As filed with the Securities and Exchange Commission on April 28, 2006
Registration No. 333-131474
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 1 TO
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. |_| ________
i
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.
ii
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED April 28, 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 700,000 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 shares being registered hereunder do not
include shares of common stock that may be acquired by the selling stockholders
upon conversion of amounts due to them resulting from future accruals of
interest pursuant to the convertible notes. 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 April 27, 2006, was $0.24.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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.
iii
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 18
Certain Relationships And Related Transactions 20
Security Ownership Of Certain Beneficial Owners And Management 21
Description Of Securities 22
Commission's Position On Indemnification For Securities Act Liabilities 22
Plan Of Distribution 23
Selling Stockholders 25
Legal Matters 28
Experts 28
Available Information 28
Index to Consolidated Financial Statements F-1
iv
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, 2005, we had
cumulative losses of $4,177,005. 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 $.40 per share (includes a
good faith estimate of the shares
underlying warrants to account for
antidilution protection adjustments),
This number represents 53.19% 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 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 19,648,398 shares of common stock outstanding as of April
24, 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.
3
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 ARE
CURRENTLY RESPONDING TO COMMENTS RECEIVED FROM THE SECURITIES AND EXCHANGE
COMMISSION ON THE PRELIMINARY INFORMATION STATEMENT. WE INTEND TO FILE 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 was disbursed on February 7, 2006; and
o $300,000 will be disbursed within five days of the effectiveness of the
registration statement of which this prospectus forms a part.
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.
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.
4
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.
On April 7, 2006, we entered into an amendment to the Securities Purchase
Agreement with the Purchasers to delete from the agreement certain sections of
the Agreement which permitted the assignment of the Agreement.
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 our 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 years ended
December 31, 2005 and 2004, we had net losses of $1,770,940 and $670,655,
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 are
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
will be successfully completed or that other funds will 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 will 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 and 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 breaches. 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, 2005, 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, 2005, we had a working capital deficiency of $159,582. Our ability
to continue as a going concern is dependent on our 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 President, Chief Executive Officer and Secretary. 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
our 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 April 24, 2006, we had 19,648,398 shares of common stock issued and
outstanding, $700,000 of secured convertible notes outstanding that may be
converted into an estimated 7,368,421 shares of common stock and outstanding
warrants to purchase 2,683,750 shares of common stock. Additionally, we have an
obligation to sell $300,000 of secured convertible notes that may be converted
into an estimated 3,157,895 shares of common stock at current market prices and
to issue warrants to purchase 300,000 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 $1,000,000 of our secured
convertible notes (excluding accrued interest), based on market prices 25%, 50%
and 75% below the market price, as of April 24, 2006 of $0.275:
% Below Market Price Per Share Discount of 50% Number of Shares Issuable
25% $0.21 $0.105 9,523,810
50% $0.14 $0.07 14,285,714
75% $0.07 $0.035 28,571,429
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 of 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 $700,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible note in the principal amount of $300,000. 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
may 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 $700,000 from the sale of
the secured convertible notes and the investors are obligated to provide us with
an additional $300,000 within five days after this registration statement of
which this prospectus forms a part, is 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
3/31/06 $0.40 $0.12
HOLDERS
As of April 24, 2006, we had approximately 118 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, 2005 WITH THE YEAR ENDED DECEMBER 31,
2004
Sales revenues of $673,821 for the fiscal year ended December 31, 2005 increased
$136,656 or 25% over the $537,165 of sales revenues reported in 2004. The
increase was principally attributable to increased purchases from significant
customers.
Two customers amounted to 80% of total sales in 2005 and 60% of total sales
during 2004.
Gross margin decreased to 45.2% in 2005 from 49.9% in 2004, primarily reflecting
manufacturing price increases from our materials suppliers.
During 2005, we received no payments from customers in connection with pricing
arrangements, as compared to receiving $120,000 of such payments in 2004.
General and administrative expenses ("G&A") for fiscal 2005 totaled $2,075,762
as compared to $1,058,425 in the prior year; the 96% increase arising primarily
from increased stock-based compensation expense and increased interest expense.
Stock-based compensation expense for 2005 totaled $683,900 as compared to
$279,468 in 2004; the 2005 amount principally reflecting the granting of
consultant options during the year. Interest expense of $406,717 for 2005
principally consists of $375,841 recorded in the year from the expensing of the
fair value of the beneficial conversion feature associated with the secured
convertible notes issued by the Company in December 2005 pursuant to the
December 16, 2005 Securities Purchase Agreement.
Excluding stock-based compensation expense and interest expense, G&A for 2005
totaled $981,445, representing a $221,430 or 29% increase from the $760,015
reported in 2004. The 29% increase in G&A reflects the increase in corporate
activity during the year coincident with the 25% increased sales revenues
experienced by our Company as discussed above. Of the $221,430 G&A increase,
$78,700 comprises increased office and general costs, $70,000 comprises costs
incurred with respect to the Company entering into secured convertible notes
arrangements, $46,310 comprises increased wages and benefits costs principally
as a consequence of increased staffing due to increased production, and $22,987
relates to increased professional fees, such increases offset by a $38,707
decline in consulting expenses and a $15,552 decline in management fees.
The decline in consulting expenses was primarily attributable to the placement
of a former consultant onto our payroll and a decrease in fees paid to a
particular consultant. The decline in management fees was primarily attributable
to the resignation in April 2005 of the former Chief Financial Officer. Brian
Fiddler resigned his position as Chief Financial Officer and as a director as of
April 4, 2005. Kimberly Landry then served in this position until March 2, 2006
when L. James Porter was appointed to serve as Chief Financial Officer. Ms.
Landry has continued her roles as Chief Executive Officer and Chairman of the
Board.
Liquidity and Capital Resources
As at December 31, 2005 we had negative working capital of $159,582,
representing a $94,411 or 37% improvement over the $253,993 working capital
deficiency that existed as at December 31, 2004.
During the twelve months ended December 31, 2005 our operations used $810,860 in
cash as compared to $265,174 in the prior fiscal year, primarily due to the
addition of consultants, staff and overhead needed to facilitate our Company's
growth and ongoing product development. Further, we reduced trade payables and
experienced increased trade receivables. Year-end accounts receivable as a
percentage of year's sales increased from 15% in 2004 to 19.8% in 2005.
We satisfied our operational requirements during 2005 principally through
$452,250 of common share issuances and $343,203 from the issuance of secured
convertible notes net of repayments of a previous convertible debenture.
12
o Secured Convertible Debenture
Between December 2002 and January 2003 we 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 was secured by all of our
company's assets and bore interest at a rate of 8% per year. The loan was 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. The loan was fully repaid
in 2005.
o Secured Convertible Notes
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. To year-end $400,000 secured convertible notes were outstanding.
Subsequent to year-end we received a further $300,000 funding under the
Securities Purchase Agreement and the investors are obligated to purchase
$300,000 of additional secured convertible notes, for an aggregate of
$1,000,000, once the registration statement of which this prospectus forms a
part, is declared effective.
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.
We anticipate our capital needs during the year ending December 31, 2006 to be
$800,000 for general and administrative expenses, including $100,000 for
research and development.
We do not have any available credit, bank financing or other external sources of
liquidity. Due to our operating losses since inception, our operations have not
been a source of liquidity. The ability of our company to continue as a going
concern is dependent on our company raising additional capital and becoming
profitable. There can be no assurance that we will be successful in obtaining
additional funding at all, or on acceptable terms.
We do 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, 2005, we had
cumulative losses of $4,177,005. 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, 2005 one customer accounted for 67% of our
gross revenues. We are 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 year ending
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
15
Photoluminescent Light Emitter With Enhanced Photometric Brightness
Characteristics - method of increasing photoluminescent brightness
characteristics through material design.
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, production and warehouse space at 61A and 61B Fawcett Road, Coquitlam,
British Columbia, at a monthly rental of CDN$3,750.
LEGAL PROCEEDINGS
We know of no material, active or pending legal proceedings against us, nor are
we involved as a plaintiff in any material proceedings or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered beneficial shareholder are an adverse party or has a material
interest adverse to us.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
As at April 24, 2006, our directors and executive officers, their ages,
positions held, and duration of such, are as follows:
Date First
Name Position Held with our Company Age Elected or Appointed
Kimberly Landry Chief Executive Officer and Director 40 April 30, 1999
Robert H. Humber Secretary and Director 61 April 30, 1999
Leslie James Porter Chief Financial Officer and Director 41 March 2, 2006
Business Experience
The following is a brief account of the education and business experience during
at least the past five years of each director, executive officer and key
employee, indicating the principal occupation during that period, and the name
and principal business of the organization in which such occupation and
employment were carried out.
Kimberly Landry
Ms. Landry was our President between September 1, 2001 and August 31, 2004. On
August 31, 2004 Ms. Landry resigned as President and was appointed the Chief
Executive Officer. Ms. Landry held the position of Principal Financial and Chief
Accounting Officer since April 5, 2005. She resigned as Principal Financial
Officer on March 2, 2006. Ms. Landry has been the Secretary, as well as a
director since April 1999. Since December 1994 Ms. Landry has also been an
officer and director of Luna Technologies Inc. Ms. Landry attended a Washington
State Community College where she studied business administration.
16
Robert H. Humber
Mr. Humber was our President between April 1999 and September 1, 2001. Mr.
Humber has been a director since April 1999. Between July 1996 and November 1999
Mr. Humber was the President of Luna Technologies Inc. Prior to July 1996 Mr.
Humber worked with Douglas Sinclair, a former officer of our company, 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.
Leslie James Porter
Mr. Porter was appointed Chief Financial Officer and Director on March 2, 2006.
Since November 2005 Mr. Porter served as CFO and Director of General Metals
Corporation, a junior mining exploration company. Since July 2005 Mr. Porter
also served as CFO and Director of Tangerine Gold Inc., a junior mining
exploration company. From January to July 2005 Mr. Porter was CFO of
Mediterranean Minerals Ltd. and its predecessor Manhattan Minerals Inc., a
junior mining exploration company. In 2003 and 2004 Mr. Porter was CFO and
Director of Firestone Ventures, Inc., a junior mining exploration company. From
2001 to 2004 Mr. Porter served on the Advisory Board of Webtech Wireless Inc., a
global positioning satellite location solutions provider. From 2004 to date Mr.
Porter served as CFO and Director of SHEC Labs Solar Hydrogen Energy
Corporation, a solar and hydrogen energy technology company. He has also served
on that company's Steering Committee since 2003 and as a financial advisor to
that company since 2001.
Since 2001 Mr. Porter has been President of LJV Capital Corp., an entity which
provides financial and business consulting services to early stage companies.
From 1999 to 2001 Mr. Porter was CFO and Director of Global Media Corp., an
internet media streaming company.
Mr. Porter received his Bachelor of Commerce degree in Finance from the
University of British Columbia in Vancouver, B.C. in 1987. He received his
Chartered Accountant designation from the Institute of Chartered Accountants of
British Columbia in 1990, his Chartered Financial Analyst designation from the
Institute of Chartered Financial Analysts in 1994 and his Certified Public
Accountant designation (State of Illinois) from the University of Illinois in
1999.
Mr. Porter received his Chartered Accountant and Chartered Financial Analyst
designations while employed with the major public accounting firm, Arthur
Andersen & Co., where he achieved the position of Senior Manager and served
large corporations and public corporations in the airline, finance, forestry,
oil and gas, manufacturing, mining, technology, distribution and service
provider sectors. While at Arthur Andersen & Co., Mr. Porter was also involved
with various international transactions.
Committees of the Board
We do not have a compensation committee. Our board of directors serve as our
Audit Committee.
Family Relationships
There are no family relationships between any of our directors or executive
officers.
Involvement in Certain Legal Proceedings
Other than as discussed herein, none of our directors, executive officers,
promoters or control persons have been involved in any of the following events
during the past five years:
1. any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the
time of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offences);
3. being subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting his involvement in any type of business, securities or banking
activities; or
4. being found by a court of competent jurisdiction (in a civil action),
the Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the
judgment has not been reversed, suspended, or vacated.
Audit Committee Financial Expert
17
Our board of directors has determined that it has one member of its audit
committee, Leslie James Porter, that qualifies as an "audit committee financial
expert" as defined in Item 401(e) of Regulation S-B, however, Mr. Porter is not
"independent" as the term is used in Tem 7(d)(3)(iv) of Schedule 14A under the
Securities Exchange Act of 1934, as amended.
We believe that the members of our board of directors are collectively capable
of analyzing and evaluating our financial statements and understanding internal
controls and procedures for financial reporting. In addition, we believe that
retaining an independent director who would qualify as an "audit committee
financial expert" would be overly costly and burdensome and is not warranted in
our circumstances given the financial condition of our company.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and
directors, and persons who own more than 10% of our common stock, to file
reports regarding ownership of, and transactions in, our securities with the
Securities and Exchange Commission and to provide us with copies of those
filings. Based solely on our review of the copies of such forms received by us,
or written representations from certain reporting persons, we believe that
during fiscal year ended December 31, 2005, all filing requirements applicable
to its officers, directors and greater than 10% beneficial owners were complied
with.
Code of Ethics
Effective May 21, 2004, our company's board of directors adopted a Code of
Ethics that applies to, among other persons, our company's principal executive
officers and principal financial officers (including principal accounting
officers and controllers), as well as persons performing similar functions. As
adopted, our Code of Ethics sets forth written standards that are designed to
deter wrongdoing and to promote a high ethical standards and commitment to
compliance.
Our Code of Ethics requires, among other things, that all of our company's
personnel shall be accorded full access to our president and corporate
secretary, as well as persons performing similar functions, with respect to any
matter which may arise relating to the Code of Business Conduct and Ethics.
Further, all of our company's personnel are to be accorded full access to our
company's board of directors if any such matter involves an alleged breach of
the Code of Ethics by our president or chief financial officer.
Our Code of Ethics is incorporated by reference from our Quarter Report on Form
10-QSB filed on May 21, 2004.
EXECUTIVE COMPENSATION
The following table summarizes the compensation of our executive officers during
the three years ended December 31, 2005, 2004 and 2003. No other officers or
directors received annual compensation in excess of $100,000 during the last
three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other Securities Restricted
Name and Annual Underlying Shares or
Principal Compen- Options/ Restricted LTIP All Other
Position Year Salary Bonus sation SARs Share Payouts Compen-
(US$) (US$) (US$) Granted Units (US$) sation
Kimberly Landry 2005 74,294 Nil Nil Nil Nil Nil Nil
President, Chief 2004 55,705 46,750 500,000 Nil Nil Nil Nil
Executive Officer 2003 45,120l Nil Nil Nil Nil Nil Nil
and Secretary (1)
Leslie James Porter 2005 Nil Nil Nil Nil Nil Nil Nil
Chief Financial 2004 Nil Nil Nil Nil Nil Nil Nil
Officer (2) 2003 Nil Nil Nil Nil Nil Nil Nil
Scott Bullis 2005 74,294 Nil Nil Nil Nil Nil Nil
President (3) 2004 22,016 Nil Nil 659,200 Nil Nil Nil
2003 Nil Nil Nil Nil Nil Nil Nil
Brian Fiddler 2005 9,906 6,800 Nil Nil Nil Nil Nil
Principal Financial 2004 36,880 9,500 Nil Nil Nil Nil Nil
and Accounting 2003 25,687 10,980 Nil 160,000 Nil Nil Nil
Officer (4)
18
(1) Ms. Landry was our President from September 1, 2001 to August 31, 2004.
On August 31, 2004 Ms. Landry was appointed Chief Executive Officer. On
April 5, 2005 Ms. Landry was appointed Principal Financial and Chief
Accounting Officer. Ms. Landry was Secretary from April 30, 1999 to
February 1, 2006.
(2) Mr. Porter was appointed Chief Financial officer on March 2, 2006. (3)
Mr. Bullis was President from August 31, 2004 to February 3, 2006. (4)
Mr. Fiddler resigned as Principal Financial and Accounting Officer on
April 4, 2005.
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to our Named Executive Officers during our fiscal year ended December
31, 2005:
Potential Realizable
Value at Assumed
Annual Rate of Stock
Price Appreciation for
Name Individual Grants Option Term (3)
Number of Percent of
Securities Total Options Exercise
Underlying Granted to or Base
Options Employees in Price
Granted (#)(1) Fiscal Year (2) ($/Sh) Expiration Date
5%($) 10%($)
Kimberly Landry Nil N/A N/A N/A N/A N/A
Scott Bullis Nil N/A N/A N/A N/A N/A
Brian Fiddler Nil N/A N/A N/A N/A N/A
Robert H. Humber Nil N/A N/A N/A N/A N/A
AGGREGATE OPTION EXERCISES IN 2005 AND YEAR-END OPTION VALUES
The following table provides certain information with respect to our Named
Executive Officers concerning the exercise of options during 2005 and
unexercised options held by them at the end of the year.
Number of
Shares Number of Securities Underlying Value of Unexercised In-the-
Acquired on Value Unexercised Options at December Money Options at December
Name Exercise (#) Realized ($) 31, 2005 (#) 31, 2005 ($)
Exercisable Unexercisable Exercisable Unexercisable
Kimberly Landry Nil Nil 11,000 Nil Nil Nil
Scott Bullis Nil Nil 659,200 Nil Nil Nil
Brian Fiddler 3,600 Nil 80,000 Nil Nil Nil
Robert H. Humber Nil Nil Nil Nil Nil Nil
19
Employment/Consulting Agreements
Our Canadian subsidiary has an employment agreement with Kimberly Landry whereby
the subsidiary has agreed to pay Ms. Landry a salary of CDN$7,500 per month.
Effective March 1, 2006, we entered into a consulting agreement with Leslie
James Porter, wherein we agreed to pay him a monthly fee of CDN$2,500 as well as
reasonable out-of-pocket expenses incurred in the performance of his duties. In
addition, we have agreed to pay Mr. Porter 500,000 shares of common stock, which
shares are to be issued pursuant to the provisions of our 2006 Stock Option
Plan. The agreement terminates February 28, 2007 and will automatically renew
for an additional one year term unless otherwise stipulated.
Long-Term Incentive Plans
There are no arrangements or plans in which we provide pension, retirement or
similar benefits for directors or executive officers, except that our directors
and executive officers may receive stock options at the discretion of our board
of directors. We do not have any material bonus or profit sharing plans pursuant
to which cash or non-cash compensation is or may be paid to our directors or
executive officers, except that stock options may be granted at the discretion
of our board of directors.
We have no plans or arrangements in respect of remuneration received or that may
be received by our executive officers to compensate such officers in the event
of termination of employment (as a result of resignation, retirement, change of
control) or a change of responsibilities following a change of control, where
the value of such compensation exceeds $60,000 per executive officer.
Directors Compensation
Standard Arrangements. At present we do not pay our directors for attending
meetings of the board, although we may adopt a director compensation policy in
the future. We have no standard arrangement pursuant to which our directors are
compensated for any services provided as a director or for committee
participation or special assignments.
Other Arrangements. During the year ended December 31, 2005, and except as
disclosed elsewhere in this annual report, none of our directors received any
form of compensation from our company.
Report on Executive Compensation
Our compensation program for our executive officers is administered and reviewed
by our board of directors. Historically, executive compensation consists of a
combination of base salary and bonuses. Individual compensation levels are
designed to reflect individual responsibilities, performance and experience, as
well as the performance of our company. The determination of discretionary
bonuses is based on various factors, including implementation of our business
plan, acquisition of assets, development of corporate opportunities and
completion of financing.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth, as of April 24, 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.
Amount and Nature of Percentage
Name and Address of Beneficial Owner Beneficial Ownership (1) of Class (1)
Kimberly Landry 1,544,000 (2) 7.86%
c/o Luna Technologies International, Inc.
61B Fawcett Road,
Coquitlam, British Columbia, Canada V3K 6V2
Leslie James Porter 500,000 2.54%
c/o Luna Technologies International, Inc.
61B Fawcett Road,
Coquitlam, British Columbia, Canada V3K 6V2
Robert H. Humber 30,000 0.15%
c/o Luna Technologies International, Inc.
61B Fawcett Road,
Coquitlam, British Columbia, Canada V3K 6V2
Scott Bullis Nil Nil
1204 - 939 Beatty Street
Vancouver, British Columbia, Canada V6C 3Z1
Douglas Sinclair 1,585,000 8.07%
1653 Plateau Crescent
Coquitlam, British Columbia, Canada V3B 3E3
Barry Drummond 1,045,000 5.32%
118 Bridge Rd.
West Vancouver
British Columbia, Canada V7P 3R2
Michael Harrison 1,869,000 9.51%
8585 Drifter Way
Whistler, British Columbia, Canada V0N 1B8
Walter Doyle 1,400,000 (3) 7.13%
c/o Luna Technologies International, Inc.
61B Fawcett Road,
Coquitlam, British Columbia, Canada V3K 6V2
Directors and Executive Officers as a Group (3 individuals) 2,074,000 common shares 10.56%
(1) Based on 19,648,398 shares of common stock issued and outstanding as
of April 24, 2006. Except as otherwise indicated, we believe that
the beneficial owners of the common stock listed above, based on
information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community
property laws where applicable. Beneficial ownership is determined
in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Shares of
common stock subject to options or warrants currently exercisable,
or exercisable within 60 days, are deemed outstanding for purposes
of computing the percentage ownership of the person holding such
option or warrants, but are not deemed outstanding for purposes of
computing the percentage ownership of any other person
(2) Ms. Landry holds 11,000 options for the purchase of common shares of
the Company's common stock at an exercise price of $0.04 per share.
(3) Mr. Doyle holds 1,100,000 options for the purchase of common shares
of the Company's common stock at an exercise price of $0.10 per
share.
21
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 no shares
of preferred stock issued or outstanding. 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 an amendment to our certificate of incorporation to increase our
authorized common stock from 30,000,000 shares to 100,000,000 shares. We are
currently responding to comments received from the Securities and Exchange
Commission on the preliminary information statement. We intend to file the
certificate of amendment to our certificate of incorporation within 20 days of
mailing a definitive information statement to our shareholders.
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.
22
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.
23
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:
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.
24
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
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.
The shares being registered hereunder do not include shares of common stock that
may be acquired by the selling stockholders upon conversion of amounts due to
them resulting from future accruals of interest pursuant to the convertible
notes.
25
(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 was disbursed on February 7, 2006; 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.
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,
26
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 $0.40 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.
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.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.
On April 7, 2006, we entered into an amendment to the Securities Purchase
Agreement with the Purchasers to delete from the agreement certain sections of
the Agreement which permitted the assignment of the Agreement.
27
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
April 13, 2006, at a conversion price of $0.275, the number of shares issuable
upon conversion would be:
$1,000,000/$0.275 = 3,636,364 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
April 24, 2006 of $0.275.
% Below Market Price Per Share Discount of 50% Number of Shares Issuable
25% $0.21 $0.105 9,523,810
50% $0.14 $0.07 14,285,714
75% $0.07 $0.035 28,571,429
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
Our consolidated financial statements as of December 31, 2005 and 2004, and for
each of the two years in the period ended December 31, 2005 and 2004, 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.
28
INDEX TO FINANCIAL STATEMENTS
LUNA TECHNOLOGIES INTERNATIONAL, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM..............F-2
CONSOLIDATED BALANCE SHEETS..........................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS................................F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT......................F-5-F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS................................F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........................F-8-F-17
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Luna Technologies International,
Inc.:
We have audited the accompanying consolidated balance sheets of Luna
Technologies International, Inc. as of December 31, 2005 and 2004 and the
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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 position of Luna Technologies International,
Inc. as of December 31, 2005 and 2004 and the results of its operations and its
cash flows and the changes in stockholders' deficit for the years then ended in
accordance with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 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, Canada
April 10, 2006
F-2
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Accounts receivable $ 133,378 $ 81,357
Prepaid expenses 37,305 6,027
Inventory 71,809 75,437
- ---------------------------------------------------------------------------------------------------------------------------------
242,492 162,821
FURNITURE AND EQUIPMENT, net of depreciation of $89,370 (2004 - $81,424) 9,412 15,605
- ---------------------------------------------------------------------------------------------------------------------------------
$ 251,904 $ 178,426
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft $ 12,739 $ 184
Accounts payable and accrued liabilities 209,493 265,505
Due to related parties (Note 3) 36,605 16,160
Current portion of convertible debenture (Note 4) - 56,797
Current portion of note payable (Note 3) 143,237 78,168
- ---------------------------------------------------------------------------------------------------------------------------------
402,074 416,814
CONVERTIBLE NOTE (Note 4) 376,172 -
NOTE PAYABLE (Note 3) 40,730 101,497
- ---------------------------------------------------------------------------------------------------------------------------------
818,976 518,311
- ---------------------------------------------------------------------------------------------------------------------------------
GOING CONCERN CONTINGENCY (Note 1)
STOCKHOLDERS' DEFICIT
Capital stock (Note 5)
Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized
NIL issued and outstanding
Common stock, $0.0001 par value, 30,000,000 shares authorized
13,598,398 (2004 - 9,664,648) shares issued and outstanding 1,360 966
Additional paid-in capital 3,558,535 2,032,988
Share purchase warrants 141,509 124,000
Accumulated deficit (4,177,005) (2,406,065)
Accumulated other comprehensive loss (91,471) (91,774)
- ---------------------------------------------------------------------------------------------------------------------------------
(567,072) (339,885)
- ---------------------------------------------------------------------------------------------------------------------------------
$ 251,904 $ 178,426
=================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
F-3
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2005 2004
- ------------------------------------------------------------------------------------------------------------------------
SALES $ 673,821 $ 537,165
COST OF SALES 368,999 269,395
- ------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 304,822 267,770
OTHER INCOME - 120,000
- ------------------------------------------------------------------------------------------------------------------------
304,822 387,770
- ------------------------------------------------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Consulting 46,812 85,519
Consulting - stock based (Note 5) 687,600 279,468
Depreciation 7,946 11,084
Financing costs (Note 4) 70,000 -
Gain on write-off of accounts payable - (53,365)
Interest 406,717 18,942
Management fees 171,622 187,174
Office and general 245,284 166,584
Professional fees 124,974 101,987
Rent 34,870 33,716
Research and development, net of recoveries 61,408 55,097
Wages and benefits 218,529 172,219
- ------------------------------------------------------------------------------------------------------------------------
2,075,762 1,058,425
- ------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (1,770,940) $ (670,655)
========================================================================================================================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.16) $ (0.09)
========================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,870,840 7,615,138
========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements
F-4
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Common Stock
---------------------- Additional
Number of Paid-in
shares Amount Capital
- ----------------------------------------------------------------------------------
Balance, December 31, 2003 6,727,836 $ 673 $ 1,342,003
Issued for cash at - $0.20 per share 1,250,000 125 199,875
- $0.65 per share 100,000 10 51,990
- $1.00 per share 35,000 4 27,996
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 on options - - 154,600
Share purchase warrants expired - - 20,000
Net loss - - -
Currency translation adjustment - - -
- ----------------------------------------------------------------------------------
Balance, December 31, 2004 9,664,648 $ 966 $ 2,032,988
==================================================================================
Accumulated
Share Other
Purchase Accumulated Comprehensive
Warrants Deficit Loss Total
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 74,000 $ (1,735,410) $ (65,262) $ (383,996)
Issued for cash at - $0.20 per share 50,000 - - 250,000
- $0.65 per share 13,000 - - 65,000
- $1.00 per share 7,000 - - 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 on options - - - 154,600
Share purchase warrants expired (20,000) - - -
Net loss - (670,655) - (670,655)
Currency translation adjustment - - (26,512) (26,512)
- ---------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 124,000 $ (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 STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Common Stock
----------------------- Additional Share
Number of Paid-in Purchase
shares Amount Capital Warrants
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2004 9,664,648 $ 966 $ 2,032,988 $ 124,000
Issued for cash at - $0.20 per share 1,833,750 184 293,216 73,350
Issued on exercise of options - $0.001 per share 500,000 50 450 -
$0.05 per share 1,300,000 130 64,870 -
$0.10 per share 200,000 20 19,980 -
$0.18 per share 20,000 2 3,598 -
Issued pursuant to stock bonus plan 80,000 8 24,392 -
Stock-based compensation - - 663,200 -
Discount on convertible debenture and issuance - - 375,841 24,159
of warrants
Share purchase warrants expired - - 80,000 (80,000)
Net loss - - - -
Currency translation adjustment - - - -
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2005 13,598,398 $ 1,360 $ 3,558,535 $ 141,509
================================================================================================
Accumulated
Other
Accumulated Comprehensive
Deficit Loss Total
- ----------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ (2,406,065) $ (91,774) $ (339,885)
Issued for cash at - $0.20 per share - - 366,750
Issued on exercise of options - $0.001 per share - - 500
$0.05 per share - - 65,000
$0.10 per share - - 20,000
$0.18 per share - - 3,600
Issued pursuant to stock bonus plan - - 24,400
Stock-based compensation - - 663,200
Discount on convertible debenture and issuance - - 400,000
of warrants
Share purchase warrants expired - - -
Net loss (1,770,940) - (1,770,940)
Currency translation adjustment - 303 303
- ----------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ (4,177,005) $ (91,471) $ (567,072)
==============================================================================================
The accompanying notes are an integral part of these consolidated financial statements
F-6
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,770,940) $ (670,655)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 7,946 11,084
Stock-based compensation 687,600 279,468
Gain on write-off of accounts payable - (53,365)
Beneficial conversion interest (Note 4) 375,841 -
Accretion of interest on convertible debenture (Note 4) 331 -
Changes in operating assets and liabilities:
Accounts receivable (52,021) (32,230)
Prepaid expenses (31,278) (2,067)
Inventory 3,628 12,810
Accounts payable and accrued liabilities (56,012) 140,272
Due to related parties 24,045 49,509
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (810,860) (265,174
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (1,753) (5,912)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,753) (5,912)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in bank overdraft 12,555 (11,068)
Proceeds from issuance of common shares 452,250 357,000
Convertible debenture proceeds (repayments) 343,203 (39,996)
Gain on notes payable (repayments) 4,302 (8,338)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 812,310 297,598
- -----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES 303 (26,512)
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH - -
CASH, BEGINNING AND END OF YEAR $ - $ -
=============================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND
FINANCING ACTIVITIES (See Note 7)
The accompanying notes are an integral part of these consolidated financial statements
F-7
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- -------------------------------------------------------------------------------
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", 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, buildings and toy
markets.
These 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, 2005 the
Company has a working capital deficiency of $159,582 (2004 - $253,993) 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 to continue
as a going concern is dependent on raising additional capital and on generating
future profitable operations. In addition, during 2005, 80% of the Company's
total sales were 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.
The Company anticipates meeting its working capital requirement for the next
year through product sales, 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
These 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 upon
consolidation.
Use of Estimates and Assumptions
Preparation of the Company's financial statements in conformity with accounting
principles generally accepted in the United States 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 consists of finished goods and is carried at the lower of cost or net
realizable value.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed by using
the straight-line method over the estimated useful lives of two to five years.
Revenue Recognition
The Company recognizes revenue when products have been shipped, the amounts are
fixed or determinable 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-8
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Foreign Currency Translation
These 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. Non-monetary
assets and liabilities are translated at the transaction 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.
Long-Lived Assets
The Company monitors the recoverability of long-lived assets, including
furniture and equipment, based on estimates using factors such as current market
value, future asset utilization, and future undiscounted cash flows expected to
result from its investment or use of the related assets. The Company's policy is
to record any impairment loss in the period when it is determined that the
carrying amount of the asset may not be recoverable. Any impairment loss is
calculated as the excess of the carrying value over estimated realizable value.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments", 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 accounts receivable, bank
overdraft, due to related parties, 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, 2005.
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.
Comparative figures
Certain of the comparative figures have been reclassified to conform to the
current year's presentation.
Net Loss per Common Share
The Company computes loss per share in accordance with SFAS No. 128, "Earnings
per Share" which requires presentation of both basic and diluted earnings per
share on the face of the statement of operations. Basic loss per share is
computed by dividing net loss available to common shareholders by the weighted
average number of outstanding common shares during the period. Diluted loss per
share gives effect to all potential dilutive common shares outstanding during
the period including stock options and share purchase warrants using the
treasury method. Convertible notes, share purchase warrants and stock options
were not included in the calculation of diluted loss per share as their effect
was anti-dilutive.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", an amendment of SFAS No. 123
"Accounting for Stock-Based Compensation". 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.
F-9
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
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 ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", 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 loss and 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:
Years ended December 31,
2005 2004
----------------------------------------
Net loss As reported $ (1,770,940) $ (670,655)
SFAS 123 compensation expense Pro-forma (43,080) (63,050)
----------------------------------------
Net loss Pro-forma $ (1,814,020) $ (733,705)
========================================
Pro-forma basic and diluted loss per share Pro-forma $ (0.17) $ (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". 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 No. 96-18.
The Company has also adopted the provisions of the FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - An
Interpretation of APB Opinion No. 25", 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.
F10
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, Share-Based Payment . SFAS No. 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. Public entities that file as small business issuers will be
required to apply SFAS No. 123R in the first interim or annual reporting period
that begins after December 15, 2005. Management is currently evaluating the
impact of the adoption of this standard on the Company's reported financial
position or results of operations.
In March 2005, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 107,
Share-Based Payment , to give guidance on the implementation of SFAS No. 123R.
The Company will consider SAB No. 107 during the implementation of SFAS No.
123R.
In May 2005, the FASB issued SFAS No. 154, Accounting for Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3 .
Under the provisions of SFAS No. 154, a voluntary change in accounting principle
requires retrospective application to prior period financial statements, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. A change in depreciation, amortization, or
depletion method for long-lived, non-financial assets must be accounted for as a
change in accounting estimate affected by a change in accounting principle. The
guidance contained in APB No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate was
not changed. The Company will implement this new standard beginning January 1,
2006. This standard is not expected to have a significant effect on the
Company's future reported financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140 , to
simplify and make more consistent the accounting for certain financial
instruments. SFAS No. 155 amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities , to permit fair value remeasurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, Accounting for the
Impairment or Disposal of Long-Lived Assets , to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains
to a beneficial interest other than another derivative financial instrument.
SFAS No. 155 applies to all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006,
with earlier application allowed. This standard is not expected to have a
significant effect on the Company's future reported financial position or
results of operations.
NOTE 3 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
During 2003 LTC and the Company executed a guarantee of certain unpaid
management fees owing to the then CEO of LTC totaling $123,750 (CDN$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 and 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 CDN$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 December 31, 2005 CDN$63,200
has been paid in connection with the above agreements leaving CDN$167,000
(US$143,237) owing. The Company did not pay the CDN $20,000 installment due
January 15, 2005, the CDN $25,000 installment due June 15, 2005 or the
CDN$30,000 installment due January 15, 2006. This debt is in default and has
been reclassified as a current liability to reflect its status as due in full.
During 2005 the Company had transactions with directors and officers as follows:
expenses paid on behalf of and advances made to the Company - $42,168 (2004 -
$96,655); management fees incurred by the Company - $162,622 (2004 - $187,174);
and payments and reimbursements made by the Company - $184,344 (2004 - $234,320)
leaving $36,605 owing as at December 31, 2005 (December 31, 2004 - $16,160).
F-11
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 3 - RELATED PARTY TRANSACTIONS (Cont'd)
- --------------------------------------------------------------------------------
The Company and LTC have non-interest-bearing promissory notes totalling $40,730
payable to LTBC originally due on or before June 30, 2001. The due dates on
these notes have been extended to January 1, 2007.
Unless otherwise noted, all amounts due to related parties are unsecured,
non-interest bearing and have no specific terms of repayment.
NOTE 4 - LONG TERM DEBT
- --------------------------------------------------------------------------------
Secured 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 totaling $59,607 including the final principal payment of
$20,010.
Secured Convertible Note
Effective December 16, 2005, ("the Closing date") the Company entered into a
Securities Purchase Agreement (the "SPA") with accredited investors for the sale
of (i) $1,000,000 in secured convertible notes and (ii) five year warrants to
buy 1,000,000 shares of the Company's common stock at $0.40 per share. The
investors are obligated to provide an aggregate of $1,000,000 as follows:
o $400,000 on December 21, 2005 (received);
o $300,000 within five days of the filing of a registration statement
on Form SB-2 covering the number of shares of the Company's common
stock underlying the secured convertible notes and warrants
(received subsequent to year-end); and
o $300,000 to be disbursed within five days of the effective date of
the aforementioned registration statement.
The secured convertible notes bear interest at 8% per annum, unless the common
stock of the Company 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 the Company's 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 full principal amount of the secured convertible notes are due upon a
default under the terms of secured convertible debentures. In addition, the
Company granted the investors a security interest in substantially all of its
assets and intellectual property.
Under the SPA, the Company is required to file a registration statement with the
Securities and Exchange Commission within 45 days of closing (filed on February
2, 2006). If the registration statement is not declared effective within 120
days from the date of closing, the Company is required to pay liquidated damages
to the investors. In the event that the Company breaches any representation or
warranty in the SPA, the Company is required to pay liquidated damages in shares
or cash, at the election of the Company, 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 investors 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.
F-12
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 4 - LONG TERM DEBT (cont'd)
- --------------------------------------------------------------------------------
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 the Company's shares
of common stock for the five trading days immediately preceding such issuance as
set forth on the Company's principal trading market.
The conversion price of the secured convertible notes and the exercise price of
the warrants may be adjusted in certain circumstances such as if the Company
pays a stock dividend, subdivides or combines outstanding shares of common stock
into a greater or lesser number of shares, or takes such other actions as would
otherwise result in dilution of the selling stockholder's position.
The investors have agreed to restrict their ability to convert their secured
convertible notes or exercise their warrants and receive shares of the Company's
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.
In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios",
the Company recognized the value of the embedded beneficial conversion feature
of $375,841 as additional paid-in capital as the secured convertible notes were
issued with an intrinsic value conversion feature. Accordingly, the Company
recorded $375,841 of interest expense, being the difference between the stated
value and carrying value at the date of issuance. In addition, in accordance
with EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has allocated the proceeds of issuance between the
convertible debt and the detachable warrants based on their relative fair
values. Accordingly, the Company recognized the fair value of the warrants of
$24,159 as a component of stockholders' deficit. The Company will record further
interest expense over the term of the secured convertible notes of $24,158
resulting from the difference between the stated value and carrying value at the
date of issuance. The carrying value of the convertible notes will be accreted
to the face value of $400,000 at maturity or the date of conversion. To December
31, 2005, accrued interest of $877 has been included in accrued liabilities, and
interest expense of $331 has been accreted increasing the carrying value of the
convertible debentures to $376,172.
In connection with the convertible notes payable, the Company incurred finance
costs totalling $70,000, which consisted of professional fees, due diligence,
and a finder's fee.
NOTE 5 - CAPITAL STOCK
- --------------------------------------------------------------------------------
2005 Transactions
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 to $0.55 per share for a period ranging from April 1,
2005 to October 28, 2007. The estimated fair value of these warrants of $73,350
has been recorded as a separate component of stockholders' equity.
The Company awarded 80,000 shares of common stock under the Stock Bonus Plan
with a fair value of $24,400. At December 31, 2005, 772,188 shares remain
available for awards under this plan.
The Company issued 2,020,000 shares of common stock under the Non-Qualified
Stock Option Plan for total consideration of $89,100 or which $85,500 was
received in cash and $3,600 by offset of amounts due to a related party.
2004 Transactions
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.
F-13
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK (cont'd)
- --------------------------------------------------------------------------------
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.
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. The estimated fair value of the warrants of $50,000 has
been recovered as a separate component of stockholders' equity.
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
Effective January 26, 2004, the Company 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 10,850,000 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 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 award of up to
1,650,000 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 October 19, 2005, the Company filed an amended Form S-8 Registration
Statement for 13,250,000 common shares authorized under the Incentive Stock
Option Plan, the Non-Qualified Stock Option Plan and the Stock Bonus Plan.
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 common 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 this plan.
During 2005, the Company awarded 80,000 shares of common stock under the Stock
Bonus Plan with a fair value of $ 24,400. At December 31, 2005, 772,188 shares
remain available for awards under this 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-14
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK (cont'd)
- --------------------------------------------------------------------------------
Stock Option Plans (cont'd)
During 2004, the Company granted a total of 659,200 stock options to the
Company's 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 an aggregate 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, 2005, $47,400 (December
31, 2004 - $30,850) of the pro forma expense has been disclosed and the
remaining $63,950 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%.
During 2005, the Company granted a total of 3,600,000 non qualified stock
options to a consultant of the Company at exercise prices ranging from $0.001
per share to $0.10 per share, exercisable for a term of two 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 fair
value stock-based compensation expense of $663,200 estimated using the
Black-Scholes option pricing model assuming an expected life of two years, a
risk-free interest rate of 3% and an expected volatility of 130%. At December
31, 2005, 6,016,505 shares remain available for granting under the Non-Qualified
Stock Option Plan
Of the 750,000 common shares available under the Incentive Stock Option Plan, as
at December 31, 2005, 305,000 shares have been granted and exercised, and
445,000 shares remain available for granting.
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 1,624,200 0.23
Expired (85,000) 0.25
Exercised (954,000) 0.11
-------------------------------------------------------------------
Balance, December 31, 2004 770,200 0.39 2.81 years
Granted 3,600,000 0.07
Expired - -
Exercised (2,020,000) 0.04
-------------------------------------------------------------------
Balance, December 31, 2005 2,350,200 $ 0.20 1.78 years
===================================================================
F-15
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 5 - CAPITAL STOCK (cont'd)
- --------------------------------------------------------------------------------
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 1,385,000 0.37
Expired (439,255) 0.89
Exercised - -
----------------------------------------------------------------------
Balance, December 31, 2004 1,785,000 0.51 0.77 years
Issued 2,233,750 0.37
Expired (1,500,000) 0.41
Exercised - -
----------------------------------------------------------------------
Balance, December 31, 2005 2,518,750 $ 0.44 1.96 years
======================================================================
NOTE 6 - 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 $2,873,000 at December 31, 2005 (2004 - $1,790,000).
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 7 - SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING
- --------------------------------------------------------------------------------
ACTIVITIES
- ----------
Year Ended December 31, Year Ended December 31,
2005 2004
--------------------------------------------------
Interest paid $ 30,545 $ 6,285
Income taxes paid $ - $ -
Fair value of stock bonus grants $ 24,400 $ 130,868
Fair value of option grants $ 663,200 $ 154,600
Exercise of stock options for debt $ 3,600 $ 98,810
======================================================================================
NOTE 8 - CONCENTRATION RISK
- --------------------------------------------------------------------------------
For the year ended December 31, 2005, the Company made purchases from three
suppliers of approximately 50%, 20% and 10%, respectively.
For the year ended December 31, 2005, the Company had sales with one customer of
approximately 67%.
F-16
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
NOTE 9 - SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
In January 2006, the Company issued 500,000 common shares under the pre-existing
Non-Qualified Stock Option Plan and 250,000 common shares under the pre-existing
Stock Bonus Plan. The Company also adopted a 2006 Stock Plan. The pre-existing
plans as discussed in Note 5 continue to remain in place.
In January 2006, the Company issued 200,000 shares on account of a finder's fee
attributable to the Company's receipt of its first tranche of funding received
under the December 16, 2005 Securities Purchase Agreement. The Company issued a
further 100,000 shares on account of a subscription for shares. These 300,000
shares were not issued pursuant to a registered stock plan and accordingly are
subject to resale restrictions.
Effective February 3, 2006, Scott Bullis resigned his position as President of
the Company.
On February 7, 2006, the Company received the $300,000 second required funding
tranche under the December 16, 2005 Securities Purchase Agreement.
Effective March 1, 2006, the Company entered into a consulting agreement with
the Company's new Chief Financial Officer ("CFO"). Under the terms of the
agreement, the CFO will be paid a total of $2,500 per month for 12 months ending
February 28, 2007 and receive 500,000 common shares of the Company.
Effective March 16, 2006, the Company registered 5,000,0000 common shares
pursuant to its 2006 Stock Plan and entered into agreements to issue 5,000,000
shares pursuant to the 2006 Stock Plan, of which 500,000 shares were issued to
the Company's new CFO pursuant to his consulting agreement, 100,000 shares were
issued to an independent Company director, 400,000 shares were issued to a
shareholder pursuant to a subscription agreement for the conversion of debt and
4,000,000 shares were issued to arms-length consultants pursuant to consulting
agreements.
F-17
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 $0.40 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 Description
3. Articles of Incorporation and By-laws:
3.1 Articles of Incorporation (incorporated by reference from our Registration Statement on Form 10-SB, filed on
March 17, 2000).
3.3 Bylaws (incorporated by reference from our Registration Statement on Form 10-SB, filed on March 17, 2000).
4. Instruments Defining the Rights of Security Holders
4.1 2006 Stock Plan (incorporated by reference from our Registration Statement on Form S-8, filed on March 17, 2006).
4.2 Incentive Stock Plan (incorporated by reference from our Registration Statement on Form S-8, filed on October 19, 2006).
4.3 Non-Qualified Stock Option Plan(incorporated by reference from our Registration Statement on Form S-8, filed on October 19,
2006).
4.4 Stock Bonus Plan (incorporated by reference from our Registration Statement on Form S-8, filed on October 19, 2006).
5 Opinion on Legality
5.1 Opinion of Sichenzia Ross Friedman Ference LLP (incorporated by reference to out Registration Statement on Form SB-2,
filed on February 2, 2006)
10. Material Contracts
10.1 Agreement relating to purchase of patent rights, dated March 31, 1999, by and among Luna Technologies International, Inc.
and Luna Technologies Inc. (incorporated by reference from our Registration Statement on Form 10-SB, filed on March 17,
2000).
10.2 Assignment of patent rights, dated April 30, 1999, by and among Luna Technologies International, Inc. and Luna Technologies
Inc. (incorporated by reference from our Registration Statement on Form 10-SB, filed on March 17, 2000).
10.3 Agreement relating to proprietary purchase of property technology and trademarks, dated October 15, 1999, by and among Luna
Technologies International, Inc. and Douglas Sinclair (incorporated by reference from our Registration Statement on Form
10-SB, filed on March 17, 2000).
10.4 Assignment of trademarks, dated November 15, 1999, by and among Luna Technologies International, Inc. and Douglas Sinclair
(incorporated by reference from our Registration Statement on Form 10-SB, filed on March 17, 2000).
10.5 Non-Compete Agreement, dated November 15, 1999, by and among Luna Technologies International, Inc. and Douglas Sinclair
(incorporated by reference from our Registration Statement on Form 10-SB, filed on March 17, 2000).
10.6 Securities Purchase Agreement, dated December 16, 2005, by and among Luna Technologies International, Inc. and AJW Offshore
Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC. (incorporated by
reference from our Current Report on Form 8-K filed on December 22, 2005).
10.7 Callable Secured Convertible Note issued to AJW Offshore, Ltd. dated December 16, 2005 (incorporated by reference from our
Current Report on Form 8-K filed on December 22, 2005).
10.8 Callable Secured Convertible Note issued to AJW Qualified Partners, LLC, dated December 16, 2005 (incorporated by reference
from our Current Report on Form 8-K filed on December 22, 2005).
II-3
Exhibit Description
10.9 Callable Secured Convertible Note issued to AJW Partners, LLC, dated December 16, 2005 (incorporated by reference from our
Current Report on Form 8-K filed on December 22, 2005).
10.10 Callable Secured Convertible Note issued to New Millennium Capital Partners II, LLC, dated December 16, 2005 incorporated
by reference from our Current Report on Form 8-K filed on December 22, 2005).
10.11 Stock Purchase Warrant issued to AJW Offshore, Ltd., dated December 16, 2005 (incorporated by reference from our Current
Report on Form 8-K filed on December 22, 2005).
10.12 Stock Purchase Warrant issued to AJW Qualified Partners, LLC., dated December 16, 2005 (incorporated by reference from our
Current Report on Form 8-K filed on December 22, 2005).
10.13 Stock Purchase Warrant issued to AJW Partners, LLC., dated December 16, 2005 (incorporated by reference from our Current
Report on Form 8-K filed on December 22, 2005).
10.14 Stock Purchase Warrant issued to New Millennium Capital Partners II, LLC., dated December 16, 2005 (incorporated by
reference from our Current Report on Form 8-K filed on December 22, 2005).
10.15 Registration Rights Agreement, dated as of December 16, 2005, by and among Luna Technologies International, Inc., AJW
Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC (incorporated by
reference from our Current Report on Form 8-K filed on December 22, 2005).
10.16 Intellectual Property Security Agreement, dated as of December 16, 2005, by and among Luna Technologies International,
Inc., AJW Offshore, Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC
(incorporated by reference from our Current Report on Form 8-K filed on December 22, 2005).
10.17 Consulting Agreement dated March 1, 2006, by and among Luna Technologies International, Inc. and Leslie James Porter
(incorporated by reference from our Current Report on Form 8-K filed on March 22, 2006).
10.18 Restricted Share Grant Agreement dated March 16, 2006, by and among Luna Technologies International, Inc. and Robert Humber
(incorporated by reference from our Current Report on Form 8-K filed on March 22, 2006).
10.19 Amendment to Securities Purchase Agreement dated April 7, 2006, by and among Luna Technologies International, Inc. and AJW
Offshore Ltd., AJW Qualified Partners, LLC, AJW Partners, LLC and New Millennium Capital Partners II, LLC. (incorporated by
reference from our Current Report on Form 8-K filed on April 13, 2006).
14. Code of Ethics
14.1 Code of Ethics(incorporated by reference from our Quarterly Report on Form 10-QSB, filed on May 21, 2004).
23. Consents
23.1* Consent of Dale Matheson Carr-Hilton LaBonte
23.2 Consent of Sichenzia Ross Friedman Ference LLP (See exhibit 5.1)
II-4
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 (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-5
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 April 28, 2006.
Luna Technologies International, Inc.
By: /s/ Kimberly Landry
-----------------------------------------
Kimberly Landry
Chief Executive Officer
By: /s/ Leslie Porter
-----------------------------------------
Leslie James Porter
Chief Financial Officer
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 April 28, 2006
- -------------------------------- and Director
Kimberly Landry
/s/ Leslie James Porter Chief Financial Officer April 28, 2006
- --------------------------------
Leslie James Porter
/s/ Robert Humber Secretary and Director April 28, 2006
- --------------------------------
Robert Humber