As filed April 18, 2005 File No. 333-122747
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
AMENDMENT NO. 1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CRYSTALIX GROUP INTERNATIONAL, INC.
(Name of small business issuer in its charter)
NEVADA 5947 65-0142472
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization Classification Code Number)
5275 SOUTH ARVILLE STREET, SUITE B-116, LAS VEGAS, NEVADA 89118
(702) 740-4616
(Address and telephone number of principal executive offices)
5275 SOUTH ARVILLE STREET, SUITE B-116, LAS VEGAS, NEVADA 89118
(Address of principal place of business or intended principal place of business)
DOUGLAS E. LEE, PRESIDENT
CRYSTALIX GROUP INTERNATIONAL, INC.
5275 SOUTH ARVILLE STREET, SUITE B-116, LAS VEGAS, NEVADA 89118
(702) 740-4616
(Name, address and telephone number of agent for service)
Copies of all communications to:
FAY M. MATSUKAGE, ESQ.
DILL DILL CARR STONBRAKER & HUTCHINGS, P.C.
455 SHERMAN STREET, SUITE 300
DENVER, COLORADO 80203
(303) 777-3737; (303) 777-3823 FAX
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of the Registration Statement.
If any of the securities registered on this form are being offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
-------------
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-----------------
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
--------------
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1)<F1> UNIT (2)<F2> PRICE (2)<F2> REGISTRATION FEE
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Common stock, $0.001 par 33,322,898 $0.09 $2,999,060.82 $352.99
value per share, issuable
upon conversion of
convertible notes
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Common stock, $0.001 par 11,191,651 $0.09 $1,007,248.59 $118.55
value per share, issuable
upon payment of interest
on the notes in shares
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Common stock, $0.001 par 4,375,000 $0.09 $393,750.00 $46.35
value per share, issuable
upon exercise of warrants
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Total 48,895,549 $4,400,059.41 $517.89
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<FN>
(1)<F1> The number of shares issuable upon conversion of the convertible notes
and upon payment of interest on the notes in shares was calculated
using a price of $0.08 per share. Pursuant to Rule 416 of the
Securities Act of 1933, as amended, this registration statement also
covers such additional number of shares of common stock that may become
issuable as a result of any stock splits, stock dividends, or other
similar transactions.
(2)<F2> Estimated pursuant to Rule 457(c) solely for the purpose of calculating
the registration fee, based upon the average of the bid and asked
prices for such shares of common stock on February 8, 2005, as reported
by the OTC Bulletin Board.
</FN>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
Subject to Completion, Dated April 18, 2005
CRYSTALIX GROUP INTERNATIONAL, INC.
UP TO 48,889,549 SHARES OF COMMON STOCK
This prospectus relates to the resale by selling stockholders of up to
48,889,549 shares of common stock, comprised of up to 33,322,898 shares issuable
if principal on convertible notes is converted to common shares, up to
11,191,651 shares issuable if payment of interest on the notes is made in common
shares, and up to 4,375,000 shares of common stock issuable upon the exercise of
common stock purchase warrants. We will not receive any proceeds from sale of
any of the shares offered by the selling stockholders. We will pay the expenses
of registering these shares.
Our common stock is traded on the OTC Bulletin Board under the symbol
"CYXG.OB." On April 14, 2005, the closing bid price for our common stock was
$0.06 per share.
INVESTING IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK. A
DETAILED EXPLANATION OF THESE RISKS IS INCLUDED IN THE SECTION ENTITLED "RISK
FACTORS" OF THIS PROSPECTUS, BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. 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.
____________, 2005
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..............................8
USE OF PROCEEDS................................................................8
MARKET FOR COMMON EQUITY.......................................................9
DIVIDEND POLICY................................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................10
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................................17
BUSINESS......................................................................18
ANAGEMENT.....................................................................25
EXECUTIVE COMPENSATION........................................................27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................29
DESCRIPTION OF SECURITIES.....................................................32
SELLING STOCKHOLDERS..........................................................33
PLAN OF DISTRIBUTION..........................................................34
LEGAL MATTERS.................................................................35
EXPERTS.......................................................................35
ADDITIONAL INFORMATION........................................................36
REPORTS TO STOCKHOLDERS.......................................................36
INDEX TO FINANCIAL STATEMENTS.................................................36
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should carefully read this entire prospectus and the financial
statements contained in this prospectus before purchasing our securities.
CRYSTALIX GROUP INTERNATIONAL, INC.
We are a manufacturer, distributor, and marketer of laser subsurface
engraved optical quality glass products and laser subsurface engraving
equipment. Our principal products are personalized three-dimensional engraved
glass blocks that feature the facial image of one or more persons, custom
three-dimensional images, and two-dimensional portraits, as well as the laser
subsurface engraving equipment. We, through our wholly-owned subsidiary,
Lazer-Tek Designs, are one of only two entities licensed under the patent
governing subsurface decorative laser marking in crystal, glass, and other clear
materials to produce and sell these products in the U.S. corporate market.
Further, we are the only licensed company that manufactures its owns laser
subsurface engraving equipment and that has the right to sublicense purchasers
of this equipment.
As of December 31, 2004, we had 30 kiosks owned by our independent
distributors, and four corporate-owned kiosks in retail shopping malls, resorts,
promenades, casinos, and theme parks where our products are engraved and sold.
Through our subsidiaries, Lazer-Tek Designs, Inc. and Lazer-Tek Designs, Ltd.,
we also sell to corporate accounts and other specialty groups, as well as an
extensive gift line. We also produce our two-dimensional portrait products for a
national portrait studio in over 900 of its stores.
Our offices are located at 5275 South Arville Street, Suite B-116, Las
Vegas, Nevada 89118, and our telephone number is (702) 740-4616. Our website is
located at WWW.CRYSTALIXUSA.COM. Information contained in our website is not
part of this prospectus.
THE OFFERING
Securities offered..................Up to 48,889,549 shares of common stock that
may be acquired by selling stockholders.
Use of proceeds.....................We will not receive any of the proceeds from
the selling stockholders of shares of our
common stock.
Securities outstanding..............37,132,192 shares of common stock and
3,920,000 shares of Class A preferred stock
as of December 31, 2004.
Plan of distribution................The offering is made by the selling
stockholders named in this prospectus, to
the extent they sell shares. Sales may be
made in the open market or in private
negotiated transactions, at fixed or
negotiated prices. See "Plan of
Distribution."
Risk factors........................An investment is subject to risk. See "Risk
Factors."
3
SUMMARY SELECTED FINANCIAL INFORMATION
The balance sheet and income statement data shown below were derived
from our audited and unaudited consolidated financial statements. Our results of
operations for any interim period do not necessarily indicate our results of
operations for the full year. You should read this summary financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," and our financial statements.
BALANCE SHEET DATA:
DECEMBER 31, DECEMBER 31,
2004 2003
Cash.......................................................... $ 270,024 $ 58,881
Working capital (deficit) .................................... $ (4,262,946) $ (6,311,497)
Intangible assets............................................. $ 1,746,954 $ 2,621,598
Total assets.................................................. $ 5,649,553 $ 6,242,294
Total liabilities............................................. $ 11,063,140 $ 9,624,922
Stockholders' equity (deficit)................................ $ (5,413,587) $ (3,382,628)
INCOME STATEMENT DATA:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED
2004 2003 DECEMBER 31, 2002
Revenue....................................... $ 4,628,674 $ 6,364,505 $ 4,664,855
Net (loss) ................................... $ (8,302,578) $ (7,433,341) $ (294,321)
Basic and diluted (loss) per share............ $ (0.23) $ (0.19) $ (0.01)
RISK FACTORS
Before deciding to invest in us or to maintain or increase your
investment, you should carefully consider the risk factors described below,
together with all other information in this prospectus and in our other filings
with the SEC, before making an investment decision. If any of the following
risks actually occurs, our business, financial conditions or operating results
could be materially adversely affected. In such case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
DUE TO OUR SUBSTANTIAL STOCKHOLDERS' DEFICIT AT DECEMBER 31, 2004, OPERATING
LOSSES, AND WORKING CAPITAL DEFICIENCY, THE REPORT OF OUR AUDITOR CONTAINS A
PARAGRAPH EXPRESSING SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
To date, we have not had profitable operations. We expect to continue
to incur additional losses for the current year. We generated a net loss of
$8,302,578 for the year ended December 31, 2004, and had a stockholders' deficit
of $5,413,587 as of December 31, 2004. These conditions raise substantial doubt
about our ability to continue as a going concern. In order to become profitable
and sustain profitability, we will need to generate significant revenues to
offset our cost of revenues and general and administrative expenses. We may
never be able to achieve or sustain our revenue or profit goals.
WE HAVE A WORKING CAPITAL DEFICIENCY AND INSUFFICIENT CASH.
At December 31, 2004, we had a working capital deficiency of
$4,262,946. Accordingly, we are dependent upon external financing such as an
offering of debt and/or equity securities or borrowing to continue operations.
We estimate that we will require external financing of at least $1,000,000
within the next few weeks to complete the purchase of patent rights and an
additional $2,000,000 during the next few months to finance the manufacture of
equipment for resale and pay operating expenses. If we can obtain this funding,
we believe we will be able to
4
increase our revenues sufficiently to sustain and grow our operations for the
remainder of the fiscal year. If we cannot obtain at least $1,000,000 or obtain
this amount within the next month, our cash needs will grow.
WE HAVE ONLY A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE
YOUR INVESTMENT IN OUR STOCK.
Your evaluation of our business will be difficult because we have a
limited operating history. Crystalix has been in business since November 2001.
We face a number of risks encountered by early-stage companies, including our
need to develop infrastructure to support growth and expansion; our need to
obtain long-term sources of financing; our need to establish our marketing,
sales and support organizations, as well as our distribution channels; our need
to manage expanding operations; and our dependence on technology which could
become incompatible or out of date. Our business strategy may not be successful,
and we may not successfully address these risks.
WE HAVE PLEDGED ALL OF OUR ASSETS TO OBTAIN OUTSIDE FINANCING, WHICH MAY IMPAIR
OUR ABILITY TO OBTAIN ADDITIONAL FINANCING.
Because of our historical inability to generate sufficient revenues, we
rely upon external sources of financing to supplement our sales revenue. Since
our inception in November 2001, we have financed our operations externally
through the sale of our stock and by borrowing from various parties. We have
pledged all of our assets to obtain these loans. Kevin Ryan, our largest
shareholder and chief executive officer, has a first position on all of our
assets. We will need financing to expand our operations and attain the growth
goals of our business plan. Sources of external financing may include short-term
loans from affiliates of our company, bank borrowings, joint ventures, and
future debt and equity offerings. We cannot assure you that debt financing will
be available on acceptable terms, or at all, as prospective lender may not want
to subordinate their debt to that of Mr. Ryan or to make unsecured loans. Any
additional financing may result in dilution to our shareholders, including those
people who purchase our stock in this offering. Our failure to obtain external
financing will have a material adverse effect on our results of operations and
financial condition. If we cannot obtain external financing when needed, we may
be forced to reduce the growth target of our business plan and/or curtail
operations.
OUR CURRENT GROWTH STRATEGY IS DEPENDENT UPON OUR ABILITY TO OBTAIN AND SUPPORT
INDEPENDENT DISTRIBUTORS AND TO SELL TO CORPORATE ACCOUNTS.
Our growth is dependent upon our ability to obtain more independent
distributors throughout the United States and in selected locations around the
world to purchase laser machinery for a retail operation. To be successful, we
need to be able to identify suitable partners, provide them with adequate
training, and manage competently the infrastructure to support their efforts.
Our growth is also dependent upon sales to corporate accounts. To be
successful in this effort, we must be able to compete with other products in the
image promotion industry.
Our growth is also dependent on the development of the two-dimensional
portrait photo industry. To be successful, we must continue to contract with
national studio chains to carry our two-dimensional portrait products. We must
also be able to grow our production facility to meet increased demand.
SINCE WE OPERATE IN THE GIFTWARE INDUSTRY, WE ARE AFFECTED BY ECONOMIC
CONDITIONS AND CONSUMER TRENDS.
Since we manufacture and market items that would be considered
giftware, our success will depend upon a number of factors relating to consumer
spending, including future economic conditions affecting disposable consumer
income, such as employment, business conditions, interest rates, and taxation.
If existing economic conditions deteriorate, consumer spending may decline,
thereby adversely affecting our business and results of operations.
We must be able to anticipate and respond to changing merchandise
trends and consumer demands in a timely manner. If we should miscalculate
consumers' purchasing habits and tastes, we will not be able to compete against
other gift products.
5
WE FACE COMPETITION FROM EXISTING AND POTENTIAL COMPETITORS.
We face substantial competition in the glass subsurface engraving
industry, as well as competition from others offering business opportunities.
Due to our small size, it can be assumed that most if not all of our competitors
have significantly greater financial, technical, marketing and other competitive
resources. Many of our competitors and potential competitors have greater name
recognition and more extensive customer bases that could be leveraged, for
example, to position themselves as being more experienced, having better
products, and being more knowledgeable than us. To compete, we may be forced to
offer lower prices and narrow our marketing focus, resulting in reduced
revenues, if any. Additionally, we need to continue to pursue enforcement of the
United States patent for the subsurface laser engraving process against the
majority of our competition, which does not have license to use the patented
process.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT OUR PROPRIETARY TECHNOLOGY.
Our success depends on our ability to protect our proprietary
technology. In the event that a third party misappropriates or infringes on our
intellectual property, our business would be seriously harmed. Third parties may
independently discover or invent competing technologies or reverse engineer our
software. We expect that if we should successfully market franchises and
licenses to use our software, competitors may attempt to duplicate our
technology. Even if we were to obtain copyright protection on the software, we
would still have to enforce our rights against those who might attempt to
infringe on our intellectual property. Such enforcement efforts are likely to be
expensive and time-consuming.
THE LOSS OF OUR OFFICERS AND DIRECTORS OR OUR FAILURE TO ATTRACT AND RETAIN
ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends largely upon the efforts, abilities, and
decision-making of our executive officers and directors. Although we believe
that we maintain a core group sufficient for us to effectively conduct our
operations, the loss of any of our key personnel could, to varying degrees, have
an adverse effect on our operations and system development. We do not currently
maintain "key-man" life insurance on any of our executives or directors, and
there is no contract in place assuring their services for any length of time.
The loss of any one of them would have a material adverse affect on us. There
can be no assurance that the services of any member of our management will
remain available to us for any period of time, or that we will be able to enter
into employment contracts with any of our management, or that any of our plans
to reduce dependency upon key personnel will be successfully implemented.
The knowledge and expertise of our officers and directors are critical
to our operations. There is no guarantee that we will be able to retain our
current officers and directors, or be able to hire suitable replacements in the
event that some or all of our current management leave our company. In the event
that we should lose key members of our staff, or if we are unable to find
suitable replacements, we may not be able to maintain our business and might
have to cease operations, in which case you might lose all of your investment.
DUE TO THE LIMITED PUBLIC MARKET FOR OUR COMMON STOCK, INVESTORS MAY EXPERIENCE
A DECLINE IN THE SHARE PRICE OR HAVE DIFFICULTY IN SELLING THEIR SHARES.
While our common stock trades on the OTC Bulletin Board, the market has
been limited and volatile at times. For example, only 346,936 shares were traded
during the month of February 2005. We cannot assure you that the public market
for our common stock will continue to develop after this offering. If an active
market for our common stock does not develop, the liquidity of your investment
may be limited, and the price of our common stock may decline below what you
paid for it.
6
A LIMITED NUMBER OF STOCKHOLDERS WILL COLLECTIVELY CONTINUE TO OWN A MAJORITY OF
OUR COMMON STOCK AFTER THIS OFFERING AND MAY ACT, OR PREVENT CERTAIN TYPES OF
CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER STOCKHOLDERS.
As of March 22, 2005, our directors and officers own more than 39% of
our outstanding common stock, excluding shares issuable as payment on
outstanding notes and assuming that none of the preferred stock is converted
into common stock and that none of the warrants is exercised. Accordingly, these
stockholders may, if they act together, exercise significant influence over all
matters requiring stockholder approval, including the election of a majority of
the directors and the determination of significant corporate actions after this
offering. This concentration could also have the effect of delaying or
preventing a change in control that could otherwise be beneficial to our
stockholders.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION THAT MAY AFFECT THE
LIQUIDITY FOR OUR COMMON STOCK.
Our common stock is subject to regulations of the Securities and
Exchange Commission relating to the market for penny stocks. These regulations
generally require that a disclosure schedule explaining the penny stock market
and the risks associated therewith be delivered to purchasers of penny stocks
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors. The
regulations applicable to penny stocks may severely affect the market liquidity
for our common stock and could limit your ability to sell your securities in the
secondary market.
OUR ISSUANCE OF THE CONVERTIBLE NOTES AND WARRANTS COULD SUBSTANTIALLY DILUTE
THE INTERESTS OF SHAREHOLDERS AND DEPRESS THE MARKET PRICE FOR OUR COMMON STOCK.
The $9,220,764 in convertible notes we issued in July and September
2004 are convertible by the holders into shares of our common stock at any time
prior to their maturity in 2007 at a conversion price of the lesser of the
average closing price of our common stock immediately prior to conversion or
$0.08, subject to adjustments for stock splits, stock dividends, stock
combinations, and other similar transactions. In addition, we issued to the
holders of convertible notes in July and September 2004 seven-year warrants
entitling the warrant holders to purchase an aggregate of 4,375,000 shares of
our common stock at an exercise price of $0.08 per share. Accordingly, our
issuance of the convertible notes and warrants could substantially dilute the
interests of our shareholders.
This prospectus covers the resale of 44,514,549 shares issuable as
partial payment of principal and interest on the notes and the 4,375,000 shares
issuable upon exercise of the warrants. If all of these shares are issued, the
number of shares outstanding will increase from 37,132,192 to 86,021,741 and
number of shares in the "public float," which was 15,145,431 as of March 24,
2005, would increase to 64,034,980. These increases could depress the market
price for our common stock.
WE ARE OBLIGATED TO MAKE SIGNIFICANT PERIODIC PAYMENTS OF PRINCIPAL AND INTEREST
UNDER OUR NOTES.
At December 31, 2004, notes payable in the principal amount of
$7,350,242, net of debt discounts, were due to Kevin Ryan. We are obligated to
make monthly principal payments of $318,447 and accrued interest. If we at any
time default on our payment obligations the creditors will have all rights
available under the instrument, including acceleration, termination, and
enforcement of security interests. Such security interests cover all of our
assets and those of our subsidiaries.
FUTURE EQUITY TRANSACTIONS, INCLUDING EXERCISE OF OPTIONS OR WARRANTS, COULD
RESULT IN DILUTION.
From time to time, we sell restricted stock, warrants, and convertible
debt to investors in private placements. Because the stock is restricted, the
stock is sold at a greater discount to market prices compared to a public stock
offering, and the exercise price of the warrants sometimes is at or even lower
than market prices. These transactions cause dilution to existing stockholders.
Also, from time to time, options are issued to officers, directors, or
employees, with exercise prices equal to market. Exercise of in-the-money
options and warrants will result in dilution to existing stockholders. The
amount of dilution will depend on the spread between the market and exercise
price, and the number of shares involved.
7
TRADING IN OUR COMMON STOCK ON THE OTC BULLETIN BOARD MAY BE LIMITED THEREBY
MAKING IT MORE DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES OF OUR COMMON
STOCK.
Our common stock trades on the OTC Bulletin Board. The OTC Bulletin
Board is not an exchange and, because trading of securities on the OTC Bulletin
Board is often more sporadic than the trading of securities listed on an
exchange or NASDAQ, you may have difficulty reselling any of the shares that you
purchase from the selling shareholders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements." All statements
other than statements of historical facts included or incorporated by reference
in this report, including, without limitation, statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations, are forward-looking statements.
In addition, forward-looking statements generally can be identified by the use
of forward-looking terminology such as "may," "will," "expect," "intend,"
"project," "estimate," "anticipate," "believe," or "continue" or the negative
thereof or variations thereon or similar terminology. Although we believe that
the expectations reflected in such forward-looking statements are reasonable, we
cannot give any assurance that such expectations will prove to have been
correct. Important factors that could cause actual results to differ materially
from our expectations ("Cautionary Statements") include, but are not limited to,
(1) risks pertaining to implementation of our proposed expansion of our
distribution network; (2) competitive pressures in the giftware industry; (3)
disputes or claims regarding the company's proprietary rights to its software
and intellectual property; (4) acceptance of our products by corporate
customers; (5) costs of desirable retail locations; (6) availability of suitable
optic glass and laser equipment components; (7) general economic and business
conditions; (8) ability to successfully integrate acquired operations; and (9)
other factors over which we have little or no control. All subsequent written
and oral forward-looking statements attributable to us, or persons acting on our
behalf, are expressly qualified in their entirety by the cautionary statements.
We assume no duty to update or revise our forward-looking statements based on
changes in internal estimates or expectations or otherwise.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholders
of shares of our common stock. However, we may receive the sale price of any
common stock we sell to the selling stockholders upon exercise of the warrants.
We expect to use the proceeds received from the exercise of warrants, if any,
for general working capital purposes. The warrants contain a provision for
cashless exercise. If that provision is utilized, we will not receive any
proceeds. The maximum amount of proceeds we could receive if all warrants were
exercised, without utilizing the cashless exercise provision, is $350,000. We do
not expect to receive any proceeds.
8
MARKET FOR COMMON EQUITY
Our common stock has been trading on the over-the-counter bulletin
board ("OTCBB") since March 2000. The common stock traded under the symbol
"ABIL" from March 2000 to December 9, 2002. Since December 9, 2002, it has
traded under the symbol "CYXG." The following table sets forth the range of high
and low bid quotations for each fiscal quarter for the last two fiscal years.
These quotations reflect inter-dealer prices without retail mark-up, mark-down,
or commissions and may not necessarily represent actual transactions.
FISCAL QUARTER ENDING HIGH BID LOW BID
March 31, 2002............................ $ 0.37 $ 0.17
June 30, 2002............................. $ 0.24 $ 0.004
September 30, 2002........................ $ 0.06 $ 0.02
December 31, 2002......................... $ 1.50 $ 0.02
March 31, 2003............................ $ 0.97 $ 0.55
June 30, 2003............................. $ 0.91 $ 0.21
September 30, 2003........................ $ 0.91 $ 0.10
December 31, 2003......................... $ 0.92 $ 0.38
March 31, 2004............................. $ 0.76 $ 0.39
June 30, 2004.............................. $ 0.67 $ 0.15
September 30, 2004......................... $ 0.28 $ 0.07
December 31, 2004.......................... $ 0.24 $ 0.09
On April 14, 2005, the closing bid price for the common stock on the
OTC Bulletin Board was $0.06.
As of March 22, 2005 there were 486 record holders of our common stock.
DIVIDEND POLICY
We have not paid any dividends on any of our shares. We have no present
intention of paying dividends on any of our shares, as we anticipate that all
available funds will be invested to finance the growth of our business.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Effective October 4, 2002, an arrangement was completed between the
company, then known as Americabilia.com, Inc. and Crystalix USA Group, Inc., a
Nevada corporation, whereby the shareholders of Crystalix USA exchanged all of
their common shares for 23,300,000 shares of Americabilia common stock. At the
same time, we issued 7,000,000 shares of Americabilia Class A preferred stock to
acquire a technology license from Crystalix Technology, Inc.
Immediately following the acquisition, the former shareholders of
Crystalix USA held approximately 77.6% of Americabilia's total issued and
outstanding common shares. Crystalix USA was thereby deemed to be the acquiror
and surviving company for accounting purposes. Accordingly, the transaction has
been accounted for as a reverse acquisition using the purchase method whereby
the assets and liabilities of Americabilia have been recorded at their fair
market values and operating results have been included in the company's
financial statements from the effective date of purchase. The net assets of
Crystalix USA are included in the balance sheet at their historical book values
and its results of operations have been presented for the comparative prior
period.
On December 23, 2002, we acquired Lazer-Tek for 1,250,000 shares of our
common stock valued at $1,125,000 and an acquisition consulting fee obligation
of $400,000. This acquisition has been accounted for using the purchase method.
The purchase price was allocated to the assets purchased and liabilities assumed
based upon their estimated fair values as determined by management, upon
reliance on an independent valuation report, on the date of acquisition, which
approximated $3.2 million. The excess of fair value of the acquired net assets
over the cost has been allocated as a pro rata reduction of all the acquired
assets, excluding financial assets, assets to be disposed of by sale, deferred
tax assets, pension or other post-retirement benefit plans, and any other
current assets.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of us as a going concern. We incurred
a net loss for the year ended December 31, 2004 of $8,302,578, used cash for
operating activities of $3,936,800 for the year ended December 31, 2004, and at
December 31, 2004 had an accumulated deficit of $16,045,562 and a working
capital deficit of $4,262,946. These conditions raise substantial doubt as to
our ability to continue as a going concern. These consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. These consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
We plan to take the following steps that we believe will be sufficient
to provide us with the ability to continue in existence. We have recently
re-negotiated the repayment term of certain debt and have issued a $2,000,000
convertible promissory note to an unrelated third party. In July 2004, we
changed our senior management by naming Mr. Kevin Ryan as Chief Executive
Officer and Mr. Robert McDermott as Chief Financial Officer and believe that the
new management team will be able to achieve profitable operations, but there can
be no assurance that we will be able to raise sufficient capital and generate
positive cash flows from operations sufficient to sustain operations. Our
discussion in "Plan of Operation" below details additional sales strategies to
sustain operations.
During the year ended December 31, 2004, we have significantly reduced
our overhead expenses while maintaining our manufacturing facilities and
equipment. We have eliminated non-critical personnel and expenditures, frozen
wages and marketing expenditures, reduced travel and renegotiated leases. We
believe we can grow revenues during the next twelve months without a significant
increase to overhead. We have already begun selling our new laser machinery and
have the current capacity to produce up to 36 units annually without any
increases in overhead. We also have several internal machines currently
operating under capacity that will allow us to increase sales of imaged glass
with a minimal increase in overhead expenses. We also believe the impending
patent litigation against the alleged infringers will increase our revenues as
violators leave the industry and reduce competition.
10
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to impairment of long-lived assets, any
potential losses from pending litigation and deferred tax asset or liability. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions; however,
we believe that our estimates, including those for the above-described items,
are reasonable.
LEASE REVENUE. We previously entered into licensing agreements to lease
our laser equipment and our licensed laser inscription technology to individuals
and businesses that open retail establishments to sell laser inscribed glass
products. The terms of these licensing agreements are typically for five years.
The lease payments were generally paid in one or two installments upon signing
the agreement and we recognize lease revenue ratably over the term of the
contract.
MACHINE SALES. Laser equipment is no longer leased, but rather sold to
our independent distributors/retailers in three installment payments as follows:
40% upon order, 40% prior to delivery, and 20% upon completion of installation
of equipment at the retail location. We retain ownership of the proprietary
software and license use of the software to the distributor/retailer for a
monthly fee, which is normally $500.
PRODUCT SALES. Revenue from the sale of laser inscribed products is
recognized when title to the products is transferred to the customer, which is
point of sale at retail locations or customer acceptance for custom-designed
products, and only when no further contingencies or material performance
obligations are warranted. Revenue from the sale of glass cube products is
recognized when title to the products is transferred to the
distributor/retailer, which is upon shipment, and only when no further
contingencies or material performance obligations are warranted.
ROYALTY REVENUE. We recognize royalty revenue from licensing our
technology only when earned with no further contingences or material performance
obligations are warranted.
DEFERRED REVENUE. Deferred revenue represents amounts received as
non-refundable payments upon the signing of the contract and delivery of the
laser system unit, for which revenue will be recognized over the term of the
license period. Deposits received from potential customers, who have not yet
received the laser system units, are accounted as refundable customer deposits
on the balance sheet.
STOCK-BASED TRANSACTIONS. Shares of our common stock issued for
services, compensation or financing costs is valued at the market value of our
common stock at the date of issuance.
INTANGIBLE ASSETS. Intangible assets consist of product and laser
licenses, capitalized software costs, website development costs, artwork and
copyrights, trademarks, trade names, customer lists and relationships and were
mostly acquired with the purchase of Laser-Tek. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," we evaluate intangible assets and other
long-lived assets for impairment, at least on an annual basis and whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable from its estimated future cash flows. Recoverability of intangible
assets and other long-lived assets is measured by comparing their net book value
to the related projected undiscounted cash flows from these assets, considering
a number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book value
of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss. Amortization is computed using the straight-line method over
the estimated useful life of the assets.
11
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO DECEMBER 31, 2003. Our net
revenues are derived from product sales, lease revenue, and royalty revenue.
PRODUCT SALES. We generate product sales through the sale of engraved
glass products to customers in our retail kiosks, to corporate customers,
through portrait studios, and through the sale of glass blanks, display bases,
and related products to our independent distributors. Our product sales revenue
for the year ended December 31, 2004 decreased by $835,462 or 19.7% from
$4,233,846 for the year ended December 31, 2003 to $3,398,384 for the year ended
December 31, 2004. The decrease is principally due the disposition of our retail
stores in Las Vegas, Nevada in April 2003 that generated sales of approximately
$186,000 during the first four months of 2003 and a reduction in the glass
products we sell our licensees due to the closing of certain licensee locations
during the latter half of 2003 and 2004. These decreases were offset by an
increase of approximately $172,000 in corporate product sales.
The cost of revenue with regard to product consists of the cost of the
glass blanks, bases, and other items that we purchase from our suppliers. Our
cost of revenue for product sales also decreased by $1,076,298 or 39.6% from
$2,719,153 for 2003 to $1,642,855 for 2004. The decrease is due to the decrease
in product sales, but also due to a shift in selling higher margin products,
such as our corporate gift/promotional lines, resulting in an increase in our
gross margin from 35.8% in 2003 to 51.7% in 2004.
LEASE REVENUE. We receive lease revenues from our independent
distributors under the terms of master equipment leases they have executed with
us. Our lease revenue for the year ended December 31, 2004 decreased by $615,001
or 35.4% from $1,739,538 for the year ended December 31, 2003 to $1,124,537 for
the year ended December 31, 2004. The reduction in our lease revenue is due to
ten licensees canceling their contracts in late 2003 and early 2004 and the
temporary cessation of machine sales in the U.S. market in 2004. The licensee
contracts were cancelled at the request of the licensees. The requests for
cancellation were granted based on the financial condition of the licensees and
their inability to continue to run a viable business enterprise. Management
believes that up to five licensees could cease operations during the next twelve
months. Due to the negotiations with current distributors and disputes regarding
their individual receivable balance, we have allowed for potential
uncollectibility of these disputed amounts, totaling approximately 43% of our
total receivables BALANCE. Most of these amounts in disputed arose prior to our
new management team taking over the operations of the company. Since most of
these amounts are 1 to 2 years old, we have deemed them uncollectible and have
established an allowance for uncollectible accounts.
The lease cost of revenue consists primarily of the amortization of
property, plant, and equipment, including the direct personnel costs and direct
product costs associated with the assembly of the leased equipment. Our cost of
lease revenue also decreased by $314,681 or 43.1% from $730,490 for 2003 to
$415,809 for 2004 due to a decrease in lease revenue. Our gross margin increased
from 58.0% in 2003 to 63.0% in 2004 due to lower assembly costs for new leased
equipment since we did not enter into any new agreements with independent
distributors in 2004.
ROYALTY REVENUE. We receive royalty revenues from our independent
distributors under the terms of master equipment leases and software license
agreements they have executed with us. Our royalty revenue for the year ended
December 31, 2004 decreased by $285,368 or 73.0% from $391,121 for the year
ended December 31, 2003 to $105,753 for the year ended December 31, 2004. The
reduction in our royalty revenue is due to the cancellation of licensee
contracts and temporary cessation of machine sales as described above and a
reduction of sales subject to royalties generated by our independent
distributors.
Royalty cost of revenue consists of the royalty payments we make to
Laser Design International for the license rights on the patent protecting the
laser imaging process. Our cost of royalty revenue decreased by $341,948 or
84.8% from $403,064 for 2003 to $61,116 for 2004. The decrease is principally
due to the cancellation of licensee contracts and temporary cessation of machine
sales as described above and a reduction of sales subject to royalties.
Accordingly, we did not have a gross margin for 2003, but had a gross margin of
42.2% for 2004.
12
Research and development for the year ended December 31, 2004 decreased
by $397,067 or 100.0% from $397,067 for the year ended December 31, 2003 to $0
for the year ended December 31, 2004. The decrease is principally due to lack of
funds to finance such activities including the completion of our new laser
system.
Payroll and related benefits for the year ended December 31, 2004
decreased by $590,698 or 23.4% from $2,525,318 for the year ended December 31,
2003 to $1,934,620 for the year ended December 31, 2004. The decrease is a
result of a reduction in personnel due to corporate downsizing in light of the
reduction on revenue and a reduction in personnel in our retail sales staff as a
result of the sale of our retail stores in Las Vegas in April 2003.
General and administrative expenses for the year ended December 31,
2004 decreased by $811,291 or 15.6% from $5,187,854 for the year ended December
31, 2003 to $4,376,563 for the year ended December 31, 2004. The decrease is
principally due to a reduction in legal fees associated with litigation with
certain of our former officers in 2003, consulting fees and a reduction in
general overhead due to corporate downsizing in light of the reduction in
revenue. Included in general and administrative expenses for the year ended
December 31, 2003 is $1,345,000, which is the valuation for 2,590,000 shares of
our common stock issued for management consulting services rendered. Also, for
the year ended December 31, 2004 we took a charge taken to earnings for the
value of certain Series A preferred shares of $462,775 that were reallocated to
certain members of the Company's senior management team.
Impairment expense for the year ended December 31, 2004 decreased by
$186,898 or 46.8% from $399,113 for the year ended December 31, 2003 to $212,215
for the year ended December 31, 2004. The 2004 expenses were comprised of a
write down of capitalized software costs of $176,052 and website development
costs of $36,163. The 2003 expenses were comprised of a write down of certain
property and equipment of $243,893 and our customer list and relationships of
$155,220.
During the year ended December 31, 2003, we wrote off our investment in
Vitro Laser Gmbh of $500,000. We had originally paid Vitro an advance of
$500,000 that was to be applied to the purchase price of that company. In
accordance with the legal settlement on November 14, 2003, we allowed Vitro to
retain the advance.
Other expense, net for the year ended December 31, 2004 decreased by
$49,809 from other expense of $27,309 for the year ended December 31, 2003 to
other income of $22,500 for the year ended December 31, 2004.
Interest expense for the year ended December 31, 2004 increased by
$3,402,096 or 374% from $908,478 for the year ended December 31, 2003 to
$4,310,574 for the year ended December 31, 2004. The significant increase is due
to the increase in debt, the amortization of debt issue costs of $460,816 and a
charge to interest expense of $2,747,011 for the issuance of common stock and
the reallocation of certain Series A preferred shares to Kevin Ryan and John
Woodward as additional consideration for funding the company. Included in
interest expense for the year ended December 31, 2003 is $528,000, which is the
valuation of 660,000 shares of our common stock issued as consideration to John
Woodward for extending the repayment terms of a loan to us of $1,500,000.
LIQUIDITY AND CAPITAL RESOURCES
AS OF DECEMBER 31, 2004. At December 31, 2004, we had a working capital
deficit of $4,262,946, as compared to $6,311,497 at December 31, 2003. We had
cash and cash equivalents of $270,024 at December 31, 2004 as compared to cash
and cash equivalents of $58,881 at December 31, 2003. The decrease in the
working capital deficit is principally due to the restructuring of related party
debt and the issuance of a $2,000,000 convertible promissory note to
CMKXTREME.COM (also DBA CMKXTREME, Inc.), an unrelated third party.
Our current cash on hand plus cash expected to be generated from
operations will not be sufficient to sustain our current operations and service
our outstanding debt for the next twelve months. In order to meet our short-term
cash needs, we will need to issue debt or equity securities of at least
$3,000,000 in order to service existing debt requirements and to sustain
operations until such time that we can generate positive cash flow from our
operations. If we can obtain financing to meet these short-term needs, then we
should be able to generate a positive cash flow in the long-term from the sales
generated from the machinery that would be manufactured using funds received
from the financing. In the first quarter of 2005, we have introduced our new
retail machine within the U.S. market and are taking deposits on their delivery.
Two machines were sold in February. The sale of these machines
13
will provide operating capital necessary to meet overhead and to buy parts for
the manufacture of additional retail machines. Glass orders are also growing as
we penetrate the promotional product industry. Additional capital will be
necessary to close on the purchase of LDI and also purchase components for the
manufacture of production machines to sell and use internally. As of March 13,
2005, we have received a verbal commitment for the investment in capital of a
minimum of $1,000,000. This amount would be sufficient to close on the LDI
purchase and begin manufacturing machines for resale. An additional $2,000,000
would be required during the next few months to finance the mass manufacture of
equipment for resale and pay off some operating expenses. If we can obtain this
funding, we believe we will be able to increase our revenues sufficiently to
sustain and grow our operations for the remainder of the fiscal year.
During the year ended December 31, 2004, our financing activities
provided cash of $4,345,695, while our operating and investing activities used
cash of $3,936,800 and $198,347, respectively. The cash used in operating
activities was principally a result of the net loss we incurred. Our negative
cash flow from operations was principally funded by borrowing additional amounts
from a related party, Kevin Ryan, and the issuance of a $2,000,000 convertible
promissory note to CMKXTREME.COM.
During the year ended December 31, 2004, we obtained $2,452,825 from
advances from a related party, Kevin Ryan, and $2,000,000 from the issuance of a
convertible promissory note to an unrelated third party, CMKXTREME.COM.
We recently restructured all of our related party debt as follows:
o On July 21, 2004, we issued a convertible promissory note to Mr. John
Woodward, our former President, in the amount of $1,824,000, which
represents principal due on a previously issued note payable in the
amount of $1,343,722 plus accrued interest in the amount of $480,279.
This note bears interest at 10% per annum and calls for monthly
interest payments from August 1, 2004 to December 1, 2004. Beginning on
January 1, 2005, this note requires monthly principal payments of
$50,405 plus accrued interest with any unpaid principal and interest
due on July 1, 2007. The monthly principal and interest payments can be
paid with shares of our common stock at the option of the holder. The
conversion price is the lesser of the average closing price of our
common stock five business days immediately prior to the conversion
notice or $0.08. We have agreed to register the shares issuable upon
conversion of this note. We have determined that there is a beneficial
conversion feature associated with this convertible promissory note in
the amount of $615,600. This amount will be amortized as financing
costs over the term of the note. This note is secured by all of our
assets, subordinated to Mr. Ryan's secured position. The note is in
default on certain interest payments, but the default provisions have
been waived by the holder for the next year. The effective interest
rate on this promissory note is approximately 21%.
o On July 21, 2004, we issued a convertible promissory note to Mr. Kevin
Ryan, our Chief Executive Officer, in the amount of $5,396,764, which
represents (a) principal due on two previously issued notes payable in
the amounts of $852,680 and $1,010,000, (b) principal due under a
revolving credit agreement in the amount of $1,766,500, (c) principal
due under an additional note payable in the amount of $1,500,000 and
(d) accrued interest on the above mention obligations in the amount of
$267,584. This note bears interest at 10% per annum and calls for
monthly principal payments from August 1, 2004 to December 1, 2004 of
$45,000. On the last day of the month beginning on August 31, 2004
through November 30, 2004, the accrued interest will be added to the
principal amount. Beginning on January 1, 2005, this note requires
monthly principal payments of $174,584 with any unpaid principal and
interest due on July 1, 2007. The monthly principal and interest
payments can be paid with shares of our common stock at the option of
the holder. The conversion price is the lesser of the average closing
price of our common stock five business days immediately prior to the
conversion notice or $0.08. In addition, we granted to Mr. Ryan a
warrant to purchase 1,875,000 shares of our common stock. The exercise
price is $0.08 per share and may be exercised by the holder at any time
prior to July 21, 2011. The warrants also include a cashless exercise
feature that allows the holder to pay the exercise price by
surrendering a sufficient number of warrants to pay for the exercise
price of the warrants being exercised as follows: warrants to be
surrendered equals the total exercise price of warrants being exercised
divided by the fair value of our common stock at the date of exercise.
We have agreed to register the shares issuable upon conversion of this
note and exercise of the warrant. In accordance with EITF 00-27, we
first determined the value of the
14
note and the fair value of the detachable warrants issued in connection
with this note. The estimated value of the warrants of $200,625 was
determined using the Black-Scholes option pricing model and the
following assumptions: term of 7 years, a risk free interest rate of
3.5%, a dividend yield of 0% and volatility of 371%. The face amount of
the note payable of $5,396,764 was proportionately allocated to the
note and the warrants in the amounts of $5,203,330 and $193,434,
respectively. The value of the note was then allocated between the note
and the beneficial conversion feature, which amounted to $3,188,488 and
$2,014,842, respectively. The combined total discount is $2,208,276,
and is being amortized over the term of the note. This note is secured
by all of our assets. The note is in default on certain principal and
interest payments, but the default provisions have been waived by the
holder for the next year. The effective interest rate on this
promissory note is approximately 24%.
o On July 21, 2004, we issued a promissory note to Ryan Capital
Management, Inc. (this company is controlled by Kevin Ryan) in the
amount of $452,137, which represents principal due on a previously
issued note payable in the amount of $400,000 plus accrued interest in
the amount of $52,137. This note bears interest at 10% per annum and
calls for monthly interest payments from August 1, 2004 to December 1,
2004. Beginning on January 1, 2005, this note requires monthly
principal payments of $37,902 plus accrued interest with any unpaid
principal and interest due on December 1, 2005. This note is secured by
all of our assets. The note is in default on certain interest payments,
but the default provisions have been waived by the holder for the next
year.
o On August 1, 2004, we issued a promissory note to McCary & Rood (this
company is controlled by Kevin Ryan) in the amount of $280,000, which
represents past due consulting fees under a consulting agreement dated
May 28, 2003. This note calls for monthly payments beginning August 1,
2004 of $30,000 with any unpaid principal due on May 1, 2005. This note
is secured by all of our assets. The note is in default on certain
principal payments, but the default provisions have been waived by the
holder for the next year.
o On August 1, 2004, we issued a promissory note to McCary & Rood in the
amount of $214,037, which represents past due reimbursable expenses
under a consulting agreement dated May 28, 2003. This note calls for
monthly payments beginning August 1, 2004 of $30,000 with any unpaid
principal due on March 1, 2005. This note is secured by all of our
assets. The note is in default on certain principal payments, but the
default provisions have been waived by the holder for the next year.
o On September 23, 2004, we issued a convertible promissory note to
CMKXTREME.COM in the amount of $2,000,000. This note bears interest at
10% per annum and calls for monthly principal payments of $83,333 plus
accrued interest beginning November 1, 2004 with any unpaid principal
and interest due on October 1, 2006. The monthly principal and interest
payments can be paid with shares of our common stock at the option of
the holder. The conversion price is the lesser of the average closing
price of our common stock five business days immediately prior to the
conversion notice or $0.08. In addition, we granted to CMKXTREME.COM a
warrant to purchase 2,500,000 shares of our common stock. The exercise
price is $0.08 per share and may be exercised by the holder at any time
prior to September 23, 2011. The warrants also include a cashless
exercise feature that allows the holder to pay the exercise price by
surrendering a sufficient number of warrants to pay for the exercise
price of the warrants being exercised as follows: warrants to be
surrendered equals the total exercise price of warrants being exercised
divided by the fair value of our common stock at the date of exercise.
We have agreed to register the shares issuable upon conversion of this
note and exercise of the warrant. In accordance with EITF 00-27, we
first determined the value of the note and the fair value of the
detachable warrants issued in connection with this note. The estimated
value of the warrants of $200,000 was determined using the
Black-Scholes option pricing model and the following assumptions: term
of 7 years, a risk free interest rate of 3.5%, a dividend yield of 0%
and volatility of 371%. The face amount of the convertible promissory
note of $2,000,000 was proportionately allocated to the note and the
warrants in the amounts of $1,818,182 and $181,818, respectively. The
value of the note was then allocated between the note and the
beneficial conversion feature, which amounted to $1,636,364 and
$181,818, respectively. The combined total discount is $363,636, and is
being amortized over the term of the note. This note is secured by all
of our assets, subordinated to Mr. Ryan's secured position. The note is
in default on certain principal and interest payments, but the default
provisions have been waived by the holder for the next year. The
effective interest rate on this promissory note is approximately 19%.
15
The obligations owed to Kevin Ryan and his entities are secured by a
pledge of all our assets, under the terms of a security agreement dating back to
December 2002. Mr. Ryan obtained a Writ of Possession in May 2003, as a result
of his enforcement of the security agreement. Under the terms of a settlement
agreement reached in July 2004, we entered into the notes described above with
Mr. Ryan and his entities and agreed that these obligations would continue to be
secured by the pledge of assets contained in the security agreement. Mr. Ryan
dismissed the legal proceeding through which he obtained the Writ of Possession.
Mr. Woodward's note is also secured by the same security agreement.
In addition, on July 21, 2004, we issued 3,019,000 shares of our common
stock to Kevin Ryan as additional consideration for the financing provided to
us. Also, certain holders of our Series A preferred stock reallocated 2,647,900
of their shares to Kevin Ryan and John Woodward and senior members of our
management team as an inducement to investors to restructure their notes and as
an inducement to management to remain with the company. We will take a charge to
financing costs and compensation expense of $2,747,011 and $409,275,
respectively, related to the issuance and reallocation of these common and
preferred shares.
PLAN OF OPERATION
We believe that we have positioned Crystalix to become a leader in the
sub-surfaced glass etching industry, now that our reorganization is almost
complete. Our management has developed a plan of operation for 2005. In our Las
Vegas corporate headquarters, we have put into place officers and department
heads bringing various areas of expertise to design and implement our plan of
operation.
Our sales push began in 2005 at the Promotional Product Industry
Convention, where our goal is to increase sales in the corporate and promotional
lines. The two-dimensional portrait line is growing rapidly as we have just
closed on our first Christmas season producing two-dimensional portraits for a
national portrait studio in over 900 of its stores. Entering 2005, we are in
negotiations with other national portrait studios as the two-dimensional
portrait demand continues to grow at a rapid pace.
As a result of not marketing retail laser engraving equipment in the
United States in 2004, we have accumulated numerous inquiries for new
independent distributorships and aggressively resumed negotiations in the first
quarter of 2005 to sell the laser engraving equipment in the United States. We
expect to start delivering units with the United States market by the beginning
of the second quarter of 2005. We have a sales office in Dublin, Ireland, that
sold the new laser equipment within Europe during 2004 and intend to accelerate
that pace this year. We believe that this sales effort should have an immediate
positive impact on revenues and cash flow as early as the end of the first
quarter of 2005.
The production facility based in Berlin, Germany, had finalized the
research and development of the new machine in 2003 and we began producting and
selling the new laser equipment in 2004. First quarter estimates are for the
production of three new machines, for which all should have a sales commitment
by April 2005. The production should then increase to five machines per month
for the second quarter, with anticipated demand for all machines within the same
quarter. We have set the same sales targets for the last two quarters of 2005.
We believe there is worldwide demand for the machines greater than current
production capacity. Accordingly, we will continue to seek outside financing to
increase production capacity while machine and glass sales continue to move us
towards financial stability and growth within the current structure.
We plan to initiate a second phase of our independent distributors
program. For a reduced fee, we will sell a satellite laser system to a satellite
partner, consisting of a three-dimensional scanner/camera and computer
workstation. We will offer an optional sales booth and display counter. Instead
of producing the glass products at the retail location, a satellite partner
would scan a customer's facial image, e-mail the image and order information to
us, and allow us to produce the actual glass product. The satellite partner
would pay us a software-licensing fee of 10% of gross sales and a facial image
production fee. In addition, a satellite partner would have the option to
purchase corporate awards, wedding, and giftware items at wholesale prices for
resale to the public.
We have secured direct glass suppliers in China, which should help
reduce glass and component costs. With the completion of the new laser-engraving
machine, we expect expenses to decrease in 2005 and our
16
production efficiencies to increase and lead to a lower cost of manufacturing
the machine. Negotiations are in progress with major component suppliers, which
should result in quantity discounts on purchases. Accordingly, we expect cost of
goods sold to decrease as a percentage of sales in both glass and machine
segments.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On May 10, 2004, our directors approved the election of De Joya &
Company to audit the financial statements for the fiscal year ended December 31,
2004. Also on May 10, 2004, we dismissed the former accountants, Stonefield
Josephson, Inc. The decision to change auditors was based upon financial
considerations. Our board of directors recommended De Joya & Company. During the
two most recent fiscal years and the subsequent interim period, neither we nor
anyone on our behalf consulted De Joya & Company regarding the application of
accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on our financial statements. We
did not receive, and De Joya & Company did not provide, any written or oral
advice that was an important factor in reaching a decision as to an accounting,
auditing or financial reporting issue prior to its engagement by us.
Stonefield Josephson, Inc. had audited our financial statements for
each of the last two fiscal years ended December 31, 2003. The report of
Stonefield Josephson, Inc. did not contain an adverse opinion or disclaimer of
opinion and was not modified as to uncertainty, audit scope, or accounting
principles, except as follows:
The audit report of Stonefield Josephson, Inc. on our financial
statements as of and for the fiscal year ended December 31, 2003 contained a
separate paragraph stating:
"The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1, the Company has incurred a net
loss of $7,433,341, used cash for operations of $1,170,778 in the
year ended December 31, 2003, is a party to various litigation,
has a stockholders' deficit of $3,382,628 as of December 31,
2003 and has a working capital deficit of $6,311,497 as of
December 31, 2003. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome
of this uncertainty."
During the two most recent fiscal years and the subsequent interim
period through May 10, 2004, there were no disagreements with Stonefield
Josephson, Inc. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
the satisfaction of Stonefield Josephson, Inc., would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
There were no other "reportable events" as that term is described in
Item 304a(1)(v) of Regulation S-K occurring within our two most recent fiscal
years and the subsequent interim period ending May 10, 2004.
17
BUSINESS
BUSINESS DEVELOPMENT
We were originally incorporated in the state of Florida on August 22,
1989 under the name First Zurich Investments, Inc. On November 15, 1996, the
name of the company was changed to Terra International Pharmaceuticals, Inc. On
August 11, 1999, we acquired Veltre Enterprises, Inc. dba Unique Images. Unique
Images designed and manufactured Hollywood and sports memorabilia for
memorabilia galleries, as well as provided custom picture framing services. On
September 7, 1999, we changed our name to americabilia.com, Inc. and on
September 14, 1999, we conducted a recapitalization through the merger of
americabilia.com Nevada with and into Worldwide Collectibles, Inc., a Nevada
corporation and a wholly owned subsidiary we formed for the purpose of the
merger. We issued a total of 6,115,000 shares of our common stock to the former
stockholders of americabilia.com Nevada. In January 2001, we merged Unique
Images into Worldwide Collectibles. As americabilia.com, Inc., we engaged in
direct Internet merchandising of American-themed collectibles, gifts and
memorabilia. On June 25, 2002, we announced our plans to cease business
operations.
On October 4, 2002, we acquired all of the outstanding common stock of
Crystalix USA Group, Inc. in exchange for 23,300,000 shares of our common stock
and an exclusive technology license from Crystalix Technology, Inc. in exchange
for 7,000,000 shares of our Class A preferred stock. We changed our name to
Crystalix Group International, Inc. on November 22, 2002 and changed our
domicile to Nevada on November 26, 2002.
On December 23, 2002, we acquired all of the outstanding common stock
of Lazer-Tek Designs, Inc. and Lazer-Tek Designs, Ltd. (collectively
"Lazer-Tek") in exchange for 1,250,000 shares of our common stock valued at
$1,125,000 and an acquisition consulting fee obligation of $400,000. In
addition, we loaned $1,000,000 to Lazer-Tek to repay existing debt, which is
carried as an intercompany receivable from Lazer-Tek and eliminated in the
financial statement consolidation. We also entered into a promissory note for
$852,680. Lazer-Tek was acquired for several strategic marketing and operation
reasons. With a wide base of corporate awards and gift clients to collegiate
giftware and traditional advertising specialty groups, and with a collection of
valuable engineered art pieces, Lazer-Tek was poised for market penetration with
the added collectibles provided by Crystalix USA. Additionally, our management
realized that with our advanced software and laser technologies, we could
improve both production time and quality at Lazer-Tek, thereby enhancing the
overall operations of Lazer-Tek.
On December 15, 2002, we executed an agreement to acquire 50% of the
ownership interest of Vitro Laser GmbH, a German corporation ("Vitro"), for
consideration consisting of cash and the right to acquire shares of our common
stock. Vitro manufactures laser-etching equipment used in the glassware
industry. No formal agreements were consummated. We had advanced $500,000 to
Vitro and have written this amount off during the fiscal year ended December 31,
2003 to other expense due to the uncertainty about successfully completing this
acquisition. We sued Vitro and subsequently settled the litigation.
OUR PRODUCTS
Our principal products are personalized three-dimensional engraved
glass blocks that feature the facial image of one or more persons, custom
three-dimensional images, and two-dimensional portraits, as well as the laser
subsurface engraving equipment. We, through our wholly-owned subsidiary,
Lazer-Tek Designs, are one of only two entities licensed under the patent
governing subsurface decorative laser marking in crystal, glass, and other clear
materials to produce and sell these products in the U.S. corporate market.
Further, we are the only licensed company that manufactures its owns laser
subsurface engraving equipment and that has the right to sublicense purchasers
of this equipment.
Our engraving process involves the use of a high-resolution digital
camera, a laser image scanner, and a laser that is configured together by a
standard desktop personal computer, using our proprietary software and a Windows
operating system. The laser image scanner converts images from the digital
camera, a customer's digital image, or a hard copy photograph into a
two-dimensional digitally formatted image that will be engraved into the center
of the glass block by the laser. The scanner processes the three-dimensional
image from several angles to create a three-dimensional or two-dimensional
digital model of the image and plots the points where the laser will be
18
directed to engrave the image in the glass. The scanner and software generally
complete the conversion process in 15 to 30 seconds. The glass block is then
placed into the laser chamber for engraving. The engraving process generally
takes a few minutes or less, depending on the number of images to be engraved,
the degree of detail in the images, and whether titles, names, or other
materials are to be added with the images.
The image can be engraved into glass blocks of different sizes and
shapes. The suggest retail price of the engraved glass ranges from $59 to $400,
depending on the size of the glass block and number of images to be engraved,
with a typical glass block retailing for $100 to $150. Engraved glass pieces for
corporate customers carry suggest retail prices from $19 to as much as several
thousands of dollars. We also offer a variety of accessories and bases on which
to display the engraved glass blocks.
PRODUCT LINES
There are numerous applications for our engraving system. We are
currently focusing on the following product lines:
o two-dimensional portraits;
o corporate/award items;
o giftware;
o three-dimensional facial images;
o two-dimensional images;
o licensed images and logos;
o tabletop items; and
o gallery pieces.
DISTRIBUTION
We sell our products
o to corporate distributors;
o to mass marketing organizations, such as QVC;
o through retail kiosks owned by us and by our independent
distributors;
o through college catalogs and bookstores;
o through photo distributors and retail outlets; and
o through art galleries.
PHOTO INDUSTRY. As of December 2004, we are producing our
two-dimensional portrait products for a national portrait studio in over 900 of
its stores. Entering 2005, we are in negotiations with other national portrait
studios as the two-dimensional portrait demand continues to grow at a rapid
pace. We are focused on building strategic relationships in this industry and
will aggressively continue to seek market share. We believe our unique software
platform allows companies to merge seamlessly photography and image data via the
Internet, thus providing photographers of any size the ability to offer our
product with little or no additional overhead.
CORPORATE SALES. With the acquisition of Lazer-Tek and the presence of
Crystalix USA at the promotional product industry trade shows, corporate
application of our laser engraved products for awards, gifts and presentation
has been growing steadily at 15-20% quarterly.
INFINITY BUYING CLUBS. We have been aggressively pursuing mass
marketing organizations such as NASCAR, the National Basketball Association,
Major League Baseball, and the Kentucky Derby, and have sold products to these
organizations or teams within these organizations. With wholesale and retail
ability available in these venues, we will explore large sales opportunities for
our entire market lines.
RETAIL KIOSKS. The kiosks typically occupy no more than 120 square feet
and can be operated by only one or two employees. As of December 31, 2004, the
following kiosks were in operation by our independent distributors:
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DATE OPENED LOCATION
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March 2002 DFS Galleria - Honolulu, Hawaii
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May 2002 Park Meadows Mall - Parker, Colorado
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May 2002 First Street Station - Rehoboth Beach, Delaware
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May 2002 Mall of America - Bloomington, Minnesota
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June 2002 Desert Passage, Aladdin - Las Vegas, Nevada
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August 2002 Tacoma Mall - Tacoma, Washington
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September 2002 Dubai International Airport - Dubai, United Arab Emirates
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November 2002 Fisherman's Wharf - Monterey, California
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November 2002 1145 Prospect Street - La Jolla, California
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November 2002 3rd Street Promenade - Santa Monica, California
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November 2002 Disney Arribas - Orlando, Florida
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November 2002 622 Royal Street - New Orleans, Louisiana
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December 2002 Stratosphere Shops - Las Vegas, Nevada
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December 2002 Beach Towers - Atlantis Paradise Island Resort, Nassau, Bahamas
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February 2003 Crystalix of Henderson - Henderson, Nevada
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February 2003 Harrah's Carnival Court - Las Vegas, Nevada
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February 2003 Prudential Center Marketplace - Boston, Massachusetts
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April 2003 Chicago - Gurnee, Illinois
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April 2003 Harrahs - Laughlin, Nevada
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April 2003 Village Shops - Gatlinburg, Tennessee
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November 2003 Bluewater - Greenhithe - Ken, United Kingdom
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December 2003 Deira City Center - Dubai, United Arab Emirates
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December 2003 The Square - Tallaght - Dublin, Ireland
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December 2003 ABC Shopping Mall - Beirut, Lebanon
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December 2003 Monte Casino - Johannesburg, South Africa
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February 2004 OCBC Center - Singapore, Singapore
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February 2004 Marafi Building - Kuwait
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May 2004 Pacific Fair - Broadbeach - Queensland, Australia
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June 2004 Mid Summer Arcade - Central Milton
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September 2004 The Grosvenor Shopping Center - Chester, United Kingdom
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We also had the following company-owned retail locations:
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DATE OPENED LOCATION
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November 2003 Jervis Shopping Center - Dublin, Ireland
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September 2004 Sony Center - Berlin, Germany
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December 2004 Blanchards Town - Dublin, Ireland
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December 2004 Harvey Norman Store - Dublin Ireland
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INDEPENDENT DISTRIBUTORS. Through our software license, we grant our
independent distributors a non-exclusive right to operate our laser engraving
system during a specified term and any extensions thereof in an identified
exclusive territory. We also make available to our independent distributors
glass blanks, light bases, collection images, and related products from a
pre-approved vendor or us to assure quality.
In 2004, we paid royalties for many of our independent distributors
that were not current with Norwood's licensing requirements, as a result of
their neglecting to submit their quarterly royalty payments for the patent
sub-license. These royalties were due for their sub-license of the patent on
their laser-imaged optic glass sales. Our agreement with Norwood and subsequent
right to grant sub-licenses to our distributors require us to submit royalties
on all US independent distributor kiosk sales or to take action against them. We
are currently re-negotiating licensing agreements to bring all independent
distributors into compliance. All independent distributors are being asked to
sign a new contract and comply with the royalty payments. While this failure to
pay royalties has had a
20
negative effect on our revenues in the short term, we believe this should be
corrected by the middle of the second quarter, which is the target date to have
all independent distributors under new contracts. Our independent distributors
can extend the terms of their agreements if they are in good standing under the
new lease/licensing agreements and reach a royalty settlement. We did not allow
any new independent distributors in the United States during the restructuring
period of 2004. A few of the affiliates may elect to not sign the new contract.
It is anticipated that if we fail to renegotiate to the satisfaction of certain
independent contractors, mediation or litigation may become necessary.
COLLEGE CATALOGS AND BOOKSTORES. We manufacture certain licensed
articles under the line name of "Collegiate Crystal". The line consists of laser
reproductions of collegiate logos, mascots, buildings, and landmarks inside of
high-quality glass cubes pursuant to orders from our collegiate distributor,
Jardine Associates. We plan to expand this line by the end of the third quarter
of 2005.
INTERNATIONAL OPERATIONS. Crystalix USA formed a wholly owned
subsidiary on October 24, 2002, Crystalix Imaging Limited, doing business as
Crystalix Europe, to explore the marketability for corporate owned locations in
the western European countries of Ireland, England and France. Through December
2004, Crystalix Europe opened locations in Dublin, Ireland, with independent
distributors. These locations are being well received and we plan to open other
locations worldwide. In addition, our production facility in Berlin, Germany,
has a kiosk at the Sony Center, which has also been very well received and
generated numerous inquiries for kiosk sales that will be pursued in 2005.
Revenues from our international operations were approximately $990,612.
LASER EQUIPMENT
Our laser systems consist of components purchased from outside vendors.
We then configure these components with our proprietary software and make
necessary adjustments to laser, mirrors, and electrical and computerized
components as required. When the laser system is properly configured, we enclose
the components with a customized casing and perform quality control tests on the
system prior to release.
REVENUE COMPONENTS
We have three major components of revenue:
o product revenue, which includes both the sale of glass product and
laser system machinery;
o lease revenues; and
o royalty revenues.
In 2004 the product sales were virtually split between glass and
machinery. We expect the machinery to become a much more significant portion of
revenue as we sell our laser system into the U.S. market in 2005. Glass product
sales will also increase, even though it will become a smaller percentage of
product sales. As we enter into a full year of two-dimensional portrait studio
production, we anticipate a large growth in this market. In the fourth quarter
of 2004, two-dimensional portrait sales represented almost $250,000 of total
revenues.
Another major revenue component is lease revenues. This has been a
major revenue component since all laser equipment was sold on a lease basis
prior to 2004. Since most of these leases were 60-month leases from 2002 and
2003, we anticipate these revenues to still play a significant portion of our
revenue for 2005.
Royalty revenues should grow again in 2005 as we grow our independent
distributor base within the U.S.
SUPPLIERS
The equipment components for our laser engraving system are available
from several suppliers. Currently, we use a high-resolution digital camera and
laser image scanner, a laser that uses neodymium: yttrium aluminum garnet
(Nd:YAG) as the material used for light emission, and a desktop personal
computer. We had minimum purchase contracts with many of our equipment suppliers
and are renegotiating our supplier contracts as we continue to seek better
technology, pricing, and service. We currently do not have any significant
vendor contracts.
21
We have secured suppliers in China for our glass blocks, which are
lead-free and arsenic-free. We believe that there are only a limited number of
suppliers of glass that can meet our needs. We have identified two potential
suppliers in the United States, several potential European suppliers, and one
other Chinese supplier. The glass that we use has the following characteristics:
o High transmittance and refraction of light throughout the visible and
near infrared spectra;
o Extremely low bubble and inclusion content;
o Requires no special handling and has stable chemical properties;
o Capable of being precision-engraved using available laser technology; and
o Environmentally acceptable due to absence of lead and arsenic.
INTELLECTUAL PROPERTY
PATENTS; LICENSES; ROYALTY AGREEMENTS. Our laser engraving system is
derived in large part from patents held by others. Laser Design International,
LLC ("LDI") had exclusive license rights to a family of patents which govern
subsurface decorative laser marking in crystal, glass, and other clear
materials. These patents were first filed in 1991 and have been issued in the US
and almost every part of the world. LDI purchased the actual patents in February
2003, as opposed to having had only the exclusive rights to those patents
previously. In addition, LDI has another US patent, which improves on the
original claims and more specifically applies them to the use of the process for
manufacture of decorative crystal and glass giftware. These patents cover both
the process of manufacturing laser-etched crystal giftware, as well as the
manufacturing machine and finished giftware products themselves.
In 1995, LDI issued a license for these patent rights and the
underlying technology to Janesville Group, Ltd. of Janesville, Wisconsin, which
is now a part of Norwood Promotional Products, Inc., based in Austin, Texas.
That license granted certain exclusive rights for manufacture of corporate
giftware in North and South America. Norwood Promotional Products, Inc. markets
20 product lines with over 6,000 products through promotional product
distributors, and is believed to be the world's largest supplier of promotional
products.
In February 1999, LDI and the Janesville Group, Ltd. granted Lazer-Tek
a non-exclusive license for the manufacture and sale of decorative products for
the specialty advertising, premium, and retail markets in the US, Canada,
Mexico, the United Kingdom, Central America, South America, and the Caribbean.
Lazer-Tek paid a royalty of 17% of net sales for annual sales of up to $500,000
and 20% of net sales for annual sales of $500,000 or more. This obligation was
contracted to continue until April 27, 2010.
In October 2001, LDI granted Crystalix USA a non-exclusive
non-transferable license to use this technology for the manufacture and sale of
decorative products in the giftware market segments, the wearable jewelry and
gemstone material market segments, and the flat glass and architectural glass
market segments. LDI also granted us a non-exclusive non-transferable license to
manufacture, use, sell and lease laser subsurface engraving machines to LDI
subsurface engraving licensees. These licenses granted by LDI are subject to the
limitation that our activities cannot conflict with the exclusive rights granted
to the Janesville Group unless the Janesville Group expressly agrees in writing
to allow the activity. We paid LDI $25,000 for the license and are obligated to
pay LDI a royalty of 10% of the net sales for decorative products sold to all
market segments except the flat glass and architectural glass market segments.
For those sales, the royalty rate is 3% of net sales. The obligation to pay
royalties continues until April 27, 2010 or termination of the license
agreement. By letter dated January 1, 2002, LDI agreed that our royalty
obligations shall be no higher than $3.00 per block, recognizing that our
business included facial marking and three-dimensional imaging improvements that
are outside of the patents licensed to us.
Effective October 1, 2003, we entered into an amended and restated
patent license agreement with LDI and Norwood, which superseded the February
1999 and October 2001 agreements described above. We now have a non-exclusive,
non-transferable, royalty-bearing sub-license from LDI to make, use, offer for
sale, and sell decorative products using the technology other than in the United
States for a royalty of $3.00 per image. Norwood granted us a non-exclusive,
non-transferable (other than reseller licenses to permitted resellers),
revocable and royalty-bearing
22
sub-license for the United States in the retail market segment. Norwood also
granted Lazer-Tek a non-exclusive, non-transferable (other than reseller
licenses to permitted resellers), revocable and royalty-bearing sub-license for
the United States in the corporate market segment. All applications for a
permitted reseller license must be approved by Norwood. We are required to pay
Norwood royalty payments based on a percentage of 10% of net sales in the United
States in the retail market and corporate market segments on a quarterly basis.
In addition to the patents described above, we have the exclusive
worldwide rights to other proprietary technology. Rainer Eissing, our chief
executive officer, has developed certain facial marking and three-dimensional
imaging improvements that are outside of the engraving patents licensed by us.
We obtained the rights to Mr. Eissing's technology by issuing Crystalix
Technology 7,000,000 shares of our Class A preferred stock.
We are currently negotiating with LDI to purchase its patents and
anticipate completion of the negotiations by April 2005. The patents are an
integral part of our business and will continue to be so through the duration of
the patents, which is August 15, 2011.
Lazer-Tek has an interest in US Patent No. 6,087,617 - computer
graphics system for generating an image reproducible inside optically
transparent material. Lazer-Tek has full rights to and possession of the patent,
which is co-owned with Igor Troitski. The patent expires May 7, 2016.
TRADEMARK AND TRADE NAME. In January 2003, we applied for federal
trademark registration of Crystalix and the diamond logo (serial number
76/489692). As of the date of this prospectus, such registration has not been
obtained. We hold Nevada trademarks on the Crystalix name.
Lazer-Tek has the following federally registered trademarks, which are
effective for ten years from the date of registration:
o For "LTD" - No. 2,021,941 registered December 10, 1996
o For "Collegiate Crystal" - No. 2,504,803 registered November 6,
2001
o For "Photocrystals" - No. 2,787,498 registered November 25, 2003
COMPETITION
We compete generally with many other manufacturers and retailers in the
giftware industry and specifically with those who offer personalized and
engraved products. With regard to manufacturers of laser subsurface engraved
optic glass items, we are aware of other competitors in the United States, but
only a few that comply with the patents described above. Most of the competition
has not received use of the patent rights and many are currently in mediation
with the patent owner regarding alleged infringements. As described above, we,
through our wholly-owned subsidiary, Lazer-Tek Designs, are one of only two
entities licensed under the patent governing subsurface decorative laser marking
in crystal, glass, and other clear materials to produce and sell these products
in the U.S. corporate market. Further, we are the only licensed company that
manufactures its owns laser subsurface engraving equipment and that has the
right to sublicense purchasers of this equipment.
There are several companies that offer laser subsurface engraved glass
products for sale to the public. However, many only offer decorative glass
pieces that are already engraved, as opposed to offering custom-engraved
products. We believe that we compete favorably, due to the breadth of our
product lines and methods of distribution.
We believe that we compete on the basis of
o Image quality, definition and accuracy;
o Crystal quality;
o Crystal selection;
o Production/turnaround times;
o Retail location and accessibility; and
o Creativity with respect to the art image and glass shape.
23
RESEARCH AND DEVELOPMENT
During the fiscal years ended December 31, 2004 and 2003, we spent $nil
and $397,067, respectively, on research and development activities.
GOVERNMENT REGULATION AND COMPLIANCE WITH ENVIRONMENTAL LAWS
Our independent distributors and we are subject to the type of
government regulation typically associated with the operation of retail
locations. These regulations pertain to the safe operation of the retail space,
wages and working conditions for employees, and the proper collection of various
taxes. We do not believe that compliance with these regulations presents any
unusual hardship or cost.
Compliance with environmental laws generally does not affect our
business.
EMPLOYEES
As of December 31, 2004, we employed a total of 31 persons, of which 25
were full-time. None of our employees is covered by a collective bargaining
agreement.
FACILITIES
Our principal offices are located at 5275 South Arville Street, Suite
B-116, Las Vegas, Nevada 89118. We lease approximately 12,000 square feet within
three centrally located buildings. We have recently renegotiated a new lease
agreement to reduce rent costs, and are inquiring regarding the availability of
more warehouse space in our current location.
LEGAL PROCEEDINGS
On February 12, 2003, Vitro Laser Group USA, Inc. and Kenneth Morrison
filed an original petition and application for injunctive relief in the District
Court of Dallas County, Texas, against Vitro Laser GmbH ("Vitro") and us. The
plaintiffs allege that Vitro and we wrongfully took two laser systems. We picked
the laser systems up the request of the owner of the lasers, Vitro, and returned
them to their possession. Neither our subsidiaries nor we used these lasers in
our operations. The plaintiffs seek a temporary and permanent injunction
enjoining, prohibiting, and restraining Vitro and us from interfering with
plaintiffs' rights in the laser systems and in their business facilities and
operations. In addition, the plaintiffs seek from us exemplary damages for
conversion of the equipment, statutory damages of $2,000 and attorneys' fees for
theft of the laser systems, actual damages for unjust enrichment, and actual and
exemplary damages for tortious interference with plaintiffs' contract with
Vitro. With respect to Vitro, the plaintiffs seek exemplary damages for fraud,
actual damages for negligent misrepresentation, actual damages and attorneys'
fees for breach of contract, and actual damages for breach of fiduciary duty.
Vitro asserts that it was not properly served and that it is not amenable to
suit or service in the United States since it is a German company. We filed a
special appearance in the lawsuit to contest the court's jurisdiction over it.
The court found that the court had jurisdiction over us and we appealed that
ruling. On March 19, 2005, the plaintiffs agreed to release and discharge all
claims against for a payment of $5,000.
In January 2005, Crystal Clear LLC filed a complaint, alleging that it
was fraudulently induced to become a marketing affiliate of ours and breach of
contract. The plaintiff seeks a judgment declaring that it was fraudulently
induced to enter into the master equipment lease and software license agreement
in October 2002, a rescission of the agreement, unspecified damages, interest,
and costs. This action has been held in abeyance while negotiations are taking
place to settle the matter.
24
MANAGEMENT
OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors, and key employees are:
NAME AGE POSITION
Kevin T. Ryan 54 Chief Executive Officer and Director
Doug Lee 40 President
Rainer Eissing 47 Chief Technical Officer and Director
Robert McDermott 59 Executive Vice President, Treasurer, Chief Financial
Officer and Director
Oswaldus Van Dam 47 Director of Technical Operations, Assistant Secretary
and Director
Patty Hill 46 Corporate Secretary, Vice President Finance and
Administration and Controller
John Lais 49 Vice President Sales and Chief Marketing Officer
Marc Janssens 49 Director
John S. Woodward 52 Director
Our shareholders elect our directors annually and our board of
directors appoints our officers annually. Vacancies in our board are filled by
the board itself. Set forth below are brief descriptions of the recent
employment and business experience of our executive officers and directors.
KEVIN T. RYAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Ryan was the president of Lazer-Tek Designs from February 2002
until its acquisition by us in December 2002. He became our president and chief
executive officer and a director in July 2004 and then resigned as president in
January 2005. Since January 1998, he has served as president of Ryan Capital
Management and Charan Industries, Inc., Westbury, New York. Charan Industries,
Inc. is currently involved in construction and redevelopment, product line
development for coin-operated games and the food and beverage industry, and
special situations in hotel and marina operations. From 1992 to 1996, Mr. Ryan
was the president of Bowling Corporation of America, a subsidiary of Charan.
During that period, Charan's bowling, leisure, and gaming activities accounted
for 80% of Charan's corporate sales and had 4,000 full and part-time employees.
In 1996, Bowling Corporation of America was sold to AMF, Inc. Mr. Ryan also
serves as president of McCary & Rood, an international trading company, since
January 1999.
DOUG LEE, PRESIDENT
In January 2005, Mr. Lee was elected as president to succeed Mr. Ryan.
Immediately prior to his election, he was our executive vice president and
director of operations. Mr. Lee joined us in December 2002, when we acquired
Lazer-Tek Designs. Mr. Lee served as executive vice president for Lazer-Tek
Designs from November 1999 to the acquisition date, where he managed operations
and directed marketing and sales. In the 1990's, he founded TD Sports, which
organized training camps sponsored by corporations in the Midwest. He is a
frequent motivational speaker and has extensive experience in the media. Since
1988, he has co-hosted a National Football League radio show, as well as served
as color commentator for several professional and collegiate sporting events.
Mr. Lee also served as an advisor during the National Basketball Association
collective bargaining agreement in the
25
mid 1990's. He has been the co-owner of Springboard Agency, a web and marketing
company based in Dallas, Texas, since June 2004. Mr. Lee was involved in
professional basketball from 1988 to 2000 as a player and consultant. He played
in the National Basketball Association and several teams in Europe, as well as
Israel and Japan. He has served on several boards including Fellowship of
Christian Athletes of Nevada from 2001 to 2002, and is currently serving a
second 4-year term on the advisory council for Purdue University. Mr. Lee
attended Texas A&M University and Purdue University where he received a BS in
RHI Business with "Big Ten" Academic Honors.
RAINER EISSING, CHIEF TECHNICAL OFFICER AND DIRECTOR
Mr. Eissing has been our executive vice president and chief technical
officer since July 2004. He previously served as chairman of the board of
directors and chief executive officer from October 2002 to July 2004. He has
been a director since October 2002. He is the developer of the 3-D software and
the laser unit used by Crystalix. Mr. Eissing founded Crystalix USA in 2001 and
Crystalix GmbH Berlin in 1997 and has served as the chief executive officer of
both companies since their inception. Mr. Eissing was a founder of EWS Rainer
Eissing, a German laser development company that has provided consulting
services to electronic manufacturers since 1994. Mr. Eissing is the holder of
four patents, including two German patents involving our technology. Mr. Eissing
received a degree in electrical engineering from the TU Institute of Electro
Technical Engineering in Berlin, Germany. Mr. Eissing has not served for any
directorships in any other reporting companies.
ROBERT MCDERMOTT, EXECUTIVE VICE PRESIDENT, TREASURER, CHIEF FINANCIAL OFFICER
AND DIRECTOR
Mr. McDermott has been our executive vice president, treasurer, chief
financial officer, and a director since July 2004. As the chief financial
officer of Charan Industries, Inc. and/or Ryan Capital Management since April 4,
1977, he has been involved in all of the business ventures of those companies
for over 25 years. Mr. McDermott is a certified public accountant and brings
both domestic and international finance expertise to our company.
OSWALDUS ("EDGAR") VAN DAM, DIRECTOR OF TECHNICAL OPERATIONS, ASSISTANT
SECRETARY, DIRECTOR OF TECHNICAL OPERATIONS AND DIRECTOR
Mr. Van Dam has been a director since February 2003 and the vice
president and assistant secretary since July 2004. He served as the director of
technical operations of Crystalix USA from July 2002 and now serves in that
capacity for us. In 1989, Mr. Van Dam founded Van Dam European, an automobile
dealership located in San Francisco, California. He served as its general
manager until joining Crystalix USA in 2002. Mr. Van Dam has not served as a
director for any other reporting companies.
PATTY HILL, CORPORATE SECRETARY, VICE PRESIDENT FINANCE AND ADMINISTRATION AND
CONTROLLER
Ms. Hill has been the controller of Lazer-Tek since October 2002 and
became our controller in December 2002. She became our corporate secretary and
vice president finance and administration in July 2004. From November 2000 to
April 2002, she was the controller for 1st National Processing, Inc., a credit
card processing company in Las Vegas, Nevada, where she was responsible for
development, implementation, and management of internal accounting for that
company. Ms. Hill was the controller for Forefront, Inc., a multinational
software corporation in Clearwater, Florida, from January 1997 to September
2000. From July 1994 to November 1996, she was the assistant business manager
for Citicaster, Inc./WTSP-TV in St. Petersburg, Florida. From May 1986 to May
1994, she worked for companies in St. Paul, Minnesota, in management accounting.
Ms. Hill received a bachelor of science degree as an accounting major from the
University of Minnesota School of Management.
JOHN LAIS, VICE PRESIDENT SALES AND CHIEF MARKETING OFFICER
Mr. Lais has been our vice president sales and chief marketing officer
since July 2004. He manages our sales, marketing, advertising, and licensing
efforts for our domestic and worldwide efforts. From October 2003 to July 2004,
Mr. Lais was the chief marketing officer for Lazer-Tek Designs. From July 2002
to October 2003, Mr. Lais was executive vice president of business development,
licensing and sponsorships for TicToc, a division of Omnicom Group Inc. in
Dallas, Texas. During the period from August 2001 to July 2002, Mr. Lais
provided sales and management consulting services independently in Dallas,
Texas. He was senior vice president of business
26
development for HALO Industries, Dallas, Texas, from February 2001 through
August 2001. From June 1989 through January 2001, he was founded and president
of Image Marketing, a sales promotion and marketing company located in Dallas,
Texas. Mr. Lais received a bachelor of science degree in kinesiology and
physical education from Pepperdine University in 1979.
MARC JANSSENS, DIRECTOR
Mr. Janssens has been a director since October 2002. He also served as
our secretary and treasurer from October 2002 to March 2003 and our president
from March 2003 to April 2003. Mr. Janssens has served as the secretary and
treasurer of Crystalix USA since its inception in November 2001. From 1995 to
2001, Mr. Janssens served as the director of marketing and sales for Spartacus
Management Company, Inc., an advertising and promotional company in Chatsworth,
California, that manufactured promotional logo recognition products. In 1990,
Mr. Janssens founded Benchmarc Communications, Chatsworth, California, and
served as its president to 1995. Benchmarc Communications provided organization
services for US conventions and international incentive travel. From 1986 to
1990, Mr. Janssens was a sales and marketing officer for United States
Lines-International Container Transport. From 1982 to 1986, Mr. Janssens served
as an account executive for McCann-Erickson Advertising Group in Brussels, Paris
and Amsterdam, where he was responsible for advertising accounts such as BMW,
Benelux, Tupperware Europe, Van Heusen Fashions, Opel Automotive, and Proctor
and Gamble. Mr. Janssens received a bachelor's degree in marketing and
advertising sciences from the Stedelijk Instituut in Brussels, Belgium and
graduated from Antwerp Atheneum, Belgium (a three-year course), having studied
business English and business German. Mr. Janssens has not served as a director
for any other reporting companies.
JOHN S. WOODWARD, DIRECTOR
Mr. Woodward became a director in February 2003 and served as our
president from April 2003 to July 2004. Mr. Woodward is a semi-retired estate
planning attorney, and has been licensed in California since 1980. He joined
Crystalix USA in the spring of 2002 as a partner in one of the company-owned
locations at the Forum Shops at Caesars Palace in Las Vegas, Nevada. Mr.
Woodward received a degree in psychology from the University of Southern
California and his law degree from Southwestern School of Law. He participates
on boards of many foundations and charitable organizations and consults to a
limited number of clients.
EXECUTIVE COMPENSATION
The following table sets forth information the remuneration of our
chief executive officers and our four most highly compensated executive officers
who earned in excess of $100,000 per annum during any part of our last three
fiscal years:
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL FISCAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION($) ($) SARS (#) ($) TION($)
- -----------------------------------------------------------------------------------------------------------------------
Kevin T. Ryan 2004 -0- -0- -0- -0- -0- -0- -0-
(1)<F1>
- -----------------------------------------------------------------------------------------------------------------------
John S. Woodward 2004 -0- -0- -0- -0- -0- -0- -0-
President 2003 170,000 (3)<F3> -0- -0- -0- -0- -0- -0-
(2) <F2>
- -----------------------------------------------------------------------------------------------------------------------
Rainer Eissing, 2004 246,450 -0- -0- -0- -0- -0- -0-
Chief Technology 2003 189,450 -0- -0- -0- -0- -0- -0-(4)<F4>
Officer 2002 226,000 -0- -0- -0- 800,000 -0- -0-(4)<F4>
(5)<F5> (6)<F6>
- -----------------------------------------------------------------------------------------------------------------------
Armin Van Damme, 2003 78,170 -0- -0- -0- -0- -0- 232,700
President 2002 218,584 -0- -0- -0- 800,000 -0- -0-(4)<F4>
(6)<F6> (7)<F7>
- -----------------------------------------------------------------------------------------------------------------------
27
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL FISCAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION($) ($) SARS (#) ($) TION($)
- -----------------------------------------------------------------------------------------------------------------------
Othmar Van Dam, 2003 95,637 -0- -0- -0- -0- -0- 205,482
Executive Vice 2002 199,885 -0- -0- -0- 800,000 -0- -0-(4)<F4>
President
(6)<F6> (7)<F7>
- -----------------------------------------------------------------------------------------------------------------------
Gary R. Moore, 2002 -0- -0- -0- -0- -0- -0- -0-
President
(8)<F8>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------
<FN>
(1)<F1> Mr. Ryan became our president and chief executive officer in July 2004.
(2)<F2> Mr. Woodward was our president from April 2003 to July 2004.
(3)<F3> We issued Mr. Woodward 340,000 shares of common stock valued at
$170,000 for his services.
(4)<F4> Does not include the value of a car furnished by us for use by Rainer
Eissing, Armin Van Damme, and Othmar Van Dam.
(5)<F5> Includes amounts paid to Mr. Eissing through his company. See "Certain
Relationships and Related Transactions."
(6)<F6> Such officers commenced their employment with us on October 4, 2002.
The compensation shown includes that paid by Crystalix USA Group in
2002.
(7)<F7> Such officers resigned in February 2003.
(8)<F8> Mr. Moore was the President from September 1999 to October 2002.
</FN>
Stock options granted to Armin Van Damme and Othmar Van Dam were
relinquished in 2003. Stock options granted to Rainer Eissing were cancelled in
2004. There were no stock options granted in 2003 and no options are outstanding
at December 31, 2004.
COMPENSATION OF DIRECTORS
Directors do not receive compensation but are reimbursed for their
expenses for each meeting of the board that they attend.
STOCK OPTION PLANS
We do not have any stock option plans at this time, but plan to adopt a
plan for our employees in the near future.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information as to our officers and
directors individually and as a group, and the holders of more than 5% of our
common stock, as of March 22, 2005. Except as otherwise indicated, the persons
named in the table have sole voting and investing power with respect to all
shares of stock owned by them.
AMOUNT OF BENEFICIAL OWNERSHIP
TOTAL ASSUMING
NAME AND ADDRESS OF CLASS A PREFERRED CONVERSION OF PERCENT
BENEFICIAL OWNER (1)<F1> COMMON STOCK STOCK PREFERRED STOCK OF CLASS (2)<F2>
Kevin Ryan 32,716,427 (3)<F3> 3,637,500 (3)<F3> 69,091,427 (3)<F3> 73.1%
3950 E. Patrick Lane (4)<F4>
Suite 101
Las Vegas, NV 89120
Rainer Eissing 6,058,000 962,100 15,679,000 20.5%
John S. Woodward 5,535,389 (4)<F4> 800,000 13,535,389 16.7%
28
AMOUNT OF BENEFICIAL OWNERSHIP
TOTAL ASSUMING
NAME AND ADDRESS OF CLASS A PREFERRED CONVERSION OF PERCENT
BENEFICIAL OWNER (1)<F1> COMMON STOCK STOCK PREFERRED STOCK OF CLASS (2)<F2>
CMKXTREME.COM (5)<F5> 8,749,895 (4)<F4> 0 8,749,895 10.3%
136 Arbor Way
Henderson, NV 89074
Marc Janssens 2,796,000 110,000 3,896,000 5.1%
Oswaldus Van Dam 1,631,000 200,000 3,631,000 4.8%
Robert McDermott 0 100,000 1,000,000 1.3%
Doug Lee 175,000 12,500 300,000 0.4%
Patty Hill 0 10,000 100,000 0.1%
John Lais 0 0 0 --
All officers and directors 37,767,947 (4)<F4> 3,800,000 75,367,947 77.3%
as a group (9 persons)
- ------------------------
<FN>
(1)<F1> To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the
shares set forth opposite such person's name. Except as otherwise
indicated, the address of each person beneficially owning more than 5%
of our common stock is c/o Crystalix Group International, Inc., 5275
South Arville, Suite B-116, Las Vegas, Nevada 89118.
(2)<F2> Percentages are based on 37,132,192 shares of common stock outstanding
and 3,920,000 shares of Class A preferred stock outstanding, for a
fully diluted total of 76,332,192 shares. If a person listed on this
table has the right to obtain additional shares of common stock within
sixty (60) days from March 22, 2005, the additional shares are deemed
to be outstanding for the purpose of computing the percentage of class
owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of any other person.
(3)<F3> Includes shares owned by Rainer Eissing, John W. Woodward, Marc
Janssens, and Oswaldus Van Dam, since they have granted Ryan Capital
Management, Inc. an irrevocable proxy to vote their shares. Ryan
Capital Management, Inc. is owned and controlled by Kevin Ryan. The
proxy expires upon the later of (i) December 1, 2004, or (ii) 90 days
after repayment in full of all amounts owed by us to the bridge lender,
Kevin Ryan (or assignee), and John S. Woodward (or assignee). Also
includes 1,875,000 shares issuable upon exercise of a warrant.
(4)<F4> Includes shares issuable upon payment of principal and interest on
notes through May 22, 2005 and exercise of warrants, assuming that no
payments of interest have been made on the notes.
(5)<F5> Urban Casavant exercises voting and/or dispositive powers with respect
to these shares.
</FN>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.
29
RAINER EISSING. During the years ended December 31, 2004 and 2003,
purchases of equipment from Entwicklungen Werbetechnik Software, a company
wholly-owned by Rainer Eissing, amounted to approximately $0 and $19,046,
respectively. This related party vendor does not have any formal agreement.
Management believes that these transactions are negotiated at arm's length. In
2003, Mr. Eissing was paid $189,450 through his company, Innovative Motions and
was paid $246,450 in 2004. We have included these amounts in the Summary
Compensation Table in "Executive Compensation" above.
JOHN S. WOODWARD. On December 20, 2002, we borrowed $1,500,000 from
John S. Woodward. At the time of the loan, Mr. Woodward was not an officer or
director of our company. He became a director in February 2003. The note accrued
interest at the annual rate of 7-1/8% but provided for an increase in order to
maintain a 4% margin above Mr. Woodward's borrowing rate. Interest was payable
on the first day of each month, beginning January 1, 2003. The note was
originally due June 30, 2003 and secured by all of the assets and our ownership
interest in Lazer-Tek Designs, Ltd. Mr. Woodward agreed to extend his note to
January 20, 2004 in exchange for guaranteed interest. We issued a total of
1,000,000 shares of our common stock to Mr. Woodward, 660,000 of which were for
the extension of the repayment terms and 340,000 of which were for his services.
On July 21, 2004, we issued a convertible promissory note to Mr.
Woodward in the amount of $1,824,000, which represents principal due on a
previously issued note payable in the amount of $1,343,722 plus accrued interest
in the amount of $480,279. This note bears interest at 10% per annum and calls
for monthly interest payments from August 1, 2004 to December 1, 2004. Beginning
on January 1, 2005, this note requires monthly principal payments of $50,405
plus accrued interest with any unpaid principal and interest due on July 1,
2007. The monthly principal and interest payments can be paid with shares of our
common stock at the option of the holder. The conversion price is the lesser of
the average closing price of our common stock five business days immediately
prior to the conversion notice or $0.08. We have agreed to register the shares
issuable upon conversion of this note.
ARMIN VAN DAMME. In April 2003, we entered into an agreement with Armin
Van Damme, a former officer and director and founder of Crystalix USA Group, to
transfer the four company-owned retail locations in Las Vegas for the surrender
of all of his Class A preferred stock and common stock remaining after permitted
transfers of the common stock. As a result of this transaction, we have canceled
5,126,000 shares of common stock and 1,540,000 shares of Class A preferred stock
owned by Mr. Van Damme and removed the net book value of the assets related to
the four company-owned retail location in the amount of $237,826. In addition,
Mr. Van Damme resigned as an employee of the company and agreed to assume
liability of the lease of his automobile, which had been leased by the company,
and liability of the lease of office space at 5720 South Arville, Suite 114, Las
Vegas, Nevada. The transfer was effective as of April 28, 2003. No gain or loss
was recognized from this related party transaction. Mr. Van Damme was to pay us
a license fee of 5% of gross sales generated from the transferred locations and
agreed to purchase all supplies and equipment needed for the operation of the
locations from us at its cost plus 10%. The agreement provided for termination
by us upon 30 days' prior written notice in the event of Mr. Van Damme's failure
to make payments or submit reports on a timely basis.
As a result of a settlement agreement with us, which was made effective
in November 2003, this agreement was declared null and void. Under the terms of
the settlement, Mr. Van Damme is to keep the locations and the equipment at the
locations. However, it is contemplated that he will replace the equipment and
arrange for his own licensing of the proprietary technology within six months.
While our equipment is in his possession, he is to pay a flat licensing and
royalty fee of $500 per month per laser. Armin Van Damme is the brother of
Oswaldus Van Dam, one of our current officers and directors.
OTHMAR VAN DAM. In April 2003, we entered into an employment agreement
with Othmar Van Dam, a former officer and director and founder of Crystalix USA
Group. He is the brother of Oswaldus Van Dam, one of our current officers and
directors. Mr. Van Dam was to serve as our head of Marketing and Development of
Affiliate Sales Locations for a three-year term beginning April 1, 2003 at a
base salary of $120,000. In addition, Mr. Van Dam was to receive a performance
bonus equal to 5% of the gross revenues generated by the Company through its
affiliate locations. In consideration for the employment agreement, Mr. Van Dam
surrendered all of his Class A preferred stock and agreed to reduce his
ownership of common stock to 4.9%. Upon Mr. Van Dam's resignation, his
employment was terminated in May 2003. As a result of a settlement agreement
with us, which was made effective in November 2003, Othmar Van Dam relinquished
all of his stock in the company.
30
KEVIN RYAN. In connection with the Lazer-Tek acquisition, we owed Kevin
Ryan, a former creditor of Lazer-Tek, the principal amount of $1,252,680,
consisting of $852,680, which was due April 1, 2003, and $400,000 owed to Kevin
Ryan in quarterly payments beginning April 1, 2003 for consulting fees. Neither
of these obligations was paid. Mr. Ryan obtained a Writ of Possession entitling
him to all of our assets as of June 2, 2003.
We entered into a consulting agreement with McCary & Rood dated May 28,
2003 under which Kevin Ryan provided advice to the President and CEO of the
company pertaining to all matters including acquisitions, management, marketing,
financial controls and other financial matters; settlement of disputes with
creditors and former officers and directors; relations with affiliates; and
other matters as may be requested by us. As compensation for the satisfactory
performance by Mr. Ryan under the agreement, we agreed to pay a fee of $20,000
per month that Mr. Ryan performed as determined by us. This agreement was
terminated effective July 31, 2004.
In addition to the two obligations described above, through December
31, 2003, Kevin Ryan had advanced a total of $823,675 to us under a revolving
line of credit agreement dated December 1, 2003. Interest on the outstanding
balance accrued at 10% per annum and was payable monthly. On December 1, 2003,
we entered into a Secured Promissory Note with Kevin Ryan in the amount of
$1,010,000. Interest accrued on the note at 10% per annum and was payable
monthly. All principal and unpaid accrued interest under the Secured Promissory
Note is due and payable no later than December 1, 2004.
In December 2003, Rainer Eissing, Marc Janssens, and Oswaldus Van Dam
agreed to transfer a portion of their Class A preferred stock to Kevin Ryan,
John S. Woodward, and other individuals in consideration of the continuing
financial support and involvement of Messrs. Ryan and Woodward and these other
individuals. The shares of Messrs. Eissing, Janssens, and Van Dam were
reallocated as of July 21, 2004.
In addition, Rainer Eissing, John S. Woodward, Marc Janssens, and
Oswaldus Van Dam granted Ryan Capital Management, Inc. an irrevocable proxy to
vote their shares. Ryan Capital Management, Inc. is owned and controlled by
Kevin Ryan. The proxy expires upon the later of (i) December 1, 2004, or (ii) 90
days after repayment in full of all amounts owed by us to the bridge lender,
Kevin Ryan (or assignee), and John S. Woodward (or assignee).
On July 21, 2004, we issued a convertible promissory note to Mr. Ryan
in the amount of $5,396,764, which represents (a) principal due on two
previously issued notes payable in the amounts of $852,680 and $1,010,000, (b)
principal due under a revolving credit agreement in the amount of $1,766,500,
(c) principal due under an additional note payable in the amount of $1,500,000
and (d) accrued interest on the above mention obligations in the amount of
$267,584. This note bears interest at 10% per annum and calls for monthly
principal payments from August 1, 2004 to December 1, 2004 of $45,000. On the
last day of the month beginning on August 31, 2004 through November 30, 2004,
the accrued interest will be added to the principal amount. Beginning on January
1, 2005, this note requires monthly principal payments of $174,584 with any
unpaid principal and interest due on July 1, 2007. The monthly principal and
interest payments can be paid with shares of our common stock at the option of
the holder. The conversion price is the lesser of the average closing price of
our common stock five business days immediately prior to the conversion notice
or $0.08. In addition, we granted to Mr. Ryan a warrant to purchase 1,875,000
shares of our common stock. The exercise price is $0.08. We have agreed to
register the shares issuable upon conversion of this note and exercise of the
warrant.
On July 21, 2004, we issued a promissory note to Ryan Capital
Management, Inc. (this company is controlled by Kevin Ryan) in the amount of
$452,137, which represents principal due on a previously issued note payable in
the amount of $400,000 plus accrued interest in the amount of $52,137. This note
bears interest at 10% per annum and calls for monthly interest payments from
August 1, 2004 to December 1, 2004. Beginning on January 1, 2005, this note
requires monthly principal payments of $37,902 plus accrued interest with any
unpaid principal and interest due on December 1, 2005.
On August 1, 2004, we issued a promissory note to McCary & Rood (this
company is controlled by Kevin Ryan) in the amount of $280,000, which represents
past due consulting fees under a consulting agreement dated May 28, 2003. This
note calls for monthly payments beginning August 1, 2004 of $30,000 with any
unpaid principal due on May 1, 2005.
31
On August 1, 2004, we issued a promissory note to McCary & Rood in the
amount of $214,037, which represents past due reimbursable expenses under a
consulting agreement dated May 28, 2003. This note calls for monthly payments
beginning August 1, 2004 of $30,000 with any unpaid principal due on March 1,
2005.
FUTURE TRANSACTIONS. All future affiliated transactions will be made or
entered into on terms that are no less favorable to us than those that can be
obtained from any unaffiliated third party. A majority of the independent,
disinterested members of our board of directors will approve future affiliated
transactions. We believe that of the transactions described above have been on
terms as favorable to us as could have been obtained from unaffiliated third
parties as a result of arm's length negotiations.
CONFLICTS OF INTEREST. In accordance with the laws applicable to us,
our directors are required to act honestly and in good faith with a view to our
best interests. In the event that a conflict of interest arises at a meeting of
the board of directors, a director who has such a conflict will disclose the
nature and extent of his interest to the meeting and abstain from voting for or
against the approval of the matter in which he has a conflict.
DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue of up to 300,000,000 shares of common stock,
$0.001 par value per share, 10,000,000 shares of Class A preferred stock, $0.001
par value per share, and 5,000,000 shares of Class B preferred stock, $0.001 par
value per share. The following summary does not purport to be complete. You may
wish to refer to our Articles of Incorporation and Bylaws, copies of which are
available for inspection.
COMMON STOCK
As of December 31, 2004, there were 37,132,192 shares of common stock
issued and outstanding. The board of directors may issue additional shares of
common stock without the consent of the common stockholders.
VOTING RIGHTS. Each outstanding share of common stock is entitled to
one vote. The common stockholders do not have cumulative voting rights, which
means that the holders of more than 50% of such outstanding shares voting for
the election of directors can elect all of the directors to be elected, if they
so choose.
NO PREEMPTIVE RIGHTS. Holders of common stock are not entitled to any
preemptive rights.
DIVIDENDS AND DISTRIBUTIONS. Holders of common stock are entitled to
receive such dividends as may be declared by the directors out of funds legally
available for dividends and to share pro rata in any distributions to holders of
common stock upon liquidation or otherwise. However, we have never paid cash
dividends on our common stock, and do not expect to pay such dividends in the
foreseeable future.
PREFERRED STOCK
As of the date of this prospectus, only 7,000,000 shares of Class A
preferred stock have been issued, and 3,920,000 shares are presently
outstanding.
The Class A shares are convertible into 10 common shares for each share
of preferred stock and each share of preferred stock is equivalent to the vote
of 10 common shares.
The rights and preferences of the Class B preferred stock is to be
established by the board of directors prior to the first issuance with authority
to do so being expressly vested in the board in our Articles of Incorporation.
TRANSFER AGENT
Interwest Transfer Company, 1981 East 4800 South, Suite 100, Salt Lake
City, Utah 84117-5126, serves as the transfer agent and registrar for our common
stock.
32
SELLING STOCKHOLDERS
This prospectus relates to the resale of 48,889,549 shares of common
stock issuable upon conversion of or as interest on the $9,220,764 of
convertible notes and upon exercise of warrants issued in July and September
2004. We are registering the shares in order to permit the selling shareholders
to offer the shares of common stock for resale from time to time.
The table below lists the selling shareholders and other information
regarding the beneficial ownership of the common stock by the selling
shareholders. The second column lists the selling shareholders' beneficial
ownership as of September 30, 2005. This amount includes shares issuable upon
payment of principal and interest on notes through September 30, 2005 and
exercise of warrants, assuming that no payments of interest have been made on
the notes. The third column lists the shares of common stock being offered by
this prospectus by the selling shareholders.
This prospectus generally covers the resale of at least that number of
shares of common stock equal to the sum of (1) the number of shares of common
stock to cover principal and interest on the notes through September 30, 2005,
and (2) the number of shares of common stock issuable upon exercise of the
warrants. The fourth column assumes the sale of all of the shares offered by the
selling shareholders pursuant to this prospectus.
Under the terms of the convertible notes, the selling shareholders only
convert that portion of the convertible notes equal to (1) the payment of
principal, interest, and any other amounts payable when due, (2) any prepayment
tendered by us, (3) the entire amount of the notes upon a sale of 51% or more of
our outstanding common stock, or (4) a portion not exceeding $1,000,000 if an
event of default occurs. The number of shares in the second column does not
reflect the $1,000,000 limitation. The selling shareholders may sell all, some
or none of their shares in this offering. See "Plan of Distribution."
OWNERSHIP AFTER OFFERING
NUMBER OF
SHARES SHARES
BENEFICIALLY REGISTERED FOR NUMBER OF
NAME OF SELLING SHAREHOLDER OWNED (1)<F1>(2)<F2> RESALE (2)<F2> SHARES PERCENT
Kevin T. Ryan (3)<F3> 79,920,025 28,705,025 51,215,000 (4)<F4> 66.7%
John S. Woodward (3)<F3> 17,020,256 8,020,256 9,000,000 11.7%
CMKXTREME.COM (5)<F5> 12,164,268 12,164,268 0 0%
- ----------------
<FN>
(1)<F1> The number of shares of common stock considered beneficially owned by
each selling shareholder equals that number of shares of our common
stock shares issuable upon payment of principal and interest on notes
through September 30, 2005 and exercise of warrants, assuming that no
payments of interest have been made on the notes, plus shares of common
stock and preferred stock presently owned.
(2)<F2> The selling shareholders may sell up to 48,889,549 shares of our common
stock under this document. As described above, they may convert only
that portion of the convertible notes equal to (1) the payment of
principal, interest, and any other amounts payable when due, (2) any
prepayment tendered by us, (3) the entire amount of the notes upon a
sale of 51% or more of our outstanding common stock, or (4) a portion
not exceeding $1,000,000 if an event of default occurs.
The number of shares of shares registered is comprised of shares
issuable as payment on the notes through September 30, 2005 and
warrants, as follows:
PAYMENT PAYMENT EXERCISE
OF OF OF
PRINCIPAL INTEREST WARRANTS
Kevin T. Ryan 20,013,386 6,816,639 1,875,000
John S. Woodward 5,670,562 2,349,694 0
CMKXTREME.COM 7,638,950 2,025,318 2,500,000
---------- ---------- ---------
Total 33,322,898 11,191,651 4,375,000
33
(3)<F3> Kevin Ryan and John Woodward are officers and/or directors of our
company.
(4)<F4> Includes shares owned by Rainer Eissing, John W. Woodward, Marc
Janssens, and Oswaldus Van Dam, since they have granted Ryan Capital
Management, Inc. an irrevocable proxy to vote their shares. Ryan
Capital Management, Inc. is owned and controlled by Kevin Ryan. The
proxy expires upon the later of (i) December 1, 2004, or (ii) 90 days
after repayment in full of all amounts owed by us to the bridge lender,
Kevin Ryan (or assignee), and John S. Woodward (or assignee). Also
includes 1,875,000 shares issuable upon exercise of a warrant.
(5)<F5> Urban Casavant exercises voting and/or dispositive powers with respect
to these shares.
</FN>
PLAN OF DISTRIBUTION
We are registering the shares of common stock issuable upon conversion
of the convertible notes and upon exercise of the warrants to permit the resale
of the shares of common stock by the holders of the convertible notes and the
warrants from time to time after the date of this prospectus. We will not
receive any of the proceeds from the sale by the selling shareholders of the
shares of common stock. We will bear all fees and expenses incident to our
obligation to register the shares of common stock.
The selling shareholders may sell all or a portion of the common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the common stock
is sold through underwriters or broker-dealers, the selling shareholders will be
responsible for underwriting discounts or commissions or agent's commissions.
The common stock may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions,
(1) on any national securities exchange or quotation service on which
the securities may be listed or quoted at the time of sale,
(2) in the over-the-counter market,
(3) in transactions otherwise than on these exchanges or systems or in
the over-the-counter market,
(4) through the writing of options, whether such options are listed on
an options exchange or otherwise, or
(5) through the settlement of short sales.
If the selling shareholders effect such transactions by selling shares
of common stock to or through underwriters, broker-dealers or agents, such
underwriters, brokers-dealers or agents may receive commissions in the form of
discounts, concessions or commissions from the selling shareholders or
commissions from purchasers of the shares of common stock for whom they may act
as agent or to whom they may sell as principal (which discounts, concessions or
commissions as to particular underwriters, brokers-dealers or agents may be in
excess of those customary in the types of transactions involved). In connection
with sales of the common stock or otherwise, the selling shareholders may enter
into hedging transactions with broker-dealers, which may in turn engage in short
sales of the common stock in the course of hedging in positions they assume. The
selling shareholders may also sell shares of common stock short and deliver
shares of common stock covered by this prospectus to close out short positions,
provided that the short sale is made after the registration statement is
declared effective and a copy of this prospectus is delivered in connection with
the short sale. The selling shareholders may also loan or pledge shares of
common stock to broker-dealers that in turn may sell such shares.
The selling shareholders may pledge or grant a security interest in
some or all of the convertible notes, warrants, or shares of common stock owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time pursuant to the prospectus. The selling shareholders also may
transfer or donate the shares of common stock in other circumstances, in which
case the transferees, donees or other successors in interest will be the selling
beneficial owners for purposes of the prospectus.
34
The selling shareholders and any broker-dealer participating in the
distribution of the shares of common stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions paid, or any
discounts or concessions allowed to any such broker-dealer may be deemed to be
underwriting commissions or discounts under the Securities Act. At the time a
particular offering of the shares of common stock is made, a prospectus
supplement, if required, will be distributed which will set forth the aggregate
amount of shares of common stock being offered and the terms of the offering,
including the name or names of any broker-dealers or agents, any discounts,
commissions and other terms constituting compensation from the selling
shareholders and any discounts, commissions or concessions allowed or reallowed
or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. In addition, in some states the shares of common stock may not be sold
unless such shares have been registered or qualified for sale in such state or
an exemption from registration or qualification is available and is complied
with.
There can be no assurance that any selling shareholder will sell any or
all of the shares of common stock registered pursuant to the registration
statement of which this prospectus forms a part.
The selling shareholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M of the Exchange Act, which may limit the timing of purchases and sales of any
of the shares of common stock by the selling shareholders and any other
participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the
ability of any person or entity to engage in market-making activities with
respect to the shares of common stock.
We will pay all expenses of the registration of the shares of common
stock pursuant to the registration rights agreement estimated to be $25,000 in
total, including, without limitation, Commission filing fees and expenses of
compliance with state securities or "blue sky" laws; provided, however, that the
selling shareholders will pay all underwriting discounts and selling
commissions, if any. In connection with sales made pursuant to this prospectus,
we will indemnify the selling shareholders against liabilities, including some
liabilities under the Securities Act, or the selling shareholders will be
entitled to contribution, in accordance with the registration rights agreement.
We will be indemnified by the selling shareholders against civil liabilities,
including liabilities under the Securities Act that may arise from any written
information furnished to us by the selling shareholders for use in this
prospectus, or we will be entitled to contribution, in accordance with the
registration rights agreement.
Once sold under the registration statement of which this prospectus
forms a part, the shares of common stock will be freely tradable in the hands of
persons other than our affiliates.
LEGAL MATTERS
Dill Dill Carr Stonbraker & Hutchings, P.C., Denver, Colorado, has
given an opinion on the validity of the securities.
EXPERTS
We have included the financial statements of the company as of December
31, 2004, and for the years ended December 31, 2004 and 2003, in reliance upon
the report of DeJoya and Company for 2004 and Stonefield Josephson, Inc. for
2003, independent registered public accounting firms, whose reports have been
included in this prospectus given upon the authority of these firms as experts
in accounting and auditing.
35
ADDITIONAL INFORMATION
We have been subject to the reporting requirements under federal
securities laws since May 2000. We have filed with the SEC a registration
statement on Form SB-2 and amendments to the registration statement with respect
to the securities offered through this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules that are part of the registration statement. For further
information about the securities and us, you should review the registration
statement and the exhibits and schedules. Statements made in this prospectus
regarding the contents of any contract or document filed as an exhibit to the
registration statement are not necessarily complete. You should review the copy
of such contract or document so filed.
You can inspect the registration statement, as well as the exhibits and
the schedules, filed with the SEC without charge, at the SEC's office at
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. You can also
obtain copies of these materials from the SEC's Public Reference Section at 450
Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. The SEC maintains
a web site on the Internet that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at HTTP://WWW.SEC.GOV.
REPORTS TO STOCKHOLDERS
We are subject to the reporting requirements of the federal securities
laws, and are required to file periodic reports, proxy statements, and other
information with the SEC. We will furnish our shareholders with annual reports
containing audited financial statements certified by independent public
accountants following the end of each fiscal year, proxy statements, and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year following the end of such fiscal quarter.
INDEX TO FINANCIAL STATEMENTS
Page
Financial Statements
Reports of Independent Registered Public Accounting Firms F-1
Consolidated Balance Sheet as of December 31, 2004 F-3
Consolidated Statements of Operations for the years ended
December 31, 2004 and 2003 F-4
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 2004 and 2003 F-5
Consolidated Statement of Stockholders' Deficit for the years ended
December 31, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Crystalix Group International, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheet of Crystalix Group
International, Inc. and Subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, comprehensive loss, stockholders' deficit
and cash flows for the year then ended. 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
audit.
We conducted our audit in accordance with 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides 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
Crystalix Group International, Inc. and Subsidiaries as of December 31, 2004,
and the consolidated results of their operations and cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company has incurred a net loss of $8,302,578, used cash for operations of
$3,936,800 for the year ended December 31, 2004, has an accumulated deficit of
$16,045,562 as of December 31, 2004 and has a working capital deficit of
$4,262,946 as of December 31, 2004. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DeJoya & Company
CERTIFIED PUBLIC ACCOUNTANTS
Henderson, Nevada
March 18, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Crystalix Group International, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated statements of operations,
comprehensive loss, stockholders; deficit and cash flows for the year ended
December 31, 2003 of Crystalix Group International, Inc. and Subsidiaries. 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 audit.
We conducted our audit in accordance with 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
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Crystalix Group International, Inc. and Subsidiaries for the year
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company has incurred a net loss of $7,433,341, used cash for operations of
$1,170,778 for the year ended December 31, 2003, is a party to various
litigation, has a stockholders' deficit of $3,382,628 as of December 31, 2003
and has a working capital deficit of $6,311,497 as of December 31, 2003. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
February 27, 2004
F-2
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER
31, 2004
-------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 270,024
Accounts receivable, net of allowance of $334,000 439,633
Inventory 1,069,003
Other current assets 227,760
-------------------
TOTAL CURRENT ASSETS 2,006,420
-------------------
PROPERTY AND EQUIPMENT, net (including equipment
acquired from related party of $2,300,000 in 2002) 1,890,175
INTANGIBLE ASSETS
Licenses and related costs, net of accumulated amortization of $536,760 1,353,141
Capitalized software costs, net of accumulated amortization of $28,627 18,217
Customer lists and relationships, net of accumulated amortization of $45,000 67,500
Artwork library, net of accumulated amortization of $597,330 298,665
Tradename and trademark, net of accumulated amortization of $6,288 9,431
-------------------
1,746,954
-------------------
OTHER ASSETS 6,004
-------------------
TOTAL ASSETS $ 5,649,553
===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses ($363,362 to related parties) $ 1,527,826
Customer deposits 23,421
Notes payable (including $2,763,675 to related parties), net of discounts of $1,107,911 3,749,793
Current portion of deferred revenue 968,326
-------------------
TOTAL CURRENT LIABILITIES 6,269,366
-------------------
NOTES PAYABLE, net of current portion (including $2,917,564 to related parties),
net of discounts of $1,618,785 3,600,449
DEFERRED REVENUE, less current portion 1,193,325
-------------------
TOTAL LIABILITIES 11,063,140
-------------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' DEFICIT
Preferred stock - Class A, $0.001 par value; 10,000,000 shares
authorized; 3,920,000 Class A shares issued and outstanding 3,920
Common stock; $0.001 par value; 300,000,000 shares
authorized; 37,132,192 shares issued and outstanding 37,132
Additional paid-in capital 10,705,413
Other comprehensive loss - foreign currency translation (114,490)
Accumulated deficit (16,045,562)
-------------------
TOTAL STOCKHOLDERS' DEFICIT (5,413,587)
-------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,649,553
===================
The accompanying notes are an integral part of these consolidated
financial statements
F - 3
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
------------------------------
December December
31, 2004 31, 2003
-------------- --------------
REVENUE
Product sales $ 3,398,384 $ 4,233,846
Lease revenue 1,124,537 1,739,538
Royalty revenue 105,753 391,121
--------------- ---------------
TOTAL REVENUE 4,628,674 6,364,505
--------------- ---------------
COST OF REVENUE
Product sales 1,642,855 2,719,153
Lease revenue 415,809 730,490
Royalty revenue 61,116 403,064
--------------- ---------------
TOTAL COST OF REVENUE 2,119,780 3,852,707
--------------- ---------------
--------------- ---------------
GROSS PROFIT 2,508,894 2,511,798
--------------- ---------------
OPERATING EXPENSES
Research and development - 397,067
Payroll and related benefits 1,934,620 2,525,318
General and administrative 4,376,563 5,187,854
Impairment expense 212,215 399,113
--------------- ---------------
TOTAL OPERATING EXPENSES 6,523,398 8,509,352
--------------- ---------------
LOSS FROM OPERATIONS (4,014,504) (5,997,554)
--------------- ---------------
OTHER INCOME (EXPENSES):
Write off of advances to Vitro Laser GmbH - (500,000)
Other expense, net 22,500 (27,309)
Amortization of debt discounts (460,816) -
Interest expense ($3,797,155 to related parties) (3,849,758) (908,478)
--------------- ---------------
TOTAL OTHER INCOME (EXPENSE) (4,288,074) (1,435,787)
--------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (8,302,578) (7,433,341)
PROVISION FOR INCOME TAXES
Current - 550,000
Deferred - (550,000)
--------------- ---------------
NET LOSS $ (8,302,578) $ (7,433,341)
=============== ===============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.23) $ (0.19)
=============== ===============
WEIGHTED AVERAGE COMMON EQUIVALENT
SHARES OUTSTANDING - BASIC AND DILUTED 35,441,222 39,340,124
=============== ===============
The accompanying notes are an integral part of these consolidated
financial statements
F - 4
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED
------------------------------------
December December
31, 2004 31, 2003
---------------- ----------------
NET LOSS $ (8,302,578) $ (7,433,341)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (72,179) (41,416)
---------------- ----------------
COMPREHENSIVE LOSS $ (8,374,757) $ (7,474,757)
================ ================
The accompanying notes are an integral part of these
consolidated financial statements
F - 5
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
PREFERRED STOCK ADDITIONAL OTHER
CLASS A COMMON STOCK PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 7,000,000 $ 7,000 39,995,192 $ 39,995 $ 2,671,105 $ (895)
Sale of shares through private placement
offering 1,120,000 1,120 258,880
Shares issued for financing costs 660,000 660 527,340
Shares issued for services 2,590,000 2,590 1,342,410
Exchange of shares with former officers
for Company assets (at cost carryover
basis) (3,080,000) (3,080) (10,252,000) (10,252) (435,101)
Foreign currency translation adjustment (41,416)
Net loss
---------------------------- --------------------------- --------------------------------
BALANCE, DECEMBER 31, 2003 3,920,000 3,920 34,113,192 34,113 4,364,634 (42,311)
Shares issued for financing costs 3,019,000 3,019 320,014
Value of Class A Preferred Stock re-allocated
to investors and senior management 2,833,253
Value of beneficial conversion feature and
value of warrants issued in connection
with convertible notes payable 3,187,512
Foreign currency translation adjustment (72,179)
Net loss
---------------------------- --------------------------- --------------------------------
BALANCE, DECEMBER 31, 2004 3,920,000 $ 3,920 37,132,192 $ 37,132 $ 10,705,413 $ (114,490)
============================ =========================== ================================
ACCUMULATED
DEFICIT TOTAL
------------------------------
BALANCE, DECEMBER 31, 2002 $ (309,643) $ 2,407,562
Sale of shares through private placement
offering 260,000
Shares issued for financing costs 528,000
Shares issued for services 1,345,000
Exchange of shares with former officers
for Company assets (at cost carryover
basis) (448,433)
Foreign currency translation adjustment (41,416)
Net loss (7,433,341) (7,433,341)
------------------------------
BALANCE, DECEMBER 31, 2003 (7,742,984) (3,382,628)
Shares issued for financing costs 323,033
Value of Class A Preferred Stock re-allocated
to investors and senior management 2,833,253
Value of beneficial conversion feature and
value of warrants issued in connection
with convertible notes payable 3,187,512
Foreign currency translation adjustment (72,179)
Net loss (8,302,578) (8,302,578)
------------------------------
BALANCE, DECEMBER 31, 2004 $(16,045,562) $ (5,413,587)
===============================
The accompanying notes are an integral part of these consolidated
financial statements
F - 6
CRYSTALIX GROUP INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
-------------------------------------
DECEMBER December
31, 2004 31, 2003
----------------- ------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (8,302,578) $ (7,433,341)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,101,181 1,296,786
Provision for doubtful accounts 74,000 156,819
Common stock issued and reallocation of Series A preferred 2,747,011 528,000
stock for financing costs
Common stock issued and reallocation of Series A preferred 409,275 1,345,000
stock for services
Amortization of debt discounts 460,816 -
Exchange gain (72,774) (45,321)
(Gain) loss on disposal of fixed assets (1,973) 243,893
Write off of deferred offering costs - 212,797
Write off of advances to Vitro Laser, Gmbh - 500,000
Write down of intangible assets 212,215 155,220
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (54,580) 234,266
Inventory (316,990) 508,696
Other current assets (203,646) 166,622
Deposits 4,269 (10,273)
Increase (decrease) in:
Accounts payable and accrued expenses 1,060,768 991,733
Customer deposits (57,267) (290,276)
Deferred revenue (996,527) 268,601
----------------- ---------------
Net cash used in operating activities (3,936,800) (1,170,778)
----------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
Advances to acquire Vitro Laser, Gmbh - (300,000)
Payment to repurchase laser (39,006) -
Payments to acquire property and equipment (159,341) (1,390,947)
----------------- ---------------
Net cash used in investing activities (198,347) (1,690,947)
----------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net advances from related party 2,452,825 823,675
Proceeds from issuance of notes payable 2,000,000 -
Proceeds from issuance of notes payable - related parties - 1,010,000
Payments on notes payable (3,600) (16,754)
Payments on notes payable - related parties (103,530) (152,748)
Payments for deferred offering costs - (136,797)
Proceeds from sale of common stock, including stock
subscription receivable - 748,000
----------------- ---------------
Net cash provided by financing activities 4,345,695 2,275,376
----------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 595 3,905
----------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 211,143 (582,444)
CASH AND CASH EQUIVALENTS, Beginning of year 58,881 641,325
----------------- ---------------
CASH AND CASH EQUIVALENTS, End of year $ 270,024 $ 58,881
================= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid $ - $ 4,023
================= ===============
Income taxes paid $ - $ -
================= ===============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Exchange of net assets to acquire common and Series A
preferred stock from former officer $ - $ 448,433
================== ================
Discounts on convertible notes payable $ 3,187,512 $ -
================== ================
Payments on notes payable from sale of vehicles $ 85,499 $ -
================== ================
The accompanying notes are an integral part of these consolidated
financial statements
F - 7
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Crystalix Group International, Inc. (formerly Americabilia.com, Inc.)
was incorporated under the laws of the State of Florida on August 22,
1989 as a C-Corporation. Pursuant to a Stock Purchase Agreement dated
October 4, 2002 between Crystalix USA Group, Inc. ("CUSA") and
Americabilia.com, Inc. ("ABIL"), and a Technology License Agreement
between Crystalix USA Group, Inc. and Crystalix Technology, Inc.
("CTI"), also dated October 4, 2002, the former shareholders of CUSA
and CTI acquired 23,300,000 newly issued shares of common stock of ABIL
and 7,000,000 shares of ABIL's Class A preferred stock with 10 to 1
limited voting and conversion rights only. At the date of consummation
of these transactions, these shareholders effectively controlled
approximately 77.6% of the issued and outstanding common stock of ABIL
and 93.7% of the voting control and ownership of ABIL assuming
conversion of the Class A preferred shares. Since the shareholders of
CUSA obtained control of ABIL, according to FASB Statement No. 141 -
"Business Combinations," this acquisition has been treated as a
recapitalization for accounting purposes, in a manner similar to
reverse acquisition accounting. In accounting for this transaction:
o CUSA is deemed to be the purchaser and surviving company for
accounting purposes. Accordingly, its net assets are included
in the balance sheet at their historical book values and the
results of operations of CUSA have been presented for the
comparative prior period. The statement of stockholder's
deficit is that of CUSA with an increase in the number of
shares outstanding of 6,669,192 that represents the shares
retained by the ABIL stockholders;
o Control of the net assets and business of ABIL was acquired
effective October 4, 2002. This transaction has been accounted
for as a purchase of the assets and liabilities of ABIL by
CUSA. The historical cost of the net assets acquired was
$5,000.
Effective November 22, 2002, the ABIL changed its name to Crystalix
Group International, Inc. On November 26, 2002, ABIL merged with
Crystalix Group International, Inc., a Nevada corporation, in a merger
solely for the purpose of redomicile.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company
as a going concern. The Company incurred a net loss for the year ended
December 31, 2004 of $8,302,578, used cash for operating activities of
$3,936,800 for the year ended December 31, 2004 and at December 31,
2004, had an accumulated deficit of $16,045,562 and a working capital
deficit of $4,262,946. In addition, the Company is in default on the
payment of certain note payable obligations. These conditions raise
substantial doubt as to the Company's ability to continue as a going
concern. These consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
These consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
F-8
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
The Company plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence. The Company has recently re-negotiated the repayment terms
of certain debt and has issued a convertible promissory note in the
amount of $2,000,000 to an unrelated third party. In July 2004, the
Company has changed its senior management by naming Mr. Kevin Ryan as
Chief Executive Officer and Mr. Robert McDermott as Chief Financial
Officer and believes that the new management team will be able to
achieve profitable operations, but there can be no assurance that the
Company will be able to raise sufficient capital and generate positive
cash flows from operations sufficient to sustain operations.
During the year ended December 31, 2004 the Company has significantly
reduced its overhead expenses while maintaining its manufacturing
facilities and equipment. The Company has eliminated non critical
personnel and expenditures, frozen wages and marketing expenditures,
reduced travel and renegotiated leases. The Company believes it can
grow revenues during the next 12 months without a significant increase
to overhead. The Company has already begun selling its new laser
machinery and has the current capacity to produce up to 36 units
without any increases in overhead. The Company also has several
internal machines currently operating under capacity that will allow
the Company to increase sales of imaged glass with a minimal increase
in overhead expenses. The Company also believes the impending patent
litigation against the alleged infringers will increase its revenues as
violators leave the industry and reduce competition.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Crystalix Group International, Inc. and its wholly owned legal
subsidiaries, Crystalix USA Group, Inc., Crystalix Imaging Limited
(incorporated on October 24, 2002 in Ireland d.b.a. Crystalix Europe),
Lazer-Tek Designs, Inc. and Lazer-Tek Designs Ltd (collectively the
"Company"). The accompanying consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America. All material inter-company
accounts and transactions have been eliminated in consolidation.
LINES OF BUSINESS
The Company assembles and leases its LaserMark II equipment, together
with its licensed laser inscription technology, to individuals and
privately held businesses throughout the United States.
Lazer-Tek designs, manufactures and sells laser inscribed gift crystals
to privately held businesses and corporate customers throughout the
United States.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current intrinsic value accounting method
specified in Accounting Principles Board ("APB") Opinion No. 25,
F-9
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the intrinsic value based
method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation. The Company
uses the fair value method for options granted to non-employees. For
the years ended December 31, 2004 and 2003, there were no options
granted to employees of the Company.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses
during the reporting periods. As of December 31, 2004, the Company used
estimates in determining the realization of its accounts receivable,
inventory, its intangible assets, accrued expenses and the value of
equity instruments, including common stock and warrants issued for
compensation expense and financing costs. Actual results could differ
from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash,
accounts receivable, inventory, other current assets, accounts payable
and accrued expenses, and customer deposits, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for notes and loans payable also approximate fair value because current
interest rates and terms offered to the Company for similar debt are
substantially the same.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company defines cash
equivalents as all highly liquid debt instruments purchased with a
maturity of three months or less, plus all certificates of deposit.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and accounts
receivables. The Company places its cash with high quality financial
institutions and at times may exceed the FDIC $100,000 insurance limit.
The Company extends credit based on an evaluation of the customer's
financial condition, generally without collateral. Exposure to losses
on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses, as required. The Company
is currently in negotiations with existing distributors over disputes
regarding amount owed to the Company for purchases of crystal blocks.
Most of these amounts in disputed arose prior to the Company's new
management team taking over the operations of the Company. Since most
of these amounts are 1 to 2 years old, the Company has deemed them
uncollectible and has established an allowance for uncollectible
accounts. The Company regularly reviews its accounts receivable
balances for collectibility and establishes an allowance for
uncollectible accounts. During the years ended December 31, 2004 and
2003, the Company recognized $74,000 and $156,819, respectively, in bad
debt expense.
F-10
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
INVENTORY
Inventory, consisting primarily of solid blank glass cubes, laser
inscribed gift crystals and related accessories and electronic parts
and accessories, are valued at the lower of cost (first-in, first-out)
or market.
PROPERTY AND EQUIPMENT
Property and equipment consisting of improvements, machinery,
equipment, computers, furniture and fixtures are recorded at cost, and
are depreciated using the straight-line method over their estimated
useful lives. Expenditures for maintenance and repairs are charged to
earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in
operations. A summary of the estimated useful lives is as follows:
DESCRIPTION USEFUL LIFE
Machinery and equipment 5-7 years
Vehicles 5 years
Furniture and fixtures 5 years
Computers and software 3-5 years
IMPAIRMENT OF LONG-LIVED ASSETS
In October 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provision of APB Opinion No. 30,"Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", for the disposal of a segment of a business. This
statement also amends ARB No. 51, "Consolidated Financial Statements",
to eliminate the exception to consolidation for a subsidiary for which
control is likely to be impaired. SFAS No. 144 requires that long-lived
assets to be disposed of by sale, including those of discontinued
operations, be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and
that will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS No. 144 also establishes a "primary-asset"
approach to determine the cash flow estimation period for a group of
assets and liabilities that represents the unit of accounting for a
long-lived asset to be held and used. The Company's adoption effective
January 1, 2002 did not have a material impact to the Company's
financial position or results of operations.
F-11
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
INTANGIBLE ASSETS
Intangible assets consist of product and laser licenses, capitalized
software costs, website development costs, artwork and copyrights,
trademarks, trade names, customer lists and relationships and were
mostly acquired with the purchase of Laser-Tek. In accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets," the Company evaluates
intangible assets and other long-lived assets for impairment, at least
on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from its
estimated future cash flows. Recoverability of intangible assets and
other long-lived assets is measured by comparing their net book value
to the related projected undiscounted cash flows from these assets,
considering a number of factors including past operating results,
budgets, economic projections, market trends and product development
cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second
test is performed to measure the amount of impairment loss.
Amortization is computed using the straight-line method over the
estimated useful life of the assets (3-10 years) as follows:
USEFUL LIFE
Licenses and related costs 10 years
Artwork library 3 years
Customer lists and relationships 5 years
Trade name and trademark 5 years
For the years ended December 31, 2004 and 2003, the Company recognized
an impairment loss on intangible assets of $212,215 and $155,220,
respectively, which is included in impairment expense in the
accompanying consolidated statement of operations. Amortization expense
amounted to $662,430 and $689,745 for the years ended December 31, 2004
and 2003, respectively. Amortization expense for the years ended
December 31, 2005, 2006, 2007, 2008 and 2009 is estimated to be
$519,104, $207,426, $197,524, $164,580 and $164,580, respectively.
WEBSITE DEVELOPMENT COSTS
The Company accounts for the costs of computer software developed or
obtained for internal use in accordance with EITF 00-2 - "WEBSITE
COSTS" and Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE." The Company
capitalizes costs of materials, consultants, and payroll and
payroll-related costs for employees incurred in developing internal-use
computer software. Amortization is computed using the straight-line
method over the estimated useful life of the asset (3 years). Costs
incurred during the preliminary project and post-implementation stages
are charged to research and development expense.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes costs incurred for the production of computer
software that generates the functionality within its laser equipment
units. Capitalized costs include direct labor and related overhead for
software produced by the Company and the cost of software purchased
from third parties. All costs in the software development process,
which are classified as research and development, are expensed as
incurred until technological feasibility has been established ("beta").
Once technological feasibility has been established, such costs are
capitalized until the software has completed beta testing and is
available for mass-marketing. Amortization, a cost of revenue, will be
provided on a product-by-product basis, using the straight-line method,
not to
F-12
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
exceed three years, commencing the month after the date of product
release. Quarterly, the Company reviews and expenses the unamortized
cost of any feature identified as being impaired. The Company also
reviews recoverability of the total unamortized cost of all features
and software products in relation to estimated service and relevant
cash flows from revenues and, when necessary, makes an appropriate
adjustment to net realizable value. Amortization is computed using the
straight-line method over the estimated useful life of the asset (3
years).
REVENUE RECOGNITION
LEASE REVENUE
The Company enters into licensing agreements to lease its laser
equipment and its licensed laser inscription technology with
individuals and businesses who open retail establishments to sell laser
inscribed crystal blocks. The terms of these licensing agreements are
typically for five years. The lease payments are paid in one or two
installments, generally upfront, and the Company recognizes lease
revenue ratably over the term of the contract.
PRODUCT SALES Revenue from the sale of laser inscribed products are
recognized when title to the products are transferred to the customer
(customer acceptance for custom designed crystals) and only when no
further contingencies or material performance obligations are
warranted, and thereby have earned the right to receive and retain
reasonably assured payments for products sold and delivered. Shipping
and handling charges are not a significant portion of revenue and are
included in gross revenue, with the related costs included in cost of
revenue.
Revenue from the sale of glass cube products is recognized when title
to the products are transferred to the customer-lessee (upon shipment)
and only when no further contingencies or material performance
obligations are warranted, and thereby have earned the right to receive
and retain reasonably assured payments for products sold and delivered.
ROYALTY REVENUE
The Company also recognizes royalty revenue from licensing its
technology, only when earned with no further contingencies or material
performance obligations are warranted, and thereby have earned the
right to receive and retain reasonably assured payments. During 2003,
the Company changed its estimation of computing and recognizing royalty
revenues to only upon collection.
DEFERRED REVENUE
Deferred revenue represent amounts received as non-refundable payments
upon the signing of the licensing agreements and delivery of the
LaserMark II equipment, for which, revenue is recognizable over the
term of the agreement (See Lease Revenue). Deposits received from
potential customers/lessees, who have not yet received the LaserMark II
equipment or products, are accounted as refundable customer-lessee
deposits.
COSTS OF REVENUE
Cost of revenue includes raw materials, component parts, shipping
supplies, freight cost and customs, direct labor, and an overhead
allocation based on manufacturing facility use. Shipping and handling
costs are not a significant portion of the cost of revenue.
F-13
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
During the years ended December 31, 2004 and 2003, the Company
purchased products from one vendor that represented approximately 42%
and 8% of total cost of revenue.
ADVERTISING AND MARKETING COSTS
The Company expenses advertising and marketing costs as incurred.
Advertising and marketing expense for the years ended December 31, 2004
and 2003 amounted to $32,001 and $125,507, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred taxes are provided on the
liability method whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities
and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will be
realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
EARNINGS (LOSS) PER SHARE
The Company reports earnings (loss) per share in accordance with SFAS
No. 128, "Earnings per Share." Basic earnings (loss) per share is
computed by dividing income (loss) available to common shareholders by
the weighted average number of common shares available. Diluted
earnings (loss) per share is computed similar to basic earnings (loss)
per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional
common shares were dilutive. Diluted earnings (loss) per share has not
been presented since the effect of the assumed exercise of options and
warrants to purchase common shares would have an anti-dilutive effect.
The following potential common shares have been excluded from the
computation of diluted net loss per share for the years ended December
31, 2004 and 2003 because the effect would have been anti-dilutive:
2004 2003
Warrants issued with convertible debentures 4,375,000 --
SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 requires
public companies to report financial and descriptive information about
their reportable operating segments. The Company identifies its
operating segments based on how management internally evaluates
separate financial information (if available), business activities and
management responsibility. The management believes it operates in a
single business segment. During the years ended December 31, 2004 and
2003, Crystalix Europe had net sales of $990,612 and $327,050,
operating loss of $484,904 and $313,148 and net loss of $494,702 and
$316,564, respectively. Total assets of Crystalix Europe at December
31, 2004 were $631,739.
F-14
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Loss," establishes standards for
the reporting and display of comprehensive income and its components in
the financial statements. For the year ended December 31, 2004 and
2003, the foreign currency translation adjustment has been included in
the consolidated statement of stockholders' deficit showing the change
in comprehensive loss.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
RECLASSIFICATION
Certain reclassifications have been made to the 2003 balances to
conform to the 2004 presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force (EITF) Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments." The objective of this Issue is to provide guidance for
identifying impaired investments. EITF 03-1 also provides new
disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a FASB Staff
Position (FSP) EITF 03-1-1 that delays the effective date of the
measurement and recognition guidance in EITF 03-1 until after further
deliberations by the FASB. The disclosure requirements are effective
only for annual periods ending after June 15, 2004. The Company has
evaluated the impact of the adoption of the disclosure requirements of
EITF 03-1 and does not believe it will have an impact to the Company's
overall combined results of operations or combined financial position.
Once the FASB reaches a final decision on the measurement and
recognition provisions, the Company will evaluate the impact of the
adoption of EITF 03-1.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4 (" SFAS No. 151". The amendments
made by SFAS 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective
for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred
during fiscal years beginning after November 23, 2004. The Company has
evaluated the impact of the adoption of SFAS 151, and does not believe
the impact will be significant to the Company's overall results of
operations or financial position.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions-an amendment of FASB Statements No. 66
and 67" ("SFAS 152") SFAS 152 amends SFAS No. 66, "Accounting for Sales
of Real Estate", to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate
Time-Sharing Transactions". SFAS 152 also amends SFAS No. 67,
"Accounting for Costs and Initial Rental
F-15
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Operations of Real Estate Projects", to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in
SOP 04-2. SFAS 152 is effective for financial statements for fiscal
years beginning after June 15, 2005, with earlier application
encouraged. The Company has evaluated the impact of the adoption of
SFAS 152, and does not believe the impact will be significant if any,
to the Company's overall results of operations or financial position
since the Company does not enter into such transactions.
In December 2004, the FASB issued SFAS No.153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." The amendments made by SFAS 153 are based on
the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of
similar productive assets and replace it with a broader exception for
exchanges of nonmonetary assets that do not have commercial substance.
Previously, Opinion 29 required that the accounting for an exchange of
a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the
recorded amount of the asset relinquished. Opinion 29 provided an
exception to its basic measurement principle (fair value) for exchanges
of similar productive assets. That exception required that some
nonmonetary exchanges, although commercially substantive, to be
recorded on a carryover basis. By focusing the exception on exchanges
that lack commercial substance, the FASB believes SFAS No.153 produces
financial reporting that more faithfully represents the economics of
the transactions. SFAS No.153 is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges
occurring in fiscal periods beginning after the date of issuance. The
provisions of SFAS No.153 shall be applied prospectively. The Company
has evaluated the impact of the adoption of SFAS 153, and does not
believe the impact will be significant to the Company's overall results
of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) will provide
investors and other users of financial statements with more complete
and neutral financial information by requiring that the compensation
cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers
a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123(R)
replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees". SFAS 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based
payment transactions with employees. However, that Statement permitted
entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net
income would have been had the preferable fair-value-based method been
used. Public entities (other than those filing as small business
issuers) will be required to apply SFAS 123(R) as of the first interim
or annual reporting period that begins after June 15, 2005. This
pronouncement is effective for the Company, a small business issuer, as
of the first interior annual reporting period that begins after
December 15, 2005. The Company has evaluated the impact of the adoption
of SFAS 123(R), and does not believe the impact will be significant to
the Company's overall results of operations or financial position.
F-16
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 2 - INVENTORY
Inventory at December 31, 2004, consist of the following:
Glass blocks, pre-made images and related products $ 708,584
Electronic parts and accessories 360,419
-------------
$ 1,069,003
=============
Note 3 - Property and Equipment
Property and equipment at December 31, 2004, consist of the following:
Equipment under operating leases as lessor $ 1,775,003
Computers and equipment 784,652
Vehicles 4,000
Furniture and fixtures 180,249
Leasehold improvements 32,188
-------------
2,776,092
Less accumulated depreciation and amortization (885,917)
-------------
$ 1,890,175
=============
Depreciation expense for the years ended December 31, 2004 and 2003 was
$438,752 and $607,041, respectively. During the year ended December 31,
2003, the Company recognized a loss on disposal of certain assets of
$243,893 and during the year ended December 31, 2004, the Company
recognized a gain on disposal of certain assets of $1,973.
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2004, consist of
the following:
Accounts payable - trade $ 502,619
Royalties payable 325,292
Accrued interest ($363,362 to related parties) 415,965
Accrued legal 125,000
Accrued payroll 59,251
Other accrued expenses 99,699
---------------
$ 1,527,826
===============
NOTE 5 - DEFERRED REVENUE
Deferred revenue represent amounts received as non-refundable payments
upon the signing of the licensing agreements and delivery of the
LaserMark II equipment, for which, the lease revenue will be
recognizable over the term of the agreement.
The following table summarizes the annual estimated revenue to be
recognized from deferred revenue, as of December 31, 2004:
F-17
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Year ending December 31,
2005 $ 968,326
2006 765,691
2007 427,634
----------------
2,161,651
Less current portion (968,326)
----------------
Long-term portion $ 1,193,325
================
NOTE 6 - NOTES PAYABLE - INCLUDING RELATED PARTIES
Notes payable at December 31, 2004 consist of the following:
John Woodward. (a) $ 1,824,000
Kevin Ryan (b) 5,396,764
Ryan Capital Management, Inc. (c) 362,137
McCary & Rood, Inc. (d) 280,000
McCary & Rood, Inc. (e) 214,037
CMKXTREME.COM (f) 2,000,000
---------------
10,076,938
Less debt discounts (2,726,696)
---------------
Net amount of notes payable 7,350,242
Less current portion (3,424,637)
---------------
Long-term portion $ 3,925,605
===============
a. On July 21, 2004, the Company issued a convertible promissory note
to Mr. John Woodward, the Company's former President, in the amount of
$1,824,000, which represents principal due on a previously issued note
payable in the amount of $1,343,722 plus accrued interest in the amount
of $480,278. This note bears interest at 10% per annum and calls for
monthly interest payments from August 1, 2004 to December 1, 2004.
Beginning on January 1, 2005, this note requires monthly principal
payments of $50,405 plus accrued interest with any unpaid principal and
interest due on July 1, 2007. The monthly principal and interest
payments can be paid with shares of the Company's common stock at the
option of the holder. The conversion price is the lesser of the average
closing price of the Company's common stock five business days
immediately prior to the conversion notice or $0.08. The Company has
agreed to register the shares issuable upon conversion of this note.
The Company has determined that there is a beneficial conversion
feature associated with this convertible promissory note in the amount
of $615,600. This amount will be amortized as financing costs over the
term of the note. This note is secured by all the assets of the
Company, subordinated to Mr. Ryan's secured position. The note is in
default on certain interest payments, but the default provisions have
been waived by the holder for the next year. The effective interest
rate on this promissory note is approximately 21%.
b. On July 21, 2004, the Company issued a convertible promissory note
to Mr. Kevin Ryan, the Company's Chief Executive Officer, in the amount
of $5,396,764, which represents (a) principal due on a two previously
issued notes payable in the amounts of $852,680 and $1,010,000, (b)
principal due under a revolving credit agreement in the amount of
$1,766,500, (c) principal due under an additional note payable in the
amount of $1,500,000 and (d) accrued interest on the above mention
obligations in the amount of $267,584. This note bears interest at
F-18
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
10% per annum and calls for monthly principal payments from August 1,
2004 to December 1, 2004 of $45,000. On the last day of the month
beginning on August 31, 2004 through November 30, 2004, the accrued
interest will be added to the principal amount. Beginning on January 1,
2005, this note requires monthly principal payments of $174,584 with
any unpaid principal and interest due on July 1, 2007. The monthly
principal and interest payments can be paid with shares of the
Company's common stock at the option of the holder. The conversion
price is the lesser of the average closing price of the Company's
common stock five business days immediately prior to the conversion
notice or $0.08. In addition, the Company granted to Mr. Ryan a warrant
to purchase 1,875,000 shares of the Company's common stock at $0.08 per
share and my be exercised by the holder at any time prior to July 21,
2011. The warrants also include a cashless exercise feature that allows
the holder to pay the exercise price by surrendering a sufficient
number of warrants to pay for the exercise price of the warrants being
exercised as follows: warrants to be surrendered equals the total
exercise price of warrants being exercised divided by the fair value of
the Company's common stock at the date of exercise. The Company has
agreed to register the shares issuable upon conversion of this note and
exercise of the warrant. In accordance with EITF 00-27, the Company
first determined the value of the note and the fair value of the
detachable warrants issued in connection with this note. The estimated
value of the warrants of $200,625 was determined using the
Black-Scholes option pricing model and the following assumptions: term
of 7 years, a risk free interest rate of 3.5%, a dividend yield of 0%
and volatility of 371%. The face amount of the note payable of
$5,396,764 was proportionately allocated to the note and the warrants
in the amounts of $5,203,330 and $193,434, respectively. The value of
the note was then allocated between the note and the beneficial
conversion feature, which amounted to $3,188,488 and $2,014,842,
respectively. The combined total discount is $2,208,276, and is being
amortized over the term of the note. This note is secured by all the
assets of the Company. The note is in default on certain principal and
interest payments, but the default provisions have been waived by the
holder for the next year. The effective interest rate on this
promissory note is approximately 24%.
c. On July 21, 2004, the Company issued a promissory note to Ryan Capital
Capital Management, Inc. (this company is controlled by Kevin Ryan) in
the amount of $452,137, which represents principal due on a previously
issued note payable in the amount of $400,000 plus accrued interest in
the amount of $52,137. This note bears interest at 10% per annum and
calls for monthly interest payments from August 1, 2004 to December 1,
2004. Beginning on January 1, 2005, this note requires monthly
principal payments of $37,902 plus accrued interest with any unpaid
principal and interest due on December 1, 2005. This note is secured by
all the assets of the Company. The note is in default on certain
interest payments, but the default provisions have been waived by the
holder for the next year.
d. On August 1, 2004, the Company issued a promissory note to McCary &
Rood (this company is controlled by Kevin Ryan) in the amount of
$280,000, which represents past due consulting fees under a consulting
agreement dated May 28, 2003. This note calls for monthly payments
beginning August 1, 2004 of $30,000 with any unpaid principal due on
May 1, 2005. This note is secured by all the assets of the Company. The
note is in default on certain principal payments, but the default
provisions have been waived by the holder for the next year.
e. On August 1, 2004, the Company issued a promissory note to McCary &
Rood in the amount of $214,037, which represents past due reimbursable
expenses under a consulting agreement dated May 28, 2003. This note
calls for monthly payments beginning August 1, 2004 of
F-19
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
$30,000 with any unpaid principal due on March 1, 2005. This note is
secured by all the assets of the Company. The note is in default on
certain principal payments but the default provisions have been waived
by the holder for the next year.
f. On September 23, 2004, the Company issued a convertible promissory
note to CMKXTREME.COM in the amount of $2,000,000. This note bears
interest at 10% per annum and calls for monthly principal payments of
$83,333 plus accrued interest beginning November 1, 2004 with any
unpaid principal and interest due on October 1, 2006. The monthly
principal and interest payments can be paid with shares of the
Company's common stock at the option of the holder. The conversion
price is the lesser of the average closing price of the Company's
common stock five business days immediately prior to the conversion
notice or $0.08. In addition, the Company granted to CMKXTREME.COM a
warrant to purchase 2,500,000 shares of the Company's common stock at
$0.08 per shares and my be exercised by the holder at any time prior to
September 23, 2011. The warrants also include a cashless exercise
feature that allows the holder to pay the exercise price by
surrendering a sufficient number of warrants to pay for the exercise
price of the warrants being exercised as follows: warrants to be
surrendered equals the total exercise price of warrants being exercised
divided by the fair value of the Company's common stock at the date of
exercise. The Company has agreed to register the shares issuable upon
conversion of this note and exercise of the warrant. In accordance with
EITF 00-27, the Company first determined the value of the note and the
fair value of the detachable warrants issued in connection with this
note. The estimated value of the warrants of $200,000 was determined
using the Black-Scholes option pricing model and the following
assumptions: term of 7 years, a risk free interest rate of 3.5%, a
dividend yield of 0% and volatility of 371%. The face amount of the
convertible promissory note of $2,000,000 was proportionately allocated
to the note and the warrants in the amounts of $1,818,182 and $181,818,
respectively, using the relative fair value method. The value of the
note was then allocated between the note and the beneficial conversion
feature, which amounted to $1,636,364 and $181,818, respectively. The
combined total discount is $363,636, and is being amortized over the
term of the note. This note is secured by all the assets of the
Company, subordinated to Mr. Ryan's secured position. The note is in
default on certain principal and interest payments, but the default
provisions have been waived by the holder for the next year. The
effective interst rate on this promissory note is approximately 19%.
The following table summarizes the aggregate maturities of the notes
payable as of December 31, 2004:
Year ending December 31,
2005 $ 4,857,704
2006 3,533,206
2007 1,686,028
---------------
10,076,938
Less current portion (4,857,704)
---------------
Long-term portion $ 5,219,234
================
Current portion $ 4,857,704
Less discount attributed to current portion (1,107,911)
----------------
$ 3,749,793
================
Long-term portion 5,219,234
Less discount attributed to long-term portion (1,618,785)
----------------
Long-term portion $ 3,600,449
================
F-20
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 7 - STOCKHOLDERS' DEFICIT
COMMON STOCK ISSUED IN PRIVATE PLACEMENTS
On November 26, 2002, the Board of Directors of the Company approved
and initiated another private placement offering (the "November Private
Placement") of the Company's Rule 144 restricted common stock at an
average offering price of $0.50 per share, on a best efforts basis. The
Private Placement was exempt from the registration provisions of the
Securities and Exchange Commission Act of 1933 and Rule 506 of
Regulation D. As of December 31, 2002, the Company sold 176,000 shares
for proceeds of $88,000, all of which was collected in January 2003. In
January 2003, the Company sold an additional 120,000 common shares for
proceeds of $60,000. Also in March 2003, the Company sold 1,000,000
shares for proceeds of $200,000. The Company did not incur or pay any
offering costs.
COMMON STOCK ISSUED FOR ACQUISITION OF LAZER-TEK DESIGNS, INC. AND
LAZER-TEK DESIGNS, LTD
On December 23, 2002, the Company issued 1,250,000 shares of the
Company's common stock to acquire Lazer-Tek, valued at a total of
$1,125,000 using the Company's trading price as of December 23, 2002.
Pursuant to the agreement, these shares had registration rights until
April 30, 2003. The Company has no obligation beyond a reasonable
effort to have these shares registered.
COMMON STOCK AND PREFERRED STOCK ISSUED FOR SERVICES AND FINANCING
COSTS
During 2003, the Company issued 660,000 shares of its common stock, as
consideration to the holder of the $1.5 million loan payable for
extending the repayment terms. The shares were valued at their fair
market value of $528,000 and included in interest expense. The Company
also issued 2,340,000 shares of its common stock for services rendered
that were valued at a fair market value of $1,170,000.
Also during 2003, the Company issued 250,000 shares of its common stock
to three consultants. The shares were valued at their fair market value
of $175,000 which was determined using the value of the Company's stock
at the date the consulting agreements were signed.
On July 21, 2004, the Company issued 3,019,000 common shares of the
Company's common stock to Kevin Ryan as additional consideration for
the financing provided to the Company. The value of these common shares
issued to Mr. Ryan (determined using the 10-day average per shares
price of the Company's common stock prior to the issuance date) was
$323,033. Also, certain holders of the Company's Series A preferred
stock reallocated 2,647,900 of their shares to certain investors and
senior members of the Company's management team. The value of these
Series A preferred shares (determined using the 10-day average per
shares price of the Company's common stock prior to the issuance date
multiplied by the 10 to 1 conversion rate) was $2,833,253. The Company
took a charge to financing costs and compensation expense of $2,747,011
and $409,275, respectively, related to the issuance of common shares
and reallocation of the Series A preferred shares.
F-21
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
SHARES OF COMMON AND PREFERRED STOCK EXCHANGED FOR CERTAIN ASSETS
During the second quarter of 2003, in accordance with an agreement with
a former officer, the Company canceled 5,126,000 shares of common stock
and 1,540,000 shares of Class A preferred stock owned by a former
officer of the Company in exchange for the Company transferring the
ownership to four retail store locations in Las Vegas, Nevada that were
previously owned by the Company (See Note 9) Since this transaction
occurred with a related party, the cost carryover basis of $237,826 was
used and no gain or loss was recognized from this transaction.
During the fourth quarter of 2003, in accordance with an agreement with
a former officer, the Company canceled 5,126,000 shares of common stock
and 1,540,000 shares of Class A preferred stock owned by a former
officer of the Company in exchange for the Company transferring the
ownership of certain laser equipment located on cruise ships that was
previously owned by the Company (See Note 9). Since this transaction
occurred with a related party, the cost carryover basis of $210,607 was
used and no gain or loss was recognized from this transaction.
STOCK OPTION PLAN
The Company does not have a formal stock option plan, however, the
Board of Directors and the management may grant options to acquire
common stock of the Company ("Options"). Options may be issued to
directors, executives, key employees and consultants providing valuable
services to the Company. The Board of Directors and management select
recipients to whom options are granted, and determine the number of
shares to be granted. Options granted are exercisable at a price
determined by the Board of Directors and management at the time of
grant, but in no event less than fair market value. During 2002,
3,000,000 options had been granted to certain key employees and
management at an exercise price of $0.25 per share underlying the stock
option when the trading price as of the date of grant was $0.16 per
share.
The following is table summarizes the options outstanding:
Weighted-
Stock Average
Option Exercise
Plan Price
------------ -------------
Balance, December 31, 2002 3,000,000 $ 0.25
Canceled (3,000,000) $ 0.25
------------
Balance, December 31, 2003 - $ -
============
In connection with the exchange of common and preferred stock for
certain assets of the Company and the resignation of certain former
officers of the Company, 1,600,000 options to purchase shares of the
Company's common stock for $0.25 per share were canceled during 2003.
Also, in 2003, the remaining 1,400,000 options were also canceled.
There were no options granted, canceled or expired during the year
ended December 31, 2004.
F-22
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 8 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 2004 are as follows:
Deferred tax assets:
Net operating loss $ 3,240,000
Deferred revenue 998,000
Stock issued for services and financing costs 1,647,000
Advances to Crystalix Europe 136,000
Allowance for doubtful accounts 113,000
----------------
6,134,000
Deferred tax liabilities:
Step-up of basis of intangible assets (554,000)
Depreciation of property and equipment (678,000)
Other basis differences for assets acquired (251,000)
----------------
(1,483,000)
----------------
Net deferred tax asset 4,651,000
Less valuation allowance (4,651,000)
----------------
$ --
================
At December 31, 2004, the Company had federal net operating loss
("NOL") carryforwards of approximately $9,700,000. Federal NOLs could,
if unused, begin to expire in 2018.
The valuation allowance increased by $2,628,000 and $1,272,000 during
2004 and 2003, respectively.
The reconciliation of the effective income tax rate to the federal
statutory rate for the years ended December 31, 2004 and 2003 is as
follows:
2004 2003
Federal income tax rate (34.0%) (34.0%)
State tax, net of federal benefit -- --
Loss for which no federal benefit was
received 34.0% 34.0%
------- ------
Effective income tax rate 0.0% 0.0%
======= ======
Utilization of the net operating loss and tax credit carryforwards is
subject to significant limitations imposed by the change in control
under I.R.C. 382, limiting its annual utilization to the value of the
Company at the date of change in control times the federal discount
rate.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003 purchased equipment
from a related party vendor amounting to $0 and $8,300, respectively.
This related party vendor is wholly owned by a minority
(non-controlling) shareholder of the Company and does not have any
formal agreement. Management believes that these transactions are
negotiated at arms length.
F-23
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
During the year ended December 31, 2004 and 2003, purchases of
technology consulting services from the same related party vendor
amounted to approximately $88,290 and $189,450, respectively.
During the year ended December 31, 2004, the Company paid $1,995 for
computer consulting services from a company that our majority
shareholder has an ownership interest.
On May 28, 2003, the Company entered into a consulting agreement with
McCary & Rood, a company controlled by Mr. Kevin Ryan, that provides
for a monthly consulting fee of $20,000. The agreement expires on the
earlier of May 27, 2006 or on the date on which Mr. Ryan accepts a
position as an officer of the Company. Mr. Ryan became an officer of
the Company in July 2004, which terminated this agreement. For the
years ended December 31, 2004 and 2003, consulting expenses related to
this agreement amounted to $140,000 and $140,000, respectively.
In April 2003, the Company entered into an agreement with Armin Van
Damme, a former officer and director and founder of Crystalix USA
Group, to transfer the four Company-owned retail locations in Las Vegas
for the surrender of all of his Class A preferred stock and common
stock remaining after permitted transfers of the common stock. As a
result of this transaction, the Company has canceled 5,126,000 shares
of common stock and 1,540,000 shares of Class A
preferred stock owned by Mr. Van Damme and removed the net book value
of the assets related to the four Company-owned retail locations in the
amount of $237,826. In addition, Mr. Van Damme resigned as an employee
of the Company and agreed to assume liability of the lease of his
automobile which had been leased by the Company, and liability of the
lease of office space at 5720 South Arville, Suite 114, Las Vegas,
Nevada. The transfer was effective as of April 28, 2003. No gain or
loss was recognized from this related party transaction. Mr. Van Damme
was to pay the Company a license fee of 5% of gross sales generated
from the transferred locations and agreed to purchase all supplies and
equipment needed for the operation of the locations from the Company at
its cost plus 10%. The agreement provided for termination by the
Company upon 30 days' prior written notice in the event of Mr. Van
Damme's failure to make payments or submit reports on a timely basis.
As a result of the settlement agreement, this agreement was declared
null and void. Under the terms of the settlement, Mr. Van Damme is to
keep the locations and the equipment at the locations. However, it is
contemplated that he will replace the equipment and arrange for his own
licensing of the proprietary technology within six months. While the
Company's equipment is in his possession, he is to pay a flat licensing
and royalty fee of $500 per month per laser.
In April 2003, the Company entered into an agreement with Other Van
Dam, a former officer and director and founder of Crystalix USA Group,
to transfer ownership of certain laser equipment aboard the cruise
ships owned by the Starboard Cruise line for the surrender of all of
his Class A preferred stock and common stock. As a result of this
transaction, the Company canceled 5,126,000 shares of common stock and
1,540,000 shares of Class A preferred stock owned by Mr. Van Dam and
used the net book value of the laser equipment in the amount of
$210,607 as the cost basis for the stock redemption.
See Notes 4, 6 and 9 for additional related party transaction.
F-24
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 10 - COMMITMENTS AND CONTINGENCIES
CONTRACTS
Acquisition Target - On December 15, 2002, the Company signed an
agreement to acquire 50% of the ownership interest of Vitro Laser GmbH
("Vitro"), a German Corporation, for consideration consisting of cash
and the right to acquire shares of the Company's common stock. The
Company advanced $500,000 to Vitro through March 31, 2003 and in
accordance with a legal settlement on November 14, 2003, the Company
allowed Vitro to retain the advance. After new management terminated
the process of acquiring Vitro in June 2003, the $500,000 advance was
expensed during the same period.
Royalty Agreement - Effective October 1, 2003, the Company entered into
an amended and restated patent license agreement with Laser Design
International, LLC ("LDI") and Norwood Promotional Products, Inc.
("Norwood"), which superseded the February 1999 and October 2001
agreements. The Company now has a non-exclusive, non-transferable,
royalty-bearing sub-license from LDI to make, use, offer for sale, and
sell decorative products using the technology other than in the United
States. Norwood granted the Company a non-exclusive, non-transferable
(other than reseller licenses to permitted resellers), revocable and
royalty-bearing sub-license for the United States in the retail market
segment. Norwood also granted Lazer-Tek a non-exclusive,
non-transferable (other than reseller licenses to permitted resellers),
revocable and royalty-bearing sub-license for the United States in the
corporate market segment. Norwood is to approve all applications for a
permitted reseller license. The Company is required to pay LDI and
Norwood royalty payments based on a percentage of net sales on a
quarterly basis. The royalty agreement expires on the earlier of April
27, 2010, a material breach of contract, or mutual recession of all
parties.
LEASES
The following is a schedule by years of future minimum rental payments
required under operating leases that have non-cancelable lease terms in
excess of one year as of December 31, 2004:
Year ending December 31,
2005 $ 51,946
2006 70,819
2007 72,944
2008 18,370
-----------------
$ 214,079
=================
Rent expense amounted to $229,937 and $545,597 for the years ended
December 31, 2004 and 2003, respectively.
LITIGATION
The Company may be named as a defendant in legal actions arising from
its normal operations, and from time-to-time is presented with claims
for damages arising out of its actions. The management of the Company
anticipates that any damages or expenses it may incur in connection
with these actions, individually and collectively, will not have a
material adverse effect on the Company. As of December 31, 2004, the
Company was not a named party to any pending legal
F-25
CRYSTALIX GROUP INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
proceedings, other than routine litigation deemed incidental to our
business, except for the following:
VITRO LASER GROUP USA -- On February 12, 2003, Vitro Laser Group USA,
Inc. and Kenneth Morrison filed an original petition and application
for injunctive relief in the District Court of Dallas County, Texas,
against Vitro Laser GmbH ("Vitro") and the Company. The plaintiffs
allege that Vitro and the Company wrongfully took two laser systems.
The Company picked the laser systems up at the request of the owner of
the lasers, Vitro, and returned them to their possession. Neither the
Company nor its subsidiaries used these lasers in its operations. The
plaintiffs seek a temporary and permanent injunction enjoining,
prohibiting, and restraining Vitro and the Company from interfering
with plaintiffs' rights in the laser systems and in their business
facilities and operations. In addition, the plaintiffs seek from the
Company exemplary damages for conversion of the equipment, statutory
damages of $2,000 and attorneys' fees for theft of the laser systems,
actual damages for unjust enrichment, and actual and exemplary damages
for tortious interference with plaintiffs' contract with Vitro. With
respect to Vitro, the plaintiffs seek exemplary damages for fraud,
actual damages for negligent misrepresentation, actual damages and
attorneys' fees for breach of contract, and actual damages for breach
of fiduciary duty. Vitro asserts that it was not properly served and
that it is not amenable to suit or service in the United States since
it is a German company. The Company filed a special appearance in the
lawsuit to contest the court's jurisdiction over it. The court found
that the court had jurisdiction over the Company and the Company
appealed that ruling. On March 19, 2005, the plaintiffs agreed to
release and discharge all claims against for a payment of $5,000.
NOTE 11 - IMPAIRMENT EXPENSE
For the years ended December 31, 2004 and 2003, impairment expense
consisted of the following:
2004 2003
----------- -----------
Impairment of property and equipment $ - $ 243,893
Impairment of value of customer lists - 155,220
Impairment of capitalized software costs 176,052 -
Impairment of website development costs 36,163 -
----------- -----------
$ 212,215 $ 399,113
=========== ===========
NOTE 12 - SUBSEQUENT EVENTS
In April 2005, the Company entered into a new lease agreement for
rental of its corporate office space in Las Vegas, Nevada that expires
in March 2008. The future minimum lease payments are incorporated in
the table presented on Note 10.
F-26
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Nevada Revised Statutes, the registrant has broad powers to
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). The registrant's Bylaws (Exhibit 3.2 hereto) also
provide for mandatory indemnification of its directors and executive officers,
and permissive indemnification of its employees and agents, to the fullest
extent permissible under Nevada law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant in connection with the
securities being registered are as follows:
Securities and Exchange Commission filing fee........$ 517.89
Accounting fees and expenses......................... 15,000.00
Blue sky fees and expenses........................... 1,000.00
Legal fees and expenses.............................. 15,000.00
Transfer agent fees and expenses..................... 1,000.00
Printing expenses.................................... 2,000.00
Miscellaneous expenses............................... 482.11
--------------
Total................................................$ 35,000.00
==============
All amounts are estimates except the SEC filing fee. The Selling
Stockholders will be bearing the cost of its own brokerage fees and commissions
and its own legal and accounting fees.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Within the past three years, the registrant has issued and sold the
unregistered securities set forth in the tables below.
COMMON STOCK:
- -------------------------------------------------------------------------------------------------------------------
PERSONS OR CLASS OF
DATE PERSONS SECURITIES CONSIDERATION
- -------------------------------------------------------------------------------------------------------------------
10/04/02 5 shareholders of 23,300,000 shares of common stock shares of Crystalix USA
Crystalix USA Group, Inc.
- -------------------------------------------------------------------------------------------------------------------
10/04/02 5 shareholders of 7,000,000 shares of Class A preferred Technology license
Crystalix USA Group, Inc. stock
- -------------------------------------------------------------------------------------------------------------------
12/23/02 3 shareholders of 1,250,000 shares of common stock Shares of Lazer-Tek
Lazer-Tek Designs Designs
- -------------------------------------------------------------------------------------------------------------------
03/31/03 John E. Dhonau 2,000,000 shares of common stock Services
- -------------------------------------------------------------------------------------------------------------------
04/08/03 John Woodward 1,000,000 shares of common stock Loan extension and
services
- -------------------------------------------------------------------------------------------------------------------
10/02 - 3/03 25 investors 9,896,000 shares of common stock $1,848,000
- -------------------------------------------------------------------------------------------------------------------
II-1
- -------------------------------------------------------------------------------------------------------------------
PERSONS OR CLASS OF
DATE PERSONS SECURITIES CONSIDERATION
- -------------------------------------------------------------------------------------------------------------------
08/20/03 Basic Investors Inc. 100,000 shares of common stock Services
- -------------------------------------------------------------------------------------------------------------------
09/01/03 Christina Hanneman 50,000 shares of common stock Services
- -------------------------------------------------------------------------------------------------------------------
10/15/03 Princeton Research, Inc. 100,000 shares of common stock Services
- -------------------------------------------------------------------------------------------------------------------
07/21/04 Kevin Ryan 3,019,000 shares of common stock and Debt restructure
seven-year warrant to purchase 1,875,000
shares of common stock at $0.08 per share
- -------------------------------------------------------------------------------------------------------------------
09/23/04 CMKXTREME.COM Seven-year warrant to purchase 2,500,000 $2,000,000 loan
shares of common stock at $0.08 per share
- -------------------------------------------------------------------------------------------------------------------
The registrant relied upon the exemption from registration contained in
Section 4(2) as to all of the transactions, as the purchasers were deemed to be
sophisticated with respect to the investment in the securities due to their
financial condition and involvement in the registrant's business. Restrictive
legends were placed on the stock certificates evidencing the securities issued
in all of the above transactions. No underwriters were used.
ITEM 27. EXHIBITS
- --------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
- --------------------------------------------------------------------------------
2.1 Stock Purchase Agreement, dated October 4, 2002, between
Americabilia.com, Inc. and Crystalix USA Group, Inc. (1)
- --------------------------------------------------------------------------------
2.2 Plan and Agreement of Merger dated November 12, 2002 between
Crystalix Group International, Inc., a Florida corporation,
and Crystalix Group International, Inc., a Nevada
corporation (2)
- --------------------------------------------------------------------------------
2.3 Common Stock Purchase Agreement, dated December 23, 2002,
among Crystalix Group International, Inc., Lazer-Tek
Designs, Inc., Lazer-Tek Designs, Ltd. and Lena Walther (3)
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation of Crystalix Group International,
Inc. (4)
- --------------------------------------------------------------------------------
3.2 Bylaws of Americabilia.com, Inc. (5)
- --------------------------------------------------------------------------------
5.1 Opinion of Dill Dill Carr Stonbraker & Hutchings, P.C. (6)
- --------------------------------------------------------------------------------
10.1 Form of Master Equipment Lease and Software License
Agreement (4)
- --------------------------------------------------------------------------------
10.2 Patent Sub-License Agreement, dated January 1, 2002, between
Laser Design International, LLC and Crystalix USA Group (4)
- --------------------------------------------------------------------------------
10.3 Patent Sub-License Agreement, dated February 17, 1999,
between Janesville Group Limited and Lazer-Tek Designs, Ltd.
(4)
- --------------------------------------------------------------------------------
10.4 Sub-Lease Agreement, dated December 13, 2001, among Arville
& Russell, LLC, Western Window & Door Company and Crystalix
USA Group, and amendment thereto (4)
- --------------------------------------------------------------------------------
II-2
- --------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
- --------------------------------------------------------------------------------
10.5 Lease Agreement, dated April 5, 2001 between South Tech
Hacienda, LLC and Lazer-Tek Designs, Ltd. (4)
- --------------------------------------------------------------------------------
10.6 Promissory note to John S. Woodward dated December 20, 2002
(4)
- --------------------------------------------------------------------------------
10.7 Promissory note to Kevin Ryan dated December 23, 2002 (4)
- --------------------------------------------------------------------------------
10.8 Bridge Loan Agreement dated October 21, 2003 (7)
- --------------------------------------------------------------------------------
10.9 Revolving Credit Agreement dated as of December 1, 2003 with
Kevin Ryan (8)
- --------------------------------------------------------------------------------
10.10 Secured Promissory Note dated December 1, 2003 to Kevin Ryan
(8)
- --------------------------------------------------------------------------------
10.11 Consulting Agreement made as of May 28, 2003 with McCary &
Rood (8)
- --------------------------------------------------------------------------------
10.12 Irrevocable Proxy Coupled with an Interest granted to Ryan
Capital Management, Inc. dated November 26, 2003 (8)
- --------------------------------------------------------------------------------
10.13 Settlement Agreement and Release between Crystalix Group
International, Inc. and John S. Woodward dated July 21, 2004
(9)
- --------------------------------------------------------------------------------
10.14 Amended and Restated Convertible Promissory Note to John S.
Woodward dated July 21, 2004 (9)
- --------------------------------------------------------------------------------
10.15 Settlement Agreement and Release among Crystalix Group
International, Inc. Kevin T Ryan, Ryan Capital Management,
Inc. and McCary & Rood dated July 21, 2004. (9)
- --------------------------------------------------------------------------------
10.16 Amended and Restated Convertible Promissory Note to Kevin T.
Ryan dated July 21, 2004 (9)
- --------------------------------------------------------------------------------
10.17 Promissory Note to Ryan Capital Management, Inc. dated July
21, 2004 (9)
- --------------------------------------------------------------------------------
10.18 Promissory Note for $280,000 to McCary & Rood dated August
1, 2004 (9)
- --------------------------------------------------------------------------------
10.19 Promissory Note for $214,037 to McCary & Rood dated August
1, 2004 (9)
- --------------------------------------------------------------------------------
10.20 Amended and Restated Warrant to Purchase Common Stock of
Crystalix Group International, Inc. issued to Kevin T. Ryan
(10)
- --------------------------------------------------------------------------------
10.21 Registration Rights Agreement (9)
- --------------------------------------------------------------------------------
10.22 Convertible Promissory Note to CMKXTREME.COM dated September
23, 2004 (11)
- --------------------------------------------------------------------------------
10.23 Amended and Restated Warrant to Purchase Common Stock issued
to CMKXTREME.COM (10)
- --------------------------------------------------------------------------------
16.1 Letter from Stonefield Josephson, Inc. (12)
- --------------------------------------------------------------------------------
21.1 Subsidiaries of Crystalix Group International, Inc. (4)
- --------------------------------------------------------------------------------
23.1 Consent of Dill Dill Carr Stonbraker & Hutchings, P.C.
Reference is made to Exhibit 5.1
- --------------------------------------------------------------------------------
23.2 Consent of Stonefield Josephson, Inc.
- --------------------------------------------------------------------------------
23.3 Consent of De Joya & Company
- --------------------------------------------------------------------------------
II-3
- ----------------------
(1) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K, filed October 9, 2002.
(2) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K, filed December 4, 2002.
(3) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K, filed December 30, 2002.
(4) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the fiscal year ended December 31, 2002.
(5) Incorporated by reference to the exhibits to the registrant's registration
statement on Form 10-SB, filed March 3, 2000.
(6) Filed previously with the initial filing of this Registration Statement on
Form SB-2, File No. 333-122747, on February 11, 2005.
(7) Incorporated by reference to the exhibits to the registrant's quarterly
report on Form 10-QSB for the quarter ended September 30, 2003.
(8) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the year ended December 31, 2003.
(9) Incorporated by reference to the exhibits to the registrant's quarterly
report on Form 10-QSB/A for the quarter ended June 30, 2004.
(10) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the year ended December 31, 2004.
(11) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K, filed September 29, 2004.
(12) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K, filed July 13, 2004.
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ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the issuer pursuant to the foregoing provisions, or
otherwise, the issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the issuer in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Las
Vegas, State of Nevada on April 15, 2005.
CRYSTALIX GROUP INTERNATIONAL, INC.
By: /s/ KEVIN T. RYAN
-----------------------------------------
Kevin T. Ryan, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE TITLE DATE
/s/ KEVIN T. RYAN Chief Executive Officer and Director
- --------------------------------- (Principal Executive Officer) April 15, 2005
Kevin T. Ryan
Executive Vice President, Treasurer, Chief
/s/ ROBERT MCDERMOTT Financial Officer, and Director (Principal
- --------------------------------- Financial Officer) April 15, 2005
Robert McDermott
Corporate Secretary, Vice President Finance
/s/ PATTY HILL and Administration and Controller (Principal
- --------------------------------- Accounting Officer) April 15, 2005
Patty Hill
Executive Vice President, Chief Technical
- --------------------------------- Officer and Director April __, 2005
Rainer Eissing
Vice President, Assistant Secretary, Director
/s/ OSWALDUS VAN DAM of Technical Operations and Director April 15, 2005
- ---------------------------------
Oswaldus Van Dam
- --------------------------------- Director April __, 2005
Marc Janssens
/s/ JOHN S. WOODWARD Director April 15, 2005
- ---------------------------------
John S. Woodward
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