As filed with the Securities and Exchange Commission on February 2, 2006
Registration No. 333-_______
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LUNA TECHNOLOGIES INTERNATIONAL, INC.
(Name of small business issuer in its charter)
DELAWARE 2810 91-1987288
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
61B Fawcett Road
Coquitlam, British Columbia,
Canada, V3k 6v2
(604) 526-5890
(Address and telephone number of principal executive offices
and principal place of business)
Kimberly Landry
Chief Executive Officer
Luna Technologies International, Inc.
61b Fawcett Road
Coquitlam, British Columbia,
Canada, V3K 6V2
(604) 526-5890
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Marcelle S. Balcombe, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas,
New York, New York 10018
(212) 930-9700
(212) 930-9725 (Fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_| ________
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE PROPOSED PROPOSED MAXIMUM AMOUNT OF
REGISTERED REGISTERED (1) MAXIMUM AGGREGATE REGISTRATION
OFFERING PRICE OFFERING PRICE FEE
PER SHARE (2)
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, $.0001 par value issuable upon 9,751,602 (3) $.22 $2,145,330.44 $229.55
conversion of the secured convertible notes
- ----------------------------------------------------------------------------------------------------------------------------
Common stock, $.0001 par value issuable upon 700,000 (4) $.22 $154,000 $16.48
exercise of warrants
- ----------------------------------------------------------------------------------------------------------------------------
Total 10,451,602 $2,299,330 $246.03
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes shares of our common stock, par value $0.0001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of warrants held
by the selling stockholders. In addition to the shares set forth in the table,
the amount to be registered includes an indeterminate number of shares issuable
upon conversion of the secured convertible notes and exercise of the warrants,
as such number may be adjusted as a result of stock splits, stock dividends and
similar transactions in accordance with Rule 416. The number of shares of common
stock registered hereunder represents a good faith estimate by us of the number
of shares of common stock issuable upon conversion of the secured convertible
notes and upon exercise of the warrants. For purposes of estimating the number
of shares of common stock to be included in this registration statement, we
calculated a good faith estimate of the number of shares of our common stock
that we believe will be issuable upon conversion of the secured convertible
notes and upon exercise of the warrants to account for market fluctuations, and
antidilution and price protection adjustments, respectively. Should the
conversion ratio result in our having insufficient shares, we will not rely upon
Rule 416, but will file a new registration statement to cover the resale of such
additional shares should that become necessary. In addition, should a decrease
in the exercise price as a result of an issuance or sale of shares below the
then current market price, result in our having insufficient shares, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on January 26, 2006, which was $.22 per share.
(3) Includes a good faith estimate (200%) of the shares underlying secured
convertible notes to account for market fluctuations. See the Explanatory Note
on page 3 of this prospectus with respect to increasing our authorized shares of
common stock to register all of the shares underlying secured convertible notes
which we are required to register under the December 2005 Registration Rights
Agreement.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $.40 per share. See the Explanatory Note on page 3 of this prospectus with
respect to increasing our authorized shares of common stock to register all of
the shares underlying warrants which we are required to register under the
December 2005 Registration Rights Agreement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2006
Luna Technologies International, Inc.
10,451,602 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
10,451,602 shares of our common stock, including up to 9,751,602 shares of
common stock underlying secured convertible notes in a principal amount of
$1,000,000 and up to 1,000,000 shares of common stock issuable upon the exercise
of common stock purchase warrants at a price of $.40 per share. This is a
partial amount of the shares of common stock underlying secured convertible
notes and warrants which we are required to register under the December 2005
Registration Rights Agreement. See the Explanatory Note on page 3 of this
prospectus. The secured convertible notes are convertible into our common stock
at a 50% discount to the average of the three lowest intraday trading prices for
the common stock on a principal market for the 20 trading days before but not
including the conversion date. The selling stockholders may sell common stock
from time to time in the principal market on which the stock is traded at the
prevailing market price or in negotiated transactions. The selling stockholders
may be deemed underwriters of the shares of common stock, which they are
offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is listed on the Over-The-Counter Bulletin Board under the
symbol "LTII". The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on January 31, 2006, was $.19.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________, 2006.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed by Luna
Technologies International, Inc. with the Securities and Exchange Commission.
The selling stockholders may not sell these securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the sale is not permitted.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements 1
Prospectus Summary 2
Risk Factors 6
Use Of Proceeds 10
Market For Common Equity And Related Stockholder Matters 11
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 12
Description Of Business 14
Description Of Property 16
Legal Proceedings 16
Management 16
Executive Compensation 17
Certain Relationships And Related Transactions 22
Security Ownership Of Certain Beneficial Owners And Management 23
Description Of Securities 24
Commission's Position On Indemnification For Securities Act Liabilities 24
Plan Of Distribution 25
Selling Stockholders 27
Legal Matters 30
Experts 30
Available Information 30
Index to Consolidated Financial Statements 31
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any prospectus supplement contain forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events.
In some cases, you can identify forward-looking statements by words such as
"may," "should," "expect," "plan," "could," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "goal," or "continue" or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements.
Unless we are required to do so under U.S. federal securities laws or other
applicable laws, we do not intend to update or revise any forward-looking
statements.
1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
Luna Technologies International, Inc.
Overview
We were incorporated on March 25, 1999 in Delaware to develop, manufacture and
sell photoluminescent products (High Performance Photoluminescent Lighting,
"HPPL") used for emergency lighting, signs and markings, wayfinding systems and
novelty products with applications in marine, commuter, rail, subway, building
and toy markets. We conduct business in Canada through our wholly-owned Canadian
subsidiary, Luna Technologies (Canada) Ltd.
Our executive offices are located at 61B Fawcett Road, Coquitlam, British
Columbia, Canada V3K 6V2.
From the date of our incorporation and through December 31, 2004, we had
cumulative losses of $(2,406,065). There can be no assurance that we will ever
earn any profits.
Technology
Phosphorescent (also referred to as photoluminescent) materials emit light
continuously when they are excited by ultraviolet or visible light. However,
unlike fluorescent materials, when the excitation source is extinguished,
phosphorescent materials continue to emit light. It is this light (called
afterglow) that people refer to as "glow-in-the-dark". The afterglow decreases
(or decays) over time after the excitation source has been extinguished.
Most photoluminescent products are composed of inorganic pigments that can be
incorporated into paint, plastic films, enamels, and flexible and rigid molded
plastics. Typical products include adhesive vinyl tapes, rigid polyvinyl
chloride (PVC) marker strips, and silk-screened plastic signage.
Photoluminescent enamel-coated sheet metal and ceramic products are also
available.
The main pigment commonly used in photoluminescent glow-type products is a zinc
sulphide compound emitting a yellowish-green light. This material performs well
when subjected to high ambient lighting levels but the decay rate is rather
rapid. Our current LUNAplast pigment material, Strontium Aluminate, has a
performance level 20 x that of zinc-based products. In addition, the decay curve
for strontium-based products is measured in hours as opposed to minutes for
zinc-based items.
Between January 1995 and October 1999, Douglas Sinclair, presently the chief
executive officer of our Canadian subsidiary, developed the proprietary
technology, formulas and processes needed to commercially manufacture Strontium
Aluminate PL products on a cost-effective basis. The resulting product, referred
to by us as Lunaplast, is up to 20 x times brighter than commercial zinc
sulphide products, and is clearly visible after many hours of total darkness.
During this same period of time, Mr. Sinclair and Kimberly Landry, our Chief
Executive Officer, developed an advanced Strontium Aluminate HPPL material which
is four times brighter than our Lunaplast product. Mr. Sinclair and Ms. Landry
filed a patent application pertaining to this invention with the U.S. Patent and
Trademark Office in November 1997. For a nominal consideration Mr. Sinclair and
Ms. Landry assigned the rights in November 1997 to the patent application and
related technology to Luna Technologies Inc. ("LTI"), a corporation formed by
Ms. Landry in December 1994. In April 1999, we acquired from LTI the rights to
the patent application and related technology assigned to LTI by Mr. Sinclair
and Ms. Landry. In consideration for this assignment, we agreed to pay LTI
$90,000, without interest, on or before June 30, 2000. Subsequent to June 30,
2000, we paid this debt in full. As of March 30, 2004 the patent application had
been placed in abeyance. In November 1999, we acquired from Mr. Sinclair the
proprietary technology required to manufacture Lunaplast into PVC sheets, vinyl
rolls and paints as well as the trademark rights to these products. In
consideration for the assignment of this technology and the trademarks, we paid
Mr. Sinclair $60,000. During 2000 we developed the processes required to
manufacturer Strontium Aluminate PL products using vacuum forming, extrusion,
and injection molding techniques.
We began producing Lunaplast on a commercial basis during fiscal 2000. Lunaplast
is available in flexible vinyl and rigid PVC sheets. In addition, a wide range
of polymer compounds for extrusions and injection molding was added during the
year. Management believes that the increase in performance opens up a new range
of opportunities in life safety. Management believes that direct replacement of
electrical exit signs (Underwriters Laboratories UL 924) is expected to be a
market for photoluminescent materials in the near future.
2
The Offering
Common stock offered by
selling stockholders ............ Up to 10,451,602 shares, including the
following:
- up to 9,751,602 shares of common stock
which is a partial amount underlying
secured convertible notes in the
principal amount of $1,000,000 (includes
a good faith estimate of the shares
underlying secured convertible notes to
account for market fluctuations and
antidilution protection
adjustments,respectively),
- up to 700,000 shares of common stock
issuable upon the exercise of a partial
amount of common stock purchase warrants
at an exercise price of $.65 per share
(includes a good faith estimate of the
shares underlying warrants to account
for antidilution protection
adjustments),
This number represents 71.3% of our current
outstanding stock.
Common stock to be
outstanding after the offering .. Up to 25,000,000 shares
Use of proceeds ................... We will not receive any proceeds from the
sale of the common stock. However, we will
receive the sale price of any common stock
we sell to the selling stockholders upon
exercise of the warrants. We expect to use
the proceeds received from the exercise of
the warrants, if any, for general working
capital purposes. However, AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners
II, LLC will be entitled to exercise a
portion of the warrants on a cashless basis
if the shares of common stock underlying the
warrants are not then registered pursuant to
an effective registration statement. In the
event that AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., or New
Millennium Partners II, LLC exercise the
warrants on a cashless basis, then we will
not receive any proceeds from the exercise
of those warrants. In addition, we have
received gross proceeds of $400,000 from the
3
sale of the secured convertible notes and
the investors are obligated to provide us
with an additional $600,000; $300,000 within
five days of the filing of this registration
statement, and $300,000 within five days of
this prospectus being declared effective.
The proceeds received from the sale of the
secured convertible notes will be used
support for working capital needs.
Over-The-Counter
Bulletin Board Symbol ........... LTII
The above information regarding common stock to be outstanding after the
offering is based on 14,648,398 shares of common stock outstanding as of January
26, 2006 and assumes the subsequent conversion of our issued secured convertible
notes and exercise of warrants by our selling stockholders, although there can
be no assurances that any warrants will be exercised.
EXPLANATORY NOTE: ON DECEMBER 16, 2005, WE ENTERED INTO A SECURITIES PURCHASE
AGREEMENT WITH FOUR ACCREDITED INVESTORS. ANY ISSUANCE OF SHARES OF COMMON STOCK
PURSUANT TO THE SECURITIES PURCHASE AGREEMENT THAT WOULD REQUIRE US TO ISSUE
SHARES OF COMMON STOCK IN EXCESS OF OUR AUTHORIZED CAPITAL IS CONTINGENT UPON US
OBTAINING SHAREHOLDER APPROVAL BY WRITTEN CONSENT TO INCREASE OUR AUTHORIZED
SHARES FROM 35,000,000 TO 110,000,000 AND FILING THE CERTIFICATE OF AMENDMENT TO
OUR CERTIFICATE OF INCORPORATION. WE HAVE FILED A PRELIMINARY INFORMATION
STATEMENT WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2006,
PURSUANT TO WHICH A MAJORITY OF OUR SHAREHOLDERS APPROVED BY WRITTEN CONSENT TO
AUTHORIZE THE INCREASE IN OUR AUTHORIZED SHARES OF COMMON STOCK. WE INTEND ON
FILING THE CERTIFICATE OF AMENDMENT TO OUR CERTIFICATE OF INCORPORATION WITHIN
20 DAYS OF MAILING A DEFINITIVE INFORMATION STATEMENT TO OUR SHAREHOLDERS. WE
ARE REGISTERING 10,451,602 SHARES OF COMMON STOCK PURSUANT TO THIS PROSPECTUS
THAT ARE UNDERLYING THE SECURED CONVERTIBLE NOTES AND WARRANTS ISSUED IN
CONNECTION WITH THE SECURITIES PURCHASE AGREEMENT.
DECEMBER 2005 SECURITIES PURCHASE AGREEMENT
On December 16, 2005, we entered into a Securities Purchase Agreement with AJW
Partners, LLC ("Partners"), AJW Offshore, Ltd. ("Offshore"), AJW Qualified
Partners, LLC ("Qualified") and New Millennium Capital Partners, II, LLC
("Millennium") for the sale of (i) $1,000,000 in secured convertible notes and
(ii) warrants to purchase 1,000,000 shares of our common stock. Partners,
Offshore, Qualified and Millennium are collectively referred to as the
"Purchasers".
The Purchasers are obligated to provide us with the funds as follows:
o $400,000 was disbursed on December 16, 2005;
o $300,000 will be disbursed within five days of filing this
registration statement; and
o $300,000 will be disbursed within five days of the effectiveness of
the registration statement.
The proceeds of the offering will be used for working capital and general
corporate purposes.
The secured convertible notes bear interest at 8%, unless our common stock is
greater than $0.2125 per share for each trading day of a month, in which event
no interest is payable during such month. The secured convertible notes mature
three years from the date of issuance, and are convertible into our common
stock, at the Purchasers' option, at a 50% discount to the average of the three
lowest trading prices of the common stock during the 20 trading day period prior
to conversion. The beneficial conversion feature of such discounted conversion
will be amortized over the three-year life of the loan.
The full principal amount of the secured convertible notes are due upon a
default under the terms of secured convertible notes. In addition, we granted
the Purchasers a security interest in substantially all of our assets and
intellectual property. We are required to file a registration statement with the
Securities and Exchange Commission within 45 days of closing, which will include
200% of the common stock underlying the secured convertible notes, and the
warrants. If the registration statement is not declared effective within 120
days from the date of closing, we are required to pay liquidated damages to the
Purchasers. In the event that we breach any representation or warranty in the
Securities Purchase Agreement, we are required to pay liquidated damages in
shares or cash, at our election, in an amount equal to three percent of the
outstanding principal amount of the secured convertible notes per month plus
accrued and unpaid interest.
The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.40 per share. The Purchasers may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the Purchasers exercise the warrants on a cashless basis, then we will not
receive any proceeds. In addition, the exercise price of the warrants will be
adjusted in the event we issue common stock at a price below market, with the
exception of any securities issued as of the date of the warrants or issued in
connection with the secured convertible notes issued pursuant to the Securities
Purchase Agreement.
4
Upon an issuance of shares of common stock below the market price, the exercise
price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise price of
the warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholders' position. We have reviewed the terms
and provisions of these derivative financial instruments (the conversion option
and the detachable warrants) and expect that in accordance with Emerging Issues
Task Force ("EITF") 00-19 "Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled In a Company's Own Stock", the conversion
option and detachable warrants will be initially recorded as liabilities at fair
value. Subsequently, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities", we expect that at each reporting period these liabilities will be
adjusted for changes in the fair value of the derivative financial instruments.
The Purchasers have agreed to restrict their ability to convert their secured
convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.9% of the then issued and outstanding shares of common stock.
We claim an exemption from the registration requirements of the Securities Act
of 1933, as amended (the "Act") for the private placement of these securities
pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder
since, among other things, the transaction did not involve a public offering,
the Purchasers were accredited Purchasers and/or qualified institutional buyers,
the Purchasers had access to information about us and their investment, the
Purchasers took the securities for investment and not resale, and we took
appropriate measures to restrict the transfer of the securities.
5
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE INCURRED LOSSES IN THE PAST AND HAVE A LIMITED OPERATING HISTORY ON
WHICH TO BASE AN EVALUATION OF OUR PROSPECTS, WHICH CAN HAVE A DETRIMENTAL
EFFECT ON THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.
We have a limited operating history on which to base an evaluation of our
business and prospects. Our prospects must be considered in light of inherent
risks, expenses and difficulties encountered by companies in their early stage
of development, particularly companies in new and evolving markets. These risks
include acceptance of its products by consumers in an evolving and unpredictable
business environment, the lack of a well-developed brand identity and the
ability to bring products to market on a timely basis. For the quarters ended
September 30, 2005 and 2004, we had net losses of $129,821 and $130,572,
respectively. For the years ended December 31, 2004 and 2003, we had net losses
of $670,655 and $611,512, respectively. We cannot give any assurance that we
will ever generate significant revenue or have profits. In addition, we
anticipate that we will require additional capital commitments during 2006 to
sustain our operations. This could have a detrimental effect on the long-term
capital appreciation of our stock.
THERE CAN BE NO ASSURANCE THAT WE WILL EVER ACHIEVE PROFITABILITY.
There can be no assurance that we will ever achieve profitability. Our revenues
and operating results may fluctuate from quarter to quarter and from year to
year due to a combination of factors, including, but not limited to, cost of
production, volume of sales and variations in expenditures for personnel and
marketing. We may incur significant expenditures for research and development of
new products or improvements to our existing products which could adversely
affect our ability to generate a profit. There can be no guarantee that we will
be able to achieve profitability on a quarterly or annual basis. If we do not
achieve profitability, our business will be adversely affected and investors may
lose all or substantially all of their investment.
WE WILL NEED ADDITIONAL FINANCING TO DEVELOP OUR PRODUCTS AND SERVICES AND TO
MEET OUR CAPITAL REQUIREMENTS WHICH CAN CAUSE DILUTION.
We continually require additional funds to develop our products and shall be
dependent upon sources such as:
o future earnings;
o the availability of funds from private sources, including, but not
limited to, our shareholders, loans and additional private
placements; and
o the availability of funds from public sources including, but not
limited to a public offering of our securities.
Market conditions for private and public offerings are subject to uncertainty
and there can be no assurance when or whether a private and/or public offering
shall be successfully completed or that other funds shall be made available to
us. In view of our operating history, our ability to obtain additional funds is
limited. Such financing may only be available, if at all, upon terms which may
not be advantageous to us. If adequate funds are not available from operations
or additional sources of financing, our business shall be materially adversely
affected.
WE ARE OPEN TO EXCHANGE LOSSES DUE TO OUR OPERATIONS BEING LOCATED IN CANADA.
The majority of our sales and cost of sales are made in U.S. currency while a
significant amount of our general and administrative expenses are made in
Canadian currency. We do not currently hedge our foreign currency exposure and
accordingly we are at risk for foreign currency exchange fluctuations which
could adversely affect the operating results of our business.
WE RELY ON SUBCONTRACTORS FOR THE MANUFACTURE OF OUR LUNAPLAST
All aspects of our manufacturing process is subcontracted to various third
parties which formulate, mix and produce Lunaplast to our specifications. Once
the manufacturing process is complete, Lunaplast is sold to fabricators which
use Lunaplast in a variety of end user products. We do not have any long-term
agreements with any of the third parties involved in manufacturing Lunaplast.
While management believes that alternative manufacturers are available, there is
however no guarantee that alternative manufacturers could produce Lunaplast on
short notice and without disrupting product delivery schedules.
6
WE MAY EXPERIENCE INFRINGEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS AND
CONFIDENTIAL INFORMATION, WHICH WOULD UNDERMINE OUR TECHNOLOGY PLATFORM.
Our success will depend, in large part, on our ability to obtain and protect
patents, protect trade secrets and operate without infringing on the proprietary
rights of others. We cannot give any assurance that the patent applications that
have been or will be filed on products developed by us will be approved, that
any issued patents will provide us with competitive advantages or will not be
challenged by others, or that the patents of others will not have an adverse
effect on us.
Our subcontractors involved in manufacturing Lunaplast have agreed to maintain
the confidential nature of our proprietary manufacturing technology, however,
there is no guarantee that we will be able to prevent any breeches. The failure
to protect our proprietary manufacturing technology could have a material
adverse effect on our business.
OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS EXPRESSED SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR
ABILITY TO OBTAIN FUTURE FINANCING.
As a result of losses since our inception, our independent registered public
accounting firm in their report on our financial statements for the fiscal year
ended December 31, 2004, raised substantial doubt about our ability to continue
as a going concern. Our ability to continue as a going concern is subject to our
ability to generate a profit and/or raise additional capital. We do not have any
available credit, bank financing or other external sources of liquidity. Due to
our operating losses, our operations have not been a source of liquidity. At
December 31, 2004, we had a working capital deficiency of approximately
$254,000. Our ability to continue as a going concern is dependent on the Company
raising additional capital and on future profitable operations. Our continued
net operating losses increases the difficulty in our ability to raise additional
capital and there can be no assurances that the infusion of capital will prove
successful.
IF WE ARE UNABLE TO RETAIN THE SERVICES OF KEY PERSONNEL OR IF WE ARE UNABLE TO
SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL AND SALES PERSONNEL HAVING EXPERIENCE
IN BUSINESS, WE MAY NOT BE ABLE TO CONTINUE OUR OPERATIONS.
Our success depends to a significant extent upon the continued service of Ms.
Kimberly Landry, our Chief Executive Officer. The loss of the services of Ms.
Landry could have a material adverse effect on our growth, revenues, and
prospective business. We may not be able to retain our executive officers and
key personnel or attract additional qualified management in the future. In
addition, in order to successfully implement and manage our business plan, we
will be dependent upon, among other things, successfully recruiting qualified
managerial and sales personnel having experience in business. Competition for
qualified individuals is intense. In addition, there can be no assurance that we
will be able to find, attract and retain existing employees or that we will be
able to find, attract and retain qualified personnel on acceptable terms.
WE ARE SUBJECT TO SECTION 203 OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE WHICH MAY INHIBIT A TAKEOVER AT A PREMIUM PRICE THAT MAY BE BENEFICIAL
TO OUR STOCKHOLDERS.
We are subject to Section 203 of the Delaware General Corporation Law. Subject
to limited exceptions, Section 203 prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder unless the proposed business combination was approved by
the corporation's board of directors before the stockholder became an interested
stockholder. In general, Section 203 defines an interested stockholder as any
stockholder directly or indirectly owning 15% or more of the outstanding voting
stock of a Delaware corporation. Section 203 could have the effect of
discouraging others from making tender offers for our shares, and also may have
the effect of preventing changes in our management.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES AND
WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY
DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of January 31, 2006, we had 14,648,398 shares of common stock issued and
outstanding, secured convertible notes outstanding that may be converted into an
estimated 2,105,263 shares of common stock at current market prices and
outstanding warrants to purchase 2,518,750 shares of common stock. Additionally,
we have an obligation to sell secured convertible notes that may be converted
into an estimated 3,157,895 shares of common stock at current market prices and
issue warrants to purchase 600,000 shares of common stock in the near future. In
addition, the number of shares of common stock issuable upon conversion of the
outstanding secured convertible notes may increase if the market price of our
stock declines. All of the shares, including all of the shares issuable upon
conversion of the secured convertible notes and upon exercise of our warrants,
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock.
7
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH
WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our secured convertible notes
is essentially limitless. The following is an example of the amount of shares of
our common stock that are issuable, upon conversion of our secured convertible
notes (excluding accrued interest), based on market prices 25%, 50% and 75%
below the market price, as of January 31, 2006 of $0.19:
% Below Market Price Per Share Discount of 50% Number of Shares Issuable
-------------- --------------- --------------- -------------------------
25% $.1425 $.0713 14,035,088
50% $.0950 $.0475 21,052,632
75% $.0475 $.0268 42,105,263
As illustrated, the number of shares of common stock issuable upon conversion of
our secured convertible notes will increase if the market price of our stock
declines, which will cause dilution to our existing stockholders. Currently, we
do not have enough shares authorized for these amounts. We intend to amend our
Articles of Incorporation to increase our authorized shares of common stock from
30,000,000 to 100,000,000. See the Explanatory Note on page 3 of this
prospectus.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES MAY HAVE A DEPRESSIVE EFFECT ON THE PRICE OF OUR COMMON STOCK.
The secured convertible notes are convertible into shares of our common stock at
a 50% discount to the trading price of the common stock prior to the conversion.
The significant downward pressure on the price of the common stock as the
selling stockholders convert and sell material amounts of common stock could
have an adverse effect on our stock price. In addition, not only the sale of
shares issued upon conversion or exercise of secured convertible notes and
warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II,
LLC from converting and/or exercising some of their holdings and then converting
the rest of their holdings. In this way, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC could
sell more than this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE SECURED CONVERTIBLE NOTES AND REGISTERED PURSUANT TO THIS
PROSPECTUS MAY NOT BE ADEQUATE AND WE MAY BE REQUIRED TO FILE A SUBSEQUENT
REGISTRATION STATEMENT COVERING ADDITIONAL SHARES AND FURTHER AMEND OUR ARTICLES
OF INCORPORATION TO INCREASE OUR AUTHORIZED SHARES OF COMMON STOCK. IF THE
SHARES WE HAVE ALLOCATED AND ARE REGISTERING HEREWITH ARE NOT ADEQUATE AND WE
ARE REQUIRED TO FILE AN ADDITIONAL REGISTRATION STATEMENT, WE MAY INCUR
SUBSTANTIAL COSTS IN CONNECTION THEREWITH.
Based on our current market price and the potential decrease in our market price
as a result of the issuance of shares upon conversion of the secured convertible
notes, we have made a good faith estimate as to the amount of shares of common
stock that we are required to register and allocate for conversion of the
secured convertible notes. Accordingly, we intend to allocate 34,383,856 shares
to cover the conversion of the secured convertible notes after we amend our
Articles of Incorporation and increase our authorized shares from 30,000,000 to
100,000,000. In the event that our stock price decreases, the shares of common
stock we intend to allocate for conversion of the secured convertible notes and
are registering hereunder may not be adequate. If the shares we intend to
allocate to the registration statement are not adequate and we are required to
file an additional registration statement and further amend our Articles of
Incorporation to increase our authorized shares of common stock, we may incur
substantial costs in connection with the preparation and filing of such
registration statement.
8
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In December 2005, we entered into a Securities Purchase Agreement for the sale
of an aggregate of $1,000,000 principal amount of secured convertible notes. The
secured convertible notes are due and payable, with 8% interest, three years
from the date of issuance, unless sooner converted into shares of our common
stock. Although we currently have $400,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $1,000,000. In addition, any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes, including a default interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the secured convertible notes will
be converted into shares of our common stock, in accordance with the terms of
the secured convertible notes. If we were required to repay the secured
convertible notes, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the notes when required, the
note holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED
CONVERTIBLE NOTES, WARRANTS, SECURITY AGREEMENT OR INTELLECTUAL PROPERTY
SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS,
INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER, AND INTELLECTUAL PROPERTY.
In connection with the Securities Purchase Agreements we entered into in
December 2005, we executed a Security Agreement and an Intellectual Property
Security Agreement in favor of the investors granting them a first priority
security interest in all of our goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The Security Agreements and Intellectual Property
Security Agreements state that if an even of default occurs under the Securities
Purchase Agreement, Secured Convertible Notes, Warrants, Security Agreements or
Intellectual Property Security Agreements, the Investors have the right to take
possession of the collateral, to operate our business using the collateral, and
have the right to assign, sell, lease or otherwise dispose of and deliver all or
any part of the collateral, at public or private sale or otherwise to satisfy
our obligations under these agreements.
RISKS RELATING TO OUR COMMON STOCK
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
9
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
OUR CORPORATE CHARTER CONTAINS AUTHORIZED, UNISSUED "BLANK CHECK" PREFERRED
STOCK WHICH CAN BE ISSUED WITHOUT STOCKHOLDER APPROVAL WITH THE EFFECT OF
DILUTING THEN CURRENT STOCKHOLDER INTERESTS.
Our certificate of incorporation currently authorizes the issuance of up to
5,000,000 shares of "blank check" preferred stock with designations, rights and
preferences as may be determined from time to time by our board of directors. A
majority of our stockholders has consented to increase the number of preferred
stock to 10,000,000. Accordingly, our board of directors is empowered, without
stockholder approval, to issue one or more series of preferred stock with
dividend, liquidation, conversion, voting or other rights which could dilute the
interest of, or impair the voting power of, our common stockholders. The
issuance of a series of preferred stock could be used as a method of
discouraging, delaying or preventing a change in control.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes. However, AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd., and New Millennium Partners II, LLC will be entitled to exercise a portion
of the warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event that AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., or New Millennium Partners II, LLC exercise the warrants on a
cashless basis, then we will not receive any proceeds from the exercise of those
warrants. In addition, we have received gross proceeds $400,000 from the sale of
the secured convertible notes and the investors are obligated to provide us with
an additional $600,000; $300,000 within five days of the filing of this
registration statement, and $300,000 within five days of this prospectus being
declared effective. The proceeds received from the sale of the secured
convertible notes will be used for working capital and general corporate
purposes.
10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In April 2001, our common stock became eligible for quotation on the NASD's OTC
Bulletin Board and currently trades under the symbol "LTII." For the periods
indicated, the following table sets forth the high and low bid prices per share
of common stock. These prices represent inter-dealer quotations without retail
markup, markdown, or commission and may not necessarily represent actual
transactions.
Quarter Ending High Low
3/31/02 $0.71 $0.41
6/30/02 $1.10 $0.75
9/30/02 $0.87 $0.35
12/31/02 $0.48 $0.25
3/31/03 $0.51 $0.30
6/30/03 $0.55 $0.40
9/30/03 $0.76 $0.35
12/31/03 $0.76 $0.55
3/31/04 $1.15 $0.43
6/30/04 $1.00 $0.25
9/30/04 $0.40 $0.19
12/31/04 $0.40 $0.19
3/31/05 $0.37 $0.22
6/30/05 $0.39 $0.20
9/30/05 $0.30 $0.17
12/31/05 $0.30 $0.11
HOLDERS
As of January 31, 2005, we had approximately 113 holders of our common stock.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies. The transfer agent of our common stock is Corporate Stock Transfer,
Denver, Colorado, (303) 282-4800.
We have never declared or paid any cash dividends on our common stock. We do not
anticipate paying any cash dividends to stockholders in the foreseeable future.
In addition, any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon our financial
condition, results of operations, capital requirements, and such other factors
as the Board of Directors deem relevant.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this prospectus contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus. See "Risk Factors."
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2004 WITH THE YEAR ENDED DECEMBER 31,
2003
Results of Operations
Sales during the year ended December 31, 2004 were $537,165, an increase of
$155,444 or 41% from the previous year. Gross margin increased 11% to 50% over
the same period in 2003 due to the Company's improvement in productivity and
cost controls. Two customers amounted to 84% of total sales in 2003 and 60% of
total sales during 2004.
During the year ended December 31, 2004 the Company received payments totaling
$120,000 from customers in connection with pricing agreements.
General and administrative expenses for the year ended December 31, 2004
increased with the addition of management, staff and overhead needed to
facilitate the Company's growth and ongoing product development. During the year
ended December 31, 2004, stock-based compensation of $154,600 was expensed as
consulting fees representing the fair value of stock options granted and
$124,868 was expensed as consulting fees representing the fair value of 597,812
common shares issued pursuant to the Company's stock bonus plan.
Liquidity and Capital Resources
During the year ended December 31, 2004, the Company's operations used $314,683
in cash and the Company purchased $5,912 of equipment. During this period the
Company satisfied its cash requirements through sales of common stock in private
placements of $357,000 and advances from related parties of $49,509. The Company
made $39,996 in convertible debenture repayments, $8,338 in notes payable
repayments and decreased the bank overdraft by $11,068.
Between December 2002 and January 2003 the Company borrowed $120,000 from a
third party. Loan proceeds of $60,000 were received in December 2002 and the
remaining $60,000 was received in January 2003. The loan is secured by all of
the Company's assets and bears interest at a rate of 8% per year. The loan is to
be repaid in 30 monthly principal payments of $3,333, commencing June 21, 2003,
with a final principal payment of $20,010 due on December 21, 2005. Interest on
the outstanding principal balance is payable monthly commencing June 21, 2003.
The unpaid balance of the loan and interest may be converted at any time into
restricted shares of the Company's common stock at a price of $1.20 per share
during 2005.
The Company anticipates that its capital needs during the year ending December
31, 2005 will be as follows:
$600,000 for corporate expenses, $100,000 for research relating to the
development of advanced strontium aluminate PL materials, $360,000 for current
liabilities and $56,797 for convertible debenture payments.
The Company does not have any available credit, bank financing or other external
sources of liquidity. Due to the operating losses of the Company during the
Company's initial year of operations, the Company's operations have not been a
source of liquidity. At December 31, 2004 the Company had a working capital
deficiency of approximately $254,000. The ability of the Company to continue as
a going concern is dependent on the Company raising additional capital and on
future profitable operations. To that end the Company is seeking financing to
expand its operations and for working capital purposes. There can be no
assurance that the Company will be successful in obtaining additional funding.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 TO NINE MONTHS ENDED
SEPTEMBER 30, 2004
Results of Operations
Sales during the nine months ended September 30, 2005 sales increased 34% over
the same period ended September 30, 2004 due to efforts by the Company to
increase awareness of the Company's products in the marketplace. The Company's
gross margin increased from 46% to 48% over the same period described mainly due
12
to increased productivity and costs savings from our in house printing facility.
Sales during the three months ended September 30, 2005 sales increased 17% over
the same period ended September 30, 2004 due to efforts by the Company to
increase awareness of the Company's products in the marketplace. The Company's
gross margin decreased from 58% to 54% over the same period described mainly due
to manufacturing price increases from our suppliers.
During the nine months ended September 30, 2005, the Company has entered into
several new reseller agreement contracts, however, these new agreements are not
territory specific as previous reseller agreements were. Previous reseller
agreements were fee based because they provided a mutually exclusive territory,
these new non-fee based reseller agreements are not mutually exclusive and allow
the Company to have several multi state distributors carry Luna's products on a
nation wide scale. During the nine months ended September 30, 2004, $120,000 was
received from customers in connection with reseller agreements.
General and administrative expenses net of stock based compensation for the
three months ended September 30, 2005 decreased by approximately $6,000 over the
same period ended September 30, 2004 highlighted by the decrease in management
fees and wages and benefits by approximately $45,000 and the increase in
aggregate of office, consulting and professional fees by $47,000. General and
administrative expenses net of stock based compensation for the nine months
ended September 30, 2005 increased by approximately $2,000 over the same period
ended September 30, 2004. Highlights for the comparative 9 month period include
the decrease in management fees of approximately $26,000 due to the resignations
or Mr. Doug Sinclair and Mr. Brian Fiddler and the increase in office and
general, and wages and benefits, by approximately $63,000 and $34,000
respectively, needed to facilitate the Company's growth and ongoing product
development. During the three months and nine months ended September 30, 2005,
stock-based compensation of $NIL and $24,400, respectively, was expensed
representing the fair value of stock bonus plan shares awarded.
Mr. Brian Fiddler resigned his position as Chief Financial Officer and Director
as of April 4, 2005. Ms Kimberly Landry will now serve in this position and will
also continue her roles as Chairman of the Board of Luna Technologies
International Inc. and its subsidiary Luna Technologies (Canada) Ltd.
Liquidity and Capital Resources
During the nine months ended September 30, 2005 the Company's operations used
$336,753 in cash. The Company satisfied its operational requirements during the
period through the sale of common stock and subscriptions for a total of
$370,350, advances from related parties of $3,162 and a bank overdraft of
$3,197. The Company paid $26,664 towards the convertible debenture.
The Company anticipates its capital needs during the twelve month period ended
September 30, 2006 to be $800,000 for general and administrative expenses,
including $100,000 for research and development.
The Company does not have any available credit, bank financing or other external
sources of liquidity. Due to operating losses of the Company since inception,
the Company's operations have not been a source of liquidity. At September 30,
2005, the Company has a working capital deficiency of $354,845. The ability of
the Company to continue as a going concern is dependent on the Company raising
additional capital and becoming profitable.
The Company does not have any "off-balance sheet arrangements" (as such term
defined in Item 303 of Regulations S-K).
13
BUSINESS
CORPORATE INFORMATION AND HISTORY
We were incorporated on March 25, 1999 in Delaware to develop, manufacture and
sell photoluminescent products (High Performance Photoluminescent Lighting,
"HPPL") used for emergency lighting, signs and markings, wayfinding systems and
novelty products with applications in marine, commuter, rail, subway, building
and toy markets. We conduct business in Canada through our wholly-owned Canadian
subsidiary, Luna Technologies (Canada) Ltd.
Our executive offices are located at 61B Fawcett Road, Coquitlam, British
Columbia, Canada V3K 6V2.
From the date of its incorporation and through December 31, 2004, we had
cumulative losses of $(2,406,065). There can be no assurance that we will ever
earn any profits.
Overview
Modern high-performance photoluminescent (PL) materials are created by combining
the latest PL pigments, such as Strontium Aluminate (SrAl) into durable clear
carriers, such as Polyester, Acrylic, or PVC plastics. While exposed to light
these materials absorb some of its energy and re-emit it as a yellow-green
tinted light. The materials can be exposed to light and discharged an infinite
number of times with service lives of twenty years or more. Phosphorescent (also
referred to as photoluminescent) materials emit light continuously when they are
excited by ultraviolet or visible light. However, unlike fluorescent materials,
when the excitation source is extinguished, phosphorescent materials continue to
emit light. It is this light (called afterglow) that people refer to as
"glow-in-the-dark". The afterglow decreases (or decays) over time after the
excitation source has been extinguished
Although many people associate the word "photoluminescence" with
"glow-in-the-dark" toys and novelties, in the lighting industry,
photoluminescent products such as marker tapes and signs are commonly used to
delineate emergency escape routes and danger areas, and to mark equipment,
pipes, tools and working and accident prevention clothing.
Photoluminescent signs and markers are used in a variety of situations,
including office buildings, industrial sites, passenger ships, offshore drilling
platforms, underground mines, and aircraft. The use of photoluminescent
materials for life safety applications is recommended or mandated in numerous
building codes, fire safety codes, and transportation standards.
Most photoluminescent products are composed of inorganic pigments that can be
incorporated into paint, plastic films, enamels, and flexible and rigid molded
plastics. Typical products include adhesive vinyl tapes, rigid polyvinyl
chloride (PVC) marker strips, and silk-screened plastic signage.
Photoluminescent enamel-coated sheet metal and ceramic products are also
available.
The main pigment commonly used in photoluminescent glow-type products is a zinc
sulphide compound emitting a yellowish-green light. This material performs well
when subjected to high ambient lighting levels but the decay rate is rather
rapid. The Company's current LUNAplast pigment material, Strontium Aluminate,
has a performance level 20 x that of zinc-based products. In addition, the decay
curve for strontium-based products is measured in hours as opposed to minutes
for zinc-based items.
Strontium Aluminate is more expensive than zinc sulphide and takes slightly
longer to charge, but can "store" more light, making it much more suitable for
use in locations where ambient light levels are low. Strontium Aluminate also
offers much brighter and longer-lasting photoluminescence.
Although Strontium Aluminate PL material is superior to products made with zinc
sulphide, the process required to manufacture Strontium Aluminate PL is very
complex and manufacturers were unable to cost effectively produce Strontium
Aluminate PL products in commercial quantities.
Between January 1995 and October 1999, Douglas Sinclair, presently the chief
executive officer of our Canadian subsidiary, developed the proprietary
technology, formulas and processes needed to commercially manufacture Strontium
Aluminate PL products on a cost-effective basis. The resulting product, referred
to by us as Lunaplast, is up to 20 x times brighter than commercial zinc
sulphide products, and is clearly visible after many hours of total darkness.
During this same period of time, Mr. Sinclair and Kimberly Landry, our Chief
Executive Officer, developed an advanced Strontium Aluminate HPPL material which
is four times brighter than our Lunaplast product. Mr. Sinclair and Ms. Landry
filed a patent application pertaining to this invention with the U.S. Patent and
Trademark Office in November 1997. For a nominal consideration Mr. Sinclair and
Ms. Landry assigned the rights in November 1997 to the patent application and
related technology to Luna Technologies Inc. ("LTI"), a corporation formed by
Ms. Landry in December 1994. In April 1999, we acquired from LTI the rights to
the patent application and related technology assigned to LTI by Mr. Sinclair
and Ms. Landry. In consideration for this assignment, we agreed to pay LTI
$90,000, without interest, on or before June 30, 2000. Subsequent to June 30,
2000, we paid this debt in full. As of March 30, 2004 the patent application had
been placed in abeyance. In November 1999, we acquired from Mr. Sinclair the
proprietary technology required to manufacture Lunaplast into PVC sheets, vinyl
rolls and paints as well as the trademark rights to these products. In
consideration for the assignment of this technology and the trademarks, we paid
Mr. Sinclair $60,000. During 2000 we developed the processes required to
manufacturer Strontium Aluminate PL products using vacuum forming, extrusion,
and injection molding techniques.
14
We began producing Lunaplast on a commercial basis during fiscal 2000. Lunaplast
is available in flexible vinyl and rigid PVC sheets. In addition, a wide range
of polymer compounds for extrusions and injection molding was added during the
year. Management believes that the increase in performance opens up a new range
of opportunities in life safety. Management believes that direct replacement of
electrical exit signs (Underwriters Laboratories UL 924) is expected to be a
market for photoluminescent materials in the near future.
During the year ended December 31, 2004 one customer accounted for 43% of our
gross revenues. We of the opinion that the loss of this customer would not have
a material adverse effect on the Company.
Manufacturing
Lunaplast is a three-part laminate, consisting of one base layer of highly
reflective white material of PVC or vinyl, one mid-layer of photoluminescent PVC
or vinyl impregnated with our proprietary Strontium Aluminate polymer compound,
and one top layer of clear PVC or vinyl with UV and fire-resistant properties.
All aspects of our manufacturing process is subcontracted to various third
parties which formulate, mix and produce Lunaplast to our specifications. Once
the manufacturing process is complete, Lunaplast is sold to fabricators which
use Lunaplast in a variety of end user products. All subcontractors involved in
manufacturing Lunaplast have agreed to maintain the confidential nature of our
proprietary manufacturing technology.
We do not have any long-term agreements with any of the third parties involved
in manufacturing Lunaplast. We believe that alternative manufacturers are
available which could produce Lunaplast on short notice and without disrupting
product delivery schedules.
Sales and Marketing
World markets for photoluminescent lighting products are in the marine (shipping
and cruise lines), transportation and commuter industry, and in the commercial,
institutional and industrial retrofit and new building construction sector, in
which the need for photoluminescent emergency lighting and wayfinding signage
systems has risen sharply over the last two decades. A third primary marker is
"glow-in-the-dark" toys and novelties.
We believe that the world market for HPPL lighting is underdeveloped due largely
to the low illumination delivered by zinc sulphide products. We plan to build
interest and sales for Lunaplast products in established markets around the
world. Our marketing plan includes advertising in trade magazines, exhibiting at
industry tradeshows, direct mail campaigns, soliciting editorial coverage from
naval architecture, building design, architecture and lighting industry
publications and distributing product samples, videos and brochures to designers
and developers. Our website will also be used as a means to distribute product
information to interested parties quickly.
We market our products through our officers and through independent sales
representatives. As of April 15, 2005 we had independent sales representatives
marketing Lunaplast in North America, Latin America, Korea and Australia.
Competition
No single company dominates the world marketplace. Instead, a number of small
and medium-sized firms are active within regional markets in Europe, the U.S.
and elsewhere. Some producers include companies such as Permalight AG of Germany
(Europe and North America), Safe T Glow (UK and U.S.), Datrex (U.S.), Jalite
(UK), Everglow (Europe) and Existalight (Europe and U.S.). It is difficult to
determine annual sales volumes and revenues for these firms, as most are
privately held.
Although there are several manufacturers and distributors of photoluminescent
products we believe we have a significant advantage over our competitors as a
result of our proprietary manufacturing processes and cost effective approach to
the production of Strontium Aluminate-based HPPL materials in commercial
quantities. We also plan to be competitive in the HPPL industry by developing
advanced Strontium Aluminate materials, enhancing formulation and focusing on
higher volumes with a resultant lower cost of production. During the twelve
month period ended December 31, 2006, the Company plans to spend approximately
$100,000 on research relating to the development of advanced Strontium Aluminate
PL materials.
Patents and Intellectual Property
We have the following patents relating to our technology: (i) Photoluminescent
coating formulation, method of application, and coated articles; and (ii)
Photoluminescent Sleeve for electric lamps for producing a non-electrical light
emitting source. We also hold the following trademarks for our LUNACOAT and
LUNAPLAST.
Trade secret
Photoluminescent Light Emitter With Enhanced Photometric Brightness
Characteristics - method of increasing photoluminescent brightness
characteristics through material design.
15
PRODUCT OVERVIEW
We develop and manufacture high-performance photoluminescent products,
including, non-electrified signage and marketing materials, including PVC PSA
film, rigid sheet, powder coated, paint, polyester film and rigid sheet, acrylic
sheet, extrusion pellets. Our photoluminescent Exit Sign passed the Underwriters
Laboratories' 75 ft. visibility/legibility standard and our photoluminescent
Exit Sign was approved by the Energy Star program. Photoluminescent products are
enhancing progressive life-safety systems in buildings of all types, airplanes,
trains and passenger ships. We advise building code and standards organizations
to assisting companies to integrate photoluminescent systems into their
life-safety programs.
GOVERNMENTAL REGULATION
We manufacture products compliant with NYC Local Law 26. Our RS6-1
photoluminescent materials were approved by the NYC Materials Evaluation
Department.
EMPLOYEES
As of January 1, 2006 the Company had ten full-time employees. Contingent upon
the Company raising sufficient capital, the Company plans to hire additional
employees as may be required by the level of the Company's operations.
We have never experienced a work stoppage and believe our employee relations are
very good.
DESCRIPTION OF PROPERTY
We rent on a month to month basis approximately 4,800 square feet of executive
office space at 61A and 16.B Fawcett Road, Coquitlam, British Columbia at a
monthly rental of CDN$3,490.
LEGAL PROCEEDINGS
The Company is not engaged in any litigation, and the officers and directors
presently know of no threatened or pending litigation in which it is
contemplated that the Company will be made a party.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information about our current executive officers
and directors:
- --------------------------------------------------------------------------------
NAME AGE POSITION WITH COMPANY
- --------------------------------------------------------------------------------
Kimberly Landry 39 Chief Executive Officer, Principal Financial
and Chief Accounting Officer and Director
- --------------------------------------------------------------------------------
Robert H. Humber 60 Secretary and Director
- --------------------------------------------------------------------------------
Kimberly Landry served as our President between September 1, 2001 and August 31,
2004. On August 31, 2004 Ms. Landry resigned as our President and was appointed
to serve as our Chief Executive Officer. Ms. Landry was also appointed as our
Principal Financial and Chief Accounting Officer on April 5, 2005. Ms. Landry
has served as our Secretary, as well as a director since April 1999. Since
December 1994, Ms. Landry served as an officer and director of Luna Technologies
Inc. TI. Ms Landry attended a Washington State Community College where she
studied business administration.
Robert Humber served as our President between September 1, 2001 and April 1999.
Mr. Humber has served as one of our directors since April 1999. Between July
1996 and November 1999 Mr. Humber was the president of LTI. Prior to July 1996
Mr. Humber worked with Douglas Sinclair and Kimberly Landry in developing
photoluminescent products. For the past twenty-three years Mr. Humber has also
been an independent investigator and security consultant providing services to
law enforcement agencies and private industry
COMMITTEES OF THE BOARD
The Company does not have a compensation committee. The Company's Board of
Directors serves as the Company's Audit Committee. None of the Company's
directors qualifies as a financial expert.
16
CODE OF ETHICS
The Company has adopted a Code of Ethics which is applicable to the Company's
principal executive, financial, and accounting officers and persons performing
similar functions. The Code of Ethics is available on the Company's website
located at www.lunaplast.com.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation (including cash bonuses)
paid or accrued by us for our years ended December 31, 2004, The following table
sets forth in summary form the compensation received by the Company's executive
officers during the fiscal years ended December 31, 2002, 2003, and 2004.
Annual Compensation Long Term Compensation
------------------------------------------------ ----------------------
Other Re-
Annual stricted
Name and Compen- Stock Options
Principal Fiscal Salary Bonus sation Awards Granted
Position Year (1) (2) (3) (4) (5)
- --------- ------ ------ ----- ------- --------- -------
Kimberly Landry, 2004 $ 55,705 $ 46,750 500,000
President between 2003 $ 45,120 -- -- -- --
September 1, 2001 2002 $ 20,000 -- -- -- --
and August 31, 2004,
and Chief Executive
Officer since August
31, 2004
Scott Bullis, 2004 $22,016 -- -- -- 659,200 President since August 31, 2004
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
(4) Amounts reflect the value of the shares of the Company's common stock issued
as compensation for services.
The table below shows the number of shares of the Company's common stock owned
by the officers listed above, and the value of such shares as of December 31,
2004.
Name Shares Value
---- ------ -----
Kimberly Landry 2,025,000 $790,000
Scott Bullis -- --
(5) The shares of common stock to be received upon the exercise of all stock
options granted during the fiscal years shown in the table.
The Company's Canadian subsidiary had an employment agreement with Kimberly
Landry whereby the subsidiary has agreed to pay Ms. Landry a salary of CDN$7,500
per month.
Mr. Bullis has an Employment Agreement with the Company which provides that the
Company will pay Mr. Bullis CDN$7,500 per month. The monthly salary payable to
Mr. Bullis will be renegotiated at the request of either Mr. Bullis or the
Company during the term of the Employment Agreement. In the event that the
Company and Mr. Bullis cannot agree on any increase in salary, the monthly
salary payable to Mr. Bullis will be increased on an annual basis by the greater
of (i) 15% or (ii) the percentage which is the average percentage increase of
all compensation paid to the Company's officers during the previous twelve
months. The Employment Agreement with Mr. Bullis may be terminated by either the
Company or Mr. Bullis on thirty days notice. Mr. Bullis has resigned as
President effective as of February
17
In addition to his compensation Mr. Bullis was granted options in accordance
with the following terms:
Shares Issuable Upon Option Exercise Expiration
Exercise of Option Price (1) Date
52,800 US $0.35 August 26, 2007
6,400 US $0.75 August 26, 2007
400,000 (1) US $0.35 August 26, 2007
200,000 (1) US $0.50 August 26, 2007
(1) Options will vest in equal monthly portions over a period of twenty-four
months beginning on July 26, 2004.
Mr. Bullis is also entitled to participate in any medical or other benefit plans
that are offered to the Company's employees generally. He is The Company's Board
of Directors may increase the compensation paid to the Company's officers
depending upon the results of the Company's future operations
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
Except as provided in the Company's employment agreements with its executive
officers, the Company does not have a defined benefit, pension plan, profit
sharing or other retirement plan, although the Company may adopt one or more of
such plans in the future.
Compensation of Directors
Standard Arrangements. At present the Company does not pay its directors for
attending meetings of the Board of Directors, although the Company may adopt a
director compensation policy in the future. The Company has no standard
arrangement pursuant to which directors of the Company are compensated for any
services provided as a director or for committee participation or special
assignments.
Other Arrangements. During the year ended December 31, 2004, and except as
disclosed elsewhere in this report, no director of the Company received any form
of compensation from the Company.
Stock Option and Bonus Plans
The Company has an Incentive Stock Option Plan, a Non-Qualified Stock Option
Plan and a Stock Bonus Plan. A summary description of each Plan follows. In some
cases these three Plans are collectively referred to as the "Plans". None of the
plans have been approved by the Company's shareholders.
Incentive Stock Option Plan. The Incentive Stock Option Plan authorizes the
issuance of shares of the Company's common stock to persons that exercise
options granted pursuant to the Plan. Only officers, directors and key employees
of the Company may be granted options pursuant to the Incentive Stock Option
Plan.
In order to qualify for incentive stock option treatment under the Internal
Revenue Code, the following requirements must be complied with:
1. Options granted pursuant to the Plan must be exercised no later than:
(a) The expiration of thirty (30) days after the date on which an option
holder's employment by the Company is terminated.
(b) The expiration of one year after the date on which an option holder's
employment by the Company is terminated, if such termination is due to the
Employee's disability or death.
2. In the event of an option holder's death while in the employ of the Company,
his legatees or distributees may exercise (prior to the option's expiration) the
option as to any of the shares not previously exercised.
3. The total fair market value of the shares of Common Stock (determined at the
time of the grant of the option) for which any employee may be granted options
which are first exercisable in any calendar year may not exceed $100,000.
4. Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common Stock of
the Company may not be exercisable by its terms after five years from the date
of grant.
18
5. The purchase price per share of Common Stock purchasable under an option is
determined by the Committee but cannot be less than the fair market value of the
Common Stock on the date of the grant of the option (or 110% of the fair market
value in the case of a person owning the Company's stock which represents more
than 10% of the total combined voting power of all classes of stock).
Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plan authorizes
the issuance of shares of the Company's common stock to persons that exercise
options granted pursuant to the Plan. The Company's employees, directors,
officers, consultants and advisors are eligible to be granted options pursuant
to the Plan, provided however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction. The option
exercise price is determined by the Committee but cannot be less than the par
value of the Company's Common Stock on the date the option is granted.
Options granted pursuant to the Plan not previously exercised terminate upon the
date specified when the option was granted.
Stock Bonus Plan. The Company's Stock Bonus Plan allows for the issuance of
shares of common stock to the Company's employees, directors, officers,
consultants and advisors; provided, however, that bona fide services must be
rendered by consultants or advisors and such services must not be provided in
connection with promoting the Company's common stock or a capital-raising
transaction.
Other Information Regarding the Plans. The Plans are administered by the
Company's Board of Directors. The Board of Directors has the authority to
interpret the provisions of the Plans and supervise the administration of the
Plans. In addition, the Board of Directors is empowered to select those persons
to whom shares or options are to be granted, to determine the number of shares
subject to each grant of a stock bonus or an option and to determine when, and
upon what conditions, shares or options granted under the Plans will vest or
otherwise be subject to forfeiture and cancellation.
In the discretion of the Board of Directors, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Board of Directors may also
accelerate the date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited if the "vesting" schedule established by the Board
of Directors at the time of the grant is not met. For this purpose, vesting
means the period during which the employee must remain an employee of the
Company or the period of time a non-employee must provide services to the
Company. At the time an employee ceases working for the Company (or at the time
a non-employee ceases to perform services for the Company), any shares or
options not fully vested will be forfeited and cancelled. In the discretion of
the Board of Directors payment for the shares of Common Stock underlying options
may be paid through the delivery of shares of the Company's Common Stock having
an aggregate fair market value equal to the option price, provided such shares
have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Board of Directors.
Options are generally non-transferable except upon death of the option holder.
Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Board of Directors when the shares were issued.
The Board of Directors of the Company may at any time, and from time to time,
amend, terminate, or suspend one or more of the Plans in any manner it deems
appropriate, provided that such amendment, termination or suspension cannot
adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
The Plans are not qualified under Section 401(a) of the Internal Revenue Code,
nor are they subject to any provisions of the Employee Retirement Income
Security Act of 1974.
Summary
Total Shares Remaining
Shares Reserved for Shares Options/
Reserved Outstanding Issued As Shares
Name of Plan Under Plan Options Stock Bonus Under Plan
- ------------ ---------- ------- ----------- ----------
Incentive Stock Option Plan 750,000 -- N/A 445,000
Non-Qualified Stock Option Plan 4,000,000 (1) 770,200 N/A 2,193,130
Stock Bonus Plan 1,250,000 (1) N/A 777,812 472,188
19
(1) Reflects amendment to Plan in February 2005 which increased number of shares
issuable upon exercise of options granted pursuant to the Plan.
The persons listed below have received options or shares of the Company's common
stock as a stock bonus:
Incentive Stock Options
Shares Expiration Options Expired/
Subject Exercise Date of Date of Exercised as of
Option Holder To Option Price Grant Option April 15, 2005
------------- --------- ----- ----- ------ --------------
Employee 5,000 $0.50 03/04/03 03/04/04 5,000
Consultant 300,000 $0.23 10/7/04 10/7/06 300,000
-------
305,000
Non-Qualified Stock Options
Shares Expiration Options Expired/
Subject Exercise Date of Date of Exercised as of
Option Holder To Option Price Grant Option April 15, 2005
------------- --------- ----- ----- ------ --------------
Brian Fiddler 40,000 $0.10 08/15/03 08/30/08 40,000
Brian Fiddler 40,000 $0.18 08/15/03 08/30/08 20,000
Brian Fiddler 20,000 $0.50 08/15/03 08/30/08
Brian Fiddler 20,000 $0.25 08/15/03 08/30/08
Brian Fiddler 20,000 $0.40 08/15/03 08/30/08
Brian Fiddler 20,000 $0.60 08/15/03 08/30/08
Scott Bullis 52,800 $0.35 07/26/04 08/26/07
Scott Bullis 6,400 $0.75 07/26/04 08/26/07
Scott Bullis 400,000 $0.35 07/26/04 08/26/07
Scott Bullis 200,000 $0.50 07/26/04 08/26/07
Kimberly Landry 359,000 $0.04 10/06/04 11/04/04 359,000
Kimberly Landry 130,000 $0.04 10/06/04 11/18/04 130,000
Kimberly Landry 11,000 $0.04 10/06/04 10/06/14
Other employees and
consultants 572,670 $0.05/$0.50 * * 572,670
--------- ---------
1,891,870 1,121,670
========= =========
* Various dates
Stock Bonuses
Shares Issued
Name as Stock Bonus Date Issued
---- -------------- -----------
Brian Fiddler 18,000 8/15/03
Kimberly Landry 205,000 10/04/04
Brian Fiddler 30,000 10/04/04
Robert Humber 100,000 10/04/04
Douglas Sinclair 175,000 10/04/04
Kimberly Landry 20,000 12/31/04
Brian Fiddler 20,000 12/31/04
Kimberly Landry 10,000 01/25/05
Brian Fiddler 10,000 01/25/05
Other employees and consultants 189,812 Various dates
--------
777,812
========
20
Options Granted and Exercised During Year Ended December 31, 2004 and Year-End
Option Values
The tables below present information concerning the options granted and
exercised during the year ended December 31, 2004 to the persons named below and
the fiscal year-end value of all unexercised options (regardless of when
granted) held by these persons. The options shown below were all Non-Qualified
Stock Options.
% of Total
Options
Granted to Exercise
Options Employees in Price Per Expiration
Name Granted (#) Fiscal Year Share Date
---- ----------- ----------- ----- ----
Kimberly Landry 489,000 42% $0.04 11/04
Kimberly Landry 11,000 1% $0.04 10/14
Scott Bullis 659,000 57% Various 8/07
Brian Fiddler (5) -- -- -- --
Robert H. Humber -- -- -- --
Value (in $) of
Unexercised
Number of In-the-Money
Unexercised Options at Fiscal
Shares Options (3) Year-End (4)
Acquired On Value Exercisable/ Exercisable/
Name Exercise (1) Realized (2) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
Kimberly Landry 489,000 $148,990 11,000/-- $ 4,290/--
Scott Bullis -- -- -- --
Brian Fiddler (5) -- -- -- --
Robert H. Humber -- -- -- --
(1) The number of shares received upon exercise of options during the year ended
December 31, 2004.
(2) With respect to options exercised during the Company's year ended December
31, 2004, the dollar value of the difference between the option exercise price
and the market value of the option shares purchased on the date of the exercise
of the options.
(3) The total number of unexercised options held as of December 31, 2004,
separated between those options that were exercisable and those options that
were not exercisable.
(4) For all unexercised options held as of December 31, 2004, the market value
of the stock underlying those options as of December 31, 2004.
(5) Brian Fiddler resigned as an officer and director of the Company on April 4,
2005.
The table below shows the weighted average exercise price of the outstanding
options granted pursuant to the Company's Incentive and Non-Qualified Stock
Option Plans as of December 31, 2004. The Company's Incentive and Non-Qualified
Stock Option Plans were not approved by the Company's shareholders.
21
Number of Securities
Remaining Available
Number For Future Issuance
of Securities Under Equity
to be Issued Weighted-Average Compensation Plans
Upon Exercise Exercise Price of (Excluding Securities
of Outstanding of Outstanding Reflected in
Plan Category Options [a] Options Column (a))
------------- ----------- ------- -----------
Incentive Stock -- -- 445,000
Option Plan
Non-Qualified Stock 770,200 $0.39 2,193,130
Option Plan
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1999 the Company issued shares of its common stock to the persons, in
the amounts, and for the consideration set forth below:
Number
Name of Shares Consideration
Robert H. Humber 800,000 $ 800
Kimberly Landry 1,580,000 $1,580
Other third parties 2,120,000 $2,120
In April 1999 the Company acquired from LTI, a corporation formed by Kimberly
Landry in December 1994, the rights to the Company's patent application and
related technology. The patent application and related technology were assigned
to LTI by Ms. Landry and Douglas Sinclair in November 1997. In consideration for
the assignment of these rights, the Company paid LTI $90,000 during the year
ended December 31, 2000. As of April 14, 2005 the patent application assigned to
the Company was pending.
Ms. Landry is an officer and director of the Company. Mr. Sinclair was an
officer of the Company prior to August 31, 2004. See "Management Changes" in
Item 9 of this report for information concerning the resignation of Mr.
Sinclair.
In November 1999, the Company acquired from Mr. Sinclair the proprietary
technology required to manufacture Lunaplast into PVC sheets, vinyl rolls and
paints as well as the trademark rights to these products. In consideration for
the assignment of this technology and the trademarks, the Company paid Mr.
Sinclair $60,000 during the year ended December 31, 2000.
During the year ended December 31, 2000 the Company borrowed $60,000 from Ms.
Landry. During the year ended December 31, 2003 the Company issued 225,000
shares of its common stock to Ms. Landry in payment of this debt.
In January 2001 the Company acquired from LTI office and production equipment,
as well as the rights to certain tradenames used by the Company. In
consideration for these assets the Company agreed to pay LTI $41,142 prior to
January 1, 2006.
22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth, as of January 31, 2006, the number of and
percent of the Company's common stock beneficially owned by
o all directors and nominees, naming them,
o our executive officers,
o our directors and executive officers as a group, without naming
them, and
o persons or groups known by us to own beneficially 5% or more of our
common stock:
The Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of common stock beneficially owned
by them.
- ---------------------------------------------------------------------------------------------------
Name and Address Shares of Common Stock (1) Percent of Class (1)
- ---------------------------------------------------------------------------------------------------
Kimberly Landry 1,869,000 (2) 12.8%
c/o Luna International Technologies, Inc.
61 B Fawcett Road, Coquitlam,
British Columbia, Canada V3K 6V2
- ---------------------------------------------------------------------------------------------------
Robert H. Humber 0 *
c/o Luna International Technologies, Inc.
61 B Fawcett Road, Coquitlam,
British Columbia, Canada V3K 6V2
- ---------------------------------------------------------------------------------------------------
Douglas Sinclair 1,585,000 10.8%
1653 Plateau Cresent
Coquitlam, British Columbia
Canada V3B 3E3
- ---------------------------------------------------------------------------------------------------
Barry Drummond 845,000 5.8%
c/o Luna International Technologies, Inc.
61 B Fawcett Road, Coquitlam,
British Columbia, Canada V3K 6V2
- ---------------------------------------------------------------------------------------------------
Walter Doyle 750,000 5.1%
c/o Luna International Technologies, Inc.
61 B Fawcett Road, Coquitlam,
British Columbia, Canada V3K 6V2
- ---------------------------------------------------------------------------------------------------
All officers and directors as a group (2 1,869,000 12.8%
persons)
- ---------------------------------------------------------------------------------------------------
*Less than one percent.
(1) In accordance with Rule 13d-3(d)(1)(i) of the Securities Exchange Act of
1934, as amended, or the Exchange Act, shares beneficially owned at any date
include shares issuable upon the exercise of stock options, warrants, rights or
conversion privileges within 60 days of that date. For the purpose of computing
the percentage of outstanding shares beneficially owned by a particular person,
any securities not outstanding that are subject to stock options, warrants,
rights or conversion privileges exercisable by that person within 60 days of
January 31, 2006 have been deemed to be outstanding, but have not been deemed
outstanding for the purpose of computing the percentage of the class
beneficially owned by any other person. Based upon 14,648,398 issued and
outstanding as of January 31, 2006.
(2) Includes 11,000 shares of common stock issuable upon exercise of options
which are presently exercisable at a price of $0.04 .
23
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 35,000,000 shares of stock, of which
30,000,000 shares are designated common stock, par value $.0001 per share, and
5,000,000 shares are designated preferred stock, par value $.0001 per share. As
of January 31, 2006, there were 14,648,398 shares of common stock, and 0 shares
of preferred stock issued and outstanding. We intend on filing a definitive
information statement on Schedule 14C with the Securities and Exchange
Commission on January 27, 2006 pursuant to which a majority of our stockholders
have approved by written consent an amendment to our certificate of
incorporation to increase our authorized common stock from 30,000,000 shares to
100,000,000 shares.
The following summary of the material provisions of our common stock, series A
preferred stock, series B preferred stock, warrants, certificate of
incorporation and by-laws is qualified by reference to the provisions of our
certificate of incorporation and by-laws and the forms of warrants included as
exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
The holders of common stock do not have cumulative voting rights and are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Our common stock is not entitled to preemptive rights and is not
subject to redemption (including sinking fund provisions) or conversion. Upon
our liquidation, dissolution or winding-up, the assets (if any) legally
available for distribution to stockholders are distributable ratably among the
holders of our common stock after payment of all classes or series of our
preferred stock. All outstanding shares of our common stock are validly issued,
fully-paid and nonassessable. The rights, preferences and privileges of holders
of our common stock are subject to the preferential rights of all classes or
series of preferred stock that we may issue in the future.
PREFERRED STOCK
Our board of directors has the authority to issue 5,000,000 shares of preferred
stock in one or more series and to determine all of the rights, preferences,
privileges and restrictions of the preferred stock. If we issue any preferred
stock, it may have the effect of delaying or preventing a change in control
without further action by our stockholders and may adversely affect the voting,
dividend and other rights of the holders of our common stock. In addition, as
discussed below, the issuance of preferred stock with voting and/or conversion
rights may adversely affect the voting power of the holders of our common stock,
including the loss of voting control to others.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Corporate Stock
Transfer, Inc. Corporate Stock Transfer's address is 3200 Cherry Creek South
Drive, Suite 430, Denver, Colorado 80209.
MARKET INFORMATION
Our common stock is quoted on the OTC Bulletin Board under the symbol "LTII.OB."
The market for our common stock is characterized generally by low volume and
broad price and volume volatility.
COMMISSION'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize us to
indemnify our employees or agents, and to advance the reasonable expenses of
such persons, to the same extent, following the same determinations and upon the
same conditions as are required for the indemnification of and advancement of
expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
24
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, or Regulation S, rather than under this
prospectus. The selling stockholders shall have the sole and absolute discretion
not to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions.
We have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement with
a broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
25
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
26
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds from
the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering the
resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants Conversion (1) Offering* Offering* (7) (7)
- ------------------------------------------------------------------------------------------------------------------------------------
AJW Offshore, Ltd. (2) 5,643,865(3) 38.79% Up to 725,965 4.99% -- --
5,643,865
shares of
common stock
- ------------------------------------------------------------------------------------------------------------------------------------
AJW Qualified 3,407,222(4) 23.41% Up to 725,965 4.99% -- --
Partners, LLC (2) 3,407,222
shares of
common stock
- ------------------------------------------------------------------------------------------------------------------------------------
AJW Partners, LLC (2) 1,243,741(5) 8.54% Up to 725,965, 4.99% -- --
1,243,741
shares of
common stock
- ------------------------------------------------------------------------------------------------------------------------------------
New Millennium Capital 156,774(6) 1.08% Up to 156,774 ** -- --
Partners II, LLC (2) 156,774
shares of
common stock
====================================================================================================================================
* These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
** Less than 1%
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of the
secured convertible notes and exercise of warrants, based on current market
prices. Because the number of shares of common stock issuable upon conversion of
the secured convertible notes is dependent in part upon the market price of the
common stock prior to a conversion, the actual number of shares of common stock
that will be issued upon conversion will fluctuate daily and cannot be
determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on January 31, 2006,
the secured convertible notes would have had a conversion price of $0.065. The
actual number of shares of common stock offered in this prospectus, and included
in the registration statement of which this prospectus is a part, includes such
additional number of shares of common stock as may be issued or issuable upon
conversion of the secured convertible notes and exercise of the related warrants
by reason of any stock split, stock dividend or similar transaction involving
the common stock, in accordance with Rule 416 under the Securities Act of 1933.
However the selling stockholders have contractually agreed to restrict their
27
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock as determined in accordance with Section 13(d) of the Exchange Act.
Accordingly, the number of shares of common stock set forth in the table for the
selling stockholders exceeds the number of shares of common stock that the
selling stockholders could own beneficially at any given time through their
ownership of the secured convertible notes and the warrants. In that regard, the
beneficial ownership of the common stock by the selling stockholder set forth in
the table is not determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended.
(2) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd., formerly
known as AJW/New Millennium Offshore, Ltd., is a private investment fund that is
owned by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by AJW Offshore, Ltd. AJW Qualified
Partners, LLC, formerly known as Pegasus Capital Partners, LLC, is a private
investment fund that is owned by its investors and managed by AJW Manager, LLC,
of which Corey S. Ribotsky and Lloyd A. Groveman are the fund managers, have
voting and investment control over the shares listed below owned by AJW
Qualified Partners, LLC. New Millennium Capital Partners II, LLC, is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by New
Millennium Capital Partners II, LLC. We have been notified by the selling
stockholders that they are not broker-dealers or affiliates of broker-dealers
and that they believe they are not required to be broker-dealers.
(3) Includes (i) 5,265,865 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 378,000 shares of common stock issuable upon
exercise of common stock purchase warrants.
(4) Includes (i) 3,179,022 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 228,200 shares of common stock issuable upon
exercise of common stock purchase warrants.
(5) Includes (i) 1,160,441 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 83,300 shares of common stock issuable upon
exercise of common stock purchase warrants.
(6) Includes (i) 146,274 shares of common stock issuable upon conversion of
secured convertible notes, and (ii) 10,500 shares of common stock issuable upon
exercise of common stock purchase warrants.
(7) Assumes that all securities registered will be sold.
TERMS OF SECURED CONVERTIBLE NOTES AND THE WARRANTS
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on December 16, 2005 for the
sale of (i) $1,000,000 in secured convertible notes and (ii) warrants to buy
1,000,000 shares of our common stock.
The investors are obligated to provide us with the funds (gross proceeds) as
follows:
o $400,000 was disbursed on December 16, 2005;
o $300,000 will be disbursed within five days of the filing of this
registration statement; and
o $300,000 will be disbursed within five days of the effectiveness of
this prospectus.
The secured convertible notes bear interest at 8%, unless our common stock is
greater than $0.2125 per share for each trading day of a month, in which event
no interest is payable during such month. The secured convertible notes mature
three years from the date of issuance, and are convertible into our common
stock, at the Purchasers' option, at a 50% discount to the average of the three
lowest trading prices of the common stock during the 20 trading day period prior
to conversion. The beneficial conversion feature of such discounted conversion
will be amortized over the three-year life of the loan.
We have a call option under the terms of the secured convertible notes. The call
option provides us with the right to prepay all of the outstanding secured
convertible notes at any time, provided we are not in default and our stock is
trading at or below $.40 per share. Prepayment of the notes is to be made in
cash equal to either (i) 125% (for prepayments occurring within thirty (30) days
of the issuance date of the notes), (ii) 135% for prepayments occurring between
thirty-one (31) and sixty (60) days of the issuance date of the notes, or (iii)
150% (for prepayments occurring after the sixtieth (60th) day following the
issuance date of the notes), multiplied by the sum of (w) the then outstanding
principal amount of the notes plus (x) accrued and unpaid interest on the unpaid
principal amount of the Note to the date of prepayment plus (y) default
Interest, if any, plus (z) certain outstanding amounts, if any, owed by the
Company, to the Holder pursuant to notes or the registration Rights Agreement.
The full principal amount of the secured convertible notes are due upon a
default under the terms of secured convertible notes. In addition, we granted
the Purchasers a security interest in substantially all of our assets and
intellectual property. We are required to file a registration statement with the
Securities and Exchange Commission within 45 days of closing, which will include
200% of the common stock underlying the secured convertible notes, and the
warrants. If the registration statement is not declared effective within 120
days from the date of closing, we are required to pay liquidated damages to the
Purchasers. In the event that we breach any representation or warranty in the
Securities Purchase Agreement, we are required to pay liquidated damages in
shares or cash, at our election, in an amount equal to three percent of the
outstanding principal amount of the secured convertible notes per month plus
accrued and unpaid interest.
28
In connection with the Securities Purchase Agreement, we executed a Security
Agreement and an Intellectual Property Security Agreement in favor of the
investors granting them a first priority security interest in all of our goods,
inventory, contractual rights and general intangibles, receivables, documents,
instruments, chattel paper, and intellectual property. Under the Security
Agreement and Intellectual Property Security Agreement, events of default occur
upon:
o The occurrence of an event of default (as defined in the secured
convertible notes) under the secured convertible notes;
o Any representation or warranty we made in the Security Agreement or
in the Intellectual Property Security Agreement shall prove to have
been incorrect in any material respect when made;
o The failure by us to observe or perform any of our obligations under
the Security Agreement or in the Intellectual Property Security
Agreement for ten (10) days after receipt of notice of such failure
from the investors; and
o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a conversion
notice;
o Fail to file a registration statement within 45 days after December
16, 2005 or fail to have the registration statement effective by
within 120 days after December 16, 2005;
o Breach any material covenant or other material term or condition in
the secured convertible notes or the Securities Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or trustee for
us or any of our subsidiaries or for a substantial part of our of
our subsidiaries' property or business, or such a receiver or
trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be entered or
filed against us or any of our subsidiaries or any of our property
or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the investors;
o Institute or have instituted against us or any of our subsidiaries
any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors;
o Fail to maintain the listing of our common stock on one of the OTCBB
or an equivalent replacement exchange, the Nasdaq National Market,
the Nasdaq SmallCap Market, the New York Stock Exchange, or the
American Stock Exchange; or
o Default under any other secured convertible note issued pursuant to
the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security Agreement or
the Intellectual Property Security Agreement, the investors shall have the right
to exercise all of the remedies conferred under the Security Agreement, the
Intellectual Property and under the secured convertible notes, and the investors
shall have all the rights and remedies of a secured party under the Uniform
Commercial Code and/or any other applicable law (including the Uniform
Commercial Code of any jurisdiction in which any collateral is then located).
The investors shall have the following rights and powers:
o Taking possession of all of our assets, including, but not limited
to, our inventory, receivables, equipment, contract rights and other
general intangibles, as well as our intellectual property; and
o Operating our business using the collateral as set forth above with
the right to assign, sell, lease or otherwise dispose of and deliver
all or any part of the collateral, at public or private sale or
otherwise, for cash or on credit.
The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.65 per share. The Purchasers may exercise the warrants on a
cashless basis if the shares of common stock underlying the warrants are not
then registered pursuant to an effective registration statement. In the event
the Purchasers exercise the warrants on a cashless basis, then we will not
receive any proceeds. In addition, the exercise price of the warrants will be
adjusted in the event we issue common stock at a price below market, with the
exception of any securities issued as of the date of the warrants or issued in
connection with the secured convertible notes issued pursuant to the Securities
Purchase Agreement.
Upon an issuance of shares of common stock below the market price, the exercise
price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise price of
the warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholders' position.
29
The Purchasers have agreed to restrict their ability to convert their secured
convertible notes or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.9% of the then issued and outstanding shares of common stock.
A complete copy of the Securities Purchase Agreements and related documents are
incorporated by reference as exhibits to our Form SB-2 registration statement
relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the secured
convertible notes is determined by dividing that portion of the principal of the
notes to be converted and interest, if any, by the conversion price. For
example, assuming conversion of the $1,000,000 of secured convertible notes on
January 31, 2006, at a conversion price of $0.065, the number of shares issuable
upon conversion would be:
$1,000,000/$0.065 = 15,384,615 shares
The following is an example of the amount of shares of our common stock that are
issuable, upon conversion of the principal amount of our secured convertible
notes, based on market prices 25%, 50% and 75% below the market price as of
January 31, 2006 of $0.145.
% Below Market Price Per Share Discount of 50% Number of Shares Issuable
-------------- --------------- --------------- -------------------------
25% $.1425 $.0713 14,035,088
50% $.0950 $.0475 21,052,632
75% $.0475 $.0238 42,105,263
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an opinion
with respect to the validity of the shares of common stock being offered hereby.
EXPERTS
The financial statements of our financial statements as of December 31, 2004 and
2003, and for each of the two years in the period ended December 31, 2004 and
2003, included in this prospectus have been audited by Dale Matheson Carr-Hilton
LaBonte, independent registered public accounting firm, as stated in their
report, appearing in this prospectus and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities Act of
1933, as amended, relating to the shares of common stock being offered by this
prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Itronics Inc., filed as part of the
registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at 100 F Street N.E. Washington, D.C. 20549. Copies of such material
can be obtained from the Public Reference Section of the SEC at 100 F Street
N.E. Washington, D.C. 20549 at prescribed rates. Because we file documents
electronically with the SEC, you may also obtain this information by visiting
the SEC's Internet website at http://www.sec.gov.
30
INDEX TO FINANCIAL STATEMENTS
LUNA TECHNOLOGIES INTERNATIONAL, INC.
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets as of December 31, 2004 F-2
Statements of Operations for the years ended December 31, 2004
and 2003 F-3
Statements of Stockholders' Deficit for the years ended
December 31, 2004 and 2003 F-4 to F-7
Statements of Cash Flows for the years ended December 31, 2004
and 2003 F-8
Notes to Financial Statements F-9 to F-23
Balance Sheet as of September 30, 2005 (Unaudited) F-24
Statements of Operations for the three and nine months ended
September 30, 2005 and 2004 (Unaudited) F-25
Statements of Stockholders' Deficit for the period
January 1, 2005 through September 30, 2005 (Unaudited) F-26 to F-28
Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 (Unaudited) F-29
Notes to the Financial Statements (Unaudited) F-30 to F-42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
To the Stockholders and Board of Directors of Luna Technologies International,
Inc.
We have audited the consolidated balance sheets of Luna Technologies
International, Inc. as at December 31, 2004 and 2003 and the consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial positions of the Company as at December 31,
2004 and 2003 and the results of its operations and its cash flows and the
changes in stockholders' equity for the years then ended in accordance with
generally accepted accounting principles in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has a working capital deficiency and has
incurred losses since inception raising substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
"Dale Matheson Carr-Hilton LaBonte"
CHARTERED ACCOUNTANTS
Vancouver, B.C.
Canada
March 31, 2005
F-1
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Accounts receivable $ 81,357 $ 49,127
Prepaid expenses 6,027 3,960
Inventory 75,437 88,247
- ------------------------------------------------------------------------------------------------------------------------------
162,821 141,334
FURNITURE AND EQUIPMENT, net of depreciation of $81,424 (2003 - $70,340) 15,605 20,777
- ------------------------------------------------------------------------------------------------------------------------------
$ 178,426 $ 162,111
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Bank overdraft $ 184 $ 11,252
Accounts payable and accrued liabilities 265,505 229,738
Current portion of convertible debenture (Note 4) 56,797 39,996
Due to related parties (Note 3) 16,160 167,506
Current portion of notes payable (Note 3) 78,168 40,730
- ------------------------------------------------------------------------------------------------------------------------------
416,814 489,222
CONVERTIBLE DEBENTURE (Note 4) -- 56,885
NOTE PAYABLE (Note 3) 101,497 --
- ------------------------------------------------------------------------------------------------------------------------------
518,311 546,107
- ------------------------------------------------------------------------------------------------------------------------------
GOING CONCERN CONTINGENCY (Note 1)
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock (Note 5)
Common stock, $0.0001 par value, 30,000,000 shares authorized
9,664,648 (2003 - 6,727,836) shares issued and outstanding 966 673
Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized
NIL issued and outstanding -- --
Additional paid-in capital 2,032,988 1,342,003
Warrants 124,000 74,000
Deficit (2,406,065) (1,735,410)
Accumulated other comprehensive loss (91,774) (65,262)
- ------------------------------------------------------------------------------------------------------------------------------
(339,885) (383,996)
- ------------------------------------------------------------------------------------------------------------------------------
$ 178,426 $ 162,111
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
F-2
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
SALES $ 537,165 $ 381,721
COST OF SALES 269,395 232,759
- ------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 267,770 148,962
OTHER INCOME 120,000 100,000
- ------------------------------------------------------------------------------------------------------------------------------
387,770 248,962
- ------------------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Consulting 85,519 86,958
Consulting - stock based (Note 5) 279,468 193,500
Depreciation 11,084 19,686
Interest and bank charges 12,745 49,542
Interest on convertible debenture 6,197 8,990
Management fees 187,174 145,558
Office and general 166,584 127,336
Professional fees 101,987 54,718
Rent 33,716 27,303
Research and development, net of recoveries 55,097 46,925
Wages and benefits 172,219 99,958
Gain on write-off of accounts payable (Note 6) (53,365) --
- ------------------------------------------------------------------------------------------------------------------------------
1,058,425 860,474
- ------------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR $ (670,655) $ (611,512)
==============================================================================================================================
BASIC NET LOSS PER SHARE $ (0.09) $ (0.10)
==============================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,615,138 6,067,002
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
F-3
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Additional Share
Number of Paid In Purchase
shares Amount Capital Warrants
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 5,415,166 $ 542 $ 605,150 $ --
Issued for cash at - $0.50 per share 200,000 20 79,980 20,000
- $0.60 per share 250,000 25 119,975 30,000
- $0.80 per share 150,000 15 95,985 24,000
Issued for consulting services 6,000 1 2,999 --
Issued for debt settlement 225,000 23 86,877 --
Issued on exercise of options - $0.05 per share 25,000 3 1,247 --
- $0.10 per share 50,000 5 4,995 --
- $0.18 per share 20,000 2 3,598 --
- $0.38 per share 34,000 3 12,917 --
- $0.40 per share 205,000 20 81,980 --
- $0.50 per share 23,670 2 11,812 --
Issued pursuant to stock bonus plan 124,000 12 62,088 --
Beneficial conversion feature of conversion option -- -- 41,000 --
Stock-based compensation -- -- 131,400 --
Net loss for the year -- -- -- --
Currency translation adjustment -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 6,727,836 $ 673 $ 1,342,003 $ 74,000
Accumulated
Other
Comprehensive
Deficit Income (loss) Total
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ (1,123,898) $ (2,970) $ (521,176)
Issued for cash at - $0.50 per share -- 100,000
- $0.60 per share -- 150,000
- $0.80 per share -- 120,000
Issued for consulting services -- -- 3,000
Issued for debt settlement -- -- 86,900
Issued on exercise of options - $0.05 per share -- -- 1,250
- $0.10 per share -- -- 5,000
- $0.18 per share -- -- 3,600
- $0.38 per share -- -- 12,920
- $0.40 per share -- -- 82,000
- $0.50 per share -- -- 11,814
Issued pursuant to stock bonus plan -- -- 62,100
Beneficial conversion feature of conversion option -- -- 41,000
Stock-based compensation -- -- 131,400
Net loss for the year (611,512) (611,512)
Currency translation adjustment -- (62,292) (62,292)
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ (1,735,410) $ (65,262) $ (383,996)
The accompanying notes are an integral part of these consolidated financial
statements
F-4
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Additional Share
Number of Paid In Purchase
shares Amount Capital Warrants
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 6,727,836 $ 673 $ 1,342,003 $ 74,000
Issued for cash at - $0.20 per share 1,250,000 125 199,875 50,000
- $0.65 per share 100,000 10 51,990 13,000
- $1.00 per share 35,000 4 27,996 7,000
Issued on exercise of options - $0.04 per share 489,000 49 19,511 --
- $0.10 per share 160,000 16 15,984 --
- $0.23 per share 300,000 30 68,220 --
- $0.40 per share 5,000 -- 2,000 --
Issued pursuant to stock bonus plan 597,812 59 130,809 --
Stock-based compensation -- -- 154,600 --
Share purchase warrants expired -- -- 20,000 (20,000)
Net loss for the year -- -- -- --
Currency translation adjustment -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 9,664,648 $ 966 $ 2,032,988 $ 124,000
============================================================================================================================
Accumulated
Other
Comprehensive
Deficit Income (loss) Total
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ (1,735,410) $ (65,262) $ (383,996)
Issued for cash at - $0.20 per share -- -- 250,000
- $0.65 per share -- -- 65,000
- $1.00 per share -- -- 35,000
Issued on exercise of options - $0.04 per share -- -- 19,560
- $0.10 per share -- -- 16,000
- $0.23 per share -- -- 68,250
- $0.40 per share -- -- 2,000
Issued pursuant to stock bonus plan -- -- 130,868
Stock-based compensation -- -- 154,600
Share purchase warrants expired -- -- --
Net loss for the year (670,655) (670,655)
Currency translation adjustment -- (26,512) (26,512)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ (2,406,065) $ (91,774) $ (339,885)
=============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
F-5
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year $ (670,655) $ (611,512)
Adjustments to reconcile net loss to net cash from operating activities:
- depreciation 11,084 19,686
- stock-based compensation 279,468 193,500
- beneficial conversion feature -- 41,000
- non-cash gain on write-off of accounts payable (53,365) --
- accrued interest expense (88) 1,957
- accounts receivable (32,230) (6,434)
- inventory 12,810 (67,189)
- prepaid expenses (2,067) (1,763)
- accounts payable and accrued liabilities 140,360 (4,033)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (314,683) (434,788)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (5,912) (6,473)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,912) (6,473)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (11,068) 8,913
Loan repayment -- (4,500)
Issuance of common shares 357,000 486,584
Convertible debenture proceeds (repayments) (39,996) 36,669
Loan from (repayments to) related parties 49,509 (24,113)
Payment on notes payable (8,338) --
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 347,107 503,553
- ------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES (26,512) (62,292)
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH -- --
CASH, BEGINNING OF YEAR -- --
- ------------------------------------------------------------------------------------------------------------------------------
CASH, END OF YEAR $ -- $ --
==============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 6,285 $ 8,883
=====================================================================================================
Taxes paid $ Nil $ Nil
=====================================================================================================
Non-cash activities:
Refer to Notes 3, 5 and 6.
The accompanying notes are an integral part of these consolidated financial
statements
F-6
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The Company was incorporated on March 25, 1999 in the state of Delaware. The
Company commenced operations April 30, 1999 and by agreement effective as of
that date, acquired proprietary technology and patent rights from Luna
Technology Inc. ("LTBC"), a private British Columbia company with certain
directors and shareholders in common with the Company. In addition, by agreement
effective November 15, 1999, the Company acquired proprietary technology and the
trademark rights to "LUNA" and "LUNAPLAST" from Douglas Sinclair, an officer and
employee of LTBC, which relate to the acquired Photoluminescent technology. This
technology is used for the development and production of photoluminescent
signage, wayfinding systems and other novelty products with applications in
marine, commuter rail, subway, building and toy markets.
The consolidated financial statements have been prepared on the basis of a going
concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At December 31, 2004 the Company
has a working capital deficiency of $253,993 (2003 - $347,888) and has incurred
losses since inception raising substantial doubt as to the Company's ability to
continue as a going concern. The ability of the Company and its subsidiary to
continue as a going concern is dependent on raising additional capital and on
generating future profitable operations. In addition, during 2004, 60% of the
Company's total sales was derived from two customers, one customer of which also
provided financing to the Company in connection with the Convertible Debenture
as described in Note 4 accounted for 43%.
The Company anticipates meeting its working capital requirement for the next
year through the sale of shares of common stock or through loans and advances
from related parties as may be required.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiary Luna Technologies (Canada) Ltd. ("LTC"), a company
incorporated June 9, 1999 in the province of British Columbia. LTC was
incorporated to conduct all future business activities in Canada. All
significant intercompany balances and transactions are eliminated on
consolidation.
Use of Estimates and Assumptions
Preparation of the Company's financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. The areas
requiring significant estimates and assumptions are determining the useful lives
of furniture and equipment and the fair value of stock-based compensation.
Inventory
Inventory is carried at the lower of cost and net realizable value.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed by the
straight-line method on estimated useful lives of two to five years.
Revenue Recognition
The Company recognizes revenue when products have been shipped and collection is
reasonably assured. The Company also generates other income from one-time fees
charged in connection with territorial Supply Agreements. As the Company has no
future obligations in connection with these agreements, these fees are
recognized as other income upon execution of the agreements and when collection
is reasonably assured.
Research and Development Costs
Ongoing new product and technology research and development costs are expensed
as incurred net of contributions made by third parties toward research projects.
F-7
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Foreign Currency Translation
The financial statements are presented in United States dollars. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation", foreign denominated monetary assets and liabilities are
translated to their United States dollar equivalents using foreign exchange
rates which prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, management has determined
the estimated fair value of financial instruments using available market
information and appropriate valuation methodologies. The fair value of financial
instruments classified as current assets or liabilities including bank overdraft
and notes and accounts payable approximate carrying value due to the short-term
maturity of the instruments. Management has also determined that the fair value
of the convertible debenture approximates its carrying value as at December 31,
2004 and 2003.
Risk Management
Currency risk. The majority of the Company's sales and cost of sales are made in
U.S. currency while a significant amount of its general and administrative
expenses are made in Canadian currency. The Company does not currently hedge its
foreign currency exposure and accordingly is at risk for foreign currency
exchange fluctuations.
Credit risk. Management does not believe the Company is exposed to significant
credit risk and accordingly does not manage credit risk directly.
Net Loss per Common Share
Basic loss per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Dilutive earnings per share reflects the potential
dilution of securities that could share in the earnings of the Company. Share
purchase warrants and stock options were not included in the calculation of
weighted average number of shares outstanding because the effect would be
anti-dilutive.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation, (2) amend the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation, and (3) to require disclosure of those effects in interim
financial information. The disclosure provisions of SFAS No. 148 were effective
for the Company commencing for the year ended December 31, 2002 and the required
disclosures have been made below.
The Company has elected to continue to account for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB No. 25") and comply with the disclosure provisions of SFAS No. 123 as
amended by SFAS No. 148 as described above. In addition, in accordance with SFAS
No. 123 the Company applies the fair value method using the Black-Scholes
option-pricing model in accounting for options granted to consultants. Under APB
No. 25, compensation expense is recognized based on the difference, if any, on
the date of grant between the estimated fair value of the Company's stock and
the amount an employee must pay to acquire the stock. Compensation expense is
recognized immediately for past services and pro-rata for future services over
the option-vesting period.
F-8
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Stock-Based Compensation (cont'd)
The following table illustrates the pro forma effect on net income (loss) and
net income (loss) per share as if the Company had accounted for its stock-based
employee compensation using the fair value provisions of SFAS No. 123 using the
assumptions as described in Note 5:
For the year ended December 31,
2004 2003
---------------------------
Net loss for the year As reported $ (670,655) $ (611,512)
SFAS 123 compensation expense Pro-forma (63,050) (18,700)
---------------------------
Net loss for the year Pro-forma $ (733,705) $ (630,212)
===========================
Pro-forma basic net loss per share Pro-forma $ (0.10) $ (0.10)
===========================
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with SFAS No. 123
and the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF
96-18"). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services as defined by EITF 96-18.
The Company has also adopted the provisions of the Financial Accounting
Standards Board Interpretation No.44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25" ("FIN
44"), which provides guidance as to certain applications of APB No. 25.
Income Taxes
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
balances. Deferred tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("SFAS 153") SFAS 153 requires that exchanges of non-monetary
assets are to be measured based on fair value and eliminates the exception for
exchanges of non-monetary, similar productive assets, and adds an exemption for
non-monetary exchanges that do not have commercial substance. SFAS 153 will be
effective for fiscal periods beginning after June 15, 2005. Management does not
believe that the adoption of this standard will have a material impact on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. A key provision of this
statement is the requirement of a public entity to measure the cost of employee
services received in exchange for an award of equity instruments (including
stock options) based on the grant date fair value of the award. That cost will
be recognized over the period during which an employee is required to provide
service in exchange for the award (i.e., the requisite service period or vesting
period). This standard becomes effective for the Company for its first annual or
interim period ended on or after December 15, 2005. The Company will adopt SFAS
123R no later than the beginning of the Company's fourth quarter ending December
31, 2005. Management is currently evaluating the potential impact that the
adoption of SFAS 123R will have on the Company's financial position and results
of operations.
F-9
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 3 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Company pays the CEO, President, and Chief Financial Officer, CDN$7,500,
CDN$5,000 and CDN$4,000 per month respectively. These obligations are on a month
by month basis.
During 2003 LTC and the Company executed a guarantee of certain unpaid
management fees owing to the CEO of LTC (Doug Sinclair) totalling $123,750
(CAN$165,000). In connection with this guarantee, the CEO was granted the right
to convert any or all of the unpaid amount into restricted shares of the
Company's common stock at a price of $0.30 per share. During 2003 the Company
recorded a $41,000 non-cash interest expense representing the beneficial
conversion feature embedded in this conversion option. This beneficial
conversion feature was valued using the intrinsic value method. Effective August
31, 2004, the CEO of LTC resigned and entered into an agreement with the Company
for the payment of these guaranteed amounts an additional fees owing. Effective
August 3, 2004, the Company has guaranteed, by a non-interest bearing promissory
note, outstanding management fees due to the former CEO of LTC totalling
CAN$187,000 payable as follows: CDN$20,000 upon acceptance, CDN$ 20,000 on
January 15, 2005, CDN$25,000 on June 15, 2005, CDN$30,000 on January 15, 2006,
CDN$40,000 on June 15, 2006 and CDN$52,000 on January 15, 2007. In addition, the
Company has agreed to a severance payment of CDN$43,200 to be paid in twelve
equal monthly installments of CDN$3,600. To December 31, 2004 CDN$41,600 has
been paid in connection with the above agreements leaving CDN$188,600
(US$156,905) owing of which $138,935 has been reclassified to notes payable and
$17,970 has been reclassified to accounts payable The Company did not pay the
CDN $20,000 installment due January 15, 2005.
During 2004 the Company had transactions with directors, officers, a relative of
a director, and LTBC as follows: expenses paid on behalf of and advances made to
the Company - $96,655 (2003 - $44,332); management fees incurred by the Company
- - $187,174 (2003 - $145,558); and payments and reimbursements made by the
Company - $234,320 (2003 - $180,959). Also during 2004 $19,560 owing to a
director of the Company was assigned to the Company as consideration for the
issuance of 489,000 shares of the Company's common stock on the exercise of
stock options at a price of $0.04 per share. In addition, amounts owing to the
former CEO of LTC totalling $181,295 were reclassified during the year to Notes
payable leaving $16,160 owing as at December 31, 2004 (2003 - $167,506).
During 2003 related party debts totalling $86,900 were settled by way of offset
against the proceeds receivable on the exercise of options by assignment of
these debts to an unrelated third party.
The Company and LTC have non-interest-bearing promissory notes totalling $40,730
to LTBC originally due on or before June 30, 2001. The due dates on these notes
have been extended to January 1, 2006.
Unless otherwise noted, all amounts due to related parties are unsecured,
non-interest bearing and with no specific terms of repayment.
Effective June 26, 2003 the Company entered into two agreements to acquire
certain proprietary technology and patent application rights from Inject A Light
Corporation Inc. ("Inject A Light"), a private Delaware corporation controlled
by a director and officer of the Company and the former CEO of LTC. This
proprietary technology and these patent application rights were originally
acquired by Inject A Light from these two individuals. Under the terms of the
agreements, the Company was required to pay consideration of a total of
1,250,000 restricted shares of the Company's common stock. Prior to the closing
of the agreement the parties re-evaluated the terms and ultimate completion of
this potential acquisition. Effective December 29, 2004, as a result of
re-evaluating this acquisition, the parties entered into an Amending Agreement
and Release whereby these parties agreed to transfer the Inject A Light
proprietary technology at no cost to the Company. The parties determined that
further significant development costs must be incurred to this technology and
accordingly the parties were not able to determine an appropriate fair value.
F-10
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 4 - CONVERTIBLE DEBENTURE
- --------------------------------------------------------------------------------
Effective December 21, 2002 the Company issued a $120,000 Secured Convertible
Debenture (the "Debenture"). The Debenture is secured by a first floating charge
on all of the property, assets and undertakings of the Company and bears
interest at a rate of 8% per annum. The Company is required to make fixed
monthly principal payments of $3,333 for a period of 30 months commencing June
21, 2003 and a final principal payment of $20,010 due December 21, 2005.
Interest is calculated on the outstanding principal balance and is payable
monthly commencing June 21, 2003. During 2004 the Company made principal and
interest payments totalling $46,281 and as at December 31, 2004 a further $124
of interest has been accrued. This Debenture was issued to the Company's major
customer as described in Note 1.
The total unpaid balance of principal and interest may be converted at any time
into restricted shares of the Company's common stock at a price of $0.90 per
share during 2004 and $1.20 per share during 2005.
NOTE 5 - CAPITAL STOCK
- --------------------------------------------------------------------------------
During 2003 the Company issued 200,000 units at a price of $0.50 per unit for
proceeds of $100,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $0.75 per share until December 15, 2004. The estimated
fair value of the warrants of $20,000 has been recorded as a separate component
of stockholders' equity.
During 2003 the Company issued 250,000 units at a price of $0.60 per unit for
proceeds of $150,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $0.75 per share until August 15, 2005. The estimated
fair value of the warrants of $30,000 has been recorded as a separate component
of stockholders' equity.
During 2003 the Company issued 150,000 units at a price of $0.80 per unit for
proceeds of $120,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $1.00 per share until June 30, 2006. The estimated
fair value of the warrants of $24,000 has been recorded as a separate component
of stockholders' equity.
During 2003 the Company issued 6,000 shares of common stock at $0.50 per share
in settlement of $3,000 of accounts payable and 225,000 shares of common stock
in settlement of a total of $86,900 of loans payable and other amounts
previously owing to related parties which were assigned to a third party during
2003.
During 2003 the Company issued 357,670 shares of common stock on exercise of
stock options for total consideration of $116,584.
During 2004 the Company issued 100,000 units at a price of $0.65 per unit for
proceeds of $65,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $1.00 per share until February 28, 2006. The estimated
fair value of the warrants of $13,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 35,000 units at a price of $1.00 per unit for
proceeds of $35,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $1.00 per share until March 31, 2006. The estimated
fair value of the warrants of $7,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 1,250,000 units at a price of $0.20 per unit for
proceeds of $250,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $0.30 per share until September 3, 2005. The estimated
fair value of the warrants of $50,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 954,000 shares of common stock on exercise of
various stock options for total consideration of $105,810 of which $7,000 was
received in cash, $79,250 by offset of accounts payable and $19,560 by offset of
amounts due to a director of the Company.
F-11
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK (cont'd)
- --------------------------------------------------------------------------------
Stock option plans
As approved by the directors effective January 26, 2004, the Company has adopted
plans allowing for the granting of stock options and awarding of shares of
common stock as follows:
Incentive Stock Option Plan
The Company adopted an Incentive Stock Option Plan authorizing the
issuance of options to purchase up to 750,000 shares of common stock of
the Company. Options granted under this plan will have a price and term to
be determined at the time of grant, but shall not be granted at less than
the then fair market value of the Company's common stock and can not be
exercised until one year following the date of grant. This plan is
available to officers, directors and key employees of the Company.
Non-Qualified Stock Option Plan
The Company adopted a Non-Qualified Stock Option Plan authorizing the
issuance of options to purchase up to 1,350,000 shares of common of the
Company. Options granted under this plan will have a price and term to be
determined at the time of grant, but shall not be granted at less than the
then par value of the Company's common stock and can be exercised at any
time following the date of grant. This plan is available to officers,
directors, employees, consultants and advisors of the Company.
Stock Bonus Plan
The Company adopted a Stock Bonus Plan authorizing the awarding of up to
1,000,000 shares of common stock of the Company solely at the discretion
of the board of directors. This plan is available to officers, directors,
employees, consultants and advisors of the Company.
Effective February 10, 2004 the Company filed a Form S-8 Registration Statement
for 3,000,000 shares authorized under the Incentive Stock Option Plan, the
Non-Qualified Stock Option Plan and the Stock Bonus Plan.
During 2003 the Company awarded 124,000 shares of common stock under the Stock
Bonus Plan with a fair value of $62,100.
During 2004 the Company issued 12,000 shares of common stock under the Company's
Stock Bonus Plan at $0.50 per share in settlement of $6,000 of accounts payable
and awarded a further 585,812 shares under the Stock Bonus Plan with a fair
value of $124,868. As at December 31, 2004 202,188 shares remain available for
awards under the Stock Bonus Plan.
During 2003 the Company granted 382,670 stock options to consultants at prices
ranging from $0.05 per share to $0.50 per share. The fair value of these options
was recorded as consulting fees of $84,400. The fair value of these options was
estimated using the Black-Scholes option pricing model assuming expected lives
ranging from 0.7 years to 1.6 years, a risk-free interest rate of 3% and
expected volatilities ranging from 67% to 82%.
During 2003 the Company granted 160,000 stock options to a director at prices
ranging from $0.10 per share to $0.60 per share. Of these options, 120,000
vested in 2003 and the remaining 40,000 options vested between March 1, 2004 and
June 1, 2004. During 2003 the Company recorded a consulting expense of $47,000
representing the intrinsic value of the vested options. Also in connection with
the vested options, pro-forma disclosures were provided in Note 2 to reflect the
fair value of these options of $18,700 as calculated using the Black-Scholes
option pricing model assuming expected lives of 5 years, a risk-free interest
rate of 3% and an expected volatility of 112%. During 2004, upon vesting of the
remaining options, the Company recorded an additional consulting expense of
$4,400 representing the intrinsic value of the options and disclosed additional
pro-forma fair value of the options totalling $15,700 as calculated using the
Black-Scholes option pricing model assuming expected lives of 5 years, a
risk-free interest rate of 3% and an expected volatility of 112%.
During 2004 the Company granted 460,000 stock options to consultants at prices
ranging from $0.10 per share to $0.23 per share. The fair value of these options
was recorded as consulting fees of $71,600. The fair value of these stock
options was estimated using the Black-Scholes option pricing model assuming
expected lives ranging from one year to five years, risk-free interest rates
ranging from 2% to 3% and expected volatilities ranging from 77% to 103%.
F-12
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK (cont'd)
- --------------------------------------------------------------------------------
During 2004 the Company granted a total of 659,200 stock options to the
Company's new president at exercise prices ranging from $0.35 per share to $0.75
per share, exercisable for a term of three years. The fair value of these stock
options was estimated using the Black-Scholes option pricing model assuming an
expected life of three years, a risk-free interest rate of 3% and an expected
volatility of 102% resulting in a pro forma expense of $142,200 to be disclosed
in Note 2 upon vesting of the options. Of these options, 59,200 vested
immediately and the remaining 600,000 vest at a rate of 16,667 per month for a
period of three years. During year ended December 31, 2004 $30,850 of the pro
forma expense has been disclosed and the remaining $111,350 will be disclosed
upon vesting of the options.
During 2004 the Company granted a total of 505,000 stock options to an employee
and a director of the Company at exercise prices ranging from $0.04 per share to
$0.30 per share, exercisable for terms ranging from one year to ten years. As
the exercise price of certain of these options was less than the market price of
the Company's common stock as at the date of grant, the Company has recorded an
intrinsic value stock based compensation expense of $78,600. In addition the
Company has disclosed a pro-forma expense of $16,500 relating to the additional
fair value of these options as estimated using the Black-Scholes option pricing
model assuming an expected life of ten years, a risk-free interest rate of 3%
and an expected volatility of 103%.
As at December 31, 2004, 305,000 shares have been granted and no stock options
were outstanding under the Incentive Stock Option Plan and 770,200 stock options
were outstanding under the Non-Qualified Stock Option Plan.
The Company's stock option activity is as follows:
Number of Weighted Average Weighted Average
options Exercise Price Remaining Life
------------------------------------------------------
Balance, December 31, 2002 -- $ -- --
Granted during the year 542,670 0.33
Expired during the year -- --
Exercised during the year (357,670) 0.33
------------------------------------------------------
Balance, December 31, 2003 185,000 0.32 2.98 years
Granted during the year 1,624,200 0.23
Expired during the year (85,000) 0.25
Exercised during the year (954,000) 0.11
------------------------------------------------------
Balance, December 31, 2004 770,200 $0.39 2.81 years
======================================================
Share Purchase Warrants
The Company's share purchase warrant activity is as follows:
Number of Weighted Average Weighted Average
warrants Exercise Price Remaining Life
------------------------------------------------------
Balance, December 31, 2002 -- $ -- --
Issued during the year 914,255 0.97
Expired during the year (75,000) 1.25
Exercised during the year -- --
------------------------------------------------------
Balance, December 31, 2003 839,255 0.94 1.21 years
Issued during the year 1,385,000 0.37
Expired during the year (439,255) 0.89
Exercised during the year -- --
------------------------------------------------------
Balance, December 31, 2004 1,785,000 $0.51 0.77 years
======================================================
F-13
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 6 - OTHER GAIN
- --------------------------------------------------------------------------------
During 2002 a creditor of the Company seized inventory from the Company in an
attempt to secure payment of certain amounts owing by the Company in excess of
the carrying value of the inventory. As at December 31, 2003 the creditor was
still in possession of the inventory and had not initiated any action in an
attempt to receive payment. During 2004 management determined that any
obligation relating to this dispute was unlikely and accordingly wrote-off
previously accrued amounts resulting in a gain of $53,365.
NOTE 7 - INCOME TAXES
- --------------------------------------------------------------------------------
There were no significant temporary differences between the Company's tax and
financial bases, except for the Company's net operating loss carryforwards
amounting to approximately $1,790,000 at December 31, 2004 (2003 - $1,400,000).
These carryforwards will expire, if not utilized, beginning in 2006. The
realization of the benefits from these deferred tax assets appears uncertain due
to the Company's limited operating history. Accordingly, a valuation allowance
has been recorded which offsets the deferred tax assets at the end of the year.
NOTE 8 - SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
Subsequent to December 31, 2004, the Company issued 20,000 common shares under
the Stock Bonus Plan and completed a private placement of 325,000 units at a
price of $0.20 per unit for proceeds of $65,000. Each unit consist of one common
share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at prices ranging from $0.35 - $0.55 per
share until March 11, 2007.
F-14
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Accounts receivable $ 94,408 $ 81,357
Inventory 43,411 75,437
Prepaid expenses and other 38,524 6,027
- ------------------------------------------------------------------------------------------------------------------------------
176,343 162,821
FURNITURE AND EQUIPMENT, net of depreciation of $87,465 (2004 - $81,424) 9,564 15,605
- ------------------------------------------------------------------------------------------------------------------------------
$ 185,907 $ 178,426
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Bank overdraft $ 3,381 $ 184
Accounts payable and accrued liabilities 293,654 265,505
Convertible debenture (Note 4) 30,272 56,797
Current portion of notes payable (Note 3) 184,559 78,168
Due to related parties (Note 3) 19,322 16,160
- ------------------------------------------------------------------------------------------------------------------------------
531,188 416,814
NOTES PAYABLE (Note 3) -- 101,497
- ------------------------------------------------------------------------------------------------------------------------------
531,188 518,311
- ------------------------------------------------------------------------------------------------------------------------------
GOING CONCERN CONTINGENCY (Note 1)
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock (Note 5)
Common stock, $0.0001 par value, 30,000,000 shares authorized
11,598,398 (December 31, 2004 - 9,664,648) shares issued and outstanding 1,160 966
Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized
NIL issued and outstanding -- --
Additional paid-in capital 2,354,194 2,032,988
Warrants 197,350 124,000
Deficit (2,788,025) (2,406,065)
Accumulated other comprehensive loss (109,960) (91,774)
- ------------------------------------------------------------------------------------------------------------------------------
(345,281) (339,885)
- ------------------------------------------------------------------------------------------------------------------------------
$ 185,907 $ 178,426
==============================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
F-15
LUNA TECHNOLOGIES INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
SALES $ 189,343 $ 161,148 $ 527,817 $ 392,809
COST OF SALES 87,149 67,171 273,212 210,585
- ------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 102,194 93,977 254,605 182,224
OTHER INCOME -- 14,000 -- 120,000
- ------------------------------------------------------------------------------------------------------------------------------
102,194 107,977 254,605 302,224
- ------------------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Consulting 23,298 9,635 33,644 72,901
Consulting - stock based (Note 5) -- 800 24,400 43,300
Depreciation 1,952 2,510 6,041 8,315
Interest 658 1,649 2,659 5,466
Management fees 37,526 72,272 120,085 146,227
Office and general 64,362 24,437 160,004 97,089
Professional fees 47,218 53,601 85,531 86,405
Rent 10,147 9,176 26,918 25,157
Research and development, net of recoveries 15,229 21,564 27,386 52,460
Wages and benefits 31,625 42,905 149,897 116,350
- ------------------------------------------------------------------------------------------------------------------------------
232,015 238,549 636,565 653,670
- ------------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (129,821) $ (130,572) $ (381,960) $ (351,446)
==============================================================================================================================
BASIC NET LOSS PER SHARE $ (0.01) $ (0.02) $ (0.04) $ (0.05)
==============================================================================================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 10,858,779 7,408,503 10,205,874 7,071,169
==============================================================================================================================
The accompanying notes are an integral part of these interim consolidated
financial statements
F-16
LUNA TECHNOLOGIES INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2005 2004
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (381,960) $ (351,446)
Adjustments to reconcile net loss to net cash from operating activities:
- depreciation 6,041 8,315
- stock-based compensation 24,400 43,300
- accrued interest expense 139 (80)
- accounts receivable (13,051) (49,795)
- inventory 32,026 35,801
- prepaid expenses (32,497) (2,076)
- accounts payable 28,149 19,658
- --------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (336,753) (296,323)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment -- (5,912)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES -- (5,912)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 3,197 (11,252)
Issuance of common shares and warrants 370,350 352,000
Convertible debenture repayments (26,664) (29,997)
Advances from related parties 3,162 45,316
Payment to former related party -- (30,800)
- --------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 350,045 325,267
- --------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES (13,292) (15,493)
- --------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH -- 7,539
CASH, BEGINNING OF PERIOD -- --
- --------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ -- $ 7,539
==========================================================================================================================
Non-cash activities:
Refer to Notes 3 and 5.
The accompanying notes are an integral part of these interim consolidated
financial statements
F-17
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company was incorporated on March 25, 1999 in the state of Delaware. The
Company commenced operations April 30, 1999 and by agreement effective as of
that date, acquired proprietary technology and patent rights from Luna
Technology Inc. ("LTBC"), a private British Columbia company with certain
directors and shareholders in common with the Company. In addition, by agreement
effective November 15, 1999, the Company acquired proprietary technology and the
trademark rights to "LUNA" and "LUNAPLAST" from Douglas Sinclair, an officer and
employee of LTBC, which relate to the acquired Photoluminescent technology. This
technology is used for the development and production of photoluminescent
signage, wayfinding systems and other novelty products with applications in
marine, commuter rail, subway, building and toy markets.
The consolidated financial statements have been prepared on the basis of a going
concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At September 30, 2005 the Company
has a working capital deficiency of $354,845 and has incurred losses since
inception raising substantial doubt as to the Company's ability to continue as a
going concern. The ability of the Company and its subsidiary to continue as a
going concern is dependent on raising additional capital and on generating
future profitable operations. In addition, during the nine months ended
September 30, 2005, 80% of the Company's total sales was derived from two
customers, one customer of which also provided financing to the Company in
connection with the Convertible Debenture as described in Note 4 accounted for
65% of sales.
The Company anticipates meeting its working capital requirement for the next
year through the sale of shares of common stock or through loans and advances
from related parties as may be required.
Unaudited Interim Financial Statements
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States for interim financial information and with the instructions to
Form 10-QSB of Regulation S-B. They may include all information and footnotes
required by generally accepted accounting principles in the United States for
complete financial statements. However, except as disclosed herein, there has
been no material changes in the information disclosed in the notes to the
financial statements for the year ended December 31, 2004 included in the
Company's Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission. The unaudited interim consolidated financial statements should be
read in conjunction with those financial statements included in the Form 10-KSB.
In the opinion of Management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments, have been made.
Operating results for the nine months ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Principles of Consolidation
The financial statements include the accounts of the Company and its
wholly-owned subsidiary Luna Technologies (Canada) Ltd. ("LTC"), a company
incorporated June 9, 1999 in the province of British Columbia. LTC was
incorporated to conduct business activities in Canada. All significant
intercompany balances and transactions are eliminated on consolidation.
Use of Estimates and Assumptions
Preparation of the Company's financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. The areas
requiring significant estimates and assumptions are determining the useful lives
of furniture and equipment and the fair value of stock-based compensation.
Inventory
Inventory is carried at the lower of cost and net realizable value.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed by the
straight-line method on estimated useful lives of two to five years.
F-18
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Revenue Recognition
The Company recognizes revenue when products have been shipped and collection is
reasonably assured. The Company also generates other income from one-time fees
charged in connection with territorial Supply Agreements. As the Company has no
future obligations in connection with these agreements, these fees are
recognized as other income upon execution of the agreements and when collection
is reasonably assured.
Research and Development Costs
Ongoing new product and technology research and development costs are expensed
as incurred net of contributions made by third parties toward research projects.
Foreign Currency Translation
The financial statements are presented in United States dollars. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation", foreign denominated monetary assets and liabilities are
translated to their United States dollar equivalents using foreign exchange
rates which prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, management has determined
the estimated fair value of financial instruments using available market
information and appropriate valuation methodologies. The fair value of financial
instruments classified as current assets or liabilities including bank overdraft
and notes and accounts payable approximate carrying value due to the short-term
maturity of the instruments. Management has also determined that the fair value
of the note payable approximates its carrying value as at June 30, 2005 and
December 31, 2004.
Risk Management
Currency risk: The majority of the Company's sales and cost of sales are made in
U.S. currency while a significant amount of its general and administrative
expenses are made in Canadian currency. The Company does not currently hedge its
foreign currency exposure and accordingly is at risk for foreign currency
exchange fluctuations.
Credit risk: Management does not believe the Company is exposed to significant
credit risk and accordingly does not manage credit risk directly.
Net Loss per Common Share
Basic loss per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Dilutive earnings per share reflects the potential
dilution of securities that could share in the earnings of the Company. Share
purchase warrants and stock options were not included in the calculation of
weighted average number of shares outstanding because the effect would be
anti-dilutive.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation, (2) amend the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation, and (3) to require disclosure of those effects in interim
financial information. The disclosure provisions of SFAS No. 148 were effective
for the Company commencing for the year ended December 31, 2002 and the required
disclosures have been made below.
F-19
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Stock-Based Compensation cont'd
The Company has elected to continue to account for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB No. 25") and comply with the disclosure provisions of SFAS No. 123 as
amended by SFAS No. 148 as described above. In addition, in accordance with SFAS
No. 123 the Company applies the fair value method using the Black-Scholes
option-pricing model in accounting for options granted to consultants. Under APB
No. 25, compensation expense is recognized based on the difference, if any, on
the date of grant between the estimated fair value of the Company's stock and
the amount an employee must pay to acquire the stock. Compensation expense is
recognized immediately for past services and pro-rata for future services over
the option-vesting period.
The following table illustrates the pro forma effect on net income (loss) and
net income (loss) per share as if the Company had accounted for its stock-based
employee compensation using the fair value provisions of SFAS No. 123 using the
assumptions as described in Note 5:
Nine months ended September 30,
2005 2004
---------------------------
Net loss for the period As reported $ (381,960) $ (351,446)
SFAS 123 compensation expense Pro-forma (38,810) (34,450)
---------------------------
Net loss for the period Pro-forma $ (420,770) $ (385,896)
===========================
Pro-forma and basic net loss per share Pro-forma $ (0.04) $ (0.05)
===========================
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with SFAS No. 123
and the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF
96-18"). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services as defined by EITF 96-18.
The Company has also adopted the provisions of the Financial Accounting
Standards Board Interpretation No.44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25" ("FIN
44"), which provides guidance as to certain applications of APB No. 25.
Income Taxes
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
balances. Deferred tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. A key provision of this
statement is the requirement of a public entity to measure the cost of employee
services received in exchange for an award of equity instruments (including
stock options) based on the grant date fair value of the award. That cost will
be recognized over the period during which an employee is required to provide
service in exchange for the award (i.e., the requisite service period or vesting
period). This standard becomes effective for the Company for its first annual or
interim period ended on or after December 15, 2005. The Company will adopt SFAS
123R no later than the beginning of the Company's fourth quarter ending December
31, 2005. Management is currently evaluating the potential impact that the
adoption of SFAS 123R will have on the Company's financial position and results
of operations.
F-20
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Company pays the Chief Executive Officer ("CEO") and President CDN$7,500
each. These obligations are on a month by month basis.
During the period the Company had transactions with directors and officers, as
follows: expenses paid on behalf of and advances made to the Company - $8,793
(2004 - $65,000); management fees incurred by the Company - $120,085 (2004 -
$37,563); and payments and reimbursements made by the Company - $125,716(2004 -
$64,320) leaving $19,322 owing as at September 30, 2005 (December 31, 2004 -
$16,160).
During 2003 LTC and the Company executed a guarantee of certain unpaid
management fees owing to the then CEO of LTC) totaling $123,750 (CAN$165,000.
Effective August 31, 2004, the CEO of LTC resigned and entered into an agreement
with the Company for the payment of these guaranteed amounts an additional fees
owing. Effective August 3, 2004, the Company had guaranteed, by a non-interest
bearing promissory note, outstanding management fees due to the former CEO of
LTC totaling CAN$187,000 payable as follows: CDN$20,000 upon acceptance, CDN$
20,000 on January 15, 2005, CDN$25,000 on June 15, 2005, CDN$30,000 on January
15, 2006, CDN$40,000 on June 15, 2006 and CDN$52,000 on January 15, 2007. In
addition, the Company agreed to a severance payment of CDN$43,200 to be paid in
twelve equal monthly installments of CDN$3,600. To September 30, 2005 CDN$63,200
has been paid in connection with the above agreements leaving CDN$167,000
(US$143,829) owing. The Company did not pay the CDN $20,000 installment due
January 15, 2005 or the CDN $25,000 installment due June 15, 2005 and has
classified the debt as current to reflect the default in payment terms.
The Company and LTC have non-interest-bearing promissory notes totalling $40,730
to LTBC originally due on or before June 30, 2001. The due dates on these notes
have been extended to January 1, 2006.
Unless otherwise noted, all amounts due to related parties are unsecured,
non-interest bearing and with no specific terms of repayment.
NOTE 4 - CONVERTIBLE DEBENTURE
Effective December 21, 2002 the Company issued a $120,000 Secured Convertible
Debenture (the "Debenture"). The Debenture is secured by a first floating charge
on all of the property, assets and undertakings of the Company and bears
interest at a rate of 8% per annum. The Company is required to make fixed
monthly principal payments of $3,333 for a period of 30 months commencing June
21, 2003 and a final principal payment of $20,010 due December 21, 2005.
Interest is calculated on the outstanding principal balance and is payable
monthly commencing June 21, 2003. During 2005 the Company made principal and
interest payments totalling $29,060, however, the September 2005 debenture
payment was not made (subsequently paid), At September 30, 2005 $263 of interest
has been accrued, this Debenture was issued to the Company's major customer as
described in Note 1.
The total unpaid balance of principal and interest may be converted at any time
into restricted shares of the Company's common stock at a price of $0.90 per
share during 2004 and $1.20 per share during 2005.
NOTE 5 - CAPITAL STOCK
During 2005 the Company issued 1,833,750 units at a price of $0.20 per unit for
proceeds of $366,750. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at prices ranging from $0.35 - $0.55 for a period ranging from April
1, 2005 to October 28, 2007. The estimated fair value of the warrants of $73,350
has been recorded as a separate component of stockholders' equity.
During 2005 the Company awarded 80,000 shares of common stock under the Stock
Bonus Plan with a fair value of $24,400. At September 30, 2005 122,188 shares
remain available for awards under the Stock Bonus Plan.
During 2005 the Company issued 20,000 shares of common stock under the
Non-Qualified Stock Option Plan for proceeds of $3,600.
F-21
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK (cont'd)
During 2004 the Company issued 100,000 units at a price of $0.65 per unit for
proceeds of $65,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $1.00 per share until February 28, 2006. The estimated
fair value of the warrants of $13,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 35,000 units at a price of $1.00 per unit for
proceeds of $35,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $1.00 per share until March 31, 2006. The estimated
fair value of the warrants of $7,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 1,250,000 units at a price of $0.20 per unit for
proceeds of $250,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $0.30 per share until September 3, 2005. The estimated
fair value of the warrants of $50,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 12,000 shares of common stock under the Company's
Stock Bonus Plan at $0.50 per share in settlement of $6,000 of accounts payable
and awarded a further 585,812 shares under the Stock Bonus Plan with a fair
value of $124,868.
During 2004 the Company issued 954,000 shares of common stock on exercise of
various stock options for total consideration of $105,810 of which $7,000 was
received in cash, $79,250 by offset of accounts payable and $19,560 by offset of
amounts due to a director of the Company.
Stock option plans
As approved by the directors effective January 26, 2004, the Company has adopted
plans allowing for the granting of stock options and awarding of shares of
common stock as follows:
Incentive Stock Option Plan
The Company adopted an Incentive Stock Option Plan authorizing the
issuance of options to purchase up to 750,000 shares of common stock of
the Company. Options granted under this plan will have a price and term to
be determined at the time of grant, but shall not be granted at less than
the then fair market value of the Company's common stock and can not be
exercised until one year following the date of grant. This plan is
available to officers, directors and key employees of the Company.
Non-Qualified Stock Option Plan
The Company adopted a Non-Qualified Stock Option Plan authorizing the
issuance of options to purchase up to 1,350,000 shares of common of the
Company. Options granted under this plan will have a price and term to be
determined at the time of grant, but shall not be granted at less than the
then par value of the Company's common stock and can be exercised at any
time following the date of grant. This plan is available to officers,
directors, employees, consultants and advisors of the Company.
Stock Bonus Plan
The Company adopted a Stock Bonus Plan authorizing the awarding of up to
1,000,000 shares of common stock of the Company solely at the discretion
of the board of directors. This plan is available to officers, directors,
employees, consultants and advisors of the Company.
Effective February 10, 2004 the Company filed a Form S-8 Registration Statement
for 3,000,000 shares authorized under the Incentive Stock Option Plan, the
Non-Qualified Stock Option Plan and the Stock Bonus Plan.
During 2004 the Company granted 460,000 stock options to consultants at prices
ranging from $0.10 per share to $0.23 per share. The fair value of these options
was recorded as consulting fees of $71,600. The fair value of these stock
options was estimated using the Black-Scholes option pricing model assuming
expected lives ranging from one year to five years, risk-free interest rates
ranging from 2% to 3% and expected volatilities ranging from 77% to 103%.
F-22
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK (cont'd)
During the third quarter of 2004 the Company granted a total of 659,200 stock
options to the Company's new president at exercise prices ranging from $0.35 per
share to $0.75 per share, exercisable for a term of three years. The fair value
of these stock options was estimated using the Black-Scholes option pricing
model assuming an expected life of three years, a risk-free interest rate of 3%
and an expected volatility of 102% resulting in a pro forma expense of $142,200
to be disclosed in Note 2 upon vesting of the options. Of these options, 59,200
vested immediately and the remaining 600,000 vest at a rate of 16,667 per month
for a period of three years. To September 30, 2005, $63,160 (December 31, 2004 -
$30,850) of the pro forma expense has been disclosed and the remaining $95,550
will be disclosed upon vesting of the options.
During the 2004 the Company granted a total of 505,000 stock options to an
employee and a director of the Company at exercise prices ranging from $0.04 per
share to $0.30 per share, exercisable for terms ranging from one year to ten
years. As the exercise price of certain of these options was less than the
market price of the Company's common stock as at the date of grant, the Company
has recorded an intrinsic value stock based compensation expense of $78,600. In
addition the Company has disclosed a pro-forma expense of $16,500 relating to
the additional fair value of these options as estimated using the Black-Scholes
option pricing model assuming an expected life of ten years, a risk-free
interest rate of 3% and an expected volatility of 103%.
As at September 30, 2005, 305,000 shares have been granted and no stock options
were outstanding under the Incentive Stock Option Plan and 776,825 stock options
were outstanding under the Non-Qualified Stock Option Plan.
The Company's stock option activity is as follows:
Number of Weighted Average Weighted Average
options Exercise Price Remaining Life
------------------------------------------------------
Balance, December 31, 2003 185,000 $ 0.32 2.98 years
Granted during the year 1,624,200 0.23
Expired during the year (85,000) 0.25
Exercised during the year (954,000) 0.11
------------------------------------------------------
Balance, December 31, 2004 770,200 0.39 2.81 years
Granted during the period 26,625 0.33
Expired during the period -- --
Exercised during the period (20,000) 0.18
------------------------------------------------------
Balance, September 30, 2005 776,825 $ 0.40 2.00 years
======================================================
Share Purchase Warrants
The Company's share purchase warrant activity is as follows:
Number of Weighted Average Weighted Average
warrants Exercise Price Remaining Life
------------------------------------------------------
Balance, December 31, 2003 839,255 $ 0.94 1.21 years
Issued during the year 1,385,000 0.37
Expired during the year (439,255) 0.89
Exercised during the year -- --
------------------------------------------------------
Balance, December 31, 2004 1,785,000 0.51 0.77 years
Issued during the period 1,833,750 0.35
Expired during the period (1,500,000) 0.42
Exercised during the period -- --
------------------------------------------------------
Balance, September 30, 2005 2,118,750 $ 0.44 1.65 years
======================================================
F-23
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - SUBSEQUENT EVENTS
Effective October 19, 2005 the Company filed a Form S-8 Registration Statement
for 10,150,000 shares authorized under the Non-Qualified Stock Option Plan and
the Stock Bonus Plan.
Effective October 11, 2005, the Company and a consultant signed a Corporate
Development Services Agreement in connection with which the consultant will
provide services to the Company for a period ending 21 days after notice of
termination is given by either party. In consideration for the services, the
Company has granted to the consultant a total of 3,600,000 options to purchase
shares of the Company's common stock for a period of two years. The options are
exercisable as follows: 500,000 at $0.001 per share; 1,300,000 at $0.05 per
share and 1,800,000 at $0.10 per share. The options vest as follows: 500,000 on
signing of the agreement and the remaining 3,100,000 over a six month period
commencing one month from the signing of the agreement. To date the Company has
issued 500,000 common shares on the exercise of options at an exercise price of
$0.001 per share and 500,000 common shares on the exercise of options at an
exercise price of $0.05 per share for total proceeds of $25,500.
F-24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended and restated, provide to the fullest
extent permitted by Section 145 of the General Corporation Law of the State of
Delaware, that our directors or officers shall not be personally liable to us or
our shareholders for damages for breach of such director's or officer's
fiduciary duty. The effect of this provision of our Articles of Incorporation,
as amended and restated, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Our By Laws also provide that the Board of Directors may also authorize us to
indemnify our employees or agents, and to advance the reasonable expenses of
such persons, to the same extent, following the same determinations and upon the
same conditions as are required for the indemnification of and advancement of
expenses to our directors and officers. As of the date of this Registration
Statement, the Board of Directors has not extended indemnification rights to
persons other than directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all of
which we will pay, in connection with the issuance and distribution of the
securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 246.03
Accounting fees and expenses 10,000.00*
Legal fees and expenses 40,000.00*
Miscellaneous 754.00
----------
TOTAL $51,000.00*
==========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Following is a summary of unregistered securities issued during the period
January 2003 through January 2006.
On July 8, 2003 the Company issued, by private placement, 200,000 units at a
price of $0.50 per unit for proceeds of $100,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $0.75 per share until
December 15, 2004.
On September 15, 2003 the Company issued, by private placement, 250,000 units at
a price of $0.60 per unit for proceeds of $150,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $0.75 per share until
August 15, 2005.
On November 21, 2003 the Company issued, by private placement, 150,000 units at
a price of $0.80 per unit for proceeds of $120,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $1.00 per share until June
30, 2006.
On May 2, 2003 and May 19, 2003, respectively, the Company issued 6,000 shares
of common stock at $0.50 per share in settlement of $3,000 of accounts payable
and 225,000 shares of common stock in settlement of a total of $86,900 of loans
payable and other amounts previously owing to related parties which were
assigned to a third party during 2003.
On February 26, 2004 the Company issued, by private placement, 100,000 units at
a price of $0.65 per unit for proceeds of $65,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $1.00 per share until
February 28, 2006.
On March 26, 2004 the Company issued, by private placement, 35,000 units at a
price of $1.00 per unit for proceeds of $35,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $1.00 per share until March
31, 2006.
On September 23, 2004 the Company issued, by private placement, 1,250,000 units
at a price of $0.20 per unit for proceeds of $250,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $0.30 per share until
September 3, 2005.
On March 31, 2005 the Company issued, by private placement, 325,000 units at a
price of $0.20 per unit for proceeds of $65,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $0.35 per share until March
31, 2007.
On July 28, 2005 the Company issued, by private placement, 908,750 units at a
price of $0.20 per unit for proceeds of $181,750. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at prices ranging from $0.35 to $0.55 per
share until July 28, 2007.
On July 29, 2005 the Company issued, by private placement, 200,000 units at a
price of $0.20 per unit for proceeds of $40,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at prices ranging from $0.35 to $0.55 per
share until July 29, 2007.
On October 28, 2005 the Company issued, by private placement, 400,000 units at a
price of $0.20 per unit for proceeds of $80,000. Each unit consists of one
common share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at prices ranging from $0.35 to $0.55 per
share until October 28, 2007.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on December 16, 2006 for the
sale of (i) $1,000,000 in secured convertible notes and (ii) warrants to buy
1,000,000 shares of our common stock. The secured convertible notes bear
interest at 8%, unless our common stock is greater than $0.2125 per share for
each trading day of a month, in which event no interest is payable during such
month. The secured convertible notes mature three years from the date of
issuance, and are convertible into our common stock, at the Purchasers' option,
at a 50% discount to the average of the three lowest trading prices of the
common stock during the 20 trading day period prior to conversion. At our
option, in any month where the current stock price is below the initial market
price (100% of the volume weighted average price of our common stock for the
five days prior to closing), we can pay the outstanding principal and interest
due for that month and this will stay any conversions for that month. The
beneficial conversion feature of such discounted conversion will be amortized
over the three-year life of the loan.
The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.65 per share. The Purchasers may exercise a portion of the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event the Purchasers exercise the warrants on a cashless
basis, then we will not receive any proceeds. In addition, the exercise price of
the warrants will be adjusted in the event we issue common stock at a price
below market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the secured convertible notes issued
pursuant to the Securities Purchase Agreement.
II-2
* All of the above offerings and sales were deemed to be exempt under rule 506
of Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
Exhibit
Number Exhibit Name
------- ------------
Exhibit 3 Articles of Incorporation and Bylaws (1)
Exhibit 4 Instruments Defining the Rights of Security Holders
Exhibit 4.1 Incentive Stock Option Plan (2)
Exhibit 4.2 Non-Qualified Stock Option Plan (2)
Exhibit 4.3 Stock Bonus Plan (2)
Exhibit 5 Opinion of Sichenzia Ross Friedman Ference LLP*
Exhibit 10 Material Contracts
Exhibit 10.1 Agreement relating to purchase of patent rights (1)
Exhibit 10.2 Assignment of patent rights (1)
Exhibit 10.3 Agreement relating to purchase of proprietary technology
and trademarks (1)
Exhibit 10.4 Assignment of trademarks (1)
Exhibit 10.5 Non-Compete Agreement (1)
Exhibit 23.1 Consent of Dale Matheson Carr-Hilton LaBonte*
Exhibit 23.2 Consent of Sichenzia Ross Friedman Ference LLP*
(1) Incorporated by reference to the same exhibit filed as part of the
Company's Registration Statement on Form 10-SB filed on March 17, 2000.
(2) Incorporated by reference to the same exhibit filed as part of the
Company's Registration Statement on Form S-8 (Commission File #
333-112647) filed on October 19, 2005.
* Filed herewith.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
II-3
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned undertakes that in a primary offering of securities of the
undersigned small business issuer pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned small business issuer will
be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or
its securities provided by or on behalf of the undersigned small business
issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in British Columbia, Canada, on February 2, 2006.
Luna Technologies International, Inc.
By: /s/ Kimberly Landry
------------------------------------
Kimberly Landry
Chief Executive Officer
Principal Financial Officer
Chief Accounting Officer and
Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kimberly Landry his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
subsequent registration statements pursuant to Rule 462 of the Securities Act of
1933 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that attorney-in-fact or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Kimberly Landry Chief Executive Officer, Principal Financial February 2, 2006
---------------------------- Officer, Chief Accounting Officer and Director
Kimberly Landry
/s/ Robert Humber Secretary and Director February 2, 2006
----------------------------
Robert Humber
II-5