<pre>
________________________________________________________________________________
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2007
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM__________ TO ___________
Commission File Number: 33-3560D
________________________
CONECTISYS CORPORATION
(Exact name of small business issuer as specified in its charter)
Colorado 84-1017107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25115 Avenue Stanford
Suite 320
Valencia, California 91355
(Address of Principal Executive Offices)
(661) 295-6763
(Issuer's telephone number)
Not applicable
(Former name, former address and former fiscal year, if changed since last
report)
_________________________________________
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes|X| No| |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No | |
As of August 13, 2007, there were 23,178,835,821 shares of the issuer's
common stock, no par value per share, outstanding.
Transitional Small Business Disclosure Format (Check one):Yes| |No|X|
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet as of June 30, 2007 (unaudited).......F-1
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2007 (unaudited) and 2006 (unaudited)
and the Cumulative Period From December 31, 1990 (Inception)
Through June 30, 2007 (unaudited )....................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through June 30, 2007 (unaudited).......F-4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended June 30, 2007 (unaudited) and 2006 (unaudited) and
the Cumulative Period From December 31, 1990 (Inception) Through
June 30, 2007 (unaudited)............................................F-16
Notes to Condensed Consolidated Financial Statements (unaudited)..........F-19
Item 2. Management's Discussion and Analysis or Plan of Operation...........2
Item 3. Controls and Procedures............................................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........10
Item 3. Defaults Upon Senior Securities....................................10
Item 4. Submission of Matters to a Vote of Security Holders................12
Item 5. Other Information..................................................12
Item 6. Exhibits...........................................................12
Signatures..................................................................13
Exhibits Filed with this Report on Form 10-QSB
ITEM 1. FINANCIAL STATEMENTS.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2007
June 30,
2007
Unaudited
Assets
Current assets
Cash and cash equivalents $ 30,467
Prepaid expenses 46,602
-----------------
Total current assets 77,069
Property and equipment, net of accumulated
depreciation of $371,141 101,712
Other assets
Deposits 9,551
Loan fees, net of accumulated
amortization of $529,543 30,011
-----------------
Total assets $ 218,343
=================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-1
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2007
June 30,
2007
Unaudited
Liabilities and shareholders' deficit
Current liabilities
Accounts payable $ 118,264
Accrued compensation 1,951,737
Due to officers 514
Accrued interest payable 316,499
Other current liabilities 19,926
Notes payable and current portion of
long-term debt 2,093,291
-----------------
Total current liabilities 4,500,231
Long-term debt, net of current portion 3,326,726
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, 21,211,056,743 shares issued
and outstanding 29,053,841
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 45,620,000
warrants exercisable 1,372,282
Accumulated deficit during development stage (38,350,602)
-----------------
Total shareholders' deficit (7,608,614)
-----------------
Total liabilities and shareholders' deficit $ 218,343
=================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-2
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended June 30, 2007 and 2006
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2007
<table>
Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended Through
June 30 June 30 June 30 June 30 June 30
2007 2006 2007 2006 2007
Unaudited Unaudited Unaudited Unaudited Unaudited
Revenues $ 6,922 $ 0 $ 6,922 $ 0 $ 524,382
Cost of prototypes and samples 80,082 67,903 140,271 188,563 1,482,760
----------------- ----------------- ----------------- ----------------- --------------
Gross loss (73,160) (67,903) (133,349) (188,563) (958,378)
General and administrative expenses 425,617 249,349 1,086,076 974,460 25,171,141
Bad debt 0 0 0 0 1,680,522
Write-off of deposits
and intangible assets 10,000 0 10,000 0 1,326,861
----------------- ----------------- ----------------- ----------------- --------------
Loss from operations (508,777) (317,252) (1,229,425) (1,163,023) (29,136,902)
Other income (expenses)
Forgiveness of debt 0 0 0 0 504,462
Settlement 0 0 0 0 (125,000)
Other income 0 0 0 0 12,072
Interest income 397 642 4,150 642 111,542
Interest expense (498,788) (387,305) (1,406,482) (1,004,199) (9,779,276)
Minority interest 0 0 0 0 62,500
----------------- ----------------- ----------------- ----------------- --------------
Net loss $ (1,007,168) $ (703,915) $ (2,631,757) $ (2,166,580) $ (38,350,602)
================= ================= ================= ================= ==============
Weighted-average shares outstanding 20,409,372,713 13,711,421,521 17,747,268,701 10,675,043,498
Net loss per share, basic and diluted (0.00) (0.00) (0.00) (0.00)
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-3
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A and B No Par Value Paid-in Subscription Development Equity
Shares Value Shares Value Capital Receivable Stage (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, November 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.
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, February 13, 1995 - $ - 1,160 $ 232,000 $ - $ - $ - $ 232,000
Debt repayment, February 13,
1995 - - 2,040 408,000 - - - 408,000
Debt repayment, February 20,
1995 - - 4,778 477,810 - - - 477,810
Acquisition of assets, CIPI
February, 1995 - - 28,750 1,950,000 - - - 1,950,000
Acquisition of assets, April 5,
1995 - - 15,000 - - - - -
Cash and services, April and
May 1995 - - 16,000 800,000 - - - 800,000
Cash, June 1, 1995 - - 500 30,000 - - - 30,000
Acquisition of assets and
services, September 26, 1995 - - 4,000 200,000 - - - 200,000
Cash, September 28, 1995 - - 41 3,000 - - - 3,000
Acquisition of assets,
September 1995 - - 35,000 1,750,000 - - - 1,750,000
Return of assets, CIPI
September, 1995 - - (27,700) (1,950,000) - - - (1,950,000)
Net loss for the year - - - - - - (2,293,867) (2,293,867)
--------- ----------- -------- ----------- -------- ------------ ---------- -----------
Balance,
November 30, 1995 16,345 $ 16,345 129,569 $ 5,031,834 $ - $ - $(3,374,010)$ 1,674,169
Shares issued in exchange for:
Cash, February, 1996 - - 1,389 152,779 - - - 152,779
Debt repayment, February 1996 - - 10,000 612,000 - - - 612,000
Services, February, 1996 - - 3,160 205,892 - - - 205,892
Cash, March, 1996 - - 179 25,000 - - - 25,000
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares returned and canceled,
March, 1996 - $ - (15,000)$ - $ - $ - $ - $ -
Services, April, 1996 - - 13 2,069 - - - 2,069
Services, September, 1996 4,155 4,155 586 36,317 - - - 40,472
Services, October, 1996 - - 6,540 327,000 - - - 327,000
Debt repayment, November, 1996 - - 2,350 64,330 - - - 64,330
Net loss for the year - - - - - - (2,238,933) (2,238,933)
--------- ---------- ---------- ----------- ---------- --------- ------------ -----------
Balance,
November 30, 1996 20,500 $ 20,500 138,786 $ 6,457,221 $ - $ - $ (5,612,943) $ 864,778
Shares issued in exchange for:
Services, March, 1997 - - 228 6,879 - - - 6,879
Services, April, 1997 - - 800 13,120 - - - 13,120
Services, July, 1997 - - 1,500 16,200 - - - 16,200
Cash, July, 1997 - - 15,000 300,000 - - - 300,000
Services, August, 1997 - - 5,958 56,000 - - - 56,000
Adjustment for partial shares due
to reverse stock split (1:20) - - 113 - - - - -
Services, October, 1997 - - 1,469,666 587,865 - - - 587,865
Debt repayment, October, 1997 - - 1,540,267 620,507 - - - 620,507
Cash, October, 1997 - - 1,500,000 281,250 - - - 281,250
Services, November, 1997 - - 4,950 10,538 - - - 10,538
Net loss for the year - - - - - - (2,739,268) (2,739,268)
--------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Balance,
November 30, 1997 20,500 $ 20,500 4,677,268 $ 8,349,580 $ - $ - $(8,352,211)$ 17,869
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, December, 1997
through November, 1998 - $ - 2,551,610 $ 2,338,264 $ - $ - $ - $ 2,338,264
Debt repayment, April, 1998
through September, 1998 - - 250,000 129,960 - - - 129,960
Cash, January, 1998 through
July, 1998 - - 4,833,334 1,139,218 - - - 1,139,218
Acquisition of assets,
July, 1998 - - 300,000 421,478 - - - 421,478
Acquisition of remaining 20%
minority interest in
subsidiary, July, 1998 - - 50,000 59,247 - - - 59,247
Services, November, 1998 60,000 60,000 - - - - - 60,000
Net loss for the year - - - - - - (4,928,682) (4,928,682)
--------- ---------- ---------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1998 80,500 $ 80,500 12,662,212 $12,437,747 $ - $ - $(13,280,893)$ (762,646)
Shares issued in exchange for:
Shares returned and canceled,
December, 1998 - - (1,350,000) (814,536) - - - (814,536)
Services, December, 1998
through September, 1999 - - 560,029 349,454 150,000 - - 499,454
Cash, December, 1998
through September, 1999 - - 1,155,800 129,537 - - - 129,537
Debt repayment, Sept., 1999 39,520 39,520 960,321 197,500 100,000 - - 337,020
Net loss for the period - - - - - - (1,323,831) (1,323,831)
--------- ---------- ---------- ----------- -------- ------------ ---------- -----------
Balance,
September 30, 1999 120,020 $ 120,020 13,988,362 $12,299,702 $250,000 $ - $(14,604,724)$1,935,002)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares re-acquired and
canceled, October, 1999 - $ - (17,500)$ (12,000)$ - $ - $ - $ (12,000)
Shares issued in exchange for:
Services, October, 1999 through
September, 2000, valued from
$0.25 to $0.80 per share - - 2,405,469 990,949 - - - 990,949
Retainers, debt and accrued
liabilities, October, 1999
through September, 2000, valued
from $0.25 to $1.57 per share - - 2,799,579 1,171,638 - - - 1,171,638
Cash, October, 1999 through
September, 2000, with subscription
prices ranging from $0.25 to
$0.66 per share - - 2,295,482 839,425 - (15,450) - 823,975
Issuance of 563,500 consultant
stock options, March, 2000,
at an exercise price of $2.00
per share - - - - 214,130 - - 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March, 2000,
to $0.38 and approximately $0.39
per share - - - - 1,113,610 - 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May, 2000, with
common stock exercise prices
ranging from $0.15 to approx.
$0.39 per share, in exchange
for officer debt 20,000 20,000 2,056,346 897,707 (407,735) - - 509,972
Issuance of 500,000 consultant
stock options, September, 2000,
with floating exercise prices
set at 15% below current market - - - - 65,000 - - 65,000
Net loss for the year - - - - - - (3,812,140) (3,812,140)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2000 140,020 $ 140,020 23,527,738 $16,187,421 $1,235,005 $ (15,450)$(18,416,864)$( 869,868)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2000 through
September, 2001, valued from
$0.11 to $0.40 per share - $ - 3,471,007 $ 572,790 $ - $ - $ - $ 572,790
Retainers, debt and accrued
liabilities, October, 2000
through September, 2001, valued
from $0.11 to $0.43 per share - - 3,688,989 487,121 - - - 487,121
Cash, October, 2000 through
March, 2001, with subscription
prices ranging from $0.075 to
$0.083 per share - - 1,045,500 78,787 - - - 78,787
Collection of stock subscription
receivable, October, 2000,
on 61,800 shares - - - - - 15,450 - 15,450
Exercise of 400,000 common
stock options, January, 2001,
at a exercise price of $0.085 per
share, in exchange for debt - - 400,000 86,000 (52,000) - - 34,000
Issuance of 1,000,000 common
stock warrants, April, 2001,
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt - - - - 77,228 - - 77,228
Issuance of 2,000,000 consultant
stock options, September, 2001,
at a exercise price of $0.13 per
share - - - - 115,000 - - 115,000
Beneficial conversion option,
April, 2001 through September,
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible debt - - - - 155,027 - - 155,027
Net loss for the year - - - - - - (2,154,567) (2,154,567)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2001 140,020 $ 140,020 32,133,234 $17,412,119 $1,530,260 $ - $(20,571,431)$(1,489,032)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2001 through
September, 2002, valued from
$0.02 to $0.25 per share - $ - 2,180,000 $ 179,916 $ - $ - $ - $ 179,916
Debt and accrued liabilities,
October, 2001 through September,
2002, with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per share 60,000 60,000 10,948,077 428,563 - - - 488,563
Cash, October, 2001 through
September, 2001, with prices
ranging from $0.01 to $0.083
per share - - 5,833,334 200,000 - - - 200,000
Exercise of 550,000 common stock
options by a consultant at a
exercise price of $0.13 per share,
in exchange for debt - - 550,000 103,125 (31,625) - - 71,500
Issuance of 3,750,000 warrants,
April, 2002 through June, 2002,
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt - - - - 100,087 - - 100,087
Beneficial conversion option,
April 2002, through June, 2002,
pertaining to $750,000 principal
value of 12% convertible debt - - - - 649,913 - - 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount - - 12,667,178 111,515 (80,702) - - 30,813
Net loss for the year - - - - - - (2,346,732) (2,346,732)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2002 200,020 $ 200,020 64,311,823 $18,435,238 $2,167,933 $ - $(22,918,163)$(2,114,972)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-10
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2002 through
July, 2003, valued from
$0.0012 to $0.0100 share - $ - 31,500,000 $ 134,000 $ - $ - $ - $ 134,000
Debt and accrued liabilities,
October, 2002 through September,
2003, valued from $0.0010 to
$0.0512 per share, including
transfer of $155,027
beneficial conversion option 162,134,748 704,774 (155,027) - - 549,747
Cash, November, 2002 through
September, 2003, with prices
ranging from $0.0010 to $0.100
per share - - 128,500,000 180,000 - - - 180,000
Issuance of 2,500,000 warrants,
November, 2002 through May, 2003,
at an exercise price of $0.005
per share, in conjunction with
$500,000 principal value of 12%
convertible debt - - - - 9,816 - - 9,816
Beneficial conversion option,
November, 2002, through May, 2003,
pertaining to $500,000 principal
value of 12% convertible debt - - - - 490,184 - - 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,355 accrued
interest, net of $52,340
convertible debt discount - - 103,778,301 353,525 (177,845) - - 175,680
Net loss for the year - - - - - - (2,386,875) (2,386,875)
--------- ---------- ----------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2003 200,020 $ 200,020 490,224,872 $19,807,537 $2,335,061 $ - $(25,305,038)$(2,962,420)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-11
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 2003 through
August 2004 valued from
$0.0008 to $0.0026 per share 0 $ 0 57,300,000 $ 78,400 $ 0 $ 0 $ 0 $ 78,400
Issuance of 7,000,000 warrants
November 2003 through
September 2004 at exercise
Prices ranging from $0.002 to
$0.005 per share, in
conjunction with $2,000,000
principal value of 12%
convertible debt 0 0 0 0 9,447 0 0 9,447
Debt and accrued liabilities
December 2003 with
preferred stock class A
valued at $1.00 per share 15,845 A 15,845 0 0 0 0 0 15,845
Debt and accrued liabilities
November 2003 to September
2004 with common shares
valued from $0.001 to $0.0025
per share 0 0 156,625,000 163,575 0 0 0 163,575
Cash, November 2003 through
March 2004 with prices of
approximately $0.0010 0 0 74,670,000 75,000 0 0 0 75,000
per share
Re-characterization of beneficial
conversion option as derivative
conversion option , October 2003
pertaining to $963,205 of
convertible debt at
September 30, 2003 0 0 0 0 (881,550) 0 0 (881,550)
Conversion of $218,115 principal
value of 12% convertible debt
$327,172 of derivative
conversion option
along with $49,008 accrued
interest, net of $28,571
convertible debt discount 0 0 352,352,250 565,724 0 0 565,724
Net loss for the year 0 0 0 0 0 0 (4,228,827)(4,228,827)
--------- ---------- ----------- ----------- ----------- ---------- ------------ -----------
Balance, September 30, 2004 215,865 $215,865 1,131,172,122 $20,690,236 $1,462,958 $ 0 $(29,533,865)$(7,164,806)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ----------- ------------
Shares issued in exchange for:
Cash, January 2005 with a price
of $0.00125 per share 0 $ 0 4,000,000 $ 5,000 $ 0 $ 0 $ 0 % 5,000
Debt, accrued liabilities
and prepaid retainer
October 2004 to September
2005 with common shares
valued from $0.0004 to $0.0010
per share 0 0 591,300,000 473,362 0 0 0 473,362
Services, December 2004 through
August 2005 valued from
$0.0006 to $0.0010 per share 0 0 52,000,000 46,200 0 0 0 46,200
Issuance of 2,800,000 warrants
November 2004 through
September 2005 at an exercise
price of $0.0039 per share, in
conjunction with $1,400,000
principle value of 12%
convertible debt 0 0 0 0 3,756 0 0 3,756
Conversion of $2,529,378 principal
value of convertible debt,
$3,794,067 of derivative
conversion option
along with $104,410 accrued
interest, net of $973,565
convertible debt discount 0 0 5,610,392,876 5,454,290 0 0 5,454,290
Net loss for the year 0 0 0 0 0 0 (3,132,683) (3,132,683)
----------- -------- ------------- ----------- --------- ---------- ---------- -----------
Balance, September 30, 2005 215,865 $215,865 7,388,864,998 $26,669,088 $1,466,714$ 0 $(32,666,548) $(4,314,881)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ----------- ------------
Shares issued in exchange for:
Cash, April through 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.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through June 30, 2007
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
-------- -------- ------------ ---------- --------- ---------- ------------ ------------
Shares issued in exchange for:
Accrued Services November 2006
valued at approximately
$0.0005 per share 0 0 250,000,000 124,165 0 0 0 124,165
Services during the fiscal year
2007 valued at approximately
$0.0003 per share 0 0 75,000,000 22,500 0 0 0 22,500
Issuance of 13,000,000 warrants
February 2007 through June 2007
at an exercise price of $0.0009
per share, in conjunction with
$650,000 principal value of 6%
convertible debt 0 0 0 0 1,017 0 0 1,017
Conversion of $315,011 principal
value of convertible debt,
$472,516 of derivative
conversion option along with
$391,886 accrued interest,
net of $202,990 convertible
debt discount 0 $ 0 6,501,261,960 $ 976,423 $ 0 $ $ 0 $ 976,423
Net loss for the period 0 0 0 0 0 0 (2,631,757) (2,631,757)
--------- --------- -------------- ---------- --------- ------- ----------- -----------
Balance, June 30, 2007 215,865 $215,865 21,211,056,743 $29,053,841 $ 1,472,282 $ 0 $(38,350,602)$ (7,608,614)
========= ========= ============== ========== ========= ======= =========== ===========
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)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2007 and 2006
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2007
<table>
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
June 30, June 30, June 30,
2007 2006 2007
Unaudited Unaudited Unaudited
Operating activities
Net loss $ (2,631,757) $ (2,166,580)$ (38,350,602)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 16,339 10,645 1,760,741
Stock issued for services 22,500 3,100 7,670,973
Stock issued for interest 0 0 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,316,861
Amortization of loan fees
and note discounts 729,525 612,670 4,529,375
Mark-to-market of derivative
conversion option 326,017 338,101 3,242,029
Forgiveness of debt 0 0 (504,462)
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses and deposits 109,478 68,648 191,595
Interest receivable 0 0 (95,700)
Increase (decrease) in liabilities
Accounts payable (36,353) (155,558) 2,388,297
Accrued compensation 73,041 158,181 3,123,745
Due to officers 65 55 631,275
Accrued interest and other current
liabilities 354,690 87,949 1,347,449
-------------- ----------------- ------------
Total adjustments 1,595,302 1,123,791 27,468,469
-------------- ----------------- ------------
Net cash used in
operating activities (1,036,455) (1,042,789) (10,882,133)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2007 and 2006 And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2007
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
June 30, June 30, June 30,
2007 2006 2007
Unaudited Unaudited Unaudited
Investing activities
Increase in notes receivable $ 0 $ 0 $ (1,322,500)
Cost of license & technology 0 0 (94,057)
Sale (purchase) of bank cds 430,733 0 0
Purchase of equipment (14,284) (53,669) (339,670)
----------------- ----------------- ------------
Net cash provided by (used in)
investing activities 416,449 (53,669) (1,756,227)
Financing activities
Common stock issued for cash 0 75,000 3,617,172
Stock warrants 1,017 3,101 205,902
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees (20,000) (20,000) (599,555)
Proceeds from debts
Related party 0 0 206,544
Other 649,520 667,395 9,562,912
Payments on debt
Related party 0 0 (53,172)
Other 0 0 (604,536)
Decrease in subscription receivable 0 0 35,450
Contributed capital 0 0 515
----------------- ----------------- ------------
Net cash provided by
financing activities 630,537 725,496 12,668,827
----------------- ----------------- ------------
Net increase (decrease) in cash and
cash equivalents 10,531 (370,962) 30,467
Cash and cash equivalents at
beginning of period 19,936 518,765 0
----------------- ----------------- ------------
Cash and cash equivalents at end
of period $ 30,467 $ 147,803 $ 30,467
================= ================= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-17
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 2007 and 2006
And the Cumulative Period
From December 31, 1990 (Inception) Through June 30, 2007
Dec. 1, 1990
(Inception)
9 Months Ended 9 Months Ended Through
June 30, June 30, June 30,
2007 2006 2007
Unaudited Unaudited Unaudited
Cash paid during the period for
Interest 5,040 0 704,530
Income Taxes 0 0 16,050
Non-cash investing and financing activities
Common stock issued for
Note receivable 0 0 281,250
Prepaid expenses 0 0 264,748
Property and equipment 0 0 130,931
Licenses & technology 0 0 2,191,478
Acquisition of remaining
minority interest in subsidiary 0 0 59,247
Repayment of debt 584,537 1,324,286 13,598,008
Accrued services & interest 516,051 8,261 5,731,553
Preferred stock issued for
Services 0 75,845
Repayment of debt 0 0 119,520
Preferred stock options issued for
repayment of debt 0 0 100,000
Re-characterize beneficial
conversion option as debt 0 0 881,550
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F- 18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's Annual Report on Form 10-KSB for the year ended September 30, 2006.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for the fair presentation have been included. The results
For the nine months ended June 30, 2007 do not necessarily indicate
the results that may be expected for the full year.
Use of estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
materially differ from those estimates.
Net loss per common share - basic and diluted
Net loss per common share - basic and diluted is based on the weighted-average
number of common and common equivalent shares outstanding for the periods
presented. Common equivalent shares representing the common shares that would be
issued on exercise of convertible securities and outstanding stock options and
warrants reduced by the number of shares which could be purchased from the
related exercise proceeds are not included since their effect would be anti-
dilutive.
As of June 30, 2007, the Company had 21,211,056,743 shares of common stock
outstanding. If all of the Company's unexpired warrants and options 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 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 45,620,000
--------------
Subtotal 55,620,000
Accrued officer compensation ($440,000),
convertible into common stock 358,758,842
Convertible note holder principal value
($2,673,325), accrued interest ($316,499)
assumed converted into common stock at
$0.00005 per share 59,796,480,000
--------------
Total potential common stock equivalents 60,210,858,842
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 2. GOING CONCERN UNCERTAINTY
As of June 30, 2007, the Company had a deficiency in working capital of
approximately $4,400,000 and had incurred cumulative net losses since inception
of approximately $38,400,000, 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 additional convertible debt securities and sales of
common stock, 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 $5,920,000 through twenty-three similar
funding tranches occurring in April 2002 through July 2006. In February 2007,
the same investor group agreed to advance the Company an additional $1,350,000,
subject to various conditions. The Company received $250,000 in February 2007,
$100,000 in March 2007, $100,000 in April 2007, $100,000 in May 2007, and
$100,000 in June 2007, including certain fees payable, in connection with this
additional financing. The remaining balance of $700,000 is to be funded in
equal monthly installments of $100,000 each from July 2007 through January 2008.
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. PREPAID EXPENSES
The Company had previously recognized a prepaid expense of $80,000 as a staying
bonus for its Chief Executive Officer as per his employment contract (see NOTE
5). The staying bonus was amortized over the calendar year 2006. For the nine
months ended June 30, 2007, $20,000 was amortized as officer salaries expense
through December 31, 2006. No future staying bonuses currently apply.
Aggregate prepaid expenses at June 30, 2007 amounted to $46,602. Included in
prepaid expenses is $20,000 in an escrow account designated for key man life
insurance. Also included are prepaid retainers for a consultant and law firm
amounting to $11,250 and $15,352, respectively.
As of June 30, 2007, the balance in prepaid expenses was $46,602.
<page>F-20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 4. LOAN FEES
During the year ended September 30, 2006, the Company received an aggregate of
$1,270,000 from an accredited investor group in exchange for 6% convertible
debentures maturing March 8, 2009, convertible at the lesser of $0.03 per share
and 40% of the average of the lowest three intra-day trading prices of a share
of common stock during the 20 trading days immediately preceding conversion.
These convertible debentures were accompanied by an aggregate of 20,320,000
common stock warrants, exercisable over a five-year period at a exercise price
of $0.0009 per share. Loan fees associated with these loans amounted to $20,000.
As of September 30, 2006, aggregate loan fees amounted to $539,555, and
accumulated amortization of these loan fees was $511,315.
During the nine months ended June 30, 2007, the Company received an aggregate of
$650,000 from the same accredited investor group in exchange for 6% convertible
debentures maturing February 13, 2010, convertible at the lesser of $0.03 per
share and 40% of the average of the lowest three intra-day trading prices of a
share of common stock during the 20 trading days immediately preceding
conversion. These convertible debentures were accompanied by an aggregate of
13,000,000 common stock warrants, exercisable over a seven-year period at a
exercise price of $0.0009 per share. Loan fees associated with these loans
amounted to $20,000.
Total amortization of all loan fees during the nine months June 30, 2007
amounted to $18,229 leaving an unamortized loan fee balance at June 30, 2007 of
$30,011.
NOTE 5. DUE TO/FROM OFFICERS
The aggregate amount due officers at June 30, 2007 was $514 and interest
expense on the officer loans amounted to $65 for the nine months ended
June 30, 2007.
As of June 30, 2007, the Company owed its officers and former officers
$1,951,737 in accrued compensation. Of this amount, $360,000 was attributable
to aggregate staying bonuses payable to the President and former Chief Financial
Officer of the Company as of January 1, 2005. An additional $80,000 payable to
the President on January 1, 2006 was 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 shares at June 30, 2007.
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 6. CONVERTIBLE DEBENTURES
Convertible debentures at June 30, 2007, including convertible debentures
previously entirely converted to equity, secured by substantially all the assets
of the Company, consisted of the following:
<table>
Original Net Remaining Accrued Unexpired
Principal Proceeds to Principal (Unpaid) Warrants
Issuance Date Amount Company(1) Amount Interest(2) Issued
March 29, 2002 $ 300,000 $ 225,000 $ -- $ -- --
May 10, 2002 150,000 129,000 -- -- --
June 17, 2002 300,000 238,000 -- -- --
November 27, 2002 200,000 144,000 -- -- 1,000,000
March 3, 2003 150,000 100,000 -- 27,720 750,000
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 -- 59,049 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 1,068,336 169,923 2,800,000
March 8, 2006 1,270,000 1,180,000 954,989 57,780 20,320,000
February 13, 2007 650,000 630,000 650,000 9,880 13,000,000
---------- ----------- ----------- ---------- ------------
Total $ 6,570,000 $ 5,382,000 $ 2,673,325 $ 420,352 45,620,000
========== =========== =========== ========== ============
</table>
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 6. CONVERTIBLE DEBENTURES (Continued)
(1) Amounts are approximate and represent net proceeds after deducting loan
fees and expenses in connection with the issuance as well as certain expenses
for legal fees incurred in connection with the preparation of reports and
statements filed with the Securities and Exchange Commission.
(2) Amounts represent accrued (unpaid) interest outstanding as of June 30,
2007. The total amount of accrued and unpaid interest does not account for
approximately $104,000 of outstanding pre-paid interest.
The above secured convertible debentures or notes were all issued to the same
investor group (with four participating investor-members). Except for the
convertible notes issued subsequent to September 9, 2004, they are due one year
following their respective issuance dates. The convertible notes issued during
the September 30, 2005 fiscal year are due two years from their respective
issuance dates, and the convertible notes issued during the September 30, 2006
fiscal year and the nine months ended June 30, 2007 are due three years from
their respective issuance dates.
The conversion price of the secured convertible debentures is the lower of 40%
of the average of the three lowest intra-day trading prices of a share of the
Company's common stock on the OTC Bulletin Board during the twenty trading days
immediately preceding the conversion date, and either (a) $0.06 for the June
2002 convertible debentures, (b) $0.01 for the November 2002 and March and May
2003 convertible debentures, (c) $0.005 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) $0.03 for the March 2006 and February
2007 convertible notes. As of June 30, 2007, the applicable conversion price
was approximately $0.00005 per share, meaning that the principal and accrued
interest (after the allocation of the prepaid interest) were potentially
convertible into approximately 59,796,480,000 common shares of the Company.
Subtotal - convertible debentures (principal and interest) $ 3,093,677
Less reclassified accrued interest (316,499)
Less prepaid interest offset (103,853)
-------------
Subtotal principal value 2,673,325
Derivative conversion option - 150% of principal 4,009,987
Less unamortized note discount (1,272,548)
-------------
Net carrying value - convertible debentures $ 5,410,264
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. Currently in default 9,253
------------
Total - convertible debentures and notes $ 5,420,017
Current portion 2,093,291
------------
Long-term portion $ 3,326,726
============
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 6. CONVERTIBLE DEBENTURES (Continued)
As of June 30, 2007, five-year maturities of the notes payable, including
convertible debentures, were as follows:
<table>
Derivative Unamortized Subsequent
Conversion Note Conversions to Total
Principal Option Discount Equity Due
--------- --------- ------------ --------------- -----------
Year ended June 30, 2008 $1,077,589 $1,602,504 $ (74,302) $ (512,500)$2,093,291
Year ended June 30, 2009 954,989 1,432,483 (601,484) -- 1,785,988
Year ended June 30, 2010 650,000 975,000 (596,762) -- 1,028,238
Subsequent conversions to
equity -- -- -- 512,500 512,500
----------- ----------- ------------ ------------ -----------
Total notes payable $ 2,682,578 $ 4,009,987 $(1,272,548) $ -- $5,420,017
=========== =========== ============ ============ ===========
</table>
NOTE 7. 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, the Company has entered into a series of
securities purchase agreements and related agreements with an accredited
investor group (the "Purchasers") for the purchase of one-year to three-year
convertible debentures, which bear interest ranging from 6% to 12% per annum,
payable quarterly in cash or common stock. The debentures are currently
convertible into common stock at prices ranging from the lesser of a fixed price
($0.005 to $0.06 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 have also been accompanied by the issuance
of three-year to seven-year common stock warrants (in amounts numbering from 3
to 20 times each dollar of related convertible debt principal issued) and
exercisable into the Company's common stock at prices ranging from $0.0009 to
$0.045 per share. As part of the recording of the convertible debt
transactions, a derivative conversion option and amortizable convertible debt
discount have been recognized. The carrying value of the debt is net of the
principal value, derivative conversion option, and unamortized convertible debt
discount components.
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.
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.
The cumulative history of the Company's convertible debt-related transactions
with the above accredited investor group is summarized as follows:
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 7. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT (continued)
Net Net
Derivative Convertible Debt
Principal Conversion Debt Carrying Warrants
Period/Transaction Amount Option Discount Amount Outstanding
- ------------------ ---------- ---------- ----------- --------- -----------
Issuances $ 750,000 $ -- $ (750,000) $ -- 3,750,000
Amortization -- -- 279,115 279,115 --
Conversions (93,130) -- 69,233 (23,897) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2002 656,870 -- (401,652) 255,218 3,750,000
Issuances 500,000 -- (500,000) -- 2,500,000
Amortization -- -- 653,720 653,720 --
Conversions (193,665) -- 52,340 (141,325) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2003 963,205 -- (195,592) 767,613 6,250,000
Re-characterize
Equity as Debt -- 881,550 -- 881,550 --
Bump-up Due to
Mark-to-Market -- 563,257 -- 563,257 --
Issuances 2,000,000 3,000,000 (2,000,000)3,000,000 7,000,000
Amortization -- -- 673,705 673,705 --
Conversions (218,115) (327,172) 28,571 (516,716) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2004 2,745,090 4,117,635 (1,493,316)5,369,409 13,250,000
Issuances 1,400,000 2,100,000 (1,400,000)2,100,000 2,800,000
Expirations -- -- -- -- (3,750,000)
Amortization -- -- 693,992 693,992 --
Conversions (2,529,378) (3,794,067) 973,565(5,349,880) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2005 1,615,712 2,423,568 (1,225,759)2,813,521 12,300,000
Issuances 1,270,000 1,905,000 (1,270,000)1,905,000 20,320,000
Amortization -- -- 715,748 715,748 --
Conversions (547,376) (821,065) 243,177(1,125,264) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2006 2,338,336 3,507,503 (1,536,834)4,309,005 32,620,000
Issuances 650,000 975,000 (650,000) 975,000 13,000,000
Amortization -- -- 711,296 711,296 --
Conversions (315,011) (472,516) 202,990 (584,537) --
---------- ---------- ----------- --------- -----------
Balance,
June 30, 2007 $ 2,673,325 $ 4,009,987 $(1,272,548)$5,410,764 45,620,000
=========== =========== =========== =========== ==========
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 8. SHAREHOLDERS' 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 authorized shares of common stock from
15,000,000,000 to 50,000,000,000. Of the 50,000,000 authorized shares of
preferred stock, 1,000,000 shares have been designated as Class A Preferred
Stock and 1,000,000 shares have been designated as Class B Preferred Stock, and
the remaining 48,000,000 shares are undesignated. As of June 30, 2007, there
were 21,211,056,743 shares of the Company's common stock outstanding held by
approximately 800 holders of record, 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 November 2006, the company issued 250,000,000 shares of common stock for
accrued services to an accounting firm valued at approximately $0.0005 per share
totaling $124,165.
In February 2007 the Company issued 75,000,000 shares of restricted common stock
to three employees, 25,000,000 shares each, as a bonus for services rendered to
the Company valued at approximately $0.0003 per share totaling $22,500.
During October 2006 through June 30, 2007, the Company issued 6,501,261,960
shares of common stock in connection with the conversion of $315,011 of
principal, $472,516 of derivative conversion option and $391,886 of accrued
interest, net of $202,990 convertible debt discount for a total conversion
amount of $976,423 of the Company's convertible debentures.
NOTE 9. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note
holder options to purchase 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share. As consideration, the Company
reduced its debt to the note holder by $50,000 and received an extension of time
to pay-off its promissory note. The Company also issued to its Chief Executive
Officer 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
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
stock at the rate of 10 common shares for each Class B preferred share. In
September 2001, the exercise price on the Class B preferred stock options was
adjusted to $2.50 per share and the exercise period was extended to November 1,
2005. In June 2002, the exercise price on the Class B preferred stock options
was adjusted to $0.50 per share. In January 2004, the exercise price on the
Class B preferred stock options was adjusted to $0.05 per share and the exercise
period was extended to November 1, 2009.
The Company's Chief Executive Officer 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%).
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R").
On January 1, 2006. Accordingly, compensation costs for all share-based awards
to employees are measured based on the grant date fair value of those awards and
recognized over the period during which the employee is required to perform
service in exchange for the award (generally over the vesting period of the
award). The Company has no awards with market or performance conditions. Excess
tax benefits are defined by SFAS 123R (when applicable) will be recognized as an
addition to additional paid-in capital. Effective January 1, 2006 and for all
periods subsequent to that date, SFAS 123R supersedes the Company's previous
accounting under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions in SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the modified prospective transition method, the Company's
consolidated financial statements for prior periods were not restated to
reflect, and do not include, the effect of SFAS 123R.
No options were granted or vested during the interim periods presented, and all
options previously granted had completely vested before January 1, 2005.
Therefore no compensation costs were incurred under SFAS 123R and the actual net
loss equals the pro forma net loss for such interim periods.
All common stock options and warrants issued to consultants and other non-
employees have been recorded at the fair value of the services rendered and
equivalent to the market value (as discounted, if applicable) of the equity
instruments received in accordance with 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
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
risk-free annual rate of return, which ranged from 4.5% to 4.75% during the nine
months ended June 30, 2007, and from 5% to 6% during the years ended September
30, 2006, 2005, 2004, and 2003, along with stock volatility, which is estimated
to be 190% for all the above periods.
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 6 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 exercise prices were substantially above the
market price of the Company's common stock, no value was attributed to these
options at the time of grant. During the year ended September 30, 2004,
4,352,205 of these non-valued options expired, leaving a balance at September
30, 2004 of 500,000 options, exercisable at $1.00 per share and expiring January
16, 2005. The Company also granted a contingent issuance to its Chief Technical
Officer of 2,000,000 common stock options exercisable at $0.50 per share and
expiring December 31, 2004, which would not have vested until certain milestones
had been attained. These respective common stock options and contingent
issuances have been excluded from the summarized table below.
In November 2003 through December 2003, 1,000,000 seven-year common stock
warrants were issued to an accredited investor group in connection with a
$200,000 12% convertible debenture financing arrangement (see Note 6 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 6 above). The allocated
cost of these warrants amounted to $1,417.
In April 2004, 750,000 seven-year common stock warrants were issued to an
accredited investor group in connection with a $250,000 12% convertible
debenture financing arrangement (see Note 6 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 6 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 6 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).
Also, in September 2004, 563,500 common stock options previously issued to a
consultant and exercisable at $2.00 per share, that were initially valued at
$214,130, expired worthless.
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
In March 2005 through September 2005, 2,800,000 five-year common stock warrants
were issued to an accredited investor group in connection with a $1,400,000 8%
convertible debenture financing arrangement (see Note 6 above). The allocated
cost of these warrants amounted to $3,756, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2005 of $1,466,714
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
During the year ended September 30, 2005, the 500,000 non-valued common stock
options and the 2,000,000 contingently issuable common stock options noted above
both expired. In addition, 6,300,000 previously-valued common stock options and
warrants expired, consisting of 4,750,000 warrants issued to convertible note
holders at exercise prices ranging from $0.045 to $0.192 per share, 1,450,000
common stock options issued to a consultant at an exercise price of $0.13 per
share, and 100,000 common stock options issued to a director at an exercise
price of $0.38 per share.
In March 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 6 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).
In February through June 2007, 13,000,000 seven-year common stock warrants were
issued to an accredited investor group in connection with a $650,000 6%
convertible debenture financing arrangement (see NOTE 6 above). The allocated
cost of these warrants amounted to $1,017, resulting in a recorded balance of
stock options and warrants exercisable at June 30, 2007 of $1,472,282.
The common stock option and warrant activity during the nine months ended
June 30, 2007 and 2006 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2006 32,620,000 $ 0.0019
Granted 13,000,000 0.0009
Expired - -
---------- -------
Balance outstanding, June 30, 2007 45,620,000 $ 0.0016
=========== =======
Balance outstanding, October 1, 2005 14,243,654 $ 0.0056
Granted 10,720,000 0.0009
Expired (1,943,654) 0.3850
----------- -------
Balance outstanding, June 30, 2006 23,220,000 $ 0.0024
========== =======
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
The following table summarizes information about common stock options and
warrants at June 30, 2007:
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 29 $ 0.0050 1,000,000 $ 0.0050
$ 0.0050 - $ 0.0050 750,000 35 $ 0.0050 750,000 $ 0.0050
$ 0.0050 - $ 0.0050 750,000 37 $ 0.0050 750,000 $ 0.0050
$ 0.0050 - $ 0.0050 500,000 41 $ 0.0050 500,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 41 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 42 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 44 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 1,250,000 44 $ 0.0050 1,250,000 $ 0.0050
$ 0.0020 - $ 0.0020 750,000 46 $ 0.0020 750,000 $ 0.0020
$ 0.0020 - $ 0.0020 1,875,000 51 $ 0.0020 1,875,000 $ 0.0020
$ 0.0020 - $ 0.0020 1,875,000 53 $ 0.0020 1,875,000 $ 0.0020
$ 0.0039 - $ 0.0039 316,066 33 $ 0.0039 316,066 $ 0.0039
$ 0.0039 - $ 0.0039 217,466 33 $ 0.0039 217,466 $ 0.0039
$ 0.0039 - $ 0.0039 1,087,330 33 $ 0.0039 1,087,330 $ 0.0039
$ 0.0039 - $ 0.0039 1,179,138 33 $ 0.0039 1,179,138 $ 0.0039
$ 0.0009 - $ 0.0009 5,920,000 44 $ 0.0009 5,920,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 44 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 44 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 44 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 9,600,000 44 $ 0.0009 9,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 5,000,000 79 $ 0.0009 5,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 79 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 79 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 79 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 79 $ 0.0009 2,000,000 $ 0.0009
----------------- ---------- -- -------- ---------- --------
$ 0.0009 - $ 0.0050 45,620,000 53 $ 0.0016 45,620,000 $ 0.0016
================= ========== == ======== ========== ========
NOTE 10. REVENUE
On January 17, 2007, the Company and Trimark Associates Inc. ("Trimark")
executed an Independent Contractor Agreement (the "Agreement") for the Company
to provide installation of its H-Net(TM) system for a key irrigation district
cooperative in Northern California. The Company was to provide the services
described in individual task orders at compensation rates also set forth
therein. The Agreement was to continue until the services described in the
various task orders were completed. The Agreement could, however, be terminated
in advance by either party at any time and for any reason with 15-days' prior
written notice. In April 2007, certain individual task orders were completed
and the Company was compensated by Trimark for its initial engineering
evaluation and feasibility work on the project, in the amount of $6,922. In
April 2007, Trimark terminated the contract due to substantial increases in
modifications and challenges in meeting the requirements to further develop the
project.
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2007
NOTE 11. INCOME TAXES
Deferred income taxes consisted of the following at June 30, 2007:
Deferred tax asset, benefit
of net operating loss
carryforwards $ 12,800,000
Valuation allowance (12,800,000)
-----------
Net deferred tax asset $ -
===========
The valuation allowance fully offsets the net deferred tax asset, since it is
more likely than not that it would not be recovered. During the nine months
ended June 30, 2007, the deferred tax asset and valuation allowance were both
increased by $1,000,000.
As of September 30, 2006, the Company has approximately $29,600,000 in federal
and $21,400,000 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.
NOTE 12. SUBSEQUENT EVENTS
COMMON STOCK ISSUANCES-Subsequent to June 30, 2007, the Company issued
approximately 1,700,000,000 shares of common stock through July 31, 2007 in
exchange for the reduction of debt and accrued interest, totaling approximately
$228,000 (including the derivative conversion option portion).
ADDITIONAL FUNDING-Monthly installments of $100,000 each from the Company's
February 13, 2007 aggregate financing arrangement for $1,350,000 were received
in July and August 2007.
<page>F-31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. We intend that those forward-looking statements be subject to the
safe harbors created by those sections. These forward- looking statements
generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance, and
can generally be identified by the use of the words "believe," "intend," "plan,"
"expect," "forecast," "project," "may," "should," "could," "seek," "pro forma,"
"estimates," "continues," "anticipate" and similar words. The forward-looking
statements and associated risks may include, relate to, or be qualified by other
important factors, including, without limitation:
o our ability to obtain FCC approval of our H-Net(TM) wireless
meter reading products;
o the projected growth in the automated meter reading markets;
o our business strategy for establishing and expanding our
presence in these markets;
o our ability to successfully implement our business plans;
o our ability to hire and retain qualified personnel;
o anticipated trends in our financial condition and results of
operations;
o our ability to distinguish ourselves from our competitors; and
o uncertainties relating to economic conditions in the markets in
which we currently operate and in which we intend to operate in
the future.
These forward-looking statements necessarily depend upon assumptions and
estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the forward-
looking statements. We do not undertake to update, revise or correct any
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section of
our most recent annual report on Form 10-KSB could cause our financial results,
including our net income (loss) or growth in net income (loss) to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate substantially.
Overview
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-Net(TM), which is a trademark of ConectiSys. Our
H- Net(TM) system is currently comprised of two principal components: our H-
Net(TM) 5.0 product, which itself is comprised of circuitry and a radio
transmitter, and our H-Net(TM) BaseStation. Our H- Net(TM) 5.0 product is a
component that is designed to be part of a digital energy meter to read and
wirelessly transmit meter data to our H-Net(TM) BaseStation. Our H-Net(TM)
BaseStation is designed to receive and relay the meter data over standard phone
lines to a central location where the data is compiled and utilized.
We are continuing the development of our H-Net(TM) system. Our recent
development efforts have focused on redesigning our H-Net(TM) circuitry from a
three-board circuit to a two-board circuit. This redesign was completed in
November 2005 and testing of our new H-Net(TM) circuitry has begun. We
<page>2
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 a history of only inconsequential
revenues and have incurred significant losses since the beginning of the
development of our H-Net(TM) system. We have a significant accumulated deficit
and a deficiency in working capital. As a result of our financial condition, our
independent auditors have issued a report questioning our ability to continue as
a going concern.
We have recently completed and successfully demonstrated a significant
update of our H-Net(TM) system's hardware and software technologies in
cooperation with one of the major electric meter manufacturers. We believe that
this update will provide us with a product that has incorporated more advanced
wireless technologies with a more market- competitive and cost-effective design
and greater reliability. We are also pursuing different applications of our H-
Net(TM) technologies that may be synergistic with our current marketing plan in
markets in which we intend to compete.
Critical Accounting Policies and Estimates
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.
The following discussion and analysis is based upon our financial
statements, which have been prepared using accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires management to make estimates and assumptions that affect the
reported amounts of revenue and expenses, and assets and liabilities, during the
periods reported. Estimates are used when accounting for certain items such as
depreciation, likelihood of realization of certain assets, employee compensation
programs and valuation of intangible assets. We base our estimates on
historical experience and other assumptions that we believe are reasonable under
the circumstances. Actual results may differ from our estimates.
Going Concern Assumption
We have based our financial statements on the assumption of our
operations continuing as a going concern. As a result, we continue to
depreciate fixed assets and show certain debts as long-term. As of June 30,
2007, we had a deficiency in working capital of $4,423,000 and had incurred
cumulative net losses since inception of approximately $38,351,000, 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, which are expected to help provide us with the liquidity necessary
<page>3
to meet operating expenses. An investor group has advanced us an aggregate
amount of $6,770,000. Over the longer-term, we plan to achieve profitability
through our operations from the sale and licensing of our H-Net (TM) automatic
meter-reading system. Our consolidated financial statements do not include any
adjustments relating to the recoverability and classification of the recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should we be unable to continue our existence.
Stock-Based Compensation
Our compensation of consultants and employees with our capital stock is
recorded and/or disclosed at estimated market value. The volatile nature of the
price of our common stock causes wide disparities in certain valuations.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-based Compensation," establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non- employees in exchange for equity
instruments. We adopted this accounting standard on January 1, 1996. SFAS No.
123 also encourages, but does not require, companies to record compensation cost
for stock- based employee compensation.
We adopted the provisions of SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123R"), on January 1, 2006. Accordingly, compensation costs for
all share-based awards to employees are measured based on the grant date fair
value of those awards and recognized over the period during which the employee
is required to perform service in exchange for the award (generally over the
vesting period of the award). We have no awards with market or performance
conditions. Excess tax benefits as defined by SFAS 123R (when applicable) will
be recognized as an addition to additional paid-in capital. Effective January
1, 2006 and for all periods subsequent to that date, SFAS 123R supersedes our
previous accounting under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123R. We have applied the provisions of SAB 107 in
our adoption of SFAS 123R.
We adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions of SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the modified prospective transition method, our consolidated
financial statements for prior periods were not restated to reflect, and do not
include, the effect of SFAS 123R.
The value of the stock-based award is determined using a pricing model
whereby compensation cost is the excess of the fair market value of the stock as
determined by the model at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. Shares of our common stock
issued in exchange for goods or services are valued at the cost of the goods or
services received or at the market value of the shares issued, depending on the
ability to estimate the value of the goods or services received.
<page>4
Results of Operations
Comparison of Results of Operations for the Three Months Ended June 30,
2007 and 2006
We generated revenues of $6,922 for the three months ended June 30, 2007
as compared to no revenues generated for the same period in 2006. These
revenues were generated under an agreement with Trimark Associates Inc. for the
installation of our H-Net(TM) technology. The agreement was subsequently
terminated and no additional revenues are expected from Trimark at this time.
Cost of prototypes and samples for the three months ended June 30, 2007 was
$80,082 as compared to $67,903 for the three months ended June 30, 2006,
representing an increase of $12,179, or 18%. This increase in cost of
prototypes and samples primarily was due to an increase in production of models
and prototypes of our H-Net(TM) products used for sales and marketing purposes.
General and administrative expenses increased by $176,268, or 71%, to
$425,617 for the three months ended June 30, 2007 as compared to $249,349 for
the same period in 2006. This increase was primarily due to sales and marketing
efforts for H-Net(TM) projects, field and deployment surveying and an increase
in consultant compensation.
Interest expense increased by $111,483, or 29%, to $498,788 during the
three months ended June 30, 2007 as compared to $387,305 for the same period in
2006. The increase in interest expense was primarily attributable to increased
amortization of convertible debt discount on our convertible debentures and
notes.
Net loss for the three months ended June 30, 2007 increased by $303,253,
or 43%, to $1,007,168 as compared to a net loss of $703,915 for the same period
in 2006. The increase in net loss primarily resulted from the increases in
general and administrative expenses and interest expense, as discussed above.
Comparison of Results of Operations for the Nine Months Ended June 30,
2007 and 2006
We generated revenues of $6,922 for the nine months ended June 30, 2007
as compared to no revenues generated for the same period in 2006. These
revenues were generated under an agreement with Trimark Associates Inc. for the
installation of our H-Net(TM) technology. The agreement was subsequently
terminated and no additional revenues are expected from Trimark at this time.
Cost of prototypes and samples for the nine months ended June 30, 2007 was
$140,271 as compared to $188,563 for the nine months ended June 30, 2006,
representing a decrease of $48,292, or 26%. This decrease in cost of prototypes
and samples primarily was due to a decrease in production of models and
prototypes of our H-Net(TM) products used for sales and marketing purposes.
General and administrative expenses increased by $111,616, or 11%, to
$1,086,076 for the nine months ended June 30, 2007 as compared to $974,460 for
the same period in 2006. This increase was primarily due to sales and marketing
efforts for H-Net(TM) projects, field and deployment surveying and an increase
in consultant compensation.
Interest expense increased by $402,283, or 40%, to $1,406,482 during the
nine months ended June 30, 2007 as compared to $1,004,199 for the same period in
2006. The increase in interest expense was primarily attributable to increased
amortization of convertible debt discount on our convertible debentures and
notes.
Net loss for the nine months ended June 30, 2007 increased by $465,177,
or 21%, to $2,631,757 as compared to a net loss of $2,166,580 for the same
period in 2006. The increase in net loss primarily resulted from the increases
<page>5
in general and administrative expenses and interest expense, as discussed above.
Liquidity and Capital Resources
During the nine months ended June 30, 2007, 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
energy industry. However, we have not yet sold any H- Net(TM) systems. We have a
history of only inconsequential 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 June 30, 2007 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 June 30, 2007, we had a working capital deficit of $4,423,000 and
an accumulated deficit of $38,351,000. As of that date, we had approximately
$30,000 in cash and cash equivalents. We had accounts payable and accrued
compensation expenses of approximately $2,070,000. We had other current
liabilities, including amounts due to officers, accrued interest and current
portion of convertible debentures of approximately $2,430,000, including debts
incurred prior to the beginning of fiscal year 2007. 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 $1,036,000 for the nine
months ended June 30, 2007 as compared to $1,043,000 for the nine months ended
June 30, 2006. Cash provided by our investing activities totaled $416,000 for
the nine months ended June 30, 2007 as compared to cash used in our investing
activities of $54,000 for the nine months ended June 30, 2006. The increase in
cash provided by our investing activities was primarily caused by the sale of
$431,000 in short-term investments.
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 August 13, 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
<page>6
stock, and market prices for our common stock have generally declined throughout
the duration of our convertible debenture and note financings, the number of
registrable securities has substantially increased. Accordingly, although we
may have been in compliance initially, the decline in market prices for our
common stock has caused us to fall out of compliance with our registration
obligations.
As of August 13, 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 February 2007 and March 2006
convertible note financing transactions, 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 August 13, 2007, we owed principal and unpaid interest on our
convertible debentures and notes in an aggregate amount of approximately
$3,114,000, net of approximately $104,000 of prepaid interest, all of which we
believe would be immediately due and payable upon demand by the holders of our
secured convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H-
Net(TM) system, which would have a material and adverse effect on our business,
prospects, results of operations and financial condition. In addition, the
holders of our secured convertible debentures and notes were entitled to demand
immediate repayment of the outstanding principal amounts of the debentures and
notes and any accrued and unpaid interest. The cash required to repay such
amounts would likely have to be taken from our working capital. Since we rely
on our working capital to sustain our day to day operations and the development
of our H-Net(TM) system, a default on the convertible debentures or notes could
have a material and adverse effect on our business, prospects, results of
operations or financial condition. However, as of that date, other than the
receipt of a notice of default, we were not aware of any action taken by the
holders of our secured convertible debentures and notes to pursue such rights,
and as of that date we also were not aware of any other legal or similar action
taken by those holders to enforce their rights or as a result of our defaults
under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange
Commission a portion of the shares of common stock underlying the convertible
debentures and notes under which we are in default and expect that the
convertible debentures and notes ultimately will be converted into shares of our
common stock and that we therefore will not be obligated to repay the
outstanding principal and accrued and unpaid interest amounts on those
debentures and notes.
As of August 13, 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 and February 2007,
<page>7
which provide for interest at the rate of 6% per annum, and warrants to purchase
common stock to various accredited inventors in connection with debenture and
note offering transactions:
<table>
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount($)(1) ConectiSys($)(2) Amount($) Interest($)(3) Offering(#)
- --------------- ------------- ----------------- ----------- ---------------- -----------
November 27, 2002 $ 200,000 $ 144,000 $ - $ - 1,000,000
March 3, 2003 150,000 100,000 - 27,720 750,000
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 - 59,048 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 1,148,000 973,483 177,108 2,800,000
March 8, 2006 1,270,000 1,180,000 954,989 64,687 20,320,000
February 13, 2007 850,000 765,000 850,000 15,123 17,000,000
------------ ------------- ----------- --------- -----------
Total: $6,020,000 $ 4,925,000 $2,778,472 $ 439,686 49,620,000
________________ ============ ============= ========== ========= ===========
(1) Amounts shown do not include additional convertible debentures issued
prior to June 17, 2002 having an aggregate original principal amount of
$750,000 that were fully converted to equity.
(2) 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.
(3) Amounts are approximate and represent accrued (unpaid) interest
outstanding as of August 13, 2007. The total amount of accrued and
unpaid interest does not account for approximately $104,000 of
outstanding pre-paid interest.
</table>
Each of the above outstanding secured convertible debentures or notes,
except for the convertible notes issued in March 2005, March 2006 and February
2007, 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 and February 2007
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 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 and February 2007 convertible notes. As of August
13, 2007, the applicable conversion price was approximately $0.00005 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 June 30,
2007 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
<page>8
included in this report, we have suffered recurring losses from operations and
at June 30, 2007 had substantial net capital and working capital deficiencies.
These factors, among others, raised substantial doubt about our ability to
continue as a going concern and led our independent registered public accounting
firm to modify its 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 $6,800,000 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 nine months ended June 30, 2007. 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 a
recent accounting pronouncement.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defined fair value, established a framework for
measuring fair value and expands disclosures about fair-value measurements
required under other accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair value. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact of adopting SFAS
No. 157.
<page>9
ITEM 3. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) has concluded,
based on his evaluation as of June 30, 2007 (the "Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) are effective to ensure that information required to
be disclosed by us in the reports filed or submitted by us under the Exchange
Act is accumulated, recorded, processed, summarized and reported to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding whether or not disclosure is
required.
There were no changes in our internal control over financial reporting,
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our
most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In April 2007, we issued an aggregate of 358,376,000 shares of common
stock to four accredited investors upon conversion of an aggregate of $17,919 in
interest on our convertible debentures.
In May 2007, we issued an aggregate of 358,376,000 shares of common
stock to four accredited investors upon conversion of an aggregate of $17,919 in
interest on our convertible debentures.
In June 2007, we issued an aggregate of 361,139,400 shares of common
stock to four accredited investors upon conversion of an aggregate of $18,057 in
interest on our convertible debentures.
The issuances of our securities described above were made in reliance
upon the exemption from registration available under Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving a public
offering. This exemption was claimed on the basis that these transactions did
not involve any public offering and the purchasers in each offering were
sophisticated and had sufficient access to the kind of information registration
would provide, including our most recent Annual Report on Form 10-KSB and our
most recent Quarterly Report on Form 10-QSB.
Dividend Policy
We have never paid cash dividends on our common stock and do not
currently intend to pay cash dividends on our common stock in the foreseeable
future. We are restricted from paying dividends on our common stock under state
law, and the terms of our secured convertible debentures. We currently
anticipate that we will retain any earnings for use in the continued development
of our business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
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
<page>10
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 August 13, 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
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 August 13, 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 February 2007 and March 2006
convertible note financing transactions, 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 August 13, 2007, we owed principal and unpaid interest on our
convertible debentures and notes in an aggregate amount of approximately
$3,114,000, net of approximately $104,000 of prepaid interest, all of which we
believe would be immediately due and payable upon demand by the holders of our
secured convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H-
Net(TM) system, which would have a material and adverse effect on our business,
prospects, results of operations and financial condition. In addition, the
holders of our secured convertible debentures and notes were entitled to demand
immediate repayment of the outstanding principal amounts of the debentures and
<page>11
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
In January 2007, we signed an Independent Contractor Agreement with
Trimark Associates Inc., or Trimark, for the installation of our H- Net(TM)
technology for a key irrigation district cooperative in Northern California.
Trimark was expected to provide Meter Service Provider and Meter Data Management
Agent services for this project. We were to provide the services described in
individual task orders at compensation rates set forth in the Agreement. The
Agreement was to continue until the services described in the various task
orders were completed. The Agreement could, however, be terminated in advance
by either party at any time and for any reason with 15-days' prior written
notice. In April 2007, certain individual task orders were completed and we
were compensated by Trimark for our initial engineering evaluation and
feasibility work on the project, in the amount of $6,922. In April 2007,
Trimark terminated the contract due to substantial increases in modifications
and challenges in meeting the requirements to further develop the project.
ITEM 6. EXHIBITS.
Exhibits
--------
Exhibit No. Description
---------- -----------
31.1 Certification Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (*)
31.2 Certification Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (*)
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (*)
__________
(*) Filed herewith.
<page>12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CONECTISYS CORPORATION
Date: August 14, 2007 By: /s/ ROBERT A. SPIGNO
--------------------
Robert A. Spigno,
Chairman of the Board, President,
Chief Executive Officer and
Chief Financial Officer
(principal executive officer and
principal financial and accounting
officer)
<page>13
EXHIBITS FILED WITH THIS REPORT ON FORM 10-QSB
Exhibit No. Description
----------- -----------
31.1 Certification Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
<page>14