<pre>
PROSPECTUS
2,102,602,912 Shares
CONECTISYS CORPORATION
Common Stock
The shares of our common stock being offered under this prospectus are
being offered by some of our security holders identified in this prospectus for
their own accounts. Our common stock trades on the OTC Bulletin Board under the
symbol "CNES." On February 7, 2007, the high and low sale prices for a share of
our common stock were $.0004 and $.0002, respectively.
The mailing address and the telephone number of our principal executive
office is 25115 Avenue Stanford, Suite 320, Valencia, California 91355, (661)
295-6763.
____________________
Investing in our common stock involves risks.
Please see "Risk Factors" beginning on page 5.
_________________
This prospectus is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus.
_________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is February 9, 2007
<page>1
TABLE OF CONTENTS
Description Page No.
- ----------- --------
Prospectus Summary.........................................................3
Risk Factors...............................................................5
Special Note Regarding Forward-Looking Statements.........................14
Use of Proceeds...........................................................14
Price Range of Common Stock...............................................15
Dividend Policy...........................................................15
Capitalization............................................................16
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................17
Business..................................................................25
Management................................................................36
Certain Relationships and Related Transactions............................43
Principal and Selling Security Holders....................................44
Plan of Distribution......................................................49
Description of Capital Stock..............................................52
Legal Matters.............................................................53
Experts...................................................................53
Where You Can Find More Information.......................................53
Index to Financial Statements.............................................55
<page>2
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because
it is a summary, it necessarily does not contain all of the information
necessary to your investment decision. To understand this offering fully, you
should read carefully the entire prospectus.
ConectiSys Corporation
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-Net(TM), which is a trademark of ConectiSys. Our
H-Net(TM) system is currently comprised of two principal components: our H-
Net(TM) 5.0 product, which itself is comprised of circuitry and a radio
transmitter, and our H-Net(TM) BaseStation. Our H-Net(TM) 5.0 product is a
component that is designed to be part of a digital energy meter to read and
wirelessly transmit meter data to our H-Net(TM) BaseStation. Our H-Net(TM)
BaseStation is designed to receive and relay the meter data over standard phone
lines to a central location where the data is compiled and utilized.
We are continuing the development of our H-Net(TM) system. Our recent
development efforts have focused on redesigning our H-Net(TM) circuitry from a
three-board circuit to a two-board circuit. This redesign was completed in
November 2005 and testing of our new H-Net(TM) circuitry has begun. We
redesigned our H-Net(TM) circuitry to respond to redesigns of meter products by
meter manufacturers. These redesigns by meter manufacturers were directed at
reducing costs and resulted in reduced available space for integration of
circuitry from third-party technology providers such as ConectiSys.
In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. Concurrently with the development
of our H-Net(TM) BaseStation, which is a single-channel design, we have been
developing an eight-channel H- Net(TM) BaseStation. Our eight-channel H-Net(TM)
BaseStation is designed to communicate with up to 7,500 H-Net(TM) 5.0 product
installations per network due to its multiple channel design and to deliver
real-time energy consumption data at low-cost. In July 2005, we submitted to the
FCC our eight-channel H-Net(TM) BaseStation product for approval for
commercialization and sale and received FCC certification for this product in
January 2006.
In January 2007, we signed an Independent Contractor Agreement with
Trimark Associates Inc. for the installation of our H-Net(TM)technology for a
key irrigation district cooperative in Northern California. Trimark Associates
Inc. is expected to provide Meter Service Provider and Meter Data Management
Agent services for this project. We expect that the project has a revenue
potential of up to $500,000 and that this contract will be the first in a series
of contracts for H-Net(TM)technology installations throughout California.
In January 2007, we signed an Independent Contractor Agreement with
Trimark Associates Inc. for the installation of our H-Net(TM)technology for a
key irrigation district cooperative in Northern California. Trimark Associates
Inc. is expected to provide Meter Service Provider and Meter Data Management
Agent services for this project. We expect that the project has a revenue
potential of up to $500,000 and that this contract will be the first in a series
of contracts for H-Net(TM)technology installations throughout California.
We have not yet sold any H-Net(TM) systems. However, we are actively
pursuing sales of our H-Net(TM) systems with meter manufacturers and other
companies in the energy industry. We have no history of revenues and have
incurred significant losses since the beginning of the development of our H-
Net(TM) system. We have significant accumulated and working capital deficits. As
a result of our financial condition, our independent auditors have issued a
report questioning our ability to continue as a going concern.
<page>3
The Offering
Common stock offered by selling security holders 2,102,602,912 (1)
Common stock outstanding prior to this offering 17,507,935,396 (2)
Common stock outstanding following this offering
if all shares are sold 19,610,538,308 (1) (2)
Use of Proceeds All proceeds of this
offering will be received
by selling security
holders for their own
accounts.
Risk Factors You should read the "Risk
Factors" section
beginning on page 5, as
well as other cautionary
statements throughout
this prospectus, before
investing in shares of
our common stock.
_____________
(1) As of February 7, 2007, the principal portions of the callable
secured convertible notes and the related warrants, whose underlying
shares of common stock are covered by this prospectus, were convertible
or exercisable into approximately 14,500,000,000 shares of common stock,
of which 2,102,602,912 shares of common stock, which amount represents
approximately 12% of our currently outstanding shares of common stock,
are being offered by the selling security holders hereunder. The common
stock offered by the selling security holders assumes exercise of all of
the warrants whose underlying shares of common stock are covered by this
prospectus in exchange for 20,320,000 shares of common stock and the
partial conversion of the principal amount of all of the notes and
accrued and unpaid interest into 2,082,282,912 shares of common stock,
and the immediate resale of all of those shares of common stock.
(2) The number of shares of common stock that will be outstanding
after this offering is based on the 17,507,935,396 shares of common
stock outstanding as of February 7, 2007, and excludes the following:
o 10,000,000 shares of common stock issuable upon exercise
of outstanding options to purchase up to 1,000,000
shares of Class B Preferred Stock, each of which shares
is convertible into 10 shares of our common stock;
o 616,823,358 shares of common stock issuable to one
executive officer and one former executive officer for
accrued and unpaid bonus compensation;
o approximately 18,500,000,000 shares of common stock
issuable upon exercise of warrants or conversion of
related debentures or notes whose underlying shares of
common stock are not covered by this prospectus;
o any additional shares of common stock we may issue from
time to time after February 7, 2007.
<page>4
RISK FACTORS
An investment in our common stock involves a high degree of risk. In
addition to the other information in this prospectus, you should carefully
consider the following risk factors before deciding to invest in shares of our
common stock. If any of the following risks actually occurs, it is likely that
our business, financial condition and operating results would be harmed. As a
result, the trading price of our common stock could decline, and you could lose
part or all of your investment.
Risks Related to Our Business
We are in default on the repayment of convertible debentures or notes
held by certain security holders, which could have a material and
adverse effect on our business, prospects, results of operations or
financial condition.
Unpaid principal and accrued and unpaid interest on our convertible
debentures and notes becomes immediately due and payable from one to three years
from their dates of issuance, depending on the debenture or note, or earlier in
the event of a default. The events of default under the convertible debentures
and notes are similar to those customary for convertible debt securities,
including breaches of material terms, failure to pay amounts owed, delisting of
our common stock from the OTC Bulletin Board or failure to comply with the
conditions of listing on the OTC Bulletin Board and cross-defaults on other debt
securities.
As of February 7, 2007, we were in default under our obligations to
register for resale shares of our common stock underlying certain of our
outstanding convertible debentures and notes due to our failure to timely
register for resale a sufficient number of shares of our common stock upon
conversion of those convertible debentures and notes. In addition, as of that
date, we were also in default under our obligations to make interest payments
under nearly all of our outstanding convertible debentures and notes due to our
lack of sufficient capital resources to fund those interest payments. As of
that date, we owed principal and unpaid interest on our convertible debentures
and notes in an aggregate amount of approximately $2.5 million, net of
approximately $104,000 of prepaid interest, all of which we believe would be
immediately due and payable upon demand by the holders of our secured
convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H-
Net(TM) system, which would have a material and adverse effect on our business,
prospects, results of operations and financial condition. In addition, the
holders of our secured convertible debentures and notes were entitled to demand
immediate repayment of the outstanding principal amounts of the debentures and
notes and any accrued and unpaid interest. The cash required to repay such
amounts would likely have to be taken from our working capital. Since we rely on
our working capital to sustain our day to day operations and the development of
our H-Net(TM) system, a default on the convertible debentures or notes could
have a material and adverse effect on our business, prospects, results of
operations or financial condition.
<page>5
We have no history of revenues, have incurred significant losses, expect
continued losses and may never achieve profitability. If we continue to
incur losses, we may have to curtail our operations, which may prevent
us from successfully deploying our H-Net(TM) wireless meter reading
system.
We have no history of revenues, have not been profitable and expect
continued losses. Historically, we have relied upon cash from financing
activities to fund all of the cash requirements of our activities and have
incurred significant losses and experienced negative cash flow. As of September
30, 2006, we had an accumulated deficit of approximately $35.7 million. For our
fiscal year ended September 30, 2006, we incurred a net loss of approximately
$3.1 million and for our fiscal year ended September 30, 2005, we also incurred
a net loss of approximately $3.1 million. We cannot predict when we will become
profitable or if we ever will become profitable, and we may continue to incur
losses for an indeterminate period of time and may never achieve or sustain
profitability. An extended period of losses and negative cash flow may prevent
us from successfully deploying our H-Net(TM) wireless meter reading system, or
our H-Net(TM) system, and operating or expanding our business. As a result of
our financial condition, our independent auditors have issued a report
questioning our ability to continue as a going concern.
Our significant losses have resulted principally from costs incurred in
connection with the development of our H-Net(TM) system and from costs
associated with our administrative activities. We expect our operating expenses
to dramatically increase as a result of our planned deployment of our H-Net(TM)
system. Since we have only recently completed the development of our H-Net(TM)
system, have no operating history and no existing sources of revenues, we cannot
assure you that our business will ever become profitable or that we will ever
generate sufficient revenues to meet our expenses and support our planned
activities. Even if we are able to achieve profitability, we may be unable to
sustain or increase our profitability on a quarterly or annual basis.
Our independent auditors have issued a report questioning our ability to
continue as a going concern. This report may impair our ability to raise
additional financing and adversely affect the price of our common stock.
The report of our independent auditors contained in our financial
statements for the years ended September 30, 2006 and 2005 includes a paragraph
that explains that we have incurred substantial losses and have a working
capital deficit. This report raises substantial doubt about our ability to
continue as a going concern. Reports of independent auditors questioning a
company's ability to continue as a going concern are generally viewed
unfavorably by analysts and investors. This report may make it difficult for us
to raise additional debt or equity financing necessary to continue the
development and deployment of our H- Net(TM) system. We urge potential investors
to review this report before making a decision to invest in ConectiSys.
Without substantial additional financing, we may be unable to achieve
the objectives of our current business strategy, which could force us to
delay, curtail or eliminate our product and service development
programs.
We require additional financing to produce cost-reduced hardware for our
H-Net(TM) system capable of large-scale manufacturing and to complete the
development of our H-Net(TM) system. We also require additional funding to
obtain and implement contracts and joint venture agreements with meter
manufacturers. If we are unable to obtain this financing, we could be forced to
delay, curtail or eliminate certain product and service development programs or
entirely abandon our planned deployment of our H-Net(TM) system. In addition,
our inability to obtain financing could have such a material adverse effect on
our business, prospects, results of operations or financial condition, that we
may be forced to restructure, file for bankruptcy, sell assets or cease
<page>6
operations entirely, any of which could jeopardize an investment in our common
stock.
We need and may be unable to obtain additional financing on satisfactory
terms, which may require us to accept financing on burdensome terms that
may cause substantial dilution to our shareholders and impose onerous
financial restrictions on our business.
We require additional financing. Deteriorating global economic
conditions may cause prolonged declines in investor confidence in and
accessibility to capital markets. Future financing may not be available on a
timely basis, in sufficient amounts or on terms acceptable to us. This financing
will likely dilute existing shareholders' equity. Any debt financing or other
financing of securities senior to our common stock will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition and results of
operations because we could lose any then-existing sources of financing and our
ability to secure new sources of financing may be impaired.
We are subject to an injunction imposed by a federal court for violating
the federal securities laws, which may make it more difficult to raise
financing.
In 1997, the Securities and Exchange Commission filed suit in the United
States District Court in the Central District of California against ConectiSys
and another individual seeking permanent injunctions and civil penalties based
on alleged violations of Sections 5(a), 5(c) and 17(a)(1)-(3) of the Securities
Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder in connection with the sale of common stock of ConectiSys in 1996. In
March 1999, we agreed with the Securities and Exchange Commission to the terms
of a settlement of its litigation against us. Under the terms of that
settlement, we dismissed our then-pending appeal of a judgment against us in
favor of the Securities and Exchange Commission and accepted a permanent
injunction against us prohibiting actions that would violate federal securities
laws in connection with the offer, purchase or sale of securities. The
Securities and Exchange Commission agreed to waive a requirement of the judgment
under appeal that we disgorge $175,000 of proceeds from the sale of our common
stock due to our inability to pay this amount. On March 9, 1999, an amended
final judgment of permanent injunction and other relief memorializing these
agreements was entered in connection with the execution by us of a consent to
entry of injunction. An injunction of this nature is viewed unfavorably by
analysts and investors and may make it more difficult for us to raise additional
debt or equity financing necessary to run our business.
We rely heavily on our management, and the loss of their services could
materially and adversely affect our business.
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board and Chief
Executive Officer, Robert A. Spigno, and our Chief Technology Officer, Lawrence
Muirhead. The loss of Messrs. Spigno or Muirhead or one or more other key
members of management could have a material adverse effect on us because each of
these individuals has experience and skills upon which we draw heavily in our
day-to-day operations, strategic planning or research and development
activities. The development and operation of our H-Net(TM) system is largely
dependent upon the skills and efforts of Mr. Muirhead. Although we have entered
into employment agreements with Messrs. Spigno and Muirhead, we cannot assure
the continued services of these key members of our management team. We do not
maintain key-man life insurance on Mr. Spigno.
<page>7
We have very limited operating experience; therefore, regardless of the
viability or market acceptance of our H-Net(TM) system, we may be unable
to achieve profitability or realize our other business goals.
Our H-Net(TM) system is the result of a new venture. We have been
engaged in research and development of automatic meter reading technologies
since 1995, and we have only recently completed limited pilot programs for our
first and only products embodied in our H-Net(TM) automatic meter reading
system. We have generated no operating revenues from our H-Net(TM) system and
have not commenced any of the widespread marketing and other functions that we
anticipate will be required for successful deployment of our H-Net(TM) system.
Deployment of our H- Net(TM) system will involve large-scale cost-reduction
manufacturing runs for the production of the components employed in our H-
Net(TM) system. Our success will depend in large part on our ability to deal
with the problems, expenses and delays frequently associated with bringing a new
product to market. Because we have little experience in the deployment and
operational aspects of automatic meter reading technologies, we may be unable to
successfully deploy and operate our H- Net(TM) system even if our H-Net(TM)
system proves to be a viable automatic meter reading solution and achieves
market acceptance. Consequently, we may be unable to achieve profitability or
realize our other business goals.
Our failure to attract and retain key personnel could adversely affect
our business, financial condition and results of operations.
Our future success is dependent in part on our ability to attract and
retain certain key personnel. We currently have few employees and need to
attract additional skilled technical, clerical and managerial personnel in all
areas of our business. The competition for such individuals is intense. There
can be no assurance that we will be able to retain our existing personnel or
attract additional qualified personnel in the future. If we are unable to
attract and retain key personnel, our business, financial condition and results
of operations could be adversely affected.
Many companies with greater resources and operating experience are
developing technology similar to that employed in our H-Net(TM) system.
These companies could successfully compete with us and negatively affect
the deployment of our H-Net(TM) system and our opportunity to achieve
revenues and/or profitability.
We anticipate significant competition with our H-Net(TM) system from
many companies. Our H-Net(TM) system is designed to compete with companies such
as those that offer meter reading services utilizing modem and telephone line
communications or drive-by data collection capabilities. Our H-Net(TM) system
may compete with numerous companies, including Schlumberger Ltd., Itron, Inc.
and Hunt Technologies, each of which has significantly more resources and
operational and product development experience than we do. Some of our
potential customers, namely, meter manufacturers and utility companies, may
decide to develop their own products or service offerings that directly compete
with our H-Net(TM) system. Although we believe that our H-Net(TM) system will be
competitive in the marketplace, we cannot assure you that these or other
companies with greater experience and greater resources than ConectiSys will not
negatively affect our business prospects and impair our ability to achieve
revenues and/or profitability.
We are targeting a new and evolving market and we cannot be certain that
our business strategy will be successful.
The automation of utility meter reading and data distribution is a
relatively new and rapidly changing market. We cannot accurately predict the
size of this market or its potential growth. Our system is one possible solution
for AMR and data distribution. It has not been adopted as an industry standard
<page>8
and it may not be adopted on a broad scale. Competing systems have been and
likely will continue to be selected by utilities and other potential clients.
Participants in the utility industry have historically been cautious and
deliberate in making decisions concerning the adoption of new technology. This
process, which can take up to several years to complete, may include the
formation of evaluation committees, a review of different technical options,
technology trials, equipment testing and certification, performance and cost
justifications, regulatory review, one or more requests for vendor quotes and
proposals, budgetary approvals and other steps. Consequently, if our H-Net(TM)
system as an AMR solution is unsuccessful and we are unable to enter into AMR or
data distribution contracts on terms favorable to us, our business, results of
operations and financial condition could be materially and adversely affected.
The new and evolving nature of the market that we intend to target makes
an accurate evaluation of our business prospects and the formulation of a viable
business strategy very difficult. Accordingly, our business strategy may be
faulty or even obsolete and as a result, we may not properly plan for or address
many obstacles to success, including the following:
o the timing and necessity of substantial expenditures for the
development and deployment of our H-Net(TM) system;
o the failure to strategically position ourselves in relation to
joint venture or strategic partners, and potential and actual
competitors;
o the failure of our H-Net(TM) system to satisfy the needs of the
market that we intend to target and the resulting lack of
widespread or adequate acceptance of our H-Net(TM) system; and
o the difficulties in managing rapid growth of operations and
personnel.
Our failure to manage growth effectively could impair our business.
Our strategy envisions a period of rapid growth that may impose a
significant burden on our administrative and operational resources. Our ability
to effectively manage growth will require us to substantially expand the
capabilities of our administrative and operational resources and to attract,
train, manage and retain qualified engineers, technicians, salespersons and
other personnel. There can be no assurance that we will be able to do so. If we
are unable to successfully manage our growth, our business, prospects, results
of operations and financial condition could be materially and adversely
affected.
Because we believe that proprietary rights are material to our success,
misappropriation of those rights or claims of infringement or legal
actions related to intellectual property could adversely impact our
financial condition.
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary rights. However,
although our H-Net(TM) system and its constituent components could benefit from
patent protection, we have chosen to retain the proprietary rights associated
with our H-Net(TM) system predominantly as trade secrets. Although we currently
rely to a great extent on trade secret protection for much of our technology, we
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop comparable or
superior technologies or obtain unauthorized access to our proprietary
technology.
We own, license or have otherwise obtained the right to use certain
technologies incorporated in our H-Net(TM) system. We may receive infringement
claims from third parties relating to our products and technologies. In those
cases, we intend to investigate the validity of the claims and, if we believe
the claims have merit, to respond through licensing or other appropriate
actions. To the extent claims relate to technology included in components
purchased from third-party vendors for incorporation into our products, we would
<page>9
forward those claims to the appropriate vendor. If we or our component
manufacturers are unable to license or otherwise provide any necessary
technology on a cost- effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs defending any
legal action taken against us.
Risks Related to This Offering
Shares of our common stock eligible or to become eligible for public
sale could adversely affect our stock price and make it difficult for us
to raise additional capital through sales of equity securities.
As of February 7, 2007, we had outstanding 17,507,935,396 shares of
common stock, of which approximately 1,834,785,493 shares were restricted under
the Securities Act of 1933. As of that date, we also had outstanding options,
warrants, convertible debentures and notes and preferred stock that were
exercisable for or convertible into approximately 33,000,000,000 shares of our
common stock, nearly all of which are covered by registration rights. Sales of a
substantial number of shares of our common stock in the public market, or the
perception that sales could occur, could adversely affect the market price of
our common stock. Any adverse effect on the market price of our common stock
could make it difficult for us to raise additional capital through sales of
equity securities at a time and at a price that we deem appropriate.
Conversion or exercise of our outstanding derivative securities could
substantially dilute your investment because the conversion and exercise
prices of those securities and/or the number of shares of common stock
issuable upon conversion or exercise of those securities are subject to
adjustment.
We have issued various debentures, notes and warrants that are
convertible or exercisable at prices that are subject to adjustment due to a
variety of factors, including fluctuations in the market price of our common
stock and the issuance of securities at an exercise or conversion price less
than the then-current exercise or conversion price of those debentures, notes or
warrants. As of February 7, 2007, the closing price of a share of our common
stock on the OTC Bulletin Board was $.0003. On that date, our debentures, notes
and warrants outstanding with adjustable conversion and/or exercise prices were
convertible or exercisable into approximately 33,000,000,000 shares of our
common stock. The number of shares of common stock that these adjustable
securities ultimately may be converted into or exercised for could prove to be
greater than this amount if the market price of our common stock declines. You
could, therefore, experience substantial dilution of your investment as a result
of the conversion or exercise of our outstanding derivative securities.
The applicable conversion price of our debentures and notes issued to
certain security holders is variable and does not have a lower-limit, therefore
the dilutive effect to our existing security holders is theoretically limitless.
However, because the variable conversion price of these debentures and notes has
an upper limit, an increase in the trading price of a share of our common stock
will result in a limited benefit to existing security holders with respect to
the conversion of these debentures and notes. The following table sets forth the
number of shares issuable upon conversion of the aggregate principal and all
accrued and unpaid interest on our convertible debentures and notes issued to
certain security holders and outstanding as of February 7, 2007, which amount
was approximately $2.5 million, net of prepaid interest, and is based upon the
indicated hypothetical trading prices:
<page>10
Approximate Percentage of
Hypothetical Number of Shares Company's
Trading Price Conversion Price(1) Issuable(2) Common Stock (3)
____________ __________________ ________________ ________________
$.0008 $.00032 7,800,000,000 31%
$.0004 $.00016 15,600,000,000 47%
$.0002 $.00008 31,200,000,000 64%
$.0001 $.00004 62,400,000,000 78%
_______________
(1) The conversion price of our debentures and notes is the lower of
40% of the average of the three lowest intraday trading prices
of a share of our common stock on the OTC Bulletin Board during
the twenty trading days immediately preceding the conversion
date, and either (a) $.06 for the March, May and June 2002
convertible debentures, (b) $.01 for the March and May 2003
convertible debentures, (c) $.005 for the November and December
2003, and the February and March 2004 convertible debentures and
the March 2005 convertible notes, or (d) $.03 for the March 2006
convertible notes. As of February 7, 2007, the applicable
conversion price was approximately $.00008.
(2) Our current authorized capital allows us to issue a maximum of
50 billion shares of common stock.
(3) Amounts are based on 17,507,935,396 shares of our common stock
outstanding as of February 7, 2007 plus the corresponding number
of shares issuable. Each of the holders of our convertible
debentures and notes may not convert our debentures or notes
into more than 4.9% of our then-outstanding common stock;
however, the holders may waive the 4.9% limitation, thus
allowing the conversion of their debentures or notes into a
number of shares of common stock in excess of 4.9% of our then-
outstanding common stock.
The holders of certain of our convertible debentures and notes may elect
to receive payment for accrued and unpaid interest on our debentures and notes
in shares of our common stock based on the conversion price and on the same
terms described above with respect to conversions of the principal portion of
these debentures and notes. As a result of conversions of the principal or
interest portion of our convertible debentures and notes and related sales of
our common stock by the holders of our convertible debentures and notes, the
market price of our common stock could be depressed, thereby resulting in a
significant increase in the number of shares issuable upon conversion of the
principal and interest portions of these debentures and notes. You could,
therefore, experience substantial dilution of your investment as a result of the
conversion of the principal or interest portions of our convertible debentures
and notes.
If our security holders engage in short sales of our common stock,
including sales of shares to be issued upon conversion or exercise of
derivative securities, the price of our common stock may decline.
Selling short is a technique used by a shareholder to take advantage of
an anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time
can create downward pressure on the market price of a security. The decrease in
market price would allow holders of our derivative securities that have
conversion or exercise prices based upon a discount on the market price of our
common stock to convert or exercise their derivative securities into or for an
increased number of shares of our common stock. Further sales of common stock
issued upon conversion or exercise of our derivative securities could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short sales
that could further undermine the value of our common stock. You could,
therefore, experience a decline in the value of your investment as a result of
short sales of our common stock.
<page>11
Our current financing arrangements could prevent our common stock from
being listed on Nasdaq or other principal markets.
Nasdaq and other principal markets require that, to be eligible for
inclusion in the stock market, a company's common stock have a specified minimum
bid price per share. Convertible debenture and convertible note financings,
especially those with variable conversion prices with low or no low-price
limits, characteristically exert downward pressure on the market for a company's
common stock. This pressure, if applied against the market for our common stock,
may prevent our common stock from being listed on Nasdaq or other principal
markets.
Our common stock price is subject to significant volatility, which could
result in substantial losses for investors and in litigation against us.
The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. During the year ended
September 30, 2006, the high and low closing bid prices of our common stock were
$.002 and $.0001, respectively. The market price of our common stock may exhibit
significant fluctuations in the future response to various factors, many of
which are beyond our control and which include:
o variations in our quarterly operating results, which variations
could result from, among other things, changes in the needs of
one or more of our customers;
o changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
o economic conditions specific to the industries in which we
operate;
o announcements by us or our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or capital
commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity
securities.
If our operating results in future quarters fall below the expectations
of market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities class
action litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which you purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you.
Because we are subject to the "Penny Stock" rules, the level of trading
activity in our stock may be reduced.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
<page>12
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, broker-dealers who sell these securities to
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.
Because our stock is not listed on a national securities exchange, you
may find it difficult to dispose of or obtain quotations for our common
stock.
Our common stock trades under the symbol "CNES" on the OTC Bulletin
Board. Because our stock trades on the OTC Bulletin Board rather than on a
national securities exchange, you may find it difficult to either dispose of, or
to obtain quotations as to the price of, our common stock.
Our preferred stock may delay or prevent a takeover of ConectiSys,
possibly preventing you from obtaining higher stock prices for your
shares.
Our board of directors has the authority to issue up to 50,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our shareholders. Of these shares, 1,000,000 shares have been
designated as Class A Preferred Stock and 1,000,000 shares have been designated
as Class B Preferred Stock. The rights of the holders of our common stock are
subject to the rights of the holders of our outstanding preferred stock and will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that we may issue in the future. The issuance of preferred
stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, which would delay, defer or prevent a change in control of ConectiSys.
Furthermore, preferred stock may have other rights, including economic rights
senior to the common stock, and, as a result, the issuance of preferred stock
could adversely affect the market value of our common stock.
<page>13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including among
others:
o our product development activities;
o our business strategy for establishing a presence in the AMR
market;
o anticipated trends in our financial condition and results of
o perations; and
o our ability to distinguish ourselves from our current and future
competitors.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believe," "expect," "may," "will,"
"should," "could," "seek," "estimate," "continue," "anticipate," "intend,"
"future," "plan" or variations of those terms and other similar expressions,
including their use in the negative, or in discussions of strategies,
opportunities, plans or intentions. You should not place undue reliance on these
forward-looking statements, which speak only as to our expectations as of the
date of this prospectus. These forward-looking statements are subject to a
number of risks and uncertainties, including those identified under "Risk
Factors" and elsewhere in this prospectus. In addition, these forward-looking
statements necessarily depend upon assumptions, estimates and expectations that
may prove to be incorrect. Although we believe that the assumptions, estimates
and expectations reflected in these forward- looking statements are reasonable,
actual conditions in the AMR industry, and actual conditions and results in our
business, could differ materially from those expressed or implied in these
forward- looking statements. In addition, none of the events anticipated in the
forward-looking statements may actually occur and we cannot assure you that we
will achieve our plans, intentions or expectations. Any of these different
outcomes could cause the price of our common stock to decline substantially.
Except as required by law, we undertake no duty to update any forward-looking
statement after the date of this prospectus, either to conform any statement to
reflect actual results or to reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus by the selling security holders.
Rather, the selling security holders will receive those proceeds directly.
<page>14
PRICE RANGE OF COMMON STOCK
The following table shows the high and low closing bid prices of our
common stock for the periods presented, as obtained from Pink Sheets LLC, a
research service that compiles quote information reported on the National
Association of Securities Dealers composite feed or other qualified interdealer
quotation medium. The quotations listed below reflect interdealer prices,
without retail mark-up, mark-down or commissions, and may not represent actual
transactions. Our common stock trades on the OTC Bulletin Board under the symbol
"CNES."
Price Range
-----------
High Low
---- ---
Year Ended September 30, 2005:
First Quarter (October 1 - December 31) $ 0.0095 $ 0.0006
Second Quarter (January 1 - March 30) 0.0066 0.0015
Third Quarter (April 1 - June 30) 0.0020 0.0005
Fourth Quarter (July 1 - September 30) 0.0006 0.0002
Year Ended September 30, 2006:
First Quarter $ 0.0003 $ 0.0002
Second Quarter 0.0020 0.0001
Third Quarter 0.0014 0.0004
Fourth Quarter 0.0005 0.0003
Year Ended September 30, 2007:
First Quarter $ 0.0005 $ 0.0002
Second Quarter (through February 7, 2007) 0.0004 0.0002
As of February 7, 2007, we had 17,507,935,396 shares of common stock
outstanding and held of record by approximately 750 shareholders, and the high
and low sale prices of a share of our common stock on the OTC Bulletin Board on
that date were $.0004 and $.0002, respectively. Within the holders of record of
our common stock are depositories such as Cede & Co. that hold shares of stock
for brokerage firms which, in turn, hold shares of stock for beneficial owners.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not
currently intend to pay cash dividends on our common stock in the foreseeable
future. We are restricted from paying dividends on our common stock under state
law, and the terms of our secured convertible debentures and our callable
secured convertible notes. We currently anticipate that we will retain any
earnings for use in the continued development of our business.
<page>15
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2006. You should read this information together with our consolidated financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus. The table excludes an aggregate of approximately 23,000,000,000
shares of common stock that were issuable as of September 30, 2006 upon
conversion of outstanding convertible debentures and notes and that were
issuable as of that date in connection with staying bonuses payable to one
executive officer and one former executive officer.
September 30, 2006
------------------
Long-term debt..........................................$ 2,053,636
============
Shareholders' equity:
Preferred stock, $1.00 par value. 50,000,000
shares authorized
Class A Preferred Stock, $1.00 par value,
1,000,000 shares authorized; 215,865 shares
issued and outstanding........................... 215,865
Class B Preferred Stock, $1.00 par value,
1,000,000 shares authorized; no shares
issued and outstanding........................... -
Common stock, no par value. 50,000,000,000 shares
authorized; 14,384,794,783 shares issued
and outstanding...................................... 27,930,753
Additional paid in capital:
Class B Convertible Preferred Stock, $1.00 par value,
1,000,000 shares authorized; no shares issued and
outstanding; 1,000,000 stock options exercisable..... 100,000
Common stock, no par value. 32,620,000 stock options and
warrants exercisable................................. 1,371,845
Accumulated deficit during development stage............ (35,718,845)
------------
Total shareholders' equity (deficit)................. $(6,100,962)
------------
Total capitalization................................. $(4,047,326)
------------
<Page>16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes and the information included
under the caption "Risk Factors" included elsewhere in this prospectus. Except
for historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions and our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies. See "Special Note Regarding Forward-Looking Statements" for further
information regarding forward-looking statements. Our actual results may differ
materially from the results discussed in the forward-looking statements as a
result of a number of factors, many of which are beyond our control, including
those factors discussed under "Risk Factors" and other headings in this
prospectus, which could, among other things, cause the price of our common stock
to fluctuate substantially.
Overview
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-Net(TM), which is a trademark of ConectiSys. Our
H-Net(TM) system is currently comprised of two principal components: our H-
Net(TM) 5.0 product, which itself is comprised of circuitry and a radio
transmitter, and our H-Net(TM) BaseStation. Our H-Net(TM) 5.0 product is a
component that is designed to be part of a digital energy meter to read and
wirelessly transmit meter data to our H-Net(TM) BaseStation. Our H-Net(TM)
BaseStation is designed to receive and relay the meter data over standard phone
lines to a central location where the data is compiled and utilized.
We are continuing the development of our H-Net(TM) system. Our recent
development efforts have focused on redesigning our H-Net(TM) circuitry from a
three-board circuit to a two-board circuit. This redesign was completed in
November 2005 and testing of our new H-Net(TM) circuitry has begun. We
redesigned our H-Net(TM) circuitry to respond to redesigns of meter products by
meter manufacturers. These redesigns by meter manufacturers were directed at
reducing costs and resulted in reduced available space for integration of
circuitry from third-party technology providers such as ConectiSys.
In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. Concurrently with the development
of our H-Net(TM) BaseStation, which is a single-channel design, we have been
developing an eight-channel H- Net(TM) BaseStation. Our eight-channel H-Net(TM)
BaseStation is designed to communicate with up to 7,500 H-Net(TM) 5.0 product
installations per network due to its multiple channel design and to deliver
real-time energy consumption data at low-cost. In July 2005, we submitted to the
FCC our eight-channel H-Net(TM) BaseStation product for approval for
commercialization and sale and received FCC certification for this product in
January 2006.
We have not yet sold any H-Net(TM) systems. However, we are actively
pursuing sales of our H-Net(TM) systems with meter manufacturers and other
companies in the energy industry. We have no history of revenues and have
incurred significant losses since the beginning of the development of our H-
Net(TM) system. We have a significant accumulated deficit and a deficiency in
working capital. As a result of our financial condition, our independent
<page>17
auditors have issued a report questioning our ability to continue as a going
concern.
Critical Accounting Policies and Estimates
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.
The following discussion and analysis is based upon our financial
statements, which have been prepared using accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires management to make estimates and assumptions that affect the
reported amounts of revenue and expenses, and assets and liabilities, during the
periods reported. Estimates are used when accounting for certain items such as
depreciation, likelihood of realization of certain assets, employee compensation
programs and valuation of intangible assets. We base our estimates on
historical experience and other assumptions that we believe are reasonable under
the circumstances. Actual results may differ from our estimates.
Going Concern Assumption
We have based our financial statements on the assumption of our
operations continuing as a going concern. As a result, we continue to
depreciate fixed assets and show certain debts as long-term. As of September
30, 2006, we had a deficiency in working capital of approximately $4.2 million
and had incurred continual net losses since our return to the development stage
in fiscal 1994 of approximately $34.6 million, which raise substantial doubt
about our ability to continue as a going concern. Our plans for correcting
these deficiencies include the future sales and licensing of our products and
technologies, and the raising of capital through the issuance of common stock
and from continued officer advances, which are expected to help provide us with
the liquidity necessary to meet operating expenses. An investor group has
advanced us an aggregate amount of approximately $5.9 million. Over the longer-
term, we plan to achieve profitability through our operations from the sale and
licensing of our H-Net (TM) automatic meter-reading system. Our consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of the recorded asset amounts or the amounts
and classification of liabilities that might be necessary should we be unable to
continue our existence.
Stock-Based Compensation
Our compensation of consultants and employees with our capital stock is
recorded and/or disclosed at estimated market value. The volatile nature of the
price of our common stock causes wide disparities in certain valuations.
Statement of Financial Accounting Standards, or SFAS, No. 123,
"Accounting for Stock-based Compensation," or SFAS No. 123, established a fair
value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from non- employees
in exchange for equity instruments. We adopted this accounting standard on
January 1, 1996. SFAS No. 123 also encourages, but does not require, companies
to record compensation cost for stock- based employee compensation.
We adopted the provisions of SFAS No. 123 (Revised 2004), "Share-Based
Payment," or SFAS 123R, on January 1, 2006. Accordingly, compensation costs for
all share-based awards to employees are measured based on the grant date fair
value of those awards and recognized over the period during which the employee
is required to perform service in exchange for the award (generally over the
vesting period of the award). We have no awards with market or performance
conditions. Excess tax benefits as defined by SFAS 123R (when applicable) will
<page>18
be recognized as an addition to additional paid-in capital. Effective January
1, 2006 and for all periods subsequent to that date, SFAS 123R supersedes our
previous accounting under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," or APB 25. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, or
SAB 107, relating to SFAS 123R. We have applied the provisions of SAB 107 in
its adoption of SFAS 123R.
We adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions of SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under Financial
Accounting Standards Board, or FASB, Statement No. 123, "Accounting for Stock-
Based Compensation," or SFAS 123. In accordance with the modified prospective
transition method, our consolidated financial statements for prior periods were
not restated to reflect, and do not include, the effect of SFAS 123R.
The value of the stock-based award is determined using a pricing model
whereby compensation cost is the excess of the fair market value of the stock as
determined by the model at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. Shares of our common stock
issued in exchange for goods or services are valued at the cost of the goods or
services received or at the market value of the shares issued, depending on the
ability to estimate the value of the goods or services received.
Results of Operations
Comparison of Results of Operations for the Fiscal Years Ended September
30, 2006 and 2005
We did not generate any revenues for the fiscal years ended September
30, 2006 and 2005. Cost of prototypes and samples provided to customers for
fiscal 2006 was $211,120 as compared to $245,427 for fiscal 2005, representing a
decrease of $34,307, or 14%. This decrease in cost of prototypes and samples
provided to customers was primarily due to a decrease in production of models
and prototypes of our H- Net(TM) products that are used for sales and marketing
purposes.
General and administrative expenses for fiscal 2006 were $1,329,175 as
compared to $1,676,520 for fiscal 2005, representing a decrease of $347,345, or
21%. This decrease in general and administrative expenses was primarily due to
decreased consulting fees.
Interest expense for fiscal 2006 was $1,499,470 as compared to
$1,715,198 for fiscal 2005, representing a decrease of $215,728, or 13%. This
decrease in interest expense was primarily due to a decrease in net borrowings
under our convertible debentures and other debt during fiscal 2006.
Net loss for fiscal 2006 was $3,052,297 as compared to $3,132,683 for
fiscal 2005, representing a decrease of $80,386, or 3%. The minor decrease in
net loss was primarily due to the decreases in interest expense and general and
administrative expenses, as described above, which were partially offset by
$504,462 in debt forgiveness income recognized in fiscal 2005 that did not recur
in fiscal 2006.
Liquidity and Capital Resources
During the year ended September 30, 2006, we financed our operations
solely through private placements of securities. We are actively pursuing sales
of our H-Net(TM) systems with meter manufacturers and other companies in the
<page>19
energy industry. However, we have not yet sold any H-Net(TM) systems. We have no
history of revenues and have incurred significant losses since the beginning of
the development of our H- Net(TM) system. We have significant accumulated and
working capital deficits. As a result of our financial condition, our
independent auditors have issued a report questioning our ability to continue as
a going concern. Our consolidated financial statements as of September 30, 2006
and for the years ended September 30, 2006 and 2005 have been prepared on a
going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.
As of September 30, 2006, we had a working capital deficit of
approximately $4.2 million and an accumulated deficit of approximately $35.7
million. As of that date, we had approximately $451,000 in cash and cash
equivalents and short-term investments. We had accounts payable and accrued
compensation expenses of approximately $2.2 million. We had other current
liabilities, including amounts due to officers, accrued interest and current
portion of convertible debentures of approximately $2.6 million, including debts
incurred prior to the beginning of fiscal year 2006. To the extent convertible
debentures or promissory notes that we have issued are converted into shares of
common stock, we will not be obligated to repay the converted amounts.
Cash used in our operating activities totaled approximately $1.4 million
for the year ended September 30, 2006 and approximately $1.3 million for the
year ended September 30, 2005. Cash used in our investing activities totaled
approximately $511,000 for the year ended September 30, 2006, as compared to
approximately $34,000 for the year ended September 30, 2005. The increase in
cash used in our investing activities was primarily caused by the purchase of
$431,000 in short-term investments.
Cash provided by our financing activities totaled approximately $1.4
million for the year ended September 30, 2006 as compared to approximately $1.3
million for the year ended September 30, 2005. We raised all of the cash
provided by financing activities during the year ended September 30, 2006 from
the issuance of common stock, convertible notes and warrants.
Unpaid principal and accrued and unpaid interest on our convertible
debentures and notes becomes immediately due and payable from one to three years
from their dates of issuance, depending on the debenture or note, or earlier in
the event of a default. The events of default under the convertible debentures
and notes are similar to those customary for convertible debt securities,
including breaches of material terms, failure to pay amounts owed, delisting of
our common stock from the OTC Bulletin Board or failure to comply with the
conditions of listing on the OTC Bulletin Board and cross-defaults on other debt
securities.
As of February 7, 2007, we were in default under our obligations to
register for resale shares of our common stock underlying certain of our
outstanding convertible debentures and notes due to our failure to timely
register for resale a sufficient number of shares of our common stock upon
conversion of those convertible debentures and notes. Our registration
obligations require us to register for resale 200% of all registrable
securities, which are largely comprised of the shares of common stock issuable
upon conversion or exercise of our outstanding convertible debentures, notes and
warrants. We have historically been unable to register for resale the full
required amounts of shares of common stock due in part to limitations in our
available authorized capital. As we have increased our authorized capital from
time to time, we have often been reluctant to utilize all or nearly all
available authorized capital to satisfy our registration obligations. This
reluctance arises from our need to maintain available authorized capital for
other potential financing transactions that we may need to conduct to fund our
research and development and otherwise maintain sufficient capital resources to
fund our operations. In addition, because the number of registrable securities
is calculated based on a discount to the prevailing market price of our common
stock, and market prices for our common stock have generally declined throughout
the duration of our convertible debenture and note financings, the number of
registrable securities has substantially increased. Accordingly, although we
<page20
may have been in compliance initially, the decline in market prices for our
common stock has caused us to fall out of compliance with our registration
obligations.
As of February 7, 2007, we were also in default under our obligations to
make interest payments under nearly all of our outstanding convertible
debentures and notes due to our lack of liquidity to fund those interest
payments. Although we received substantial cash investments in connection with
our convertible debenture and note financing transactions, we have been
reluctant to make quarterly cash interest payments to our investors. This
reluctance arises from our need to maintain sufficient capital resources to fund
our research and development and our operations. However, on various occasions,
we have prepaid certain interest amounts in connection with convertible
debenture and note financing transactions. In these instances, we were able to
at least temporarily, and on occasion fully, comply with our interest payment
obligations until the convertible debentures or notes were fully converted into
shares of our common stock. In our most recent March 2006 convertible note
financing transaction, we did not prepay any interest amounts and we expect to
continue indefinitely to be in default of our obligations to make quarterly
interest payments under those convertible notes as well as numerous other
convertible debentures and notes outstanding from prior financing transactions.
As of February 7, 2007, we owed principal and unpaid interest on our
convertible debentures and notes in an aggregate amount of approximately $2.5
million, net of approximately $104,000 of prepaid interest, all of which we
believe would be immediately due and payable upon demand by the holders of our
secured convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H-
Net(TM) system, which would have a material and adverse effect on our business,
prospects, results of operations and financial condition. In addition, the
holders of our secured convertible debentures and notes were entitled to demand
immediate repayment of the outstanding principal amounts of the debentures and
notes and any accrued and unpaid interest. The cash required to repay such
amounts would likely have to be taken from our working capital. Since we rely
on our working capital to sustain our day to day operations and the development
of our H-Net(TM) system, a default on the convertible debentures or notes could
have a material and adverse effect on our business, prospects, results of
operations or financial condition. However, as of that date, other than the
receipt of a notice of default, we were not aware of any action taken by the
holders of our secured convertible debentures and notes to pursue such rights,
and as of that date we also were not aware of any other legal or similar action
taken by those holders to enforce their rights or as a result of our defaults
under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange
Commission a portion of the shares of common stock underlying the convertible
debentures and notes under which we are in default and expect that the
convertible debentures and notes ultimately will be converted into shares of our
common stock and that we therefore will not be obligated to repay the
outstanding principal and accrued and unpaid interest amounts on those
debentures and notes.
As of February 7, 2007, we had issued the following secured convertible
debentures and notes, which provide for interest at the rate of 12% per annum,
except for the notes issued in March 2005, which provide for interest at the
rate of 8% per annum, and the notes issued in March 2006, which provide for
interest at the rate of 6% per annum, and warrants to purchase common stock to
various accredited inventors in connection with debenture and note offering
transactions:
<page>21
<table>
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount ($) ConectiSys ($)(1) Amount ($) Interest ($)(2) Offering(#)
- --------------- ---------- ----------------- ---------- ---------------- -----------
March 29, 2002... $ 300,000 $ 225,000 $ - $ - -
May 10, 2002..... 150,000 125,000 - 5,600 -
June 17, 2002.... 300,000 238,000 - 72,000 -
November 27, 2002 200,000 144,000 - - 1,000,000
March 3, 2003.... 150,000 100,000 - 27,700 750,000
May 12, 2003..... 150,000 100,000 - 36,000 750,000
November 25, 2003 100,000 76,000 - 24,000 500,000
December 3, 2003 50,000 31,000 - 12,000 250,000
December 31, 2003 50,000 44,000 - 12,000 250,000
February 18, 2004 50,000 35,000 - 12,000 250,000
March 4, 2004.... 250,000 203,000 - 59,000 1,250,000
April 19, 2004... 250,000 165,000 - - 750,000
June 30, 2004.... 625,000 452,000 - - 1,875,000
September 9, 2004 625,000 482,000 - - 1,875,000
March 17, 2005 1,400,000 1,148,000 1,068,336 136,400 2,800,000
March 8, 2006 1,270,000 1,250,000 1,102,000 43,500 20,320,000
----------- ----------- ------------ ---------- ----------
Total: $5,920,000 $4,818,000 $2,170,336 $ 440,200 32,620,000
=========== =========== ============ =========== ==========
</table>
________________
(1) Amounts are approximate and represent net proceeds after
deducting expenses incurred in connection with the offering as
well as expenses for legal fees incurred in connection with
preparation of reports and statements filed with the Securities
and Exchange Commission.
(2) Amounts are approximate and represent accrued and unpaid
interest outstanding as of February 7, 2007. The total amount of
accrued and unpaid interest does not account for approximately
$104,000 of outstanding pre-paid interest.
Each of the above outstanding secured convertible debentures or notes,
except for the convertible notes issued in March 2005 and March 2006, are due
one year following their respective issuance dates. The convertible notes
issued in March 2005 are due two years following their issuance dates. The
convertible notes issued in March 2006 are due three years following their
issuance dates. The conversion price of our secured convertible debentures is
the lower of 40% of the average of the three lowest intra-day trading prices of
a share of our common stock on the OTC Bulletin Board during the twenty trading
days immediately preceding the conversion date, and either (a) $.06 for the
March, May and June 2002 convertible debentures, (b) $.01 for the November 2002,
March and May 2003 convertible debentures, (c) $.005 for the November and
December 2003 and the February, March, April, June and September 2004
convertible debentures and the March 2005 convertible notes, or (d) $.03 for the
March 2006 convertible notes. As of February 7, 2007, the applicable conversion
price was approximately $0.00008 per share.
Our continued operations are dependent on securing additional sources of
liquidity through debt and/or equity financing.
As indicated above, our consolidated financial statements as of
September 30, 2006 and for the years ended September 30, 2006 and 2005 have been
prepared on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. As discussed
in this report and in Note 2 to our condensed consolidated financial statements
included in this report, we have suffered recurring losses from operations and
at September 30, 2006 had substantial net capital and working capital
<page>22
deficiencies. These factors, among others, raised substantial doubt about our
ability to continue as a going concern and led our independent certified public
accountants to modify their unqualified report to include an explanatory
paragraph related to our ability to continue as a going concern. The
consolidated financial statements included in this document do not include any
adjustments that might result from the outcome of this uncertainty.
We have been, and currently are, working toward identifying and
obtaining new sources of financing. Our current convertible debenture and note
investors have provided us with an aggregate of approximately $5.9 million in
financing to date. No assurances can be given that they will provide any
additional financing in the future. Our current secured convertible debenture
and note financing documents contain notice and right of first refusal
provisions and the grant of a security interest in substantially all of our
assets in favor of the convertible debenture and note investors, all of which
provisions will restrict our ability to obtain debt and/or equity financing from
any investor other than our current investors.
Any future financing that we may obtain may cause significant dilution
to existing stockholders. Any debt financing or other financing of securities
senior to common stock that we are able to obtain will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition, results of
operations and cash flows.
If adequate funds are not available, we may be required to delay, scale
back or eliminate portions of our operations and product and service development
efforts or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain of our technologies
or potential products or other assets. Accordingly, the inability to obtain such
financing could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also adversely
affect our ability to fund our continued operations and our product and service
development efforts that historically have contributed significantly to our
competitiveness.
Effect of Inflation
Inflation did not have any significant effect on our operations during
the year ended September 30, 2006. Further, inflation is not expected to have
any significant effect on our future operations.
Impact of New Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, has established new
accounting pronouncements. We do not expect the adoption of these
pronouncements to have a material impact on our financial position, results of
operations or cash flows.
In June 2006, the FASB released FASB Interpretation No. 48, "Accounting
for Uncertainty In Income Taxes," an interpretation of FASB Statement No. 109,
or FIN 48. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. A company must determine whether it is
"more-likely-than-not" that a tax position meets the more-likely-than-not
recognition threshold, the position is measured to determine the amount of
benefit to recognize in the financial statements. This interpretation is
effective for fiscal years beginning after December 15, 2006. Earlier
application of the provisions of this interpretation is encouraged if the
enterprise has not yet issued financial statements, including interim financial
statements, in the period this interpretation is adopted.
<page>23
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of
Financial Assets," which provides an approach to simplify efforts to obtain
hedge-like (offset)accounting. This statement amends SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," with respect to the accounting for separately recognized servicing
assets and servicing liabilities. The statement (1) requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract in
certain situations; (2) requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable; (3)
permits an entity to choose either the amortization method or the fair value
method for subsequent measurement for each class of separately recognized
servicing assets or servicing liabilities; (4) permits at initial adoption a
one-time reclassification of available- for-sale securities to trading
securities by an entity with recognized servicing rights, provided the
securities reclassified offset the entity's exposure to changes in the fair
value of the servicing assets or liabilities: and (5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all separately
recognized servicing assets and liabilities, SFAS No. 156 is effective for all
separately recognized servicing assets and liabilities as of the beginning of an
entity's fiscal year that begins after September 15, 2006, with earlier adoption
permitted in certain circumstances. The statement also describes the manner in
which it should be initially applied.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments," which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Acitivities" and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 155 amends SFAS No. 140 to allow qualifying special-
purpose entities to hold a passive derivative financial instrument. This
statement shall be effective for all financial instruments acquired, issued, or
subject to a remeasurement (new basis) event occurring after the beginning of an
entity's first fiscal year that begins after September 15, 2006.
<page>24
BUSINESS
Overview
We were incorporated in Colorado on February 2, 1986 under the name
Coastal Financial Corp. On December 5, 1994, Coastal Financial Corp. changed its
name to BDR Industries, Inc. which changed its name on October 16, 1995, to
ConectiSys Corporation.
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-Net(TM), which is a trademark of ConectiSys. Our
H-Net(TM) system is currently comprised of two principal components: our H-
Net(TM) 5.0 product, which itself is comprised of circuitry and a radio
transmitter, and our H-Net(TM) BaseStation. Our H-Net(TM) 5.0 product is a
component that is designed to be part of a digital energy meter to read and
wirelessly transmit meter data to our H-Net(TM) BaseStation. Our H-Net(TM)
BaseStation is designed to receive and relay the meter data over standard phone
lines to a central location where the data is compiled and utilized.
We are continuing the development of our H-Net(TM) system. Our recent
development efforts have focused on redesigning our H-Net(TM) circuitry from a
three-board circuit to a two-board circuit. This redesign was completed in
November 2005 and testing of our new H-Net(TM) circuitry has begun. We
redesigned our H-Net(TM) circuitry to respond to redesigns of meter products by
meter manufacturers. These redesigns by meter manufacturers were directed at
reducing costs and resulted in reduced available space for integration of
circuitry from third-party technology providers such as ConectiSys.
In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. Concurrently with the development
of our H-Net(TM) BaseStation, which is a single-channel design, we have been
developing an eight-channel H- Net(TM) BaseStation. Our eight-channel H-Net(TM)
BaseStation is designed to communicate with up to 7,500 H-Net(TM) 5.0 product
installations per network due to its multiple channel design and to deliver
real-time energy consumption data at low-cost. In July 2005, we submitted to the
FCC our eight-channel H-Net(TM) BaseStation product for approval for
commercialization and sale and received FCC certification for this product in
January 2006.
In January 2007, we signed an Independent Contractor Agreement with
Trimark Associates Inc. for the installation of our H-Net(TM)technology for a
key irrigation district cooperative in Northern California. Trimark Associates
Inc. is expected to provide Meter Service Provider and Meter Data Management
Agent services for this project. We expect that the project has a revenue
potential of up to $500,000 and that this contract will be the first in a series
of contracts for H-Net(TM)technology installations throughout California.
We have not yet sold any H-Net(TM)systems. However, we are actively
pursuing sales of our H-Net(TM)systems with meter manufacturers and other
companies in the energy industry. We have no history of revenues and have
incurred significant losses since the beginning of the development of our H-
Net(TM)system. We have significant accumulated and working capital deficits. As
a result of our financial condition, our independent auditors have issued a
report questioning our ability to continue as a going concern
Industry Overview
Over the past several years, the AMR industry has undergone tremendous
growth. Many factors have contributed to this growth, including:
o a surge in demand for wireless data transmission services that
increase the efficiency of meter reading service companies;
<page>25
o mandates by federal and state regulators requiring that the
energy industry utilize automatic meter reading technologies and
read meters with increased frequency;
o an apparent nation-wide trend toward deregulation of the energy
industry, which may enable a large number of new energy service
providers to enter the market who will require easily
obtainable, accurate and comprehensive data regarding their
customers' energy usage; and
o a growing preference among commercial, industrial and
governmental enterprises for automation of remote data
acquisition and collection activities through wired and wireless
communications technologies.
Although the need for a comprehensive, low-cost AMR solution has become
widespread, a viable solution remains unmet for many reasons, including the
following:
o the high cost of hardware and installation of traditional
wireless data collection processes employing technologies
similar to cellular or other wireless data transmission towers;
o the failure of existing AMR systems to satisfy the mandates
imposed by government regulations concerning the collection and
transmission of data; and
o the failure of existing AMR systems to provide true two-way data
communications, as a result of which those systems are less
accurate and do not provide increases in efficiency allowed by
two-way data communications systems.
Responding to the growing demand for communications services and
increased competitive pressures, businesses and government organizations that
rely heavily on information technology are devoting significant resources to the
evaluation and purchase of data transmission products.
We estimate that there are approximately 125 million electrical energy
meters in the United States, approximately 12.5 million of which are located in
California. Our goal is to achieve sufficient proliferation of our H-Net(TM)
system so that it is installed in one percent of the electrical energy meters in
the United States or ten percent of the electrical energy meters in the State of
California. Initially, we intend our principal efforts to be focused on the
deployment of our H- Net(TM) system in the State of California.
Our Strategy
We have strived to develop expertise relating to AMR systems and
products. Our goal is to become a leading provider of products and services
relating to data acquisition from remote locations and data collection at
centralized locations. Our business strategy to achieve this goal includes the
following elements:
o Develop strategic relationships. We have explored and intend to
continue to explore the possibility of entering into strategic
relationships with manufacturers of energy meters, utility
companies, energy providers and others in order to promote the
adoption of our H- Net(TM) system within the energy and AMR
industries.
o Establish outsource manufacturing for full-scale commercial
production. We have the means of outsourcing small-scale
production of the products employed in our H-Net(TM) system. We
<page>26
intend to continue the cost-reduction phase of our H-Net(TM)
system's development and in doing so, we intend to examine
various manufacturing alternatives, including strategic
relationships with manufacturers of energy meters and third-
party manufacturing of the products employed in our H-Net(TM)
system for use in energy meters.
o Build market share for our products. We intend to establish
ourselves as the source for comprehensive, low-cost AMR
solutions and plan to focus on building our own market share for
our H-Net(TM) system and further develop our H-Net(TM) system
where market demand is identified. We also plan to develop new
products and enhancements to meet or exceed the evolving
requirements of both centralized and remote applications of our
technologies.
o Intensify our marketing activities. As funds become available,
we intend to invest in a comprehensive targeted, product-
specific marketing program to raise awareness of ConectiSys and
our H-Net(TM) system and in order to attract customers.
o Continue to develop wireless products. We intend to continue to
invest in research and development of wireless products to meet
the needs of the AMR industry. We believe that the expertise
that we have developed in creating our existing H-Net(TM) system
will enable us to enhance our products, develop new products and
services and respond to emerging technologies in a cost-
effective and timely manner.
Our H-Net(TM) System
Our H-Net(TM) system is designed to enable users to remotely read
electronic energy usage meters without the necessity of someone traveling to and
physically reading the meter. The predominant method of reading electronic
meters is for an individual to travel to the site of the meter and make a record
of the data compiled by that meter, either manually as a notation in a log book
or electronically by inputting the data into a handheld or other electronic data
retention device. In the case of a log book, the information is then typically
recorded manually into a centralized database for energy usage tracking and
billing purposes. In the case of an electronic data retention device, the
information is typically downloaded to a centralized database for these
purposes. Residential meters are customarily read on a monthly basis, allowing
only a limited ability to track energy usage fluctuations over periods of less
than one month. In addition, physical reading of meters is accompanied by the
problem of reader error, causing inefficiencies resulting from necessary
corrective procedures. Our H-Net(TM) system is designed to provide continuous
meter-reading capabilities, address the inefficiencies that accompany physical
meter reading and provide additional benefits to its users.
We believe that the anticipated deployment costs of our H-Net(TM) system
are small compared to other AMR products because there are no cellular or other
telecommunications or wireless towers to erect or expensive hardware
infrastructure to install. We anticipate that all field installations and
deployment programs of our H-Net(TM) system will be administered by United
Telemetry Company, one of our wholly-owned subsidiaries. The data collected by
H-Net(TM)-equipped meters will be transmitted over the unlicensed ISM 900 MHz
radio frequency band. Our H- Net(TM) system allows for high-density data
transmissions, which we believe makes it ideal for metropolitan and other
crowded areas where a large amount of data would normally be collected.
H-Net(TM)-Equipped Meters
Our H-Net(TM) system is comprised of the following two principal
components that operate together to provide what we believe to be a
comprehensive, low-cost AMR solution: our H-Net(TM) 5.0 product, which itself
is comprised of circuitry and a radio transmitter, and our H- Net(TM)
BaseStation. In addition to these two principal components, our H-Net(TM) system
utilizes a network operating center. The first component of our H-Net(TM) system
<page>27
is an electronic meter put into service at a residence that is equipped with a
circuit board that contains a memory module, microprocessor and a two-way radio
transmission and receiver device that operates in the ISM 900 MHz radio
frequency band. This circuit board may also be retrofitted to some existing
meters. We refer to each energy meter equipped with this circuit board and that
is connected to our AMR network as an H-Net(TM)- equipped meter or a "node."
With the installation of each H-Net(TM)- equipped meter, the existing installed
H-Net(TM)-equipped meters self- configure by transmitting configuration data to
other H-Net(TM)-equipped meters and receiving configuration data from other H-
Net(TM)-equipped meters.
Base Stations
Our AMR network, when it is operational, will be partially comprised of
these H-Net(TM)-equipped meters, each communicating to another with the final
communication of data in a given communication cycle being transmitted to the
second component of our H-Net(TM) system, a base station. We anticipate that a
base station will be housed in a small metal box, no larger than the size of a
shoe box, that contains a memory module, microprocessor, radio transmission and
receiver device and a modem. The node and base station configuration is similar
to a hub and spoke configuration, but rather than direct communication among
each of the nodes and the base station, numerous nodes will communicate with one
another in a web configuration with some nodes sending final transmission to the
base station of the data collected by many other nodes. The base station is
designed to receive data transmissions from various nodes in its local network
and use its modem to place a local telephone call and transmit the data it has
collected to the third component of our H-Net(TM) system, our network operating
center. We anticipate that the base stations will deliver energy meter data four
times an hour, twenty-four hours a day to our network operating center.
Network Operating Center
We plan to use a computer center located at our main office facility to
store the information gathered from the H-Net(TM)-equipped meters. We call this
computer center our network operating center. We have designed our network
operating center to support up to 250,000 H- Net(TM)-equipped meters. We
anticipate that our network operating center will be the central control center
for our entire AMR network and will operate in a large geographic area. We plan
to use the network operating center to archive all data for future use and as a
protective measure against data loss or corruption. After the data archival
process, we expect that the network operating center will handle uploading of
the data to the Internet where it can be accessed by users directly and also
downloaded through an interpreter software program into a utility company's or
energy service provider's database. We anticipate that our network operating
center will be administered by our wholly-owned subsidiary, eEnergyServices.com,
Inc.
The H-Net(TM) Network
The H-Net(TM) network, once deployed, will be comprised of our network
operating center and local networks, which in turn are each comprised of a base
station and H-Net(TM)-equipped meters. Each H-Net(TM)-equipped meter can
communicate with other H-Net(TM)-equipped meters that are up to a distance of
approximately one-quarter mile away. We plan to install a base station for every
H-Net(TM)-equipped meter area. Our base stations are designed to receive data
transmissions from up to 7,500 H- Net(TM)-equipped meters. We have designed our
system so that a base station can transmit the accumulated data it has received
from the H- Net(TM)-equipped meters in its local network by telephone every
fifteen minutes by using its modem to communicate with our network operating
center. Once the data from the H-Net(TM)-equipped meters arrives from the base
stations at the network operating center, the data can be assembled into various
formats for billing customers as well as for management of energy purchasing and
energy conservation programs.
<page>28
Our H-Net(TM) system has certain limitations inherent in each local
network, each of which is comprised of H-Net(TM)-equipped meters and a base
station. Each local network has the following principal limitations:
o it can consist of a maximum of 7,500 H-Net(TM)-equipped meters;
o each H-Net(TM)-equipped meter must be within approximately one-
quarter mile of another H-Net(TM)-equipped meter in the same
local network; and
o the maximum radius of a local network is five miles.
In addition to the limitations described above, our H-Net(TM)-equipped
meters transmit data using the ISM 900 MHz radio frequency band, which is an
unlicensed frequency band. Because this frequency band is regulated, the H-
Net(TM) system requires FCC approval for compliance and sales. In August 2004,
we submitted to the FCC our H-Net(TM) 5.0 product for approval for
commercialization and sale and received FCC certification for this product in
December 2004. In December 2004, we submitted to the FCC our H-Net(TM)
BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. In July 2005, we submitted to the
FCC our eight- channel H-Net(TM) BaseStation product for approval for
commercialization and sale and received FCC certification for this product in
January 2006.
H-Net(TM) Services
We plan to offer a wide variety of services to utility companies and
energy service providers in addition to reading their customers' energy meters.
We anticipate that these services will include energy management, data storage
and archiving, and the provision of near real- time energy usage data in order
to evaluate energy consumption and determine cost savings procedures. We plan
to provide complete billing and accounting transaction services to utility
companies and energy providers as well as to end-users of energy.
Our H-Net(TM) system employs new technology developed to allow utility
companies and energy service providers to have a wireless network of intelligent
meters, with each meter communicating with another and passing data back and
forth, allowing near real-time energy consumption data to be collected. We
believe that energy service providers will have an opportunity to save money by
efficiently collecting accurate energy usage profiles and using this near real-
time energy usage data to competitively bid for energy in the newly deregulated
energy markets.
Our H-Net(TM) system has been designed so that an energy service
provider can determine exactly how much electric power a metropolitan area, a
neighborhood, or even an individual residence is using. Energy users who have H-
Net(TM)-equipped meters will have the ability to check their energy consumption
and billing rates in near real-time by obtaining this information over the
Internet, which we believe will promote energy conservation.
H-Net(TM) Product Development and Pilot Programs
Our product development efforts are directed toward developing an AMR
solution in the form of our H-Net(TM) system. We believe that our existing
expertise in data transmission devices provides us with a strong technology base
to pursue this objective. Our product development efforts focus on the following
principles:
<page>29
o Development of New Products and Technology. We plan to assess
domestic and international market trends, with the focus of
developing new products designed to meet emerging market
demands. In developing new products, we plan to attempt to
combine our existing technology base with new technologies to
provide a broader range of automation and data communications
and data acquisition solutions to end users.
o Improvement of Existing Technology. We seek to expand the
features and functionality of our existing H-Net(TM) system
technology through modifications and enhancements to meet the
changing needs of the marketplace. We are reviewing the design
of our products to determine areas of potential cost savings or
enhanced product quality and reliability.
We believe our future success will depend, in part, upon our ability to
expand and enhance the features of our H-Net(TM) system and to develop and
introduce new products designed to meet changing customer needs on a cost-
effective and timely basis. Consequently, failure by us to respond on a timely
basis to technological developments, changes in industry standards or customer
requirements, or any significant delay in product development or introduction,
could have a material adverse effect on our business and results of operations.
We cannot assure you that we will respond effectively to technological changes
or new product announcements by others or that we will be able to successfully
develop and market new products or product enhancements.
Beginning in 2000, we successfully launched and completed H-Net(TM)
demonstration programs at various locations in Southern California. In 2004, we
began a similar program in Los Angeles County, California at various sites in
the Southern California Edison service territory. Our H-Net(TM) meters for this
program were installed by Southern California Edison in May 2004 and the program
recorded and continues to record real-time meter data seamlessly and error-free.
We expanded this demonstration program during 2006 and expect that it will
continue to grow with additional commercial and residential clients.
We are in the process of evaluating meter manufacturers as potential
business partners for the installation of the H-Net(TM) system into their
meters.
We are actively pursuing and planning other demonstration programs with
various utility companies and energy service providers across the country.
However, we expect that future demonstration programs will be in conjunction
with the first stages of sales or licensing of our H- Net(TM) system to utility
companies, energy service providers and other industry-related parties.
The H-Net(TM) Wireless Network Vision
We have designed and will continue to design our H-Net(TM) system to
deliver a comprehensive and robust AMR solution that enables the realization of
substantial efficiencies in the remote meter reading and centralized data
collection contexts and that provides numerous features and services. In
addition to its many other planned features and services, we are designing our
H-Net(TM) system to:
o constantly monitor an end-user's energy meter and gather meter
data and display it on the Internet in fifteen-minute intervals,
twenty- four hours a day;
o allow the end-user to access an information link on the Internet
taking him or her directly to the energy usage data transmitted
by the H-Net(TM)-equipped meter;
o provide utility companies, and energy service providers with
reliable and accurate electricity usage records;
<page>30
o enable a utility company or an energy service provider to supply
to end-users over the Internet information and special incentive
offers regarding the use of energy at off-peak times, thereby
improving energy conservation during critical peak periods.
Other innovative offers may also be implemented such as pre-
payment plans and direct purchases of additional energy over the
Internet;
o allow an end-user to pay his or her energy bills over the
Internet, at a very low administrative cost to the utility
company and reduce billing delays;
o allow the monitoring of energy usage levels to ensure that
utility companies and energy service providers are aware of any
delivery problems, including power outages and energy thefts;
o provide utility companies with the ability of two-way
communications so that they may determine which of their
customers do not have power without the aid of customer service
phone calls, thereby allowing service crews to be dispatched
more efficiently. By using our H-Net(TM) system, we believe that
utility companies will be in a position to know precisely when
each end-user's service is restored and the exact duration of a
power outage;
o enhance safety and convenience by allowing the remote delivery
and termination of electricity, with all billing transactions
completely automated. We plan to design our H-Net(TM) system to
allow end-users to request over the Internet the delivery of
electricity;
o allow the distribution of electricity more efficiently and
inexpensively with energy usage and other vital data informing
each decision through the entire energy supply channel. We
believe that by using our H-Net(TM) system, energy purchasers
can make precise forecasts of purchasing requirements,
eliminating much of the over- and under- purchasing of energy
that contributes to volatile wholesale energy prices;
o allow end-users who are preparing to terminate or switch energy
service providers to use the Internet to inform the current
energy service provider of the change. At a precise time,
selected by the end- user, our H-Net(TM) system has the ability
to read the end-user's H- Net(TM)-equipped meter, pass the
information to the current energy service provider's system to
produce a final bill, and disconnect the end-user's electricity.
In the case of a change in an energy service provider, the data
from an H-Net(TM)-equipped meter can automatically be routed to
a new energy service provider; and
o enable lower energy costs as a result of its efficiencies,
quicker transactions with less paperwork and reduced potential
for error. Lower energy and transaction costs will assist the
transition to an open, competitive market for energy.
Government Regulation
Our H-Net(TM) system is designed to comply with a significant number of
industry standards and regulations, some of which are evolving as new
technologies are deployed. In the United States, our H-Net(TM) system must
comply with various regulations defined by the FCC, and Underwriters
Laboratories, or other nationally-recognized test laboratories, as well as
industry standards.
The regulatory approval process can be time-consuming and can require
the expenditure of substantial resources. The failure of our H-Net(TM) system to
comply, or delays in compliance, with the various existing and evolving
<page>31
standards could negatively impact our ability to sell or license our H-Net(TM)
system. Government regulations regarding the manufacture, sale and
implementation of products and systems similar to our H-Net(TM) system and other
data communications devices are subject to future change. We cannot predict what
impact, if any, such changes may have upon our business.
In August 2004, we submitted to the FCC our H-Net(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
Net(TM) BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. In July 2005, we submitted to the
FCC our eight-channel H-Net(TM) BaseStation product for approval for
commercialization and sale and received FCC certification for this product in
January 2006.
We do not anticipate that any government regulations will hamper our
efforts to deploy our H-Net(TM) system. Rather, the restructuring of the energy
market in the United States has required the reading of energy meters much more
frequently than the current practice of once a month, thus making the physical
meter reading techniques currently in use inadequate. Our H-Net(TM) system is
designed to meet various government regulations mandating frequent meter
readings and we are attempting to position ourselves so that we will be a
beneficiary of these mandates.
Operations
During the initial design and engineering phases for our H-Net(TM)
system, we maintained low overhead costs and we plan to continue to do so until
manufacturing and sales of our H-Net(TM) system are underway. We plan to hire
additional personnel as needed during the coming year, including managerial,
clerical, administration, sales, marketing, and customer service personnel.
We plan to lease suitable office facilities for our operations within
the Southern California area. We plan to initially utilize existing
manufacturers to produce our products and will therefore likely not have a
short-term need to lease or build manufacturing facilities. We intend to
operate not principally as a manufacturer of products, but as a provider of
comprehensive, cost-effective AMR solutions, and we plan to outsource
manufacturing of the hardware employed in our H-Net(TM) system in order to
achieve the highest cost-efficiencies.
Anticipated Revenues and Marketing
Our H-Net(TM) system is designed to be a comprehensive, cost-effective
AMR solution and an alternative to other AMR technologies and physical reading
of meters. Our H-Net(TM) system is capable of providing meter data every fifteen
minutes, twenty-four hours a day and nearly 3,000 times per month. We estimate
that physical readings of a meter cost approximately $1.00 per reading. Our H-
Net(TM) system is designed to meet the relatively low cost of physical meter
reading while providing nearly 3,000 times more readings per month. We believe
that the base cost to operate a fully-deployed H-Net(TM) system is approximately
$.20 per meter per month, or approximately $.0000667 per reading.
We plan to license our H-Net(TM) system technology to meter
manufacturers so that they may incorporate it into their meters. We plan on
deriving a small royalty per meter sold for every H-Net(TM)-equipped meter. We
anticipate that the predominant source of any future revenues will be through
recurring monthly service charges for reading, archiving and supplying data from
H-Net(TM)-equipped meters and from providing other services described in more
detail above. However, despite our belief of the cost-effectiveness and
significant advantages of our H- Net(TM) system over physical meter reading
practices and other AMR technologies, there can be no assurances that the market
we intend to target will adopt or accept our H-Net(TM) system or that we will
earn any significant revenues. See "Risk Factors."
<page>32
We have developed a marketing plan that was formulated to help us
achieve the following objectives:
o acquisition and retention of strategic beta test placement
locations for H-Net(TM)-equipped meters;
o formation of synergistic partnerships with energy service
providers, utility companies and internet service providers,
including joint ventures, license arrangements and strategic
alliances;
o participation in H-Net(TM)-equipped meter manufacturing
partnerships and acquisition of Internet commerce sponsorship;
o promotion of unique features and specialized services of our H-
Net(TM) system; and
o creation of industry awareness by implementing a public
relations and marketing campaign along with establishing a
relationship with regulatory agencies of the State of California
and other states in an attempt to facilitate a long-term
solution for the nation's energy needs.
The current principal target of our marketing and sales efforts is the
utility and energy service provider industries. These industries consist of a
wide variety of organizations that use data communications in an automated
process application, such as utilities and energy management companies.
Responding to deregulation and other major changes taking place within the
industry, electric power utility companies have become leading advocates in
promoting the implementation of automation and technological advancement as a
means of achieving cost savings as they enter the competitive arena. Utility
companies are automating numerous distinct processes within their operating
systems. Our H Net(TM) system is designed for and is expected to be sold for use
in:
o the AMR context, which is intended primarily to eliminate the
expense and inefficiencies of human meter readers and also is
intended to provide data archival and delivery services as well
as additional value-added services for the end-user; and
o distribution automation, which is the remote monitoring and
control of power distribution networks. These control systems
are often referred to as SCADA systems. SCADA is an acronym for
Supervisory Control and Data Acquisition.
If sufficient funds are not available for full deployment of our H-
Net(TM) system, it is our intention to license our H-Net(TM) technology to
various sectors of the energy industry, including meter manufacturers for
integration into their meters. We also may license our software and software
systems for archival of the data transmitted by H-Net(TM)- equipped meters to
various utility companies and energy service providers. Under this scenario, we
would also supply support and technical assistance to these various sectors of
the energy industry while collecting revenues solely in the form of fees for
licensing and support and technical assistance. We expect any revenue from this
alternate strategy to be far less than our active participation in the
collecting and archiving of meter data and the ancillary services described in
greater detail above.
Competition
Many companies have developed data transmission products designed to
meet the growing demand for AMR solutions. We anticipate that our H- Net(TM)
system will compete on the basis of features, price, quality, reliability, name
recognition, product breadth and technical support and service. We believe that
<page>33
we generally will be competitive in each of these areas. However, many of our
existing and potential competitors have significantly more financial,
engineering, product development, manufacturing and marketing resources than we
have. We cannot assure you that our competitors will not introduce comparable or
superior products incorporating more advanced technology at lower prices, or
that other changes in market conditions or technology will not adversely affect
our ability to compete successfully in the future. We perceive the following
companies as being the principal competition to our AMR solution in the form of
our H-Net(TM) system:
Schlumberger Ltd. Schlumberger's Resource Management Systems Division has
deployed meter reading systems that include hand-held
meter reading devices.
Itron Inc. Itron provides and has installed AMR systems worldwide.
Itron provides "drive-by" automated meter reading
equipment.
Hunt Technologies, Inc. Hunt provides power line carrier AMR systems with
capabilities including substation switching. The market
niche for Hunt's AMR systems is rural electric
cooperatives.
We believe that we will be the only company able to collect data
transmitted from H-Net(TM)-equipped meters, thereby ensuring our competitive
advantage once we are able to achieve sufficient proliferation of our H-Net(TM)-
equipped meters.
Customers
Except with respect to our contract with Trimark Associates Inc., we do
not currently have revenue-generating customers. We have not yet sold any H-
Net(TM) systems. However, we are actively pursuing sales of our H- Net(TM)
systems with meter manufacturers and other companies in the energy industry. We
anticipate that once we commercially produce and install our H- Net(TM) system,
our customers will include energy meter manufacturers, energy service providers,
utility companies and end-users of energy.
Intellectual Property
We currently rely on a combination of contractual rights, copyrights,
trademarks and trade secrets to protect our proprietary rights. However,
although our H-Net(TM) system and its constituent components could benefit from
patent protection, we have chosen to retain the proprietary rights associated
with our H-Net(TM) system predominantly as trade secrets. Although we currently
rely to a great extent on trade secret protection for much of our technology, we
cannot assure you that our means of protecting our proprietary rights will be
adequate or that our competitors will not independently develop comparable or
superior technologies or obtain unauthorized access to our proprietary
technology.
We own, license or have otherwise obtained the right to use certain
technologies incorporated in our H-Net(TM) system. We may receive infringement
claims from third parties relating to our products and technologies. In those
cases, we intend to investigate the validity of the claims and, if we believe
the claims have merit, to respond through licensing or other appropriate
actions. To the extent claims relate to technology included in components
purchased from third-party vendors for incorporation into our products, we would
forward those claims to the appropriate vendor. If we or our component
manufacturers are unable to license or otherwise provide any necessary
technology on a cost- effective basis, we could be prohibited from marketing
products containing that technology, incur substantial costs in redesigning
products incorporating that technology, or incur substantial costs defending any
legal action taken against us.
<page>34
Employees
We have four full time and two part time employees and a five person
advisory board. Our employees are involved in executive, corporate
administration, operations and sales and marketing functions. We also use the
services of outside consultants and experts on many of our projects to help
reduce costs. We consider our relations with our employees to be good. None of
our employees is represented by a labor union.
Property
Our principal center of operations is located at 25115 Avenue Stanford,
Suite 320, Valencia, California 91355. This 1,100 square foot space is leased
for approximately $2250 per month. We believe that our facilities are adequate
for our needs for the near future.
Legal Proceedings
We are not a party to any material pending legal proceedings. We are
subject to legal proceedings, claims and litigation arising in the ordinary
course of business. While the amounts claimed may be substantial, the ultimate
liability cannot presently be determined because of considerable uncertainties
that exist. Therefore, it is possible the outcome of such legal proceedings,
claims and litigation could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period. However, based
on facts currently available, management believes such matters will not have a
material adverse effect on our financial position, results of operations or cash
flows.
<page>35
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of ConectiSys and their ages,
positions, business experience and education as of February 7, 2007 are as
follows:
Name Age Position
---- --- --------
Robert A. Spigno(1)(2).. 52 Chairman of the Board, Chief
Executive Officer, Chief Financial
Officer and Director
Lawrence Muirhead(1)(2). 47 Chief Technology Officer and Director
Rodney w. Lighthipe..... 60 Treasurer and Secretary
Melissa McGough (1)..... 30 Director
_______________
(1) Member of Stock Option Committee.
(2) Member of Nominating Committee.
Business Experience
Directors
Robert A. Spigno has served as our Chief Executive Officer, Chairman of
the Board and as a member of our board of directors since August 1995. Prior to
that time, Mr. Spigno was President, for more than a decade, of S.W. Carver
Corp., a company founded by him and his former wife, Patricia A. Spigno, that
was a commercial builder of residential homes. Mr. Spigno has over 25 years of
experience in executive management and majority ownership of several privately
held companies.
Lawrence Muirhead has served as our Chief Technical Officer and as a
member of our board of directors since October 1997. Prior to that time, Mr.
Muirhead worked for TRW. Mr. Muirhead has over 18 years of engineering and
research and development experience in the aerospace industry, including over 13
years of experience with TRW, where helped lead new product development and
deployment. Mr. Muirhead holds a B.S. degree in physics and a B.A. degree in
mathematics from the University of California, Santa Barbara, and holds an M.S.
degree in physics from the California Institute of Technology.
Melissa McGough has served as a member of our board of directors since
November 1999. Ms. McGough was also our Corporate Administrator from December
1998 until March 2005. Her responsibilities as Corporate Administrator included
public relations and management of our daily office activities. Prior to that
time, Ms McGough was a student.
Executive Officer
Rodney W. Lighthipe has served as our Treasurer and Secretary since May
2006 and previously served as an advisor to our board of directors from April
2001 through April 2006. Mr. Lighthipe also served as our President from
September 2000 until his resignation in September 2001. Prior to that time, Mr.
Lighthipe served as Director of Research for San Diego Gas & Electric from 1992
until 1996 and was responsible for the development and deployment of new
<page>36
technologies. Mr. Lighthipe was Research Manager for Southern California Edison
from 1980 to 1987 and organized an international consortium of companies for the
design, construction and operation of the world's largest coal gasification
plant. Mr. Lighthipe was also Power Contracts Manager for Southern California
Edison from 1974 until 1980 during which he opened new transmission paths
throughout the Western United States and Canada for the purchase and sale of
bulk electric power. Some of Mr. Lighthipe's major projects included the
installation of photovoltaics in remote areas and the launch of a "smart card"
project employing residential telephone systems. Mr. Lighthipe has also acted as
a consulting engineer in the energy and telecommunications industries and served
two tours of duty in Vietnam as a Lieutenant in the United States Navy.
All directors hold office until the next annual meeting of shareholders
and until their respective successors are elected or until their earlier death,
resignation or removal. Each officer of ConectiSys serves at the discretion of
the board of directors. There are no other family relationships between or among
any directors or executive officers of ConectiSys.
Advisors to our Board of Directors
Dr. Hugo Pomrehn has served as an advisor to our board of directors
since April 2001. On June 28, 1992, Dr. Pomrehn was nominated by former
President George Bush to serve as the Under Secretary of Energy, and was
confirmed by the United States Senate for that position on September 29, 1992.
As Under Secretary to Admiral James Watkins, Dr. Pomrehn was the third-ranking
official at the U.S. Department of Energy, which employed approximately 170,000
personnel and had an annual budget of $20 billion. Dr. Pomrehn's professional
career covers a broad spectrum of involvement with energy and environmental
technologies. He has been engaged in engineering and management consulting in
the energy and nuclear fields for more than 30 years and was a Vice President of
the Bechtel Corporation.
Aaron R. Sokol has served as an advisor to our board of directors since
April 2001. Mr. Sokol is a Vice President at Deutsche Bank Alex Brown where his
responsibilities include providing innovative and customized solutions to
clients in order to preserve and enhance their wealth. He is also responsible
for new business development as well as global financial advisory services for
existing and prospective clients. Mr. Sokol joined Deutsche Bank Alex Brown from
Los Angeles-based Scudder Kemper Investments, Inc. Mr. Sokol has also served as
an Assistant Vice President at First Chicago Capital Markets, Inc., and prior to
that, worked in the corporate finance department at Nations Bank Capital
Markets, Inc. Mr. Sokol holds a J.D. degree from Boston University School of Law
and a M.B.A. in Finance and New Venture Management from the University of
Southern California.
Larry W. Siler has served as an advisor to our board of directors since
April 2001. Mr. Siler is currently Manager of Fuel Transportation for Edison
Mission Energy in Chicago, Illinois. Mr. Siler was the Coal Supply
Superintendent for Commonwealth Edison Company in Chicago from 1988 until 1999.
From 1986 until 1988 Mr. Siler was a management and engineering consultant in
Austin, Texas. He also held positions as the Fuels Manager, Engineering
Supervisor, Staff Engineer and Fuels Engineer for the Lower Colorado River
Authority from 1973 until 1986.
Tod O'Connor has served as an advisor to our board of directors since
April 2001. Mr. O'Connor was Director of Government Relations for two Edison
International Inc. subsidiaries, Southern California Edison RD&D Department and
Edison Technology Solutions from 1993 until 1999. Mr. O'Connor also was employed
by Pacific Enterprises and its subsidiary, Southern California Gas Co. from 1989
until 1993, and MARC Associates' Status Group in Washington, D.C. from 1988
until 1989. Mr. O'Connor was a Legislative Aide in the United States House of
Representatives where he advised House Speaker Thomas P. (Tip) O'Neill on
pending legislation and proposed federal regulations, as well as the Democratic
Steering and Policy Committee from 1980 until 1981. Mr. O'Connor is currently
<page>37
President of O'Connor Consulting Services, Inc. in Woodland Hills, California.
Mr. O'Connor holds a L.L.M. degree in labor law from Georgetown University Law
Center, Washington, D.C., and a J.D. degree from Suffolk University Law School.
Dr. Fredric Brauner was appointed to serve as an advisor to our board of
directors in October 2003. Dr. Brauner is a doctor of medicine, specializing in
dermatology. He graduated from the University of Vienna and became a doctor in
1977. Dr. Brauner, took over his father's practice in 1983 at the University
Clinic of Dermatology in Vienna. Dr. Brauner is a key investor in ConectiSys and
is leading our efforts to expand our H-Net(TM) system to fit the European
marketplace.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than 10%
of a registered class of our common stock to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission.
These officers, directors and stockholders are required by the Securities and
Exchange Commission regulations to furnish us with copies of all such reports
that they file.
Based solely upon a review of copies of these reports furnished to us
during 2006 and thereafter, or written representations received by us from
reporting persons that no other reports were required, we believe that all
Section 16(a) filing requirements applicable to our reporting persons during
2006 were complied with, except that Mr. Robert Spigno did not timely file a
Form 4 to report one transaction.
Board Committees
Our board of directors has a Stock Option Committee and a Nominating
Committee. Our board of directors does not have an Audit Committee. In the
absence of an Audit Committee, the entire board of directors intends to satisfy
the duties of that committee. Our Nominating Committee has a written charter.
During fiscal 2006, our board of directors held 12 meetings and
took action by written consent on 7 occasions. During fiscal 2006, no incumbent
director attended fewer than 75% of the aggregate of the total number of
meetings of the board of directors held during the period for which he or she
has been a director and the total number of meetings held by all committees of
the board on which he or she served during the periods that he or she served.
Stock Option Committee. Our Stock Option Committee makes recommendations
to our board of directors concerning incentive compensation for employees and
consultants of ConectiSys and selects the persons entitled to receive options
under our stock option plans and establishes the number of shares, exercise
price, vesting period and other terms of the options granted under those plans.
The Stock Option Committee currently consists of Robert A. Spigno, Lawrence
Muirhead and Melissa McGough. During fiscal 2006, the Stock Option Committee
held one meeting and did not take action by written consent on any occasion. No
executive officer of ConectiSys has served as a director or member of the
compensation committee of any other entity whose executive officers served as a
director of ConectiSys.
Audit Committee. We do not currently have an Audit Committee. In
addition, having no Audit Committee, we do not have an Audit Committee financial
expert. As a small, development-stage company, it has been exceedingly
difficult for us to attract an independent member of our board of directors, who
would qualify as an Audit Committee financial expert, to serve as the sole
member of the Audit Committee of our board of directors. We plan to form an
Audit Committee consisting solely of one or more independent members of our
board of directors, at least one of whom will qualify as an Audit Committee
<page>38
financial expert under the rules and regulations of the Securities and Exchange
Commission, once we are able to identify and attract a satisfactory candidate.
Nominating Committee. Our Nominating Committee currently consists of two
directors, Robert A. Spigno, who serves as Chairman, and Lawrence Muirhead,
neither of whom is "independent" under the rules and regulations of the
Securities and Exchange Commission or under the current Nasdaq listing
standards. We intend to reconstitute our Nominating Committee with one or more
independent members of our board of directors once we are able to identify and
attract a satisfactory candidate.
Our Nominating Committee assists our board of directors in the selection
of nominees for election to the board. The committee determines the required
selection criteria and qualifications of director nominees based upon the needs
of ConectiSys at the time nominees are considered and recommends candidates to
be nominated for election to the board. The Nominating Committee was
constituted, and our board of directors adopted a written charter for the
Nominating Committee, in June 2004. A copy of the current charter is available
on our website at http://www.conectisys.com under the headings "Investor
Relations" and "Corporate Governance." During fiscal 2006, our Nominating
Committee held no meetings and took action by written consent on one occasion.
Our Nominating Committee considered and nominated candidates for directorship in
connection with our 2006 annual meeting. No candidates for director nominations
were submitted to our board of directors by any shareholder in connection with
the election of directors at our 2006 annual meeting.
Criteria for Director Nominees. Our board of directors believes that it
should be comprised of directors with varied, complementary backgrounds, and
that directors should, at a minimum, exhibit proven leadership capabilities and
experience at a high level of responsibility within their chosen fields, and
have the ability to quickly grasp complex principles of business, finance and
automatic meter reading technologies. Directors should possess the highest
personal and professional ethics, integrity and values and should be committed
to representing the long-term interests of our shareholders.
When considering a candidate for director, the Nominating Committee
intends to take into account a number of factors, including the following:
o independence from management;
o depth of understanding of technology, manufacturing, sales and
marketing, finance and/or other elements directly relevant to
the technology and business of ConectiSys;
o education and professional background;
o judgment, skill, integrity and reputation;
o existing commitments to other businesses as a director,
executive or owner;
o personal conflicts of interest, if any; and
o the size and composition of our existing board of directors.
Prior to nominating a sitting director for re-election at an annual
meeting of shareholders, the Nominating Committee intends to consider the
director's past attendance at, and participation in, meetings of our board of
directors and its committees and the director's formal and informal
contributions to his or her respective activities.
When seeking candidates for director, the Nominating Committee may
solicit suggestions from incumbent directors, management, shareholders and
others. Additionally, the Nominating Committee may use the services of third
party search firms to assist in the identification of appropriate candidates.
After conducting an initial evaluation of a prospective candidate, the
Nominating Committee may interview that candidate if it believes the candidate
might be suitable to be a director. The Nominating Committee may also ask the
<page>39
candidate to meet with management. If the Nominating Committee believes a
candidate would be a valuable addition to our board of directors, it may
recommend to the full board of directors that candidate's appointment or
election.
Shareholder Recommendations for Nominations to the Board of Directors.
The Nominating Committee will consider candidates for director recommended by
any shareholder that is the beneficial owner of shares representing more than
one percent of the then-outstanding shares of common stock of ConectiSys and
that has beneficially owned those shares for at least one year. The Nominating
Committee will evaluate such recommendations applying its regular nominee
criteria and considering the additional information set forth below. Eligible
shareholders wishing to recommend a candidate for nomination as a director are
to send the recommendation in writing to the Chairman of the Nominating
Committee, ConectiSys Corporation, 25115 Avenue Stanford, Suite 320, Valencia,
California 91355. A shareholder recommendation must contain the following
information:
o documentation supporting that the writer is a shareholder of
ConectiSys and has been a beneficial owner of shares
representing more than one percent of the then-outstanding
shares of common stock of ConectiSys for at least one year and a
statement that the writer is recommending a candidate for
nomination as a director;
o a resume of the candidate's business experience and educational
background that also includes the candidate's name, business and
residence addresses, and principal occupation or employment and
an explanation of how the candidate's background and
qualifications are directly relevant to the business of
ConectiSys;
o the number of shares of common stock of ConectiSys beneficially
owned by the candidate;
o a statement detailing any relationship, arrangement or
understanding, formal or informal, between or among the
candidate, any affiliate of the candidate, and any customer,
supplier or competitor of ConectiSys, or any other relationship,
arrangement or understanding that might affect the independence
of the candidate as a member of our board of directors;
o detailed information describing any relationship, arrangement or
understanding, formal or informal, between or among the
proposing shareholder, the candidate, and any affiliate of the
proposing shareholder or the candidate;
o any other information that would be required under SEC rules in
a proxy statement soliciting proxies for the election of such
candidate as a director; and
o a signed consent of the candidate to serve as a director, if
nominated and elected.
In connection with its evaluation, the Nominating Committee may request
additional information from the candidate or the recommending shareholder and
may request an interview with the candidate. The Nominating Committee has
discretion to decide which individuals to recommend for nomination as directors.
Codes of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics
that applies to all of our directors, officers and employees and an additional
Code of Business Ethics that applies to our Chief Executive Officer and our
Senior Financial Officers.
<page>40
The Code of Ethics, as applied to our principal financial officers,
constitutes our "code of ethics" within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002 and would also constitute our "code of conduct"
within the meaning of the listing standards of Nasdaq.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-
K relating to amendments to or waivers from provision of these codes that relate
to one or more of the items set forth in Item 406(b) of Regulation S-K, by
describing on our Internet website, within five business days following the date
of a waiver or a substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to whom the waiver
was granted.
Information on our Internet website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Securities and Exchange Commission.
Compensation Committee Interlocks and Insider Participation
No member of our board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity.
ITEM 10. EXECUTIVE COMPENSATION.
Compensation of Executive Officers
The Summary Compensation Table below provides information concerning the
annual and long-term compensation for services in all capacities as an employee
of ConectiSys of our Chief Executive Officer and Chief Financial Officer, our
Chief Technology Officer and our former Chief Financial Officer and
Secretary/Treasurer, or the named executive officers, during the years ended
September 30, 2006 and 2005. There were no other officers whose annual
compensation exceeded $100,000 during the year ended September 30, 2006.
<table>
Summary Compensation Table
Stock
Name and Principal Position Year Salary($) Bonus($) Awards($)(1) Total($)
- --------------------------- ---- --------- -------- ------------ --------
Robert A. Spigno
CEO and CFO.............. 2006 160,000 - 80,000 240,000
2005 160,000 - 80,000 240,000
Lawrence Muirhead
Chief Technology Officer. 2006 150,000 - - 150,000
2005 150,000 - - 150,000
Patricia A. Spigno
former CFO(2)............ 2006 - - - -
2005 40,000 - - 40,000
</table>
_______________
(1) Amounts represent bonus earned, but deferred and recorded on the books
and records of ConectiSys as accrued compensation. Amounts are payable
in common stock of ConectiSys based on a conversion price equivalent to
50% of the average of the closing bid and asked prices of a share of
ConectiSys common stock for the 30 days prior to the end of the year in
which such bonus was earned. Although our agreement with Robert Spigno
provides that the conversion price is to be equal to 50% of the average
of the closing bid and asked prices of a share of our common stock for
the 30 days prior to the end of the calendar year, Mr. Spigno
voluntarily relinquished his right to receive shares for 2006 and 2005
based on this conversion price in favor of a conversion price equal to
100% of the average of the closing bid and asked prices of a share of
<page>41
our common stock for the 30 days prior to the end of the applicable
calendar year.
(2) Ms. Spigno's employment was terminated at the end of the first six
months of fiscal 2005.
Outstanding Equity Awards at Fiscal Year End
As of September 30, 2006, Robert Spigno held an option to purchase
234,155 shares of our Class A preferred stock at an exercise price of $1.00 per
share. Each share of Class A preferred stock is entitled to 100 votes per share
on all matters presented to our shareholders for action. The Class A preferred
stock does not have any liquidation preference, additional voting rights,
conversion rights, anti-dilution rights or any other preferential rights. The
Class A preferred stock option is fully vested and expires on November 1, 2009.
As of September 30, 2006, Robert Spigno held an option to purchase
500,000 shares of our Class B preferred stock at an exercise price of $.05 per
share. Each share of Class B preferred stock is convertible into 10 shares of
our common stock. The Class B preferred stock does not have any liquidation
preference, voting rights, other conversion rights, anti-dilution rights or any
other preferential rights. The exercise price of $.05 per share equates to
$.005 per share of common stock if the Class B preferred stock were converted,
which was in excess of the price of our common stock on that date. The price of
our common stock on the OTC Bulletin Board(R)as of September 30, 2006 was
$.0004. The Class B preferred stock option is fully vested and expires on
November 1, 2009.
Compensation of Directors
Our directors do not receive any compensation in their capacity as
members of the board of directors, but may be reimbursed for reasonable expenses
incurred in connection with attendance of meetings of the board of directors.
The advisors to our board of directors each initially received 250,000
shares of common stock as compensation for their advisory services. No
additional compensation has been paid and any future compensation will be in the
discretion of our board of directors.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
In October 1995, our board of directors set the compensation for Robert
A. Spigno, our Chairman of the Board, Chief Executive Officer and Chief
Financial Officer. Mr. Spigno has executed an employment agreement with
ConectiSys effective October 2, 1995, as amended by employment agreement
amendments effective July 24, 1996, August 11, 1997, September 1, 1999 and March
27, 2000 that provide for annual salary of $160,000 and a bonus of 50% of Mr.
Spigno's annual salary, with the bonus payable in common stock of ConectiSys.
In August 1998, our board of directors set the compensation for Lawrence
Muirhead, our Chief Technology Officer. Mr. Muirhead has executed an employment
agreement with ConectiSys effective August 1, 1998, that provides for annual
salary compensation of $150,000.
Indemnification of Directors and Officers
The Colorado Business Corporation Act, or CBCA, requires that each
director discharge his duties to ConectiSys in good faith, with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances, and in a manner that he reasonably believes to be in the best
interests of ConectiSys. Generally, a director will not be liable to ConectiSys
or its shareholders, for any action he takes or omits to take as a director if,
<page>42
in connection with such action or omission, he performed the duties of his
position in compliance with the standards described above.
Our Articles of Incorporation provide that ConectiSys may indemnify any
director or officer of ConectiSys to the full extent permitted by Colorado law.
Under the CBCA, except for the situation described below, a corporation may
indemnify a person made a party to a proceeding because the person is or was a
director against liability incurred in the proceeding if:
o the person conducted himself in good faith;
o the person reasonably believed, in the case of conduct in an
official capacity with ConectiSys, that his conduct was in the
best interests of ConectiSys and, in all other cases, that his
conduct was at least not opposed to the best interests of
ConectiSys; and
o in the case of any criminal proceeding, the person had no
reasonable cause to believe his conduct was unlawful.
Under the CBCA, ConectiSys may not indemnify a director as described
above:
o in connection with a proceeding by or in the right of
ConectiSys, in which the director was adjudged liable to
ConectiSys; or
o in connection with any other proceeding charging that the
director derived an improper personal benefit, whether or not
involving action in an official capacity, in which proceeding
the director was adjudged liable on the basis that he derived an
improper personal benefit.
Under the CBCA, ConectiSys is required to indemnify any director who is
wholly successful on the merits or otherwise, in the defense of any proceeding
to which the director was a party because the person is or was a director,
against reasonable expenses incurred by him in connection with the proceeding.
To the extent indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of ConectiSys under the above provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
Equity Compensation Plan Information
No options, warrants or rights under any formal or informal incentive
compensation plan were outstanding, and there were no securities remaining
available for future issuance under any formal incentive compensation plan, as
of September 30, 2006.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
On September 1, 2003, we executed a promissory note in the amount of
$36,000 in favor of Robert Spigno, our Chairman of the Board, Chief Executive
Officer and Chief Financial Officer. Under the note, any outstanding principal
and accrued and unpaid interest is due on demand and any outstanding principal
accrues interest at an annual rate of 18%. As of September 30, 2005,
approximately $12,000 of principal and accrued and unpaid interest under this
note remained outstanding. During fiscal 2005 and 2006, we borrowed and repaid
<page>43
various amounts from time to time from and to Mr. Spigno and as of September 30,
2006, no principal or accrued and unpaid interest under this note remained
outstanding.
On September 1, 2003, we executed a promissory note in the amount of
$50,000 in favor of Patricia Spigno, our former Chief Financial Officer and
Secretary/Treasurer. Under the note, any outstanding principal and accrued and
unpaid interest is due on demand and any outstanding principal accrues interest
at an annual rate of 18%. We borrowed additional funds from Ms. Spigno
resulting in approximately $49,000 owed to Ms. Spigno as of September 30, 2005.
During fiscal 2005 and 2006, we borrowed and repaid various amounts from time to
time from and to Ms. Spigno resulting in $449 owed to Ms. Spigno as of September
30, 2006.
Effective December 31, 2005, Robert Spigno earned bonus compensation
under his employment arrangement with ConectiSys in the amount of $80,000
payable in common stock of ConectiSys based on a conversion price equal to 50%
of the average of the closing bid and asked prices of a share of our common
stock for the 30 days prior to December 31, 2005. Although our agreement with
Mr. Spigno provides that the conversion price is to be equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2005, Mr. Spigno voluntarily relinquished his
right to receive shares for 2005 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and asked
prices of a share of our common stock for the 30 days prior to December 31,
2005. The number of shares of common stock of ConectiSys issuable in connection
with this bonus is 289,156,627.
In May 2006, Rodney W. Lighthipe was appointed as Treasurer and
Secretary of Conectisys. Since February 2006, Mr. Lighthipe has received weekly
consulting fees of $1,000 in connection with consulting services rendered to
ConectiSys.
Effective December 31, 2006, Robert Spigno earned bonus compensation
under his employment arrangement with ConectiSys in the amount of $80,000
payable in common stock of ConectiSys based on a conversion price equal to 50%
of the average of the closing bid and asked prices of a share of our common
stock for the 30 days prior to December 31, 2006. Although our agreement with
Mr. Spigno provides that the conversion price is to be equal to 50% of the
average of the closing bid and asked prices of a share of our common stock for
the 30 days prior to December 31, 2006, Mr. Spigno voluntarily relinquished his
right to receive shares for 2006 based on this conversion price in favor of a
conversion price equal to 100% of the average of the closing bid and asked
prices of a share of our common stock for the 30 days prior to December 31,
2006. The number of shares of common stock of ConectiSys issuable in connection
with this bonus is 258,064,516.
2
We are or have been a party to various employment, consulting and
compensation arrangements with related parties, as more particularly described
above under the headings "Compensation of Executive Officers," "Compensation of
Directors" and "Employment Contracts and Termination of Employment and Change-
in-Control Arrangements."
PRINCIPAL AND SELLING SECURITY HOLDERS
As of February 7, 2007, a total of 17,507,935,396 shares of our common
stock were outstanding. The following table sets forth information as of that
date regarding the beneficial ownership of our common stock both before and
immediately after the offering by:
o each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our
common stock as of the date of the table;
o each selling security holder;
<page>44
o each of our directors;
o each named executive officer who is a current officer; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Securities and Exchange Commission, and generally includes
voting or investment power with respect to securities. Except as indicated in
the footnotes to the table, we believe each holder possesses sole voting and
investment power with respect to all of the shares of common stock owned by that
holder, subject to community property laws where applicable. In computing the
number of shares beneficially owned by a holder and the percentage ownership of
that holder, shares of common stock subject to options or warrants or underlying
notes or preferred stock held by that holder that are currently exercisable or
convertible or are exercisable or convertible within 60 days after the date of
the table are deemed outstanding. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person or group.
All of the shares of common stock being offered under this prospectus
are issuable upon conversion of the principal and accrued and unpaid interest on
the notes or upon exercise of warrants that were acquired by the selling
security holders from us in connection with a private placement that we made
effective on March 8, 2006, in which we issued an aggregate of $1.27 million in
principal amount of callable secured convertible notes due March 8, 2009 to four
accredited investors in exchange for aggregate gross proceeds of $1.27 million
in cash and we also issued warrants to purchase up to an aggregate of 20,320,000
shares of our common stock. An aggregate of 2,082,282,912 shares issuable upon
conversion of the principal and accrued and unpaid interest on the callable
secured convertible notes and an aggregate of 20,320,000 shares underlying the
warrants are offered for resale under this prospectus.
The callable secured convertible notes bear interest at an initial rate
of 6% per year. The initial conversion price of the notes is equal to the lesser
of (i) 40% of the average of the three lowest intraday trading prices of a share
of our common stock for the twenty trading days immediately preceding a
conversion date, and (ii) $.03. The conversion price also is subject to
customary anti-dilution adjustments in connection with mergers, acquisitions,
stock splits, dividends and the like.
The shares of common stock being offered under this prospectus include
shares of common stock issuable upon conversion of interest on the above
convertible notes that may accrue up to two years after their initial issuance.
The warrants are exercisable at a price per share equal to $0.0009
through March 8, 2011 and also contain standard cashless exercise provisions in
the event the resale of the shares of common stock issuable upon exercise of the
warrants is not registered under an effective registration statement. The
warrants contain customary representations, warranties and covenants.
The shares of common stock being offered under this prospectus include
shares of common stock issuable upon conversion of the callable secured
convertible notes and upon exercise of the related warrants without regard to
the exercise limitations described below.
The terms of the callable secured convertible notes and the warrants
prohibit conversion of the notes or exercise of the warrants to the extent that
conversion of the notes would result in the note investor, together with its
affiliates, beneficially owning in excess of 4.9% of our outstanding shares of
common stock, and to the extent that exercise of the warrants would result in
the note investor, together with its affiliates, beneficially owning in excess
of 4.9% of our outstanding shares of common stock. A note investor may waive the
4.9% limitation upon 60 days' prior written notice to us. Also, these
<page>45
limitations do not preclude a note investor from converting or exercising a
callable secured convertible note or warrant and selling shares underlying the
note or warrant in stages over time where each stage does not cause the investor
and its affiliates to beneficially own shares in excess of the limitation
amounts. Despite the limitations contained in the callable secured convertible
notes and warrants, the number of shares shown in the table as beneficially
owned by each note investor prior to this offering is in excess of 4.9% of the
shares of our common stock outstanding based on the date of the table. The
number of shares being offered by each note investor under this prospectus is in
excess of the amount of shares issuable to that investor without such investor's
waiver of the conversion and exercise limitations discussed above.
We have agreed to pay expenses, other than broker discounts and
commissions, if any, in connection with this prospectus. We have agreed with
some of the selling security holders to prepare and file all amendments and
supplements to the registration statement of which this prospectus is a part as
may be necessary under the rules and regulations of the Securities Act of 1933
to keep it effective until the earlier of:
o the date that all shares of common stock offered under this
prospectus may be resold by those holders in a public
transaction without volume limitations or other material
restrictions without registration under the Securities Act,
including without limitation, under Rule 144 under the
Securities Act; and
o the date that all shares of common stock offered by those
holders under this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
<page>46
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders listed in the table below.
<table>
Shares Beneficially Owned Shares Beneficially
Name and Address Title of Prior to the Offering Shares Owned After the Offering (3)
of Beneficial Owner (1) (2) Class Number Being Offered Number % of Class
- --------------------------- -------- ------------------------- ------------- ----------------------------
Robert A. Spigno Common 603,615,176(4) -- 603,615,176 3.33%
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 50.00%
Lawrence Muirhead Common 971,393 -- 971,393 *
Rodney W. Lighthipe Common 852,388 -- 852,388 *
Melissa McGough Common 354,138 -- 354,138 *
AJW Offshore, Ltd. Common 1,282,587,847(7) 1,282,587,847(7) 1,010,427,315(7) 4.90%
AJW Qualified Partners, LLC. Common 567,702,800(7) 567,702,800(7) 1,010,427,315(7) 4.90%
AJW Partners, LLC Common 231,286,303(7) 231,286,303(7) 1,010,427,315(7) 4.90%
New Millennium Capital
Partners II, LLC Common 21,025,962(7) 21,025,962(7) 649,060,008(7) 3.20%
All directors and executive
officers as a group
(4 persons) Common 605,793,095(8) -- 605,793,095 3.35%
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 50.00%
</table>
_______________
* Less than 1.00%
(1) The address of each director and executive officer named in this table
is c/o ConectiSys Corporation, 25115 Avenue Stanford, Suite 320,
Valencia, California 91355. Mr. Spigno and Mr. Muirhead are directors
and executive officers of ConectiSys. Ms. McGough is a director of
ConectiSys. Mr. Lighthipe is Treasurer and Secretary of ConectiSys.
(2) The address of each of AJW Partners, LLC, New Millennium Capital
Partners II, LLC and AJW Qualified Partners, LLC and AJW Offshore, Ltd.
is 1044 Northern Boulevard, Suite 302, Roslyn, New York 11576. AJW
Offshore, Ltd. was formerly known as AJW/New Millennium Offshore, Ltd.
and AJW Qualified Partners, LLC was formerly known as Pegasus Capital
Partners, LLC.
(3) Assumes all shares of class being offered are sold and is based on
17,507,935,396 shares outstanding plus the 2,102,602,912 shares offered
and assumed sold under this prospectus.
(4) Includes (i) 4,992,556 shares held directly, (ii) 5,000,000 shares
issuable upon conversion of Class B preferred stock, and (iii)
593,622,620 shares issuable in connection with payment of annual bonuses
for calendar years 2002 through 2006. Mr. Spigno holds an option to
purchase up to 500,000 shares of Class B preferred stock.
(5) Includes (i) 215,865 shares held directly, and (ii) 234,155 shares
underlying an option to purchase Class A Preferred Stock.
(6) Represents an option to purchase up to 500,000 shares of Class B
Preferred Stock.
(7) The number of shares set forth in the table for the selling security
holders represents an estimate of the number of shares of common stock
to be offered by the selling security holders. The actual number of
shares of common stock issuable upon conversion of the debentures and
notes and exercise of the related warrants is indeterminate, is subject
to adjustment and could be materially less or more than such estimated
number depending on factors which cannot be predicted by us at this time
including, among other factors, the future market price of the common
stock. The actual number of shares of common stock offered in this
<page>47
prospectus, and included in the registration statement of which this
prospectus is a part, includes such additional number of shares of
common stock as may be issued or issuable upon conversion of the
debentures and notes and exercise of the related warrants by reason of
any stock split, stock dividend or similar transaction involving the
common stock, in accordance with Rule 416 under the Securities Act of
1933. Under the terms of the notes, if the notes had actually been
converted on February 7, 2007, the conversion price would have been
approximately $.00008. The exercise price of the warrants is $.0009.
(8) Includes (i) 7,170,475 shares held directly, (ii) 5,000,000 shares
issuable upon conversion of Class B preferred stock, and (iii)
593,622,620 shares issuable in connection with payment of annual bonuses
to Mr. Spigno for calendar years 2002 through 2006. Mr. Spigno holds an
option to purchase up to 500,000 shares of Class B preferred stock.
<page>48
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of our common stock being offered under this prospectus on
any stock exchange, market or trading facility on which the shares are traded,
or in private transactions. These sales, which may include block transactions,
may be at fixed or negotiated prices. The selling security holders may use any
one or more of the following methods when disposing of shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of stock
that the seller does not own, or certificates for which are not
within his control, so as to be available for delivery at the
time when, under applicable rules, delivery must be made;
o transactions to cover short sales;
o distribution of the shares by any selling security holder to its
partners, members or stockholders;
o broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share;
o one or more underwritten public offerings on a firm commitment
or best efforts basis;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to
time.
The shares may also be sold under Rule 144 or Regulation S under the
Securities Act, if available, rather than under this prospectus. The selling
security holders have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling security holders may also engage in short sales against the
box, which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in securities of
ConectiSys or derivatives of ConectiSys securities and may sell or deliver
shares in connection with these trades. The selling security holders may pledge
their shares to their brokers under the margin provisions of customer
agreements. If a selling security holder defaults on a margin loan, the broker
may, from time to time, offer and sell the pledged shares.
<page>49
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any broker-
dealer acts as agent for the purchaser of shares, from the purchaser) in amounts
to be negotiated, which commissions as to a particular broker or dealer may be
in excess of customary commissions to the extent permitted by applicable law.
If sales of shares offered under this prospectus are made to broker-
dealers as principals, we would be required to file a post-effective amendment
to the registration statement of which this prospectus is a part. In the post-
effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to such
sales.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker- dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a post-
effective amendment to the registration statement of which this prospectus is a
part.
The selling security holders may sell all or any part of the shares
offered under this prospectus through an underwriter. To our knowledge, no
selling security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If a selling security holder informs us that it has entered into
such an agreement or agreements, any material details will be set forth in a
supplement to this prospectus or, if required, in a replacement prospectus
included in a post-effective amendment to the registration statement of which
this prospectus is a part.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act, and the rules and regulations
under that act, including Regulation M. These provisions may restrict activities
of, and limit the timing of purchases and sales of any of the shares by, the
selling security holders or any other person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of the secured
convertible debentures, notes or the warrants held by the selling security
holders or the issuance of shares of common stock to the holders of the secured
convertible debentures, notes or the warrants upon conversion or exercise. If a
selling security holder transfers its secured convertible debentures, notes or
warrants prior to conversion or exercise, the transferee of the secured
convertible debentures, notes or warrants may not sell the shares of common
stock issuable upon conversion of the secured convertible debentures or notes or
upon exercise of the warrants under this prospectus unless we amend or
supplement this prospectus to cover such sales.
In addition, if any of the shares of common stock offered for sale
pursuant to this prospectus are transferred other than pursuant to a sale under
this prospectus, then subsequent holders could not use this prospectus until a
post-effective amendment or prospectus supplement is filed, naming such holders.
<page>50
We offer no assurance as to whether any of the selling security holders will
sell all or any portion of the shares offered under this prospectus.
For the period a selling security holder holds the secured convertible
debentures, notes or the warrants, the selling security holder has the
opportunity to profit from a rise in the market price of our common stock
without assuming the risk of ownership of the shares of common stock issuable
upon conversion of the secured convertible debentures or notes or upon exercise
of the warrants. The terms on which we could obtain additional capital during
the period in which the secured convertible debentures, notes or the warrants
remain outstanding may be adversely affected. The holders of the secured
convertible debentures, notes and the warrants are most likely to voluntarily
convert their secured convertible debentures and notes or exercise their
warrants when the conversion or exercise price is less than the market price of
our common stock. However, we offer no assurances as to whether any of those
derivative securities will be converted or exercised.
We have agreed to pay all fees and expenses incident to the registration
of the shares being offered under this prospectus. However, each selling
security holder and purchaser is responsible for paying any discounts,
concessions and similar selling expenses they incur.
We and certain of the selling security holders have agreed to indemnify
one another against certain losses, claims, damages and liabilities arising in
connection with this prospectus, including liabilities under the Securities Act.
<page>51
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50 billion shares of common
stock, no par value per share, and 50 million shares of preferred stock, $1.00
par value per share. Of the 50 million authorized shares of preferred stock, one
million shares have been designated as Class A Preferred Stock, or Class A
Preferred, one million shares have been designated as Class B Preferred Stock,
or Class B Preferred, and the remaining 48 million shares are undesignated. As
of February 7, 2007, there were 17,507,935,396 shares of common stock
outstanding held by approximately 750 shareholders of record, 215,865 shares of
Class A Preferred outstanding held by one holder of record and no shares of
Class B Preferred outstanding.
The following is a summary description of our capital stock.
Common Stock
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available at times and in amounts as the
board of directors may from time to time determine, subordinate to any
preferences that may be granted to the holders of preferred stock. Holders of
common stock are entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be
redeemed or converted. Upon our liquidation, dissolution or winding up, the
assets legally available for distribution to our shareholders are divided among
the holders of the common stock in proportion to the number of shares of common
stock held by each of them, after payment of all of our debts and liabilities
and fulfillment of the rights of any outstanding class or series of preferred
stock that has priority to distributed assets. The rights of holders of common
stock are subordinate to those of holders of any series of preferred stock.
Preferred Stock
Preferred stock may be issued from time to time in one or more series,
and our board of directors, without action by the holders of common stock, may
fix or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without shareholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. The
issuance of shares of preferred stock could adversely affect the voting power of
the holders of common stock and could have the effect of making it more
difficult for a third party to acquire, or could discourage or delay a third
party from acquiring, a majority of our outstanding common stock.
Class A Preferred
Each share of Class A Preferred is entitled to 100 votes per share on
all matters presented to our shareholders for action. The Class A Preferred does
not have any liquidation preference, additional voting rights, conversion
rights, anti-dilution rights or any other preferential rights.
<page>52
Class B Preferred
Each share of Class B Preferred is convertible into 10 shares of our
common stock. The Class B Preferred does not have any liquidation preference,
voting rights, other conversion rights, anti-dilution rights or any other
preferential rights.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Signature Stock
Transfer, Inc. Its telephone number is (972) 788-4193.
LEGAL MATTERS
The validity of the shares of common stock offered under this prospectus
has been passed upon by Rutan & Tucker, LLP, Costa Mesa, California.
EXPERTS
The consolidated financial statements of ConectiSys as of and for the
years ended September 30, 2006 and 2005 included in this prospectus and in the
registration statement of which this prospectus is a part have been audited by
Farber Hass Hurley & McEwen, LLP, independent certified public accountants, to
the extent and for the periods set forth in their report, appearing elsewhere in
this prospectus and are incorporated in this prospectus in reliance upon the
report given upon the authority of Farber Hass Hurley & McEwen, LLP as experts
in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB 2 under the Securities Act, and the rules and regulations
promulgated under the Securities Act, with respect to the common stock offered
under this prospectus. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information contained in the
registration statement and the exhibits and schedules to the registration
statement. While material elements of the contracts and documents referenced in
this prospectus are contained in this prospectus, statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the full
text of the contract or other document which is filed as an exhibit to the
registration statement.
For further information with respect to us and the common stock offered
under this prospectus, reference is made to the registration statement and its
exhibits and schedules. The registration statement, including its exhibits and
schedules, may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such documents may be obtained from the
Securities and Exchange Commission upon the payment of the charges prescribed by
the Securities and Exchange Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's web site address is
http://www.sec.gov. Our web site address is http://www.conectisys.com.
<page>53
All trademarks or trade names referred to in this prospectus are the
property of their respective owners.
<page>54
CONECTISYS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm.....................F-1
Consolidated Balance Sheet as of September 30, 2006.........................F-2
Consolidated Statements of Operations for the Years Ended
September 30, 2006 and 2005 and the Cumulative Period from
December 1, 1990 (Inception) through September 30, 2006.....................F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the Cumulative Period from December 1, 1990 (Inception) through September
30, 2006....................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2006 and 2005 and the Cumulative Period from
December 1, 1990 (Inception) through September 30, 2006.....................F-16
Notes to Consolidated Financial Statements..................................F-19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Conectisys Corporation and Subsidiaries
Valencia, California
We have audited the accompanying consolidated balance sheet of Conectisys
Corporation and Subsidiaries (a development stage company) (the "Company") as
of September 30, 2006, and the related consolidated statements of operations,
changes in shareholders' equity (deficit), and cash flows for the years ended
September 30, 2006 and 2005, and the cumulative period from December 1, 1990
(inception of development stage) through September 30, 2006, except that we did
not audit these financial statements for the period December 1, 1990 (inception
of development stage) through November 30, 1997; these financial statements
were audited by other auditors, whose reports dated March 6, 1998 (for the
period December 1, 1994 through November 30, 1997) and January 9, 1995 (for the
period December 1, 1990 (inception of development stage) through November 30,
1994), respectively, expressed a going concern uncertainty. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Conectisys Corporation and Subsidiaries as of September 30, 2006, and the
results of their operations and their cash flows for the years ended September
30, 2006 and 2005, and the cumulative period from December 1, 1990 (inception
of development stage) through September 30, 2006, 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 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has a deficiency in working capital at September 30,
2006. These matters raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also discussed
in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ FARBER HASS HURLEY & MCEWEN, LLP
Granada Hills, California
December 20, 2006
<page>F-1
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2006
Assets
Current assets
Cash and cash equivalents $ 19,936
Short-term investments 430,733
Prepaid expenses 160,933
-----------------
Total current assets 611,602
Property and equipment, net of accumulated
depreciation of $354,801 103,767
Other assets
Security Deposit 4,698
License and technology, net of accumulated
amortization of $421,478 0
Loan fees, net of accumulated amortization of $511,315 28,240
-----------------
Total assets $ 748,307
=================
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-2
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET
September 30, 2006
Liabilities and shareholders' (deficit)
Current liabilities
Accounts payable $ 278,782
Accrued compensation 1,878,696
Due to officers 449
Accrued interest payable 345,818
Other current liabilities 27,803
Current portion of convertible debentures 2,264,085
-----------------
Total current liabilities 4,795,633
Convertible debentures, net of current portion 2,053,636
-----------------
Total liabilities 6,849,269
Commitments and contingencies 0
Shareholders' (deficit)
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized, 215,865 shares
issued and outstanding 215,865
Convertible preferred stock - Class B, $1.00
par value; 1,000,000 shares authorized,
-0- shares issued and outstanding 0
Common stock, no par value - 50,000,000,000 shares
authorized, 14,384,794,783 shares issued
and outstanding 27,930,753
Additional paid-in capital:
Convertible preferred stock - Class B $1.00 par
value, 1,000,000 stock options exercisable 100,000
Common stock, no par value 32,620,000 stock
options and warrants 1,371,265
Accumulated (deficit) during development stage (35,718,845)
-----------------
Total shareholders' (deficit) (6,100,962)
-----------------
Total liabilities and shareholders' (deficit) $ 748,307
=================
The accompanying notes are an integral part of these consolidated financial
statements.
<page>F-3
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2006
<table>
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2006 2005 2006
Revenues $ 0 $ 0 $ 517,460
Cost of prototypes and samples sold 211,120 245,427 1,342,489
----------------- ----------------- -----------------
Gross loss (211,120) (245,427) (825,029)
General and administrative expenses 1,329,175 1,676,520 24,085,065
Bad debt expense 0 0 1,680,522
Write-off of deposits
and intangible assets 17,000 0 1,316,861
----------------- ----------------- -----------------
Loss from operations (1,557,295) (1,921,947) (27,907,477)
Other income (expenses)
Forgiveness of debt 0 504,462 504,462
Settled damages 0 0 (125,000)
Other income 0 0 12,072
Interest income 4,468 0 107,392
Interest expense (1,499,470) (1,715,198) (8,372,794)
Minority interest 0 0 62,500
----------------- ----------------- -----------------
Net loss $ (3,052,297) $ (3,132,683) $ (35,718,845)
================= ================= =================
Weighted average shares outstanding 11,530,291,162 3,713,202,999
================= =================
Net loss per share - basic and diluted $ (0.00) $ (0.00)
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For the
Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
<table>
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ----------- ---------- ---------- ----------- ----------- -----------
Balance, Dec. 1, 1990
(re-entry
development stage) 0 $ 0 10,609 $ 1,042,140 $ 0 $ 0 $(1,042,140)$ 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 0 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 0 0 515
Services, Mar. 1993 0 0 2,000 500 0 0 0 500
Services, Mar. 1993 0 0 1,200 600 0 0 0 600
Net loss for the year 0 0 0 0 0 0 (5,459) (5,459)
-------- ---------- ------------- -------- --------- ----------- ---------- ---------
Balance, September 30, 1993 0 0 16,809 1,044,755 0 0 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 0 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 0 0 23,655
Services, Sep. 199 0 0 8,700 11,614 0 0 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 0 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 0 0 33,000
Net loss for the year 0 0 0 0 0 0 (32,544) (32,544)
---------- ---------- ------------- ---------- -------- ---------- ------------ ---------
Balance, November 30, 1994 16,345 $ 16,345 50,000 $ 1,131,024 $ 0 $ 0 $(1,080,143) $ 67,226
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-5
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Balance, Dec. 1, 1990
(re-entry
development stage) 0 $ 0 10,609 $ 1,042,140 $ 0 $ 0 $ (1,042,140)$ 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 0 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 0 0 515
Services, Mar. 1993 0 0 2,000 500 0 0 0 500
Services, Mar. 1993 0 0 1,200 600 0 0 0 600
Net loss for the year 0 0 0 0 0 0 (5,459) (5,459)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, September 30, 1993 0 0 16,809 1,044,755 0 0 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 0 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 0 0 23,655
Services, Sep. 1994 0 0 8,700 11,614 0 0 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 0 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 0 0 33,000
Net loss for the year 0 0 0 0 0 0 (32,544) (32,544)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, November 30, 1994 16,345 $ 16,345 50,000 $ 1,131,024 $ 0 $ 0 $ (1,080,143) $ 67,226
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, Feb. 1995 0 0 1,160 232,000 0 0 0 232,000
Debt repayment, Feb. 1995 0 0 2,040 408,000 0 0 0 408,000
Debt repayment, Feb. 1995 0 0 4,778 477,810 0 0 0 477,810
Acquisition of assets, CIPI
Feb. 1995 0 0 28,750 1,950,000 0 0 0 1,950,000
Acquisition of assets,
Apr. 1995 0 0 15,000 0 0 0 0 0
Cash and services, Apr.
and May 1995 0 0 16,000 800,000 0 0 0 800,000
Cash, Jun. 1995 0 0 500 30,000 0 0 0 30,000
Acquisition of assets and
services, Sep. 1995 0 0 4,000 200,000 0 0 0 200,000
Cash, Sep. 1995 0 0 41 3,000 0 0 0 3,000
Acquisition of assets,
Sep. 1995 0 0 35,000 1,750,000 0 0 0 1,750,000
Return of assets, CIPI
Sep. 1995 0 0 (27,700) (1,950,000) 0 0 0 (1,950,000)
Net loss for the year 0 0 0 0 0 0 (2,293,867) (2,293,867)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, November 30, 1995 16,345 $ 16,345 $ 129,569 $ 5,031,834 $ 0 $ 0 $ (3,374,010) $1,674,169
Shares issued in exchange for:
Cash, Feb. 1996 0 0 1,389 152,779 0 0 0 152,779
Debt repayment, Feb. 1996 0 0 10,000 612,000 0 0 0 612,000
Services, Feb. 1996 0 0 3,160 205,892 0 0 0 205,892
Cash, Mar. 1996 0 0 179 25,000 0 0 0 25,000
Shares returned and
canceled Mar. 1996 0 0 (15,000) 0 0 0 0 0
Services, Apr. 1996 0 0 13 2,069 0 0 0 2,069
Services, Sep. 1996 4,155 A 4,155 586 36,317 0 0 0 40,472
Services, Oct. 1996 0 0 6,540 327,000 0 0 0 327,000
Debt repayment, Nov. 1996 0 0 2,350 64,330 0 0 0 64,330
Net loss for the year 0 0 0 0 0 0 (2,238,933) (2,238,933)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, November 30, 1996 20,500 $ 20,500 138,786 $ 6,457,221 $ 0 $ 0 $ (5,612,943) $ 864,778
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Services, Mar. 1997 0 0 228 6,879 0 0 0 6,879
Services, Apr. 1997 0 0 800 13,120 0 0 0 13,120
Services, Jul. 1997 0 0 1,500 16,200 0 0 0 16,200
Cash, Jul. 1997 0 0 15,000 300,000 0 0 0 300,000
Services, Aug. 1997 0 0 5,958 56,000 0 0 0 56,000
Adjustment for partial
shares due to reverse
stock split (1:20) 0 0 113 0 0 0 0 0
Services, Oct. 1997 0 0 1,469,666 587,865 0 0 0 587,865
Debt repayment, Oct 1997 0 0 1,540,267 620,507 0 0 0 620,507
Cash, Oct. 1997 0 0 1,500,000 281,250 0 0 0 281,250
Services, Nov. 1997 0 0 4,950 10,538 0 0 0 10,538
Net loss for the year 0 0 0 0 0 0 (2,739,268) (2,739,268)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, November 30, 1997 20,500 $ 20,500 $ 4,677,268 $ 8,349,580 $ $ $ (8,352,211) $ 17,869
Shares issued in exchange for:
Services, Dec. 1997
through Nov. 1998 0 0 2,551,610 2,338,264 0 0 0 2,338,264
Debt repayment, Apr. 1998
through Sep. 1998 0 0 250,000 129,960 0 0 0 129,960
Cash, Jan. 1998 through
Jul. 1998 0 0 4,833,334 1,139,218 0 0 0 1,139,218
Acquisition of assets,
Jul. 1998 0 0 300,000 421,478 0 0 0 421,478
Acquisition of 20% minority
interest in subsidiary,
Jul. 1998 0 0 50,000 59,247 0 0 0 59,247
Services, Nov. 1998 60,000 A 60,000 0 0 0 0 0 60,000
Net loss for the year 0 0 0 0 0 0 (4,928,682) (4,928,682)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, November 30, 1998 80,500 $ 80,500 12,662,212 $12,437,747 $ $ $(13,280,893) $ (762,646)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Shares returned and canceled
Dec. 1998 0 0 (1,350,000) (814,536) (814,536)
Services, Dec. 1998
through Sep. 1999 0 0 560,029 349,454 150,000 0 499,454
Cash, Dec. 1998
through Sep. 1999 0 0 1,155,800 129,537 129,537
Debt repayment, Sep. 1999 39,520 A 39,520 960,321 197,500 100,000 0 337,020
Net loss for the year 0 0 0 0 0 0 (1,323,831) (1,323,831)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Balance, September 30, 1999 120,020 $ 120,020 13,988,362 $12,299,702 $ 250,000 $ 0 $(14,604,724) $(1,935,002)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 1999 through (17,500) (12,000) 0 0 0 (12,000)
September 2000, valued from
$.025 to $0.80 per share 0 0 2,405,469 990,949 0 0 0 990,949
Retainers, debt and accrued
liabilities, October 1999
through September 2000 valued
from $0.25 to $1.57 share 0 0 2,799,579 1,171,638 0 0 0 1,171,638
Cash, October 1999 through
September 2000, with subscription
prices ranging from $0.25 to
$0.66 per share 0 0 2,295,482 839,425 0 (15,450) 0 823,975
Issuance of $63,500 consultant
stock options, March, 2000
at an exercise price of $2.00
per share 0 0 0 0 214,130 0 0 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March 2000
to $0.38 and approx.$0.39
per share 0 0 0 0 1,113,610 0 0 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May 2000, with
common stock strike prices
ranging from $0.15 to approx.
$0.39 per share, in exchange for
officer debt 20,000 20,000 2,056,346 897,707 (407,735) 0 0 509,972
Issuance of $500,000 consultant
stock options, September 2000
with floating exercise prices
set at 15% below current mar 0 0 0 0 65,000 0 0 65,000
Net loss for the year 0 0 0 0 0 0 (3,812,140) (3,812,140)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Balance, September 30, 2000 140,020 $ 140,020 23,527,738 $16,187,421 $1,235,005 $ (15,450) $(18,416,864) $ (869,868)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 2000 through
September 2001 valued from
$0.11 to $0.40 per share 0 0 3,471,007 572,790 0 0 0 73,790
Retainers, debt and accrued
liabilities October 2000
through September 2001, valued
from $0.11 to $0.43 per share 0 0 3,688,989 487,121 0 0 0 487,121
Cash, October 2000 through
March 2001 with subscription
prices ranging from $0.075 to
$0.083 per share 0 0 1,045,500 78,787 0 0 0 78,787
Collection of stock subscription
receivable, October 2000
on 61,800 shares 0 0 0 0 0 15,450 15,450
Exercise of 400,000 common
stock options, January, 2001
at a strike price of $0.085 per
share, in exchange for debt 0 0 400,000 86,000 (52,000) 0 0 34,000
Issuance of 1,000,000 common
stock warrants, April 2001
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt 0 0 0 0 77,228 0 0 77,228
Issuance of 2,000,000 consultant
stock options, September 2001
at a strike price of $0.13
per share 0 0 0 0 115,000 0 0 115,000
Beneficial conversion options
April 2001 through September
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible debt 0 0 0 0 155,027 0 0 155,027
Net loss for the year 0 0 0 0 0 0 (2,154,567) (2,154,567)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, September 30, 2001 140,020 $ 140,020 32,133,234 $17,412,119 $1,530,260 $ 0 $(20,571,431) $(1,489,032)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-10
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 2001 through
September 2002 valued from
$0.02 to $0.25 per share 0 0 2,180,000 179,916 0 0 0 179,916
Debt and accrued liabilities
October 2001 through September
2002 with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per share 60,000 60,000 10,948,077 428,563 0 0 0 488,563
Cash, October 2001 through2
September 2002 with prices
ranging from $0.01 to $0.083
per share 0 0 5,833,334 200,000 0 0 0 200,000
Exercise of 550,000 common stock
option by a consultant at a
strike price of $0.13 per share
in exchange for debt 0 0 550,000 103,125 (31,625) 0 0 71,500
Issuance of 3,750,000 warrants
April 2002 through June 2002
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt 0 0 0 0 100,087 0 0 100,087
Beneficial conversion option
April 2002 through June 2002
pertaining to $750,000 principal
valued of 12% convertible debt 0 0 0 0 649,913 0 0 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount 0 0 12,667,178 111,515 (80,702) 0 0 30,813
Net loss for the year 0 0 0 0 0 0 (2,346,732) (2,346,732)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Balance, September 30, 2002 200,020 $ 200,020 64,311,823 $18,435,238 $2,167,933 $ 0 $(22,918,163) $(2,114,972)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-11
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 2002 through
September 2003 valued from
$0.0012 to $0.01 per share 0 0 31,500,000 134,000 0 0 0 134,000
Debt and accrued liabilities
October 2002 through September
2003 with common shares
valued from $0.001 to $0.0512
per share 0 0 162,134,748 704,774 (155,027) 0 0 549,747
Cash, October 2002 through
September 2003 with prices
ranging from $0.001 to $0.10
per share 0 0 128,500,000 180,000 0 0 0 180,000
Issuance of 2,500,000 warrants
November 2002 through
May 2003 at an exercise
price of $0.005 per share, in
conjunction with $500,000
principal value of 12%
convertible debt 0 0 0 0 9,816 0 0 9,816
Beneficial conversion option
October 2002 through May 2003
pertaining to $500,000 principal
valued of 12% convertible debt 0 0 0 0 490,184 0 0 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,335 accrued
interest, net of $52,340
convertible debt discount 0 0 103,778,301 353,525 (177,845) 0 0 175,680
Net loss for the year 0 0 0 0 0 0 (2,386,875) (2,386,875)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Balance, September 30, 2003 200,020 $ 200,020 490,224,872 $19,807,537 $2,335,061 $ 0 $(25,305,038) $(2,962,420)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 2003 through
December 2003 valued from
$0.002 to $0.003 per share 15,845 15,845 57,300,000 78,400 0 0 0 94,245
Issuance of 13,750,000 warrants
November 2003 through
June 2004 at an exercise
price of $0.005 per share, in
conjunction with $1,375,000
principle value of 12%
convertible debt 0 0 0 0 9,447 0 0 9,447
Debt and accrued liabilities
November 2003 to September
2004 with common shares
valued from $0.001 to $0.0512
per share 0 0 156,625,000 168,575 0 0 0 168,575
Cash, October 2003 through
September 2004 with prices
ranging from $0.001 to $0.10 0 0 74,670,000 70,000 0 0 0 70,000
per share
Re-characterization of beneficial
conversion option as derivative
conversion option , October 2003
pertaining to $881,550 of
convertible debt at
September 30, 2003 0 0 0 0 (881,550) 0 0 (881,550)
Conversion of $184,782 principal
value of 12% convertible debt
$277,173 of derivative
conversion option
along with $46,611 accrued
interest, net of $28,571
convertible debt discount 0 0 352,352,250 565,725 0 0 565,724
Net loss for the year 0 0 0 0 0 0 (4,228,827) (4,228,827)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, September 30, 2004 215,865 $ 215,865 1,131,172,122 $20,690,236 $1,462,958 $ 0 $(29,533,865) $(7,164,805)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
---------- ---------- ------------- ----------- ----------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, January 2005 with a price
of $0.00125 per share 0 0 4,000,000 5,000 0 0 0 5,000
Debt, accrued liabilities
and prepaid retainer
October 2004 to September
2005 with common shares
valued from approximately
$0.0004 to $0.0010 per share 0 0 591,300,000 473,362 0 0 0 473,362
Services, December 2004 through
August 2005 valued from
$0.0006 to $0.0010 per share 0 0 52,000,000 46,200 0 0 0 46,200
Issuance of 2,800,000 warrants
November 2004 through
September 2005 at an exercise
price of $0.0039 per share, in
conjunction with $1,400,000
principle value of 12%
convertible debt 0 0 0 0 3,756 0 0 3,756
Conversion of $2,529,378 principal
value of convertible debt,
$3,794,067 of derivative
conversion option
along with $104,410 accrued
interest, net of $973,565
convertible debt discount 0 0 5,610,392,876 5,454,290 0 0 5,454,290
Net loss for the year 0 0 0 0 0 0 (3,132,683) (3,132,683)
---------- ---------- ------------- ----------- ----------- ---------- ------------ ----------
Balance, September 30, 2005 215,865 $ 215,865 7,388,864,998 $ 26,669,089 $ 1,466,714 $ 0 $ (32,666,548) $(4,314,880)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through September 30, 2006
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ----------- ----------- ---------- --------- ----------- ------------
Shares issued in exchange for:
Cash, April through July 2006
with prices ranging from
$0.00015 to $0.00050 per share 0 0 533,333,333 125,000 0 0 0 125,000
Services, March 2006 valued
at approximately $0.00071 per share 0 0 4,368,872 3,100 0 0 0 3,100
Issuance of 20,320,000 warrants
September 2006 at an exercise
price of $0.0009 per share, in
conjunction with $1,270,000
principal value of 6%
convertible debt 0 0 0 0 4,551 0 0 4,551
Conversion of $547,376 principal
value of 8% and 12% convertible debt,
$821,065 of derivative conversion
option, along with $8,300 accrued
interest, net of $243,177
convertible debt discount 0 0 6,458,227,580 1,133,564 0 0 0 1,133,564
Net loss for the period 0 0 0 0 0 0 (3,052,297) (3,052,297)
---------- ---------- ------------- ----------- ---------- ------ ----------- ------------
Balance, September 30, 2006 215,865 $ 215,865 14,384,794,783 $27,930,753 $1,471,265 $ 0 $(35,718,845) $(6,100,962)
========== ========= ============== =========== ========== ====== ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2006
<table>
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2006 2005 2006
Operating activities
Net loss $ (3,052,297)$ (3,132,683)$ (34,641,103)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 15,472 17,770 1,744,402
Stock issued for services 3,100 46,200 7,648,473
Stock issued for interest 0 0 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Write-off of deposits and
Intangible assets 17,000 0 1,316,861
Amortization of loan fees
and note discounts 752,710 835,863 3,799,850
Mark-to-market of derivative
conversion option 639,551 703,756 2,916,012
Forgiveness of debt 0 (504,462) (504,462)
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses and deposits (28,447) 105,185 82,117
Interest receivable 0 0 (95,700)
Increase (decrease) in liabilities
Accounts payable (37,435) 350,834 1,346,908
Accrued compensation 195,505 274,946 3,050,704
Due to officers 64 (75,656) 631,210
Other current liabilities 130,994 105,737 992,759
---------------- ---------------- ----------------
Total adjustments 1,688,514 1,860,173 24,795,425
---------------- ---------------- ----------------
Net cash used in operating activities (1,363,783) (1,272,510) (9,845,678)
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2006
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2006 2005 2006
Investing activities
Collection of notes receivable $ 0 $ 0 $ 0
Increase in notes receivable 0 0 (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of bank cds (430,733) 0 (430,733)
Purchase of equipment (79,981) (33,671) (325,386)
---------------- ---------------- ----------------
Net cash used in investing activities (510,714) (33,671) (2,172,676)
Financing activities
Common stock issued for cash 125,000 5,000 3,617,172
Stock warrants 4,551 3,756 204,885
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees (20,000) (42,368) (579,555)
Proceeds from debts
Related party 0 0 206,544
Other 1,266,117 1,411,014 8,913,392
Payments on debt
Related party 0 0 (53,172)
Other 0 (102,500) (604,536)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
---------------- ---------------- ----------------
Net cash provided by financing activities 1,375,668 1,274,902 12,038,290
Net increase (decrease)
in cash and cash equivalents (498,829) (31,279) 19,936
Cash and cash equivalents
at beginning of period 518,765 550,044 0
---------------- ---------------- ----------------
Cash and cash equivalents
at end of period $ 19,936 $ 518,765 $ 19,936
================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2006 and 2005
And the Cumulative Period
From December 31, 1990 (Inception) Through September 30, 2006
Dec. 1, 1990
(Inception)
Year Ended Year Ended Through
September 30, September 30, September 30,
2006 2005 2006
Cash paid during the year for
Interest $ 2,197 $ 81,123 $ 699,490
Taxes $ 0 $ 1,600 $ 16,050
Non-cash investing and financing activities
Common stock issued for
Note receivable $ 0 $ 0 $ 281,250
Prepaids $ 0 $ 82,402 $ 264,748
PP&E $ 0 $ 0 $ 130,931
Deposit $ 0 $ 0 $ 0
License & technology $ 0 $ 0 $ 2,191,478
Minority interest $ 0 $ 0 $ 59,247
Conversion of debt $ 1,125,264 $ 5,587,240 $13,013,471
Service & interest $ 8,300 $ 258,010 $ 5,215,502
Preferred stock issued for
Services $ 0 $ 0 $ 75,845
Repayment of debt $ 0 $ 0 $ 119,520
Preferred stock options issued for
Repayment of debt $ 0 $ 0 $ 100,000
Re-characterization of beneficial
conversion option as debt $ 0 $ 0 $ 881,550
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company") was
incorporated under the laws of Colorado on February 3, 1986, to analyze and
invest in business opportunities as they may occur. The Company is a
development-stage entity developing automatic meter reading technologies and
products for remote reading of electronic energy meters located in residential
structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the State
of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc., was
formed as a wholly-owned subsidiary of the Company, which, as yet, has no net
assets and has not commenced operations.
Basis of presentation
The accompanying consolidated financial statements include the accounts and
transactions of Conectisys Corporation, its wholly-owned subsidiaries
TechniLink, Inc., eEnergyServices.com, Inc., and United Telemetry Company,
Inc., and its 80% owned subsidiary PrimeLink, Inc. All material intercompany
transactions and balances have been eliminated in the accompanying
consolidated financial statements. Certain prior period balances have been
reclassified to conform to the current year's presentation.
The Company returned to the development stage in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 7 on December 1, 1990 and during the
fiscal year ended November 30, 1995.
The Company has completed two mergers and is in the process of developing its
technology and product lines.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with 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 disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that the Company disclose estimated fair values for its financial instruments.
The following summary presents a description of the methodologies and
assumptions used to determine such amounts.
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument;
they are subjective in nature and involve uncertainties, matters of judgment
and, therefore, cannot be determined with precision. These estimates do not
reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular instrument. Changes in
assumptions could significantly affect the estimates.
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
Since the fair value is estimated at September 30, 2006, the amounts that will
actually be realized or paid at settlement of the instruments could be
significantly different. The carrying amount of cash and cash equivalents and
short-term investments is assumed to be the fair value because of the liquidity
of these instruments. Accounts payable, accrued compensation, due to/from
officer, accrued interest, other current liabilities, and notes payable
approximate fair value because of the short maturity of these instruments.
Also, market rates of interest apply on all officer advances and short-term
promissory notes. Long-term debt is recorded at face value because the
principal amount is convertible into common stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from
November 30 to September 30.
Research and development costs
The Company has been engaged in researching, engineering, and developing its H-
Net(TM) technologies since August 1995, and did not generate any revenue during
the past fiscal year. Such expenses are identified as "cost of prototypes and
samples sold" in the statements of operations.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid
debt instruments with original maturities of three months or less.
Substantially all funds currently on deposit are with one financial institution.
Short-term investments
Short-term investments consist of available-for-sale debt securities that are
carried at fair value. Unrealized gains and losses on short-term investments
net of tax, are included in shareholders' equity (deficit). Available-for-sale
debt securities are classified as current assets based on the Company's intent
and ability to use any and all of these securities as necessary to satisfy the
significant short-term liquidity requirements of the business.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on property
and equipment using the straight-line method over the expected useful lives of
the assets, which are generally three years for computer software, five years
for vehicles and office equipment, six year depreciation (amortization) life for
the leasehold improvements and seven years for furniture and fixtures.
Impairment of long-lived and intangible assets
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
requires that the Company periodically review the carrying amounts of its
property and equipment and its finite-lived intangible assets to determine
whether current events or circumstances indicate that such carrying amounts may
not be recoverable. During the year ended September 30, 2006, the Company
determined that its deposits and other costs related to its operation of an on-
line video game company were impaired, and a write-down of $17,000 was recorded.
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued)
Accounting for stock-based compensation
The compensation for consultants and employees with the Company's capital stock
is recorded at estimated market value. The volatile nature of the price of the
Company's common stock causes wide disparities in certain valuations.
SFAS No. 123, "Accounting for Stock-Based Compensation," established a fair
value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from non-employees in
exchange for equity instruments. The Company adopted this accounting standard
on January 1, 1996. SFAS No. 123 also encouraged, but does not require,
companies to record compensation cost for stock-based employee compensation.
The Company adopted the provisions of SFAS No. 123(Revised 2004), "Share-Based
Payment" ("SFAS 123R"), on January 1, 2006. Accordingly, compensation costs for
all share-based awards to employees are measured based on the grant date fair
value of those awards and recognized over the period during which the employee
is required to perform services in exchange for the award (generally over the
vesting period of the award). The Company has no awards with market or
performance conditions. Excess tax benefits as defined by SFAS 123R (when
applicable) will be recognized as an addition to additional paid-in capital.
Effective January 1, 2006 and for all periods subsequent to that date, SFAS 123R
supersedes the Company's previous accounting under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 107 ("SAB 107") relating to SFAS 123R. The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions of SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for the pro forma disclosure purposes under FASB
Statement No. 123. In accordance with the modified prospective transition
method, the Company's consolidated financial statements for prior periods were
not restated to reflect, and do not include, the effect of SFAS 123R.
The value of the stock-based award is determined using a pricing model whereby
compensation cost is the excess of the fair value of the stock as determined by
the model at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. Shares of the Company's common stock
issued in exchange for goods or services are valued at the cost of the goods or
services received or at the market value of the shares issued, depending on the
ability to estimate the value of the goods or services received.
Net loss per common share - basic and diluted
Net loss per common share - diluted is based on the weighted average number of
common and common equivalent shares outstanding for the periods presented.
Common equivalent shares representing the common shares that would be issued on
exercise of convertible securities and outstanding stock options and warrants
reduced by the number of shares which could be purchased from the related
exercise proceeds are not included since their effect would be anti- dilutive.
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of September 30, 2006, the Company had 14,384,794,783 shares of common stock
outstanding. If all of the Company's unexpired stock warrants and options
(including contingent issuances) were exercised, and all the principal value and
accrued interest on its outstanding convertible debentures were converted, the
Company's incremental common shares (not included in the denominator of diluted
earnings (loss) per share because of their anti-dilutive nature) would be as
follows:
Class B preferred stock options 10,000,000
Convertible note holder - common stock warrants 32,620,000
--------------
Subtotal 42,620,000
Accrued officer compensation ($440,000),
convertible into common stock 358,758,842
Convertible note holder principal value
($2,338,336), accrued interest ($345,818)
assumed converted into common stock at
$0.00012 per share 22,367,950,000
--------------
Total potential common stock equivalents 22,769,328,842
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for goods
or services are valued at the cost of the goods or services received or at the
market value of the shares issued, depending on the ability to estimate the
value of the goods or services received.
Income taxes
The Company files a consolidated federal income tax return. The Company has
adopted SFAS No. 109, which requires the Company to recognize deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial statements or tax
returns. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets using the enacted rates in effect in the years in which the
differences are expected to reverse. The Company has recognized a valuation
allowance covering 100% of the net deferred tax assets (primarily tax benefits
from net operating loss carryforwards), because it is more likely than not that
the tax benefits attributable to the deferred tax assets will not be realized in
the future.
Advertising Costs
The Company expenses advertising costs in the year incurred. Such costs amounted
to $8,716 and $16,824 for the years ended September 30, 2006 and 2005
respectively.
Recently issued accounting pronouncements
The Financial Accounting Standards Board, or FASB, has established new
accounting pronouncements. The Company does not expect the adoption of these
pronouncements to have a material impact on its financial position, results of
operations, or cash flows.
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 2006, the FASB released FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109 ("FIN
48"). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. A company must determine whether it is
"more-likely-than-not" that a tax position meets the more-likely-than-not
recognition threshold, the position is measured to determine the amount of
benefit to recognize in the financial statements. This interpretation is
effective for fiscal years beginning after December 15, 2006. Earlier
application of the provisions of this interpretation is encouraged if the
enterprise has not yet issued financial statements, including interim financial
statements, in the period this interpretation is adopted.
In March 2006, the FASB issued SFAS 156, "Accounting for Servicing of Financial
Assets," which provides an approach to simplify efforts to obtain hedge-like
(offset)accounting. This statement amends SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. The statement (1) requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain
situations; (2) requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable; (3)
permits an entity to choose either the amortization method or the fair value
method for subsequent measurement for each class of separately recognized
servicing assets or servicing liabilities; (4) permits at initial adoption a
one-time reclassification of available-for-sale securities to trading securities
by an entity with recognized servicing rights, provided the securities
reclassified offset the entity's exposure to changes in the fair value of the
servicing assets or liabilities: and (5) requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the balance sheet and additional disclosures for all separately recognized
servicing assets and liabilities, SFAS No. 156 is effective for all separately
recognized servicing assets and liabilities as of the beginning of an entity's
fiscal year that begins after September 15, 2006, with earlier adoption
permitted in certain circumstances. The statement also describes the manner in
which it should be initially applied.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments," which amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
155 amends SFAS No. 140 to allow qualifying special-purpose entities to hold a
passive derivative financial instrument. This statement shall be effective for
all financial instruments acquired, issued, or subject to a remeasurement (new
basis) event occurring after the beginning of an entity's first fiscal year that
begins after September 15, 2006.
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 2. GOING CONCERN UNCERTAINTY
As of September 30, 2006, the Company had a deficiency in working capital of
approximately $4,200,000 and had incurred cumulative net losses since inception
of approximately $36,000,000, which raise substantial doubt about the Company's
ability to continue as a going concern.
Management's plans for correcting these deficiencies include the future sales
and licensing of the Company's products and technologies, the raising of capital
through the issuance of common stock and from continued officer advances, which
are expected to help provide the Company with the liquidity necessary to meet
operating expenses. An investor group had previously advanced the Company an
aggregate amount of $4,650,000 through eighteen similar funding tranches
occurring in April 2002 through September 2005. During the year ended September
30, 2006, the same investor group advanced the Company an additional $1,270,000.
The Company received $370,000 in March 2006, $100,000 in April 2006, $100,000 in
May 2006, $100,000 in June 2006 and $600,000 in July 2006, including certain
fees payable, in connection with this additional financing. Over the longer
term, the Company plans to achieve profitability through its operations from the
sale and licensing of its H-Net(TM) automatic meter-reading system. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of the recorded asset amounts
or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue in existence.
NOTE 3. RELATED PARTY TRANSACTIONS
The officers of the Company have advanced funds to the Company. These advances
have generally been in the form of revolving short-term promissory notes at an
annual interest rate of 18% (see Note 8 below).
Effective October 1, 2006, the Company entered a lease for a residence located
in Valencia, California. The lease commitment is through May 31, 2007. The
aggregate lease commitment is $13,952. The space is being utilized by a
corporate officer and occasionally by other consultants.
NOTE 4. PREPAID EXPENSES AND DEPOSITS
The Company has accrued a prepaid expense of $80,000 as a staying bonus for its
Chief Executive Officer as per his employment agreement (see Note 13). The
staying bonus is being amortized over the calendar year 2006. For the calendar
year ended December 31, 2006, $60,000 of this cost had been amortized as officer
salaries through September 2006, resulting in an unamortized balance at
September 30, 2006 of $20,000.
Also included in prepaid expenses at September 30, 2006 was $20,000 maintained
in an escrow account designated for key man life insurance, retainers for a
consultant and law firm amounting to $84,902 and $30,056, respectively, and
$5,975 in prepaid health insurance.
As of September 30, 2006, the balance in prepaid expenses totaled $160,933.
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2006 consisted of the following:
Office equipment $ 347,794
Furniture and fixtures 55,336
Vehicles 35,362
Leasehold improvements 20,076
-----------
Total cost 458,568
Accumulated depreciation (354,801)
-----------
Net book value $ 103,767
===========
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at September 30, 2006 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
===========
NOTE 7. LOAN FEES
As of September 30, 2004, aggregate loan fees amounted to $477,187, and
accumulated amortization of these loan fees was $332,482, resulting in an
unamortized loan fee balance of $144,705 at that date.
During the year ended September 2005, the Company received an aggregate of
$1,400,000 from the above accredited investor group in exchange for 8%
convertible debentures maturing March 17, 2007, convertible at the lesser of
$0.005 per share and 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. These convertible debentures were accompanied by an
aggregate of 2,800,000 common stock warrants, exercisable over a five-year
period at a strike price of $0.0039 per share. Loan fees associated with these
loans amounted to $42,368.
Total amortization of all loan fees during the year ended September 30, 2005
amounted to $141,871.
During the year ended September 30, 2006, the Company received an aggregate of
$1,270,000 from the same accredited investor group in exchange for 6%
convertible debentures maturing March 8, 2009, convertible at the lesser of
$0.005 per share and 40% of the average Of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. These convertible debentures were accompanied by an
aggregate of 20,320,000 common stock warrants, exercisable over a five-year
period at a strike price of $0.0009 per share. Loan fees associated with these
loans amounted to $20,000.
Total amortization of all loan fees during the year ended September 30, 2006
amounted to $36,962, leaving an unamortized loan fee balance at September 30,
2006 of $28,240.
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 8. DUE TO/FROM OFFICERS
At the beginning of fiscal 2005, the Company owed its CEO $7,805, due on demand,
at an annual interest rate of 18%. During the year ended September 30, 2005,
the Company repaid and advanced $45,715, including accrued interest during the
period of $212, creating a balance due from the officer of $37,698, which was
applied to accrued compensation due the CEO. There was no amount due the CEO at
September 30, 2006 and September 30, 2005.
At the beginning of fiscal 2005, the Company owed its CFO, Secretary and
Treasurer $35,253, due on demand, at an annual interest rate of 18%. During the
year ended September 30, 2005, the Company repaid $37,962. Accrued interest
during the period amounted to $3,094, bringing the loan balance at September 30,
2005 to $385. Accrued interest during the year ended September 30, 2006 was
$64, resulting in a loan balance due the (now former) Secretary/Treasurer of
$449.
At the beginning of fiscal 2005, the Company owed its Chief Technical Officer
$12,293. This amount was applied against the accrued compensation owed the
Chief Technical Officer, resulting in a net amount due to/from the officer of $0
at both September 30, 2005 and September 30, 2006.
The aggregate amount due officers at September 30, 2006 was $449, and interest
expense on the officer loans amounted to $64 and $3,600, respectively, during
the years ended September 30, 2006 and 2005.
As of September 30, 2006, the Company owed its officers and former officers
$1,878,696 in accrued compensation. Of this amount, $360,000 was attributable
to aggregate staying bonuses payable to the President and former CFO, Secretary
and Treasurer of the Company as of January 31, 2005. An additional $80,000
payable to the President on January 1, 2006 is being amortized over the 2006
calendar year. The staying bonuses are to be compensated for with the Company's
common stock, valued at the average bid and ask price for the stock for the 30
days prior to each respective year-end issuance date. The total common stock to
be issued as staying bonuses amounted to 358,758,842 at September 30, 2006,
including 289,156,628 shares to settle the President's January 1, 2006 staying
bonus.
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES
Convertible debentures at September 30, 2006, secured by substantially all the
assets of the Company, consisted of the following:
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 58,958,333
shares of common stock at the price
of $0.00012 at September 30, 2006 7,075 $ 7,075
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $7,075 and principal
on Convertible Debenture convertible
into approximately 58,958,333
shares of common stock at the price
of $0.00012 at September 30, 2006 7,075 $ 7,075
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $8,136 and principal
on Convertible Debenture convertible
into approximately 67,800,000
shares of common stock at the price
of $0.00012 at September 30, 2006 8,136 $ 8,136
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $4,975 and principal
on Convertible Debenture convertible
into approximately 41,458,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,975 $ 4,975
--------
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #2
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $9,600 and principal
on Convertible Debenture convertible
into approximately 80,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 9,600 $ 9,600
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $9,600 and principal
on Convertible Debenture convertible
into approximately 80,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 9,600 $ 9,600
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $10,800 and principal
on Convertible Debenture convertible
into approximately 90,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 10,800 $ 10,800
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $6,000 and principal
on Convertible Debenture convertible
into approximately 50,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 6,000 $ 6,000
-------
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #3
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 160,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 19,200 $ 19,200
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $19,200 and principal
on Convertible Debenture convertible
into approximately 160,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 19,200 $ 19,200
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $21,600 and principal
on Convertible Debenture convertible
into approximately 180,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 21,600 $ 21,600
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 100,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 12,000 $ 12,000
--------
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #5
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 77,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 9,240 $ 9,240
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 77,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 9,240 $ 9,240
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $9,240 and principal
on Convertible Debenture convertible
into approximately 77,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 9,240 $ 9,240
-------
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #6
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 100,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 12,000 $ 12,000
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 100,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 12,000 $ 12,000
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $12,000 and principal
on Convertible Debenture convertible
into approximately 100,000,000
shares of common stock at the price
of $0.00012 at September 30, 2006 12,000 $ 12,000
-------
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #7
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $8,000 and principal
on Convertible Debenture convertible
into approximately 66,666,667
shares of common stock at the price
of $0.00012 at September 30, 2006 8,000 $ 8,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $8,000 and principal
on Convertible Debenture convertible
into approximately 66,666,667
shares of common stock at the price
of $0.00012 at September 30, 2006 8,000 $ 8,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $8,000 and principal
on Convertible Debenture convertible
into approximately 66,666,667
shares of common stock at the price
of $0.00012 at September 30, 2006 8,000 $ 8,000
--------
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #8
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
<page>F-33
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #9
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
<page>F-34
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #10
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $4,000 and principal
on Convertible Debenture convertible
into approximately 33,333,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,000 $ 4,000
--------
<page>F-35
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #11
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $19,683 and principal
on Convertible Debenture convertible
into approximately 164,025,000
shares of common stock at the price
of $0.00012 at September 30, 2006 19,683 $ 19,683
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $19,683 and principal
on Convertible Debenture convertible
into approximately 164,025,000
shares of common stock at the price
of $0.00012 at September 30, 2006 19,683 $ 19,683
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $ 0
Accrued interest of $19,683 and principal
on Convertible Debenture convertible
into approximately 164,025,000
shares of common stock at the price
of $0.00012 at September 30, 2006 19,683 $ 19,683
--------
<page>F-36
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #12
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 16,929
Accrued interest of $2,780 and principal
on Convertible Debenture convertible
into approximately 164,241,667
shares of common stock at the price
of $0.00012 at September 30, 2006 2,780 $ 19,709
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 47,613
Accrued interest of $ 7,818 and principal
on Convertible Debenture convertible
into approximately 461,925,000
shares of common stock at the price
of $0.00012 at September 30, 2006 7,818 $ 55,431
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 39,149
Accrued interest of $6,428 and principal
on Convertible Debenture convertible
into approximately 379,808,333
shares of common stock at the price
of $0.00012 at September 30, 2006 6,428 $ 45,577
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 17, 2007 at an annual
interest rate of 8% with certain
interest prepaid $ 2,116
Accrued interest of $347 and principal
on Convertible Debenture convertible
into approximately 20,525,000
shares of common stock at the price
of $0.00012 at September 30, 2006 347 $ 2,463
--------
<page>F-37
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #13
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 17,397
Accrued interest of $2,017 and principal
on Convertible Debenture convertible
into approximately 161,783,333
shares of common stock at the price
of $0.00012 at September 30, 2006 2,017 $ 19,414
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 48,930
Accrued interest of $5,673 and principal
on Convertible Debenture convertible
into approximately 455,025,000
shares of common stock at the price
of $0.00012 at September 30, 2006 5,673 $ 54,603
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 40,231
Accrued interest of $4,665 and principal
on Convertible Debenture convertible
into approximately 374,133,333
shares of common stock at the price
of $0.00012 at September 30, 2006 4,665 $ 44,896
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 17, 2007 at an annual
interest rate of 8% with certain
interest prepaid $ 2,175
Accrued interest of $252 and principal
on Convertible Debenture convertible
into approximately 20,225,000
shares of common stock at the price
of $0.00012 at September 30, 2006 252 $ 2,427
--------
<page>F-38
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #14
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 42,276
Accrued interest of $4,596 and principal
on Convertible Debenture convertible
into approximately 390,600,000
shares of common stock at the price
of $0.00012 at September 30, 2006 4,596 $ 46,872
--------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $118,902
Accrued interest of $12,926 and principal
on Convertible Debenture convertible
into approximately 1,098,566,667
shares of common stock at the price
of $0.00012 at September 30, 2006 12,926 $ 131,828
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 97,764
Accrued interest of $10,628 and principal
on Convertible Debenture convertible
into approximately 903,266,667
shares of common stock at the price
of $0.00012 at September 30, 2006 10,628 $ 108,392
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 17, 2007 at an annual
interest rate of 8% with certain
interest prepaid $ 5,285
Accrued interest of $575 and principal
on Convertible Debenture convertible
into approximately 48,833,333
shares of common stock at the price
of $0.00012 at September 30, 2006 575 $ 5,860
--------
<page>F-39
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #16
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $ 94,331
Accrued interest of $7,567 and principal
on Convertible Debenture convertible
into approximately 849,150,000
shares of common stock at the price
of $0.00012 at September 30, 2006 7,567 $ 101,898
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 17, 2007 at an annual
interest rate of 8% with certain
interest prepaid $ 265,306
Accrued interest of $21,283 and principal
on Convertible Debenture convertible
into approximately 2,388,241,667
shares of common stock at the price
of $0.00012 at September 30, 2006 21,283 $ 286,589
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 17, 2007 at an annual interest
rate of 8% with certain
interest prepaid $218,141
Accrued interest of $17,499 and principal
on Convertible Debenture convertible
into approximately 1,963,666,667
shares of common stock at the price
of $0.00012 at September 30, 2006 17,499 $ 235,640
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 17, 2007 at an annual
interest rate of 8% with certain
interest prepaid $ 11,791
Accrued interest of $946 and principal
on Convertible Debenture convertible
into approximately 106,141,667
shares of common stock at the price
of $0.00012 at September 30, 2006 946 $ 12,737
--------
<page>F-40
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #17
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $40,700
Accrued interest of $1,385 and principal
on Convertible Debenture convertible
into approximately 350,708,333
shares of common stock at the price
of $0.00012 at September 30, 2006 1,385 $ 42,085
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6%
$ 225,700
Accrued interest of $7,680 and principal
on Convertible Debenture convertible
into approximately 1,944,833,333
shares of common stock at the price
of $0.00012 at September 30, 2006 7,680 $233,380
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 99,900
Accrued interest of $3,399 and principal
on Convertible Debenture convertible
into approximately 860,825,000
shares of common stock at the price
of $0.00012 at September 30, 2006 3,399 $103,299
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 3,700
Accrued interest of $126 and principal
on Convertible Debenture convertible
into approximately 31,883,333
shares of common stock at the price
of $0.00012 at September 30, 2006 126 $ 3,826
--------
<page>F-41
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #18
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 11,000
Accrued interest of $289 and principal
on Convertible Debenture convertible
into approximately 94,075,000
shares of common stock at the price
of $0.00012 at September 30, 2006 289 $ 11,289
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 61,000
Accrued interest of $1,604 and principal
on Convertible Debenture convertible
into approximately 521,700,000
shares of common stock at the price
of $0.00012 at September 30, 2006 1,604 $ 62,604
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 27,000
Accrued interest of $710 and principal
on Convertible Debenture convertible
into approximately 230,916,667
shares of common stock at the price
of $0.00012 at September 30, 2006 710 $ 27,710
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 1,000
Accrued interest of $26 and principal
on Convertible Debenture convertible
into approximately 8,550,000
shares of common stock at the price
of $0.00012 at September 30, 2006 26 $ 1,026
--------
<page>F-42
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #19
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 11,000
Accrued interest of $244 and principal
on Convertible Debenture convertible
into approximately 93,700,000
shares of common stock at the price
of $0.00012 at September 30, 2006 244 $ 11,244
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 61,000
Accrued interest of $1,354 and principal
on Convertible Debenture convertible
into approximately 519,616,667
shares of common stock at the price
of $0.00012 at September 30, 2006 1,354 $ 62,354
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 27,000
Accrued interest of $599 and principal
on Convertible Debenture convertible
into approximately 229,991,667
shares of common stock at the price
of $0.00012 at September 30, 2006 599 $ 27,599
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 1,000
Accrued interest of $22 and principal
on Convertible Debenture convertible
into approximately 8,516,667
shares of common stock at the price
of $0.00012 at September 30, 2006 22 $ 1,022
--------
<page>F-43
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #20
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 11,000
Accrued interest of $186 and principal
on Convertible Debenture convertible
into approximately 93,216,667
shares of common stock at the price
of $0.00012 at September 30, 2006 186 $ 11,186
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 61,000
Accrued interest of $1,033 and principal
on Convertible Debenture convertible
into approximately 516,941,667
shares of common stock at the price
of $0.00012 at September 30, 2006 1,033 $ 62,033
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 27,000
Accrued interest of $457 and principal
on Convertible Debenture convertible
into approximately 228,808,333
shares of common stock at the price
of $0.00012 at September 30, 2006 457 $ 27,457
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 1,000
Accrued interest of $17 and principal
on Convertible Debenture convertible
into approximately 8,475,000
shares of common stock at the price
of $0.00012 at September 30, 2006 17 $ 1,017
--------
<page>F-44
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Convertible Debenture #21
Note payable to AJW Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $ 66,000
Accrued interest of $716 and principal
on Convertible Debenture convertible
into approximately 555,966,667
shares of common stock at the price
of $0.00012 at September 30, 2006 716 $ 66,716
--------
Note payable to AJW Offshore, LTD
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $366,000
Accrued interest of $3,971 and principal
on Convertible Debenture convertible
into approximately 3,083,091,667
shares of common stock at the price
of $0.00012 at September 30, 2006 3,971 $ 369,971
--------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 8, 2009 at an annual interest
rate of 6% $162,000
Accrued interest of $1,758 and principal
on Convertible Debenture convertible
into approximately 1,364,650,000
shares of common stock at the price
of $0.00012 at September 30, 2006 1,758 $ 163,758
--------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 8, 2009 at an annual
interest rate of 6% $ 6,000
Accrued interest of $65 and principal
on Convertible Debenture convertible
into approximately 50,541,667
shares of common stock at the price
of $0.00012 at September 30, 2006 65 $ 6,065
--------
<page>F-45
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 9. CONVERTIBLE DEBENTURES (continued)
Subtotal - convertible debentures $ 2,788,007
Less reclassified accrued interest (345,818)
Less prepaid interest offset (103,853)
------------
Subtotal principal value 2,338,336
Derivative conversion option - 150 percent of principal 3,507,503
Less unamortized note discount (1,536,834)
-----------
Net carrying value -
convertible debentures $ 4,309,005
Convertible note payable to Laurus Master Fund, Ltd.,
unsecured, with interest payable at an annual rate
of 8%, conversion premium of 25% based on current
market price of the Company's common stock (as defined),
initially due October 12, 2001 and extended to
December 1, 2001. Currently in default. 8,716
-----------
Total - convertible debentures and notes $ 4,317,721
Current portion 2,264,085
-----------
Long-term portion $ 2,053,636
===========
As of September 30, 2006, five-year maturities of the convertible debentures and
notes were as follows:
<table>
Subsequent
Derivative Unamortized Conversions
Principal Conversion Option Note Discount to Equity Total Due
Year ended September 30, 2007 $1,077,052 $ 1,602,503 $ (415,470) $ - $2,264,085
Year ended September 30, 2008 - - - - -
Year ended September 30, 2009 1,270,000 1,905,000 (1,121,364) (168,832) 1,884,804
Subsequent conversions to equity - - - 168,832 168,832
------------- ------------------ -------------- ---------- ----------
Total convertible debentures and notes $2,347,052 $ 3,507,503 $ (1,536,834) $ - $4,317,721
============ ============= ============= ========== ==========
</table>
<page>F-46
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 10. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
In order to provide working capital and financing for the Company's continued
research and development efforts as of March 29, 2002, the Company entered into
a securities purchase agreement and related agreements with four accredited
investors (the "Purchasers") for the purchase of up to $750,000 of the Company's
12% Convertible Debentures due one year from their date of issuance. The Company
granted the holders of the debentures a continuing security interest in all of
the Company's assets to secure the Company's obligations under the debentures
and related agreements. The debentures bear interest at a rate of 12% per annum,
payable quarterly in common stock or cash at the option of the Purchasers.
On March 29, 2002 the Company issued an aggregate of $300,000 of 12% convertible
debentures in a private offering to four accredited investors. Three of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of the company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the lesser
of $.06 per share and 50% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. In October 2003, the conversion rate was changed from 50%
to 40% of the average of the lowest three intra-day trading prices of a share of
common stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
1,500,000 shares of common stock at a per share exercise price equal to the
lesser of $.045 and the average of the lowest three intra-day trading prices
during the 20 trading days immediately preceding an exercise.
On May 10, 2002 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to four accredited investors. Three of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of the Company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the lesser
of $.06 per share and 50% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. In October 2003, the conversion rate was changed from 50%
to 40% of the average of the lowest three intra-day trading prices of a share of
common stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
750,000 shares of common stock at a per share exercise price equal to the lesser
of $.045 and the average of the lowest three intra-day trading prices during the
20 trading days immediately preceding an exercise.
On June 17, 2002 the Company issued an aggregate of $300,000 of 12% convertible
debentures in a private offering to four accredited investors. Three of the
investors, if certain conversion limitations are disregarded, are beneficial
owners of 5% or more of the company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the lesser
of $.06 per share and 50% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. In October 2003, the conversion rate was changed from 50%
to 40% of the average of the lowest three intra-day trading prices of a share of
common stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
1,500,000 shares of common stock at a per share exercise price equal to the
lesser of $.045 and the average of the lowest three intra-day trading prices
during the 20 trading days immediately preceding an exercise.
The Company entered into another securities purchase agreement plus related
agreements with three accredited investors on November 27, 2002 (essentially the
same re-organized investor group delineated above) for the purchase of up to
$500,000 of the Company's 12% Convertible Debentures due one year from their
date of issuance. The Company granted the holders of the debentures a
<page>F-47
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 10. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
(continued)
continuing security interest in all of the Company's assets to secure the
Company's obligations under the debentures and related agreements. The
debentures bear interest at a rate of 12% per annum, payable quarterly in common
stock or cash at the option of the Purchasers. The Company entered into similar
purchase agreements during the fiscal year ended September 30, 2004 for the
purchase of up to $2,000,000 of the Company's 12% Convertible Debentures, during
the fiscal year ended September 30, 2005 for the purchase of up to $1,400,000 of
the Company's 8% Convertible Debentures, and during the fiscal year ended
September 30, 2006 for the purchase of up to $1,270,000 of the Company's 6%
Convertible Debentures.
On November 27, 2002 the Company issued an aggregate of $200,000 of 12%
convertible debentures in a private offering to three accredited investors who,
if certain conversion limitations are disregarded, would be deemed beneficial
owners of 5% or more of the Company's outstanding shares of common stock. The
debentures initially were convertible into shares of common stock at the lesser
of $.01 per share and 50% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. In October 2003, the conversion rate was changed from 50%
to 40% of the average of the lowest three intra-day trading prices of a share of
common stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
1,000,000 shares of common stock at a per share exercise price equal to $.005.
On March 3, 2003 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to three accredited investors. The debentures
initially were convertible into shares of common stock at the lesser of $.01 per
share and 50% of the average of the lowest three intra-day trading prices of a
share of common stock during the 20 trading days immediately preceding
conversion. In October 2003, the conversion rate was changed from 50% to 40% of
the average of the lowest three intra-day trading prices of a share of common
stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
750,000 shares of common stock at a per share exercise price equal to $.005.
On May 12, 2003 the Company issued an aggregate of $150,000 of 12% convertible
debentures in a private offering to three accredited investors. The debentures
initially were convertible into shares of common stock at the lesser of $.01 per
share and 50% of the average of the lowest three intra-day trading prices of a
share of common stock during the 20 trading days immediately preceding
conversion. In October 2003, the conversion rate was changed from 50% to 40% of
the average of the lowest three intra-day trading prices of a share of common
stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
750,000 shares of common stock at a per share exercise price equal to $.005.
On November 25, 2003 the Company issued an aggregate of $100,000 of 12%
convertible debentures in a private offering to three accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 500,000 shares of common stock at a per share exercise price equal
to $.005.
On December 3, 2003 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to three accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately
<page>F-48
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 10. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
(continued)
preceding conversion. The debentures were accompanied by warrants to purchase up
to an aggregate of 250,000 shares of common stock at a per share exercise price
equal to $.005.
On December 31, 2003 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to three accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 250,000 shares of common stock at a per share exercise price equal
to $.005.
On February 18, 2004 the Company issued an aggregate of $50,000 of 12%
convertible debentures in a private offering to three accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 250,000 shares of common stock at a per share exercise price equal
to $.005.
On March 4, 2004 the Company issued an aggregate of $250,000 of 12% convertible
debentures in a private offering to three accredited investors. The debentures
were convertible into shares of common stock at the lesser of $.005 per share
and 40% of the average of the lowest three intra-day trading prices of a share
of common stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
1,250,000 shares of common stock at a per share exercise price equal to $.005.
On April 19, 2004, the Company issued an aggregate of $250,000 of 12%
convertible debentures in a private offering to four accredited investors. The
Company prepaid one year's interest of $30,000 upon receipt of the funds. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 750,000 shares of common stock at a per share exercise price equal
to $.002.
On June 30, 2004 the Company issued an aggregate of $625,000 of 12% convertible
debentures in a private offering to four accredited investors. The Company
prepaid one year's interest of $75,000 upon receipt of the funds. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,875,000 shares of common stock at a per share exercise price
equal to $.002.
On September 9, 2004 the Company issued an aggregate of $625,000 of 12%
convertible debentures in a private offering to four accredited investors. The
Company prepaid one year's interest of $75,000 upon receipt of the funds. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,875,000 shares of common stock at a per share exercise price
equal to $.002.
<page>F-49
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 10. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
(continued)
On March 17, 2005 the Company issued an aggregate of $158,033 of 8% convertible
debentures in a private offering to the four accredited investors. The Company
prepaid $1,033 in interest upon receipt of the funds. The debentures were
convertible into shares of common stock at the lesser of $.005 per share and 40%
of the average of the lowest three intra-day trading prices of a share of common
stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
316,066 shares of common stock at a per share exercise price equal to $.0039.
On April 20, 2005 the Company issued an aggregate of $108,733 of 8% convertible
debentures in a private offering to the four accredited investors. The Company
prepaid $1,033 in interest upon receipt of the funds. The debentures were
convertible into shares of common stock at the lesser of $.005 per share and 40%
of the average of the lowest three intra-day trading prices of a share of common
stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
217,466 shares of common stock at a per share exercise price equal to $.0039.
On May 23, 2005 the Company issued an aggregate of $543,665 of 8% convertible
debentures in a private offering to the four accredited investors. The Company
prepaid $5,165 in interest upon receipt of the funds. The debentures were
convertible into shares of common stock at the lesser of $.005 per share and 40%
of the average of the lowest three intra-day trading prices of a share of common
stock during the 20 trading days immediately preceding conversion. The
debentures were accompanied by warrants to purchase up to an aggregate of
1,087,330 shares of common stock at a per share exercise price equal to $.0039.
On September 30, 2005 the Company issued an aggregate of $589,569 of 8%
convertible debentures in a private offering to the four accredited investors.
The Company prepaid $36,665 in interest upon receipt of the funds. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of 1,179,138 shares of common stock at a per share exercise price
equal to $.0039.
On March 8, 2006, the Company issued an aggregate of $370,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of $5,920,000 shares of common stock at a per share exercise price of
$.0009.
On April 24, 2006, the Company issued an aggregate of $100,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of $1,600,000 shares of common stock at a per share exercise price of
$.0009.
On May 19, 2006, the Company issued an aggregate of $100,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of $1,600,000 shares of common stock at a per share exercise price of
$.0009.
<page>F-50
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 10. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
(continued)
On June 20, 2006, the Company issued an aggregate of $100,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of $1,600,000 shares of common stock at a per share exercise price of
$.0009.
On July 27, 2006, the Company issued an aggregate of $600,000 of 6% convertible
debentures in a private offering to the four accredited investors. The
debentures were convertible into shares of common stock at the lesser of $.005
per share and 40% of the average of the lowest three intra-day trading prices of
a share of common stock during the 20 trading days immediately preceding
conversion. The debentures were accompanied by warrants to purchase up to an
aggregate of $9,600,000 shares of common stock at a per share exercise price of
$.0009.
The Company's convertible debentures and related warrants contain anti- dilution
provisions whereby, if the Company issues common stock or securities convertible
into or exercisable for common stock at a price less than the conversion or
exercise prices of the debentures or warrants, the conversion and exercise
prices of the debentures and/or warrants shall be adjusted as stipulated in the
agreements governing such debentures and warrants.
Through September 30, 2003, as part of the recording of the convertible debt
transactions, a beneficial conversion option was recognized, along with a
corresponding convertible debt discount. The fair value of the debt instruments
issued totaling $1,250,000 in principal value was $2,500,000 in aggregate,
representing a 100% premium on the principal value (due to the 100% pricing
advantage) and making the beneficial conversion option of $1,140,097 at the
inception of the loans ($1,250,000 proceeds less $109,903 allocated to the
issuance of the 6,250,000 related warrants). In October 2003, the conversion
option was increased to 150% from 100% which resulted in an increase of $563,257
in the conversion option and a corresponding expense in the current period. Due
to the nature of the debt instrument and its repayment terms, the beneficial
conversion option was re-characterized as derivative conversion option and
reclassified as additional debt. In connection with the issuance of an
additional $2,000,000 of convertible debt during the year ended September 30,
2004, the derivative conversion option was increased by $3,000,000. During the
year ended September 30, 2005, the derivative conversion option was increased by
$2,100,000 in conjunction with the issuance of an additional $1,400,000 of
convertible debt. During the year ended September 30, 2006, the derivative
conversion option was increased by $1,905,000 in conjunction with the issuance
of an additional $1,270,000 of convertible debt.
During the fiscal year ended September 30, 2002, the Company issued 12,667,178
shares of common stock in connection with the conversion of an aggregate $93,130
of principal and $6,916 of related interest on the Company's convertible
debentures. A corresponding pro-rata reduction of $80,702 to the beneficial
conversion option was made, bringing the beneficial conversion option balance at
September 30, 2002 to $1,059,395.
<page>F-51
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 10. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
(continued)
During the fiscal year ended September 30, 2003, the Company issued another
103,778,301 shares of common stock in connection with the conversion of another
$193,665 of principal and $34,355 of accrued interest on the Company's
convertible debentures, resulting in a convertible debt principal balance at
September 30, 2003 of $963,205 (net of an aggregate of $286,795 in debt
conversions through that date). A corresponding pro-rata reduction of $177,845
was made to the beneficial conversion option during the fiscal year ended
September 30, 2003(an aggregate of $258,547 since the inception of the loans),
bringing the beneficial conversion option balance at September 30, 2003 to
$881,550.
During the year ended September 30, 2004, the Company issued an additional
$2,000,000 of 12% convertible debentures. Also, the Company issued 352,352,250
shares of common stock in connection with the conversion of another $218,115 of
principal and $49,008 of accrued interest on the Company's convertible
debentures, resulting in a convertible debt principal balance at September 30,
2004 of $2,745,090 (net of an aggregate of $504,910 in debt conversions through
that date). In connection with the issuance of the additional $2,000,000
convertible debt, the Company recorded a corresponding derivative conversion
option of $3,000,000. A corresponding pro-rata reduction of $327,172 was made
to the derivative conversion option during the year ended September 30, 2004 (an
aggregate of $613,967 since the inception of the loans), as well as an increase
of $563,257 due to the above noted re-characterization, bringing the derivative
conversion option balance at September 30, 2004 to $4,117,635.
During the year ended September 30, 2005, the Company issued an additional
$1,400,000 of 8% convertible debentures. Also, the Company issued 5,610,392,876
shares of common stock in connection with the conversion of $2,529,378 of
principal and $104,410 of accrued interest on the Company's convertible
debentures, resulting in a convertible debt principal balance at September 30,
2005 of $1,615,712 (net of an aggregate of $3,034,288 in debt conversions
through that date). A corresponding pro-rata reduction of $3,794,067 was made
to the derivative conversion option during the year ended September 30, 2005 (an
aggregate of $4,408,034 since the inception of the loans), bringing the
derivative conversion option balance at September 30, 2005 to $2,423,568.
During the year ended September 30, 2006, the Company issued an additional
$1,270,000 of 6% convertible debentures. Also, the Company issued 6,458,227,580
shares of common stock upon the conversion of $547,376 of principal and $8,300
of accrued interest on the Company's convertible debentures, resulting in a
convertible debt principal balance at September 30, 2006 of $2,338,336 (net of
an aggregate of $3,581,664 in debt conversions through that date). A
corresponding pro-rata reduction of $821,065 was made to the derivative
conversion option during the year ended September 30, 2006 (an aggregate of
$5,229,099 since the inception of the loans), bringing the derivative conversion
option balance at September 30, 2006 to $3,507,503.
The aggregate note discount of $5,920,000 is being amortized over the one-year
and two-year, and three-year lives of the respective debt instruments. Of this
amount, $279,115 was amortized during the fiscal year ended September 30, 2002,
$653,720 was amortized during the year ended September 30, 2003, $673,705 was
amortized during the year ended September 30, 2004 and $693,992 was amortized
during the year ended September 30, 2005, and $715,748 was amortized during the
year September 30, 2006, while $69,233 in convertible bond discount was
transferred to equity upon conversion of $93,130 in debt principal during the
fiscal year ended September 30, 2002, $52,340 in convertible bond discount was
transferred to equity upon conversion of $193,665 of debt principal during the
fiscal year ended September 30, 2003, $28,571 in convertible bond discount was
transferred to equity upon conversion of $218,115 of debt principal during the
year ended September 30, 2004, $973,565 in convertible bond discount was
transferred to equity upon conversion of $2,529,378 of debt principal during the
year ended September 30, 2005, and $243,177 in convertible bond discount was
transferred to
<page>F-52
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 10. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
(continued)
equity upon conversion of $547,376 of debt principal during the year ended
September 30, 2006, resulting in an unamortized convertible debt discount
balance of $1,536,834 at September 30, 2006.
As of September 30, 2006, the Company was indebted for an aggregate of
$4,654,823 in Secured Convertible Debentures, consisting of $2,338,336
principal, $3,507,503 derivative conversion option, $345,818 accrued interest
(net of prepaid interest of $103,853), less $1,536,834 convertible debt
discount. To the extent debentures issued by the Company are converted into
shares of common stock, the Company will not be obligated to repay the amounts
converted.
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's authorized capital stock consists of 50,000,000,000 shares of
common stock, no par value per share and 50,000,000 shares of preferred stock,
$1.00 par value per share. On June 28, 2006, the shareholders of the Company
approved an increase in the amount of common shares from 15,000,000,000 to
50,000,000,000. Of the 50,000,000 authorized shares of preferred stock,
1,000,000 shares have been designated as Class A Preferred Stock and 1,000,000
shares have been designated as Class B Preferred Stock, and the remaining
48,000,000 shares are undesignated. As of September 30, 2006, there were
14,384,794,783 shares of the Company's common stock outstanding held by
approximately 800 holders of record and 215,865 shares of the Company's Class A
Preferred Stock outstanding held by one holder of record and no shares of Class
B Preferred Stock outstanding.
Each share of Class A Preferred Stock is entitled to 100 votes per share on all
matters presented to the Company's shareholders for action. The Class A
Preferred Stock does not have any liquidation preference, additional voting
rights, conversion rights, anti-dilution rights or any other preferential
rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the
Company's common stock. The Class B Preferred Stock does not have any
liquidation preference, voting rights, other conversion rights, anti-dilution
rights or any other preferential rights.
In April 2006, the company issued 4,368,872 restricted common shares for
consulting services rendered having a value of $3,100.
During April 2006 through July 2006, the company issued 533,333,333 restricted
common shares to an individual investor for cash of $125,000.
During October 2005 through September 2006, the Company issued 6,458,227,580
shares of common stock in connection with the conversion of $547,376 of
principal, $821,065 of derivative conversion option, $8,300 of accrued interest,
net of $243,177 of convertible debt discount, for a total conversion amount of
$1,133,564
During March 2006 through September 2006, the Company received $1,270,000 in
exchange for 6% convertible debentures. The debentures were accompanied by
20,320,000 common stock warrants, exercisable over a five year period at $0.0009
per share. The common stock warrants were valued at $4,551.
During October 2005 through September 2006, the Company issued 6,995,929,785
shares of common stock in connection with the conversion of $2,529,378 of
principal, $639,551 of derivative conversion option and $345,818 of accrued
interest, net of $715,748 in convertible debt discount, for total conversion of
$5,454,290 on the Company's convertible debentures.
<page>F-53
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 12. INCOME TAXES
Deferred income taxes consisted of the following at September 30, 2006:
Deferred tax asset, benefit
of net operating loss
carryforward $ 11,800,000
Valuation allowance (11,800,000)
-----------
Net deferred tax asset $ -
===========
The valuation allowance offsets the net deferred tax asset, since it is more
likely than not that it would not be recovered. During the year ended September
30, 2006, the deferred tax asset and valuation allowance were both increased by
$1,200,000.
The Company has approximately $29,600,000 in federal and $20,400,000 in
California net operating loss carryforwards. The federal net operating loss
carryforwards expire as follows: $2,700,000 in the year 2012, $5,300,000 in
2018, $1,200,000 in 2019, $3,500,000 in 2020, $2,300,000 in 2021, $2,200,000 in
2022, $2,100,000 in 2023, $4,200,000 in 2024 $3,100,000 in 2025 and $3,000,000
in 2026. The California net operating loss carryforwards expire as follows:
$3,500,000 in the year 2007, $3,300,000 in 2013, $8,500,000 in 2014, $3,100,000
in 2015, and $3,000,000 in 2016.
<page>F-54
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 13. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into three employment agreements with key individuals,
the terms of the agreements are as follows:
1) The Chief Executive Officer (and President) of the Company entered into
an agreement dated October 2, 1995 (which was subsequently amended September 1,
1997, September 1, 1999, and March 27, 2000) for a period of five years to April
1, 2005 and extended annually to April 1, 2007 and he is entitled to receive a
base salary of $160,000 per year. The Chief Executive Officer is further to
receive a bonus, paid at year-end, equal to 50% of the Chief Executive Officer's
salary, for continued employment. The staying bonus is to be paid in the
Company's restricted common stock. He was also granted an option to purchase up
to 1,943,654 shares of the Company's restricted common stock at a price equal to
50% of the average market value for the prior 30 trading days before exercise.
On March 27, 2000, the exercise price was adjusted to a fixed rate of
approximately $0.39 per share, with an expiration date of December 2, 2003,
which was subsequently extended to December 2, 2005. These options have since
expired.
2) The Secretary/Treasurer of the Company entered into an Agreement dated
October 2, 1995 (which was subsequently amended September 1, 1997, September 1,
1999, and March 27, 2000), for a period of five years (extended through April 1,
2005), and she was entitled to receive a base salary of $80,000 per year. The
Secretary/Treasurer was to receive a bonus, paid at year- end, equal to 50% of
the Secretary/Treasurer's salary, for continued employment. The staying bonus
was to be paid in the Company's restricted common stock. She was also granted
an option to purchase up to 500,000 shares of the Company's restricted common
stock at a price equal to 60% of the average market value for the prior 180
trading days before exercise. On March 27, 2000, the exercise price was
adjusted to a fixed rate of $0.38 per share, with an expiration date of December
31, 2004, which was subsequently extended to December 2, 2005. These options
have since expired. The employment agreement with the Secretary/Treasurer was
not extended beyond April 1, 2005, so she was not entitled to the bonus for
continued employment for calendar year 2005. The former Secretary/Treasurer
continues to provide services on a consulting basis.
3) The Chief Technical Officer of the Company entered into an agreement
dated August 1, 1998 for an initial term of three years (extended through August
1, 2003 and again through January 19, 2009), and he is entitled to receive a
base salary of $150,000 per year, with a minimum of $90,000 to be paid annually
in cash and the balance paid (at the option of the Company) in cash or the
Company's common stock. The employee received a hire-on bonus of $75,000 paid
in the Company's common stock, at a discount of one-half market price. The
Chief Technical Officer is also to receive performance bonuses (paid in common
stock, as above) upon successful completion of specific milestones pertaining to
the implementation and deployment of certain software (up to $862,500). If
substantially all performance milestones are met, he is also to be granted an
option to purchase up to 500,000 shares of the Company's common stock at a price
equal to 60% of the market price at the date of purchase. As of September 30,
2006, none of the aforementioned milestones had been successfully completed.
Litigation
The Company, during its normal course of business, may be subject from time to
time to disputes and to legal proceedings against it. Management does not
expect that the ultimate outcome of any current claims will have a material
adverse effect on the Company's financial position.
<page>F-55
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Building Lease
The Company has leased approximately 1,107 square feet of office space in
Valencia, California. The operating lease commenced November 1, 2005 for a
period of three years and is renewable at the option of the Company for an
additional three year term. The rent was abated for the months of November and
December 2005, while the Company was incurring approximately $20,076 in
leasehold improvements, before moving in. A security deposit of approximately
$4,698 was also paid at the inception of the lease. The initial base rent was
set at $2,214 per month, with annual increases of 3%. The Company must also pay
its share of increases in common area maintenance costs, which amounted to
approximately $147 per month effective September 1, 2006. Total rental expense
for the years ended September 30, 2006 and 2005 (including other lease
arrangements) was $34,658 and $35,396, respectively.
Future minimum lease payments required under the building lease are as follows:
Year ending September 30, 2007 $ 27,299
Year ending September 30, 2008 28,117
Year ending September 30, 2009 2,349
-------------
Total lease commitment $ 57,765
=============
NOTE 14. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note
holder options to purchase 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share. As consideration, the Company
reduced its debt to the note holder by $50,000 and received an extension of time
to pay-off its promissory note. The Company also issued to its CEO options to
purchase another 500,000 shares of the Company's Class B preferred stock at an
exercise price of $5.00 per share in exchange for a reduction in debt of
$50,000. Total consideration received on the above issued options, as evidenced
by debt reduction, was $100,000. These options were initially exercisable
through November 1, 2002 and are exercisable into common stock at the rate of 10
common shares for each Class B preferred share. In September 2001, the exercise
price on the options was adjusted to $2.50 per share and the exercise period was
extended to November 1, 2005. In June 2002, the exercise price on the options
was further adjusted to $0.50 per share. In January 2004, the exercise price on
the options was further adjusted to $0.05 per share and the exercise period was
extended to November 1, 2009.
The Company's CEO currently owns 215,865 shares of the Company's Class A
preferred stock, of which 15,845 shares were purchased during the year ended
September 30, 2004, and has options to purchase another 234,155 shares for $1.00
per share through November 1, 2009.
The Company has granted various common stock options and warrants to employees
and consultants. Generally, the options and warrants were granted at
approximately the fair market value of the Company's common stock at the date of
grant and vested immediately, except that when restricted common stock was
issued, the options and warrants were granted at an average discount to market
of 50% (ranging from between 20% to 75%).
<page>F-56
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 14. STOCK OPTIONS AND WARRANTS (continued)
The Company previously accounted for employee stock-based compensation under the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25.
Accordingly, compensation expense for common stock options and warrants issued
to employees for services was recorded as the difference between the intrinsic
value of those services as measured by the market value (as discounted, if
applicable) of the common stock at the date of grant and the exercise price,
with pro forma disclosure of the excess market value as required by SFAS No.
123. Effective January 1, 2006, the Company adopted SFAS no. 123R, which
requires measurement of these options or warrants at fair value from the grant
date. However, no common stock options or warrants were granted to employees
(including officers and directors) of the Company during the years ended
September 30, 2006 and 2005.
All common stock options and warrants issued to consultants and other non-
employees have been recorded at the fair value of the services rendered and
equivalent to the market value (as discounted, if applicable) of the equity
instruments received as per SFAS No. 123. The market value was determined by
utilizing an averaging convention of between 5 to 30 days of the closing price
of the Company's common shares as traded on the OTC Bulletin Board (stock symbol
CNES) through the grant date and applying certain mathematical assumptions as
required under the Black-Scholes model. Such assumptions were generally the
same as those mentioned above when making fair value disclosures for the
issuance of officer and employee stock options. These included the risk-free
annual rate of return and stock volatility, which were assumed to be 4.50% and
190%, respectively, during the years ended September 30, 2006 and 2005.
At September 30, 2002, the Company had an aggregate of 8,807,154 common stock
options and a total of 1,000,000 Class B preferred stock options recorded as
additional paid-in capital at a value of $1,443,695. Of the common stock
options and warrants, 2,043,654 had been issued to officers and employees and
the remaining 6,763,500 had been issued to consultants and investors.
In November 2002 through May 2003, 2,500,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $500,000 12%
convertible debenture financing arrangement (see Note 10 above). The allocated
cost of these warrants amounted to $9,816, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2003 of $1,453,511
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
As of September 30, 2003, the Company had an additional 4,852,205 common stock
options that had been granted to consultants and investors at exercise prices
ranging from $0.50 to $2.00 per share, expiring from November 1, 2003 through
January 16, 2005. Because these strike prices were substantially above the
market price of the Company's common stock, no value was attributed to these
options at the time of grant. During the year ended September 30, 2004,
4,352,205 of these non-valued options expired, leaving a balance at September
30, 2004 of 500,000 options, exercisable at $1.00 per share and expiring January
16, 2005. The Company also granted a contingent issuance to its Chief Technical
Officer of 2,000,000 common stock options exercisable at $0.50 per share and
expiring December 31, 2004, which will not vest until certain milestones have
been attained. These respective common stock options and contingent issuances
have been excluded from the summarized table below.
In November 2003 through December 2003, 1,500,000 seven-year common stock
warrants were issued to an accredited investor group in connection with a
$200,000 12% convertible debenture financing arrangement (see Note 10 above).
The allocated cost of these warrants amounted to $945.
In February 2004 and March 2004, 1,500,000 seven-year common stock warrants were
issued to an accredited investor group in connection with a $300,000 12%
convertible debenture financing arrangement (see Note 10 above). The allocated
cost of these warrants amounted to $1,417.
<page>F-57
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 14. STOCK OPTIONS AND WARRANTS (continued)
In April 2004, 750,000 seven-year common stock warrants were issued to an
accredited investor group in connection with a $250,000 12% convertible
debenture financing arrangement (see Note 10 above). The allocated cost of
these warrants amounted to $1,181.
In June 2004, 1,875,000 seven-year common stock warrants were issued to an
accredited investor group in connection with a $625,000 12% convertible
debenture financing arrangement (see Note 10 above). The allocated cost of
these warrants amounted to $2,952.
In September 2004, 1,875,000 seven-year common stock warrants were issued to an
accredited investor group in connection with a $625,000 12% convertible
debenture financing arrangement (see Note 10 above). The allocated cost of
these warrants amounted to $2,952, resulting in a recorded balance of stock
options and warrants exercisable at September 30, 2004 of $1,462,958 (including
$100,000 attributable to 1,000,000 Class B preferred stock options noted above).
In March through September 2005, 2,800,000 five-year common stock warrants were
issued to an accredited investor group in connection with a $1,400,000 8%
convertible debenture financing arrangement (see Note 10 above). The allocated
cost of these warrants amounted to $3,756, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2005 of $1,466,714
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
In March through July 2006, 20,320,000 five-year common stock warrants were
issued to an accredited investor group in connection with a $1,270,000 6%
convertible debenture financing arrangement (see Note 10 above). The allocated
cost of these warrants amounted to $4,551, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2006 of $1,471,265
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
The common stock option and warrant activity during the fiscal years ended
September 30, 2006 and 2005 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2004 17,743,654 $ 0.0680
Granted 2,800,000 0.0039
Expired (6,300,000) 0.0480
---------- -------
Balance outstanding, September 30, 2005 14,243,654 $ 0.0560
Granted 20,320,000 0.0009
Expired (1,943,654) 0.3845
----------- -------
Balance outstanding, September 30, 2006 32,620,000 $ 0.0019
========== =======
<page>F-58
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
NOTE 14. STOCK OPTIONS AND WARRANTS (continued)
The following table summarizes information about common stock options and
warrants at September 30, 2006:
Outstanding Exercisable
Common Weighted Weighted Common Weighted
Range of Stock Average Average Stock Average
Exercise Options/ Life Exercise Options/ Exercise
Prices Warrants (Months) Price Warrants Price
--------------- --------- ------- -------- ---------- --------
$ 0.0050 - $ 0.0050 1,000,000 38 $ 0.0050 1,000,000 $ 0.0050
$ 0.0050 - $ 0.0050 750,000 44 $ 0.0050 750,000 $ 0.0050
$ 0.0050 - $ 0.0050 750,000 46 $ 0.0050 750,000 $ 0.0050
$ 0.0050 - $ 0.0050 500,000 50 $ 0.0050 500,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 50 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 51 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 53 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 1,250,000 53 $ 0.0050 1,250,000 $ 0.0050
$ 0.0020 - $ 0.0020 750,000 55 $ 0.0020 750,000 $ 0.0020
$ 0.0020 - $ 0.0020 1,875,000 60 $ 0.0020 1,875,000 $ 0.0020
$ 0.0020 - $ 0.0020 1,875,000 62 $ 0.0020 1,875,000 $ 0.0020
$ 0.0039 - $ 0.0039 316,066 42 $ 0.0039 316,066 $ 0.0039
$ 0.0039 - $ 0.0039 217,466 42 $ 0.0039 217,466 $ 0.0039
$ 0.0039 - $ 0.0039 1,087,330 42 $ 0.0039 1,087,330 $ 0.0039
$ 0.0039 - $ 0.0039 1,179,138 42 $ 0.0039 1,179,138 $ 0.0039
$ 0.0009 - $ 0.0009 5,920,000 53 $ 0.0009 5,920,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 53 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 53 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 53 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 9,600,000 53 $ 0.0009 9,600,000 $ 0.0009
$ 0.0009 - $ 0.0050 32,620,000 52 $ 0.0019 32,620,000 $ 0.0019
================ ========== == ======== ========== ========
NOTE 15. SUBSEQUENT EVENTS
Subsequent to September 30, 2006, the Company issued approximately 1,323,000,000
shares of common stock through December 8, 2006 in exchange for the reduction of
approximately $111,000 in principal and approximately $167,000 in derivative
conversion option, totaling approximately $278,000 in convertible debt.
<page>F-59