors and executive
officers as a group
(4 persons)............. Common 347,728,579(8) -- 347,728,579 1.83%
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 50.00%
_______________
* Less than 1.00%</table>
(1) The address of each director and executive officer named in this
table is c/o ConectiSys Corporation, 24307 Magic Mountain
Parkway, Suite 41, Valencia, California 91355. Mr. Spigno and
Mr. Muirhead are directors and executive officers of ConectiSys.
Ms. McGough is a director of ConectiSys. Mr. Lighthipe is
Treasurer and Secretary of ConectiSys.
(2) The address of each of AJW Partners, LLC, New Millennium Capital
Partners II, LLC and AJW Qualified Partners, LLC and AJW
Offshore, Ltd. is 1044 Northern Boulevard, Suite 302, Roslyn,
New York 11576. AJW Offshore, Ltd. was formerly known as AJW/New
Millennium Offshore, Ltd. and AJW Qualified Partners, LLC was
formerly known as Pegasus Capital Partners, LLC.
(3) Assumes all shares of class being offered are sold and is based
on 14,385,996,783 shares outstanding plus the 4,225,836,000
shares offered and assumed sold under this prospectus.
(4) Includes (i) 4,992,556 shares held directly, (ii) 5,000,000
shares issuable upon conversion of Class B Preferred Stock, and
(iii) 335,558,104 shares issuable in connection with payment of
annual bonuses for calendar years 2002 through 2005. Mr. Spigno
holds an option to purchase up to 500,000 shares of Class B
Preferred Stock.
(5) Includes (i) 215,865 shares held directly, and (ii) 234,155
shares underlying an option to purchase Class A Preferred Stock.
(6) Represents an option to purchase up to 500,000 shares of Class B
Preferred Stock.
(7) The number of shares set forth in the table for the selling
security holders represents an estimate of the number of shares
of common stock to be offered by the selling security holders.
The actual number of shares of common stock issuable upon
conversion of the debentures and notes and exercise of the
related warrants is indeterminate, is subject to adjustment and
could be materially less or more than such estimated number
depending on factors which cannot be predicted by us at this
time including, among other factors, the future market price of
the common stock. The actual number of shares of common stock
<page>51
conversion of the debentures and notes and exercise of the
related warrants is indeterminate, is subject to adjustment and
could be materially less or more than such estimated number
depending on factors which cannot be predicted by us at this
time including, among other factors, the future market price of
the common stock. The actual number of shares of common stock
offered in this prospectus, and included in the registration
statement of which this prospectus is a part, includes such
additional number of shares of common stock as may be issued or
issuable upon conversion of the debentures and notes and
exercise of the related warrants by reason of any stock split,
stock dividend or similar transaction involving the common
stock, in accordance with Rule 416 under the Securities Act of
1933. Under the terms of the notes, if the notes had actually
been converted on November 8, 2006, the conversion price would
have been approximately $.00012. The exercise price of the
warrants is $.0009.
(8) Includes (i) 7,170,475 shares held directly, (ii) 5,000,000
shares issuable upon conversion of Class B Preferred Stock, and
(iii) 335,558,104 shares issuable in connection with payment of
annual bonuses to Mr. Spigno for calendar years 2002 through
2005. Mr. Spigno holds an option to purchase up to 500,000
shares of Class B Preferred Stock.
<page>53
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of our common stock being offered under this prospectus on
any stock exchange, market or trading facility on which the shares are traded,
or in private transactions. These sales, which may include block transactions,
may be at fixed or negotiated prices. The selling security holders may use any
one or more of the following methods when disposing of shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of stock
that the seller does not own, or certificates for which are not
within his control, so as to be available for delivery at the
time when, under applicable rules, delivery must be made;
o transactions to cover short sales;
o distribution of the shares by any selling security holder to its
partners, members or stockholders;
o broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share;
o one or more underwritten public offerings on a firm commitment
or best efforts basis;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to
time.
The shares may also be sold under Rule 144 or Regulation S under the
Securities Act, if available, rather than under this prospectus. The selling
security holders have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling security holders may also engage in short sales against the
box, which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in securities of
ConectiSys or derivatives of ConectiSys securities and may sell or deliver
shares in connection with these trades. The selling security holders may pledge
their shares to their brokers under the margin provisions of customer
agreements. If a selling security holder defaults on a margin loan, the broker
may, from time to time, offer and sell the pledged shares.
<page>54
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any broker-
dealer acts as agent for the purchaser of shares, from the purchaser) in amounts
to be negotiated, which commissions as to a particular broker or dealer may be
in excess of customary commissions to the extent permitted by applicable law.
If sales of shares offered under this prospectus are made to broker-
dealers as principals, we would be required to file a post-effective amendment
to the registration statement of which this prospectus is a part. In the post-
effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to such
sales.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker- dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a post-
effective amendment to the registration statement of which this prospectus is a
part.
The selling security holders may sell all or any part of the shares
offered under this prospectus through an underwriter. To our knowledge, no
selling security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If a selling security holder informs us that it has entered into
such an agreement or agreements, any material details will be set forth in a
supplement to this prospectus or, if required, in a replacement prospectus
included in a post-effective amendment to the registration statement of which
this prospectus is a part.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act, and the rules and regulations
under that act, including Regulation M. These provisions may restrict activities
of, and limit the timing of purchases and sales of any of the shares by, the
selling security holders or any other person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of the secured
convertible debentures, notes or the warrants held by the selling security
holders or the issuance of shares of common stock to the holders of the secured
convertible debentures, notes or the warrants upon conversion or exercise. If a
selling security holder transfers its secured convertible debentures, notes or
warrants prior to conversion or exercise, the transferee of the secured
convertible debentures, notes or warrants may not sell the shares of common
stock issuable upon conversion of the secured convertible debentures or notes or
upon exercise of the warrants under this prospectus unless we amend or
supplement this prospectus to cover such sales.
In addition, if any of the shares of common stock offered for sale
pursuant to this prospectus are transferred other than pursuant to a sale under
this prospectus, then subsequent holders could not use this prospectus until a
post-effective amendment or prospectus supplement is filed, naming such holders.
We offer no assurance as to whether any of the selling security holders will
<Page>55
sell all or any portion of the shares offered under this prospectus.
For the period a selling security holder holds the secured convertible
debentures, notes or the warrants, the selling security holder has the
opportunity to profit from a rise in the market price of our common stock
without assuming the risk of ownership of the shares of common stock issuable
upon conversion of the secured convertible debentures or notes or upon exercise
of the warrants. The terms on which we could obtain additional capital during
the period in which the secured convertible debentures, notes or the warrants
remain outstanding may be adversely affected. The holders of the secured
convertible debentures, notes and the warrants are most likely to voluntarily
convert their secured convertible debentures and notes or exercise their
warrants when the conversion or exercise price is less than the market price of
our common stock. However, we offer no assurances as to whether any of those
derivative securities will be converted or exercised.
We have agreed to pay all fees and expenses incident to the registration
of the shares being offered under this prospectus. However, each selling
security holder and purchaser is responsible for paying any discounts,
concessions and similar selling expenses they incur.
We and certain of the selling security holders have agreed to indemnify
one another against certain losses, claims, damages and liabilities arising in
connection with this prospectus, including liabilities under the Securities Act.
<page>56
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50 billion shares of common
stock, no par value per share, and 50 million shares of preferred stock, $1.00
par value per share. Of the 50 million authorized shares of preferred stock, one
million shares have been designated as Class A Preferred Stock, or Class A
Preferred, one million shares have been designated as Class B Preferred Stock,
or Class B Preferred, and the remaining 48 million shares are undesignated. As
of November 8, 2006, there were 14,385,996,783 shares of common stock
outstanding held by approximately 775 shareholders of record, 215,865 shares of
Class A Preferred outstanding held by one holder of record and no shares of
Class B Preferred outstanding.
The following is a summary description of our capital stock.
Common Stock
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available at times and in amounts as the
board of directors may from time to time determine, subordinate to any
preferences that may be granted to the holders of preferred stock. Holders of
common stock are entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be
redeemed or converted. Upon our liquidation, dissolution or winding up, the
assets legally available for distribution to our shareholders are divided among
the holders of the common stock in proportion to the number of shares of common
stock held by each of them, after payment of all of our debts and liabilities
and fulfillment of the rights of any outstanding class or series of preferred
stock that has priority to distributed assets. The rights of holders of common
stock are subordinate to those of holders of any series of preferred stock.
Preferred Stock
Preferred stock may be issued from time to time in one or more series,
and our board of directors, without action by the holders of common stock, may
fix or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without shareholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. The
issuance of shares of preferred stock could adversely affect the voting power of
the holders of common stock and could have the effect of making it more
difficult for a third party to acquire, or could discourage or delay a third
party from acquiring, a majority of our outstanding common stock.
Class A Preferred
Each share of Class A Preferred is entitled to 100 votes per share on
all matters presented to our shareholders for action. The Class A Preferred does
not have any liquidation preference, additional voting rights, conversion
rights, anti-dilution rights or any other preferential rights.
<page>57
Class B Preferred
Each share of Class B Preferred is convertible into 10 shares of our
common stock. The Class B Preferred does not have any liquidation preference,
voting rights, other conversion rights, anti-dilution rights or any other
preferential rights.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Signature Stock
Transfer, Inc. Its telephone number is (972) 788-4193.
LEGAL MATTERS
The validity of the shares of common stock offered under this prospectus
will be passed upon by Rutan & Tucker, LLP, Costa Mesa, California.
EXPERTS
The consolidated financial statements of ConectiSys as of and for the
years ended September 30, 2005 and 2004 included in this prospectus and in the
registration statement of which this prospectus is a part have been audited by
Hurley & Company, independent certified public accountants, to the extent and
for the periods set forth in their report, appearing elsewhere in this
prospectus and are incorporated in this prospectus in reliance upon the report
given upon the authority of Hurley & Company as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB 2 under the Securities Act, and the rules and regulations
promulgated under the Securities Act, with respect to the common stock offered
under this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information contained in the
registration statement and the exhibits and schedules to the registration
statement. While material elements of the contracts and documents referenced in
this prospectus are contained in this prospectus, statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the full
text of the contract or other document which is filed as an exhibit to the
registration statement.
For further information with respect to us and the common stock offered
under this prospectus, reference is made to the registration statement and its
exhibits and schedules. The registration statement, including its exhibits and
schedules, may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such documents may be obtained from the
Securities and Exchange Commission upon the payment of the charges prescribed by
the Securities and Exchange Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's web site address is
http://www.sec.gov. Our web site address is http://www.conectisys.com.
<page>58
All trademarks or trade names referred to in this prospectus are the
property of their respective owners.
<page>59
CONECTISYS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Condensed Consolidated Financial Statements As Of And For The
- -------------------------------------------------------------
Three and Nine Months Ended June 30, 2006 and 2005
--------------------------------------------------
Condensed Consolidated Balance Sheets as of June 30, 2006(unaudited)F-1
Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2006 and 2005 and the
Cumulative Period From December 31, 1990 (Inception)
Through June 30, 2006 (unaudited)..............................F-3
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through June 30, 2006 (unaudited)F-4
Consolidated Statement of Cash Flows for the Nine
Months Ended June 30, 2006 and 2005 and the Cumulative
Period From December 31, 1990 (Inception) Through
June 30, 2006 (unaudited)......................................F-14
Notes to Condensed Consolidated Financial Statements (unaudited)....F-17
Consolidated Financial Statements As Of And For The Years Ended
- ---------------------------------------------------------------
September 30, 2005 and 2004
--------------------------
Report of Independent Registered Public Accounting Firm.............F-54
Consolidated Balance Sheet for the Year Ended September 30, 2005....F-56
Consolidated Statements of Operations for the Years
Ended September 30, 2005 and 2004..............................F-58
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
for the Years Ended September 30, 2005 and 2004................F-59
Consolidated Statements of Cash Flows for the Years Ended September
30, 2005 and 2004..............................................F-68
Notes to Consolidated Financial Statements for the Years Ended
September 30, 2005 and 2004....................................F-71
<page>59
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2006
June 30,
2006
Unaudited
Assets
Current assets
Cash and cash equivalents $ 147,803
Prepaid expenses 85,536
-----------------
Total current assets 233,339
Property and equipment, net of accumulated
depreciation of $349,975 82,281
Other assets
License and technology, net of accumulated
amortization of $421,478 0
Loan fees, net of accumulated
amortization of $514,804 24,751
-----------------
Total assets $ 340,371
=================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-1
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2006
June 30,
2006
Unaudited
Liabilities and shareholders' equity (deficit)
Current liabilities
Accounts payable $ 160,659
Accrued compensation 1,841,372
Due to officers 440
Accrued interest payable 298,031
Other current liabilities 32,584
Notes payable and current portion of
long-term debt 2,021,339
-----------------
Total current liabilities 4,354,425
Long-term debt, net of current portion 1,053,659
-----------------
Total liabilities 5,408,084
Shareholders' equity (deficit)
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized, 215,865 shares
issued and outstanding 215,865
Convertible preferred stock - Class B, $1.00
par value; 1,000,000 shares authorized,
-0- shares issued and outstanding 0
Common stock - 50,000,000,000 shares authorized,
no par value; 13,909,025,887 shares issued
and outstanding 28,079,735
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 23,020,000
options and warrants exercisable 1,369,815
Accumulated deficit during development stage (34,833,128)
-----------------
Total shareholders' equity (deficit) (5,067,713)
-----------------
Total liabilities and shareholders' equity (deficit) $ 340,371
=================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-2
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2006
<table> Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended Through
June 30, June 30, June 30, June 30, June 30,
2006 2005 2006 2005 2006
Unaudited Unaudited Unaudited Unaudited Unaudited
C>
Revenues $ 0 $ 0 $ 0 $ 0 $ 517,460
Cost of prototypes and samples 67,903 32,121 188,563 135,795 1,319,932
----------------- ----------------- ----------------- ----------------- ----------
Gross loss (67,903) (32,121) (188,563) (135,795) (802,472)
General and administrative expenses 249,349 397,652 974,460 1,497,589 22,652,608
Bad debt 0 0 0 0 1,680,522
Write-off of intangible assets 0 0 0 0 1,299,861
----------------- ----------------- ----------------- ----------------- ----------
Loss from operations (317,252) (429,773) (1,163,023) (1,633,384)(26,435,463)
Other income (expenses)
Forgiveness of debt 0 0 0 0 504,462
Settlement 0 0 0 0 (125,000)
Other income 0 0 0 0 12,072
Interest income 642 0 642 0 103,566
Interest expense (387,305) (549,666) (1,004,199) (1,279,882) (7,877,523)
Minority interest 0 0 0 0 62,500
------------------ ----------------- ----------------- ----------------- -----------
Net loss $ (703,915) $ (979,439) (2,166,580)$ (2,913,266)$(33,755,386)
================= ================= ================= ================ ============
Weighted average shares
outstanding 13,711,421,521 4,606,915,696 10,675,043,498 2,743,784,176
Net loss per share-basic and diluted (0.00) (0.00) (0.00) (0.00)
</table>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-3
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-10
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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-11
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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 retainer
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-12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2006
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, April through June 2006
with a price ranging from
$0.00025 to $0.0005 per
share 200,000,000 75,000 75,000
Services, March 2006 valued
at approximately $0.0007 per share 4,368,872 3,100 3,100
Issuance of 10,720,000 warrants
June 2006 at an exercise
price of $0.0009 per share, in
conjunction with $670,000
principal value of 6%
convertible debt 0 0 0 0 3,101 0 0 3,101
Conversion of $529,714 principal
value of convertible debt,
$794,572 of derivative
conversion option
along with $8,261 accrued
interest, net of $0
convertible debt discount 0 0 6,315,792,017 1,332,547 0 0 1,332,547
Net loss for the period 0 0 0 0 0 0 (2,166,580) (2,166,580)
---------- ---------- ------------- ------------ ----------- ------- ----------- ------------
Balance, June 30, 2006 215,865 $ 215,865 13,009,025,887$28,079,735 $1,469,815 $ 0 $(34,833,128) $(5,067,713)
========== ========= ============== =========== =========== ====== ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2006
<table>
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
June 30, June 30, June 30,
2006 2005 2006
Unaudited Unaudited Unaudited
Operating activities
Net (loss) $ (2,166,580)$ (2,913,266)$ (33,755,386)
Adjustments to reconcile net (loss)
to net cash provided by (used in)
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 10,645 19,459 1,739,575
Stock issued for services 3,100 408,862 7,648,473
Stock issued for interest 0 41,764 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of loan fees
and note discounts 612,670 768,682 3,254,594
Mark-to-market of derivative
conversion option 338,101 405,670 3,020,232
Forgiveness of debt 0 0 (504,462)
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses 68,648 112,808 179,212
Interest receivable 0 0 (95,700)
Increase (decrease) in liabilities
Accounts payable (155,558) 1,423 1,228,785
Accrued compensation 158,181 224,701 3,013,380
Due to officers 55 (26,280) 631,201
Accrued interest and other current
liabilities 87,949 (22,743) 949,714
----------------- ----------------- -----------------
Total adjustments 1,123,791 1,934,346 24,231,156
----------------- ----------------- -----------------
Net cash used in
operating activities (1,042,789) (978,920) (9,524,230)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2006
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
June 30, June 30, June 30,
2006 2005 2006
Unaudited Unaudited Unaudited
Investing activities
Increase in notes receivable $ 0 $ 0 $ (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment (53,669) 0 (299,074)
----------------- ----------------- -----------------
Net cash used in
investing activities (53,669) 0 (1,715,631)
Financing activities
Common stock issued for cash 75,000 5,000 3,567,172
Stock warrants 3,101 454 203,435
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees (20,000) (26,000) (579,555)
Proceeds from debts
Related party 0 0 206,544
Other 667,395 809,977 8,314,216
Payments on debt
Related party 0 0 (53,172)
Other 0 (28,271) (604,536)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
----------------- ----------------- -----------------
Net cash provided by
financing activities 725,496 761,160 11,387,664
----------------- ----------------- -----------------
Net increase (decrease) in cash and
cash equivalents (370,962) (217,760) 147,803
Cash and cash equivalents at
beginning of period 518,765 550,044 0
----------------- ----------------- -----------------
Cash and cash equivalents at end
of period $ 147,803 $ 332,284 $ 147,803
================= ================= =================
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 Nine Months Ended June 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2006
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
June 30, June 30, June 30,
2006 2005 2006
Unaudited Unaudited Unaudited
Cash paid during the period for
Interest 0 14,653 699,490
Income Taxes 0 0 14,450
Non-cash investing and financing activities
Common stock issued for
Note receivable 0 0 281,250
Prepaid expenses 0 0 264,748
Property and equipment 0 0 130,931
Licenses & technology 0 0 2,191,478
Acquisition of remaining
minority interest in subsidiary 0 0 59,247
Repayment of debt 1,324,286 4,718,160 13,212,493
Accrued services & interest 8,261 450,626 5,215,463
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-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 nine months ended June 30, 2006 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 June 30, 2006, the Company had 13,909,025,887 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 23,020,000
--------------
Subtotal 33,020,000
Accrued officer compensation ($440,000),
convertible into common stock 358,758,842
Convertible note holder principal value
($1,755,998), accrued interest ($298,031)
assumed converted into common stock at
$0.0002 per share 10,270,145,000
--------------
Total potential common stock equivalents 10,661,923,842
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 2. GOING CONCERN UNCERTAINTY
As of June 30, 2006, the Company had a deficiency in working capital of
approximately $4,000,000 and had incurred continual net losses since its return
to the development stage in fiscal 1996, of approximately $34,000,000, 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. During the nine months ended June 30,
2006, the same group of investors committed to advance the Company an additional
$1,270,000. The Company received $370,000 in March 2006, $100,000 in April
2006, $100,000 in May 2006 and $100,000 in June 2006 including certain fees
associated with the financing agreement. 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.
NOTE 3. PREPAID EXPENSES AND DEPOSITS
The Company has accrued a prepaid expense of $80,000 as a staying bonus for
its Chief Executive Officer as per his employment contract (see NOTE 13).
The staying bonus is being amortized over the calendar year 2006. For the
calendar year ended December 31, 2006, $40,000 of this expense was amortized
as officer salaries with a balance of $40,000 at June 30, 2006.
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 3. PREPAID EXPENSES AND DEPOSITS (continued)
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 June 30, 2006 tentatively were $10,174,
$22,700 and $33,137 for a total prepaid interest of $66,011. As of
June 30, 2006, 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 law firm for
$23,536 and another deposit of $2,000.
As of June 30, 2006, the balance in prepaid expenses was $85,536.
NOTE 4. LOAN FEES
In February 2002, the Company received $340,000 in short-term financing from
an investment group through the issuance of a promissory note maturing on May
15, 2002 and accruing interest at an annual rate of 18%. Included in the loan
was $40,000 in fees, consisting specifically of a $30,000 finder's fee and a
$10,000 legal fee. These loan fees were fully amortized at September 30,
2002, with the balances written-off at March 31, 2006 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-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 nine months ended March 31, 2006,
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 $14,000.
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.
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.
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. The Company also paid $36,665 in prepaid interest.
In March, April, May and June 2006, the Company received another $670,000 from
the above accredited investor group in exchange for 6% convertible debentures,
convertible at the lesser of $0.03 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 10,720,000 common stock warrants, exercisable over a five-year
period at $0.0009 per share. Loan fees associated with these loans amounted to
$20,000.
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 $45,202. The
Company incurred $20,000 in loan fees during the nine months ended June 30,
2006. During the nine months ended June 30, 2006, total amortization of the
loan fees amounted to $40,451, leaving an unamortized balance of $24,751 at June
30, 2006.
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 June 30,
2006.
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 the nine months ended June
30, 2006 amounted to $55, bringing the loan balance at June 30, 2006 to $440.
The loan balance at June 30, 2006 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 has been retained as a consultant effective May 1,
2006 through October 31, 2006 unless extended by agreement.
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 June 30, 2006 of $0.
The aggregate amount due officers at June 30, 2006 was $440 and interest expense
on the officer loans amounted to $55 for the nine months ended June 30, 2006.
As of June 30, 2006, the Company owed its officers $1,841,372 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 June 30, 2006. 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 shares at
June 30, 2006, including 289,156,627 shares attributable to the staying bonus
earned as of December 31, 2005.
As of May 1, 2006, the Company approved and appointed Rodney H. Lighthipe as
Secretary and Treasurer and Robert A. Spigno as Chief Financial Officer thereby,
replacing Patricia A. Spigno who retired from these positions.
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE
Notes payable at June 30, 2006 consisted of the following:
Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 35,375,000
shares of common stock at the price
of $0.0002 at June 30, 2006 7,075 $ 7,075
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 35,375,000
shares of common stock at the price
of $0.0002 at June 30, 2006 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 40,680,000
shares of common stock at the price
of $0.0002 at June 30, 2006 8,136 $ 8,136
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $4,975 and principal
on Convertible Debenture convertible
into approximately 24,875,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,975 $ 4,975
-------
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 48,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 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 48,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 9,600 $ 9,600
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $10,800 and principal
on Convertible Debenture convertible
into approximately 54,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 10,800 $ 10,800
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $6,000 and principal
on Convertible Debenture convertible
into approximately 30,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 6,000 $ 6,000
-------
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #3
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 96,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 19,200 $ 19,200
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 96,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 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 108,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 21,600 $ 21,600
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 12,000 $ 12,000
--------
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 46,200,000
shares of common stock at the price
of $0.0002 at June 30, 2006 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 46,200,000
shares of common stock at the price
of $0.0002 at June 30, 2006 9,240 $ 9,240
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 46,200,000
shares of common stock at the price
of $0.0002 at June 30, 2006 9,240 $ 9,240
-------
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #6
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 12,000 $ 12,000
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 12,000 $ 12,000
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 60,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 12,000 $ 12,000
--------
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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% $ 0
Accrued interest of $8,000 and principal
on Convertible Debenture convertible
into approximately 40,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 8,000 $ 8,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $8,000 and principal
on Convertible Debenture convertible
into approximately 40,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 8,000 $ 8,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $8,000 and principal
on Convertible Debenture convertible
into approximately 40,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 8,000 $ 8,000
--------
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 20,000,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,000 $ 4,000
--------
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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% $ 0
Accrued interest of $16,059 and principal
on Convertible Debenture convertible
into approximately 80,295,000
shares of common stock at the price
of $0.0002 at June 30, 2006 16,059 $ 16,059
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $16,059 and principal
on Convertible Debenture convertible
into approximately 80,295,000
shares of common stock at the price
of $0.0002 at June 30, 2006 16,059 $ 16,059
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $16,060 and principal
on Convertible Debenture convertible
into approximately 80,300,000
shares of common stock at the price
of $0.0002 at June 30, 2006 16,060 $ 16,060
--------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 $ 19,755
Accrued interest of $2,054 and principal
on Convertible Debenture convertible
into approximately 109,045,000
shares of common stock at the price
of $0.0002 at June 30, 2006 2,054 $ 21,809
--------
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 $ 55,561
Accrued interest of $5,778 and principal
on Convertible Debenture convertible
into approximately 306,695,000
shares of common stock at the price
of $0.0002 at June 30, 2006 5,778 $ 61,339
--------
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 $ 45,684
Accrued interest of $4,751 and principal
on Convertible Debenture convertible
into approximately 252,175,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,751 $ 50,435
--------
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 $2,469
Accrued interest of $257 and principal
on Convertible Debenture convertible
into approximately 13,630,000
shares of common stock at the price
of $0.0002 at June 30, 2006 257 $ 2,726
--------
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 $1,666 and principal
on Convertible Debenture convertible
into approximately 95,315,000
shares of common stock at the price
of $0.0002 at June 30, 2006 1,666 $ 19,063
--------
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 $4,687 and principal
on Convertible Debenture convertible
into approximately 268,085,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,687 $ 53,617
--------
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 $3,853 and principal
on Convertible Debenture convertible
into approximately 220,420,000
shares of common stock at the price
of $0.0002 at June 30, 2006 3,853 $ 44,084
--------
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 $208 and principal
on Convertible Debenture convertible
into approximately 11,915,000
shares of common stock at the price
of $0.0002 at June 30, 2006 208 $ 2,383
--------
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 $3,743 and principal
on Convertible Debenture convertible
into approximately 230,095,000
shares of common stock at the price
of $0.0002 at June 30, 2006 3,743 $ 46,019
--------
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 $10,529 and principal
on Convertible Debenture convertible
into approximately 647,155,000
shares of common stock at the price
of $0.0002 at June 30, 2006 10,529 $ 129,431
--------
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 $8,657 and principal
on Convertible Debenture convertible
into approximately 532,105,000
shares of common stock at the price
of $0.0002 at June 30, 2006 8,657 $ 106,421
--------
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 $468 and principal
on Convertible Debenture convertible
into approximately 28,765,000
shares of common stock at the price
of $0.0002 at June 30, 2006 468 $ 5,753
--------
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 $5,665 and principal
on Convertible Debenture convertible
into approximately 499,980,000
shares of common stock at the price
of $0.0002 at June 30, 2006 5,665 $ 99,996
--------
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 $15,933 and principal
on Convertible Debenture convertible
into approximately 1,406,195,000
shares of common stock at the price
of $0.0002 at June 30, 2006 15,933 $ 281,239
--------
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 $13,100 and principal
on Convertible Debenture convertible
into approximately 1,156,205,000
shares of common stock at the price
of $0.0002 at June 30, 2006 13,100 $ 231,241
--------
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 $708 and principal
on Convertible Debenture convertible
into approximately 62,495,000
shares of common stock at the price
of $0.0002 at June 30, 2006 708 $ 12,499
--------
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #17
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $ 40,700
Accrued interest of $769 and principal
on Convertible Debenture convertible
into approximately 207,345,000
shares of common stock at the price
of $0.0002 at June 30, 2006 769 $ 41,469
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $225,700
Accrued interest of $4,267 and principal
on Convertible Debenture convertible
into approximately 1,149,835,000
shares of common stock at the price
of $0.0002 at June 30, 2006 4,267 $ 229,967
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $99,900
Accrued interest of $1,889 and principal
on Convertible Debenture convertible
into approximately 508,945,000
shares of common stock at the price
of $0.0002 at June 30, 2006 1,889 $ 101,789
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $ 3,700
Accrued interest of $70 and principal
on Convertible Debenture convertible
into approximately 18,850,000
shares of common stock at the price
of $0.0002 at June 30, 2006 70 $ 3,770
--------
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #18
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $ 11,000
Accrued interest of $208 and principal
on Convertible Debenture convertible
into approximately 56,040,000
shares of common stock at the price
of $0.0002 at June 30, 2006 208 $ 11,208
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $ 61,000
Accrued interest of $1,153 and principal
on Convertible Debenture convertible
into approximately 310,765,000
shares of common stock at the price
of $0.0002 at June 30, 2006 1,153 $ 62,153
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $ 27,000
Accrued interest of $510 and principal
on Convertible Debenture convertible
into approximately 137,550,000
shares of common stock at the price
of $0.00029 at June 30, 2006 510 $ 27,510
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $ 1,000
Accrued interest of $19 and principal
on Convertible Debenture convertible
into approximately 5,095,000
shares of common stock at the price
of $0.0002 at June 30, 2006 19 $ 1,019
--------
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #19
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $ 11,000
Accrued interest of $208 and principal
on Convertible Debenture convertible
into approximately 56,040,000
shares of common stock at the price
of $0.0002 at June 30, 2006 208 $ 11,208
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $ 61,000
Accrued interest of $1,153 and principal
on Convertible Debenture convertible
into approximately 310,765,000
shares of common stock at the price
of $0.0002 at June 30, 2006 1,153 $ 62,153
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $ 27,000
Accrued interest of $510 and principal
on Convertible Debenture convertible
into approximately 137,550,000
shares of common stock at the price
of $0.00029 at June 30, 2006 510 $ 27,510
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $ 1,000
Accrued interest of $19 and principal
on Convertible Debenture convertible
into approximately 5,095,000
shares of common stock at the price
of $0.0002 at June 30, 2006 19 $ 1,019
--------
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE (continued)
Convertible Debenture #20
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $ 11,000
Accrued interest of $209 and principal9
on Convertible Debenture convertible
into approximately 56,045,000
shares of common stock at the price
of $0.0002 at June 30, 2006 209 $ 11,209
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $ 61,000
Accrued interest of $1,153 and principal
on Convertible Debenture convertible
into approximately 310,765,000
shares of common stock at the price
of $0.0002 at June 30, 2006 1,153 $ 62,153
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% with one year
interest prepaid $ 27,000
Accrued interest of $511 and principal
on Convertible Debenture convertible
into approximately 137,555,000
shares of common stock at the price
of $0.00029 at June 30, 2006 511 $ 27,511
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% with one year
interest prepaid $ 1,000
Accrued interest of $19 and principal
on Convertible Debenture convertible
into approximately 5,095,000
shares of common stock at the price
of $0.0002 at June 30, 2006 19 $ 1,019
--------
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 6. NOTES PAYABLE (continued)
Subtotal of all Convertible Debentures 2,157,881
Less reclassified accrued interest $ (298,031)
Less prepaid interest offset (103,852)
------------
Subtotal principal value 1,755,998
Derivative conversion option - 150% of principal 2,633,996
Less unamortized note discount (1,323,540)
-----------
Net carrying value of
Convertible Debentures $ 3,066,454
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. 8,544
-----------
Total notes payable $ 3,074,998
Current portion 2,021,339
-----------
Long-term portion $ 1,053,659
===========
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-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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 nine months ended June 30, 2006, an additional $496 was accrued
bringing the balance at June 30, 2006 to $8,544. 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.
As of June 30, 2006, 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 June 30, 2006 $ 8,544 $ 0 $ 0 $ 0 $ 8,544
Year ended June 30, 2007 1,085,998 1,628,996 (702,199) 0 2,012,795
Year ended June 30, 2008 0 0 0 0 0
Year ended June 30, 2009 670,000 1,005,000 (621,341) 0 1,053,659
Subsequent conversions to equity 0 0 0 0 0
---------- ---------- ---------- -------- ----------
Total notes payable $ 1,764,542 $ 2,633,996 (1,323,540) $ 0 $ 3,074,998
========== ========== ========== ======== ==========
</table>
<page>F-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
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.
On March 8, 2006, the Company issued an aggregate of $370,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.03
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 5,920,000 shares of common stock at a per share exercise price
equal to $.0009.
On April 5, 2006, the Company issued an aggregate of $100,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.03
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 1,600,000 shares of common stock at a per share exercise price
equal to $.0009.
On April 7, 2006, the Company issued an aggregate of $100,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.03
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 1,600,000 shares of common stock at a per share exercise price
equal to $.0009.
On June 21, 2006, the Company issued an aggregate of $100,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.03
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 1,600,000 shares of common stock at a per share exercise price
equal to $.0009.
<page>F-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
The Company's convertible debentures and related warrants contain anti-
dilution provisions whereby, if the Company issues common stock or securities
convertible into or exercisable for common stock at a price less than the
conversion or exercise prices of the debentures or warrants, the conversion and
exercise prices of the debentures and/or warrants shall be adjusted as
stipulated in the agreements governing such debentures and warrants.
As part of the recording of the convertible debt transactions, a beneficial
conversion option was recognized, along with a corresponding convertible debt
discount. The fair value of the debt instruments issued totaling $1,750,000 in
principal value was $3,500,000 in aggregate, representing a 100% premium on the
principal value (due to the 100% pricing advantage) and making the beneficial
conversion option $1,637,735 at the inception of the loans ($1,750,000 proceeds
less $112,265 allocated to the issuance of the 8,750,000 related warrants). In
October 2003, the conversion option was increased to 150% from 100% which
resulted in an increase of $563,257 in the conversion interest and a
corresponding expense in the current period. Due to the nature of the debt
instrument and its repayment terms, the beneficial conversion option has been
re-characterized as derivative conversion option and reclassified as additional
debt. In connection with the issuance of an additional $2,000,000 of
convertible debt during the year ended September 30, 2004, the derivative
conversion option was increased by $3,000,000. During the year ended September
30, 2005, the derivative conversion option was increased by $2,100,000 in
connection with the issuance of an additional $1,400,000 of debt. During the
nine months ended June 30, 2006, the derivative conversion option was increased
by $555,000 in connection with the issuance of an additional $370,000 of debt.
During the fiscal year ended September 30, 2002, the Company issued 12,667,178
shares of common stock in connection with interest payments and upon
conversion of an aggregate $93,130 of principal and $6,916 of related interest
on the Company's convertible debentures. A corresponding pro-rata reduction of
$80,702 to the beneficial conversion option was made. During the fiscal year
ended September 30, 2003, the Company issued another 103,778,301 shares of
common stock in connection with the conversion of another $193,665 of principal
and $34,355 of accrued interest on the Company's convertible debentures,
resulting in a convertible debt principal balance at September 30, 2003 of
$963,205 (net of an aggregate of $286,795 in debt conversions through that
date). A corresponding pro-rata reduction of $177,845 was made to the
beneficial conversion option during the fiscal year ended September 30, 2003
(an aggregate of $258,547 since the inception of the loans), bringing the
beneficial conversion option balance at September 30, 2003 to $881,550. In
October 2003, the conversion option was increased to 150% from 100% resulting
in an increase of $563,257 and a re-characterization of the conversion option
as additional debt.
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
<page>F-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 7. SECURED CONVERTIBLE DEBENTURES (continued)
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 nine months ended June 30, 2006, the Company issued an additional
$670,000 of 6% convertible debentures. Also, the Company issued 6,315,792,017
shares common stock in connection with the conversion of $529,714 of principal
and $8,261 of accrued interest on the Company's convertible debentures,
resulting in a convertible debt principal balance at June 30, 2006 of $1,755,998
(net of an aggregate of $3,564,002 in debt conversions through that date). A
corresponding pro-rata reduction of $794,572 was made to the derivative
conversion option during the nine months ended June 30, 2006 (an aggregate of
$5,553,898 since the inception of the loans), bringing the derivative conversion
option balance at June 30, 2006 to $2,633,996.
The aggregate note discount of $5,320,000 is being amortized over the one-year,
two-year and three-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 $572,219 was amortized during the
nine months ended June 30, 2006, 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 $1,323,540 at June 30, 2006.
As of June 30, 2006, the Company was indebted for an aggregate of
$2,054,029 including $1,755,998 of principal and $298,031 of accrued interest,
net of prepaid interest of $103,852, 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 50,000,000,000 shares of
common stock, no par value per share and 50,000,000 shares of preferred stock,
$1.00 par value per share. On June 28, 2006, the Board of Directors and
stockholders approved an increase in the amount of common shares from
15,000,000,000 to 50,000,000,000. 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 June 30, 2006,
there were 13,909,025,887 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.
<page>F-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 8. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
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.
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 a total conversion amount of $5,454,290 of the Company's
convertible debentures.
During October 2005 through June 30, 2006, the Company issued 6,315,792,017
shares of common stock in connection with the conversion of $529,714 of
principal, $794,572 of derivative conversion option and $8.261 of accrued
interest, for a total conversion amount of $1,332,547 of the Company's
convertible debentures.
During April 2006 through June 2006, the Company issued 200,000,000 common
shares for cash of $75,000.
During April 2006 through June 2006, the Company issued 4,368,872 common shares
for consulting services rendered having a value of $3,100.
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 was
extended to November 1, 2009.
The Company's CEO 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 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-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). On
January 1, 2006. Accordingly, compensation costs for all share-based awards to
Employees are measured based on the grant date fair value of those awards and
Recognized over the period during which the employee is required to perform
Service in exchange for the award (generally over the vesting period of the
award). The Company has no awards with market or performance conditions. Excess
tax benefits are defined by SFAS 123R (when applicable) will be recognized as an
addition to additional paid-in capital. Effective January 1, 2006 and for all
periods subsequent to that date, SFAS 123R supersedes the Company's previous
accounting under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions in SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the modified prospective transition method, the Company's
consolidated financial statements for prior periods were not restated to
reflect, and do not include, the effect of SFAS 123R.
No options were granted or vested during the interim periods presented, and all
Options previously granted had completely vested before January 1, 2005.
Therefore no compensation costs were incurred under SFAS 123R and the actual net
loss equals the pro forma net loss for such interim periods.
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 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,
<page>F-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2006
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
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.
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.
In March 2006 through June 2006, 10,720,000 five-year common stock warrants were
issued to an accredited investor group in connection with a $670,000 6%
convertible debenture financing arrangement (see Note 7 above). The allocated
cost of these warrants amounted to $3,101, resulting in a recorded balance of
stock options and warrants exercisable at June 30, 2006 of $1,469,815 (including
$100,000 attributable to 1,000,000 Class B preferred stock options noted above).
During the nine months ended June 30, 2006, the 500,000 common stock options
issued to the Acting Secretary/Treasurer and 1,443,654 common stock options
issued to the Chief Executive Officer expired.
No common stock options or warrants were granted to employees (including
officers) and directors of the Company during the nine months ended June 30,
2006, and the years ended September 30, 2005 and 2004.
<page>F-52
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2006
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the fiscal year ended September 30,
2005 and the nine months ended June 30, 2006 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- ---------
Balance outstanding, October 1, 2004 17,743,654 $.0680
Granted 2,800,000 .0040
Expired (6,300,000) .0480
---------- ------
Balance outstanding, September 30, 2005 14,243,654 .0560
Granted 10,720,000 .0009
Expired (1,943,654) .3800
---------- ------
Balance outstanding, June 30, 2006 23,020,000 .0024
========== ======
The following table summarizes information about common stock options at
June 30, 2006:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- --------------- --------- ------- -------- ---------- -------
$ .0050 - $ .0050 2,500,000 46 $ .0050 2,500,000 $ .0050
$ .0050 - $ .0050 500,000 56 $ .0050 500,000 $ .0050
$ .0050 - $ .0050 250,000 56 $ .0050 250,000 $ .0050
$ .0050 - $ .0050 250,000 56 $ .0050 250,000 $ .0050
$ .0050 - $ .0050 250,000 57 $ .0050 250,000 $ .0050
$ .0050 - $ .0050 1,250,000 59 $ .0050 1,250,000 $ .0050
$ .0020 - $ .0020 750,000 61 $ .0020 750,000 $ .0020
$ .0020 - $ .0020 1,875,000 63 $ .0020 1,875,000 $ .0020
$ .0020 - $ .0020 1,875,000 65 $ .0020 1,875,000 $ .0020
$ .0040 - $ .0040 316,066 48 $ .0040 316,066 $ .0040
$ .0040 - $ .0040 217,466 48 $ .0040 217,466 $ .0040
$ .0040 - $ .0040 1,087,330 48 $ .0040 1,087,330 $ .0040
$ .0040 - $ .0040 1,179,138 48 $ .0040 1,179,138 $ .0040
$ .0009 - $ .0009 5,920,000 56 $ .0009 5,920,000 $ .0009
$ .0009 - $ .0009 4,800,000 56 $ .0009 4,800,000 $ .0009
$ .0009 - $ .0050 23,020,000 56 $ .0024 23,020,000 $ .0024
================= ========== == ======= ========== =======
NOTE 10. SUBSEQUENT EVENTS
The balance of convertible debt funding in the amount of $600,000 (along with
9,600,000 in common stock warrants) from the Company's March 8, 2006 aggregate
financing arrangement for $1,270,000 was funded in July 2006.
<page>F-53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------
Board of Directors
Conectisys Corporation and Subsidiaries
Valencia, California
We have audited the accompanying consolidated balance sheet of Conectisys
Corporation and Subsidiaries (a development stage company) (the "Company") as
of September 30, 2005, and the related consolidated statements of operations,
changes in shareholders' equity (deficit), and cash flows for the years ended
September 30, 2005 and 2004, and the cumulative period from December 1, 1990
(inception of development stage) through September 30, 2005, except that we did
not audit these financial statements for the period December 1, 1990 (inception
of development stage) through November 30, 1997; these financial statements
were audited by other auditors, whose reports dated March 6, 1998 (for the
period December 1, 1994 through November 30, 1997) and January 9, 1995 (for the
period December 1, 1990 (inception of development stage) through November 30,
1994), respectively, expressed a going concern uncertainty. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Conectisys Corporation and Subsidiaries as of September 30, 2005, and the
results of their operations and their cash flows for the years ended September
30, 2005 and 2004, and the cumulative period from December 1, 1990 (inception
of development stage) through September 30, 2005, in conformity with accounting
principles generally accepted in the United States of America.
<page>F-54
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has a deficiency in working capital at September 30,
2005. These matters raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described
in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Hurley & Company
Granada Hills, California
December 30, 2005
<page>F-55
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2005
Assets
Current assets
Cash and cash equivalents $ 518,765
Prepaid expenses 154,184
-----------------
Total current assets 672,949
Property and equipment, net of accumulated
depreciation of $339,330 39,257
Other assets
License and technology, net of accumulated
amortization of $421,478 0
Loan fees, net of accumulated
amortization of $474,353 45,202
-----------------
Total assets $ 757,408
=================
The accompanying notes are an integral part of these consolidated
financial statements.
<page>F-56
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2005
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 316,217
Accrued compensation 1,683,191
Due to officers 385
Accrued interest payable 212,924
Other current liabilities 38,003
Notes payable and current potion of
long-term debt 1,231,048
-----------------
Total current liabilities 3,481,768
Long-term debt, net of current 1,590,521
-----------------
Total liabilities 5,072,289
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; 7,388,864,998 shares issued
and outstanding 26,669,088
Additional paid-in capital:
Convertible preferred stock - Class B $1.00 par
value, 1,000,000 stock options exercisable 100,000
Common stock, no par value 14,243,654 stock
options and warrants exercisable 1,366,714
Accumulated gain (deficit) during development stage (32,666,548)
-----------------
Total shareholders' equity (deficit) (4,314,881)
-----------------
Total liabilities and shareholders' equity $ 757,408
=================
The accompanying notes are an integral part of these consolidated
financial statements.
<page>F-57
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2005
<table>
Dec. 1, 1990
(Inception)
Period
Year Ended Year Ended Through
September 30, September 30, September 30,
2005 2004 2005
Revenues $ 0 $ 0 $ 517,460
Cost of goods sold 245,427 95,879 1,131,369
----------------- ----------------- -----------------
Gross profit (loss) (245,427) (95,879) (613,909)
General and administrative expenses 1,676,520 1,459,844 21,678,148
Bad debt expense 0 0 1,680,522
Write-off of intangible assets 0 0 1,299,861
----------------- ----------------- -----------------
Loss from operations (1,921,947) (1,555,723) (25,272,440)
Other income (expenses)
Forgiveness of debt 504,462 0 504,462
Settled damages 0 (150,000) (125,000)
Other income 0 0 12,072
Interest income 0 1 102,924
Interest expense (1,715,198) (2,523,105) (6,873,324)
Minority interest 0 0 62,500
----------------- ----------------- -----------------
Net loss $ (3,132,683)$ (4,228,827)$ (31,588,806)
================= ================= =================
Weighted average shares outstanding 3,713,202,999 795,809,759
Net loss per share (0.00) (0.01)
</table>
The accompanying notes are an integral part of these consolidated
financial statements.
<page>F-58
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September
30, 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 consolidated financial statements.
<page>F-59
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>F-60
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>F-61
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>F-62
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>F-63
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>F-64
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>F-65
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>F-66
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 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 consolidated financial statements.
<page>14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2005
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity (Deficit)
---------- ---------- ------------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, January 2005 with a price
of $0.00125 per share 0 0 4,000,000 5,000 0 0 0 5,000
Debt, accrued liabilities
and prepaid retainer
October 2004 to September
2005 with common shares
valued from approximately
$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 consolidated financial statements.
</table>
<page>F-67
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2005
<table>
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2005 2004 2005
Operating activities
Net loss $ (3,132,683)$ (4,228,827)$ (31,588,806)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 17,770 17,007 1,728,930
Stock issued for services 46,200 78,400 7,645,373
Stock issued for interest 0 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of loan fees
and note discounts 835,863 770,739 3,047,140
Mark-to-market of derivative
conversion option 703,756 1,572,705 2,276,461
Forgiveness of debt (504,462) 0 (504,462)
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses 105,185 (176,967) 110,564
Interest receivable 0 0 (95,700)
Increase (decrease) in liabilities
Accounts payable 350,834 116,108 1,384,343
Accrued compensation 274,946 360,461 2,855,199
Due to officers (75,656) (37,168) 631,146
Other current liabilities 105,737 206,870 861,765
---------------- ---------------- ----------------
Total adjustments 1,860,173 2,908,154 23,106,911
---------------- ---------------- ----------------
Net cash used in operating activities (1,272,510) (1,320,672) (8,481,895)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-68
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2005
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2005 2004 2005
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 (33,671) (7,888) (245,405)
---------------- ---------------- ----------------
Net cash used in investing activities (33,671) (7,888) (1,661,962)
Financing activities
Common stock issued for cash 5,000 75,000 3,492,172
Stock warrants 3,756 9,447 200,334
Preferred stock issued for cash 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees (42,368) (213,843) (559,555)
Proceeds from debts
Related party 0 0 206,544
Other 1,411,014 2,073,218 7,647,275
Payments on debt
Related party 0 (53,172)
Other (102,500) (67,500) (604,536)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
---------------- ---------------- ----------------
Net cash provided by financing activities 1,274,902 1,876,322 10,662,622
Net increase (decrease) in cash (31,279) 547,762 518,765
Cash beginning of period 550,044 2,282 0
---------------- ---------------- ----------------
Cash end of period $ 518,765 $ 550,044 $ 518,765
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-69
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2005 and 2004
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2005
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2005 2004 2005
Cash paid during the year for
Interest 81,123 105,000 699,490
Taxes 0 6,400 14,450
Non-cash investing and financing activities
Common stock issued for
Note receivable 0 0 281,250
Prepaids 82,402 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 5,587,240 729,300 11,888,207
Service & interest 258,010 0 5,207,202
Preferred stock issued for
Services 15,845 75,845
Repayment of debt 0 0 119,520
Preferred stock options issued for
Repayment of debt 0 0 100,000
Re-characterize beneficial
conversion option as debt 0 881,550 881,550
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-70
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company") was
incorporated under the laws of Colorado on February 3, 1986, to analyze and
invest in business opportunities as they may occur. The Company is a
development-stage entity developing automatic meter reading technologies and
products for remote reading of electronic energy meters located in residential
structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the State
of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc., was
formed as a wholly-owned subsidiary of the Company, which, as yet, has no net
assets and has not commenced operations.
Basis of presentation
The accompanying consolidated financial statements include the accounts and
transactions of Conectisys Corporation, its wholly-owned subsidiaries
TechniLink, Inc., eEnergyServices.com, Inc., and United Telemetry Company,
Inc., and its 80% owned subsidiary PrimeLink, Inc. All material intercompany
transactions and balances have been eliminated in the accompanying
consolidated financial statements. Certain prior period balances have been
reclassified to conform to the current year's presentation.
The Company returned to the development stage in accordance with SFAS No. 7 on
December 1, 1990 and during the fiscal year ended November 30, 1995. The
Company has completed two mergers and is in the process of developing its
technology and product lines.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires that the Company disclose estimated
fair values for its financial instruments. The following summary presents a
description of the methodologies and assumptions used to determine such
amounts.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of judgment
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect the estimates.
<page>F-71
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
Since the fair value is estimated at September 30, 2005, the amounts that will
actually be realized or paid at settlement of the instruments could be
significantly different. The carrying amount of cash and cash equivalents is
assumed to be the fair value because of the liquidity of these instruments.
Accounts payable, accrued compensation, due to/from officer, accrued interest,
other current liabilities, and notes payable approximate fair value because of
the short maturity of these instruments. Also, market rates of interest apply
on all officer advances and short-term promissory notes. Long-term debt is
recorded at face value because the principal amount is convertible into common
stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from
November 30 to September 30.
Research and development costs
The Company has been engaged in researching, engineering, and developing its
H-Net(TM) technologies since August 1995, and did not generate any revenue
during the past fiscal year. The Company hopes to complete additional large-
scale cost reduction runs for the production and subsequent sale of the H-Net
(TM)system in 2005.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit and highly
liquid debt instruments with original maturities of three months or less. All
funds on deposit are with one financial institution.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on
property and equipment using the straight-line method over the expected useful
lives of the assets, which are generally three years for computer software,
five years for vehicles and office equipment, and seven years for furniture
and fixtures.
Technology
Deferred technology costs include capitalized product development and product
improvement costs incurred after achieving technological feasibility and are
amortized over a period of five years. At September 30, 2005, no deferred
technology costs were recognized.
<page>F-72
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
Accounting for stock-based compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-based Compensation," establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity instruments. The
Company adopted this accounting standard on January 1, 1996. SFAS No. 123 also
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation. The Company has chosen to account for
stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market price of the Company's stock at the date
of grant over the amount an employee must pay to acquire the stock. Also, in
accordance with SFAS No. 123, the Company has provided footnote disclosures
with respect to stock-based employee compensation. The cost of stock-based
compensation is measured at the grant date on the value of the award, and this
cost is then recognized as compensation expense over the service period. The
value of the stock-based award is determined using a pricing model whereby
compensation cost is the excess of the fair market value of the stock as
determined by the model at the grant date or other measurement date over the
amount an employee must pay to acquire the stock.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123," effective for fiscal years ending after December 15, 2002, which
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
adoption of SFAS No. 148 did not have a material impact on the Company's
consolidated financial statements, as the adoption of this standard did not
require the Company to change, and the Company did not change, to the fair
value based method of accounting for stock-based compensation.
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.
<page>F-73
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of September 30, 2005, the Company had 7,388,864,998 shares of common stock
outstanding. If all of the Company's unexpired stock warrants and options
(including contingent issuances) were exercised, and all the principal value
and accrued interest on its outstanding convertible debentures were converted,
the Company's incremental common shares (not included in the denominator of
diluted earnings (loss) per share because of their anti-dilutive nature) would
be as follows:
Class B preferred stock options 10,000,000
Convertible note holder - common stock warrants 12,300,000
Common stock options - officers 1,943,654
--------------
Subtotal 24,243,654
Accrued officer compensation ($440,000),
convertible into common stock 358,758,842
Convertible note holder principal value
($1,615,712), accrued interest ($212,924)
assumed converted into common stock at
$0.00008 per share 22,857,950,000
--------------
Total potential common stock equivalents 23,240,952,496
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:
Year Ended Year Ended
09/30/2005 09/30/2004
------------------ ------------------
Net loss, as reported $ (3,132,683) $ (4,228,827)
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 $ (3,132,683) $ (4,228,827)
<page>F-74
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for goods
or services are valued at the cost of the goods or services received or at the
market value of the shares issued, depending on the ability to estimate the
value of the goods or services received.
Income taxes
The Company files a consolidated federal income tax return. The Company has
adopted SFAS No. 109, which requires the Company to recognize deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and
tax basis of assets using the enacted rates in effect in the years in which the
differences are expected to reverse. The Company has recognized a valuation
allowance covering 100% of the net deferred tax assets (primarily tax benefits
from net operating loss carryforwards), because it is more likely than not that
the tax benefits attributable to the deferred tax assets will not be realized
in the future.
Advertising Costs
The Company expenses advertising cost in the year incurred. Such costs amounted
to $16,824 and $7,447 for the years ended September 30, 2005 and 2004
respectively.
Recently issued accounting pronouncements
In November 2004, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS
No. 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted materials. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The initial application of SFAS No. 151 will have no impact on the Company's
financial position or results of operations.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment," which
addresses the accounting for employee stock options. SFAS 123(R) revises the
disclosure provisions of SFAS 123 and supersedes APB 25. SFAS 123(R) requires
that the cost of all employee stock options, as well as other equity-based
compensation arrangements, be reflected in financial statements based on the
estimated fair value of the awards. In March 2005, the Securities & Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment," which summarizes the views of the SEC staff regarding the interaction
between SFAS 123(R) and certain SEC rules and regulations, and is intended to
assist in the initial implementation. SFAS(R) is effective for all companies
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 Company is
currently evaluating the provisions of SFAS 123(R) and its effect on its
financial statements. The Company does not expect the adoption of this
statements to have a material impact on its financial statements.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets,
an amendment of APB 29, Accounting for Nonmonetary Transactions." This
statement's amendments are based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged.
Further, SFAS 153 eliminates the narrow exception for nonmonetary exchanges of
similar productive assets and replaces it with a broader exception for
exchanges of nonmonetary assets that do not have commercial substance.
Provisions of this statement are effective for fiscal periods beginning after
June 15, 2005. The Company does not expect the adoption of this statement to
have a material impact on its 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. The Company does not expect
the adoption of this statement to have a material impact on its financial
statements.
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 correcetion 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 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 the Company's consolidated financial statements.
<page>F-75
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 2. GOING CONCERN UNCERTAINTY
As of September 30, 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
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.
NOTE 3. RELATED PARTY TRANSACTIONS
The officers of the Company have continually advanced funds to the Company.
These advances have generally been in the form of revolving short-term
promissory notes at an annual interest rate of 18% (see Note 8 below).
NOTE 4. PREPAID EXPENSES AND DEPOSITS
The Company has accrued a prepaid expense of $80,000 as a staying bonus for
its Chief Executive Officer as per his employment contract (see NOTE 13).
The staying bonus is being amortized over the calendar year 2005. For the
calendar year ended December 31, 2005, $60,000 of this expense was amortized
as officer salaries with a balance of $20,000 at September 30, 2005.
In connection with the convertible debenture financing obtained in April 2004,
June 2004 and September 2004, the Company prepaid $30,000, $75,000 and $75,000
dollars in interest, respectively (see NOTE 10). The prepaid interest is being
amortized over a one year period. For the year ended September 30, 2004,
$13,562, $19,110 and $4,520 were amortized, respectively, 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 September 30, 2005 tentatively were $10,174,
$22,700 and $33,137 for a total prepaid interest of $66,011. As of
September 30, 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.
<page>F-76
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 4. PREPAID EXPENSES AND DEPOSITS(continued)
The balance of the September 2004 retainer in the amount of $4,159 to a law
firm in connection with a suit brought forth by Devon Investment Advisors Ltd.
has been fully applied to invoices.
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
$82,402 and a law firm for $31,782.
As of September 30, 2005, the balance in prepaid expenses was $154,184.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2005 consisted of the following:
Office equipment $ 323,525
Furniture and fixtures 19,700
Vehicles 35,362
-----------
Total cost 378,587
Accumulated depreciation (339,330)
-----------
Net book value $ 39,257
===========
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at September 30, 2005 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
===========
NOTE 7. LOAN FEES
In February 2002, the Company received $340,000 in short-term financing from
an investment group through the issuance of a promissory note maturing on May
15, 2002 and accruing interest at an annual rate of 18%. Included in the loan
was $40,000 in fees, consisting specifically of a $30,000 finder's fee and a
$10,000 legal fee. These loan fees were fully amortized at September 30,
2002, with the balances written-off at September 30, 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-77
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 7. 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-78
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 7. 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.
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 of 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.
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
current year's loan fees amounted to $12,366, leaving an unamortized balance of
$30,002.
Total unamortized loan fees at September 30, 2005 is $45,202.
<page>F-79
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 8. DUE TO/FROM OFFICERS
At September 30, 2001, a revolving promissory note agreement for $56,880 was
drawn up, due on demand, at an annual interest rate of 18%, for unpaid
cumulative advances (plus interest) made by the Company's CEO. During the year
ended September 30, 2002, cash advances of $31,500 were made. Additionally, the
loan account was increased by $120,875, representing the value of 2,361,814
restricted shares of the Company's common stock held by the CEO, which were
used as collateral and transferred to a note holder in June of 2002 to
partially cover a $300,000 debt, and by $16,202, representing the value of
794,857 restricted shares of the Company's common stock held by the CEO, which
were pledged to and sold by a convertible note holder on a Company obligation
in default. Repayments of debt by the Company amounted to $144,806 and accrued
interest amounted to $6,913 during the year ended September 30, 2002, resulting
in a loan balance due the CEO at September 30, 2002 of $87,564. During the
year ended September 30, 2003, additional cash advances totaling $37,869 were
made, along with $37,423, representing another 1,835,885 restricted shares of
the Company's common stock pledged and sold by the above note holder.
Repayments of debt by the Company amounted to $136,009, including re-issuance
of 2,361,814 restricted shares of the Company's common stock valued at $120,875
that had been transferred to a note holder during the previous fiscal year.
Accrued interest during the year ended September 30, 2003 was $10,073, bringing
the loan balance due the CEO at September 30, 2003 to $36,920. During the
year ended September 30, 2004, the Company repaid $32,673. Accrued interest of
$3,558 during the period brought the loan balance due the CEO at September 30,
2004 to $7,805. 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 is no amount due to the CEO at September
30, 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. The loan balance at September 30, 2005 is
due on demand and continues to accrue interest at the rate of 18% per
year.
<page>F-80
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 8. 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 September 30, 2005 of $0.
The aggregate amount due officers at September 30, 2005 was $385 and interest
expense on the officer loans amounted to $3,306 for the year ended September
30, 2005.
As of September 30, 2005, the Company owed its officers $1,683,191 in accrued
compensation. Of this amount, $360,000 was attributable to aggregate staying
bonuses payable to the President and Secretary/Treasurer of the Company as of
December 31, 2004. An additional $80,000 payable to the President on
January 1, 2006 is being amortized over the 2005 calendar year.
The staying bonuses are to be compensated for with the Company's common stock,
valued at the average bid and ask price for the stock for the 30 days prior
to each respective year-end issuance date. The total common stock to be issued
as staying bonuses amounted to 358,758,842 at September 30, 2005, including
289,156,627 shares to settle the upcoming January 1, 2006 stating bonus.
<page>F-81
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE
Notes payable at September 30, 2005 consisted of the following:
Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 88,437,500
shares of common stock at the price
of $0.00008 at September 30, 2005 7,075 $ 7,075
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 88,437,500
shares of common stock at the price
of $0.00008 at September 30, 2005 7,075 7,075
-------
<page>F-82
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12% $ 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 September 30, 2005 8,136 $ 8,136
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $4,975 and principal
on Convertible Debenture convertible
into approximately 62,187,500
shares of common stock at the price
of $0.00008 at September 30, 2005 4,975 $ 4,975
-------
Convertible Debenture #2
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $9,600 and principal
on Convertible Debenture convertible
into approximately 120,000,000
shares of common stock at the price
of $0.00008 at September 30, 2005 9,600 $ 9,600
--------
<page>F-83
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $ 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 September 30, 2005 9,600 $ 9,600
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $10,800 and principal
on Convertible Debenture convertible
into approximately 135,000,000
shares of common stock at the price
of $0.00008 at September 30, 2005 10,800 $ 10,800
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $6,000 and principal
on Convertible Debenture convertible
into approximately 75,000,000
shares of common stock at the price
of $0.00008 at September 30, 2005 6,000 $ 6,000
-------
<page>F-84
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. 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 September 30, 2005 19,200 $ 19,200
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 240,000,000
shares of common stock at the price
of $0.00008 at September 30, 2005 19,200 $ 19,200
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
<page>F-85
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
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 September 30, 2005 21,600 $ 21,600
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 150,000,000
shares of common stock at the price
of $0.00008 at September 30, 2005 12,000 $ 12,000
--------
Convertible Debenture #5
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 115,500,000
shares of common stock at the price
of $0.00008 at September 30, 2005 9,240 $ 9,240
-------
<page>F-86
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 115,500,000
shares of common stock at the price
of $0.00008 at September 30, 2005 9,240 $ 9,240
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 115,500,000
shares of common stock at the price
of $0.00008 at September 30, 2005 9,240 9,240
-------
<page>F-87
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #6
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 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 September 30, 2005 12,000 $ 12,000
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 150,000,000
shares of common stock at the price
of $0.00008 at September 30, 2005 12,000 $ 12,000
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 150,000,000
shares of common stock at the price
of $0.00008 at September 30, 2005 12,000 $ 12,000
--------
<page>F-88
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #7
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $33,334
Accrued interest of $7,408 and principal
on Convertible Debenture convertible
into approximately 509,275,000
shares of common stock at the price
of $0.00008 at September 30, 2005 7,408 $ 40,742
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $33,333
Accrued interest of $7,408 and principal
on Convertible Debenture convertible
into approximately 509,262,500
shares of common stock at the price
of $0.00008 at September 30, 2005 7,408 $ 40,741
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $33,333
Accrued interest of $7,409 and principal
on Convertible Debenture convertible
into approximately 509,275,000
shares of common stock at the price
of $0.00008 at September 30, 2005 7,409 $ 40,742
--------
<page>F-89
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #8
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $3,660 and principal
on Convertible Debenture convertible
into approximately 254,087,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,660 $ 20,327
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $3,660 and principal
on Convertible Debenture convertible
into approximately 254,087,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,660 $ 20,327
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $3,661 and principal
on Convertible Debenture convertible
into approximately 254,087,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,661 $ 20,327
--------
<page>F-90
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #9
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $3,507 and principal
on Convertible Debenture convertible
into approximately 252,175,000
shares of common stock at the price
of $0.00008 at September 30, 2005 3,507 $ 20,174
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $3,507 and principal
on Convertible Debenture convertible
into approximately 252,175,000
shares of common stock at the price
of $0.00008 at September 30, 2005 3,507 $ 20,174
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $3,507 and principal
on Convertible Debenture convertible
into approximately 252,162,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,507 $ 20,173
--------
<page>F-91
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #10
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,666
Accrued interest of $3,239 and principal
on Convertible Debenture convertible
into approximately 248,812,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,239 $ 19,905
--------
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 $3,238 and principal
on Convertible Debenture convertible
into approximately 248,812,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,238 $ 19,905
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,667
Accrued interest of $3,238 and principal
on Convertible Debenture convertible
into approximately 248,812,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,238 $ 19,905
--------
<page>F-92
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. 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 $15,646 and principal
on Convertible Debenture convertible
into approximately 1,192,250,000
shares of common stock at the price
of $0.00008 at September 30, 2005 15,646 $ 95,380
--------
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 $15,646 and principal
on Convertible Debenture convertible
into approximately 1,192,237,500
shares of common stock at the price
of $0.00008 at September 30, 2005 15,646 $ 95,379
--------
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 $15,646 and principal
on Convertible Debenture convertible
into approximately 1,192,237,500
shares of common stock at the price
of $0.00008 at September 30, 2005 15,646 $ 95,379
--------
<page>F-93
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. 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 $1,097 and principal
on Convertible Debenture convertible
into approximately 329,775,000
shares of common stock at the price
of $0.00008 at September 30, 2005 1,097 $ 26,382
--------
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 $3,086 and principal
on Convertible Debenture convertible
into approximately 927,512,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,086 $ 74,201
--------
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 $2,538 and principal
on Convertible Debenture convertible
into approximately 762,625,000
shares of common stock at the price
of $0.00008 at September 30, 2005 2,538 $ 61,010
--------
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 $137 and principal
on Convertible Debenture convertible
into approximately 41,225,000
shares of common stock at the price
of $0.00008 at September 30, 2005 137 $ 3,298
--------
<page>F-94
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. 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 $625 and principal
on Convertible Debenture convertible
into approximately 225,275,000
shares of common stock at the price
of $0.00008 at September 30, 2005 625 $ 18,022
--------
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 $1,759 and principal
on Convertible Debenture convertible
into approximately 633,612,500
shares of common stock at the price
of $0.00008 at September 30, 2005 1,759 $ 50,689
--------
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 $1,446 and principal
on Convertible Debenture convertible
into approximately 520,962,500
shares of common stock at the price
of $0.00008 at September 30, 2005 1,446 $ 41,677
--------
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 $78 and principal
on Convertible Debenture convertible
into approximately 28,162,500
shares of common stock at the price
of $0.00008 at September 30, 2005 78 $ 2,253
--------
<page>F-95
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. 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 $ 43,228
Accrued interest of $1,241 and principal
on Convertible Debenture convertible
into approximately 555,862,500
shares of common stock at the price
of $0.00008 at September 30, 2005 1,241 $ 44,469
--------
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 $121,580
Accrued interest of $3,491 and principal
on Convertible Debenture convertible
into approximately 1,563,387,500
shares of common stock at the price
of $0.00008 at September 30, 2005 3,491 $ 125,071
--------
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 $ 99,965
Accrued interest of $2,870 and principal
on Convertible Debenture convertible
into approximately 1,285,437,500
shares of common stock at the price
of $0.00008 at September 30, 2005 2,870 $ 102,835
--------
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 $ 5,404
Accrued interest of $155 and principal
on Convertible Debenture convertible
into approximately 69,487,500
shares of common stock at the price
of $0.00008 at September 30, 2005 155 $ 5,559
--------
<page>F-96
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. 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 $21 and principal
on Convertible Debenture convertible
into approximately 1,179,400,000
shares of common stock at the price
of $0.00008 at September 30, 2005 21 $ 94,352
--------
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 $58 and principal
on Convertible Debenture convertible
into approximately 3,317,050,000
shares of common stock at the price
of $0.00008 at September 30, 2005 58 $ 265,364
--------
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 $48 and principal
on Convertible Debenture convertible
into approximately 2,727,362,500
shares of common stock at the price
of $0.00008 at September 30, 2005 48 $ 218,189
--------
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 $ 11,791
Accrued interest of $2 and principal
on Convertible Debenture convertible
into approximately 147,412,500
shares of common stock at the price
of $0.00008 at September 30, 2005 2 $ 11,793
--------
<page>F-97
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. NOTES PAYABLE (continued)
Subtotal of all Convertible Debentures 1,933,725
Less reclassified accrued interest $ (212,924)
Less prepaid interest offset (105,089)
------------
Subtotal principal value 1,615,712
Derivative conversion option - 150 percent of principal 2,423,568
Less unamortized note discount (1,225,759)
-----------
Net carrying value of
Convertible Debentures $ 2,813,521
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. 8,048
-----------
Total notes payable $ 2,821,569
Current portion 1,231,048
-----------
Long-term portion $ 1,590,521
===========
On April 12, 2001, the Company received $300,000 in proceeds from Laurus
Master Fund, Ltd. ("L9aurus") 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-98
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 9. 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. 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.
<page>F-99
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 10. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's continued
research and development efforts as of March 29, 2002, the Company entered
into a securities purchase agreement and related agreements with four
accredited investors (the "Purchasers") for the purchase of up to $750,000 of
the Company's 12% Convertible Debentures due one year from their date of
issuance. The Company granted the holders of the debentures a continuing
security interest in all of the Company's assets to secure the Company's
obligations under the debentures and related agreements. The debentures bear
interest at a rate of 12% per annum, payable quarterly in common stock or cash
at the option of the Purchasers.
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-100
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 10. 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-101
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 10. 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.
<page>F-102
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On September 9, 2004 the Company issued an aggregate of $625,000 of 12%
convertible debentures in a private offering to four accredited investors. The
Company prepaid one year's interest of $75,000 upon receipt of the funds. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices
of a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,875,000 shares of common stock at a per share exercise price
equal to $.002.
On March 17, 2005 the Company issued an aggregate of $158,033 of 8% convertible
debentures in a private offering to the four accredited investors. The Company
prepaid $1,033 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.
<page>F-103
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
As part of the recording of the convertible debt transactions, a beneficial
conversion option was recognized, along with a corresponding convertible debt
discount. The fair value of the debt instruments issued totaling $1,750,000 in
principal value was $3,500,000 in aggregate, representing a 100% premium on the
principal value (due to the 100% pricing advantage) and making the beneficial
conversion option $1,637,735 at the inception of the loans ($1,750,000 proceeds
less $112,265 allocated to the issuance of the 8,750,000 related warrants). In
October 2003, the conversion option was increased to 150% from 100% which
resulted in an increase of $563,257 in the conversion interest and a
corresponding expense in the current period. Due to the nature of the debt
instrument and its repayment terms, the beneficial conversion option has been
re-characterized as derivative conversion option and reclassified as additional
debt. In connection with the issuance of an additional $2,000,000 of
convertible debt during the year ended September 30, 2004, the derivative
conversion option was increased by $3,000,000. During the 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.
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, 2005 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.
<page>F-104
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 10. 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 and $973,565 was amortized
during the year ended September 30, 2005, while $69,233 in convertible bond
discount was transferred to equity upon conversion of $93,130 in debt principal
during the fiscal year ended September 30, 2002, $52,340 in convertible bond
discount was transferred to equity upon conversion of $193,665 of debt
principal during the fiscal year ended September 30, 2003, $28,571 in
convertible bond discount was transferred to equity upon conversion of $218,115
of debt principal during the year ended September 30, 2004 and $973,565 in
convertible bond discount was transferred to equity upon conversion of
$2,529,378 of debt principal during the year ended September 30, 2005,
resulting in an unamortized convertible debt discount balance of $1,225,759 at
September 30, 2005.
As of September 30, 2005, the Company was indebted for an aggregate of
$1,828,636 including $1,615,712 of principal and $212,924 of accrued interest,
net of prepaid interest of $105,089, 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 11. 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 September 30, 2005,
there were 7,388,864,998 shares of the Company's common stock outstanding held
by approximately 800 holders of record and 215,865 shares of the Company's
Class A Preferred Stock outstanding held by one holder of record and no shares
of Class B Preferred Stock outstanding.
Each share of Class A Preferred Stock is entitled to 100 votes per share on all
matters presented to the Company's shareholders for action. The Class A
Preferred Stock does not have any liquidation preference, additional voting
rights, conversion rights, anti-dilution rights or any other preferential
rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the
Company's common stock. The Class B Preferred Stock does not have any
liquidation preference, voting rights, other conversion rights, anti-dilution
rights or any other preferential rights.
In March 2005, the Company issued 4,000,000 shares of common stock for $5,000
in cash.
During 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-105
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005
NOTE 11. 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, %3,794,067 of derivative conversion option and $104,410 of accrued
interest, net of $973,565 in convertible debt discount, for total of conversion
$5,454,290 on the Company's convertible debentures.
NOTE 12. INCOME TAXES
Deferred income taxes consisted of the following at September 30, 2005:
Deferred tax asset, benefit
of net operating loss
carryforward $ 10,600,000
Valuation allowance (10,600,000)
-----------
Net deferred taxes $ -
===========
The valuation allowance offsets the net deferred tax asset, since it is more
likely than not that it would not be recovered. During the year ended
September 30, 2005, the deferred tax asset and valuation allowance were both
increased by $1,000,000.
The Company has approximately $26,600,000 in both federal and California net
operating loss carryforwards. The federal net operating loss carryforwards
expire as follows: $2,700,000 in the year 2012, $5,300,000 in 2018, $1,200,000
in 2019, $3,500,000 in 2020, $2,300,000 in 2021, $2,200,000 in 2022, $2,100,000
in 2023, $4,200,000 in 2024 and $3,100,000 in 2025. The California net
operating loss carryforwards expire as follows: $2,700,000 in the year 2004,
$5,300,000 in 2005, $1,200,000 in 2006, $3,500,000 in 2007, $2,300,000 in 2013,
$8,500,000 in 2014 and $3,100,000 in 2015.
<page>F-106
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into three employment agreements with key individuals,
the terms of the agreements are as follows:
1) The CEO (and President) of the Company entered into an agreement dated
October 2, 1995 (which was subsequently amended September 1, 1997, September 1,
1999, and March 27, 2000) for a period of five years to April 1, 2005 and
extended to April 1, 2006 and he is entitled to receive a base salary of
$160,000 per year. The employee shall further receive a bonus, paid at year-
end, equal to 50% of the employee's salary, for continued employment. The
staying bonus will be compensated for with the Company's restricted common
stock. He is also granted an option to purchase up to 2,000,000 shares of the
Company's restricted common stock at a price equal to 50% of the average market
value for the prior 30 trading days before exercise. On March 27, 2000, the
exercise price was adjusted to a flat $0.3864 per share, with an expiration
date of December 2, 2003, which, in turn, has subsequently been extended to
December 2, 2005.
2) The Secretary and Treasurer of the Company entered into an Agreement
dated October 2, 1995 (which was subsequently amended September 1, 1997,
September 1, 1999, and March 27, 2000), for a period of five years (extended
through April 1, 2005), and she is entitled to receive a base salary of $80,000
per year. The employee shall further receive a bonus, paid at year- end, equal
to 50% of the employee's salary, for continued employment. The staying bonus
shall be compensated for with the Company's restricted common stock. She is
also granted an option to purchase up to 500,000 shares of the Company's
restricted common stock at a price equal to 60% of the average market value for
the prior 180 trading days before exercise. On March 27, 2000, the exercise
price was adjusted to a flat $0.38 per share, with an expiration date of
December 31, 2004, which was subsequently extended to December 2, 2005. The
employment agreement with the Secretary/Treasurer was not extended beyond April
1, 2005, so she was not entitled to the bonus for continued employment for
calendar year 2005. The Secretary/Treasurer continues to act as
Secretary/Treasurer on a consulting basis.
<page>F-107
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
3) The Chief Technical Officer of the Company entered into an agreement
dated August 1, 1998 for an initial term of three years (extended through
August 1, 2003 and again through January 19, 2009), and he is entitled to
receive a base salary of $150,000 per year, with a minimum of $90,000 to be
paid annually in cash and the balance paid (at the option of the Company) in
cash or restricted common stock under rule 144. The employee shall receive a
hire-on bonus of $75,000 worth of the Company's restricted common stock under
rule 144, at one-half market price. The employee shall further receive
performance bonuses (paid in restricted common stock, as above) upon successful
completion of specific milestones pertaining to the implementation and
deployment of certain software (up to $862,500). If substantially all
performance milestones are met, he is also granted an option to purchase up to
500,000 shares of the Company's restricted common stock at a price equal to 60%
of the average market value at the date of purchase. As of September 30, 2005,
none of the aforementioned milestones had been successfully completed.
Litigation
There have been two recent legal proceedings in which the Company has been a
party:
In February 2002, the Company borrowed $340,000 from the Mercator Momentum Fund
("Mercator") in order to make an initial $100,000 payment to Laurus Master
Fund, Ltd. and to fund continuing development of the Company's H- Net(TM)
system. This loan from Mercator was a short-term loan due May 15, 2002 and
accrues interest at an annual rate of 18%. The loan was secured by shares of
the Company's common stock. As of June 13, 2002, the Company owed Mercator
approximately $243,000 of principal and accrued and unpaid interest under this
loan and was in default in the repayment of this debt.
<page>F-108
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
On June 14, 2002, Mercator transferred collateral in the form of 5,861,814
shares of the Company's common stock into its name as a result of the Company's
default on Mercator's loan. Of the 5,861,814 shares of common stock transferred
into the name of Mercator 3,500,000 shares of the Company's common stock were
issued and pledged as collateral by the Company in February 2002, and 2,361,814
shares of the Company's common stock were issued and pledged as collateral by
Robert Spigno, the Company's Chief Executive Officer, in February 2002.
On June 21, 2002 Mercator filed an action against Conectisys Corporation,
Robert A. Spigno and Patricia A. Spigno in the Superior Court of California,
County of Los Angeles (Case No. BC276283) for breach of promissory note,
foreclosure of security interests and fraud and deceit. Mr. Spigno is the
Chairman of the Board and a director of the Company and is also the Company's
Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief
Financial Officer. On July 3, 2002, Mercator filed a first amended complaint in
the Superior Court of California, County of Los Angeles (Case No. BC276283)
adding a claim for common count for money lent. In March 2004, the Company
settled its suit with Mercator for $150,000.
On or about August 18, 2004, Devon Investment Advisors, Ltd., or plaintiff,
filed a Complaint in the Arapahoe County District Court of the State of
Colorado against ConectiSys Corporation. The complaint seeks repayment of
amounts allegedly loaned, plus interest and applicable attorneys' fees. On
June 21, 2005, the Company was granted summary judgment to dismiss the suit.
The Company submitted affirmative evidence demonstrating the statute of
limitations had passed for recovery of the debt. Thus, the Company has
recognized a forgiveness of debt of $504,462 for the year ended September 30,
2005.
<page>F-109
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
The Company, during its normal course of business, may be subject from time to
time to disputes and to legal proceedings against it. Both counsel and
management do not expect that the ultimate outcome of any current claims will
have a material adverse effect on the Company's financial statements.
<page>F-110
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 14. FORM S-8 FILINGS
In December 2004, the Company filed a registration statement on Form S-8
covering 20,000,000 shares issued to an independent consultant valued at
$20,000.
In April 2005, the Company filed a registration statement on Form S-8
covering 30,000,000 shares issued to an independent consultant valued at
$25,000.
NOTE 15. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note
holder options to purchase 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share. As consideration, the Company
reduced its debt to the note holder by $50,000 and received an extension of
time to pay-off its promissory note. The Company also issued to its CEO
options to purchase another 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share in exchange for a reduction in
debt of $50,000. Total consideration received on the above issued options, as
evidenced by debt reduction, was $100,000. These options can be exercised
through November 1, 2002 and can also be converted into common stock at the
rate of 10 common shares for each Class B preferred share. In September 2001,
the exercise price on the Class B preferred stock options was adjusted to
$2.50 per share and the exercise period extended to November 1, 2005. In June
2002, the exercise price on the Class B preferred stock options was adjusted to
$0.50 per share. In January 2004, the exercise price on the Class B preferred
stock options was adjusted to $0.05 per share and the exercise period extended
to November 1, 2009.
The Company's CEO currently owns 215,865 shares of the Company's Class A
preferred stock, of which 15,845 shares were purchased during the year ended
September 30, 2004, and has options to purchase another 234,155 shares for
$1.00 per share through November 1, 2005, which has been extended to 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-111
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The Company accounts for stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25. Accordingly,
compensation expense for common stock options and warrants issued to employees
for services have been recorded as the difference between the intrinsic value
of those services as measured by the (discounted) market value of the common
stock at the date of grant and the exercise price, with pro forma disclosure
of the excess market value as required by FASB No. 123. No common stock
options or warrants were granted to employees (including officers) and
directors of the Company during the 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 10 above). The
allocated cost of these warrants amounted to $9,816, resulting in a recorded
balance of stock options and warrants exercisable at September 30, 2003 of
$1,453,511 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
As of September 30, 2003, the Company had an additional 4,852,205 common stock
options that had been granted to consultants and investors at exercise prices
ranging from $0.50 to $2.00 per share, expiring from November 1, 2003 through
January 16, 2005. Because these strike prices were substantially above the
market price of the Company's common stock, no value was attributed to these
options at the time of grant. During the year ended September 30, 2004,
4,352,205 of these non-valued options expired, leaving a balance at September
30, 2004 of 500,000 options, exercisable at $1.00 per share and expiring
January 16, 2005. The Company also granted a contingent issuance
to its Chief Technical Officer of 2,000,000 common stock options exercisable
at $0.50 per share and expiring December 31, 2004, which will not vest until
certain milestones have been attained. These respective common stock options
and contingent issuances have been excluded from the summarized table below.
<page>F-112
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 15. 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 10 above).
The allocated cost of these warrants amounted to $945.
In February 2004 and March 2004, 1,500,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $300,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $1,417.
In April 2004, 750,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $250,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $1,181.
In June 2004, 1,875,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $625,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $2,952.
In September 2004, 1,875,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $625,000 12%
convertible debenture financing arrangement (see Note 10 above). The
allocated cost of these warrants amounted to $2,952, resulting in a recorded
balance of stock options and warrants exercisable at September 30, 2004 of
$1,462,958 (including $100,000 attributable to 1,000,000 Class B preferred
stock options noted above).
In March 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 10 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.
The common stock option activity during the fiscal year ended September 30,
2005 and 2004 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2003 11,307,154 $.204
Granted 7,000,000 .003
Expired (563,500) 2.00
---------- -----
Balance outstanding, September 30, 2004 17,743,654 $.068
Granted 2,800,000 .004
Expired (6,300,000) .048
---------- -----
Balance outstanding, September 30, 2005 14,243,654 .056
========== =====
<page>F-113
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The following table summarizes information about common stock options at
September 30, 2005:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
- --------------- --------- ------- -------- ---------- -------
$ .380 - $ .380 500,000 2 $ .380 500,000 $ .380
$ .386 - $ .386 1,443,654 2 $ .386 1,443,654 $ .386
$ .002 - $ .002 2,500,000 52 $ .005 2,500,000 $ .005
$ .002 - $ .002 500,000 62 $ .005 500,000 $ .005
$ .002 - $ .002 250,000 62 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 62 $ .005 250,000 $ .005
$ .002 - $ .005 250,000 63 $ .005 250,000 $ .005
$ .002 - $ .005 1,250,000 65 $ .005 1,250,000 $ .005
$ .002 - $ .005 750,000 67 $ .002 750,000 $ .002
$ .002 - $ .005 1,875,000 69 $ .002 1,875,000 $ .002
$ .002 - $ .005 1,875,000 71 $ .002 1,875,000 $ .002
$ .004 - $ .004 316,066 54 $ .004 316,066 $ .004
$ .004 - $ .004 217,466 54 $ .004 217,466 $ .004
$ .004 - $ .004 1,087,330 54 $ .004 1,087,330 $ .004
$ .004 - $ .004 1,179,138 54 $ .004 1,179,138 $ .004
$ .001 - $0.386 14,243,654 53 $ .056 14,243,654 $ .056
=============== ========== == ======== ========== =======
NOTE 16. SUBSEQUENT EVENTS
Subsequent to September 30, 2005, the Company issued approximately 570,000,000
shares of common stock through December 21, 2005 in exchange for reduction of
approximately $60,000 in principal and approximately $90,000 in derivative
conversion option, totaling approximately $150,000 in convertible debt.
Subsequent to September 30, 2005, the Company signed a three year lease
agreement to relocate its corporate office.
<page>F-114