<pre>
As filed with the
Securities and Exchange Commission On June 25, 2004
Registration No.333-
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
CONECTISYS CORPORATION
(Name of small business issuer in its charter
Colorado 3663 84-1017107
(State or other jurisdiction of (Primary Standard ) (I.R.S.
incorporation or organization) Industrial Classification Employer
Code Number) Identification)
|
Copies to:
Larry A. Cerutti, Esq.
John T. Bradley, Esq.
Rutan & Tucker, LLP
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626
(714) 641-5100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this registration becomes effective.
If any of the 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, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration 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 the delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |__|
(1) The amount to be registered includes an indeterminate number of shares issuable upon conversion of or in respect of the debentures and the warrants, as such number may be adjusted as a result of stock splits, stock dividends and similar transactions in accordance with Rule 416 of the Securities Act of 1933. Pursuant to Rule 429, includes 7,500,000 shares being carried forward from the Registrant's Registration Statement No. 333-87062 and includes 5,000,000 shares being carried forward from the Registrant's Registration Statement No. 333- 102781. Also includes 3,375,000,000 shares covered by this Registration Statement that are not presently covered by any other registration statement.
(2) Represents shares of common stock being offered by selling security holders, which shares of common stock are issuable upon conversion of secured convertible debentures and upon exercise of warrants. The number of shares of common stock registered hereunder is based on the price of our common stock on the OTC Bulletin Board(R) on June 17, 2004 and represents a good faith estimate by the Company of the number of shares of common stock issuable upon conversion of the debentures and upon exercise of the warrants, multiplied by 200%, which amount we are obligated to register for resale under our agreements with the holders of our debentures.
(3) The proposed maximum offering price per share has been estimated solely for the purpose of calculating the registration fee for the 3,375,000,000 shares covered by this Registration Statement that are not covered by any other registration statement and has been calculated pursuant to Rule 457(c) of the Securities Act of 1933 and is based upon the average of the high and low reported prices of the Registrant's common stock on the OTC Bulletin Board(R) on June 22, 2004.
Pursuant to Rule 429, this Registration Statement contains a combined prospectus that covers 7,500,000 shares being carried forward from the Registrant's Registration Statement No. 333-87062 and covers 5,000,000 shares being carried forward from the Registrant's Registration Statement No. 333- 102781, in addition to the 3,375,000,000 shares being registered for the first time hereunder.
DEREGISTRATION OF SECURITIES
Pursuant to Rule 429, this Registration Statement contains a combined prospectus that covers 7,500,000 shares being carried forward from the Registrant's Registration Statement No. 333-87062 and covers 5,000,000 shares being carried forward from the Registrant's Registration Statement No. 333- 102781, in addition to the 3,375,000,000 shares being registered for the first time hereunder.
When declared effective, Registration Statement No. 333-87062 covered 55,500,000 shares of the Registrant's common stock and Registration Statement No. 333-102781 covered 229,000,000 shares of the Registrant's common stock. In accordance with the undertakings of the Registrant set forth in Registration Statements No. 333-87062 and 333- 102781, effective as of the date and time this Registration Statement is declared effective, the Registrant hereby deregisters such shares of its common stock that were registered on Registration Statements No. 333-87062 and 333-102781 but were not sold under such Registration Statements and that are not being carried forward onto this Registration Statement.
Subject To Completion, Dated June 25, 2004
PROSPECTUS
3,387,500,000 SHARES
CONECTISYS CORPORATION
Common Stock
The shares of our common stock being offered under this prospectus are being offered by some of our security holders identified in this prospectus for their own accounts. Our common stock trades on the OTC Bulletin Board(R) under the symbol "CNES." On June 22, 2004, the high and low sale prices for a share of our common stock were $.0018 and $.0014, respectively.
The mailing address and the telephone number of our principal executive office is 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355, (661) 295-6763.
The information in this prospectus is not complete and may be changed. The selling security holders identified in this prospectus may not sell these securities until the registration statement filed with the Securities and Exchange Commission, of which this prospectus is a part, is declared 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.
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2004.
TABLE OF CONTENTS
Description Page No. ----------- -------- Prospectus Summary........................................................3 Risk Factors..............................................................5 Special Note Regarding Forward-Looking Statements........................13 Use of Proceeds..........................................................13 Price Range of Common Stock..............................................14 Dividend Policy..........................................................14 Capitalization...........................................................15 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................16 Business.................................................................23 Management...............................................................35 Certain Relationships and Related Transactions...........................44 Principal and Selling Security Holders...................................47 Plan of Distribution.....................................................52 Description of Capital Stock.............................................54 Legal Matters............................................................55 Experts..................................................................55 Where You Can Find More Information......................................55 Index to Financial Statements...........................................F-1 |
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because it is a summary, it necessarily does not contain all of the information necessary to your investment decision. To understand this offering fully, you should read carefully the entire prospectus.
ConectiSys Corporation
Since 1995, we have been engaged in the development of a low-cost automatic meter reading, or AMR, solution. We have developed a low- cost AMR solution that includes a proprietary system employing specialized hardware and software that will allow for residential and commercial applications. Our proprietary system is called H-Net(TM), which is a trademark of ConectiSys.
We are currently developing our H-Net(TM) 5.0 wireless meter reading product which is designed to increase the data transmission range of our H- Net(TM) system over the data transmission range of our existing H- Net(TM) 4.0 product. The development of our H-Net(TM) 5.0 product is also directed at curing certain radio frequency interference experienced in our H-Net(TM) 4.0 product. We expect to submit to the United States Federal Communications Commission, or the FCC, by the end of our current fiscal year in September 2004, our H-Net(TM) 5.0 wireless meter reading product for approval for commercialization and sale. We expect that this approval by the FCC will occur within approximately 60 days following submission to the FCC of our H-Net(TM) 5.0 wireless meter reading product, but no assurances can be made that this approval will be obtained or that it will not be delayed. Once FCC approval is obtained, we expect that our H-Net(TM) 5.0 wireless meter reading product will be ready for full-scale commercial production.
We have not yet sold any H-Net(TM) systems and we do not expect any significant sales of our H-Net(TM) systems until after FCC approval is obtained. Accordingly, we have not earned any significant revenues from the sale of our H-Net(TM) system. We have no history of revenues and have incurred significant losses since the beginning of the development of our H-Net(TM) system. We have a significant accumulated deficit and negative working capital. As a result of our financial condition, our independent auditors have issued a report questioning our ability to continue as a going concern.
Our H-Net(TM) system has been developed as an AMR solution predominantly for application by utility companies and energy service providers to assist in the comprehensive, low-cost remote reading of electric energy meters in residential structures and the transmission of that data on a frequent basis to a centralized location where the data can be archived and further supplied to utility companies and energy service providers for billing purposes, energy usage tracking, energy consumption management and other uses.
Our H-Net(TM) system is comprised of the following three principal components: H-Net(TM)-equipped meters, base stations and a network operating center. H-Net(TM)-equipped meters are designed to communicate with one another, relaying energy usage data back and forth, and ultimately communicate with a base station where energy usage data is then transmitted to a network operating center. Each base station is designed to service up to 20,000 H- Net(TM)-equipped meters and to transmit energy usage data to the network operating center in fifteen minute intervals, 24 hours per day. The network operating center is designed to collect and archive energy usage data and then distribute the data over the Internet to customers such as utility companies and energy service providers.
We believe that our AMR solution in the form of our H-Net(TM) system is a cost-effective and useful AMR solution for meter reading applications and that its adoption will allow for new information regarding energy usage. We plan to
provide a variety of additional services to our customers including remote meter reading, complete billing solutions and remote access and control of energy meters. We anticipate that our customers will include energy meter manufacturers, energy service providers, utility companies and end-users of
RISK FACTORS
An investment in our common stock involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the following risk factors before deciding to invest in shares of our common stock. If any of the following risks actually occurs, it is likely that our business, financial condition and operating results would be harmed. As a result, the trading price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
We have no history of revenues, have incurred significant losses, expect continued losses and may never achieve profitably. If we continue to incur losses, we may have to curtail our operations, which may prevent us from successfully deploying our H-Net(TM) wireless meter reading system.
We have no history of revenues, have not been profitable and expect continued losses. Historically, we have relied upon cash from financing activities to fund all of the cash requirements of our activities and have incurred significant losses and experienced negative cash flow. As of September 30, 2003, we had an accumulated deficit of approximately $2,962,000. For our fiscal year ended September 30, 2003, we incurred a net loss of approximately $2,387,000 and for our fiscal year ended September 30, 2002, we incurred a net loss of approximately $2,347,000. We cannot predict when we will become profitable or if we ever will become profitable, and we may continue to incur losses for an indeterminate period of time and may never achieve or sustain profitability. An extended period of losses and negative cash flow may prevent us from successfully deploying our H-Net(TM) wireless meter reading system, or our H-Net(TM) system, and operating or expanding our business. As a result of our financial condition, our independent auditors have issued a report questioning our ability to continue as a going concern.
Our significant losses have resulted principally from costs incurred in connection with the development of our H-Net(TM) system and from costs associated with our administrative activities. We expect our operating expenses to dramatically increase as a result of our planned deployment of our H-Net(TM) system. Since we have only recently completed the development of our H-Net(TM) system, have no operating history and no existing sources of revenues, we cannot assure you that our business will ever become profitable or that we will ever generate sufficient revenues to meet our expenses and support our planned activities. Even if we are able to achieve profitability, we may be unable to sustain or increase our profitability on a quarterly or annual basis.
Our independent auditors have issued a report questioning our ability to continue as a going concern. This report may impair our ability to raise additional financing and adversely affect the price of our common stock.
The report of our independent auditors contained in our financial statements for the years ended September 30, 2003 and 2002 includes a paragraph that explains that we have incurred substantial losses and have a working capital deficit. This report raises substantial doubt about our ability to continue as a going concern. Reports of independent auditors questioning a company's ability to continue as a going concern are generally viewed unfavorably by analysts and investors. This report may make it difficult for us to raise additional debt or equity financing necessary to continue the development and deployment of our H-Net(TM) system. We urge potential investors to review this report before making a decision to invest in ConectiSys.
Without substantial additional financing, we may be unable to achieve the objectives of our current business strategy, which could force us to delay, curtail or eliminate our product and service development programs.
We require additional financing to produce cost-reduced hardware for our H-Net(TM) system capable of large-scale manufacturing and to complete the development of our H-Net(TM) 5.0 wireless meter reading product. We also require additional funding to obtain and implement contracts and joint venture agreements with meter manufacturers. If we are unable to obtain this financing, we could be forced to delay, curtail or eliminate certain product and service development programs or entirely abandon our planned deployment of our H-Net(TM) system. In addition, our inability to obtain financing could have such a material adverse effect on our business, prospects, results of operations or financial condition, that we may be forced to restructure, file for bankruptcy, sell assets or cease operations entirely, any of which could jeopardize an investment in our common stock.
We need and may be unable to obtain additional financing on satisfactory terms, which may require us to accept financing on burdensome terms that may cause substantial dilution to our shareholders and impose onerous financial restrictions on our business.
We require additional financing. Deteriorating global economic conditions may cause prolonged declines in investor confidence in and accessibility to capital markets. Future financing may not be available on a timely basis, in sufficient amounts or on terms acceptable to us. This financing may also dilute existing shareholders' equity. Any debt financing or other financing of securities senior to our common stock will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operations because we could lose any then-existing sources of financing and our ability to secure new sources of financing may be impaired.
We are subject to an injunction imposed by a federal court for violating the federal securities laws, which may make it more difficult to raise financing.
In 1997, the Securities and Exchange Commission filed suit in the United States District Court in the Central District of California against ConectiSys and another individual seeking permanent injunctions and civil penalties based on alleged violations of Sections 5(a), 5(c) and 17(a)(1)-(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with the sale of common stock of ConectiSys in 1996. In March 1999, we agreed with the Securities and Exchange Commission to the terms of a settlement of its litigation against us. Under the terms of that settlement, we dismissed our then-pending appeal of a judgment against us in favor of the Securities and Exchange Commission and accepted a permanent injunction against us prohibiting actions that would violate federal securities laws in connection with the offer, purchase or sale of securities. The Securities and Exchange Commission agreed to waive a requirement of the judgment under appeal that we disgorge $175,000 of proceeds from the sale of our common stock due to our inability to pay this amount. On March 9, 1999, an amended final judgment of permanent injunction and other relief memorializing these agreements was entered in connection with the execution by us of a consent to entry of injunction. An injunction of this nature is viewed unfavorably by analysts and investors and may make it more difficult for us to raise additional debt or equity financing necessary to run our business.
Our default on the repayment of the convertible debentures held by certain security holders could have a material and adverse effect on our business, prospects, results of operations or financial condition.
Unpaid principal and accrued and unpaid interest on our convertible debentures becomes immediately due and payable from one to two years from their date of issuance, depending on the debenture, or earlier in the event of a default. The events of default under the convertible debentures are similar to those customary for convertible debt securities, including breaches of material terms, failure to pay amounts owed, delisting of our common stock from the OTC Bulletin Board(R) or failure to comply with the conditions of listing on the OTC Bulletin Board(R). If we default on our obligations under the convertible debentures, we may be required to immediately repay the outstanding principal amounts of the debentures and any accrued and unpaid interest. The cash required to repay such amounts would likely have to be taken from our working capital. Since we rely on our working capital to sustain our day to day operations and the development of our H-Net(TM) system, a default on the convertible debentures could have a material and adverse effect on our business, prospects, results of operations or financial condition.
We rely heavily on our management, and the loss of their services could materially and adversely affect our business.
Our success is highly dependent upon the continued services of key members of our management, including our Chairman of the Board and Chief Executive Officer, Robert A. Spigno, and our Chief Technology Officer, Lawrence Muirhead. The loss of Messrs. Spigno or Muirhead or one or more other key members of management could have a material adverse effect on us because each of these individuals has experience and skills upon which we draw heavily in our day-to-day operations, strategic planning or research and development activities. The development and operation of our H-Net(TM) system is largely dependent upon the skills and efforts of Mr. Muirhead. Although we have entered into employment agreements with Messrs. Spigno and Muirhead, we cannot assure the continued services of these key members of our management team. We do not maintain key-man life insurance policies on any member of management.
We have a limited operating history of approximately eight years and very limited operating experience; therefore, regardless of the viability or market acceptance of our H-Net(TM) system, we may be unable to achieve profitability or realize our other business goals.
Our H-Net(TM) system is the result of a new venture. We have been engaged in research and development of automatic meter reading technologies since 1995, and we have only recently completed limited pilot programs for our first and only product, our H-Net(TM) automatic meter reading system. We have generated no operating revenues from our H-Net(TM) system and have not commenced any of the widespread marketing and other functions that we anticipate will be required for successful deployment of our H-Net(TM) system. Deployment of our H- Net(TM) system will involve large-scale cost-reduction manufacturing runs for the production of the components employed in our H- Net(TM) system. Our success will depend in large part on our ability to deal with the problems, expenses and delays frequently associated with bringing a new product to market. Because we have little experience in the deployment and operational aspects of automatic meter reading technologies, we may be unable to successfully deploy and operate our H-Net(TM) system even if our H-Net(TM) system proves to be a viable automatic meter reading solution and achieves market acceptance. Consequently, we may be unable to achieve profitability or realize our other business goals.
Many companies with greater resources and operating experience are developing technology similar to that employed in our H-Net(TM) system. These companies could successfully compete with us and negatively affect the deployment of our H-Net(TM) system and our opportunity to achieve profitability.
We anticipate significant competition with our H-Net(TM) system from many companies. Our H-Net(TM) system is designed to compete with companies such as those that offer meter reading services utilizing modem and telephone line communications or drive-by data collection capabilities. Our H-Net(TM) system may compete with numerous companies, including Schlumberger Ltd., Itron, Inc., CellNet Data Systems, Hunt Technologies and Metricom Corporation, each of which has significantly more resources and operational and product development experience than we do. Some of our potential customers, namely, meter manufacturers and utility companies, may decide to develop their own products or service offerings that directly compete with our H-Net(TM) system. Although we believe that our H-Net(TM) system will be competitive in the marketplace, we cannot assure you that these or other companies with greater experience and greater resources than ConectiSys will not negatively affect our business prospects and impair our ability to achieve profitability.
We are targeting a new and evolving market and we cannot be certain that our business strategy will be successful.
The automation of utility meter reading and data distribution is a relatively new and rapidly changing market. We cannot accurately predict the size of this market or its potential growth. Our system is one possible solution for AMR and data distribution. It has not been adopted as an industry standard and it may not be adopted on a broad scale. Competing systems have been and likely will continue to be selected by utilities and other potential clients. Participants in the utility industry have historically been cautious and deliberate in making decisions concerning the adoption of new technology. This process, which can take up to several years to complete, may include the formation of evaluation committees, a review of different technical options, technology trials, equipment testing and certification, performance and cost justifications, regulatory review, one or more requests for vendor quotes and proposals, budgetary approvals and other steps. Only a limited number of utilities have made a commitment to purchase our products to date. Consequently, if our H-Net(TM) system as an AMR solution is unsuccessful and we are unable to enter into AMR or data distribution contracts on terms favorable to us, our business, results of operations and financial condition could be materially and adversely affected.
The new and evolving nature of the market that we intend to target makes an accurate evaluation of our business prospects and the formulation of a viable business strategy very difficult. Accordingly, our business strategy may be faulty or even obsolete and as a result, we may not properly plan for or address many obstacles to success, including the following:
o the timing and necessity of substantial expenditures for the development and deployment of our H-Net(TM) system;
o the failure to strategically position ourselves in relation to
joint venture or strategic partners, and potential and actual
competitors;
o the failure of our H-Net(TM) system to satisfy the needs of
the market that we intend to target and the resulting lack of
widespread or adequate acceptance of our H-Net(TM) system; and
o the difficulties in managing rapid growth of operations and
personnel.
Our failure to manage growth effectively could impair our business.
We do not currently have revenue-generating operations but our strategy envisions a period of rapid growth that may impose a significant burden on our administrative and operational resources. Our ability to effectively manage growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified engineers, technicians, salespersons and other personnel. There can be no assurance that we will be able to do so. If we are unable to successfully manage our growth, our business, prospects, results of operations and financial condition could be materially and adversely affected.
Because we believe that proprietary rights are material to our success, misappropriation of those rights or claims of infringement or legal actions related to intellectual property could adversely impact our financial condition.
We currently rely on a combination of contractual rights, copyrights, trademarks and trade secrets to protect our proprietary rights. However, although our H-Net(TM) system and its constituent components could benefit from patent protection, we have chosen to retain the proprietary rights associated with our H-Net(TM) system predominantly as trade secrets. Although we currently rely to a great extent on trade secret protection for much of our technology, we cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop comparable or superior technologies or obtain unauthorized access to our proprietary technology.
We own, license or have otherwise obtained the right to use certain technologies incorporated in our H-Net(TM) system. We may receive infringement claims from third parties relating to our products and technologies. In those cases, we intend to investigate the validity of the claims and, if we believe the claims have merit, to respond through licensing or other appropriate actions. To the extent claims relate to technology included in components purchased from third-party vendors for incorporation into our products, we would forward those claims to the appropriate vendor. If we or our component manufacturers are unable to license or otherwise provide any necessary technology on a cost-effective basis, we could be prohibited from marketing products containing that technology, incur substantial costs in redesigning products incorporating that technology, or incur substantial costs defending any legal action taken against us.
Risks Related To This Offering
Shares of our common stock eligible or to become eligible for public sale could adversely affect our stock price and make it difficult for us to raise additional capital through sales of equity securities.
As of June 22, 2004, we had outstanding 986,190,156 shares of common stock, of which approximately 365,000,000 shares were unrestricted under the Securities Act of 1933. As of June 22, 2004, we also had outstanding options, warrants, promissory notes, convertible debentures and preferred stock that were exercisable for or convertible into approximately 2,950,000,000 shares of common stock, approximately 2,917,000,000 of which are covered by registration rights. Sales of a substantial number of shares of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price of our common stock. Any adverse effect on the market price of our common stock could make it difficult for us to raise additional capital through sales of equity securities at a time and at a price that we deem appropriate.
Conversion or exercise of our outstanding derivative securities could substantially dilute your investment because the conversion and exercise prices of those securities and/or the number of shares of common stock issuable upon conversion or exercise of those securities are subject to adjustment.
We have issued various notes, debentures and warrants that are convertible or exercisable at prices that are subject to adjustment due to a variety of factors, including fluctuations in the market price of our common stock and the issuance of securities at an exercise or conversion price less than the then-current exercise or conversion price of those notes, debentures or warrants. As of June 22, 2004, the closing price of a share of our common stock on the OTC Bulletin Board(R) was $.0014. On that date, our notes, debentures and warrants outstanding with adjustable conversion and/or exercise prices were convertible or exercisable into approximately 2,923,000,000 shares of our common stock. The number of shares of common stock that these adjustable securities ultimately may be converted into or exercised for could prove to be greater than this amount if the market price of our common stock declines. You could, therefore, experience substantial dilution of your investment as a result of the conversion or exercise of our outstanding derivative securities.
The applicable conversion price of our debentures and a convertible promissory note issued to certain security holders is variable and does not have a lower-limit, therefore the dilutive effect to our existing security holders is theoretically limitless. However, because the variable conversion price of these debentures and convertible promissory note has an upper limit, an increase in the trading price of a share of our common stock will result in a limited benefit to existing security holders with respect to the conversion of these debentures and the convertible promissory note. The following table sets forth the number of shares issuable upon conversion of the aggregate principal portion of our convertible debentures issued to certain security holders and outstanding as of June 22, 2004, which amount was $1,536,757, and is based upon the indicated hypothetical trading prices:
Approximate
Number of Percentage of
Hypothetical Shares Company's
Trading Price Conversion Price (1) Issuable (2) Common Stock (3)
------------- --------------------- ------------ -----------------
$.006 $.0024 640,000,000 39.4%
$.004 $.0016 960,000,000 49.3%
$.002 $.0008 1,921,000,000 66.1%
$.001 $.0004 3,842,000,000 79.6%
______________________
|
(1) The conversion price of our debentures and the convertible promissory
note is the lower of 40% of the average of the three lowest intraday
trading prices of a share of our common stock on the OTC Bulletin
Board(R) during the twenty trading days immediately preceding the
conversion date, and either (a) $.06 for the March, May and June 2002
convertible debentures, (b) $.01 for the November 2002, March and May
2003 convertible debentures, or (c) $.005 for the November and
December 2003 and the February, March and April 2004 convertible
debentures. As of June 22, 2004, the applicable conversion price was
approximately $.0006.
(2) Our current authorized capital allows us to issue a maximum of
1,000,000,000 shares of common stock; however, we have filed a proxy
statement with the Securities and Exchange Commission covering, among
other things, a proposal to be voted on by our shareholders to
increase our authorized shares of common stock from 1,000,000,000
shares to 7,500,000,000 shares.
(3) Amounts are based on 986,190,156 shares of our common stock outstanding as of June 22, 2004 plus the corresponding number of shares issuable. Each of the holders of our convertible debentures may not convert our debentures into more than 4.9% of our then-outstanding common stock; however, the holders may waive the 4.9% limitation, thus allowing the conversion of their debentures into a number of shares of common stock in excess of 4.9% of our then-outstanding common stock.
The holders of certain of our convertible debentures may elect to receive payment for accrued and unpaid interest on our convertible debentures in shares of our common stock based on the conversion price and on the same terms described above with respect to conversions of the principal portion of these debentures. As a result of conversions of the principal or interest portion of our convertible debentures and related sales of our common stock by the holders of our convertible debentures, the market price of our common stock could be depressed, thereby resulting in a significant increase in the number of shares issuable upon conversion of the principal and interest portions of these debentures. You could, therefore, experience substantial dilution of your investment as a result of the conversion of the principal or interest portions of our convertible debentures.
If our security holders engage in short sales of our common stock, including sales of shares to be issued upon conversion or exercise of derivative securities, the price of our common stock may decline.
Selling short is a technique used by a shareholder to take advantage of an anticipated decline in the price of a security. A significant number of short sales or a large volume of other sales within a relatively short period of time can create downward pressure on the market price of a security. The decrease in market price would allow holders of our derivative securities that have conversion or exercise prices based upon a discount on the market price of our common stock to convert or exercise their derivative securities into or for an increased number of shares of our common stock. Further sales of common stock issued upon conversion or exercise of our derivative securities could cause even greater declines in the price of our common stock due to the number of additional shares available in the market, which could encourage short sales that could further undermine the value of our common stock. You could, therefore, experience a decline in the value of your investment as a result of short sales of our common stock.
Our current financing arrangements could prevent our common stock from being listed on Nasdaq or other principal markets.
Nasdaq and other principal markets require that, to be eligible for inclusion in the stock market, a company's common stock have a specified minimum bid price per share. Convertible debenture financings, especially those with variable conversion prices with low or no low-price limits, characteristically exert downward pressure on the market for a company's common stock. This pressure, if applied against the market for our common stock, may prevent our common stock from being listed on Nasdaq or other principal markets.
Our common stock price is subject to significant volatility, which could result in substantial losses for investors and in litigation against us.
The stock market as a whole and individual stocks historically have experienced extreme price and volume fluctuations, which often have been unrelated to the performance of the related corporations. During the three months ended December 31, 2003, the high and low closing bid prices of our common stock were $.0069 and $.0022, respectively. The market price of our common stock may exhibit significant fluctuations in the future response to
various factors, many of which are beyond our control and which include:
o variations in our quarterly operating results, which
variations could result from, among other things, changes in
the needs of one or more of our customers;
o changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
o economic conditions specific to the industries in which we
operate;
o announcements by us or our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or
capital commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity
securities.
If our operating results in future quarters fall below the expectations of market makers, securities analysts and investors, the price of our common stock likely will decline, perhaps substantially. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources. Consequently, the price at which you purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you.
Because we are subject to the "Penny Stock" rules, the level of trading activity in our stock may be reduced.
Broker-dealer practices in connection with transactions in "penny stocks" are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker- dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell these securities to persons other than established customers and "accredited investors" must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.
Because our stock is not listed on a national securities exchange, you may find it difficult to dispose of or obtain quotations for our common stock.
Our common stock trades under the symbol "CNES" on the OTC Bulletin Board(R). Because our stock trades on the OTC Bulletin Board(R) rather than on a national securities exchange, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our common stock.
Our preferred stock may delay or prevent a takeover of ConectiSys, possibly preventing you from obtaining higher stock prices for your shares.
Our board of directors has the authority to issue up to 50,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights of those shares, without any further vote or action by our shareholders. Of these shares, 1,000,000 shares have been designated as Class A Preferred Stock and 1,000,000 shares have been designated as Class B Preferred Stock. The rights of the holders of our common stock are subject to the rights of the holders of our outstanding preferred stock and will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, which would delay, defer or prevent a change in control of ConectiSys. Furthermore, preferred stock may have other rights, including economic rights senior to the common stock, and, as a result, the issuance of preferred stock could adversely affect the market value of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including among others:
o our product development activities;
o our business strategy for establishing a presence in the AMR
market;
o anticipated trends in our financial condition and results of
operations; and
o our ability to distinguish ourselves from our current and
future competitors.
We use words like "believe," "expect," "may," "will," "could," "seek," "estimate," "continue," "anticipate," "intend," "future," "plan" or variations of those terms and other similar expressions, including their use in the negative, to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as to our expectations as of the date of this prospectus. These forward-looking statements are subject to a number of risks and uncertainties, including those identified under "Risk Factors" and elsewhere in this prospectus. Although we believe that the expectations reflected in these forward-looking statements are reasonable, actual conditions in the data storage and digital entertainment industries, and actual conditions and results in our business, could differ materially from those expressed in these forward-looking statements. In addition, none of the events anticipated in the forward-looking statements may actually occur. Any of these different outcomes could cause the price of our common stock to decline substantially. Except as required by law, we undertake no duty to update any forward-looking statement after the date of this prospectus, either to conform any statement to reflect actual results or to reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of common stock offered under this prospectus by the selling security holders. Rather, the selling security holders will receive those proceeds directly.
PRICE RANGE OF COMMON STOCK
The following table shows the high and low closing bid prices of our common stock for the periods presented, as obtained from Pink Sheets LLC, a research service that compiles quote information reported on the National Association of Securities Dealers composite feed or other qualified interdealer quotation medium. The quotations listed below reflect interdealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions. Our common stock trades on the OTC Bulletin Board(R) under the symbol "CNES."
Price Range
-------------
High Low
---- ---
Year Ended September 30, 2002:
First Quarter (October 1 - December 31).... $ 0.19 $ 0.095
Second Quarter (January 1 - March 30)...... 0.105 0.07
Third Quarter (April 1 - June 30).......... 0.10 0.016
Fourth Quarter (July 1 - September 30)..... 0.036 0.007
Year Ended September 30, 2003
First Quarter.............................. $ 0.018 $0.008
Second Quarter............................. 0.012 0.003
Third Quarter.............................. 0.007 0.0025
Fourth Quarter............................. 0.0075 0.0025
Year Ending September 30, 2004
First Quarter.............................. $ 0.0069 $0.0022
|
As of June 22, 2004, we had 986,190,156 shares of common stock outstanding and held of record by approximately 790 shareholders, and the high and low sale prices of a share of our common stock on the OTC Bulletin Board(R) on that date were $.0018 and $.0014, respectively. Within the holders of record of our common stock are depositories such as Cede & Co. that hold shares of stock for brokerage firms which, in turn, hold shares of stock for beneficial owners.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not currently intend to pay cash dividends on our common stock in the foreseeable future. We are restricted from paying dividends on our common stock under state law, and the terms of our secured convertible debentures. We currently anticipate that we will retain any earnings for use in the continued development of our business.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2004. You should read this information together with our consolidated financial statements and the notes relating to those statements appearing elsewhere in this prospectus. The table excludes an aggregate of approximately 1,578,000,000 shares of common stock that were issuable upon conversion or exercise of outstanding convertible notes, debentures, options and warrants as of March 31, 2004.
March 31, 2004
------------------
Cash.........................................................$ 43,269
==================
Long-term debt, less current portion.........................$ 48,500
==================
|
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 50,000,000 shares.
Class A Preferred Stock, $1.00 par value, 1,000,000 shares
authorized, 215,865 shares issued and outstanding............ 215,865
Common stock, no par value. Authorized 1,000,000,000 shares; issued and outstanding, 726,799,714 shares................... 20,208,640
Additional paid in capital:
Class B B Convertible Preferred Stock, $1.00 par value,
1,000,000 shares authorized, no shares issued and outstanding
1,000,000 stock options exercisable.......................... 100,000
Common stock, no par value. 13,807,154 stock options and
warrants exercisable........................................ 1,355,873
Accumulated deficit............................................. (27,147,072)
---------------
Total shareholders' equity (deficit)......................... $ (5,266,694)
---------------
Total capitalization......................................... $ (5,266,694)
---------------
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes and the information included under the caption "Risk Factors" included elsewhere in this prospectus. Except for historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. See "Special Note Regarding Forward- Looking Statements" for further information regarding forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements as a result of a number of factors, many of which are beyond our control, including those factors discussed under "Risk Factors" and other headings in this prospectus, which could, among other things, cause the price of our common stock to fluctuate substantially.
Overview
Since 1995, we have been engaged in the development of a low-cost automatic meter reading, or AMR, solution. We have developed a low- cost AMR solution that includes a proprietary system employing specialized hardware and software that will allow for residential and commercial applications. Our proprietary system is called H-Net(TM), which is a trademark of ConectiSys.
We are currently developing our H-Net(TM) 5.0 wireless meter reading product which is designed to increase the data transmission range of our H- Net(TM) system over the data transmission range of our existing H-Net(TM) 4.0 product. The development of our H-Net(TM) 5.0 product is also directed at curing certain radio frequency interference experienced in our H-Net(TM) 4.0 product. We expect to submit to the FCC, by the end of our current fiscal year in September 2004, our H- Net(TM) 5.0 wireless meter reading product for approval for commercialization and sale. We expect that this approval by the FCC will occur within approximately 60 days following submission to the FCC of our H-Net(TM) 5.0 wireless meter reading product, but no assurances can be made that this approval will be obtained or that it will not be delayed. Once FCC approval is obtained, we expect that our H-Net(TM) 5.0 wireless meter reading product will be ready for full- scale commercial production.
We have not yet sold any H-Net(TM) systems and we do not expect any significant sales of our H-Net(TM) systems until after FCC approval is obtained. Accordingly, we have not earned any significant revenues from the sale of our H-Net(TM) system. We have no history of revenues and have incurred significant losses since the beginning of the development of our H-Net(TM) system. We have a significant accumulated deficit and negative working capital. As a result of our financial condition, our independent auditors have issued a report questioning our ability to continue as a going concern.
Critical Accounting Policies and Estimates
The following discussion and analysis is based upon our financial statements, which have been prepared using accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses, and assets and liabilities, during the periods reported. Estimates are used when accounting for certain items such as depreciation, likelihood of realization of certain assets, employee compensation programs and valuation of intangible assets. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements. We have based our financial statements on the assumption of our operations continuing as a going concern. As a result, we continue to depreciate fixed assets and show certain debts as long-term. We have written- off the value of technology in prior periods because the realization of that value was doubtful. Our compensation of consultants and employees with our capital stock is recorded at estimated market value. The volatile nature of the price of our common stock causes wide disparities in certain valuations.
Results of Operations
Comparison of Results of Operations for the Six Months Ended March 31, 2004 and 2003
We did not generate any revenues for the six months ended March 31, 2004 and March 31, 2003. Cost of sales for the six months ended March 31, 2004 was $22,195 as compared to $35,014 for the six months ended March 31, 2003, a decrease of $12,819 or 36.6%. This decrease in cost of sales primarily was due to a decrease in production of models and prototypes of our H-Net(TM) products that are used for sales and marketing purposes.
General and administrative expenses decreased by $254,766 or 28.7% to $632,350 for the six months ended March 31, 2004 as compared to $887,116 for the six months ended March 31, 2003. This decrease was primarily due to decreased expenses associated with legal and consulting services.
Interest expense increased by $510,051 or 49.2% to $1,037,489 for the six months ended March 31, 2004 as compared to $527,438 for the six months ended March 31, 2003. This increase was primarily due to an expense in the amount of $563,258 resulting from the reduction in October 2003 of the variable conversion price of our outstanding convertible debentures from 50% to 40% of the average of the lowest three intra-day trading prices of a share of our common stock during the twenty trading days immediately preceding conversion.
Net loss for the six months ended March 31, 2004 increased by $392,466 or 27.1% to $1,842,034 as compared to a net loss of $1,449,568 for the six months ended March 31, 2003.
Comparison of Results of Operations for the Fiscal Years Ended September 30, 2003 and 2002
We did not generate any revenues for the fiscal years ended September 30, 2003 and September 30, 2002. Cost of sales for fiscal 2003 was $148,675 as compared to $73,667 for fiscal 2002, an increase of $75,008 or 102%. This increase in cost of sales primarily was due to an increase in production of models and prototypes of our H-Net(TM) products that are used for sales and marketing purposes.
General and administrative expenses decreased by $436,002 or 24% to $1,372,655 for fiscal 2003 as compared to $1,808,657 for fiscal 2002. This decrease in general and administrative expenses primarily was due to a substantial decrease in fees paid to outside consultants.
Interest expense increased by $401,136 or 86% to $865,546 during fiscal 2003 as compared to $464,410 for fiscal 2002. This increase in interest expense primarily was due to an increase in borrowings under our convertible debentures and other promissory notes during fiscal 2003.
Net loss for fiscal 2003 increased by $40,143 or 2% to $2,386,875 as compared to a net loss of $2,346,732 for fiscal 2002. The decrease in general and administrative expenses described above were substantially offset by the significant increase in interest expense also described above.
Liquidity and Capital Resources
During the twelve months ended September 30, 2003 and the three and six months ended March 31, 2004 we financed our operations solely through private placements of securities. We are currently developing our H-Net(TM) 5.0 wireless meter reading product. We expect to submit to the FCC by the end of our current fiscal year in September 2004, our H-Net(TM) 5.0 wireless meter reading product for approval for commercialization and sale. We expect that this approval by the FCC will occur within approximately 60 days following submission to the FCC of our H-Net(TM) 5.0 wireless meter reading product, but no assurances can be made that this approval will be obtained or that it will not be delayed.
We have not yet sold any H-Net(TM) systems and we do not expect any significant sales of our H-Net(TM) systems until after FCC approval is obtained. Accordingly, we have not earned any significant revenues from the sale of our H-Net(TM) systems. We have no history of revenues and have incurred significant losses since the beginning of the development of our H- Net(TM) system. We have a significant accumulated deficit and negative working capital. As a result of our financial condition, our independent auditors have issued a report questioning our ability to continue as a going concern. Our consolidated financial statements as of and for the years ended September 30, 2003 and 2002 have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
As of March 31, 2004, we had negative working capital of approximately $5,270,000 and an accumulated deficit of approximately $27,147,000. As of that date, we had approximately $43,000 in cash and cash equivalents. We had accounts payable and accrued compensation expenses of approximately $1,613,000. We had other liabilities, including amounts due to officers, accrued interest, notes payable and current portion of long term debt of approximately $3,910,000, including those issued prior to the beginning of fiscal year 2004. To the extent convertible debentures or promissory notes that we have issued are converted into shares of common stock, we will not be obligated to repay the converted amounts.
Cash used in our operating activities totaled approximately $450,000 for the six months ended March 31, 2004 as compared to approximately $536,000 for the six months ended March 31, 2003. No cash was provided by our investing activities for the six months ended March 31, 2004 and March 31, 2003.
Cash provided by our financing activities totaled $491,000 for the six months ended March 31, 2004 as compared to $548,000 for the six months ended March 31, 2003. We raised all of the cash provided by financing activities during the six months ended March 31, 2004 from the issuance of common stock, convertible debentures and/or promissory notes.
As of March 29, 2003, we were in default in the repayment of principal of approximately $114,000 plus related interest on our secured convertible debentures due March 29, 2003; as of May 10, 2003, we were in default in the repayment of principal of approximately $150,000 plus related interest on our secured convertible debentures due May 10, 2003; as of June 17, 2003, we were in default in the repayment of principal of approximately $300,000 plus related interest on our secured convertible debentures due June 17, 2003; as of November 27, 2003 we were in default in the repayment of principal of approximately $200,000 plus related interest on our secured convertible debentures due November 27, 2003; as of March 3, 2004, we were in default in the repayment of principal of approximately $123,000 plus related interest on
our secured convertible debentures due March 3, 2004; and as of May 12, 2004, we were in default in the repayment of principal of approximately $150,000 plus related interest on our secured convertible debentures due May 12, 2004. As of June 22, 2004, each of these defaults was continuing and we were in payment default under convertible debentures in the aggregate principal amount of approximately $787,000 plus related interest on those debentures. As of June 22, 2004, we also were in default under our obligations to register for resale shares of our common stock underlying certain of our outstanding convertible debentures. In addition, as of June 22, 2004, we also were in default under our obligations to make quarterly interest payments under all of our outstanding convertible debentures issued prior to March 31, 2004. As of June 22, 2004, as a result of the above defaults, the holders of our secured convertible debentures were entitled to pursue their rights to foreclose upon their security interest in all of our assets. However, as of that date, we were not aware of any action taken by the holders of our secured convertible debentures to pursue such rights, and as of that date we also were not aware of any other legal or similar action taken by those holders to enforce their rights or as a result of our defaults under those secured convertible debentures.
We plan to register for resale with the Securities and Exchange Commission a portion of the shares of common stock underlying the convertible debentures under which we are in default and expect that the convertible debentures ultimately will be converted into shares of our common stock and that we therefore will not be obligated to repay the outstanding principal and accrued and unpaid interest amounts on those debentures.
In April 2001, we issued an 8% Convertible Note to Laurus Master Fund, Ltd., or Laurus, in the principal amount of $300,000. We have been unable to repay the amounts owed under this note and we have failed to satisfy our obligation to register for resale the shares of common stock underlying this note. On February 15, 2002, and as amended on April 2, 2002, we agreed to terms with Laurus regarding our obligations under this note. Under the terms of this agreement, we paid to Laurus $100,000 in cash on February 19, 2002 and $50,000 in cash on April 5, 2002. However, we have not met all the terms of the February 15, 2002 agreement, as well as, the original terms under the April 2001 Convertible Note. We are currently working with Laurus to pay down the remaining balance of the original April 2001 Convertible Note. As of September 30, 2003, approximately $6,850 of principal and accrued and unpaid interest under the original note remained outstanding. As of June 22, 2004, approximately $7,270 of principal and accrued and unpaid interest under this note remained outstanding.
In March 2002, we issued $300,000 of our secured convertible debentures to four accredited investors in the first stage of a three- stage offering. The secured convertible debentures were due March 29, 2003 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $225,000. As of June 22, 2004, an aggregate of $71,257 of principal plus related accrued and unpaid interest relating to the debentures issued in March 2002 remained outstanding.
In May 2002, we issued $150,000 of our secured convertible debentures to four accredited investors in the second stage of a three-stage offering. The secured convertible debentures were due May 10, 2003 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $140,000. As of June 22, 2004, an aggregate of $150,000 of principal plus related accrued and unpaid interest relating to the debentures issued in May 2002 remained outstanding.
In June 2002, we issued $300,000 of our secured convertible debentures to four accredited investors in the third stage of a three-stage offering. The secured convertible debentures were due June 17, 2003 and provide for interest
at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $237,500. As of June 22, 2004, an aggregate of $300,000 of principal plus related accrued and unpaid interest relating to the debentures issued in June 2002 remained outstanding.
In November 2002, we issued $200,000 of our secured convertible debentures to three accredited investors in the first stage of a three-stage offering. The secured convertible debentures were due November 27, 2003 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 1,000,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $145,000. As of June 22, 2004, an aggregate of $0 of principal plus related accrued and unpaid interest relating to the debentures issued in November 2002 remained outstanding.
In March 2003, we issued $150,000 of our secured convertible debentures to three accredited investors in the second stage of a three-stage offering. The secured convertible debentures are due March 3, 2004 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $100,000. As of June 22, 2004, an aggregate of $115,500 of principal plus related accrued and unpaid interest relating to the debentures issued in March 2003 remained outstanding.
In May 2003, we issued $150,000 of our secured convertible debentures to three accredited investors in the second stage of a three-stage offering. The secured convertible debentures are due May 12, 2004 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $100,000. As of June 22, 2004, an aggregate of $150,000 of principal plus related accrued and unpaid interest relating to the debentures issued in May 2003 remained outstanding.
In October 2003, in consideration for certain bridge financing which later was incorporated into the November 2003 convertible debenture offering described below, the variable conversion price of our outstanding 12% convertible debentures issued from March 2002 through June 2002 and from November 2002 through May 2003 was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion.
In November 2003, we issued $100,000 of our secured convertible debentures to three accredited investors in the first stage of a five- stage offering. The secured convertible debentures are due November 25, 2004 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 500,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $75,000. As of June 22, 2004, an aggregate of approximately $100,000 of principal plus related accrued and unpaid interest relating to the debentures issued in November 2003 remained outstanding.
On December 3, 2003, we issued $50,000 of our secured convertible debentures to three accredited investors in the second stage of a five-stage offering. The secured convertible debentures are due December 3, 2004 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $31,000. As of June 22, 2004, an aggregate of $50,000 of principal plus related accrued and unpaid interest relating to the debentures issued on December 3, 2003 remained outstanding.
On December 31, 2003, we issued $50,000 of our secured convertible debentures to three accredited investors in the third stage of a five- stage offering. The secured convertible debentures are due December 31, 2004 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $39,000. As of June 22, 2004, an aggregate of $50,000 of principal plus related accrued and unpaid interest relating to the debentures issued on December 31, 2003 remained outstanding.
In February 2004, we issued $50,000 of our secured convertible debentures to three accredited investors in the fourth stage of a five-stage offering. The secured convertible debentures are due February 18, 2005 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $35,000. As of June 22, 2004, an aggregate of $50,000 of principal plus related accrued and unpaid interest relating to the debentures issued on February 18, 2004 remained outstanding.
In March 2004, we issued $250,000 of our secured convertible debentures to three accredited investors in the fifth stage of a five- stage offering. The secured convertible debentures are due March 4, 2005 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 1,250,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, were approximately $203,000. As of June 22, 2004, an aggregate of $250,000 of principal plus related accrued and unpaid interest relating to the debentures issued on March 4, 2004 remained outstanding.
In April 2004, we issued $250,000 of our secured convertible debentures to four accredited investors in the first stage of a three- stage offering. The secured convertible debentures are due April 19, 2004 and provide for interest at the rate of 12% per annum. The secured convertible debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock. The net proceeds of that offering, after payment of related expenses, including prepayment of interest, were approximately $165,000. As of June 22, 2004 an aggregate of $250,000 of principal plus related accrued and unpaid interest relating to the debentures issued in April 2004 remained outstanding.
As of June 22, 2004, we had a loan outstanding and due on demand in an amount equal to approximately $35,100. This loan accrues interest at an annual rate of 18% and was made by Robert Spigno, our President and Chief Executive Officer and a member of our board of directors. As of that date we also had a loan outstanding and due on demand in an amount equal to approximately $41,200. This loan accrues interest at an annual rate of 18% and was made by Patricia Spigno, our Chief Financial Officer and Secretary.
As of June 22, 2004, we had a promissory note outstanding and due September 1, 2004, payable in the approximate amount of $285,800. This note bears interest at an annual rate of 18%.
Our continued operations are dependent on securing additional sources of liquidity through debt and/or equity financing.
As indicated above, our consolidated financial statements as of and for the years ended September 30, 2003 and 2002 have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in this document and in Note 1 to our consolidated financial statements for the years ended September 30, 2003 and 2002, we have suffered recurring losses from operations and at September 30, 2003 had net capital and working capital deficiencies. These factors, among others, raised substantial doubt about our ability to
continue as a going concern and led our independent certified public accountants to modify their unqualified report to include an explanatory paragraph related to our ability to continue as a going concern. The consolidated financial statements included in this document do not include any adjustments that might result from the outcome of this uncertainty.
We have been, and currently are, working toward identifying and obtaining new sources of financing. Our current convertible debenture investors have provided us with an aggregate of $2,000,000 in financing to date. No assurances can be given that they will provide any additional financing in the future. Our current secured convertible debenture financing documents contain notice and right of first refusal provisions and the grant of a security interest in substantially all of our assets in favor of the convertible debenture investors, all of which provisions will restrict our ability to obtain debt and/or equity financing from any investor other than our current investors.
Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product and service development efforts that historically have contributed significantly to our competitiveness.
We have not yet sold any H-Net(TM) systems and we do not expect any significant sales of our H-Net(TM) systems until after FCC approval of our H- Net(TM) 5.0 wireless meter reading product is obtained. We expect that this approval will be obtained prior to the end of 2004, but no assurances can be made that this approval will be obtained or that it will not be delayed. Once FCC approval is obtained, we expect that our H-Net(TM) 5.0 wireless meter reading product will be ready for full-scale commercial production. We believe that if we are successful in deploying our H-Net(TM) system, we will begin to generate revenues from our business activities.
Effect of Inflation
Inflation did not have any significant effect on the operations of the Company during the twelve months ended September 30, 2003 or the three or six months ended March 31, 2004. Further, inflation is not expected to have any significant effect on future operations of the Company.
Impact of New Accounting Pronouncements
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that we disclose estimated fair values for our financial instruments. The following summary presents a description of the methodologies and assumptions used to determine such amounts. Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties, matters of judgment and, therefore, cannot be determined with precision. These estimates do not reflect any premium or discount that could result from
offering for sale at one time our entire holdings of a particular instrument. Changes in assumptions could significantly affect the estimates.
Since the fair value is estimated as of the effective date of the relevant financial statements, the amounts that will actually be realized or paid at settlement of the instruments could be significantly different. The carrying amount of cash and cash equivalents is assumed to be the fair value because of the liquidity of these instruments. Accounts payable, accrued compensation, due to officer, other current liabilities, and notes payable approximate fair value because of the short maturity of these instruments. Long-term debt is recorded at face value because the principal amount is convertible into common stock.
BUSINESS
Overview
We were incorporated in Colorado on February 2, 1986 under the name Coastal Financial Corp. On December 5, 1994, Coastal Financial Corp. changed its name to BDR Industries, Inc. which changed its name on October 16, 1995, to ConectiSys Corporation.
Since 1995, we have been engaged in the development of a low-cost automatic meter reading, or AMR, solution. We have developed a low- cost AMR solution that includes a proprietary system employing specialized hardware and software that will allow for residential and commercial applications. Our proprietary system is called H-Net(TM), which is a trademark of ConectiSys.
We are currently developing our H-Net(TM) 5.0 wireless meter reading product which is designed to increase the data transmission range of our H- Net(TM) system over the data transmission range of our existing H-Net(TM) 4.0 product. The development of our H-Net(TM) 5.0 product is also directed at curing certain radio frequency interference experienced in our H-Net(TM) 4.0 product. We expect to submit to the FCC, by the end of our current fiscal year in September 2004, our H- Net(TM) 5.0 wireless meter reading product for approval for commercialization and sale. We expect that this approval by the FCC will occur within approximately 60 days following submission to the FCC of our H-Net(TM) 5.0 wireless meter reading product, but no assurances can be made that this approval will be obtained or that it will not be delayed. Once FCC approval is obtained, we expect that our H-Net(TM) 5.0 wireless meter reading product will be ready for full- scale commercial production.
We have not yet sold any H-Net(TM) systems and we do not expect any significant sales of our H-Net(TM) systems until after FCC approval is obtained. Accordingly, we have not earned any significant revenues from the sale of our H-Net(TM) system. We have no history of revenues and have incurred significant losses since the beginning of the development of our H-Net(TM) system. We have a significant accumulated deficit and negative working capital. As a result of our financial condition, our independent auditors have issued a report questioning our ability to continue as a going concern.
Industry Overview
Over the past several years, the AMR industry has undergone tremendous growth. Many factors have contributed to this growth, including:
o a surge in demand for wireless data transmission services that increase the efficiency of meter reading service companies;
o mandates by federal and state regulators requiring that the energy industry utilize automatic meter reading technologies and read meters with increased frequency;
o an apparent nation-wide trend toward deregulation of the energy industry, which may enable a large number of new energy service providers to enter the market who will require easily obtainable, accurate and comprehensive data regarding their customers' energy usage; and
o a growing preference among commercial, industrial and governmental enterprises for automation of remote data acquisition and collection activities through wired and wireless communications technologies.
Although the need for a comprehensive, low-cost AMR solution has become widespread, a viable solution remains unmet for many reasons, including the following:
o the high cost of hardware and installation of traditional wireless data collection processes employing technologies similar to cellular or other wireless data transmission towers;
o the failure of existing AMR systems to satisfy the mandates imposed by government regulations concerning the collection and transmission of data; and
o the failure of existing AMR systems to provide true two-way data communications, a result of which those systems are less accurate and do not provide increases in efficiency allowed by two-way data communications systems.
Responding to the growing demand for communications services and increased competitive pressures, businesses and government organizations that rely heavily on information technology are devoting significant resources to the evaluation and purchase of data transmission products.
According to the Annual Electricity Utility Report for 2000 of the Energy Information Administration, which compiles official energy statistics from the United States government, there are approximately 125 million energy meters in the United States, approximately 12.5 million of which are located in California. Our goal is to achieve sufficient proliferation of our H- Net(TM) system so that it is installed in one percent of the energy meters in the United States or ten percent of the energy meters in the State of California. Initially, we intend our principal efforts to be focused on the deployment of our H-Net(TM) system in the State of California.
Our Strategy
We have strived to develop expertise relating to AMR systems and products. Our goal is to become a leading provider of products and services relating to data acquisition from remote locations and data collection at centralized locations. Our business strategy to achieve this goal includes the following elements:
o Develop strategic relationships. We have explored and intend to continue to explore the possibility of entering into strategic relationships with manufacturers of energy meters, utility companies, energy providers and others in order to promote the adoption of our H- Net(TM) system within the energy and AMR industries.
o Establish outsource manufacturing for full-scale commercial production. We have the means of outsourcing small-scale production of the products employed in our H-Net(TM) system. We intend to continue the cost-reduction phase of our H- Net(TM) system's development and in doing so, we intend to examine various manufacturing alternatives, including strategic relationships with manufacturers of energy meters and third-party manufacturing of the products employed in our H-Net(TM) system for use in energy meters.
o Build market share for our products. We intend to establish ourselves as the source for comprehensive, low-cost AMR solutions and plan to focus on building our own market share for our H-Net(TM) system and further develop our H-Net(TM) system where market demand is identified. We also plan to develop new products and enhancements to meet or exceed the evolving requirements of both centralized and remote applications of our technologies.
o Intensify our marketing activities. As funds become available, we intend to invest in a comprehensive targeted, product- specific marketing program to raise awareness of ConectiSys and our H- Net(TM) system and in order to attract customers.
o Continue to develop wireless products. We intend to continue to invest in research and development of wireless products to meet the needs of the AMR industry. We believe that the expertise that we have developed in creating our existing H- Net(TM) system will enable us to enhance our products, develop new products and services and respond to emerging technologies in a cost-effective and timely manner.
Our H-Net(TM) System
Our H-Net(TM) system is designed to enable users to remotely read electronic energy usage meters without the necessity of someone traveling to and physically reading the meter. The predominant method of reading electronic meters is for an individual to travel to the site of the meter and make a record of the data compiled by that meter, either manually as a notation in a log book or electronically by inputting the data into a handheld or other electronic data retention device. In the case of a log book, the information is then typically recorded manually into a centralized database for energy usage tracking and billing purposes. In the case of a electronic data retention device, the information is typically downloaded to a centralized database for these purposes. Residential meters are customarily read on a monthly basis, allowing only a limited ability to track energy usage fluctuations over periods of less than one month. In addition, physical reading of meters is accompanied by the problem of reader error, causing inefficiencies resulting from necessary corrective procedures. Our H-Net(TM) system is designed to provide continuous meter-reading capabilities, address the inefficiencies that accompany physical meter reading and provide additional benefits to its users.
We believe that the anticipated deployment costs of our H-Net(TM) system are small compared to other AMR products because there are no cellular or other telecommunications or wireless towers to erect or expensive hardware infrastructure to install. We anticipate that all field installations and deployment programs of our H-Net(TM) system will be administered by United Telemetry Company, one of our two wholly-owned subsidiaries. The data collected by H-Net(TM)-equipped meters will be transmitted over the unlicensed ISM 900 MHz radio frequency band. Our H-Net(TM) system allows for high-density data transmissions, which we believe makes it ideal for metropolitan and other crowded areas where a large amount of data would normally be collected.
H-Net(TM)-Equipped Meters
Our H-Net(TM) system is comprised of the following three principal components that operate together to provide what we believe to be a comprehensive, low-cost AMR solution: H-Net(TM)-equipped meters, base stations and a network operating center. The first component of our H- Net(TM) system is an electronic meter put into service at a residence that is equipped with a circuit board that contains a memory module, microprocessor and a two- way radio transmission and receiver device that operates in the ISM 900 MHz radio frequency band. This circuit board may also be retrofitted to some existing meters. We refer to each energy meter equipped with this circuit board and that is connected to our AMR network as an H-Net(TM)-equipped meter
or a "node." With the installation of each H-Net(TM)-equipped meter, the existing installed H-Net(TM)-equipped meters self-configure by transmitting configuration data to other H-Net(TM)-equipped meters and receiving configuration data from other H-Net(TM)-equipped meters.
Base Stations
Our AMR network, when it is operational, will be partially comprised of these H-Net(TM)-equipped meters, each communicating to another with the final communication of data in a given communication cycle being transmitted to the second component of our H-Net(TM) system, a base station. We anticipate that a base station will be housed in a small metal box, no larger than the size of a shoe box, that contains a memory module, microprocessor, radio transmission and receiver device and a modem. The node and base station configuration is similar to a hub and spoke configuration, but rather than direct communication among each of the nodes and the base station, numerous nodes will communicate with one another in a web configuration with some nodes sending final transmission to the base station of the data collected by many other nodes. The base station is designed to receive data transmissions from various nodes in its local network and use its modem to place a local telephone call and transmit the data it has collected to the third component of our H-Net(TM) system, our network operating center. We anticipate that the base stations will deliver energy meter data four times an hour, twenty-four hours a day to our network operating center.
Network Operating Center
We plan to use a computer center located at our main office facility to store the information gathered from the H-Net(TM)-equipped meters. We call this computer center our network operating center. We have designed our network operating center to support up to one million H- Net(TM)-equipped meters. We anticipate that our network operating center will be the central control center for our entire AMR network and will operate in a large geographic area. We plan to use the network operating center to archive all data for future use and as a protective measure against data loss or corruption. After the data archival process, we expect that the network operating center will handle uploading of the data to the Internet where it can be accessed by users directly and also downloaded through an interpreter software program into a utility company's or energy service provider's database. We anticipate that our network operating center will be administered by our wholly-owned subsidiary, eEnergyServices.com, Inc.
The H-Net(TM) Network
The H-Net(TM) network, once deployed, will be comprised of our network operating center and local networks, which in turn are each comprised of a base station and H-Net(TM)-equipped meters. Each H-Net(TM)- equipped meter can communicate with other H-Net(TM)-equipped meters that are up to a distance of approximately one-quarter mile away. We plan to install a base station for every H-Net(TM)-equipped meter area. Our base stations are designed to receive data transmissions from up to 20,000 H-Net(TM)-equipped meters. We have designed our system so that a base station can transmit the accumulated data it has received from the H-Net(TM)-equipped meters in its local network by telephone every fifteen minutes by using its modem to communicate with our network operating center. Once the data from the H-Net(TM)- equipped meters arrives from the base stations at the network operating center, the data can be assembled into various formats for billing customers as well as for management of energy purchasing and energy conservation programs.
Our H-Net(TM) system has certain limitations inherent in each local network, each of which is comprised of H-Net(TM)-equipped meters and a base station. Each local network has the following principal limitations:
o it can consist of a maximum of 20,000 H-Net(TM)-equipped meters;
o each H-Net(TM)-equipped meter must be within approximately one-quarter mile of another H-Net(TM)-equipped meter in the same local network; and
o the maximum radius of a local network is five miles.
In addition to the limitations described above, our H-Net(TM)-equipped meters transmit data using the ISM 900 MHz radio frequency band, which is an unlicensed frequency band. Because this frequency band is regulated, the H- Net(TM) system will require FCC approval for compliance and sales. We expect to submit to the FCC, by the end of our current fiscal year in September 2004, our H-Net(TM) 5.0 wireless meter reading product for approval for commercialization and sale. We expect that this approval by the FCC will occur within approximately 60 days following submission to the FCC of our H-Net(TM) 5.0 wireless meter reading product, but no assurances can be made that this approval will be obtained or that it will not be delayed. Once FCC approval is obtained, we expect that our H-Net(TM) 5.0 wireless meter reading product will be ready for full-scale commercial production.
H-Net(TM) Services
We plan to offer a wide variety of services to utility companies and energy service providers in addition to reading their customers' energy meters. We anticipate that these services will include energy management, data storage and archiving, and the provision of near real-time energy usage data in order to evaluate energy consumption and determine cost savings procedures. We plan to provide complete billing and accounting transaction services to utility companies and energy providers as well as to end-users of energy.
Our H-Net(TM) system employs new technology developed to allow utility companies and energy service providers to have a wireless network of intelligent meters, with each meter communicating with another and passing data back and forth, allowing near real-time energy consumption data to be collected. We believe that energy service providers will have an opportunity to save money by efficiently collecting accurate energy usage profiles and using this near real- time energy usage data to competitively bid for energy in the newly deregulated energy markets.
Our H-Net(TM) system has been designed so that an energy service provider can determine exactly how much electric power a metropolitan area, a neighborhood, or even an individual residence is using. Energy users who have H-Net(TM)-equipped meters will have the ability to check their energy consumption and billing rates in near real-time by obtaining this information over the Internet, which we believe will promote energy conservation.
H-Net(TM) Product Development and Pilot Programs
Our product development efforts are directed toward developing an AMR solution in the form of our H-Net(TM) system. We believe that our existing expertise in data transmission devices provides us with a strong technology base to pursue this objective. Our product development efforts focus on the following principles:
o Development of New Products and Technology. We plan to assess domestic and international market trends, with the focus of developing new products designed to meet emerging market demands. In developing new products, we plan to attempt to combine our existing technology base with new technologies to provide a broader range of automation and data communications and data acquisition solutions to end users.
o Improvement of Existing Technology. We seek to expand the features and functionality of our existing H-Net(TM) system technology through modifications and enhancements to meet the changing needs of the marketplace. We are reviewing the design of our products to determine areas of potential cost savings or enhanced product quality and reliability.
We believe our future success will depend, in part, upon our ability to expand and enhance the features of our H-Net(TM) system and to develop and introduce new products designed to meet changing customer needs on a cost- effective and timely basis. Consequently, failure by us to respond on a timely basis to technological developments, changes in industry standards or customer requirements, or any significant delay in product development or introduction, could have a material adverse effect on our business and results of operations. We cannot assure you that we will respond effectively to technological changes or new product announcements by others or that we will be able to successfully develop and market new products or product enhancements.
On February 15, 2000, we successfully launched our H-Net(TM) pilot test program in Los Angeles, California. Although this initial pilot program was small, it was a working model of our first-generation H- Net(TM) system that demonstrated the capabilities of our H-Net(TM) system as an AMR solution. This initial pilot program demonstrated the technology of our H-Net(TM) system, which remotely acquires near real- time data from an energy meter, processes this data to show energy usage and cost, and can display this information on the Internet.
In September 2000, we successfully launched a second pilot test program for which we developed a portable wireless network capable of demonstrating our H-Net(TM) system anywhere in the country.
Based upon the success of our early-generation H-Net(TM) systems in our first two pilot test programs in demonstrating our H-Net(TM) system as a viable means of remotely reading energy meters and collecting the resulting data, we successfully launched a third pilot test program in September 2001.
We are currently running a small residential pilot program of five meters in Orange County, California with the cooperation of Southern California Edison. Our H-Net(TM) meters were installed by Southern California Edison in July 2003 and the pilot program has been recording real-time meter data seamlessly and error-free for the past eleven months. We are also running a pilot program in Los Angeles County, California with the cooperation of Southern California Edison. Our H-Net(TM) meters for this program were installed by Southern California Edison in May 2004 and the pilot program has been recording real-time meter data seamlessly and error-free since commencement. These working meters can be viewed on our website at http://www.conectisys.com. In addition, we are still actively pursuing and planning other field testing programs with various other utility companies and energy service providers across the country.
We are in the process of evaluating with Lyndis & Gyr, a meter manufacture, a potential business partnership regarding the implementation of the H-Net(TM) system into its meters. We have used Lyndis & Gyr meters in all of our pilot programs and continue to do so in our existing pilot programs.
We are actively pursuing and planning other field testing programs with various utility companies and energy service providers across the country. However, we expect that future field testing programs will be in conjunction with the first stages of sales or licensing of our H- Net(TM) system to utility companies, energy service providers and other parties.
The H-Net(TM) Wireless Network Vision
We have designed and will continue to design our H-Net(TM) system to deliver a comprehensive and robust AMR solution that enables the realization of substantial efficiencies in the remote meter reading and centralized data collection contexts and that provides numerous features and services. In addition to its many other planned features and services, we are designing our H-Net(TM) system to:
o constantly monitor an end-user's energy meter and gather meter data and display it on the Internet in fifteen-minute intervals, twenty-four hours a day;
o allow the end-user to access an information link on the Internet taking them directly to the energy usage data transmitted by their H-Net(TM)-equipped meter;
o provide utility companies, and energy service providers with reliable and accurate electricity usage records;
o enable a utility company or energy service providers to supply to end-users over the Internet information and special incentive offers regarding the use of energy at off-peak times, thereby improving energy conservation during critical peak periods. Other innovative offers may also be implemented such as pre-payment plans and direct purchases of additional energy over the Internet;
o allow an end-user to pay his or her energy bills over the Internet, at a very low administrative cost to the utility company and reduce billing delays;
o allow the monitoring of energy usage levels to ensure that utility companies and energy service providers are aware of any delivery problems, including power outages and energy thefts;
o provide utility companies with the ability to determine which of its customers does not have power without the aid of customer service phone calls, thereby allowing service crews to be dispatched more efficiently. By using our H-Net(TM) system, we believe that a utility company will be in a position to know precisely when each end- user's service is restored and the exact duration of a power outage;
o enhance safety and convenience by allowing the remote delivery and termination of electricity, with all billing transactions completely automated. We plan to design our H-Net(TM) system to allow end-users to request over the Internet the delivery of electricity;
o allow the distribution of electricity more efficiently and inexpensively with energy usage and other vital data informing each decision through the entire energy supply channel. We believe that by using our H-Net(TM) system, energy purchasers can make precise forecasts of purchasing requirements, eliminating much of the over- and under-purchasing of energy that contributes to volatile wholesale energy prices;
o allow end-users who are preparing to terminate or switch energy service providers to use the Internet to inform the current energy service provider of the change. At a precise time, selected by the end-user, our H-Net(TM) system has the ability to read the end- user's H-Net(TM)-equipped meter, pass the information to the current energy service provider's system to produce a final bill, and disconnect the end-user's electricity. In the case of a change in an energy service
provider, the data from an H-Net(TM)-equipped meter can automatically be routed to a new energy service provider; and
o enable lower energy costs as a result of its efficiencies, quicker transactions with less paperwork and reduced potential for error. Lower energy and transaction costs will assist the transition to an open, competitive market for energy.
Government Regulation
Our H-Net(TM) system is designed to comply with a significant number of industry standards and regulations, some of which are evolving as new technologies are deployed. In the United States, our H-Net(TM) system must comply with various regulations defined by the FCC, and Underwriters Laboratories, or other nationally-recognized test laboratories, as well as industry standards.
The regulatory approval process can be time-consuming and can require the expenditure of substantial resources.
We expect to submit to the FCC, by the end of our current fiscal year in September 2004, our H-Net(TM) 5.0 wireless meter reading product for approval for commercialization and sale. We expect that this approval by the FCC will occur within approximately 60 days following submission to the FCC of our H-Net(TM) 5.0 wireless meter reading product. We cannot assure you that the FCC will grant the requisite approvals for our H-Net(TM) system on a timely basis, or at all. The failure of our H-Net(TM) system to comply, or delays in compliance, with the various existing and evolving standards could negatively impact our ability to sell or license our H-Net(TM) system. Government regulations regarding the manufacture, sale and implementation of products and systems similar to our H-Net(TM) system and other data communications devices are subject to future change. We cannot predict what impact, if any, such changes may have upon our business.
We do not anticipate that any government regulations will hamper our efforts to deploy our H-Net(TM) system. Rather, the restructuring of the energy market in the United States has required the reading of energy meters much more frequently than the current practice of once a month, thus making the physical meter reading techniques currently in use inadequate. Our H- Net(TM) system is designed to meet various government regulations mandating frequent meter readings and we are attempting to position ourselves so that we will be a beneficiary of these mandates. We have conducted pilot programs of our H-Net(TM) system with the University of California, Irvine through its Advanced Power and Energy Program. We believe that if we are able to preserve our relationship with the University of California, Irvine, as a result of its Advanced Power and Energy Program which we believe is a high-profile program, we may have a significant opportunity to secure government recognition of our H-Net(TM) system, and we hope that we can position our H-Net(TM) system to be referred to in government regulations, or informally, as the standard in the AMR industry.
Operations
During the initial design and engineering phases for our H-Net(TM) system, we maintained low overhead costs and we plan to continue to do so until manufacturing and sales of our H-Net(TM) system are underway. We plan to hire additional personnel as needed during the coming year, including managerial, clerical, administration, sales, marketing, and customer service personnel.
We plan to lease suitable office facilities for our operations within the Southern California area. We plan to initially utilize existing manufacturers to produce our products and will therefore likely not have a short-term need to lease or build manufacturing facilities. We intend to operate not principally as a manufacturer of products, but as a provider of
comprehensive, cost-effective AMR solutions, and we plan to outsource manufacturing of the hardware employed in our H- Net(TM) system in order to achieve the highest cost-efficiencies.
Anticipated Revenues and Marketing
Our H-Net(TM) system is designed to be a comprehensive, cost-effective AMR solution and an alternative to other AMR technologies and physical reading of meters. Our H-Net(TM) system is capable of providing meter data every fifteen minutes, twenty-four hours a day and nearly 3,000 times per month. Physical readings of a meter cost approximately $1.00 per reading. Our H- Net(TM) system is designed to meet the relatively low cost of physical meter reading while providing nearly 3,000 times more readings per month. We believe that our base cost to operate a fully-deployed H-Net(TM) system is approximately $.20 per meter per month, or approximately $.0000667 per reading.
We plan to license our H-Net(TM) system technology to meter manufacturers so that they may incorporate it into their meters. We plan on deriving a small royalty per meter sold for every H-Net(TM)- equipped meter. We anticipate that the predominant source of any future revenues will be through recurring monthly service charges for reading, archiving and supplying data from H-Net(TM)-equipped meters and from providing other services described in more detail above. However, despite our belief of the cost- effectiveness and significant advantages of our H-Net(TM) system over physical meter reading practices and other AMR technologies, there can be no assurances that the market we intent to target will adopt or accept our H-Net(TM) system or that we will earn any significant revenues.
We have developed a marketing plan that was formulated to help us achieve the following objectives:
o acquisition and retention of strategic beta test placement locations for H-Net(TM)-equipped meters;
o formation of synergistic partnerships with energy service providers, utilities companies and internet service providers, including joint ventures, license arrangements and strategic alliances;
o participation in H-Net(TM)-equipped meter manufacturing partnerships and acquisition of Internet commerce sponsorship;
o promotion of unique features and specialized services of our H-Net(TM) system; and
o creation of industry awareness by implementing a public relations and marketing campaign along with establishing a relationship with the State of California and other states in an attempt to facilitate a long-term solution for the nation's energy needs.
The current principal target of our marketing and sales efforts is the utility and energy service provider industries. These industries consist of a wide variety of organizations that use data communications in an automated process application, such as utilities and energy management companies. Responding to deregulation and other major changes taking place within the industry, electric power utility companies have become leading advocates in promoting the implementation of automation and technological advancement as a means of achieving cost savings as they enter the competitive arena. Utility companies are automating numerous distinct processes within their operating systems. Our H-Net(TM) system is designed for and sold for use in:
o the AMR context, which is intended primarily to eliminate the expense and inefficiencies of human meter readers and also is intended to provide data archival and delivery services as well as additional value-added services for the end-user; and
o distribution automation, which is the remote monitoring and control of power distribution networks. These control systems are often referred to as SCADA systems. SCADA is an acronym for Supervisory Control and Data Acquisition.
If sufficient funds are not available for full deployment of our H- Net(TM) system, it is our intention to license our H-Net(TM) technology to various sectors of the energy industry, including meter manufacturers for integration into their meters. We also may license our software and software systems for archival of the data transmitted by H-Net(TM)-equipped meters to various utility companies and energy service providers. Under this scenario, we would also supply support and technical assistance to these various sectors of the energy industry while collecting revenues solely in the form of fees for licensing and support and technical assistance. We expect any revenue from this alternate strategy to be far less than our active participation in the collecting and archiving of meter data and the ancillary services described in greater detail above.
Competition
Many companies have developed data transmission products designed to meet the growing demand for AMR solutions. We anticipate that our H- Net(TM) system will compete on the basis of features, price, quality, reliability, name recognition, product breadth and technical support and service. We believe that we generally will be competitive in each of these areas. However, many of our existing and potential competitors have significantly more financial, engineering, product development, manufacturing and marketing resources than we have. We cannot assure you that our competitors will not introduce comparable or superior products incorporating more advanced technology at lower prices, or that other changes in market conditions or technology will not adversely affect our ability to compete successfully in the future. We perceive the following companies as being the principal competition to our AMR solution in the form of our H-Net(TM) system:
Itron Inc. Itron provides and has installed AMR systems
worldwide. Itron provides "drive-by" automated meter
reading equipment.
CellNet
Data Systems CellNet provides fixed-network wireless AMR
systems and has installed systems in Kansas City,
Minneapolis, San Francisco, Indianapolis, and through
Puget Sound Power. CellNet has technology alliances
with the major energy meter manufacturers and was
recently acquired by Schlumberger.
Schlumberger
Ltd. Schlumberger's Resource Management Systems Division
has deployed meter reading systems that include hand-
held meter reading devices. Schlumberger recently
acquired CellNet and Metricom.
Hunt
Technologies,
Inc. Hunt provides power line carrier AMR systems
with capabilities including substation switching. The
market niche for Hunt's AMR systems is rural electric
cooperatives.
Metricom
Corporation Metricom provides wireless communication
networks with fixed-wireless networks installed in the
San Francisco Bay Area, Seattle, Washington, D.C., and
|
at universities. Metricom and Whisper Communications,
Inc. have formed an alliance to provide AMR systems.
Their AMR systems are installed at KN Energy and
Pacific Gas & Electric Company. Metricom recently was
acquired by Schlumberger.
|
We believe that we will be the only company able to collect data transmitted from H-Net(TM)-equipped meters, thereby ensuring our competitive advantage once we are able to achieve sufficient proliferation of our H- Net(TM)-equipped meters.
Customers
We do not currently have revenue-generating customers. We have not yet sold any H-Net(TM) systems and we do not expect any significant sales of our H-Net(TM) systems until after FCC approval of our H-Net(TM) 5.0 wireless meter reading product is obtained. Accordingly, we have not earned any significant revenues from the sale of our H-Net(TM) system. We anticipate that once we commercially produce and install our H- Net(TM) system, our customers will include energy meter manufacturers, energy service providers, utility companies and end-users of energy.
Intellectual Property
We currently rely on a combination of contractual rights, copyrights, trademarks and trade secrets to protect our proprietary rights. However, although our H-Net(TM) system and its constituent components could benefit from patent protection, we have chosen to retain the proprietary rights associated with our H-Net(TM) system predominantly as trade secrets. Although we currently rely to a great extent on trade secret protection for much of our technology, we cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop comparable or superior technologies or obtain unauthorized access to our proprietary technology.
We own, license or have otherwise obtained the right to use certain technologies incorporated in our H-Net(TM) system. We may receive infringement claims from third parties relating to our products and technologies. In those cases, we intend to investigate the validity of the claims and, if we believe the claims have merit, to respond through licensing or other appropriate actions. To the extent claims relate to technology included in components purchased from third-party vendors for incorporation into our products, we would forward those claims to the appropriate vendor. If we or our component manufacturers are unable to license or otherwise provide any necessary technology on a cost-effective basis, we could be prohibited from marketing products containing that technology, incur substantial costs in redesigning products incorporating that technology, or incur substantial costs defending any legal action taken against us.
Employees
We have four full time employees and a six person advisory board. Our employees are involved in executive, corporate administration, operations, and sales and marketing functions. We also use the services of outside consultants and experts on many of our projects to help reduce costs. We consider our relations with our employees to be good. None of our employees is represented by a labor union.
Property
Our principal center of operations is located at 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355. This 1,000 square foot space is leased for approximately $1,260 per month. We believe that our facilities are adequate for our needs for the near future.
Legal Proceedings
We are not a party to any material pending legal proceedings. We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse effect on our financial position, results of operations or cash flows.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of ConectiSys and their ages, positions, business experience and education as of June 22, 2004 are as follows:
Name Age Position
---- --- --------
Robert A. Spigno (1)(2) 50 Chairman of the Board, Chief Executive
Officer and Director
Lawrence Muirhead (1)(2) 44 Chief Technology Officer and
Director
Patricia A. Spigno 46 Chief Financial Officer, Treasurer and
Secretary
Melissa McGough (1) 27 Corporate Administrator and Director
_______________
|
(1) Member of Stock Option Committee.
(2) Member of Nominating Committee.
All directors hold office until the next annual meeting of shareholders and until their respective successors are elected or until their earlier death, resignation or removal. Each officer of ConectiSys serves at the discretion of the board of directors. Robert A. Spigno and Patricia A. Spigno were formerly husband and wife. There are no other family relationships between or among any other directors, director nominees or executive officers of ConectiSys.
Business Experience
Directors
Robert A. Spigno has served as our Chief Executive Officer, Chairman of the Board and as a member of our board of directors since August 1995. Prior to that time, Mr. Spigno was President, for more than a decade, of S.W. Carver Corp., a company founded by he and his former wife, Patricia A. Spigno, that was a commercial builder of residential homes. Mr. Spigno has over 25 years of experience in executive management and majority ownership of several privately held companies.
Lawrence Muirhead has served as our Chief Technical Officer and as a member of our board of directors since October 1997. Prior to that time, Mr. Muirhead worked for TRW. Mr. Muirhead has over 18 years of engineering and research and development experience in the aerospace industry, including over 13 years of experience with TRW, where helped lead new product development and deployment. Mr. Muirhead holds a B.S. degree in physics and a B.A. degree in mathematics from the University of California, Santa Barbara, and holds an M.S. degree in physics from the California Institute of Technology.
Melissa McGough has served as a member of our board of directors since November 1999. Ms. McGough has also been an employee since December 1998 and whose current responsibilities include public relations and management of our daily office activities. Prior to that time, Ms McGough was a student.
Executive Officer
Patricia A. Spigno has served as our Chief Financial Officer and Secretary since August 1995 and as a member of our board of directors from August 1995 until October 1997. Prior to that time, Ms. Spigno was Chief Financial Officer and the head of administration of S.W. Carver Corp., a company founded by her and her former husband, Robert A. Spigno. Ms. Spigno has over 22 years of experience in accounting and asset management.
Advisors to Our Board of Directors
Rodney W. Lighthipe has served as an advisor to our board of directors since April 2001. Mr. Lighthipe also served as our President from September 2000 until his resignation in September 2001. Prior to that time, Mr. Lighthipe served as Director of Research for San Diego Gas & Electric from 1992 until 1996 and was responsible for the development and deployment of new technologies. Mr. Lighthipe was Research Manager for Southern California Edison from 1980 to 1987 and organized an international consortium of companies for the design, construction and operation of the world's largest coal gasification plant. Mr. Lighthipe was also Power Contracts Manager for Southern California Edison from 1974 until 1980 during which he opened new transmission paths throughout the Western United States and Canada for the purchase and sale of bulk electric power. Some of Mr. Lighthipe's Major projects included the installation of photovoltaics in remote areas and the launch of a "smart card" project employing residential telephone systems. Mr. Lighthipe has also acted as a consulting engineer in the energy and telecommunications industries and served two tours of duty in Vietnam as a Lieutenant in the United States Navy.
Dr. Hugo Pomrehn has served as an advisor to our board of directors since April 2001. On June 28, 1992, Dr. Pomrehn was nominated by former President George Bush to serve as the Under Secretary of Energy, and was confirmed by the United States Senate for that position on September 29, 1992. As Under Secretary to Admiral James Watkins, Dr. Pomrehn was the third-ranking official at the U.S. Department of Energy, which employed approximately 170,000 personnel and had an annual budget of $20 billion. Dr. Pomrehn's professional career covers a broad spectrum of involvement with energy and environmental technologies. He has been engaged in engineering and management consulting in the energy and nuclear fields for more than 30 years and was a Vice President of the Bechtel Corporation.
Aaron R. Sokol has served as an advisor to our board of directors since April 2001. Mr. Sokol is a Vice President at Deutsche Bank Alex Brown where his responsibilities include providing innovative and customized solutions to clients in order to preserve and enhance their wealth. He is also responsible for new business development as well as global financial advisory services for existing and prospective clients. Mr. Sokol joined Deutsche Bank Alex Brown from Los Angeles- based Scudder Kemper Investments, Inc. Mr. Sokol has also served as an Assistant Vice President at First Chicago Capital Markets, Inc., and prior to that, worked in the corporate finance department at Nations Bank Capital Markets, Inc. Mr. Sokol holds a J.D. degree from Boston University School of Law and a M.B.A. in Finance and New Venture Management from the University of Southern California.
Larry W. Siler has served as an advisor to our board of directors since April 2001. Mr. Siler is currently Manager of Fuel Transportation for Edison Mission Energy in Chicago, Illinois. Mr. Siler was the Coal Supply Superintendent for Commonwealth Edison Company in Chicago from 1988 until 1999. From 1986 until 1988 Mr. Siler was a management and engineering consultant in Austin, Texas. He also held positions as the Fuels Manager, Engineering Supervisor, Staff Engineer and Fuels Engineer for the Lower Colorado River Authority from 1973 until 1986.
Tod O'Connor has served as an advisor to our board of directors since April 2001. Mr. O'Connor was Director of Government Relations for two Edison International Inc. subsidiaries, Southern California Edison RD&D Department and Edison Technology Solutions from 1993 until 1999. Mr. O'Connor also was employed by Pacific Enterprises and its subsidiary, Southern California Gas Co. from 1989 until 1993, and MARC Associates' Status Group in Washington, D.C. from 1988 until 1989. Mr. O'Connor was a Legislative Aide in the United States House of Representatives where he advised House Speaker Thomas P. (Tip) O'Neill on pending legislation and proposed federal regulations, as well as the Democratic Steering and Policy Committee from 1980 until 1981. Mr. O'Connor is currently President of O'Connor Consulting Services, Inc. in Woodland Hills, California. Mr. O'Connor holds a L.L.M. degree in labor law from Georgetown University Law Center, Washington, D.C., and a J.D. degree from Suffolk University Law School.
Dr. Fredric Brauner was appointed to serve as an advisor to our board of directors in October 2003. Dr. Brauner is a doctor of medicine, specializing in dermatology. He graduated from the University of Vienna and became a doctor in 1977. Dr. Brauner, took over his father's practice in 1983 at the University Clinic of Dermatology in Vienna. Dr. Brauner is a key investor in ConectiSys and is leading our efforts to expand our H-Net(TM) system to fit the European marketplace.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our common stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. These officers, directors and stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all such reports that they file.
Based solely upon a review of copies of these reports furnished to us
during 2003 and thereafter, or written representations received by us from
reporting persons that no other reports were required, we believe that all
Section 16(a) filing requirements applicable to our reporting persons during
2003 were complied with, except as described below.
The following individuals did not timely file the following numbers of Forms 4 to report the following numbers of transactions: Mr. Robert Spigno - 2 reports, 2 transactions; Mr. Lawrence Muirhead - 1 report, 1 transaction; and Melissa McGough - 1 report, 1 transaction.
Codes of Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees and an additional Code of Business Ethics that applies to our Chief Executive Officer and our Senior Financial Officers.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K relating to amendments to or waivers from provision of these codes that relate to one or more of the items set forth in Item 406(b) of Regulation S-K, by describing on our Internet website, within five business days following the date of a waiver or a substantive amendment, the date of the waiver or amendment, the nature of the amendment or waiver, and the name of the person to whom the waiver was granted.
Information on our Internet website is not, and shall not be deemed to be, a part of this prospectus or incorporated into any other filings we make with the Securities and Exchange Commission.
Compensation of Executive Officers
The Summary Compensation Table below provides information concerning the annual and long-term compensation for services in all capacities as an employee of ConectiSys of our Chief Executive Officer, our Chief Technology Officer and our Chief Financial Officer, or the named executives, during the years ended September 30, 2003, 2002 and 2001. There were no other executive officers whose annual salary and bonus compensation exceeded $100,000 during the year ended September 30, 2003.
Summary Compensation Table
Long-Term
Compensation
------------
Awards
------------
Annual Compensation Securities
Name and Underlying All Other
Principal Position Year Salary($) Bonus($)(1) Options(#) Compensation ($)
------------------- ------- --------- ----------- ------------ ----------------
Robert A. Spigno, 2003 $160,000 $80,000 -- --
Chief Executive Officer 2002 $160,000 $80,000 -- --
2001 $160,000 $80,000 6,453,654 --
Lawrence Muirhead, 2003 $150,000 -- -- --
Chief Technology Officer 2002 $150,000 -- -- --
2001 $150,000 -- 2,000,000 --
Patricia A. Spigno, 2003 $ 80,000 $40,000 -- --
Chief Financial Officer 2002 $ 80,000 $40,000 -- --
and Secretary 2001 $ 80,000 $40,000 500,000 --
_______________
|
(1) Amounts represent bonus earned, but deferred and recorded on the books and records of ConectiSys as accrued compensation. Amounts are payable in common stock of ConectiSys based on a conversion price equivalent to 50% of the average of the closing bid and asked prices of a share of ConectiSys common stock for the 30 days prior to the end of the year in which such bonus was earned.
Stock Option Grants in 2003
In fiscal 2003, no options or stock appreciation rights were granted to the named executives.
Option Exercises and Fiscal Year-End Values
The following table sets forth the number of shares acquired and value realized upon exercise of options during the fiscal year ended September 30, 2003 and the number of exercisable and unexercisable in- the-money stock options and their values at September 30, 2003 for the named executives. An option is "in-the-money" if the fair market value for the underlying securities exceeds the exercise price of the option.
Option Table
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Value ($)of Unexercised
Shares Unexercised Options In-the-Money Options at
Acquired on Value September 30, 2003 September 30, 2003 (1)
Name Exercise Realized ($) Exercisable(#) Unexercisable(#) Exercisable Unexercisable
--------------------- ------------ ------------ -------------- ---------------- -------------- ----------------
Robert A. Spigno --- --- 6,453,654 --- --- ---
Lawrence Muirhead --- --- --- 2,000,000 --- ---
Patricia Spigno --- --- 500,000 --- --- ---
_______________
(1) The closing sale price of our common stock on the OTC Bulletin Board(R) as of September 30, 2003 was $.0044.
|
Long-Term Incentive Plan Awards
In fiscal 2003, no awards were given to named executives under long- term incentive plans.
Compensation of Directors
Our directors do not receive any compensation in their capacity as members of the board of directors, but may be reimbursed for reasonable expenses incurred in connection with attendance of meetings of the board of directors.
Repricing of Options and SARs
Except as specified below, no adjustments to or repricing of stock options or stock appreciation rights previously awarded to the named executives occurred in fiscal 2003.
On December 30, 2003, we repriced Robert Spigno's fully-vested option to purchase up to 500,000 shares of Class B Preferred Stock from $.50 per share to $.05 per share.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under our Amended Non-Qualified Stock Option and Stock Bonus Plan as well as stock options, warrants and rights issued outside of any formal plan as of September 30, 2003.
Number of Securities Weighted Average Number of to be Issued Upon Exercise Exercise Price of Securities
of Outstanding Options, Outstanding Remaining
Warrants Options, Warrants Available for
Plan Category and Rights(1) and Rights Future Issuance
------------------- -------------------- ------------------ -----------------
Equity compensation
plans approved by
security holders N/A N/A N/A
Equity compensation
plans not approved
by security holders 8,807,154(2) $0.28 N/A
Total 8,807,154 $0.28 N/A
_______________
|
(1) Number of shares is subject to adjustment for changes in capitalization for stock splits, stock dividends and similar events.
(2) Represents 5,000,000 shares of common stock underlying stock options, warrants and rights issued under our Amended Non- Qualified Stock Option and Stock Bonus Plan and 3,807,154 shares of common stock underlying stock options, warrants and rights issued outside of any formal plan.
Our Amended Non-Qualified Stock Option and Stock Bonus Plan permits grants of stock bonuses and non-qualified stock options. Vesting periods under our Amended Non-Qualified Stock Option and Stock Bonus Plan vary from person to person, and options under the plan are exercisable subject to certain standard conditions.
Stock Option Plans
General
Our Amended Non-Qualified Stock Option and Stock Bonus Plan, including the Non-Qualified Stock Option and Stock Bonus Plans it amends, or the Plan, was adopted and approved by our board of directors effective as of September 11, 2001. The Plan, is designed to enable us to grant compensation and offer an incentive-based compensation system to consultants who do business with ConectiSys. The Plan provides for the grant of nonqualified stock options. As of June 22, 2004, options to purchase a total of 5,000,000 shares of common stock were outstanding under the Plan, and no options to purchase shares of common stock were available for issuance under the Plan.
We filed a registration statement on Form S-8 on September 21, 2001 covering the shares of common stock subject to the Plan.
Shares Subject to the Plan
A total of 5,000,000 shares of common stock are authorized for issuance under the Plan. Any shares of common stock that are subject to an award but are not used because the terms and conditions of the award are not met, or any shares that are used by participants to pay all or part of the purchase price of any option, may again be used for awards under the Plan.
Administration
The Plan is administered by a committee of not less than three persons appointed by the board of directors, each of whom must be a director of ConectiSys. The board of directors also may act as the committee at any time or from time to time.
The committee is empowered to select those eligible persons to whom stock and options shall be granted under the Plan, to determine the time or times at which each option shall be granted and the number of shares to be subject to each option, and to fix the time and manner in which each such option may be exercised, including the exercise price and option period, and other terms and conditions of such options, all subject to the terms and conditions of the Plan. The committee has sole discretion to interpret and administer the Plan, and its decisions regarding the Plan are final.
The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time and from time to time by the board of directors. The board of directors may not materially impair any outstanding options without the express consent of the optionee. No option may be granted under the Plan after January 31, 2006.
Option Terms
Options granted under the Plan must have an exercise price of not less than 85% of the fair market value of the common stock on the date the option is granted.
Options may be exercised during a period of time fixed by the committee except that no option may be exercised more than five years after the date of grant. In the discretion of the committee, payment of the purchase price for the shares of stock acquired through the exercise of an option may be made in cash, shares of our common stock or a combination of cash and shares of our common stock.
Federal Income Tax Consequences
Holders of non-qualified options do not realize income as a result of a grant of the option, but normally realize compensation income upon exercise of a non-qualified option to the extent that the fair market value of the shares of common stock on the date of exercise of the non-qualified option exceeds the exercise price paid. ConectiSys will be required to withhold taxes on ordinary income realized by an optionee upon the exercise of an option under the Plan.
In the case of an optionee subject to the "short-swing" profit
recapture provisions of Section 16(b) of the Exchange Act, the optionee
realizes income only upon the lapse of the six-month period under Section
16(b), unless the optionee elects to recognize income immediately upon
exercise of his or her option.
Indemnification of Directors and Officers
The Colorado Business Corporation Act, or CBCA, requires that each director discharge his duties to ConectiSys in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner that he reasonably believes to be in the best interests of ConectiSys. Generally, a director will not be liable to ConectiSys or its shareholders, for any action he takes or omits to take as a director if, in connection with such action or omission, he performed the duties of his position in compliance with the standards described above.
Our Articles of Incorporation provide that ConectiSys may indemnify any director or officer of ConectiSys to the full extent permitted by Colorado law. Under the CBCA, except for the situation described below, a corporation may indemnify a person made a party to a proceeding because the person is or was a director against liability incurred in the proceeding if:
o the person conducted himself in good faith;
o the person reasonably believed, in the case of conduct in an official capacity with ConectiSys, that his conduct was in the best interests of ConectiSys and, in all other cases, that his conduct was at least not opposed to the best interests of ConectiSys; and
o in the case of any criminal proceeding, the person had no reasonable cause to believe his conduct was unlawful.
Under the CBCA, ConectiSys may not indemnify a director as described above:
o in connection with a proceeding by or in the right of ConectiSys, in which the director was adjudged liable to ConectiSys; or
o in connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director was adjudged liable on the basis that he derived an improper personal benefit.
Under the CBCA, ConectiSys is required to indemnify any director who is wholly successful on the merits or otherwise, in the defense of any proceeding to which the director was a party because the person is or was a director, against reasonable expenses incurred by him in connection with the proceeding.
Section 2115 of the California General Corporation Law, or the California Corporations Code, provides that corporations such as ConectiSys that are incorporated in jurisdictions other than California and that meet various tests are subject to several provisions of the California Corporations Code, to the exclusion of the law of the jurisdiction in which the corporation is incorporated. We believe that as of September 30, 2003, we met the tests contained in Section 2115. Consequently, we are subject to, among other provisions of the California Corporations Code, Section 317 which governs indemnification of directors, officers and others. Section 317 generally eliminates the personal liability of a director for monetary damages in an action brought by or in the right of ConectiSys for breach of a director's duties to ConectiSys or our shareholders except for liability:
o for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law;
o for acts or omissions that a director believes to be contrary to the best interests of ConectiSys or our shareholders or that involve the absence of good faith on the part of the director;
o for any transaction for which a director derived an improper personal benefit;
o for acts or omissions that show a reckless disregard for the director's duty to ConectiSys or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to ConectiSys or our shareholders;
o for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to ConectiSys or our shareholders; and
o for engaging in transactions described in the California Corporations Code or California case law which result in liability, or approving the same kinds of transactions.
To the extent indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of ConectiSys under the above provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Board Committees
Our board of directors has a Stock Option Committee and a Nominating Committee. Our board of directors does not have an Audit Committee. In the absence of an Audit Committee, the entire board of directors intends to satisfy the duties of that committee.
Stock Option Committee. Our Stock Option Committee makes recommendations to our board of directors concerning incentive compensation for employees and consultants of ConectiSys and selects the persons entitled to receive options under our stock option plans and establishes the number of shares, exercise price, vesting period and other terms of the options granted under those plans. The Stock Option Committee currently consists of Robert A. Spigno, Lawrence Muirhead and Melissa McGough. During 2003, the Stock Option Committee held four meetings and did not take action by written consent on any occasion. No executive officer of ConectiSys has served as a director or member of the compensation committee of any other entity whose executive officers served as a director of ConectiSys.
Audit Committee. We do not currently have an Audit Committee. Because we do not have an Audit Committee, we are not in compliance with the Sarbanes- Oxley Act of 2002 and the rules and regulations of the Securities and Exchange Commission mandating that public companies have an Audit Committee consisting solely of independent members of the board of directors. In addition, having no Audit Committee, we do not have an Audit Committee financial expert as required by the rules and regulations of the Securities and Exchange Commission. As a small, development-stage company, it has been exceedingly difficult for us to attract and retain an independent member of our board of directors, who would qualify as an Audit Committee financial expert, to serve as the sole member of the Audit Committee of our board of directors. We plan to form an Audit Committee consisting solely of one or more independent members of our board of directors, at least one of whom will qualify as an Audit Committee financial expert under the rules and regulations of the Securities and Exchange Commission prior to the time that the registration statement of which this prospectus forms a part is declared effective by the Securities and Exchange Commission, and in any event we plan to form an Audit Committee as provided above no later than the end of our current fiscal year in September 2004.
Nominating Committee. Our Nominating Committee currently consists of two directors, Mr. Robert A. Spigno, who serves as Chairman, and Mr. Lawrence Muirhead, neither of whom is "independent" under the rules and regulations of the Securities and Exchange Commission or under the current Nasdaq listing standards. We intend to reconstitute our Nominating Committee with one or more independent members of our board of directors prior to the end of our current fiscal year in September 2004. Our Nominating Committee assists our board of directors in the selection of nominees for election to the board. The committee determines the required selection criteria and qualifications of director nominees based upon the needs of ConectiSys at the time nominees are considered and recommends candidates to be nominated for election to the board.
Compensation Committee Interlocks and Insider Participation
No member of our board of directors has a relationship that would constitute an interlocking relationship with executive officers and directors of another entity.
Employment Contracts and Termination of Employment and Change-in- Control Arrangements
In October 1995, our board of directors set the compensation for Robert A. Spigno, our Chairman of the Board and Chief Executive Officer. Mr. Spigno has executed an employment agreement with ConectiSys effective October 2, 1995, as amended by employment agreement amendments effective July 24, 1996, August 11, 1997, September 1, 1999 and March 27, 2000 that provide for annual salary of $160,000 and a bonus of 50% of Mr. Spigno's annual salary, with the bonus payable in common stock of ConectiSys.
In August 1998, our board of directors set the compensation for Lawrence Muirhead, our Chief Technology Officer. Mr. Muirhead has executed an employment agreement with ConectiSys effective August 1, 1998, that provides for annual salary compensation of $150,000. On November 22, 1999, Mr. Muirhead was granted an option initially expiring December 31, 2002 to purchase up to 2,000,000 shares of common stock at an exercise price of $.50 per share, which was the closing price of a share of our common stock on that date. This option vests upon the achievement of certain specified performance criteria. On January 6, 2003, we extended the expiration date of this option to December 31, 2004.
In October 1995, our board of directors set the compensation for Patricia A. Spigno, our Chief Financial Officer and Secretary. Ms. Spigno has executed an employment agreement with ConectiSys effective October 2, 1996, as amended by employment agreement amendments effective July 24, 1996, September 1, 1999 and March 27, 2000 that provide for annual salary of $80,000 and a bonus of 50% of Ms. Spigno's annual salary, with the bonus payable in common stock of ConectiSys.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, our board of directors set the compensation for Robert A. Spigno, our Chairman of the Board and Chief Executive Officer. Mr. Spigno has executed an employment agreement with ConectiSys effective October 2, 1995, as amended by employment agreement amendments effective July 24, 1996, August 11, 1997, September 1, 1999 and March 27, 2000 that provide for annual salary of $160,000 and a bonus of 50% of Mr. Spigno's annual salary, with the bonus payable in common stock of ConectiSys.
In August 1998, our board of directors set the compensation for Lawrence Muirhead, our Chief Technology Officer. Mr. Muirhead has executed an employment agreement with ConectiSys effective August 1, 1998, that provides
for annual salary compensation of $150,000. On November 22, 1999, Mr. Muirhead was granted an option initially expiring December 31, 2002 to purchase up to 2,000,000 shares of common stock at an exercise price of $.50 per share, which was the closing price of a share of our common stock on that date. This option vests upon the achievement of certain specified performance criteria. On January 6, 2003, we extended the expiration date of this option to December 31, 2004.
In October 1995, our board of directors set the compensation for Patricia A. Spigno, our Chief Financial Officer and Secretary. Ms. Spigno has executed an employment agreement with ConectiSys effective October 2, 1996, as amended by employment agreement amendments effective July 24, 1996, September 1, 1999 and March 27, 2000 that provide for annual salary of $80,000 and a bonus of 50% of Ms. Spigno's annual salary, with the bonus payable in common stock of ConectiSys.
On September 1, 2002, we executed a promissory note due September 1, 2003 in favor of Robert Spigno in the principal amount of $87,100 representing amounts borrowed from Mr. Spigno prior to that date. On September 1, 2003 we executed a replacement promissory note in favor of Mr. Spigno in the amount of $36,000. As of September 30, 2003, approximately $36,920 of principal and accrued and unpaid interest under this note remained outstanding. As of June 22, 2004, approximately $35,100 of principal and accrued and unpaid interest under this note remained outstanding. The loan balance is currently due on demand and accrues interest at an annual rate of 18%.
On October 1, 2002, we owed Patricia A. Spigno approximately $8,140 resulting from cash advances, other borrowings and related accrued interest. On September 1, 2003 we executed a replacement promissory note in favor of Ms. Spigno in the amount of $50,000. We borrowed additional funds from Ms. Spigno resulting in approximately $52,170 owed to Ms. Spigno as of September 30, 2003. As of June 22, 2004, approximately $41,200 was owed to Ms. Spigno. The loan balance is currently due on demand and accrues interest at an annual rate of 18%.
In October 2002, Laurus Master Fund transferred into its name 279,539 shares of our common stock pledged by Robert Spigno as security for a loan made by Laurus to us in April 2001 in the original principal amount of $300,000.
In October 2002, Laurus Master Fund transferred into its name 1,458,059 shares of our common stock pledged by Patricia Spigno as security for a loan made by Laurus to us in April 2001 in the original principal amount of $300,000.
In November 2002, Laurus Master Fund transferred into its name 1,556,346 shares of our common stock pledged by Robert Spigno as security for a loan made by Laurus to us in April 2001 in the original principal amount of $300,000.
In November 2002, we issued 636,886 shares of common stock to Lawrence Muirhead to reimburse him for 636,886 shares pledged by him as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
In November 2002, we issued 2,630,742 shares of common stock to Robert Spigno to reimburse him for 2,630,742 shares pledged by him as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
In November 2002, we issued 1,458,059 shares of common stock to Patricia Spigno to reimburse her for 1,458,059 shares pledged by her as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
On December 12, 2002, we issued 250,000 shares of common stock valued at $1,250 to Melissa McGough as bonus compensation.
Effective December 31, 2002, Robert Spigno earned bonus compensation under his employment arrangement with ConectiSys in the amount of $80,000 payable in common stock of ConectiSys based on a conversion price equal to 50% of the average of the closing bid and asked prices of a share of our common stock for the 30 days prior to December 31, 2002. The number of shares of common stock of ConectiSys issuable in connection with this bonus was 8,000,000.
Effective December 31, 2002, Patricia Spigno earned bonus compensation under her employment arrangement with ConectiSys in the amount of $40,000 payable in common stock of ConectiSys based on a conversion price equal to 50% of the average of the closing bid and asked prices of a share of our common stock for the 30 days prior to December 31, 2002. The number of shares of common stock of ConectiSys issuable in connection with this bonus was 4,000,000.
In January 2003, we issued 2,361,814 shares of common stock to Robert Spigno to reimburse him for 2,361,814 shares pledged by him as security for a loan made by Mercator Momentum Fund to us in February 2002 in the original principal amount of $340,000, which pledged shares were transferred by Mercator into its name in connection with a default on that loan.
In January 2003, we issued 47,521 shares of common stock to Lawrence Muirhead to reimburse him for 47,521 shares pledged by him as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
On January 6, 2003, we extended to December 31, 2004, the expiration date of an option granted to Mr. Muirhead on November 22, 1999 that initially expired December 31, 2002, to purchase up to 2,000,000 shares of common stock at an exercise price of $.50 per share, which was the closing price of a share of our common stock on the date of grant. This option vests upon the achievement of certain specified performance criteria.
On January 6, 2003, we extended to December 31, 2004, the expiration date of an option granted to Mr. Spigno on November 22, 1999 that initially expired December 31, 2002, to purchase up to 500,000 shares of common stock at an exercise price of $.15 per share, which was 50% of the closing price of a share of our common stock on the date of grant. This option vested immediately.
On January 6, 2003, we extended to December 31, 2004, the expiration date of an option granted to Ms. McGough on September 1, 1999 that initially expired December 31, 2002, to purchase up to 100,000 shares of common stock at an exercise price of $.38 per share, which was 50% of the closing price of a share of our common stock on the date of grant. This option vested immediately.
On December 10, 2003, Mr. Spigno exercised a portion of an option to purchase 15,845 shares of Class A Preferred Stock for $1.00 per share, which was the estimated value on that date.
Effective December 31, 2003, Robert Spigno earned bonus compensation under his employment arrangement with ConectiSys in the amount of $80,000 payable in common stock of ConectiSys based on a conversion price equal to 50% of the average of the closing bid and asked prices of a share of our common stock for the 30 days prior to December 31, 2003. The number of shares of common stock of ConectiSys issuable in connection with this bonus was 8,000,000.
Effective December 31, 2003, Patricia Spigno earned bonus compensation under her employment arrangement with ConectiSys in the amount of $40,000 payable in common stock of ConectiSys based on a conversion price equal to 50% of the average of the closing bid and asked prices of a share of our common stock for the 30 days prior to December 31, 2003. The number of shares of common stock of ConectiSys issuable in connection with this bonus was 4,000,000.
On January 6, 2004, we repriced Robert Spigno's fully-vested option to purchase up to 500,000 shares of Class B Preferred Stock from an exercise price of $0.50 per share to an exercise price of $.05 per share. The exercise price of $.05 per share equates to $.005 per share of common stock if the Class B Preferred Stock were converted, which was in excess of the price of our common stock on that date. This option was granted on September 11, 2001 and vested immediately with an initial exercise price of $2.50 per share which equaled $.25 per share of common stock if the Class B Preferred Stock were converted, which was the price of our common stock on that date. On June 28, 2002 this option was repriced from an exercise price of $2.50 per share to an exercise price of $.50 per share, which was in excess of the price of our common stock on that date.
We are or have been a party to various employment, consulting and compensation arrangements with related parties, as more particularly described above under the headings "Employment Contracts and Termination of Employment and Change-in-Control Arrangements," "Compensation of Executive Officers" and "Compensation of Directors."
PRINCIPAL AND SELLING SECURITY HOLDERS
As of June 22, 2004, a total of 986,190,156 shares of our common stock were outstanding. The following table sets forth information as of that date regarding the beneficial ownership of our common stock both before and immediately after the offering by:
o each person known by us to own beneficially more than five percent, in the aggregate, of the outstanding shares of our common stock as of the date of the table;
o each selling security holder;
o each of our directors;
o each executive officer named in the Summary Compensation Table contained elsewhere in this prospectus; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission, and generally includes voting or investment power with respect to securities. Except as indicated in the footnotes to the table, we believe each holder possesses sole voting and investment power with respect to all of the shares of common stock owned by that holder, subject to community property laws where applicable. In computing the number of shares beneficially owned by a holder and the percentage ownership of that holder, shares of common stock subject to options or warrants or underlying notes or preferred stock held by that holder that are currently exercisable or convertible or are exercisable or convertible within 60 days after the date of the table are deemed outstanding. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person or group.
Other than certain shares of common stock issuable in connection with the exercise of certain warrants, which shares have previously been registered on Registration Statements No. 333-87062 and 333-102781, all of the shares of common stock being offered under this prospectus are issuable upon conversion of debentures or upon exercise of warrants that were acquired by the selling security holders from us in connection with a private placement that we made effective as of April 19, 2004 or in connection with additional funding tranches, as described below, that the debenture investors have committed to make. In the private placement effective April 19, 2004, we issued $250,000 in principal amount of secured convertible debentures due April 19, 2005 to four accredited investors, or the debenture investors, in exchange for gross proceeds of $250,000 in cash. In connection with that private placement, we also issued warrants to purchase up to an aggregate of 1,250,000 shares of our common stock to the debenture investors. Upon filing of the registration statement of which this prospectus is a part, the debenture investors have committed to purchase an additional $625,000 of our secured convertible debentures and related warrants to purchase up to an aggregate of 3,125,000 shares of our common stock. Upon declaration of the effectiveness by the Securities and Exchange Commission of the registration statement of which this prospectus is a part, the debenture investors have committed to purchase an additional $625,000 of our secured convertible debentures and related warrants to purchase up to an aggregate of 3,125,000 shares of our common stock.
The secured convertible debentures bear interest at an initial rate of 12% per year. The initial conversion price of the debentures is equal to the lesser of (i) 40% of the average of the three lowest intraday trading prices of a share of our common stock for the twenty trading days immediately preceding a conversion date, and (ii) $.005. The conversion price also is subject to customary anti-dilution adjustments in connection with mergers, acquisitions, stock splits, dividends and the like.
We agreed to register for resale a total of 200% of the shares of common stock that may be issuable upon conversion of the convertible debentures and related warrants. The shares of common stock being offered under this prospectus include shares of common stock issuable upon conversion of the secured convertible debentures and upon exercise of the related warrants without regard to the exercise limitations described below.
The terms of the secured convertible debentures and the warrants prohibit conversion of the secured convertible debentures or exercise of the warrants to the extent that conversion of the debentures would result in the debenture investor, together with its affiliates, beneficially owning in excess of 4.9% of our outstanding shares of common stock, and to the extent that exercise of the warrants would result in the debenture investor, together with its affiliates, beneficially owning in excess of 4.9% of our outstanding shares of common stock. A debenture investor may waive the 4.9% limitation upon 60 days' prior written notice to us. Also, these limitations do not preclude a debenture investor from converting or exercising a secured convertible debenture or warrant and selling shares underlying the secured convertible debenture or warrant in stages over time where each stage does not cause the investor and its affiliates to beneficially own shares in excess of the limitation amounts. Despite the limitations contained in the secured convertible debentures and warrants, the number of shares shown in the table as beneficially owned by each debenture investor prior to this offering is in excess of 4.9% of the shares of our common stock outstanding based on the date of the table. The number of shares being offered by each debenture investor under this prospectus is in excess of the amount of shares issuable to that investor without such investor's waiver of the conversion and exercise limitations discussed above.
We have agreed to pay expenses, other than broker discounts and commissions, if any, in connection with this prospectus. We have agreed with some of the selling security holders to prepare and file all amendments and supplements to the registration statement of which this prospectus is a part as may be necessary under the rules and regulations of the Securities Act of 1933 to keep it effective until the earlier of:
o the date that all shares of common stock offered under this prospectus may be resold by those holders in a public transaction without volume limitations or other material restrictions without registration under the Securities Act, including without limitation, under Rule 144 under the Securities Act; and
o the date that all shares of common stock offered by those holders under this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares of common stock offered by the selling security holders.
The shares of common stock being offered under this prospectus may be offered for sale from time to time during the period the registration statement of which this prospectus is a part remains effective, by or for the accounts of the selling security holders listed in the table below.
Name and Address of Title of Shares Beneficially Owned Shares Shares Beneficially
of Beneficial Owner (1)(2) Class Prior to the Offering Being Offered Owned After the Offering(3)
Number Number % of Class
__________________________ ________ _________________________ _____________ __________________________
Robert A. Spigno.......... Common 31,123,164(4) -- 31,123,164 *
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 100.00%
Patricia A. Spigno........ Common 12,267,340(7) -- 12,267,340 *
Lawrence Muirhead......... Common 971,393 -- 971,393 *
Melissa McGough........... Common 454,138(8) -- 454,138 *
AJW Qualified Partners, LLC. Common 1,368,104,180(9) 1,368,104,180(9) 225,353,120(9) 4.9%
New Millennium Capital
Partners II, LLC Common 1,199,450,000(9) 1,199,450,000(9) 225,353,120(9) 4.9%
AJW Partners, LLC Common 678,666,660(9) 678,666,660(9) 225,353,120(9) 4.9%
AJW Offshore, Ltd. Common 141,279,160(9) 141,279,160(9) 225,353,120(9) 4.9%
All directors and executive
officers
as a group (4 persons) Common 44,816,035(10) -- 44,816,035 *
Class A Preferred 450,020(5) -- 450,020 100.00%
Class B Preferred 500,000(6) -- 500,000 100.00%
|
(1) The address of each director and executive officer named in this table is c/o ConectiSys Corporation, 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355. Mr. Spigno and Mr. Muirhead are directors and executive officers of ConectiSys. Ms. McGough is a director of ConectiSys. Ms. Spigno is an executive officer of ConectiSys.
(2) The address of each of AJW Partners, LLC, New Millennium Capital Partners II, LLC and AJW Qualified Partners, LLC and AJW Offshore, Ltd. is 1044 Northern Boulevard, Suite 302, Roslyn, New York 11576. AJW Offshore, Ltd. was formerly known as AJW/New Millennium Offshore, Ltd. and AJW Qualified Partners, LLC was formerly known as Pegasus Capital Partners, LLC.
(3) Assumes all shares of class being offered are sold and is based on 986,190,156 shares outstanding plus the 3,387,500,000 shares offerred and assumed sold under this propsectus
(4) Includes 1,443,654 shares underlying options and 5,000,000 shares issuable upon conversion of Class B Preferred Stock. Mr. Spigno holds an option to purchase Class B Preferred Stock. Also includes 19,686,954 shares issuable in connection with payment of annual bonuses for fiscal years 2000 through 2003.
(5) Includes an option to purchase up to 234,155 shares of Class A Preferred Stock.
(6) Represents an option to purchase up to 500,000 shares of Class B Preferred Stock.
(7) Includes 500,000 shares underlying options. Also includes 9,843,477 shares issuable in connection with payment of annual bonuses for fiscal years 2000 through 2003.
(8) Includes 100,000 shares underlying options.
(9) The number of shares set forth in the table for the selling
security holders represents an estimate of the number of shares
of common stock to be offered by the selling security holders.
The actual number of shares of common stock issuable upon
conversion of the debentures and exercise of the related
warrants is indeterminate, is subject to adjustment and could be
materially less or more than such estimated number depending on
factors which cannot be predicted by us at this time including,
among other factors, the future market price of the common
stock. The actual number of shares of common stock offered in
this prospectus, and included in the registration statement of
which this prospectus is a part, includes such additional number
of shares of common stock as may be issued or issuable upon
conversion of the debentures and exercise of the related
warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule
416 under the Securities Act of 1933. Under the terms of the
debentures, if the debentures had actually been converted on
June 22, 2004, the conversion price would have been
approximately $.0006. Under the terms of the warrants, if the
warrants had actually been converted on June 22, 2004, the
exercise price would have been (i) $.002 for the warrants issued
in April 2004 and to be issued in connection with related
subsequent funding tranches, (ii) $.005 for the warrants issued
in the November 2003 to March 2004 financing transactions and
the November 2002 through May 2003 financing transactions, and
(iii) approximately $.0006 for the warrants issued in the March
2002 through June 2002 financing transactions.
(10) Includes 2,043,654 shares underlying options and 5,000,000 shares issuable upon conversion of Class B Preferred Stock. Also includes 29,530,431 shares issuable in connection with payment of annual bonuses for fiscal years 2000 through 2003.
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of our common stock being offered under this prospectus on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales, which may include block transactions, may be at fixed or negotiated prices. The selling security holders may use any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of stock that the seller does not own, or certificates for which are not within his control, so as to be available for delivery at the time when, under applicable rules, delivery must be made;
o transactions to cover short sales;
o broker-dealers may agree with the selling security holders to sell a specified number of shares at a stipulated price per share;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to time.
The shares may also be sold under Rule 144 or Regulation S under the Securities Act of 1933, if available, rather than under this prospectus. The selling security holders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.
The selling security holders may also engage in short sales against the box, which are sales where the seller owns enough shares to cover the borrowed shares, if necessary, puts and calls and other transactions in securities of ConectiSys or derivatives of ConectiSys securities and may sell or deliver shares in connection with these trades. The selling security holders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling security holder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker- dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of transactions involved.
The selling security holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with these sales. In that event, any commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.
The selling security holders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. To our knowledge, no selling security holder has entered into any agreement with a prospective underwriter, and there is no assurance that any such agreement will be entered into. If a selling security holder enters into such an agreement or agreements, the relevant details will be set forth in a supplement or revisions to this prospectus.
The selling security holders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling security holders or any other such person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of the secured convertible debentures or the warrants held by the selling security holders or the issuance of shares of common stock to the holders of the secured convertible debentures or the warrants upon conversion or exercise. If a selling security holder transfers its secured convertible debentures or warrants prior to conversion or exercise, the transferee of the secured convertible debentures or warrants may not sell the shares of common stock issuable upon conversion of the secured convertible debentures or upon exercise of the warrants under the terms of this prospectus unless this prospectus is appropriately amended or supplemented by us.
For the period a holder holds the secured convertible debentures or the warrants, the holder has the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership of the shares of common stock issuable upon conversion of the secured convertible debentures or upon exercise of the warrants. The terms on which we could obtain additional capital during the period in which the secured convertible debentures or the warrants remain outstanding may be adversely affected. The holders of the secured convertible debentures and the warrants are most likely to voluntarily convert their secured convertible debentures or exercise their warrants when the conversion price or exercise price is less than the market price of our common stock.
We have agreed to indemnify the selling security holders, 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 security holders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 1,000,000,000 shares of common stock, no par value per share, and 50,000,000 shares of preferred stock, $1.00 par value per share. Of the 50,000,000 authorized shares of preferred stock, 1,000,000 shares have been designated as Class A Preferred Stock, or Class A Preferred, 1,000,000 shares have been designated as Class B Preferred Stock, or Class B Preferred, and the remaining 48,000,000 shares are undesignated. As of June 22, 2004, there were 986,190,156 shares of common stock outstanding held by approximately 790 shareholders of record and 215,865 shares of Class A Preferred outstanding held by one holder of record and no shares of Class B Preferred outstanding.
We have filed a proxy statement with the Securities and Exchange Commission covering, among other things, a proposal to be voted on by our shareholders to increase our authorized shares of common stock from 1,000,000,000 shares to 7,500,000,000 shares. Prior to the time that the registration statement of which this prospectus forms a part is declared effective by the Securities and Exchange Commission, we must duly increase our authorized shares of common stock to an amount at least sufficient to cover the shares of common stock to be registered for resale under the registration statement of which this prospectus forms a part. The following is a summary description of our capital stock.
Common Stock
The holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available at times and in amounts as the board of directors may from time to time determine, subordinate to any preferences that may be granted to the holders of preferred stock. Holders of common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be redeemed or converted. Upon our liquidation, dissolution or winding up, the assets legally available for distribution to our shareholders are divided among the holders of the common stock in proportion to the number of shares of common stock held by each of them, after payment of all of our debts and liabilities and fulfillment of the rights of any outstanding class or series of preferred stock that has priority to distributed assets. The rights of holders of common stock are subordinate to those of holders of any series of preferred stock.
Preferred Stock
Preferred stock may be issued from time to time in one or more series, and our board of directors, without action by the holders of common stock, may fix or alter the voting rights, redemption provisions, dividend rights, dividend rates, claims to our assets superior to those of holders of our common stock, conversion rights and any other rights, preferences, privileges and restrictions of any wholly unissued series of preferred stock. The board of directors, without shareholder approval, can issue shares of preferred stock with rights that could adversely affect the rights of the holders of common stock. The issuance of shares of preferred stock could adversely affect the voting power of the holders of common stock and could have the effect of making it more difficult for a third party to acquire, or could discourage or delay a third party from acquiring, a majority of our outstanding common stock.
Class A Preferred
Each share of Class A Preferred is entitled to 100 votes per share on all matters presented to our shareholders for action. The Class A Preferred does not have any liquidation preference, additional voting rights, conversion rights, anti-dilution rights or any other preferential rights.
Class B Preferred
Each share of Class B Preferred is convertible into 10 shares of our common stock. The Class B Preferred does not have any liquidation preference, voting rights, other conversion rights, anti-dilution rights or any other preferential rights.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Signature Stock Transfer, Inc. Its telephone number is (972) 788-4193.
LEGAL MATTERS
The validity of the shares of common stock offered under this prospectus will be passed upon by Rutan & Tucker, LLP, Costa Mesa, California.
EXPERTS
The consolidated financial statements of ConectiSys as of and for the years ended September 30, 2003 and 2002 included in this prospectus and in the registration statement of which this prospectus is a part have been audited by Hurley & Company, independent certified public accountants, to the extent and for the periods set forth in their report, appearing elsewhere in this prospectus and are incorporated in this prospectus in reliance upon the report given upon the authority of Hurley & Company as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form SB?2 under the Securities Act, and the rules and regulations promulgated under the Securities Act, with respect to the common stock offered under this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information contained in the registration statement and the exhibits and schedules to the registration statement. While material elements of the contracts and documents referenced in this prospectus are contained in this prospectus, statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the full text of the contract or other document which is filed as an exhibit to the registration statement.
For further information with respect to us and the common stock offered under this prospectus, reference is made to the registration statement and its exhibits and schedules. The registration statement, including its exhibits and schedules, may be inspected without charge at the Public Reference Room maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such documents may be obtained from the Securities and Exchange Commission upon the payment of the charges prescribed by the Securities and Exchange Commission. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The Securities and Exchange Commission's web site address is http://www.sec.gov. Our web site address is http://www.conectisys.com.
All trademarks or trade names referred to in this prospectus are the property of their respective owners.
CONECTISYS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements As Of And For The
Years Ended September 30, 2003 and 2002
----------------------------------------------------
Report of Independent Certified Public Accountants........F-1
Consolidated Balance Sheet as of September 30, 2003.......F-3
Consolidated Statements of Operations for the Years
Ended September 30, 2003 and 2002 and the
Cumulative Period From December 31, 1990 (Inception)
Through September 30, 2003...............................F-5
Consolidated Statements of Shareholders' Equity
(Deficit) for the Cumulative Period From December
31, 1990 (Inception) Through September 30, 2003..........F-6
Consolidated Statements of Cash Flows for the Years
Ended September 30, 2003 and 2002 and the Cumulative
Period From December 31, 1990 (Inception) Through
September 30, 2003.......................................F-14
Notes to Consolidated Financial Statements................F-17
Condensed Consolidated Financial Statements As Of And
For The Three and Six Months Ended March 31, 2004 and 2003
----------------------------------------------------------
|
Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited) and September 30, 2003 (audited).......F-58
Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2004 and 2003 and the Cumulative Period From December 31, 1990 (Inception) Through March 31, 2004 (unaudited ).....................F-60
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Cumulative Period From December 31, 1990 (Inception)Through March 31, 2004.....F-61
Consolidated Statement of Cash Flows for the Six Months Ended March 31, 2004 and 2003 and the Cumulative Period From December 31, 1990 (Inception) Through March 31, 2004 (unaudited)......................F-69
Notes to Condensed Consolidated Financial Statements (unaudited)..................................F-72
INDEPENDENT AUDITORS' REPORT
Board of Directors
Conectisys Corporation and Subsidiaries
Valencia, California
We have audited the accompanying consolidated balance sheet of Conectisys Corporation and Subsidiaries (a development stage company) (the "Company") as of September 30, 2003, and the related consolidated statements of operations, changes in shareholders' equity (deficit), and cash flows for the years ended September 30, 2003 and 2002, and the cumulative period from December 1, 1990 (inception of development stage) through September 30, 2003, except that we did not audit these financial statements for the period December 1, 1990 (inception of development stage) through November 30, 1997; these financial statements were audited by other auditors, whose reports dated March 6, 1998 (for the period December 1, 1994 through November 30, 1997) and January 9, 1995 (for the period December 1, 1990 (inception of development stage) through November 30, 1994), respectively, expressed a going concern uncertainty. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Conectisys Corporation and Subsidiaries as of September 30, 2003, and the results of their operations and their cash flows for the years ended September 30, 2003 and 2002, and the cumulative period from December 1, 1990 (inception of development stage) through September 30, 2003, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a deficiency in working capital at September 30, 2003. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Hurley & Company
Granada Hills, California
January 6, 2004
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET September 30, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 2,282
Debt issuance costs - current, net of
accumulated amortization of $275,448 27,896
-----------
Total current assets 30,178
Property and equipment, net of
accumulated depreciation of $304,553 32,476
Other assets:
License rights and technology, net of
accumulated amortization of $421,4 78 -
-----------
Total assets $ 62,654
===========
|
The accompanying notes are an integral part of these consolidated financial statements.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED BALANCE SHEET (continued)
September 30, 2003
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 274,746
Accrued compensation 1,113,620
Due to officers 92,121
Accrued interest 339,965
Other current liabilities 14,410
Notes payable and
current portion of long-term debt 1,090,597
------------
Total current liabilities 2,925,459
Long-term debt, net of current portion 99,615
Commitments and contingencies -
SHAREHOLDERS' DEFICIT:
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized, 200,020
shares issued and outstanding 200,020
Convertible preferred stock - Class B,
no par value; 1,000,000 shares
authorized, -0- shares issued and outstanding -
Common stock, no par value; 1,000,000,000
shares authorized, 490,224,872
shares issued and outstanding 19,807,537
Additional paid-in capital:
Convertible preferred stock - Class B, no
par value; 1,000,000 stock options exercisable 100,000
Common stock, no par value;
11,307,154 stock options and warrants exercisable 1,353,511
Beneficial conversion option, debt instruments 881,550
Deficit accumulated during the development stage (25,305,038)
------------
Total shareholders' deficit (2,962,420)
------------
Total liabilities and
shareholders' deficit $ 62,654
============
|
The accompanying notes are an integral part of these consolidated financial statements.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ----------- --------------
Net revenues $ - $ - $ 517,460
Cost of sales 148,675 73,667 790,063
----------- ----------- --------------
Gross loss (148,675) (73,667) (272,603)
Operating expenses:
General and administrative 1,372,655 1,808,657 18,541,785
Bad debt expense - - 1,680,522
----------- ----------- --------------
Loss from operations (1,521,330) (1,882,324) (20,494,910)
Other income (expense):
Settled damages - - 25,000
Other income - - 12,072
Interest income 1 2 102,924
Interest expense (865,546) (464,410) (2,635,021)
Write-off of
intangible assets - - (1,299,861)
Minority interest - - 62,500
----------- ----------- --------------
Net loss $(2,386,875) $(2,346,732) $ (24,227,296)
=========== =========== ==============
Weighted average number
of shares outstanding -
basic and diluted 237,357,973 39,976,138
Net loss per share -
basic and diluted $ (.01) $ (.06)
=========== ===========
|
The accompanying notes are an integral part of these consolidated financial statements.
CONECTISYS CORORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For the
Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
December 1, 1990
(re-entry
development stage) - $ - 10,609 $ 1,042,140 $ - $ - $ (1,042,140)$ -
Shares issued in exchange for:
Cash, May 31, 1993 - - 1,000 1,000 - - - 1,000
Capital contribution,
May 31, 1993 - - 2,000 515 - - - 515
Services, March 26, 1993 - - 2,000 500 - - - 500
Services, March 26, 1993 - - 1,200 600 - - - 600
Net loss for the year - - - - - - (5,459) (5,459)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1993 - - 16,809 1,044,755 - - (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1, 1994 - - 2,400 3,000 - - - 3,000
Cash, September 1, 1994 - - 17,771 23,655 - - - 23,655
Services, September 15, 1994 - - 8,700 11,614 - - - 11,614
Cash, September 26, 1994 - - 3,000 15,000 - - - 15,000
Cash, October 6, 1994 16,345 16,345 - - - - - 16,345
Cash, September and October,
1994 - - 1,320 33,000 - - - 33,000
Net loss for the year - - - - - - (32,544) (32,544)
--------- ---------- --------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1994 16,345 16,345 50,000 1,131,024 - - (1,080,143) 67,226
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, February 13, 1995 - $ - 1,160 $ 232,000 $ - $ - $ - $ 232,000
Debt repayment, February 13,
1995 - - 2,040 408,000 - - - 408,000
Debt repayment, February 20,
1995 - - 4,778 477,810 - - - 477,810
Acquisition of assets, CIPI
February, 1995 - - 28,750 1,950,000 - - - 1,950,000
Acquisition of assets, April 5,
1995 - - 15,000 - - - - -
Cash and services, April and
May 1995 - - 16,000 800,000 - - - 800,000
Cash, June 1, 1995 - - 500 30,000 - - - 30,000
Acquisition of assets and
services, September 26, 1995 - - 4,000 200,000 - - - 200,000
Cash, September 28, 1995 - - 41 3,000 - - - 3,000
Acquisition of assets,
September 1995 - - 35,000 1,750,000 - - - 1,750,000
Return of assets, CIPI
September, 1995 - - (27,700) (1,950,000) - - - (1,950,000)
Net loss for the year - - - - - - (2,293,867) (2,293,867)
--------- ----------- -------- ----------- -------- ------------ ---------- -----------
Balance,
November 30, 1995 16,345 16,345 129,569 5,031,834 - - (3,374,010) 1,674,169
Shares issued in exchange for:
Cash, February, 1996 - - 1,389 152,779 - - - 152,779
Debt repayment, February 1996 - - 10,000 612,000 - - - 612,000
Services, February, 1996 - - 3,160 205,892 - - - 205,892
Cash, March, 1996 - - 179 25,000 - - - 25,000
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares returned and canceled,
March, 1996 - $ - (15,000)$ - $ - $ - $ - $ -
Services, April, 1996 - - 13 2,069 - - - 2,069
Services, September, 1996 4,155 4,155 586 36,317 - - - 40,472
Services, October, 1996 - - 6,540 327,000 - - - 327,000
Debt repayment, November, 1996 - - 2,350 64,330 - - - 64,330
Net loss for the year - - - - - - (2,238,933) (2,238,933)
--------- ---------- ---------- ----------- ---------- --------- ------------ -----------
Balance,
November 30, 1996 20,500 20,500 138,786 6,457,221 - - (5,612,943) 864,778
Shares issued in exchange for:
Services, March, 1997 - - 228 6,879 - - - 6,879
Services, April, 1997 - - 800 13,120 - - - 13,120
Services, July, 1997 - - 1,500 16,200 - - - 16,200
Cash, July, 1997 - - 15,000 300,000 - - - 300,000
Services, August, 1997 - - 5,958 56,000 - - - 56,000
Adjustment for partial shares due
to reverse stock split (1:20) - - 113 - - - - -
Services, October, 1997 - - 1,469,666 587,865 - - - 587,865
Debt repayment, October, 1997 - - 1,540,267 620,507 - - - 620,507
Cash, October, 1997 - - 1,500,000 281,250 - - - 281,250
Services, November, 1997 - - 4,950 10,538 - - - 10,538
Net loss for the year - - - - - - (2,739,268) (2,739,268)
--------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Balance,
November 30, 1997 20,500 20,500 4,677,268 8,349,580 - - (8,352,211) 17,869
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, December, 1997
through November, 1998 - $ - 2,551,610 $ 2,338,264 $ - $ - - $ 2,338,264
Debt repayment, April, 1998
through September, 1998 - - 250,000 129,960 - - - 129,960
Cash, January, 1998 through
July, 1998 - - 4,833,334 1,139,218 - - - 1,139,218
Acquisition of assets,
July, 1998 - - 300,000 421,478 - - - 421,478
Acquisition of remaining 20%
minority interest in
subsidiary, July, 1998 - - 50,000 59,247 - - - 59,247
Services, November, 1998 60,000 60,000 - - - - - 60,000
Net loss for the year - - - - - - (4,928,682) (4,928,682)
--------- ---------- ---------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1998 80,500 80,500 12,662,212 12,437,747 - - (13,280,893) (762,646)
Shares issued in exchange for:
Shares returned and canceled,
December, 1998 - - (1,350,000) (814,536) - - - (814,536)
Services, December, 1998
through September, 1999 - - 560,029 349,454 150,000 - - 499,454
Cash, December, 1998
through September, 1999 - - 1,155,800 129,537 - - - 129,537
Debt repayment, Sept., 1999 39,520 39,520 960,321 197,500 100,000 - - 337,020
Net loss for the period - - - - - - (1,323,831) (1,323,831)
--------- ---------- ---------- ----------- -------- ------------ ---------- -----------
Balance,
September 30, 1999 120,020 120,020 13,988,362 12,299,702 250,000 - (14,604,724) (1,935,002)
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares re-acquired and
canceled, October, 1999 - $ - (17,500)$ (12,000)$ - $ - $ - $ (12,000)
Shares issued in exchange for:
Services, October, 1999 through
September, 2000, valued from
$0.25 to $0.80 per share - - 2,405,469 990,949 - - - 990,949
Retainers, debt and accrued
liabilities, October, 1999
through September, 2000, valued
from $0.25 to $1.57 per share - - 2,799,579 1,171,638 - - - 1,171,638
Cash, October, 1999 through
September, 2000, with subscription
prices ranging from $0.25 to
$0.66 per share - - 2,295,482 839,425 - (15,450) - 823,975
Issuance of 563,500 consultant
stock options, March, 2000,
at an exercise price of $2.00
per share - - - - 214,130 - - 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March, 2000,
to $0.38 and approximately $0.39
per share - - - - 1,113,610 - 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May, 2000, with
common stock strike prices
ranging from $0.15 to approx.
$0.39 per share, in exchange
for officer debt 20,000 20,000 2,056,346 897,707 (407,735) - - 509,972
Issuance of 500,000 consultant
stock options, September, 2000,
with floating exercise prices
set at 15% below current market - - - - 65,000 - - 65,000
Net loss for the year - - - - - - (3,812,140) (3,812,140)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) ( 869,868)
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2000 through
September, 2001, valued from
$0.11 to $0.40 per share - $ - 3,471,007 $ 572,790 $ - $ - $ - $ 572,790
Retainers, debt and accrued
liabilities, October, 2000
through September, 2001, valued
from $0.11 to $0.43 per share - - 3,688,989 487,121 - - - 487,121
Cash, October, 2000 through
March, 2001, with subscription
prices ranging from $0.075 to
$0.083 per share - - 1,045,500 78,787 - - - 78,787
Collection of stock subscription
receivable, October, 2000,
on 61,800 shares - - - - - 15,450 - 15,450
Exercise of 400,000 common
stock options, January, 2001,
at a strike price of $0.085 per
share, in exchange for debt - - 400,000 86,000 (52,000) - - 34,000
Issuance of 1,000,000 common
stock warrants, April, 2001,
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt - - - - 77,228 - - 77,228
Issuance of 2,000,000 consultant
stock options, September, 2001,
at a strike price of $0.13 per
share - - - - 115,000 - - 115,000
Beneficial conversion option,
April, 2001 through September,
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible debt - - - - 155,027 - - 155,027
Net loss for the year - - - - - - (2,154,567) (2,154,567)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 - (20,571,431) (1,489,032)
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2001 through
September, 2002, valued from
$0.02 to $0.25 per share - $ - 2,180,000 $ 179,916 $ - $ - $ - $ 179,916
Debt and accrued liabilities,
October, 2001 through September,
2002, with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per share 60,000 60,000 10,948,077 428,563 - - - 488,563
Cash, October, 2001 through
September, 2001, with prices
ranging from $0.01 to $0.083
per share - - 5,833,334 200,000 - - - 200,000
Exercise of 550,000 common stock
options by a consultant at a
strike price of $0.13 per share,
in exchange for debt - - 550,000 103,125 (31,625) - - 71,500
Issuance of 3,750,000 warrants,
April, 2002 through June, 2002,
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt - - - - 100,087 - - 100,087
Beneficial conversion option,
April 2002, through June, 2002,
pertaining to $750,000 principal
value of 12% convertible debt - - - - 649,913 - - 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount - - 12,667,178 111,515 (80,702) - - 30,813
Net loss for the year - - - - - - (2,346,732) (2,346,732)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2002 200,020 200,020 64,311,823 18,435,238 2,167,933 $ - (22,918,163) (2,114,972)
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through September 30, 2003
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2002 through
July, 2003, valued from
$0.0012 to $0.0100 share - $ - 31,500,000 $ 134,000 $ - $ - $ - $ 134,000
Debt and accrued liabilities,
October, 2002 through September,
2003, valued from $0.0010 to
$0.0512 per share, including
transfer of $155,027
beneficial conversion option 162,134,748 704,774 (155,027) - - 549,747
Cash, November, 2002 through
September, 2003, with prices
ranging from $0.0010 to $0.100
per share - - 128,500,000 180,000 - - - 180,000
Issuance of 2,500,000 warrants,
November, 2002 through May, 2003,
at an exercise price of $0.005
per share, in conjunction with
$500,000 principal value of 12%
convertible debt - - - - 9,816 - - 9,816
Beneficial conversion option,
November, 2002, through May, 2003,
pertaining to $500,000 principal
value of 12% convertible debt - - - - 490,184 - - 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,355 accrued
interest, net of $52,340
convertible debt discount - - 103,778,301 353,525 (177,845) - - 175,680
Net loss for the year - - - - - - (2,386,875) (2,386,875)
--------- ---------- ----------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2003 200,020 $ 200,020 490,224,872 $19,807,537 $2,335,061 $ - $(25,305,038)$(2,962,420)
========= ========== =========== =========== ========== ========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ------------ -------------
Cash flows from operating
activities:
Net loss $(2,386,875) $ (2,346,732) $(24,227,296)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Stock issued for services 134,000 179,916 7,520,773
Stock issued for interest - - 535,591
Provision for bad debt
write-offs - - 1,422,401
Minority interest - - (62,500)
Settled damages - - (25,000)
Write-off of intangible
assets - - 1,299,861
Depreciation and
amortization of property 24,180 27,309 1,694,154
Amortization of debt issuance
costs and note discount 797,996 377,512 1,440,538
Changes in:
Accounts receivable - - (4,201)
Accrued interest
receivable - - (95,700)
Prepaid exp. and deposits - 48,800 182,346
Accounts payable 297,153 308,251 917,401
Accrued compensation 185,770 394,459 2,219,792
Due to officers 70,179 (62,293) 743,971
Accrued interest and
other current liabilities 92,314 61,078 549,157
----------- ------------ -------------
Total adjustments 1,601,592 1,335,032 18,338,584
----------- ------------ -------------
Net cash used in
operating activities (785,283) (1,011,700) (5,888,712)
----------- ------------ -------------
|
The accompanying notes are an integral part of these consolidated financial statements.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ------------ -------------
Cash flows from investing
activities:
Issuance of
notes receivable $ - $ - $ (1,322,500)
Costs of license rights
and technology - - (94,057)
Purchase of equipment (5,317) (6,687) (203,847)
----------- ----------- -------------
Net cash used in
investing activities (5,317) (6,687) (1,620,404)
----------- ----------- -------------
Cash flows from financing
activities:
Common stock issuance 180,000 200,000 3,412,172
Stock warrant issuance 9,816 100,087 187,131
Preferred stock issuance - - 16,345
Proceeds from debt, other 679,163 1,244,790 4,163,043
Debt issuance costs from
debt, other (83,069) (187,500) (303,344)
Proceeds from debt, related - - 206,544
Proceeds from stock purchase - - 281,250
Payments on debt, other (48,129) (290,000) (434,536)
Payments on debt, related - - (53,172)
Decrease in stock
subscription receivable - - 35,450
Contributed capital - - 515
----------- ----------- -------------
Net cash provided by
financing activities 737,781 1,067,377 7,511,398
----------- ----------- -------------
Net increase (decrease) in
cash and cash equivalents (52,819) 48,990 2,282
Cash and cash equivalents
at beginning of period 55,101 6,111 -
------------ ----------- -------------
Cash and cash equivalents
|
The accompanying notes are an integral part of these consolidated financial statements.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2003 and 2002,
and the Cumulative Period
From December 1, 1990 (Inception) Through September 30, 2003
Year Year Dec. 1, 1990
Ended Ended (Inception)
September 30, September 30, Through
2003 2002 Sept. 30, 2003
----------- ----------- -------------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 50,979 $ 127,868 $ 388,648
=========== =========== =============
Cash paid for income taxes$ 3,200 $ 800 $ 8,050
=========== =========== =============
|
Non-cash investing and financing activities:
Common stock issued in exchange for: Note receivable $ - $ - $ 281,250 Prepaid expenses $ - $ - $ 182,346 Property and equipment $ - $ - $ 130,931 Licenses and technology $ - $ - $ 2,191,478 Acquisition of remaining minority interest in subsidiary $ - $ - $ 59,247 Repayment of debt and interest $ 1,215,611 $ 530,876 $ 5,571,667 Accrued services and interest $ - $ - $ 4,949,192 Preferred stock issued in exchange for: Accrued services $ - $ - $ 60,000 Repayment of debt $ - $ 60,000 $ 119,520 Preferred stock options issued in exchange for: Repayment of debt $ - $ - $ 100,000 |
The accompanying notes are an integral part of these consolidated financial statements.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company") was incorporated under the laws of Colorado on February 3, 1986, to analyze and invest in business opportunities as they may occur. The Company is a development-stage entity developing automatic meter reading technologies and products for remote reading of electronic energy meters located in residential structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the State of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, a new Nevada corporation, eEnergyServices.com, Inc., was formed as a wholly-owned subsidiary of the Company, which, as yet, has no net assets and has not commenced operations.
Basis of presentation
The accompanying consolidated financial statements include the accounts and transactions of Conectisys Corporation, its wholly-owned subsidiaries TechniLink, Inc., eEnergyServices.com, Inc., and United Telemetry Company, Inc., and its 80% owned subsidiary PrimeLink, Inc. All material intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements. Certain prior period balances have been reclassified to conform to the current year's presentation.
The Company returned to the development stage in accordance with SFAS No. 7 on December 1, 1990 and during the fiscal year ended November 30, 1995. The Company has completed two mergers and is in the process of developing its technology and product lines.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Use of estimates
The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values for its financial instruments. The following summary presents a description of the methodologies and assumptions used to determine such amounts.
Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties, matters of judgment and, therefore, cannot be determined with precision. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. Changes in assumptions could significantly affect the estimates.
Since the fair value is estimated at September 30, 2003, the amounts that will actually be realized or paid at settlement of the instruments could be significantly different. The carrying amount of cash and cash equivalents is assumed to be the fair value because of the liquidity of these instruments. Accounts payable, accrued compensation, due to officer, accrued interest, other current liabilities, and notes payable approximate fair value because of the short maturity of these instruments. Also, market rates of interest apply on all officer advances and short-term promissory notes. Long-term debt is recorded at face value because the principal amount is convertible into common stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from November 30 to September 30.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Research and development costs
The Company has been engaged in researching, engineering, and developing its H-Net(TM) technologies since August 1995, and did not generate any revenue during the past fiscal year. The Company hopes to complete additional large- scale cost reduction runs for the production and subsequent sale of the H-Net TM system in 2004.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid debt instruments with original maturities of three months or less. All funds on deposit are with one financial institution.
Licensing agreements
The costs of acquiring license rights are capitalized and amortized over the shorter of the estimated useful life of the license or the term of the license agreement. The company's current licenses have been amortized over a period of five years. During the year ended November 30, 1998, the Company acquired additional license rights in the amount of $421,478 from TechniLink. Although the license remains viable, the Company currently lacks the resources to develop and market it. Accordingly, during the ten month period ended September 30, 1999, the Company accelerated amortization on this asset by writing it down to its net realizable value of $40,000, incurring a charge of $283,133. The balance was fully amortized at September 30, 2000.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on property and equipment using the straight-line method over the expected useful lives of the assets, which are generally three years for computer software, five years for vehicles and office equipment, and seven years for furniture and fixtures.
Technology
Deferred technology costs include capitalized product development and product improvement costs incurred after achieving technological feasibility and are amortized over a period of five years. At September 30, 2003, no deferred technology costs were recognized.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Accounting for stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock- based Compensation" (SFAS No. 123) establishes a fair value method of accounting for stock-based compensation plans and for transactions in which an entity acquires goods or services from non-employees in exchange for equity instruments. The Company adopted this accounting standard on January 1, 1996. SFAS No. 123 also encourages, but does not require, companies to record compensation cost for stock-based employee compensation. The Company has chosen to account for stock-based compensation utilizing the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS No. 123, the Company has provided footnote disclosures with respect to stock-based employee compensation. The cost of stock-based compensation is measured at the grant date on the value of the award, and this cost is then recognized as compensation expense over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair market value of the stock as determined by the model at the grant date or other measurement date over the amount an employee must pay to acquire the stock.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," effective for fiscal years ending after December 15, 2002, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The adoption of SFAS No. 148 did not have a material impact on the Company's consolidated financial statements, as the adoption of this standard did not require the Company to change, and the Company did not change, to the fair value based method of accounting for stock-based compensation.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for goods or services are valued at the cost of the goods or services received or at the market value of the shares issued, depending on the ability to estimate the value of the goods or services received.
Income taxes
The Company files a consolidated federal income tax return. The Company has adopted Statement of Financial Accounting Standards("SFAS") No. 109, which requires the Company to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets using the enacted rates in effect in the years in which the differences are expected to reverse. The Company has recognized a valuation allowance covering 100% of the net deferred tax assets (primarily tax benefits from net operating loss carryforwards), because it is more likely than not that the tax benefits attributable to the deferred tax assets will not be realized in the future.
Net loss per common share - basic and diluted
Net loss per common share - diluted is based on the weighted average number of common and common equivalent shares outstanding for the periods presented. Common equivalent shares representing the common shares that would be issued on exercise of convertible securities and outstanding stock options and warrants reduced by the number of shares which could be purchased from the related exercise proceeds are not included since their effect would be anti- dilutive.
As of September 30, 2003, the Company had 490,224,872 shares of common stock outstanding. If all the Company's unexpired stock warrants and options (including contingent issuances) were exercised, and all the principal value and accrued interest on its outstanding convertible debentures were converted, the Company's incremental common shares (not included in the denominator of diluted earnings (loss) per share because of their anti-dilutive nature) would be as follows:
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Net loss per common share - basic and diluted (continued)
Class B preferred stock options 10,000,000
Convertible note holder common stock warrants 6,250,000
Common stock warrants - other 3,215,705
Common stock options - officers 4,043,654
Common stock options - other 4,650,000
-----------
Subtotal 28,159,359
Accrued officer compensation ($360,000),
assumed converted into common stock at
prices ranging from $0.0215 to $0.2250
per share 6,888,922
Convertible note holder principal value
($963,205) and accrued interest ($119,645),
assumed converted into common stock at
$0.002 per share 541,425,000
-----------
Total potential common stock equivalents 576,473,281
|
If all currently outstanding potential common stock equivalents were exercised, the Company would receive proceeds of approximately $11,060,000.
Recently issued accounting pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective for financial statements issued after May 25, 2002, which effectively amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency involving sale- leaseback transactions and also gives clarity to other existing authoritative pronouncements. The adoption of SFAS No. 145 did not have a material effect on the company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective for exit or disposal activities after December 15, 2002, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issue Task Force
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Recently issued accounting pronouncements (continued)
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring." The adoption of the provisions of this SFAS did not have a material impact on the Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9," applicable for acquisitions on or after October 1, 2002, which generally removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, "Goodwill and Other Intangible Assets," and amends FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope certain long-term customer- relationship intangible assets of financial institutions. The adoption of SFAS No. 147 did not have a material impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarified the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. The Company holds no interest in variable interest entities.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment met the characteristic of a derivative as described in SFAS No. 133. SFAS No. 149 also clarifies when a derivative contains a financing component. SFAS No. 149 is generally effective for derivative instruments entered
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Recently issued accounting pronouncements (continued)
into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company holds no derivative instruments and does not engage in hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments that have both equity and liability characteristics to be classified as a liability on the balance sheet. SFAS No. 150 is effective for the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements.
NOTE 2. GOING CONCERN UNCERTAINTY
As of September 30, 2003, the Company had a deficiency in working capital of approximately $2,900,000, and had incurred continual net losses since its return to the development stage in fiscal 1996 of almost $22,000,000, which raise substantial doubt about the Company's ability to continue as a going concern.
Management's plans for correcting these deficiencies include the future sales and licensing of the Company's products and technologies, the raising of capital through the issuance of common stock and from continued officer advances, which will help provide the Company with the liquidity necessary to meet operating expenses. Subsequent to the end of fiscal year 2003, the Company has received $200,000 in funding from an accredited investor group, through the issuance of 12% convertible debt, along with 1,000,000 detachable stock warrants (see Note 16(b)). This same investor group had previously advanced the Company an aggregate amount of $1,250,000 through six similar funding tranches occurring in April 2002, May 2002, June 2002, November 2002, March 2003, and May 2003. Over the longer term, the Company plans to achieve profitability through its operations from the sale and licensing of its H-Net automatic meter-reading system. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
CONECTISYS CORPORATION AND SUBSIDIARIES (A
Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 3. RELATED PARTY TRANSACTIONS
The officers of the Company have continually advanced funds to the Company. These advances have generally been in the form of revolving short-term promissory notes at an annual interest rate of 18% (see Note 8 below).
NOTE 4. PREPAID EXPENSES AND DEPOSITS
386,584 shares of common stock (valued at $43,800) were issued to a consultant as a retainer at September 30, 2001, for cash payments that were subsequently made by the consultant to other vendors in October 2001. An attorney was paid a retainer in September 2001 for services not yet rendered, bringing the total prepaid expense balance at September 30, 2001 to $48,800. These costs were fully expensed during the year ended September 30, 2002.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2003 consisted of the following:
Office equipment $ 285,058
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 337,029
Accumulated depreciation (304,553)
-----------
Net book value $ 32,476
===========
|
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at September 30, 2003 consisted of the following:
License rights $ 421,478
Accumulated amorttion (421,478)
-----------
Net book value $ -
===========
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 7. DEBT ISSUANCE COSTS
In April 2001, the Company received proceeds of $300,000 from an investor in return for a six-month 8% convertible note and 1,000,000 common stock warrants, exercisable at $0.192 per share over a four-year period. Debt issuance costs on this transaction amounted to $32,775, and consisted of $24,000 in finder's fees, $8,000 in legal fees, and $775 in other costs. These debt issuance costs were fully amortized at September 30, 2001.
In February 2002, the Company received $340,000 in short-term financing from an investment group through the issuance of a promissory note maturing on May 15, 2002 and accruing interest at an annual rate of 18%. Included in the loan was $40,000 in fees, consisting specifically of a $30,000 finder's fee and a $10,000 legal fee. These loan fees were fully amortized at September 30, 2002.
In March through June 2002, the Company received $750,000 from an accredited investor group in exchange for 12% convertible debt, along with 3,750,000 common stock warrants, exercisable over a four-year period at the lesser of $0.045 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. Debt issuance costs associated with these loans amounted to $147,500, of which $90,000 represented finder's fees and $57,500 represented legal costs. Amortization of these fees over the pro-rata portion of the one-year term of the loans amounted to $58,397 through September 30, 2002, leaving an unamortized balance of $89,103 at September 30, 2002. Total amortization of all debt issuance costs during the year ended September 30, 2002 amounted to $98,397.
In November 2002 through May 2003, the Company received another $500,000 from the above accredited investor group in exchange for 12% convertible debt, along with 2,500,000 common stock warrants, exercisable over a seven-year period at the lesser of $0.005 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. Debt issuance costs associated with these loans amounted to $83,069, consisting of $66,069 in finder's fees and $17,000 in legal costs. Amortization of these costs over the pro-rata portion of the one-year term of the loans
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 7. DEBT ISSUANCE COSTS (continued)
amounted to $55,173 through September 30, 2003. Total amortization of all debt issuance costs during the year ended September 30, 2003 amounted to $144,276, including $89,103 attributable to the unamortized balance at September 30, 2002. The unamortized balance of the debt issuance costs at September 30, 2003 was $27,896.
NOTE 8. DUE TO OFFICERS
At September 30, 2001, a revolving promissory note agreement for $56,880 was drawn up, due on demand, at an annual interest rate of 18%, for unpaid cumulative advances (plus interest) made by the Company's CEO. During the year ended September 30, 2002, cash advances of $31,500 were made. Additionally, the loan account was increased by $120,875, representing the value of 2,361,814 restricted shares of the Company's common stock held by the CEO, which were used as collateral and transferred to a note holder in June of 2002 to partially cover a $300,000 debt, and by $16,202, representing the value of 794,857 restricted shares of the Company's common stock held by the CEO, which were pledged to and sold by a convertible note holder on a Company obligation in default. Repayments of debt by the Company amounted to $144,806 and accrued interest amounted to $6,913 during the year ended September 30, 2002, resulting in a loan balance due the CEO at September 30, 2002 of $87,564. During the year ended September 30, 2003, additional cash advances totaling $37,869 were made, along with $37,423, representing another 1,835,885 restricted shares of the Company's common stock pledged and sold by the above note holder. Repayments of debt by the Company amounted to $136,009, including re-issuance of 2,361,814 restricted shares of the Company's common stock valued at $120,875 that had been transferred to a note holder during the previous fiscal year. Accrued interest during the year ended September 30, 2003 was $10,073, bringing the loan balance due the CEO at September 30, 2003 to $36,920. The loan balance at September 30, 2003 is currently due on demand and continues to accrue interest at the rate of 18% per year.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 8. DUE TO OFFICERS (continued)
At September 30, 2001, a promissory note agreement for $25,874 was drawn up, due on demand, at an annual interest rate of 18%, for cumulative advances (plus interest) made by the Company's Secretary/Treasurer. The Secretary/Treasurer had also borrowed on a personal credit card for the Company's behalf in the amount of $18,455, bringing the total obligation due the Secretary/Treasurer at September 30, 2001 to $44,329. During the year ended September 30, 2002, the personal credit card balance was virtually paid- off. Additional loan advances were $19,500, loan repayments were $39,500, and accrued interest was $2,269 during the year ended September 30, 2002, bringing the aggregate loan balance due the Secretary/Treasurer at September 30, 2002 to $8,143. During the year ended September 30, 2003, additional cash advances of $37,500 were made, and accrued interest was $6,522, resulting in a loan balance due the secretary Treasurer at September 30, 2003 of $52,165. The loan balance at September 30, 2003 is currently due on demand and continues to accrue interest at the rate of 18% per year.
During the period May through September 2002, the Company's Chief Technical Officer advanced the Company $32,946, corresponding to 684,407 restricted shares of the Company's common stock held by the officer, which were pledged to and sold by a convertible note holder on a Company obligation in default. Accrued interest at the annual rate of 18% was $1,831 through the end of the fiscal year, bringing the total loan amount to $34,777 at September 30, 2002. In November 2002, the Company re-issued the 684,407 restricted shares to the Chief Technical Officer (valued at $32,946) that had been pledged to and sold by the convertible note holder during the previous fiscal year. Accrued interest amounted to $1,205 during the year ended September 30, 2003, resulting in a loan balance of $3,036 as of that date. The loan balance at September 30, 2003 is currently due on demand and continues to accrue interest at the rate of 18% per year.
The aggregate amount due officers at September 30, 2003 and 2002 was $92,121 and $130,484, respectively, and interest expense on the officer loans amounted to $17,800 and $11,013 for the years ended September 30, 2003 and 2002, respectively.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 8. DUE TO OFFICERS (continued)
As of September 30, 2003, the Company owed its officers $1,113,620 in accrued compensation. Of this amount, $360,000 was attributable to aggregate staying bonuses payable to the President and Secretary/Treasurer of the Company. The staying bonuses are to be compensated for with Conectisys Corp. restricted stock, valued at the average bid and ask price for the stock for the 30 days prior to each respective year-end issuance date. The total common stock to be issued as staying bonuses amounted to 6,888,922 shares at September 30, 2003.
NOTE 9. NOTES PAYABLE
Notes payable at September 30, 2003 consisted of the following:
Registered Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $29,480
Accrued interest of $5,340 and principal
on Convertible Debenture convertible
into approximately 17,410,000
shares of common stock at the price
of $0.002 at September 30, 2003 5,340 $ 34,820
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% 29,480
Accrued interest of $5,340 and principal
on Convertible Debenture convertible
into approximately 17,410,000
shares of common stock at the price
of $0.002 at September 30, 2003 5,340 34,820
-------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12% $33,900
Accrued interest of $6,141 and principal
on Convertible Debenture convertible
into approximately 20,020,500
shares of common stock at the price
of $0.002 at September 30, 2003 6,141 $ 40,041
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% 20,730
Accrued interest of $3,756 and principal
on Convertible Debenture convertible
into approximately 12,243,000
shares of common stock at the price
of $0.002 at September 30, 2003 3,756 24,486
-------
Convertible Debenture #2
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12% 40,000
Accrued interest of $6,694 and principal
on Convertible Debenture convertible
into approximately 23,347,000
shares of common stock at the price
of $0.002 at September 30, 2003 6,694 46,694
--------
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $40,000
Accrued interest of $6,694 and principal
on Convertible Debenture convertible
into approximately 23,347,000
shares of common stock at the price
of $0.002 at September 30, 2003 6,694 $ 46,694
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% 45,000
Accrued interest of $7,530 and principal
on Convertible Debenture convertible
into approximately 26,265,000
shares of common stock at the price
of $0.002 at September 30, 2003 7,530 52,530
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% 25,000
Accrued interest of $4,183 and principal
on Convertible Debenture convertible
into approximately 14,591,500
shares of common stock at the price
of $0.002 at September 30, 2003 4,183 29,183
-------
|
Convertible Debenture #3
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12% 80,000
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Accrued interest of $12,388 and principal
on Convertible Debenture convertible
into approximately 46,194,000
shares of common stock at the price
of $0.002 at September 30, 2003 $12,388 $ 92,388
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% 80,000
Accrued interest of $12,388 and principal
on Convertible Debenture convertible
into approximately 46,194,000
shares of common stock at the price
of $0.002 at September 30, 2003 12,388 92,388
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% 90,000
Accrued interest of $13,936 and principal
on Convertible Debenture convertible
into approximately 51,968,000
shares of common stock at the price
of $0.002 at September 30, 2003 13,936 103,936
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% 50,000
Accrued interest of $7,743 and principal
on Convertible Debenture convertible
into approximately 28,871,500
shares of common stock at the price
of $0.002 at September 30, 2003 7,743 57,743
--------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #4
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
November 27, 2003 at an annual interest
rate of 12% $33,204
Accrued interest of $3,351 and principal
on Convertible Debenture convertible
into approximately 18,277,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,351 $ 36,555
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 27, 2003 at an annual interest
rate of 12% 33,204
Accrued interest of $3,351 and principal
on Convertible Debenture convertible
into approximately 18,277,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,351 36,555
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 27, 2003 at an annual interest
rate of 12% 33,207
Accrued interest of $3,352 and principal
on Convertible Debenture convertible
into approximately 18,279,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,352 36,559
-------
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #5
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $3,485 and principal
on Convertible Debenture convertible
into approximately 26,742,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,485 $ 53,485
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $3,485 and principal
on Convertible Debenture convertible
into approximately 26,742,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,485 53,485
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $3,485 and principal
on Convertible Debenture convertible
into approximately 26,742,500
shares of common stock at the price
of $0.002 at September 30, 2003 3,485 53,485
-------
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #6
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $2,334 and principal
on Convertible Debenture convertible
into approximately 26,167,000
shares of common stock at the price
of $0.002 at September 30, 2003 2,334 $ 52,334
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $2,334 and principal
on Convertible Debenture convertible
into approximately 26,167,000
shares of common stock at the price
of $0.002 at September 30, 2003 2,334 52,334
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% 50.000
Accrued interest of $2,335 and principal
on Convertible Debenture convertible
into approximately 26,167,500
shares of common stock at the price
of $0.002 at September 30, 2003 2,335 52,335
------- -----------
|
Subtotal of all Registered Convertible Debentures 1,082,850
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
Less reclassified accrued interest $ (119,645)
------------
Subtotal principal value 963,205
Less unamortized note discount (195,592)
-----------
Net carrying value of
Registered Convertible Debentures $ 767,613
Note payable to Devon Investment Advisors,
unsecured, due on demand, interest payable
at an annual rate of 10%. 241,824
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including interest
at an annual rate of 18%. 173,924
Convertible note payable to Laurus Master Fund, Ltd.,
unsecured, with interest payable at an annual rate
of 8%, conversion premium of 25% based on current
market price of the Company's common stock (as defined),
initially due October 12, 2001 and extended to
December 1, 2001. Currently in default. 6,851
-----------
Total notes payable $ 1,190,212
Current porti (1,090,597)
-----------
Long-term porn $ 99,615
===========
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
On April 12, 2001, the Company received $300,000 in proceeds from Laurus Master Fund, Ltd. ("Laurus") and issued a $300,000 principal value 8% convertible note due on October 12, 2001, along with 1,000,000 common stock warrants, exercisable at $0.192 per share over a four-year period. $77,228 of the proceeds was allocated to the cost of the warrants, with the remaining $222,772 allocated to the cost of the debt instrument, based on the relative fair market values of the note and the warrants at the date of issuance.
A convertible note discount of $77,228 was also recognized, which was effectively fully amortized at September 30, 2002 as interest expense.
The note is convertible (at the option of the holder) into common stock at the lesser of 80% of the average of the 3-lowest closing bid prices during the 30 trading days prior to the closing date (April 12, 2001) or 80% of the average of the 3-lowest closing bid prices during the 30 trading days prior to the conversion date (assumed to be September 30, 2002). At April 12, 2001, the note was convertible into approximately 2,181,500 common shares at an exercise price of approximately $0.1021 per share, and at September 30, 2002, the note was convertible into approximately 20,189,875 common shares at an exercise price of approximately $0.0064 per share. In either instance, the fair value of the debt instrument (due to the 80% pricing advantage) was $375,000 (a 25% premium on the principal value), resulting in a further convertible debt discount of $152,228, representing the difference between the note's fair value of $375,000 and the allocated proceeds at issuance of $222,772. This discount was also fully amortized at September 30, 2001.
A corresponding $152,228 credit was made to additional paid-in capital for the conversion benefit option, i.e., the intrinsic value of the matured debt instrument. Interest accrued at 8% on the $300,000 note principal through September 30, 2002 was $17,168; for presentation purposes, this interest was added to the principal value of the note at the year-end balance sheet date. The holder can also convert the accrued interest into common stock at a 25% premium ($4,292), bringing the total conversion benefit
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 9. NOTES PAYABLE (continued)
option to $155,027. Total amortization of interest on the discounted convertible note during the year ended September 30, 2001 (including $32,775 in debt issuance costs associated with the transaction) amounted to $265,030.
The maturity date on the $300,000 principal value 8% convertible note, initially October 12, 2001, was extended to December 1, 2001. Because of the inherent conversion benefit feature, the aggregate note with accrued interest, totaling $311,194 at September 30, 2001, was classified as a long-term liability.
The Company was unable to pay-off the note at maturity. However, after receiving bridge financing from another investment group in February 2002, the Company subsequently repaid $150,000 of the obligation, as the note holder elected to not convert the debt to shares. Consequently, the note holder sold 1,479,264 of the 4,773,208 shares of the Company's common stock that had been pledged by officers of the Company as collateral, resulting in net proceeds of $49,148. Adding accrued interest of $17,168 at an annual rate of 8%, brought the loan balance at September 30, 2002 to $129,214. During the year ended September 30, 2003, the note holder sold the remaining 3,293,944 pledged shares for net proceeds of $67,144. The note holder elected to convert essentially all the remaining debt for common stock of the Company, receiving 26,000,000 newly issued Company shares valued at $58,400, and bringing the tentative liability down to $3,670. Accrued interest amounted to $3,183, resulting in a total liability to the note holder at September 30, 2003 of $6,851. In connection with the pay-down of the debt, the $155,027 beneficial conversion option noted above was reduced to zero through transference to common stock.
In February 2002, the Company borrowed $340,000 from the Mercator Momentum Fund ("Mercator"). This loan from Mercator was a short-term loan due May 15, 2002 and accrues interest at an annual rate of 18%. The loan was secured by shares of the Company's common stock. In April and May of 2002, the Company paid Mercator an aggregate of $100,000. On June 14, 2002 Mercator transferred collateral in the form of 5,861,814 shares of common stock to their name because the Company was in default on the balance of the loan.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
Thereafter, on June 21, 2002, Mercator filed an action against Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court of California, County of Los Angeles (Case No. BC276283) for breach of promissory note, foreclosure of security interests, fraud and deceit. Mr. Spigno is the Chairman of the Board and a director of the Company and is also the Company's Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief Financial Officer. On July 3, 2002, Mercator filed a first amended complaint in the Superior Court of California, County of Los Angeles (Case No. BC276283), adding a claim for common count for money lent.
Mercator seeks damages of approximately $243,000 plus approximately $66 in interest per day commencing June 21, 2002 and other compensatory and punitive damages of unspecified amount. The Company believes that Mercator's claims are without merit because, among other factors, they have affirmative defenses to those claims, including usury and the satisfaction of amounts owed under loan from Mercator as a result of the enforcement by Mercator of its security interest in shares of common stock. The Company intends to vigorously defend against these claims and to pursue appropriate counterclaims against Mercator. The Court is tentatively scheduled to hear the matter on March 1, 2004.
NOTE 10. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's continued research and development efforts as of March 29, 2002, the Company entered into a securities purchase agreement and related agreements with four accredited investors (the "Purchasers") for the purchase of up to $750,000 of the Company's 12% Convertible Debentures due one year from their date of issuance. The Company granted the holders of the debentures a continuing security interest in all of the Company's assets to secure the Company's obligations under the debentures and related agreements. The debentures bear interest at a rate of 12% per annum, payable quarterly in common stock or cash at the option of the Purchasers.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On March 29, 2002 the Company issued an aggregate of $300,000 of 12% convertible debentures in a private offering to four accredited investors. Three of the investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of the company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
On May 10, 2002 the Company issued an aggregate of $150,000 of 12% convertible debentures in a private offering to four accredited investors. Three of the investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of the Company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
On June 17, 2002 the Company issued an aggregate of $300,000 of 12% convertible debentures in a private offering to four accredited investors. Three of the investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of the company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
The Company entered into another securities purchase agreement plus related agreements with three accredited investors on November 27, 2002 (essentially the same re-organized investor group delineated above) for the purchase of up to $500,000 of the Company's 12% Convertible Debentures due one year from their date of issuance. The Company granted the holders of the debentures a continuing security interest in all of the Company's assets to secure the Company's obligations under the debentures and related agreements. The debentures bear interest at a rate of 12% per annum, payable quarterly in common stock or cash at the option of the Purchasers.
On November 27, 2002 the Company issued an aggregate of $200,000 of 12% convertible debentures in a private offering to three accredited investors who, if certain conversion limitations are disregarded, would be deemed beneficial owners of 5% or more of the Company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,000,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
On March 3, 2003 the Company issued an aggregate of $150,000 of 12% convertible debentures in a private offering to these same three accredited investors. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On May 12, 2003 the Company issued an aggregate of $150,000 of 12% convertible debentures in a private offering to the three accredited investors. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
The Company's convertible debentures and related warrants contain anti- dilution provisions whereby, if the Company issues common stock or securities convertible into or exercisable for common stock at a price less than the conversion or exercise prices of the debentures or warrants, the conversion and exercise prices of the debentures or shall be adjusted as stipulated in the agreements governing such debentures and warrants.
As part of the recording of the convertible debt transactions, a beneficial conversion option was recognized, along with a corresponding convertible debt discount. The fair value of the twenty-one debt instruments issued totaling $1,250,000 in principal value was $2,500,000 in aggregate, representing a 100% premium on the principal value (due to the 100% pricing advantage) and making the beneficial conversion option $1,140,097 at the inception of the loans ($1,250,000 proceeds less $109,903 allocated to the issuance of the 6,250,000 related warrants).
During the fiscal year ended September 30, 2002, the Company issued 12,667,178 shares of common stock in connection with interest payments and upon conversion of an aggregate $93,130 of principal and $6,916 of related interest on the Company's convertible debentures. A corresponding pro-rata reduction of $80,702 to the beneficial conversion option was made. During the fiscal year ended September 30, 2003, the Company issued another 103,778,301 shares of common stock in connection with the conversion of another $193,665 of principal and $34,355 of accrued interest on the Company's convertible debentures,
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
resulting in a convertible debt principal balance at September 30, 2003 of $963,205 (net of an aggregate of $286,795 in debt conversions through that date). A corresponding pro-rata reduction of $177,845 was made to the beneficial conversion option during the fiscal year ended September 30, 2003 (an aggregate of $258,547 since the inception of the loans), bringing the beneficial conversion option balance at September 30, 2003 to $881,550.
The aggregate note discount of $1,250,000 is being amortized over the one-year lives of the respective debt instruments. Of this amount, $279,115 was amortized during the fiscal year ended September 30, 2002 and another $653,720 during the year ended September 30, 2003, while $69,233 in convertible bond discount was transferred to equity upon conversion of $93,130 in debt principal during the fiscal year ended September 30, 2002 plus another $52,340 upon conversion of $193,665 of debt principal during the fiscal year ended September 30, 2003, resulting in an unamortized convertible debt discount balance of $195,592 at September 30, 2003.
As of September 30, 2003, the Company was indebted for an aggregate of $1,082,850, including $963,205 of principal and $119,645 of accrued interest on these convertible debentures. To the extent debentures issued by the Company are converted into shares of common stock, the Company will not be obligated to repay the converted amounts. Of the remaining principal amount at September 30, 2003, $99,615 has been classified as long-term, based upon additional principal conversions made subsequent to the end of the fiscal year.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's authorized capital stock consists of 1,000,000,000 shares of common stock, no par value per share, and 50,000,000 shares of preferred stock, $1.00 par value per share. Of the 50,000,000 authorized shares of preferred stock, 1,000,000 shares have been designated as Class A Preferred Stock and 1,000,000 shares have been designated as Class B Preferred Stock, and the remaining 48,000,000 shares are undesignated. As of September 30, 2003, there were 490,224,872 shares of the Company's common stock outstanding held by approximately 750 holders of record and 200,020 shares of the Company's Class A Preferred Stock outstanding held by one holder of record and no shares of Class B Preferred Stock outstanding.
Each share of Class A Preferred Stock is entitled to 100 votes per share on all matters presented to the Company's shareholders for action. The Class A Preferred Stock does not have any liquidation preference, additional voting rights, conversion rights, anti-dilution rights or any other preferential rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the Company's common stock. The Class B Preferred Stock does not have any liquidation preference, voting rights, other conversion rights, anti-dilution rights or any other preferential rights.
During the months October 2001 through January 2002, the Company issued a total of 2,333,334 shares of its restricted common stock for cash of $145,000 in private placements. In conjunction with these stock issuances, the Company issued 700,000 common stock warrants at an exercise price of $1.00 per share, expiring November 2003 through January 2005.
During the period October 2001 through September 2002, the Company issued 5,300,000 shares of its common stock (of which 4,100,000 shares were restricted) to a consultant in exchange for accrued consulting services of $203,566. In September 2002, 1,000,000 common stock options were also issued to the consultant at an exercise price of $0.50 until September 2004. The common stock options were not recorded in the financial statements, as they had nominal value.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In October 2001 through November 2001, the Company issued 60,000 shares of its Class A preferred stock to its CEO for a $60,000 reduction of debt. An additional 109,980 of Class A preferred stock options were issued to the CEO at an exercise price per share of $1.00 through November 2005.
In December 2001 and January 2002, the Company issued 500,000 shares of its restricted common stock to a consultant in exchange for media services rendered in the amount of $87,500.
In December 2001 and January 2002, a consultant exercised 550,000 common stock options at $0.13 per share in exchange for debt of $71,500. As part of the transaction, $31,625 in stock options exercisable was transferred to common stock.
In January 2002, the Company issued 192,100 common stock warrants to investors at an exercise price of $2.00 per share, expiring in September 2004.
During the months February 2002 through August 2002, the Company issued 1,680,000 shares of its common stock (including 50,000 restricted shares) in exchange for $85,500 in consulting services.
During the months March 2002 through June 2002, the Company issued 3,750,000 in three-year common stock warrants as part of a $750,000 12% convertible debt issuance, exercisable at the lower of $0.045 and 50% of the market price of the common stock (as defined) through the date of exercise. The warrants were recorded at $100,087 and the debt at $649,913, based upon the relative fair values of each, and a beneficial conversion option for an additional $649,913 was also recognized.
In May 2002 and June 2002, the Company issued a total of 500,000 shares of its restricted common stock for cash of $25,000 (net of $25,000 in fees) in private placements. In conjunction with these issuances, the Company issued 500,000 common stock options at an exercise price of $0.50 per share, expiring April 2004 through June 2004. The common stock options were not recorded in the financial statements, as they had nominal value.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
In May 2002, the Company issued 100,000 shares of its restricted common stock to an engineering consultant in exchange for $5,000 in accrued services.
In June 2002 through September 2002, the Company issued 12,667,178 of its common shares to an investor group in exchange for $93,130 in convertible debt and $6,916 in interest (considered services). In conjunction with these transactions, $80,702 of the Company's beneficial conversion option was also transferred to common stock, and $69,233 in convertible note discounts was applied against common stock as a result of debt conversion.
In June 2002, the Company issued 48,077 shares of its common stock to its former Acting President for $7,788 in accrued compensation. In June 2002, the Company issued 3,500,000 shares of its common stock valued at $179,125 in partial settlement of a $300,000 note.
In June 2002, the Company issued 1,000,000 restricted common shares to an outside accountant in exchange for $30,000 in accrued services rendered.
In September 2002, the Company issued 4,000,000 shares of its restricted common stock to a consultant/investor for $30,000 in cash and reduction of debt of $10,000. 1,000,000 common stock options were also issued to the consultant at an exercise price of $0.50 until September 2004. The common stock options were not recorded in the financial statements, as they had nominal value.
During the months October 2002 through July 2003, the Company issued 15,000,000 shares of its restricted common stock to a consultant in exchange for promotional services valued at $65,000.
During the months October 2002 through September 2003, the Company issued 119,630,468 shares of its restricted common stock to a consultant for debt reduction of $162,500 and accrued fees of $91,305.
During the months October 2002 through September 2003, the Company issued 103,778,301 of its common shares to an investor group in exchange for $193,665 principal value of convertible debt and $34,355 in accrued interest. In conjunction with these transactions, $177,845 of the Company's beneficial conversion
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
option was also transferred to common stock, and $52,340 in convertible note discounts was applied against common stock as a result of debt conversion.
During the months November 2002 through May 2003, the Company issued 14,500,000 shares of its restricted common stock to consultants in exchange for media services rendered of $49,000.
During the months November 2002 through September 2003, the Company issued 128,500,000 shares of its restricted common stock for cash of $180,000 in private placements.
During the months November 2002 through May 2003, the Company issued 2,500,000 in seven-year common stock warrants as part of a %500,000 12% convertible debt issuance, exercisable at the lower of $0.01 and 50% of the market price of the common stock (as defined) through the date of exercise. The warrants were recorded at $9,816 and the debt at $490,184, based upon the relative fair values of each, and a beneficial conversion option for an additional $490,184 was also recognized.
During the months November 2002 through January 2003, the Company issued 4,504,280 shares of its restricted common stock to its corporate officers in exchange for a net reduction of debt of $183,542.
During the months December 2002 through September 2003, the Company issued 26,000,000 shares of its common stock to a convertible note holder in exchange for $58,400 in debt reduction. In conjunction with these transactions, the Company transferred a beneficial conversion option valued at $155,027 to common stock.
In December 2002 and January 2003, the Company issued its advisory board members 1,250,000 shares of its restricted common stock in exchange for $12,500 in services.
In December 2002, the Company issued 750,000 shares of its restricted common stock to staff consultants as a $7,500 bonus.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued
In January 2003, the Company received back 1,000,000 restricted common shares held by a former director as collateral on a $75,000 loan and re-issued the shares as interest (valued at $9,000). The $75,000 loan (previously recorded as an addition to capital) was paid-off by and recorded as a new loan to the Company's CEO and Secretary/Treasurer.
In May 2003, the Company issued 12,000,000 shares of its restricted common stock to an outside accountant in exchange for $120,000 in accrued services rendered.
NOTE 12. INCOME TAXES
Deferred income taxes consisted of the following at September 30, 2003:
Deferred tax asset, benefit
of net operating loss
carryforward $ 7,800,000
Valuation allowance (7,800,000)
-----------
Net deferred taxes $ -
===========
|
The valuation allowance offsets the net deferred tax asset, since it is more likely than not that it would not be recovered. During the year ended September 30, 2003, the deferred tax asset and valuation allowance were both increased by $900,000.
The Company has approximately $19,400,000 in both federal and California net operating loss carryforwards. The federal net operating loss carryforwards expire as follows: $2,700,000 in the year 2012, $5,300,000 in 2018, $1,200,000 in 2019, $3,500,000 in 2020, $2,400,000 in 2021, $2,300,000 in 2022, and $2,000,000 in 2023. The California net operating loss carryforwards expire as follows: $2,700,000 in the year 2002, $5,300,000 in 2003, $1,200,000 in 2004, $3,500,000 in 2005, $2,400,000 in 2006, $2,300,000 in 2007, and $2,000,000 in 2008. The latest federal and California corporate income tax returns filed by the Company were for the tax year ended November 30, 2000.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 13. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into three employment agreements with key individuals, the terms of the agreements are as follows:
1) The CEO (and President) of the Company entered into an agreement dated October 2, 1995 (which was subsequently amended September 1, 1997, September 1, 1999, and March 27, 2000) for a period of five years (to April 1, 2005), and he is entitled to receive a base salary of $160,000 per year. The employee shall further receive a bonus, paid at year-end, equal to 50% of the employee's salary, for continued employment. The staying bonus will be compensated for with the Company's restricted common stock. He is also granted an option to purchase up to 2,000,000 shares of the Company's restricted common stock at a price equal to 50% of the average market value for the prior 30 trading days before exercise. On March 27, 2000, the exercise price was adjusted to a flat $0.3864 per share, with an expiration date of December 2, 2003, which, in turn, has subsequently been extended to December 2, 2005.
2) The Secretary and Treasurer of the Company entered into an Agreement dated October 2, 1995 (which was subsequently amended September 1, 1997, September 1, 1999, and March 27, 2000), for a period of five years (extended through April 1, 2005), and she is entitled to receive a base salary of $80,000 per year. The employee shall further receive a bonus, paid at year- end, equal to 50% of the employee's salary, for continued employment. The staying bonus shall be compensated for with the Company's restricted common stock. She is also granted an option to purchase up to 500,000 shares of the Company's restricted common stock at a price equal to 60% of the average market value for the prior 180 trading days before exercise. On March 27, 2000, the exercise price was adjusted to a flat $0.38 per share, with an expiration date of December 31, 2004.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
3) The Chief Technical Officer of the Company entered into an agreement dated August 1, 1998 for an initial term of three years (extended through August 1, 2003 and again through January 19, 2009), and he is entitled to receive a base salary of $150,000 per year, with a minimum of $90,000 to be paid annually in cash and the balance paid (at the option of the Company) in cash or restricted common stock under rule 144. The employee shall receive a hire-on bonus of $75,000 worth of the Company's restricted common stock under rule 144, at one-half market price. The employee shall further receive performance bonuses (paid in restricted common stock, as above) upon successful completion of specific milestones pertaining to the implementation and deployment of certain software (up to $862,500). If substantially all performance milestones are met, he is also granted an option to purchase up to 500,000 shares of the Company's restricted common stock at a price equal to 60% of the average market value at the date of purchase. As of September 30, 2003, none of the aforementioned milestones had been successfully completed.
Litigation
There has been one recent legal proceeding in which the Company has been a party:
In February 2002, the Company borrowed $340,000 from the Mercator Momentum Fund ("Mercator") in order to make an initial $100,000 payment to Laurus Master Fund, Ltd. and to fund continuing development of the Company's H- Net(TM) system. This loan from Mercator was a short-term loan due May 15, 2002 and accrues interest at an annual rate of 18%. The loan was secured by shares of the Company's common stock. As of June 13, 2002, the Company owed Mercator approximately $243,000 of principal and accrued and unpaid interest under this loan and was in default in the repayment of this debt.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
On June 14, 2002, Mercator transferred collateral in the form of 5,861,814 shares of the Company's common stock into its name as a result of the Company's default on Mercator's loan. Of the 5,861,814 shares of common stock transferred into the name of Mercator 3,500,000 shares of the Company's common stock were issued and pledged as collateral by the Company in February 2002, and 2,361,814 shares of the Company's common stock were issued and pledged as collateral by Robert Spigno, the Company's Chief Executive Officer, in February 2002.
On June 21, 2002 Mercator filed an action against Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court of California, County of Los Angeles (Case No. BC276283) for breach of promissory note, foreclosure of security interests and fraud and deceit. Mr. Spigno is the Chairman of the Board and a director of the Company and is also the Company's Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief Financial Officer. On July 3, 2002, Mercator filed a first amended complaint in the Superior Court of California, County of Los Angeles (Case No. BC276283) adding a claim for common count for money lent. Mercator seeks damages of approximately $243,000 plus approximately $66 in interest per day commencing June 21, 2002 and other compensatory and punitive damages of unspecified amount. The Company believes that Mercator's claims are without merit because, among other factors, they have affirmative defenses to those claims, including usury and the satisfaction of amounts owed under loan from Mercator Momentum Fund as a result of the enforcement by Mercator of its security interest in shares of common stock. The Company intends to vigorously defend against these claims and to pursue appropriate counterclaims against Mercator. The Court is tentatively scheduled to hear the matter on March 1, 2004.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
The Company, during its normal course of business, may be subject from time to time to disputes and to legal proceedings against it. Both counsel and management do not expect that the ultimate outcome of any current claims will have a material adverse effect on the Company's financial statements.
NOTE 14. FORM S-8 FILINGS
In October 2002, March 2003, and July 2003, the Company filed registration statements on Forms S-8 covering an aggregate of 15,000,000 shares issued to an independent consultant to the Company, which authorized the re-sale of the 15,000,000 shares of common stock valued at $65,000.
NOTE 15. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note holder options to purchase 500,000 shares of the Company's Class B preferred stock at an exercise price of $5.00 per share. As consideration, the Company reduced its debt to the note holder by $50,000 and received an extension of time to pay-off its promissory note. The Company also issued to its CEO options to purchase another 500,000 shares of the Company's Class B preferred stock at an exercise price of $5.00 per share in exchange for a reduction in debt of $50,000. Total consideration received on the above issued options, as evidenced by debt reduction, was $100,000. These options can be exercised through November 1, 2002 and can also be converted into common stock at the rate of 10 common shares for each Class B preferred share. In September 2001, the exercise price on the Class B preferred stock options was adjusted to $2.50 per share and the exercise period extended to November 1, 2005.
The Company's CEO currently owns 200,020 shares of the Company's Class A preferred stock, of which 60,000 shares were purchased during the year ended September 30, 2002, and has options to purchase another 250,000 shares for $1.00 per share through November 1, 2005.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The Company has granted various common stock options and warrants to employees and consultants. Generally, the options and warrants were granted at approximately the fair market value of the Company's common stock at the date of grant and vested immediately, except that when restricted rule 144 common stock was issued, the options and warrants were granted at an average market discount of 50% (ranging from between 20% to 75%).
The Company accounts for stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. Accordingly, compensation expense for common stock options and warrants issued to employees for services have been recorded as the difference between the intrinsic value of those services as measured by the (discounted) market value of the common stock at the date of grant and the exercise price, with pro forma disclosure of the excess market value as required by FASB No. 123. No common stock options or warrants wee granted to employees (including officers) and directors of the Company during the years ended September 30, 2003 or 2002.
All common stock options and warrants issued to consultants and other non- employees have been recorded at the fair value of the services rendered and equivalent to the market value (as discounted, if applicable) of the equity instruments received as per FASB No. 123. The market value was determined by utilizing an averaging convention of between 5 to 30 days of the closing price of the Company's common shares as traded on the over-the-counter bulletin board (stock symbol CNES) through the grant date and applying certain mathematical assumptions as required under the Black-Scholes model. Such assumptions, pertaining to the risk-free annual rate of return and stock volatility, were generally the same as those mentioned above when making fair value disclosures for the issuance of officer and employee stock options, except that the risk-free annual rate of return during the latter half of fiscal 2001 and subsequent was assumed to be 5% (rather than 6%) due to the general decline of interest rates occurring throughout the economy and the world.
At September 30, 2001, the Company had an aggregate of 5,607,154 common stock options and a total of 1,000,000 Class B preferred stock options recorded as additional paid-in capital at a value of $1,375,233. Of the common stock options and warrants, 2,043,654
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 15. STOCK OPTIONS (continued)
had been issued to officers and employees and the remaining 3,563,500 had been issued to consultants and investors.
In December 2001 and January 2002, a consultant exercised 550,000 common stock options, applying the $71,500 cost of exercise against an outstanding note payable. Stock options exercisable were also reduced and transferred to common stock in the amount of $31,625.
In March 2002 trough June 2002, 3,750,000 three-year common stock warrants were issued to an accredited investor group in connection with a $750,000 12% convertible debenture financing arrangement (see Note 10 above). The allocated cost of these warrants amounted to $100,087, so that the total stock options and warrants exercisable at September 30, 2002 became $1,443,695.
In November 2002 trough May 2003, 2,500,000 seven-year common stock warrants were issued to an accredited investor group in connection with a $500,000 12% convertible debenture financing arrangement (see Note 10 above). The allocated cost of these warrants amounted to $9,816, resulting in a recorded balance of stock options and warrants exercisable at September 30, 2003 of $1,453,511 (including $100,000 attributable to 1,000,000 Class B preferred stock options noted above).
As of September 30, 2003, the Company had an additional 4,852,205 common stock options that had been granted to consultants and investors at exercise prices ranging from $0.50 to $2.00 per share, expiring from November 1, 2003 through January 16, 2005. Because these strike prices were substantially above the market price of the Company's common stock, no value was attributed to these options at the time of grant. The Company also granted a contingent issuance to its Chief Technical Officer of 2,000,000 common stock options exercisable at $0.50 per share and expiring December 31, 2004, which will note vest until certain milestones have been attained. These respective common stock options and contingent issuances have been excluded from the summarized table below.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the fiscal years ended September 30, 2003 and September 30, 2002 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2001 5,607,154 $.420
Granted 3,750,000 .050
Exercised (550,000) .130
----------
Balance outstanding, September 30, 2002 8,807,154 .280
Granted 2,500,000 .010
----------
Balance outstanding, September 30, 2003 11,307,154 $.204
========== =====
|
The following table summarizes information about common stock options at September 30, 2003:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
--------------- --------- ------- -------- ---------- -------
$2.000 - $2.000 563,500 11 $ 2.000 563,500 $ 2.000
$ .380 - $ .380 100,000 15 $ .380 100,000 $ .380
$ .192 - $ .192 1,000,000 6 $ .192 1,000,000 $ .190
$ .050 - $ .050 3,750,000 19 $ .002 3,750,000 $ .050
$ .130 - $ .130 1,450,000 23 $ .130 1,450,000 $ .130
$ .386 - $ .386 1,443,654 26 $ .386 1,443,654 $ .386
$ .380 - $ .380 500,000 26 $ .380 500,000 $ .380
& .002 - $ .002 2,500,000 76 $ .002 2,500,000 $ .002
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 16. SUBSEQUENT EVENTS
(a) In November 2003, the Company filed a registration statement on Form S-8 covering 12,000,000 shares issued to an independent consultant, authorizing the re-sale of the 12,000,000 shares of common stock valued at $25,000.
(b) During the months of October 2003 through December 2003, the Company received funding of another $200,000 (net proceeds of $138,722) from an investor group in exchange for one-year 12% convertible debt and 1,000,000 common stock warrants, with such warrants exercisable at $0.005 per share over a seven-year period.
During the subsequent period October 1, 2003 through January 8, 2004, this same investor group also converted approximately $92,000 of debt principal along with accrued interest into 84,651,456 shares of the Company's common stock. Effective October 2003, as an inducement for this investor group's continued funding of the Company's operations, the Company agreed to allow prospective conversions of issued convertible debt instruments into freely- trading shares of the Company's common stock at the lower of 40% (from 50% previously) of the average of the three lowest intra-day trading prices of a share of the Company's common stock on the OTC Bulletin Board during the twenty trading days immediately preceding the conversion date, and either (a) $.06 for the March, May, and June 2002 convertible debentures, or (b) $.01 for the November 2002, March and May 2003 convertible debentures. The effect on the Company's future operations would be a charge to earnings of approximately $500,000 (including accrued interest).
(c) Through January 8, 2004, in addition to the common share issuances described in Notes 16(a) and 16(b) above, the Company has issued restricted common stock in the aggregate of 116,400,000 shares, valued at approximately $118,500. Of the aggregate amount, 65,100,000 shares were issued to a consultant as debt reduction of $65,100, 50,000,000 shares were issued in a private placement for $50,000 in cash, and 1,300,000 shares were issued to a consultant for services rendered of $3,400. In addition, 15,845 Class A preferred stock options were exercised by the Company's CEO at $1.00 per share against a reduction of accrued compensation of $15,845.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 16. SUBSEQUENT EVENTS (continued)
(d) As of January 1, 2004, the President and Secretary/Treasurer of the Company had earned additional annual staying bonuses of $80,000 and $40,000, respectively, payable in restricted shares of the Company's common stock. Based upon the average bid and ask price of the Company's common stock during the prior 30 days of trading of approximately $0.0053 per share, this equates to the issuance of 22,641,509 shares of common stock to satisfy the additional liability.
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 and September 30, 2003
Mar. Sep. 30
2004 2003
Unaudited Audited
Assets
Current assets
Cash and cash equivalents 43,269 2,282
Prepaid staying bonus 90,000 0
Debt issuance cost - current, net of accumulated
amortization of $316,345, and $275,448 98,124 27,896
Total current assets 231,393 30,178
Property and equipment, net of accumulated
depreciation of $311,684, and $304,553 25,345 32,476
License and technology, net of accumulated
amortization of $421,478, and $421,478 0 0
Total assets 256,738 62,654
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 and September 30, 2003
Mar. Sep. 30
2004 2003
Unaudited Audited
Liabilities and shareholders' equity
Current liabilities
Accounts payable 281,680 274,746
Accrued compensation 1,331,394 1,113,620
Due to officers 73,896 92,121
Accrued interest payable 404,661 339,965
Other current liabilities 17,760 14,410
Notes payable and current potion of
long-term debt 3,365,541 1,090,597
Total current liabilities 5,474,932 2,925,459
Long-term debt, net of current 48,500 99,615
Total liabilities 5,523,432 3,025,074
Shareholders' equity
Preferred stock - Class A, 1,000,000 shares authorized
$1.00 par value, 215,865, and 200,020 issued and outstanding 215,865 200,020
Convertible preferred stock - Class B, 1,000,000
shares authorized, $1.00 par value; -0- shares
issued and outstanding 0 0
Common stock - 1,000,000,000 shares authorized,
no par value, 726,799,714, and 490,224,872
issued and outstanding 20,208,640 19,807,537
Additional paid in capital:
Common stock, no par value
13,807,154 and 11,307,154
exercisable options and warrants 1,355,873 1,353,511
Convertible preferred stock - Class B
$1.00 par value, 1,000,000 options exercisable 100,000 100,000
Beneficial conversion option 0 881,550
Accumulated gain (deficit) during development stage (27,147,072) (25,305,038)
Total shareholders' equity (5,266,694) (2,962,420)
Total liabilities and shareholders' equity 256,738 62,654
|
The accompanying notes are an integral part of these financial statements.
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended March 31, 2004 and 2003 And the Cumulative Period From December 31, 1990 (Inception) Through March 31, 2004
Dec. 1, 1990
(Inception)
Period
3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended Through
Mar. 31 Mar. 31 Mar. 31 Mar. 31 Mar. 31
2004 2003 2004 2003 2004
Unaudited Unaudited Unaudited Unaudited Unaudited
Revenues 0 0 0 0 517,460
Cost of goods sold 22,195 35,014 22,195 35,014 812,258
Gross profit (22,195) (35,014) (22,195) (35,014) (294,798)
General and administrative 448,542 398,884 632,350 887,116 20,854,657
Loss from operations (470,737) (433,898) (654,545) (922,130) (21,149,455)
Non-operating income (expense) 0 0 (150,000) 0 (1,247,365)
Interest expense (228,167) (265,848) (1,037,489) (527,438) (3,672,510)
Net loss (698,904) (699,746) (1,842,034) (1,449,568) (26,069,330)
Weighted average shares outstanding 697,702,258 93,438,124 631,525,095 104,251,198
Net loss per share (0.00) (0.01) (0.00) (0.01)
|
The accompanying notes are an integral part of these financial statements.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Balance, Dec. 1, 1990
(re-entry
development stage) 0 0 10,609 1,042,140 (1,042,140) 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 515
Services, Mar. 1993 0 0 2,000 500 0 500
Services, Mar. 1993 0 0 1,200 600 0 600
Net loss for the year 0 0 0 0 (5,459) (5,459)
Balance, Sep. 30, 1993 0 0 16,809 1,044,755 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 23,655
Services, Sep. 1994 0 0 8,700 11,614 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 33,000
Net loss for the year 0 0 0 0 (32,544) (32,544)
Balance, Sep. 30, 1994 16,345 16,345 50,000 1,131,024 (1,080,143) 67,226
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Cash, Feb. 1995 0 0 1,160 232,000 0 232,000
Debt repayment, Feb. 1995 0 0 2,040 408,000 0 408,000
Debt repayment, Feb. 1995 0 0 4,778 477,810 0 477,810
Acquisition of assets, CIPI
Feb. 1995 0 0 28,750 1,950,000 0 1,950,000
Acquisition of assets,
Apr. 1995 0 0 15,000 0 0 0
Cash and services, Apr.
and May 1995 0 0 16,000 800,000 0 800,000
Cash, Jun. 1995 0 0 500 30,000 0 30,000
Acquisition of assets and
services, Sep. 1995 0 0 4,000 200,000 0 200,000
Cash, Sep. 1995 0 0 41 3,000 0 3,000
Acquisition of assets,
Sep. 1995 0 0 35,000 1,750,000 0 1,750,000
Return of assets, CIPI
Sep. 1995 0 0 (27,700) (1,950,000) 0 (1,950,000)
Net loss for the year 0 0 0 0 (2,293,867) (2,293,867)
Balance, Sep. 30, 1995 16,345 16,345 129,569 5,031,834 (3,374,010) 1,674,169
Shares issued in exchange for:
Cash, Feb. 1996 0 0 1,389 152,779 0 152,779
Debt repayment, Feb. 1996 0 0 10,000 612,000 0 612,000
Services, Feb. 1996 0 0 3,160 205,892 0 205,892
Cash, Mar. 1996 0 0 179 25,000 0 25,000
Shares returned and
cnaceled Mar. 1996 0 0 (15,000) 0 0 0
Services, Apr. 1996 0 0 13 2,069 0 2,069
Services, Sep. 1996 4,155 A 4,155 586 36,317 0 40,472
Services, Oct. 1996 0 0 6,540 327,000 0 327,000
Debt repayment, Nov. 1996 0 0 2,350 64,330 0 64,330
Net loss for the year 0 0 0 0 (2,238,933) (2,238,933)
Balance, Sep. 30, 1996 20,500 20,500 138,786 6,457,221 (5,612,943) 864,778
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity (Deficit)
Shares issued in exchange for:
Services, Mar. 1997 0 0 228 6,879 0 6,879
Services, Apr. 1997 0 0 800 13,120 0 13,120
Services, Jul. 1997 0 0 1,500 16,200 0 16,200
Cash, Jul. 1997 0 0 15,000 300,000 0 300,000
Services, Aug. 1997 0 0 5,958 56,000 0 56,000
Adjustment for partial
shares due to reverse
stock split (1:20) 0 0 113 0 0 0
Services, Oct. 1997 0 0 1,469,666 587,865 0 587,865
Debt repayment, Oct 1997 0 0 1,540,267 620,507 0 620,507
Cash, Oct. 1997 0 0 1,500,000 281,250 0 281,250
Services, Nov. 1997 0 0 4,950 10,538 0 10,538
Net loss for the year 0 0 0 0 (2,739,268) (2,739,268)
Balance, Sep. 30, 1997 20,500 20,500 4,677,268 8,349,580 (8,352,211) 17,869
Shares issued in exchange for:
Services, Dec. 1997
through Nov. 1998 0 0 2,551,610 2,338,264 0 2,338,264
Debt repayment, Apr. 1998
through Sep. 1998 0 0 250,000 129,960 0 129,960
Cash, Jan. 1998 through
Jul. 1998 0 0 4,833,334 1,139,218 0 1,139,218
Acquisition of assets,
Jul. 1998 0 0 300,000 421,478 0 421,478
Acquisition of 20% minority
interest in subsidiary,
Jul. 1998 0 0 50,000 59,247 0 59,247
Services, Nov. 1998 60,000 A 60,000 0 0 0 60,000
Net loss for the year 0 0 0 0 (4,928,682) (4,928,682)
Balance, Sep. 30, 1998 80,500 80,500 12,662,212 12,437,747 (13,280,893) (762,646)
Shares issued in exchange for:
Shares returned and canceled
Dec. 1998 0 0 (1,350,000) (814,536) (814,536)
Services, Dec. 1998
through Sep. 1999 0 0 560,029 349,454 150,000 499,454
Cash, Dec. 1998
through Sep. 1999 0 0 1,155,800 129,537 129,537
Debt repayment, Sep. 1999 39,520 A 39,520 960,321 197,500 100,000 337,020
Net loss for the year 0 0 0 0 (1,323,831) (1,323,831)
Balance, Sep. 30, 1999 120,020 120,020 13,988,362 12,299,702 250,000 (14,604,724) (1,935,002)
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Services, October 1999 through (17,500) (12,000) (12,000)
September 2000, valued from
$.025 to $0.80 per shar 0 0 2,405,469 990,949 990,949
Retainers, debt and accrued
liabilities, October 1999
through September 2000 valued
from $0.25 to $1.57 sha 0 0 2,799,579 1,171,638 1,171,638
Cash, October 1999 through
September 2000, with subscription
prices ranging from $0.25 to
$0.66 per share 0 0 2,295,482 839,425 (15,450) 823,975
Issuance of $63,500 consultant
stock options, March, 2000
at an exercise price of $2.00
per share 0 0 0 0 214,130 0 0 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March 2000
to $0.38 and approx.$0.39
per share 0 0 0 0 1,113,610 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May 2000, with
common stock strike prices
ranging from $0.15 to approx.
$0.39 per share, in exchange for
officer debt 20,000 20,000 2,056,346 897,707 (407,735) 509,972
Issuance of $500,000 consultant
stock options, September 2000
with floating exercise prices
set at 15% below current 0 0 0 0 65,000 65,000
Net loss for the year 0 0 0 0 0 0 (3,812,140) (3,812,140)
Balance, September 30, 2000 140,020 140,020 23,527,738 16,187,421 1,235,005 (15,450) (18,416,864) (869,868)
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Services, October 2000 through
September 2001 valued from
$0.11 to $0.40 per share 0 0 3,471,007 572,790 0 0 0 73,790
Retainers, debt and accrued
liabilities October 2000
through September 2001, valued
from $0.11 to $0.43 per 0 0 3,688,989 487,121 0 0 0 487,121
Cash, October 2000 through
March 2001 with subscription
prices ranging from $0.075 to
$0.083 per share 0 0 1,045,500 78,787 0 0 0 78,787
Collection of stock subscription
receivable, October 2000
on 61,800 shares 0 0 0 0 0 15,450 15,450
Exercise of 400,000 common
stock options, January, 2001
at a strike price of $0.085 per
share, in exchange for 0 0 400,000 86,000 (52,000) 34,000
Issuance of 1,000,000 common
stock warrants, April 2001
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt 0 0 0 0 77,228 0 0 77,228
Issuance of 2,000,000 consultant
stock options, September 2001
at a strike price of $0 0 0 0 0 115,000 0 0 115,000
Beneficial conversion options
April 2001 through September
2001, pertaining to $300,000
principal value and accrued
interest on 8% converti 0 0 0 0 155,027 0 0 155,027
Net loss for the year 0 0 0 0 0 0 (2,154,567) (2,154,567)
Balance, September 30, 2001 140,020 140,020 32,133,234 17,412,119 1,530,260 0 (20,571,431) (1,489,032)
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity (Deficit)
Shares issued in exchange for:
Services, October 2001 through
September 2002 valued from
$0.02 to $0.25 per share 0 0 2,180,000 179,916 0 0 0 179,916
Debt and accrued liabilities
October 2001 through September
2002 with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per share 60,000 60,000 10,948,077 428,563 0 0 0 488,563
Cash, October 2001 through
September 2002 with prices
ranging from $0.01 to $0.083
per share 0 0 5,833,334 200,000 0 0 0 200,000
Exercise of 550,000 common stock
option by a consultant at a
strike price of $0.13 per share
in exchange for debt 0 0 550,000 103,125 (31,625) 0 0 71,500
Issuance of 3,750,000 warrants
April 2002 through June 2002
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt 0 0 0 0 100,087 0 0 100,087
Beneficial conversion option
April 2002 through June 2002
pertaining to $750,000 principal
valued of 12% convertible 0 0 0 0 649,913 0 0 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount 0 0 12,667,178 111,515 (80,702) 0 0 30,813
Net loss for the year 0 0 0 0 0 0 (2,346,732) (2,346,732)
Balance, September 30, 2002 200,020 200,020 64,311,823 18,435,238 2,167,933 0 (22,918,163) (2,114,972)
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity(Deficit)
Shares issued in exchange for:
Services, October 2002 through
September 2003 valued from
$0.0012 to $0.01 per share 0 0 31,500,000 134,000 0 0 0 134,000
Debt and accrued liabilities
October 2002 through September
2003 with common shares
valued from $0.001 to $0.0512
per share 0 0 162,134,748 704,774 (155,027) 0 0 549,747
Cash, October 2002 through
September 2003 with prices
ranging from $0.001 to $0.10
per share 0 0 128,500,000 180,000 0 0 0 180,000
Issuance of 2,500,000 warrants
November 2002 through
September 2003 at an exercise
price of $0.005 per share, in
conjunction with $500,000
principle value of 12%
convertible debt 0 0 0 0 9,816 0 0 9,816
Beneficial conversion option
October 2002 through June 2003
pertaining to $350,000 principal
valued of 12% convertible 0 0 0 0 490,184 0 0 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,335 accrued
interest, net of $52,340
convertible debt discount 0 0 103,778,301 353,525 (177,845) 0 0 175,680
Net loss for the year 0 0 0 0 0 0 (2,386,875) (2,386,875)
Balance, September 30, 2003 200,020 200,020 490,224,872 19,807,537 2,335,061 0 (25,305,038) (2,962,420)
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period December 1, 1990 (Inception) Through March 31, 2004
Preferred Stock Common Stock Additional Stock Total
Class A and B No Par Value Paid in Subscription Accumulated Shareholders'
Shares Value Shares Value Capital Receivable Deficit Equity (Deficit)
Shares issued in exchange for:
Services, October 2003 through
March 2004
Common stock valued from
$0.002 to $0.003 per share 0 0 27,300,000 53,400 0 0 0 53,400
Class A Preferred Stock valued
at $1.00 per share 15,845 15,845 0 0 0 0 0 15,845
Issuance of 1,000,000 warrants
November 2003 through
March 2004 at an exercise
price of $0.005 per share, in
conjunction with $200,000
principal value of 12%
Convertible debt 0 0 0 0 2,362 0 0 2,362
Debt reduction, October 2003 through
March 2004 with common shares
valued at $0.001 per share 0 0 65,100,000 65,100 0 0 0 65,100
Cash, October 2003 through
March 2004 with a price
of $0.001 per share 0 0 50,000,000 50,000 0 0 0 50,000
Re-characterization of beneficial
conversion option as derivative
conversion option, October 2003
pertaining to $881,550 of
convertible debt at
September 30, 2003 0 0 0 0 (881,550) 0 0 (881,550)
Conversion of $99,615 principal
value of 12% convertible debt
$149,423 of derivative
conversion option along with
$12,136 accrued interest,
net of $28,571 convertible
debt discount 0 0 94,174,842 232,603 0 0 0 232,603
Net loss for the period 0 0 0 0 0 0 (1,842,034) (1,842,034)
Balance, March 31, 2004 215,865 215,865 726,799,714 20,208,640 1,455,873 0 (27,147,072) (5,266,694)
|
The accompanying notes are an integral part of these financial statements.
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Six Months Ended March 31, 2004 and 2003 And the Cumulative Period From December 31, 1990 (Inception) Through March 31, 2004
Dec. 1, 1990
(Inception)
Through
Mar. Mar. Mar.
2004 2003 2004
Unaudited Unaudited Unaudited
Operating activities
Net income (loss) (1,842,034) (1,449,568) (26,069,330)
Adjustments to reconcile net income (loss)
to net cash provided by (used by)
operating activities:
Provision for bad debt 0 0 1,422,401
Depreciation and amortization 7,131 7,131 1,701,285
Derivative conversion option 815,620 0 815,620
Stock issued for services 69,245 181,305 7,590,018
Stock issued for interest 0 91,339 535,591
Settlements 0 0 (25,000)
Minority interest 0 0 (62,500)
Intangibles 0 0 1,299,861
Amortization of debt issuance cost
and note discounts 303,398 503,770 1,743,936
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 0 0 (4,201)
Prepaid expenses (90,000) 0 (90,000)
Interest receivable 0 0 (95,700)
Deposits and prepaids 0 0 182,346
Increase (decrease) in liabilities
Accounts payable 6,934 148,904 924,335
Accrued compensation 217,774 91,738 2,437,566
Due to officers (18,225) (111,053) 725,746
Other current liabilities 80,182 728 629,339
Net cash (used by) operating activities (449,975) (535,706) (6,338,687)
The accompanying notes are an integral part of these financial statements.
|
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Six Months Ended March 31, 2004 and 2003
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2004
Dec. 1, 1990
(Inception)
Through
Mar. 31 Mar. 31 Mar. 31
2004 2003 2004
Unaudited Unaudited Unaudited
Investing activities
Increase in notes receivable 0 0 (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of equipment 0 0 (203,847)
Net cash provided by (used by) investing activities 0 0 (1,620,404)
Financing activities
Common stock issued for cash 50,000 140,000 3,462,172
Stock warrants 2,362 0 189,493
Preferred stock issued for cash 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Debt issuance cost (111,125) 0 (414,469)
Proceeds from debts
Related party 0 0 206,544
Other 585,429 420,000 4,748,472
Payments on debt
Related party 0 (53,172)
Other (35,704) (12,500) (470,240)
Decrease in subscription receivable 0 0 35,450
Contributed capital 515
Net cash from financing activities 490,962 547,500 8,002,360
Net increase (decrease) in cash and cash equivalents 40,987 11,794 43,269
Cash and cash equivalents at beginning of period 2,282 55,101 0
Cash and cash equivalents at end of period 43,269 66,895 43,269
|
The accompanying notes are an integral part of these financial statements.
CONECTISYS CORPORATION AND SUBSUDIARIES ( A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASHFLOW
For the Six Months Ended March 31, 2004 and 2003 And the Cumulative Period From December 31, 1990 (Inception) Through March 31, 2004
Dec. 1, 1990
(Inception)
Through
Mar. Mar. Mar.
2004 2003 2004
Unaudited Unaudited Unaudited
Cash paid during the period for
Interest 0 0 388,648
Taxes 0 0 8,050
Non-cash activities
Common stock issued for
Prepaids 0 0 182,346
PP&E 0 0 130,931
License & technology 0 0 2,191,478
Minority interest 0 0 59,247
Repayment of debt 285,567 309,803 5,857,234
Service & interest 12,136 272,644 4,961,328
Preferred stock options issued for
Services 0 0 60,000
Repayment of debt 0 60,000 119,520
|
The accompanying notes are an integral part of these financial statements.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Conectisys Corporation (formerly Coastal Financial Corp.)(the "Company") was incorporated under the laws of the State of Colorado on February 3, 1986, to analyze and invest in business opportunities as they may occur. The Company is a development-stage entity developing automatic meter reading technologies and products for remote reading of electronic energy meters located in residential structures.
On July 15, 1998, United Telemetry Company, Inc. was incorporated in the State of Nevada as a wholly-owned subsidiary of the Company.
On January 11, 2000, eEnergyServices.com, Inc. was incorporated in the State of Nevada as a wholly-owned subsidiary of the Company, which, as yet, has no net assets and has not commenced operations.
Basis of presentation
The accompanying financial statements have been prepared by the Company without audit, and reflect all adjustments that are, in the opinion of management, necessary for the fair statement of the results for the interim periods. The statements have been prepared in accordance with generally accepted accounting principles for the interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (of a normal and recurring nature) that are necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. The results of operations for both the three and six months ended March 31, 2004 are not necessarily indicative of the results to be expected for the entire year.
These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-KSB for the fiscal year ended September 30, 2003.
The accompanying consolidated financial statements include the accounts and transactions of Conectisys Corporation, and its wholly-owned subsidiaries, eEnergyServices.com, Inc. and United Telemetry Company, Inc. All material intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements. Certain prior period balances have been reclassified to conform to the current year's presentation.
The Company returned to the development stage in accordance with SFAS No. 7 on December 1, 1990 and during the fiscal year ended November 30, 1995. The Company has completed two mergers and is in the process of developing its technology and product lines.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Use of estimates
The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values for its financial instruments. The following summary presents a description of the methodologies and assumptions used to determine such amounts.
Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties, matters of judgment and, therefore, cannot be determined with precision. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. Changes in assumptions could significantly affect the estimates.
Since the fair value is estimated at March 31, 2004, the amounts that will actually be realized or paid at settlement of the instruments could be significantly different. The carrying amount of cash and cash equivalents is assumed to be the fair value because of the liquidity of these instruments. Accounts payable, accrued compensation, due to officer, accrued interest, other current liabilities, and notes payable approximate fair value because of the short maturity of these instruments. Also, market rates of interest apply on all officer advances and short-term promissory notes. Long-term debt is recorded at face value because the principal amount is convertible into common stock.
Fiscal year
Effective December 1, 1998, the Company changed its fiscal year-end from November 30 to September 30.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Research and development costs
The Company has been engaged in researching, engineering, and developing its H- Net(TM) system technologies since August 1995, and did not generate any revenue during the past fiscal year. The Company hopes to complete additional large- scale cost reduction runs for the production and subsequent sale of the H-Net(TM) system in 2004.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and on deposit and highly liquid debt instruments with original maturities of three months or less. All funds on deposit are with one financial institution.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on property and equipment using the straight-line method over the expected useful lives of the assets, which are generally three years for computer software, five years for vehicles and office equipment, and seven years for furniture and fixtures.
Technology
Deferred technology costs include capitalized product development and product improvement costs incurred after achieving technological feasibility and are amortized over a period of five years. At March 31, 2004, no deferred technology costs were recognized.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Accounting for stock-based compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock- based Compensation" (SFAS No. 123) establishes a fair value method of accounting for stock-based compensation plans and for transactions in which an entity acquires goods or services from non-employees in exchange for equity instruments. The Company adopted this accounting standard on January 1, 1996. SFAS No. 123 also encourages, but does not require, companies to record compensation cost for stock-based employee compensation. The Company has chosen to account for stock-based compensation utilizing the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS No. 123, the Company has provided footnote disclosures with respect to stock-based employee compensation. The cost of stock-based compensation is measured at the grant date on the value of the award, and this cost is then recognized as compensation expense over the service period. The value of the stock-based award is determined using a pricing model whereby compensation cost is the excess of the fair market value of the stock as determined by the model at the grant date or other measurement date over the amount an employee must pay to acquire the stock.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," effective for fiscal years ending after December 15, 2002, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The adoption of SFAS No. 148 did not have a material impact on the Company's consolidated financial statements, as the adoption of this standard did not require the Company to change, and the Company did not change, to the fair value based method of accounting for stock-based compensation.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Stock issued for non-cash consideration
Shares of the Company's no par value common stock issued in exchange for goods or services are valued at the cost of the goods or services received or at the market value of the shares issued, depending on the ability to estimate the value of the goods or services received.
Income taxes
The Company files a consolidated federal income tax return. The Company has adopted Statement of Financial Accounting Standards("SFAS") No. 109, which requires the Company to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets using the enacted rates in effect in the years in which the differences are expected to reverse. The Company has recognized a valuation allowance covering 100% of the net deferred tax assets (primarily tax benefits from net operating loss carryforwards), because it is more likely than not that the tax benefits attributable to the deferred tax assets will not be realized in the future.
Net loss per common share - basic and diluted
Net loss per common share - diluted is based on the weighted average number of common and common equivalent shares outstanding for the periods presented. Common equivalent shares representing the common shares that would be issued on exercise of convertible securities and outstanding stock options and warrants reduced by the number of shares which could be purchased from the related exercise proceeds are not included since their effect would be anti- dilutive.
As of March 31, 2004, the Company had 726,799,714 shares of common stock outstanding. If all the Company's unexpired stock warrants and options (including contingent issuances) were exercised, and all the principal value and accrued interest on its outstanding convertible debentures were converted, the Company's incremental common shares (not included in the denominator of diluted earnings (loss) per share because of their anti-dilutive nature) would be as follows:
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Net loss per common share - basic and diluted (continued)
Class B preferred stock options 10,000,000
Convertible note holder common stock warrants 8,750,000
Common stock warrants - other 3,215,705
Common stock options - officers 4,043,654
Common stock options - other 4,650,000
-----------
Subtotal 30,659,359
Accrued officer compensation ($480,000),
assumed converted into common stock at
prices ranging from $0.0215 to $0.2250
per share 36,419,353
Convertible note holder principal value
($1,363,590) and accrued interest ($172,250),
assumed converted into common stock at
$0.002 per share 767,920,000
-----------
Total potential common stock equivalents 834,998,712
|
If all currently outstanding potential common stock equivalents were exercised, the Company would receive proceeds of approximately $8,615,000.
Recently issued accounting pronouncements
In April 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," effective for financial statements issued after May 25, 2002, which effectively amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency involving sale- leaseback transactions and also gives clarity to other existing authoritative pronouncements. The adoption of SFAS No. 145 did not have a material effect on the company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," effective for exit or disposal activities after December 15, 2002, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issue Task Force
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Recently issued accounting pronouncements (continued)
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring." The adoption of the provisions of this SFAS did not have a material impact on the Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9," applicable for acquisitions on or after October 1, 2002, which generally removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, "Goodwill and Other Intangible Assets," and amends FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope certain long-term customer- relationship intangible assets of financial institutions. The adoption of SFAS No. 147 did not have a material impact on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarified the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. The Company holds no interest in variable interest entities.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies the accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment met the characteristic of a derivative as described in SFAS No. 133. SFAS No. 149 also clarifies when a derivative contains a financing component. SFAS No. 149 is generally effective for derivative instruments entered
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Recently issued accounting pronouncements (continued)
into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company holds no derivative instruments and does not engage in hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments that have both equity and liability characteristics to be classified as a liability on the balance sheet. SFAS No. 150 is effective for the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements.
NOTE 2. GOING CONCERN UNCERTAINTY
As of March 31, 2004, the Company had a deficiency in working capital of approximately $5,300,000 and had incurred continual net losses since its return to the development stage in fiscal 1996 of approximately $24,000,000, which raise substantial doubt about the Company's ability to continue as a going concern.
Management's plans for correcting these deficiencies include the future sales and licensing of the Company's products and technologies, the raising of capital through the issuance of common stock and from continued officer advances, which will help provide the Company with the liquidity necessary to meet operating expenses. An investor group has previously advanced the Company an aggregate amount of $1,750,000 through March 2004. Over the longer term, the Company plans to achieve profitability through its operations from the sale and licensing of its H-Net(TM) automatic meter-reading system. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
CONECTISYS CORPORATION AND SUBSIDIARIES (A
Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 3. RELATED PARTY TRANSACTIONS
The officers of the Company have often advanced funds to the Company. These advances have generally been in the form of short-term promissory notes at an annual interest rate of 18% (see Note 8 below).
NOTE 4. PREPAID EXPENSES AND DEPOSITS
The Company has accrued a prepaid expense for $120,000 as a staying bonus for the Chief Executive Officer and the Secretary as per their employment contract (see note 8). The staying bonus will be amortized over the calendar year 2004. For the three months ended March 31, 2004, $30,000 was amortized as officer salaries with a balance of $90,000 at March 31, 2004.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2004 consisted of the following:
Office equipment $ 285,058
Furniture and fixtures 16,609
Vehicles 35,362
-----------
Total cost 337,029
Accumulated depreciation (311,684)
-----------
Net book value $ 25,345
===========
|
NOTE 6. LICENSE RIGHTS AND TECHNOLOGY
License rights and technology at March 31, 2004 consisted of the following:
License rights $ 421,478
Accumulated amortization (421,478)
-----------
Net book value $ -
===========
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 7. DEBT ISSUANCE COSTS
In April 2001, the Company received proceeds of $300,000 from an investor in return for a six-month 8% convertible note and 1,000,000 common stock warrants, exercisable at $0.192 per share over a four-year period. Debt issuance costs on this transaction amounted to $32,775, and consisted of $24,000 in finder's fees, $8,000 in legal fees, and $775 in other costs. These debt issuance costs were fully amortized at September 30, 2001.
In February 2002, the Company received $340,000 in short-term financing from an investment group through the issuance of a promissory note maturing on May 15, 2002 and accruing interest at an annual rate of 18%. Included in the loan was $40,000 in fees, consisting specifically of a $30,000 finder's fee and a $10,000 legal fee. These loan fees were fully amortized at September 30, 2002.
In March through June 2002, the Company received $750,000 from an accredited investor group in exchange for 12% convertible debentures, convertible at the lesser of $0.06 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The convertible debentures were accompanied by 3,750,000 common stock warrants, exercisable over a three year period at the lesser of $0.045 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. Debt issuance costs associated with these loans amounted to $147,500, of which $90,000 represented finder's fees and $57,500 represented legal costs. These loan fees were fully amortized at September 30, 2003.
In November 2002 through May 2003, the Company received another $500,000 from the above accredited investor group in exchange for 12% convertible debentures, convertible at the lesser of $0.01 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The convertible debentures were accompanied by 2,500,000 common stock warrants, exercisable over a seven-year period at $0.005 per share. Debt issuance costs associated with these loans amounted to $83,069, consisting of $66,069 in finder's fees and $17,000 in legal costs.
In October 2003, the variable conversion price of the 12% convertible debentures issued from March through June 2002 and from November 2002 through May 2003 was reduced from 50% to 40% of the average of the lowest three intra- day trading prices of a share of common stock during the 20 trading days immediately preceding conversion.
In November 2003 through March 2004, the Company received another $500,000 from the above accredited investor group in exchange for 12% convertible debentures, convertible at the lesser of $0.005 per share and 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The convertible debentures were accompanied by 2,500,000 common stock warrants, exercisable over a seven-year period at $0.005 per share. Debt issuance costs associated with these loans amounted to $111,125, consisting of $54,125 in finder's fees and $57,000 in legal costs.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 7. DEBT ISSUANCE COSTS (continued)
Amortization of the costs associated with these loans over the pro-rata portion of the one-year term of the loans amounted to $55,173 through September 30, 2003. Total amortization of all debt issuance costs during the year ended September 30, 2003 amounted to $144,276, including $89,103 attributable to the unamortized balance at September 30, 2002. The unamortized balance of the debt issuance costs at September 30, 2003 was $27,896. Total amortization of all debt issuance cost during the six months ended March 31, 2004 was $40,897, leaving an unamortized balance of $98,124.
NOTE 8. DUE TO OFFICERS
At September 30, 2001, a revolving promissory note agreement for $56,880 was
drawn up, due on demand, at an annual interest rate of 18%, for unpaid
cumulative advances (plus interest) made by the Company's CEO. During the
year ended September 30, 2002, cash advances of $31,500 were made.
Additionally, the loan account was increased by $120,875, representing the
value of 2,361,814 restricted shares of the Company's common stock held by the
CEO, which were used as collateral and transferred to a note holder in June of
2002 to partially cover a $300,000 debt, and by $16,202, representing the
value of 794,857 restricted shares of the Company's common stock held by the
CEO, which were pledged to and sold by a convertible note holder on a Company
obligation in default. Repayments of debt by the Company amounted to $144,806
and accrued interest amounted to $6,913 during the year ended September 30,
2002, resulting in a loan balance due the CEO at September 30, 2002 of
$87,564. During the year ended September 30, 2003, additional cash advances
totaling $37,869 were made, along with $37,423, representing another 1,835,885
restricted shares of the Company's common stock pledged and sold by the above
note holder. Repayments of debt by the Company amounted to $136,009,
including re-issuance of 2,361,814 restricted shares of the Company's common
stock valued at $120,875 that had been transferred to a note holder during the
previous fiscal year. Accrued interest during the year ended September 30,
2003 was $10,073, bringing the loan balance due the CEO at September 30, 2003
to $36,920. During the six months ended March 31, 2004, the Company
repaid $21,151. Accrued interest of $2,165 during the period brought
the loan balance due the
CEO at March 31, 2004 to $17,934. The loan balance at March 31, 2004 is
currently due on demand and continues to accrue interest at the rate of 18%
per year.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 8. DUE TO OFFICERS (continued)
At September 30, 2001, a promissory note agreement for $25,874 was drawn up, due on demand, at an annual interest rate of 18 percent, for cumulative advances (plus interest) made by the Company's Secretary/Treasurer. The Secretary/Treasurer had also borrowed on a personal credit card for the Company's behalf in the amount of $18,455, bringing the total obligation due the Secretary/Treasurer at September 30, 2001 to $44,329. During the year ended September 30, 2002, the personal credit card balance was virtually paid- off. Additional loan advances were $19,500, loan repayments were $39,500, and accrued interest was $2,269 during the year ended September 30, 2002, bringing the aggregate loan balance due the Secretary/Treasurer at September 30, 2002 to $8,143. During the year ended September 30, 2003, additional cash advances of $37,500 were made, and accrued interest was $6,522, resulting in a loan balance due the secretary Treasurer at September 30, 2003 of $52,165. During the six months ended March 31, 2004, the Company repaid $4,218. Accrued interest amounted to $4,695 during the period bring the loan balance due the Secretary at March 31, 2004 to $52,642. The loan balance at March 31, 2004 is currently due on demand and continues to accrue interest at the rate of 18% per year.
During the period May through September 2002, the Company's Chief Technical Officer advanced the Company $32,946, corresponding to 684,407 restricted shares of the Company's common stock held by the officer, which were pledged to and sold by a convertible note holder on a Company obligation in default. Accrued interest at the annual rate of 18% was $1,831 through the end of the fiscal year, bringing the total loan amount to $34,777 at September 30, 2002. In November 2002, the Company re-issued the 684,407 restricted shares to the Chief Technical Officer (valued at $32,946) that had been pledged to and sold by the convertible note holder during the previous fiscal year. Accrued interest amounted to $1,205 during the year ended September 30, 2003, resulting in a loan balance of $3,036 as of that date. During the six months ended March 31, 2004, accrued interest amounted to $284 bringing the loan balance due the Chief Technical Officer at March 31, 2004 to $3,320.The loan balance at March 31, 2004 is currently due on demand and continues to accrue interest at the rate of 18% per year.
The aggregate amount due officers at March 31, 2004 and 2003 was $73,896 and $92,121, respectively, and interest expense on the officer loans amounted to $7,143 and $19,431 for the six months ended March 31, 2004 and 2003, respectively.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 8. DUE TO OFFICERS (continued)
As of March 31, 2004, the Company owed its officers $1,331,394 in accrued compensation. Of this amount, $360,000 was attributable to aggregate staying bonuses payable to the President and Secretary/Treasurer of the Company as of September 30, 2003. An additional $120,000 was accrued on December 31, 2003 which will be amortized over the 2004 calendar year. The staying bonuses are to be compensated for with the Company's restricted stock, valued at the average bid and ask price for the stock for the 30 days prior to each respective year-end issuance date. The total common stock to be issued as staying bonuses amounted to 6,888,922 as of September 30, 2003 and 29,530,431 for the December 31, 2003 accrual bringing the total to be issued to 36,419,353 shares at March 31, 2004.
NOTE 9. NOTES PAYABLE
Notes payable at March 31, 2004 consisted of the following:
Registered Convertible Debentures - secured by substantially all the assets of
the Company
Convertible Debenture #1
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% $29,480
Accrued interest of $7,114 and principal
on Convertible Debenture convertible
into approximately 18,297,000
shares of common stock at the price
of $0.002 at March 31, 2004 7,114 $ 36,594
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on March 29, 2003 at an annual interest
rate of 12% 29,480
Accrued interest of $7,114 and principal
on Convertible Debenture convertible
into approximately 18,297,000
shares of common stock at the price
of $0.002 at March 31, 2004 7,114 36,594
-------
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on March 29, 2003 at an annual
interest rate of 12% $33,900
Accrued interest of $8,181 and principal
on Convertible Debenture convertible
into approximately 21,040,500
shares of common stock at the price
of $0.002 at March 31, 2004 8,181 $ 42,081
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
March 29, 2003 at an annual interest
rate of 12% 20,730
Accrued interest of $5,002 and principal
on Convertible Debenture convertible
into approximately 12,866,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,002 25,732
-------
Convertible Debenture #2
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 10, 2003 at an annual interest
rate of 12% 40,000
Accrued interest of $9,100 and principal
on Convertible Debenture convertible
into approximately 24,550,000
shares of common stock at the price
of $0.002 at March 31, 2004 9,100 49,100
--------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% $40,000
Accrued interest of $9,100 and principal
on Convertible Debenture convertible
into approximately 24,550,000
shares of common stock at the price
of $0.002 at March 31, 2004 9,100 $ 49,100
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on May 10, 2003 at an annual
interest rate of 12% 45,000
Accrued interest of $10,238 and principal
on Convertible Debenture convertible
into approximately 27,619,000
shares of common stock at the price
of $0.002 at March 31, 2004 10,238 55,238
-------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
May 10, 2003 at an annual
interest rate of 12% 25,000
Accrued interest of $5,688 and principal
on Convertible Debenture convertible
into approximately 15,344,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,688 30,688
-------
Convertible Debenture #3
|
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
June 17, 2003 at an annual interest
rate of 12% 80,000
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Accrued interest of $17,201 and principal
on Convertible Debenture convertible
into approximately 48,600,500
shares of common stock at the price
of $0.002 at March 31, 2004 $17,201 $ 97,201
-------
Note payable to New Millennium Capital
Partners II, LLC (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% 80,000
Accrued interest of $17,201 and principal
on Convertible Debenture convertible
into approximately 48,600,500
shares of common stock at the price
of $0.002 at March 31, 2004 17,201 97,201
-------
Note payable to AJW/New Millennium
Offshore, Ltd. (Convertible Debenture)
due on June 17, 2003 at an annual
interest rate of 12% 90,000
Accrued interest of $19,351 and principal
on Convertible Debenture convertible
into approximately 54,675,500
shares of common stock at the price
of $0.002 at March 31, 2004 19,351 109,351
--------
Note payable to Pegasus Capital Partners,
LLC (Convertible Debenture) due on
June 17, 2003 at an annual
interest rate of 12% 50,000
Accrued interest of $10,751 and principal
on Convertible Debenture convertible
into approximately 30,375,500
shares of common stock at the price
of $0.002 at March 31, 2004 10,751 60,751
--------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #5
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $6,493 and principal
on Convertible Debenture convertible
into approximately 28,246,500
shares of common stock at the price
of $0.002 at March 31, 2004 6,493 $ 56,493
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $6,493 and principal
on Convertible Debenture convertible
into approximately 28,246,500
shares of common stock at the price
of $0.002 at March 31, 2004 6,493 $ 56,493
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 3, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $6,493 and principal
on Convertible Debenture convertible
into approximately 28,246,500
shares of common stock at the price
of $0.002 at March 31, 2004 6,493 $ 56,493
-------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #6
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% $50,000
Accrued interest of $5,342 and principal
on Convertible Debenture convertible
into approximately 27,671,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,342 $ 55,342
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $5,342 and principal
on Convertible Debenture convertible
into approximately 27,671,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,342 $ 55,342
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
May 12, 2004 at an annual interest
rate of 12% 50,000
Accrued interest of $5,342 and principal
on Convertible Debenture convertible
into approximately 27,671,000
shares of common stock at the price
of $0.002 at March 31, 2004 5,342 $ 55,342
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #7
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% $33,333
Accrued interest of $1,403 and principal
on Convertible Debenture convertible
into approximately 17,368,000
shares of common stock at the price
of $0.002 at March 31, 2004 1,403 $ 34,736
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% 33,333
Accrued interest of $1,403 and principal
on Convertible Debenture convertible
into approximately 17,368,000
shares of common stock at the price
of $0.002 at March 31, 2004 1,403 $ 34,736
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
November 25, 2004 at an annual interest
rate of 12% 33,334
Accrued interest of $1,404 and principal
on Convertible Debenture convertible
into approximately 17,369,000
shares of common stock at the price
of $0.002 at March 31, 2004 1,404 $ 34,738
-------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #8
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $658 and principal
on Convertible Debenture convertible
into approximately 8,662,500
shares of common stock at the price
of $0.002 at March 31, 2004 658 $ 17,325
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $658 and principal
on Convertible Debenture convertible
into approximately 8,662,500
shares of common stock at the price
of $0.002 at March 31, 2004 658 $ 17,325
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 3, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $658 and principal
on Convertible Debenture convertible
into approximately 8,662,500
shares of common stock at the price
of $0.002 at March 31, 2004 658 $ 17,325
-------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #9
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $504 and principal
on Convertible Debenture convertible
into approximately 8,585,000
shares of common stock at the price
of $0.002 at March 31, 2004 504 $ 17,170
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,667
Accrued interest of $504 and principal
on Convertible Debenture convertible
into approximately 8,585,000
shares of common stock at the price
of $0.002 at March 31, 2004 504 17,170
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
December 31, 2004 at an annual interest
rate of 12% $16,666
Accrued interest of $504 and principal
on Convertible Debenture convertible
into approximately 8,585,000
shares of common stock at the price
of $0.002 at March 31, 2004 504 17,170
-------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #10
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,666
Accrued interest of $236 and principal
on Convertible Debenture convertible
into approximately 8,451,000
shares of common stock at the price
of $0.002 at March 31, 2004 236 $ 16,902
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,667
Accrued interest of $236 and principal
on Convertible Debenture convertible
into approximately 8,4,51,500
shares of common stock at the price
of $0.002 at March 31, 2004 236 16,903
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
February 18, 2005 at an annual interest
rate of 12% $16,666
Accrued interest of $236 and principal
on Convertible Debenture convertible
into approximately 8,451,000
shares of common stock at the price
of $0.002 at March 31, 2004 236 16,902
--------
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Convertible Debenture #11
Note payable to AJW Partners, LLC
(Convertible Debenture) due on
Mardch 4, 2005 at an annual interest
rate of 12% $83,334
Accrued interest of $767 and principal
on Convertible Debenture convertible
into approximately 42,050,500
shares of common stock at the price
of $0.002 at March 31, 2004 767 $ 84,101
-------
Note payable to AJW Offshore, Ltd.
(Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $767 and principal
on Convertible Debenture convertible
into approximately 42,050,000
shares of common stock at the price
of $0.002 at March 31, 2004 767 84,100
-------
Note payable to AJW Qualified Partners,
LLC (Convertible Debenture) due on
March 4, 2005 at an annual interest
rate of 12% $83,333
Accrued interest of $767 and principal
on Convertible Debenture convertible
into approximately 42,050,000
shares of common stock at the price
of $0.002 at March 31, 2004 767 84,100
------- ----------
Subtotal of all Registered Convertible Debentures 1,535,840
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
Less reclassified accrued interest $ (172,250)
------------
Subtotal principal value 1,363,590
Derivative conversion option 150 percent of principal 2,045,385
Less unamortized note discount (404,520)
-----------
Net carrying value of
Registered Convertible Debentures $ 3,004,455
Note payable to Devon Investment Advisors,
unsecured, due on demand, interest payable
at an annual rate of 10%. 241,824
Note payable to Black Dog Ranch LLC,
unsecured, due on demand, including interest
at an annual rate of 18%. 160,621
Convertible note payable to Laurus Master Fund, Ltd.,
unsecured, with interest payable at an annual rate
of 8%, conversion premium of 25% based on current
market price of the Company's common stock (as defined),
initially due October 12, 2001 and extended to
December 1, 2001. Currently in default. 7,141
-----------
Total notes payable $ 3,414,041
Current portion (3,365,541)
-----------
Long-term portion $ 48,500
===========
|
|
|
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
On April 12, 2001, the Company received $300,000 in proceeds from Laurus Master Fund, Ltd. ("Laurus") and issued a $300,000 principal value 8% convertible note due on October 12, 2001, along with 1,000,000 common stock warrants, exercisable at $0.192 per share over a four-year period. $77,228 of the proceeds was allocated to the cost of the warrants, with the remaining $222,772 allocated to the cost of the debt instrument, based on the relative fair market values of the note and the warrants at the date of issuance.
A convertible note discount of $77,228 was also recognized, which was effectively fully amortized at September 30, 2002 as interest expense.
The note is convertible (at the option of the holder) into common stock at the lesser of 80% of the average of the 3-lowest closing bid prices during the 30 trading days prior to the closing date (April 12, 2001) or 80% of the average of the 3-lowest closing bid prices during the 30 trading days prior to the conversion date (assumed to be September 30, 2002). At April 12, 2001, the note was convertible into approximately 2,181,500 common shares at an exercise price of approximately $0.1021 per share, and at September 30, 2002, the note was convertible into approximately 20,189,875 common shares at an exercise price of approximately $0.0064 per share. In either instance, the fair value of the debt instrument (due to the 80% pricing advantage) was $375,000 (a 25% premium on the principal value), resulting in a further convertible debt discount of $152,228, representing the difference between the note's fair value of $375,000 and the allocated proceeds at issuance of $222,772. This discount was also fully amortized at September 30, 2001.
A corresponding $152,228 credit was made to additional paid-in capital for the conversion benefit option, i.e., the intrinsic value of the matured debt instrument. Interest accrued at 8% on the $300,000 note principal through September 30, 2002 was $17,168; for presentation purposes, this interest was added to the principal value of the note at the year-end balance sheet date. The holder can also convert the accrued interest into common stock at a 25% premium ($4,292), bringing the total conversion benefit
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 9. NOTES PAYABLE (continued)
option to $155,027. Total amortization of interest on the discounted convertible note during the year ended September 30, 2001 (including $32,775 in debt issuance costs associated with the transaction) amounted to $265,030.
The maturity date on the $300,000 principal value 8% convertible note, initially October 12, 2001, was extended to December 1, 2001. Because of the inherent conversion benefit feature, the aggregate note with accrued interest, totaling $311,194 at September 30, 2001, was classified as a long-term liability.
The Company was unable to pay-off the note at maturity. However, after receiving bridge financing from another investment group in February 2002, the Company subsequently repaid $150,000 of the obligation, as the note holder elected to not convert the debt to shares. Consequently, the note holder sold 1,479,264 of the 4,773,208 shares of the Company's common stock that had been pledged by officers of the Company as collateral, resulting in net proceeds of $49,148. Adding accrued interest of $17,168 at an annual rate of 8%, brought the loan balance at September 30, 2002 to $129,214. During the year ended September 30, 2003, the note holder sold the remaining 3,293,944 pledged shares for net proceeds of $67,144. The note holder elected to convert essentially all the remaining debt for common stock of the Company, receiving 26,000,000 newly issued Company shares valued at $58,400, and bringing the tentative liability down to $3,670. Accrued interest amounted to $3,183, resulting in a total liability to the note holder at September 30, 2003 of $6,851. In connection with the pay-down of the debt, the $155,027 beneficial conversion option noted above was reduced to zero through transference to common stock.
In February 2002, the Company borrowed $340,000 from the Mercator Momentum Fund ("Mercator"). This loan from Mercator was a short-term loan due May 15, 2002 and accrues interest at an annual rate of 18%. The loan was secured by shares of the Company's common stock. In April and May of 2002, the Company paid Mercator an aggregate of $100,000. On June 14, 2002 Mercator transferred collateral in the form of 5,861,814 shares of common stock to their name because the Company was in default on the balance of the loan.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Thereafter, on June 21, 2002, Mercator filed an action against Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court of California, County of Los Angeles (Case No. BC276283) for breach of promissory note, foreclosure of security interests, fraud and deceit. Mr. Spigno is the Chairman of the Board and a director of the Company and is also the Company's Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief Financial Officer. On July 3, 2002, Mercator filed a first amended complaint in the Superior Court of California, County of Los Angeles (Case No. BC276283), adding a claim for common count for money lent. In March 2004, the Company settled its suit with Mercator for $150,000.
NOTE 10. SECURED CONVERTIBLE DEBENTURES
In order to provide working capital and financing for the Company's continued research and development efforts as of March 29, 2002, the Company entered into a securities purchase agreement and related agreements with four accredited investors (the "Purchasers") for the purchase of up to $750,000 of the Company's 12% Convertible Debentures due one year from their date of issuance. The Company granted the holders of the debentures a continuing security interest in all of the Company's assets to secure the Company's obligations under the debentures and related agreements. The debentures bear interest at a rate of 12% per annum, payable quarterly in common stock or cash at the option of the Purchasers.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On March 29, 2002 the Company issued an aggregate of $300,000 of 12% convertible debentures in a private offering to four accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of the company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the lowest three intra- day trading prices during the 20 trading days immediately preceding an exercise.
On May 10, 2002 the Company issued an aggregate of $150,000 of 12% convertible debentures in a private offering to four accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of the Company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the lowest three intra- day trading prices during the 20 trading days immediately preceding an exercise.
On June 17, 2002 the Company issued an aggregate of $300,000 of 12% convertible debentures in a private offering to four accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of the company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
The Company entered into another securities purchase agreement plus related agreements with three accredited investors on November 27, 2002 (essentially the same re-organized investor group delineated above) for the purchase of up to $500,000 of the Company's 12% Convertible Debentures due one year from their date of issuance. The Company granted the holders of the debentures a continuing security interest in all of the Company's assets to secure the Company's obligations under the debentures and related agreements. The debentures bear interest at a rate of 12% per annum, payable quarterly in common stock or cash at the option of the Purchasers.
On November 27, 2002 the Company issued an aggregate of $200,000 of 12% convertible debentures in a private offering to three accredited investors who, if certain conversion limitations are disregarded, would be deemed beneficial owners of 5% or more of the Company's outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,000,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
On March 3, 2003 the Company issued an aggregate of $150,000 of 12% convertible debentures in a private offering to these same three accredited investors. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra- day trading prices during the 20 trading days immediately preceding an exercise.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
On May 12, 2003 the Company issued an aggregate of $150,000 of 12% convertible debentures in a private offering to the three accredited investors. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra- day trading prices during the 20 trading days immediately preceding an exercise.
On November 18, 2003 the Company issued an aggregate of $100,000 of 12% convertible debentures in a private offering to the three accredited investors. The debentures were convertible into shares of common stock at the lesser of $.01 per share and 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 500,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra- day trading prices during the 20 trading days immediately preceding an exercise.
On December 3, 2003 the Company issued an aggregate of $50,000 of 12% convertible debentures in a private offering to the three accredited investors. The debentures were convertible into shares of common stock at the lesser of $.01 per share and 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
On December 31, 2003 the Company issued an aggregate of $50,000 of 12% convertible debentures in a private offering to the three accredited investors. The debentures were convertible into shares of common stock at the lesser of $.01 per share and 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
On February 18, 2004 the Company issued an aggregate of $50,000 of 12% convertible debentures in a private offering to the three accredited investors. The debentures were convertible into shares of common stock at the lesser of $.01 per share and 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
On March 4, 2004 the Company issued an aggregate of $250,000 of 12% convertible debentures in a private offering to the three accredited investors. The debentures were convertible into shares of common stock at the lesser of $.01 per share and 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,250,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intra-day trading prices during the 20 trading days immediately preceding an exercise.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
The Company's convertible debentures and related warrants contain anti- dilution provisions whereby, if the Company issues common stock or securities convertible into or exercisable for common stock at a price less than the conversion or exercise prices of the debentures or warrants, the conversion and exercise prices of the debentures or shall be adjusted as stipulated in the agreements governing such debentures and warrants.
As part of the recording of the convertible debt transactions, a beneficial conversion option was recognized, along with a corresponding convertible debt discount. The fair value of the thirty three debt instruments issued totaling $1,750,000 in principal value was $3,500,000 in aggregate, representing a 100% premium on the principal value (due to the 100% pricing advantage) and making the beneficial conversion option $1,637,735 at the inception of the loans ($1,750,000 proceeds less $112,265 allocated to the issuance of the 8,750,000 related warrants). In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. Accordingly, in October 2003, the beneficial conversion option was increased from 100% to 150% which resulted in an increase of $563,258 in the conversion interest and a corresponding expense in the current period. Due to the nature of the debt instrument and its repayment terms, the beneficial conversion option has been re-characterized as derivative conversion option and reclassified as additional debt. In connection with the issuance of an additional $500,000 of convertible debt during the six months ended March 31, 2004, the derivative conversion option was increased by $750,000.
During the fiscal year ended September 30, 2002, the Company issued 12,667,178 shares of common stock in connection with interest payments and upon conversion of an aggregate $93,130 of principal and $6,916 of related interest on the Company's convertible debentures. A corresponding pro-rata reduction of $80,702 to the beneficial conversion option was made. During the fiscal year ended September 30, 2003, the Company issued another 103,778,301 shares of common stock in connection with the conversion of another $193,665 of principal and $34,355 of accrued interest on the Company's convertible debentures,
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 10. SECURED CONVERTIBLE DEBENTURES (continued)
resulting in a convertible debt principal balance at September 30, 2003 of $963,205 (net of an aggregate of $286,795 in debt conversions through that date). A corresponding pro-rata reduction of $177,845 was made to the beneficial conversion option during the fiscal year ended September 30, 2003 (an aggregate of $258,547 since the inception of the loans), bringing the beneficial conversion option balance at September 30, 2003 to $881,550. In October 2003, the variable conversion price was reduced from 50% to 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. Accordingly in October 2003, the beneficial conversion option was increased from 100% to 150% resulting in an increase of $563,258 and a re-characterization of the conversion option as additional debt.
During the six months ended December 31, 2003, the Company issued an additional $500,000 of 12% convertible debentures. Also, the Company issued 94,174,842 shares of common stock in connection with the conversion of another $99,615 of principal and $12,136 of accrued interest on the Company's convertible debentures, resulting in a convertible debt principal balance at March 31, 2004 of $1,363,590 (net of an aggregate of $386,410 in debt conversions through that date). In connection with the issuance of the additional $500,000 convertible debt, the Company recorded a corresponding derivative conversion option of $750,000. A corresponding pro-rata reduction of $149,423 was made to the derivative conversion option during the six months ended March 31, 2004 (an aggregate of $407,970 since the inception of the loans), bringing the derivative conversion option balance at March 31, 2004 to $2,045,385.
The aggregate note discount of $1,750,000 is being amortized over the one-year lives of the respective debt instruments. Of this amount, $279,115 was amortized during the fiscal year ended September 30, 2002, another $653,720 during the year ended September 30, 2003 and $262,501 during the six months ended March 31, 2004, while $69,233 in convertible bond discount was transferred to equity upon conversion of $93,130 in debt principal during the fiscal year ended September 30, 2002, $52,340 upon conversion of $193,665 of debt principal during the fiscal year ended September 30, 2003 and $28,571 upon conversion of $99,616 of debt principal during the six months ended March 31, 2004, resulting in an unamortized convertible debt discount balance of $404,520 at March 31, 2004.
As of March 31, 2004, the Company was indebted for an aggregate of $1,535,840, including $1,363,590 of principal and $172,250 of accrued interest on these convertible debentures. To the extent debentures issued by the Company are converted into shares of common stock, the Company will not be obligated to repay the converted amounts.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT)
The Company's authorized capital stock consists of 1,000,000,000 shares of common stock, no par value per share, and 50,000,000 shares of preferred stock, $1.00 par value per share. Of the 50,000,000 authorized shares of preferred stock, 1,000,000 shares have been designated as Class A Preferred Stock and 1,000,000 shares have been designated as Class B Preferred Stock, and the remaining 48,000,000 shares are undesignated. As of December 31, 2003, there were 680,013,310 shares of the Company's common stock outstanding held by approximately 750 holders of record and 215,865 shares of the Company's Class A Preferred Stock outstanding held by one holder of record and no shares of Class B Preferred Stock outstanding.
Each share of Class A Preferred Stock is entitled to 100 votes per share on all matters presented to the Company's shareholders for action. The Class A Preferred Stock does not have any liquidation preference, additional voting rights, conversion rights, anti-dilution rights or any other preferential rights.
Each share of Class B Preferred Stock is convertible into 10 shares of the Company's common stock. The Class B Preferred Stock does not have any liquidation preference, voting rights, other conversion rights, anti-dilution rights or any other preferential rights.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
During the months October 2002 through July 2003, the Company issued 15,000,000 shares of its restricted common stock to a consultant in exchange for promotional services valued at $65,000.
During the months October 2002 through September 2003, the Company issued 119,630,468 shares of its restricted common stock to a consultant for debt reduction of $162,500 and accrued fees of $91,305.
During the months October 2002 through September 2003, the Company issued 103,778,301 of its common shares to an investor group in exchange for $193,665 principal value of convertible debt and $34,355 in accrued interest. In conjunction with these transactions, $177,845 of the Company's beneficial conversion
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued)
option was also transferred to common stock, and $52,340 in convertible note discounts was applied against common stock as a result of debt conversion.
During the months November 2002 through May 2003, the Company issued 14,500,000 shares of its restricted common stock to consultants in exchange for media services rendered valued of $49,000.
During the months November 2002 through September 2003, the Company issued 128,500,000 shares of its restricted common stock for cash of $180,000 in private placements.
During the months November 2002 through May 2003, the Company issued 2,500,000 in seven-year common stock warrants as part of a $500,000 12% convertible debt issuance, exercisable at the lower of $0.01 and 50% of the market price of the common stock (as defined) through the date of exercise. The warrants were recorded at $9,816 and the debt at $490,184, based upon the relative fair values of each, and a beneficial conversion option for an additional $490,184 was also recognized.
During the months November 2002 through January 2003, the Company issued 4,504,280 shares of its restricted common stock to its corporate officers in exchange for a net reduction of debt of $183,542.
During the months December 2002 through September 2003, the Company issued 26,000,000 shares of its common stock to a convertible note holder in exchange for $58,400 in debt reduction. In conjunction with these transactions, the Company transferred a beneficial conversion option valued at $155,027 to common stock.
In December 2002 and January 2003, the Company issued its advisory board members 1,250,000 shares of its restricted common stock in exchange for $12,500 in services.
In December 2002, the Company issued 750,000 shares of its restricted common stock to certain consultants as a $7,500 bonus.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 11. SHAREHOLDERS' EQUITY (DEFICIT) (continued
In January 2003, the Company received back 1,000,000 restricted common shares held by a former director as collateral on a $75,000 loan and re-issued the shares as interest (valued at $9,000). The $75,000 loan (previously recorded as an addition to capital) was paid-off by and recorded as a new loan to the Company's CEO and Secretary/Treasurer.
In May 2003, the Company issued 12,000,000 shares of its restricted common stock to an outside accountant in exchange for $120,000 in accrued services rendered.
During the months October 2003 through March 31, 2004, the Company issued 94,174,842 shares of common stock to a convertible note holder in exchange for $99,615 in debt reduction and $12,136 in accrued interest. In conjunction with these transactions, the Company transferred $149,423 in derivative conversion option, net of $28,571 convertible debt discount to common stock.
During the months October 2003 through December 2003, the Company issued 65,100,000 shares of its restricted common stock to a consultant for debt reduction of $65,100.
During the months October 2003 through March 2004, the Company issued 27,300,000 shares of its restricted common stock to three consultants for services rendered of $53,400.
During the months October 2003 through December 2003, the Company issued 50,000,000 shares of its common stock for $50,000 in cash.
In December 2003, the Company issued 15,845 convertible preferred A shares to its President for a reduction $15,845 in accrued compensation.
NOTE 12. INCOME TAXES
Deferred income taxes consisted of the following at March 31, 2004:
Deferred tax asset, benefit
of net operating loss
carryforward $ 8,300,000
Valuation allowance (8,300,000)
-----------
Net deferred taxes $ -
===========
|
The valuation allowance offsets the net deferred tax asset, since it is more likely than not that it would not be recovered. During the year ended March 31, 2004, the deferred tax asset and valuation allowance were both increased by $500,000.
The Company has approximately $19,400,000 in both federal and California net operating loss carryforwards. The federal net operating loss carryforwards expire as follows: $2,700,000 in the year 2012, $5,300,000 in 2018, $1,200,000 in 2019, $3,500,000 in 2020, $2,400,000 in 2021, $2,300,000 in 2022, and $2,000,000 in 2023. The California net operating loss carryforwards expire as follows: $2,700,000 in the year 2002, $5,300,000 in 2003, $1,200,000 in 2004, $3,500,000 in 2005, $2,400,000 in 2006, $2,300,000 in 2007, and $2,000,000 in 2008. The latest federal and California corporate income tax returns filed by the Company were for the tax year ended November 30, 2000.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company has entered into three employment agreements with key individuals, the terms of the agreements are as follows:
1) The CEO (and President) of the Company entered into an agreement dated October 2, 1995 (which was subsequently amended September 1, 1997, September 1, 1999, and March 27, 2000) for a period of five years (to April 1, 2005), and he is entitled to receive a base salary of $160,000 per year. The employee shall further receive a bonus, paid at year-end, equal to 50% of the employee's salary, for continued employment. The staying bonus will be compensated for with the Company's restricted common stock. He is also granted an option to purchase up to 2,000,000 shares of the Company's restricted common stock at a price equal to 50% of the average market value for the prior 30 trading days before exercise. On March 27, 2000, the exercise price was adjusted to a flat $0.3864 per share, with an expiration date of December 2, 2003, which, in turn, has subsequently been extended to December 2, 2005.
2) The Secretary and Treasurer of the Company entered into an Agreement dated October 2, 1995 (which was subsequently amended September 1, 1997, September 1, 1999, and March 27, 2000), for a period of five years (extended through April 1, 2005), and she is entitled to receive a base salary of $80,000 per year. The employee shall further receive a bonus, paid at year- end, equal to 50% of the employee's salary, for continued employment. The staying bonus shall be compensated for with the Company's restricted common stock. She is also granted an option to purchase up to 500,000 shares of the Company's restricted common stock at a price equal to 60% of the average market value for the prior 180 trading days before exercise. On March 27, 2000, the exercise price was adjusted to a flat $0.38 per share, with an expiration date of December 31, 2004.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Employment agreements (continued)
3) The Chief Technical Officer of the Company entered into an agreement dated August 1, 1998 for an initial term of three years (extended through August 1, 2003 and again through January 19, 2009), and he is entitled to receive a base salary of $150,000 per year, with a minimum of $90,000 to be paid annually in cash and the balance paid (at the option of the Company) in cash or restricted common stock under rule 144. The employee shall receive a hire-on bonus of $75,000 worth of the Company's restricted common stock under rule 144, at one-half market price. The employee shall further receive performance bonuses (paid in restricted common stock, as above) upon successful completion of specific milestones pertaining to the implementation and deployment of certain software (up to $862,500). If substantially all performance milestones are met, he is also granted an option to purchase up to 500,000 shares of the Company's restricted common stock at a price equal to 60% of the average market value at the date of purchase. As of September 30, 2003, none of the aforementioned milestones had been successfully completed.
Litigation
There has been one recent legal proceeding in which the Company has been a party:
In February 2002, the Company borrowed $340,000 from the Mercator Momentum Fund ("Mercator") in order to make an initial $100,000 payment to Laurus Master Fund, Ltd. and to fund continuing development of the Company's H- Net(TM) system. This loan from Mercator was a short-term loan due May 15, 2002 and accrues interest at an annual rate of 18%. The loan was secured by shares of the Company's common stock. As of June 13, 2002, the Company owed Mercator approximately $243,000 of principal and accrued and unpaid interest under this loan and was in default in the repayment of this debt.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
On June 14, 2002, Mercator transferred collateral in the form of 5,861,814 shares of the Company's common stock into its name as a result of the Company's default on Mercator's loan. Of the 5,861,814 shares of common stock transferred into the name of Mercator 3,500,000 shares of the Company's common stock were issued and pledged as collateral by the Company in February 2002, and 2,361,814 shares of the Company's common stock were issued and pledged as collateral by Robert Spigno, the Company's Chief Executive Officer, in February 2002.
On June 21, 2002 Mercator filed an action against Conectisys Corporation, Robert A. Spigno and Patricia A. Spigno in the Superior Court of California, County of Los Angeles (Case No. BC276283) for breach of promissory note, foreclosure of security interests and fraud and deceit. Mr. Spigno is the Chairman of the Board and a director of the Company and is also the Company's Chief Executive Officer. Ms. Spigno is the Company's Secretary and Chief Financial Officer. On July 3, 2002, Mercator filed a first amended complaint in the Superior Court of California, County of Los Angeles (Case No. BC276283) adding a claim for common count for money lent. In March 2004, the Company settled its suit with Mercator for $150,000.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 13. COMMITMENTS AND CONTINGENCIES (continued)
Litigation (continued)
The Company, during its normal course of business, may be subject from time to time to disputes and to legal proceedings against it. Both counsel and management do not expect that the ultimate outcome of any current claims will have a material adverse effect on the Company's financial statements.
NOTE 14. FORM S-8 FILINGS
In November 2003, the Company filed a registration statement on Form S-8 covering 12,000,000 share issued to an independent consultant to the Company, which authorized the re-sale of the 12,000,000 shares of common stock valued at $46,800. In March 2004, the Company filed another registration statement on Form S-8 covering an additional 14,000,000 share issued to the same independent consultant valued at $36,400.
NOTE 15. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note holder options to purchase 500,000 shares of the Company's Class B preferred stock at an exercise price of $5.00 per share. As consideration, the Company reduced its debt to the note holder by $50,000 and received an extension of time to pay-off its promissory note. The Company also issued to its CEO options to purchase another 500,000 shares of the Company's Class B preferred stock at an exercise price of $5.00 per share in exchange for a reduction in debt of $50,000. Total consideration received on the above issued options, as evidenced by debt reduction, was $100,000. These options can be exercised through November 1, 2002 and can also be converted into common stock at the rate of 10 common shares for each Class B preferred share. In September 2001, the exercise price on the Class B preferred stock options was adjusted to $2.50 per share and the exercise period extended to November 1, 2005. In January 2004, the exercise price on the Class B preferred stock options was adjusted to $0.05 per share.
The Company's CEO currently own 215,865 shares of the Company's Class A preferred stock, of which 60,000 shares were purchased during the year ended September 30, 2002, and has options to purchase another 234,155 shares for $1.00 per share through November 1, 2005.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The Company has granted various common stock options and warrants to employees and consultants. Generally, the options and warrants were granted at approximately the fair market value of the Company's common stock at the date of grant and vested immediately, except that when restricted rule 144 common stock is to be issued, the options and warrants were granted at an average market discount of 50% (ranging from between 20% to 75%).
The Company accounts for stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25. Accordingly, compensation expense for common stock options and warrants issued to employees for services have been recorded as the difference between the intrinsic value of those services as measured by the (discounted) market value of the common stock at the date of grant and the exercise price, with pro forma disclosure of the excess market value as required by FASB No. 123. No common stock options or warrants were granted to employees (including officers) and directors of the Company during the six months ended March 31, 2004 and the year ended September 30, 2003.
All common stock options and warrants issued to consultants and other non- employees have been recorded at the fair value of the services rendered and equivalent to the market value (as discounted, if applicable) of the equity instruments received as per FASB No. 123. The market value was determined by utilizing an averaging convention of between 5 to 30 days of the closing price of the Company's common shares as traded on the over-the-counter bulletin board (stock symbol CNES) through the grant date and applying certain mathematical assumptions as required under the Black-Scholes model. Such assumptions, pertaining to the risk-free annual rate of return and stock volatility, were generally the same as those mentioned above when making fair value disclosures for the issuance of officer and employee stock options, except that the risk-free annual rate of return during the latter half of fiscal 2001 and subsequent was assumed to be 5% (rather than 6%) due to the general decline of interest rates occurring throughout the economy and the world.
At September 30, 2002, the Company had an aggregate of 8,807,154 common stock options and a total of 1,000,000 Class B preferred stock options recorded as additional paid-in capital at a value of $1,443,695. Of the common stock options and warrants, 2,043,654
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 15. STOCK OPTIONS (continued)
had been issued to officers and employees and the remaining 6,763,500 had been issued to consultants and investors.
In December 2001 and January 2002, a consultant exercised 550,000 common stock options, applying the $71,500 cost of exercise against an outstanding note payable. Stock options exercisable were also reduced and transferred to common stock in the amount of $31,625.
In March 2002 trough June 2002, 3,750,000 three-year common stock warrants were issued to an accredited investor group in connection with a $750,000 12% convertible debenture financing arrangement (see Note 10 above). The allocated cost of these warrants amounted to $100,087, so that the total stock options and warrants exercisable at September 30, 2002 became $1,443,695.
In November 2002 trough May 2003, 2,500,000 seven-year common stock warrants were issued to an accredited investor group in connection with a $500,000 12% convertible debenture financing arrangement (see Note 10 above). The allocated cost of these warrants amounted to $9,816, resulting in a recorded balance of stock options and warrants exercisable at September 30, 2003 of $1,453,511 (including $100,000 attributable to 1,000,000 Class B preferred stock options noted above).
As of September 30, 2003, the Company had an additional 4,852,205 common stock options that had been granted to consultants and investors at exercise prices ranging from $0.50 to $2.00 per share, expiring from November 1, 2003 through January 16, 2005. Because these strike prices were substantially above the market price of the Company's common stock, no value was attributed to these options at the time of grant. The Company also granted a contingent issuance to its Chief Technical Officer of 2,000,000 common stock options exercisable at $0.50 per share and expiring December 31, 2004, which will not vest until certain milestones have been attained. These respective common stock options and contingent issuances have been excluded from the summarized table below.
In November 2003 through December 2003, 1,000,000 seven-year common stock warrants were issued to an accredited investor group in connection with a $200,000 12% convertible debenture financing arrangement (see Note 10 above). The allocated cost of these warrants amounted to $945, resulting in a recorded balance of stock options and warrants exercisable at December 31, 2003 of $1,454,456 (including $100,000 attributable to 1,000,000 Class B preferred stock options noted above).
In February through March 2004, 1,500,000 seven-year common stock warrants were issued to an accredited investor group in connection with a $300,000 12% convertible debenture financing arrangement (see Note 10 above). The allocated cost of these warrants amounted to $1,417, resulting in a recorded balance of stock options and warrants exercisable at March 31, 2004 of $1,455,873 (including $100,000 attributable to 1,000,000 Class B preferred stock options noted above).
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
NOTE 15. STOCK OPTIONS AND WARRANTS (continued)
The common stock option activity during the six months ended March 31, 2004 and the fiscal year ended September 30, 2003 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2002 8,807,154 .280
Granted 2,500,000 .010
----------
Balance outstanding, September 30, 2003 11,307,154 $.204
Granted 2,500,000 .002
----------
Balance outstanding, March 31, 2004 13,807,154 $.167
========== =====
|
The following table summarizes information about common stock options at March 31, 2004:
Outstanding Exercisable
Weighted Weighted Weighted
Range of Common Average Average Common Average
Exercise Stock Life Exercise Stock Exercise
Prices Options (Months) Price Options Price
--------------- --------- ------- -------- ---------- -------
$2.000 - $2.000 563,500 5 $ 2.000 563,500 $ 2.000
$ .380 - $ .380 100,000 9 $ .380 100,000 $ .380
$ .192 - $ .192 1,000,000 12 $ .192 1,000,000 $ .192
$ .050 - $ .050 3,750,000 13 $ .002 3,750,000 $ .050
$ .130 - $ .130 1,450,000 17 $ .130 1,450,000 $ .130
$ .386 - $ .386 1,443,654 20 $ .386 1,443,654 $ .386
$ .380 - $ .380 500,000 20 $ .380 500,000 $ .380
& .002 - $ .002 2,500,000 70 $ .002 2,500,000 $ .002
& .002 - $ .002 1,000,000 80 $ .002 1,000,000 $ .002
& .002 - $ .002 1,500,000 83 $ .002 1,000,000 $ .002
|
NOTE 16. SUBSEQUENT EVENTS
(a) Subsequent to March 31, 2004, the Company issued 84,412,161 shares of common stock in exchange for reduction of $48,500 in convertible debt and payment of related accrued interested.
(b) In April 2004, the Company received $250,000 from an accredited investor group in exchange for 12% convertible debentures, convertible at the lesser of $0.005 per share and 40% of the average of the lowest three intra-day trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The convertible debentures were accompanied by 1,250,000 common stock warrants, exercisable over a three year period at $0.002 per share. Debt issuance costs associated with these loans amounted to $84,624, of which $21,624 represented finder's fees and $33,000 represented legal costs and $30,000 represented pre-paid interest on these loans.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Colorado Business Corporation Act, or CBCA, requires that each director discharge his duties to ConectiSys in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner that he reasonably believes to be in the best interests of ConectiSys. Generally, a director will not be liable to ConectiSys or its shareholders, for any action he takes or omits to take as a director if, in connection with such action or omission, he performed the duties of his position in compliance with the standards described above.
Our Articles of Incorporation provide that ConectiSys may indemnify any director or officer of ConectiSys to the full extent permitted by Colorado law. Under the CBCA, except for the situation described below, a corporation may indemnify a person made a party to a proceeding because the person is or was a director against liability incurred in the proceeding if:
o the person conducted himself in good faith;
o the person reasonably believed, in the case of conduct in an official capacity with ConectiSys, that his conduct was in the best interests of ConectiSys and, in all other cases, that his conduct was at least not opposed to the best interests of ConectiSys; and
o in the case of any criminal proceeding, the person had no reasonable cause to believe his conduct was unlawful.
Under the CBCA, ConectiSys may not indemnify a director as described above:
o in connection with a proceeding by or in the right of ConectiSys, in which the director was adjudged liable to ConectiSys; or
o in connection with any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director was adjudged liable on the basis that he derived an improper personal benefit.
Under the CBCA, ConectiSys is required to indemnify any director who is wholly successful on the merits or otherwise, in the defense of any proceeding to which the director was a party because the person is or was a director, against reasonable expenses incurred by him in connection with the proceeding.
Section 2115 of the California General Corporation Law, or the California Corporations Code, provides that corporations such as ConectiSys that are incorporated in jurisdictions other than California and that meet various tests are subject to several provisions of the California Corporations Code, to the exclusion of the law of the jurisdiction in which the corporation is incorporated. We believe that as of September 30, 2003, we met the tests contained in Section 2115. Consequently, we are subject to, among other provisions of the California Corporations Code, Section 317 which governs indemnification of directors, officers and others. Section 317 generally eliminates the personal liability of a director for monetary damages in an
action brought by or in the right of ConectiSys for breach of a director's duties to ConectiSys or our shareholders except for liability:
o for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law;
o for acts or omissions that a director believes to be contrary to the best interests of ConectiSys or our shareholders or that involve the absence of good faith on the part of the director;
o for any transaction for which a director derived an improper personal benefit;
o for acts or omissions that show a reckless disregard for the director's duty to ConectiSys or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to ConectiSys or our shareholders;
o for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to ConectiSys or our shareholders; and
o for engaging in transactions described in the California Corporations Code or California case law which result in liability, or approving the same kinds of transactions.
To the extent indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant under the above 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the offering described in this Registration Statement:
SEC Registration $684.18
NASD Fees --
Accounting Fees and
Expenses *
Legal Fees and Expenses *
Blue Sky Fees and
Expenses 300.00
Placement Agent
Fees and Expenses -
Printing Costs -
Miscellaneous Expenses -
TOTAL $ *
========
|
* To be provided by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In June 2001 and through September 2001, we issued an aggregate of 591,419 shares of common stock valued at $157,683 to a consultant as compensation for consulting services rendered.
In September 2001, we issued 364,940 shares of common stock valued at $88,300 to a consultant as compensation for consulting services rendered.
In September 2001, we issued an 18% revolving promissory note due September 1, 2002 to an officer and director in the amount of $56,880 as replacement for a note of the same amount that was cancelled.
In September 2001, we issued an 18% revolving promissory note due September 1, 2002 to an officer in the amount of $25,874 as replacement for a note of the same amount that was cancelled.
In September 2001, we granted a fully-vested option to an officer and director to purchase up to 500,000 shares of Class B Preferred Stock at an exercise price of $2.50 per share, as incentive compensation. This equates to $.25 per share of common stock if the Class B Preferred Stock were converted, which was the price of the common stock on that date.
In September 2001 we granted an option to purchase 465,000 shares of common stock at an exercise price of $2.00 per share to an accredited investor in connection with a private placement transaction.
In September 2001 we granted options to purchase an aggregate of 2,000,000 shares of common stock at an exercise price of $.13 per share to two consultants in exchange for consulting services rendered.
In September 2001, we issued 1,000,000 shares of common stock valued at $100,000 to a consultant for services rendered.
In October 2001 we granted a fully-vested option to an officer and director to purchase up to 310,000 shares of Class A Preferred Stock at an exercise price of $1.00 per share, which was the estimated value on that date.
In October 2001, we issued 1,200,000 shares of common stock valued at $120,000 to a consultant for services rendered.
In November 2001 we granted options to purchase an aggregate of 200,000 shares of common stock at an exercise price of $1.00 per share to two accredited investors in connection with private placement transactions.
In December 2001, we issued 60,000 shares of Class A Preferred Stock to an officer upon partial exercise of an option and in exchange for the cancellation of $60,000 of debt.
In December 2001, we issued 300,000 shares of common stock valued at $39,000 to a consultant for services rendered.
In January 2002 we granted an option to purchase 192,100 shares of common stock at an exercise price of $2.00 per share to an accredited investor in connection with a private placement transaction.
In January 2002, we granted an option to purchase 500,000 shares of common stock at an exercise price of $1.00 per share to an accredited investor in connection with a private placement transaction.
In January 2002, we issued an aggregate of 500,000 shares of common stock valued at $57,500 to two consultants for services rendered.
In February 2002, we issued 2,613,334 shares of common stock to five note holders in exchange for the cancellation of $209,000 of debt.
In February 2002 we issued to one entity an 8% promissory note due May 15, 2002 in the principal amount of $340,000 in exchange for $300,000 in cash. In February 2002, we also issued 3,500,000 shares of common stock valued at $402,500 to that entity as security for its loan of $340,000.
In February and April 2002, we reached a settlement arrangement with respect to our 8% convertible promissory note issued in April 2001 under which we agreed to immediately repay certain portions of the note and to make certain payments in the future. Under this arrangement, the interest rate on the note increases to 14%. Of the warrants that were initially issued in connection with this note, 500,000 were cancelled and the exercise price of the remaining 500,000 was re-priced.
In March 2002, we issued 50,000 shares of common stock valued at $5,000 to a consultant as compensation for services rendered.
On March 29, 2002 we issued an aggregate of $300,000 of 12% convertible debentures in a private offering to four accredited investors. Three of the investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the lowest three intraday trading prices during the 20 trading days immediately preceding an exercise.
In April 2002, we granted an option to purchase 500,000 shares of common stock to an investor, having an exercise price of $.10 per share with respect to 250,000 shares of common stock and $.15 per share with respect to the other 250,000 shares of common stock.
In April 2002, we issued 630,000 shares of common stock valued at $63,000 to a consultant as compensation for consulting services rendered.
In May 2002, we issued 100,000 shares of common stock valued at $5,000 to a consultant as compensation for consulting services rendered.
On May 10, 2002, we issued $150,000 of 12% convertible debentures in a private offering to four accredited investors. Three of the investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the lowest three intraday trading prices during the 20 trading days immediately preceding an exercise.
In May 2002, we issued 200,000 shares of common stock and an option to purchase 200,000 shares of common stock at an exercise price of $.50 per share in a private placement transaction to one accredited investor in exchange for $20,000 in cash.
In June 2002, we issued an aggregate of 300,000 shares of common stock and an option to purchase 300,000 shares of common stock at an exercise price of $.50 per share in a private placement transaction to two accredited investors in exchange for $30,000 in cash.
In June 2002, we issued an aggregate of 2,903,661 shares of common stock to four accredited investors upon conversion of an aggregate of $53,250 in principal plus related interest on our convertible debentures.
In June 2002, we issued an aggregate of 1,098,707 shares of common stock valued at $42,789 to three consultants for services rendered.
On June 17, 2002 we issued an aggregate of $300,000 of 12% convertible debentures in a private offering to four accredited investors. Three of the investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.06 per share and 50% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,500,000 shares of common stock at a per share exercise price equal to the lesser of $.045 and the average of the lowest three intraday trading prices during the 20 trading days immediately preceding an exercise.
In June 2002, we issued an aggregate of 2,903,661 shares of common stock to four accredited investors upon conversion of an aggregate of $53,250 in principal and related interest on our convertible debentures.
On June 28, 2002, we repriced a fully-vested option issued to an officer and director to purchase up to 500,000 shares of Class B Preferred Stock from an exercise price of $2.50 per share to an exercise price of $.50 per share. The exercise price of $.50 per share equates to $.05 per share of common stock if the Class B Preferred Stock were converted, which was in excess of the price of our common stock on that date.
In August 2002, we issued an aggregate of 3,745,142 shares of common stock to four accredited investors upon conversion of an aggregate of $20,871 in principal and related interest on our convertible debentures.
In August 2002, we issued an aggregate of 1,000,000 shares of common stock valued at $20,000 to a consultant for services rendered.
In September 2002, we issued an aggregate of 6,018,325 shares of common stock to four accredited investors upon conversion of an aggregate of $21,064 in principal and related interest on our convertible debentures.
In September 2002, we issued 4,000,000 shares of common stock valued at $40,000 to a consultant for services rendered.
In September 2002, we issued 4,000,000 shares of common stock in a private offering to one accredited investor in exchange for $40,000 in cash.
In October 2002, we issued 1,000,000 shares of common stock valued at $20,000 to a consultant for services rendered.
In October 2002, we issued 2,325,000 shares of common stock valued at $23,250 to a consultant for services rendered.
In October 2002, we issued an aggregate of 2,669,503 shares of common stock to four accredited investors upon conversion of an aggregate of $10,678 in principal plus related interest on our convertible debentures.
In November 2002, we issued an aggregate of 4,500,000 shares of common stock valued at $45,000 to four consultants for services rendered.
In November 2002, we issued an aggregate of 2,685,892 shares of common stock to four accredited investors upon conversion of an aggregate of $10,744 in principal and related interest on our convertible debentures.
In November 2002, we issued 3,000,000 shares of common stock in a private offering to one accredited investor in exchange for $30,000 in cash.
In November 2002, we issued 636,886 shares of common stock to a director and officer to reimburse him for 636,886 shares pledged by him as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
In November 2002, we issued 2,630,742 shares of common stock to a director and officer to reimburse him for 2,630,742 shares pledged by him as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
In November 2002, we issued 1,458,059 shares of common stock to an officer to reimburse her for 1,458,059 shares pledged by her as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
On November 27, 2002 we issued an aggregate of $200,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,000,000 shares of common stock at a per share exercise price equal to $.005.
In December 2002, we issued an aggregate of 1,250,000 shares of common stock valued at $31,250 to the five members of our advisory board for consulting services rendered.
In December 2002, we issued 500,000 shares of common stock to an accredited investor upon conversion of $3,200 in principal and related interest on a convertible promissory note.
In December 2002, we issued 4,000,000 shares of common stock in a private offering to one accredited investor in exchange for $20,000 in cash.
In December 2002, we issued 500,000 shares of common stock valued at $5,000 to a consultant for services rendered.
In December 2002, we issued 250,000 shares of common stock to one of our directors and employees as a bonus valued at $1,250.
On January 6, 2003, we extended to December 31, 2004, the expiration date of an option granted to one of our officers and directors on November 22, 1999 that initially expired December 31, 2002, to purchase up to 2,000,000 shares of common stock at an exercise price of $.50 per share, which was the closing price of a share of our common stock on the date of grant. This option vests upon the achievement of certain specified performance criteria.
On January 6, 2003, we extended to December 31, 2004, the expiration date of an option granted to one of our officers and directors on November 22, 1999 that initially expired December 31, 2002, to purchase up to 500,000 shares of common stock at an exercise price of $.15 per share, which was 50% of the closing price of a share of our common stock on the date of grant. This option vested immediately.
On January 6, 2003, we extended to December 31, 2004, the expiration date of an option granted to one of our directors on September 1, 1999 that initially expired December 31, 2002, to purchase up to 100,000 shares of common stock at an exercise price of $.38 per share, which was 50% of the closing price of a share of our common stock on the date of grant. This option vested immediately.
In January 2003, we issued 2,361,814 shares of common stock to a director and officer to reimburse him for 2,361,814 shares pledged by him as security for a loan made by Mercator Momentum Fund to us in February 2002 in the original principal amount of $340,000, which pledged shares were transferred by Mercator into its name in connection with a default on that loan.
In January 2003, we issued 47,521 shares of common stock to a director and officer to reimburse him for 47,521 shares pledged by him as security for a loan made by Laurus Master Fund to us in April 2001 in the original principal amount of $300,000, which pledged shares were transferred by Laurus into its name in connection with a default on that loan.
In January 2003, we issued an aggregate of 6,981,501 shares of common stock to four accredited investors upon conversion of an aggregate of $32,752 in principal and related interest on our convertible debentures.
In January 2003, we issued 3,305,468 shares of common stock valued at $20,554 to a consultant for services rendered.
In January 2003, we issued 4,000,000 shares of common stock in a private offering to one accredited investor in exchange for $20,000 in cash.
In January 2003, we issued 2,500,000 shares of common stock to a creditor in exchange for the cancellation of $20,000 of debt.
In January 2003, we issued 2,500,000 shares of common stock valued at $12,500 to a consultant for services rendered.
In January 2003, we issued 2,500,000 shares of common stock in exchange for the cancellation of $12,500 in debt.
In February 2003, we issued an aggregate of 12,958,103 shares of common stock to four accredited investors upon conversion of an aggregate of $29,910 in principal and related interest on our convertible debentures.
In February 2003, we issued 2,000,000 shares of common stock valued at $10,000 to a consultant for services rendered.
In February 2003, we issued 20,000,000 shares of common stock in a private offering to one accredited investor in exchange for $30,000 in cash.
In March 2003, we issued an aggregate of 6,960,565 shares of common stock to four accredited investors upon conversion of an aggregate of $9,970 in principal and related interest on our convertible debentures.
In March 2003, we issued 60,000,000 shares of common stock in a private offering to four accredited investors in exchange for $60,000 in cash.
In March 2003, we issued 4,000,000 shares of common stock valued at $20,000 to a consultant for services rendered.
In March 2003, we issued 50,000,000 shares of common stock in a private offering to one accredited investor in exchange for $50,000 in cash.
On March 3, 2003, we issued $150,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to the lesser of $.005 and the average of the lowest three intraday trading prices during the 20 trading days immediately preceding an exercise.
In April 2003, we issued an aggregate of 3,075,523 shares of common stock to four accredited investors upon conversion of an aggregate of $7,500 in principal and related interest on our convertible debentures.
In April 2003, we issued 25,000,000 shares of common stock in a private offering to one accredited investor in exchange for $25,000 in cash.
In May 2003, we issued an aggregate of 10,747,705 shares of common stock to four accredited investors upon conversion of an aggregate of $15,000 in principal and related interest on our convertible debentures.
In May 2003, we issued 50,000,000 shares of common stock in a private offering to an accredited investor in exchange for $50,000 in cash.
In May 2003, we issued 6,000,000 shares of common stock in exchange for the cancellation of $12,000 in debt.
In May 2003, we issued 24,000,000 shares of common stock valued at $156,000 to three consultants for services rendered.
On May 12, 2003, we issued $150,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.01 per share and 50% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 750,000 shares of common stock at a per share exercise price equal to $.005.
In June 2003, we issued an aggregate of 15,615,666 shares of common stock to four accredited investors upon conversion of an aggregate of $22,500 in principal and related interest on our convertible debentures.
In June 2003, we issued 5,000,000 shares of common stock in exchange for the cancellation of $13,500 in debt.
In July 2003, we issued 35,000,000 shares of common stock in a private offering to one accredited investor in exchange for $50,000 in cash and $20,000 in debt reduction.
In September 2003, we issued 10,000,000 shares of common stock in a private offering to two accredited investors in exchange for $20,000 in cash.
In September 2003, we issued 14,500,000 shares of common stock in exchange for the cancellation of $39,700 in debt.
In October 2003, we issued an aggregate of 17,565,279 shares of common stock to three accredited investors upon conversion of an aggregate of $28,061 in principal and related interest on our convertible debentures.
In November 2003, we issued 12,000,000 shares of common stock valued at $25,000 to a consultant in a S-8 offering for services rendered.
In November 2003, we issued 1,300,000 shares of common stock valued at $3,400 to two consultants for services rendered.
In November 2003, we issued 23,500,000 shares of common stock in exchange for the cancellation of $23,500 in debt.
In November 2003, we issued an aggregate of 20,695,062 shares of common stock to three accredited investors upon conversion of an aggregate of $25,650 in principal and related interest on our convertible debentures.
On November 25, 2003, we issued $100,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.005 per share and 40% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 500,000 shares of common stock at a per share exercise price equal to $.005.
In December 2003, we issued 41,600,000 shares of common stock in exchange for the cancellation of $41,600 in debt.
In December 2003, we issued an aggregate of 27,499,788 shares of common stock to three accredited investors upon conversion of an aggregate of $23,550 in principal and related interest on our convertible debentures.
In December 2003, we issued an aggregate of 15,845 shares of Class A Preferred stock to our CEO, Robert A. Spigno valued at $15,845 for reduction in debt.
On December 3, 2003, we issued $50,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.005 per share and 40% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock at a per share exercise price equal to $.005.
On December 31, 2003, we issued $50,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.005 per share and 40% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock at a per share exercise price equal to $.005.
In January 2004, we issued an aggregate of 18,891,327 shares of common stock to three accredited investors upon conversion of an aggregate of $15,000 in principal and related interest on our convertible debentures.
On February 18, 2004, we issued $50,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.005 per share and 40% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 250,000 shares of common stock at a per share exercise price equal to $.005.
In February 2004, we issued an aggregate 24,670,000 shares of restricted common stock to six accredited investors for cash in the aggregate amount of $25,000.
On March 4, 2004, we issued $250,000 of 12% convertible debentures in a private offering to three accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.005 per share and 40% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,250,000 shares of common stock at a per share exercise price equal to $.005.
In March 2004, we issued an aggregate of 9,465,852 shares of common stock to three accredited investors upon conversion of an aggregate of $7,500 in principal and related interest on our convertible debentures.
In March 2004, the Company issued 14,000,000 shares of common stock valued at $25,000 to a consultant for services rendered.
In April 2004, we issued 10,000,000 shares of common stock in exchange for the cancellation of $10,000 in debt.
In May 2004, we issued 81,525,000 shares of common stock in exchange for the cancellation of $83,475,000 in debt.
On April 19, 2004, we issued $250,000 of 12% convertible debentures in a private offering to four accredited investors. The investors, if certain conversion limitations are disregarded, are beneficial owners of 5% or more of our outstanding shares of common stock. The debentures initially were convertible into shares of common stock at the lesser of $.005 per share and 40% of the average of the lowest three intraday trading prices of a share of common stock during the 20 trading days immediately preceding conversion. The debentures were accompanied by warrants to purchase up to an aggregate of 1,250,000 shares of common stock at a per share exercise price equal to $.005.
In April 2004, we issued an aggregate of 52,123,755 shares of common stock to three accredited investors upon conversion of an aggregate of $30,000 in principal and related interest on our convertible debentures.
In May 2004, we issued an aggregate of 32,288,406 shares of common stock to four accredited investors upon conversion of an aggregate of $18,500 in principal and related interest on our convertible debentures.
In June 2004, we issued an aggregate of 34,138,815 shares of common stock to four accredited investors upon conversion of an aggregate of $28,333 in principal and related interest on our convertible debentures.
Exemption from the registration provisions of the Securities Act of 1933 for the transactions described above is claimed under Section 4(2) of the Securities Act of 1933, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide.
ITEM 27. EXHIBITS.
(a) Exhibits.
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation of the Registrant (4)
3.2 Articles of Amendment to the Articles of Incorporation of the
Registrant filed November 7, 1994 (4)
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant filed December 5, 1994 (6)
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant filed October 16, 1995 (4)
3.5 Articles of Amendment to the Articles of Incorporation of the
Registrant filed April 18, 2003 (9)
3.6 Bylaws of the Registrant (4)
4.1 Specimen Common Stock Certificate (6)
4.2 Form of Common Stock Purchase Warrant dated as of March 29,
2002 (4)
4.3 Form of Common Stock Purchase Warrant dated as of May 10, 2002
(5)
4.4 Form of Common Stock Purchase Warrant dated as of June 17,
2002 (7)
4.5 Form of Common Stock Purchase Warrant dated as of November 27,
2002 (8)
4.6 Form of Common Stock Purchase Warrant dated as of March 3,
2003 (9)
4.7 Form of Common Stock Purchase Warrant dated as of May 12, 2003
(10)
4.8 Securities Purchase Agreement dated as of April 19, 2004 by
and between the Registrant and the purchasers named therein
4.9 Form of Secured Convertible Debenture due April 19, 2006
4.10 Form of Common Stock Purchase Warrant dated as of April 19,
2004
4.11 Registration Rights Agreement dated as of April 19, 2004 by
and between the Registrant and the investors named therein
4.12 Security Agreement dated as of April 19, 2004 between the
Registrant and the secured parties named therein
|
4.13 Intellectual Property Security Agreement dated as of April 19,
2004 between the Registrant and the secured parties named
therein
5.1 Opinion of Rutan & Tucker, LLP (*)
10.1 Employment Agreement dated October 2, 1995 between the
Registrant and Robert Spigno (#) (4)
10.2 Amendment to Employment Agreement dated July 24, 1996 between
the Registrant and Robert Spigno (#) (4)
10.3 Amendment to Employment Agreement dated August 11, 1997
between the Registrant and Robert Spigno (#) (4)
10.4 Amendment to Employment Agreement dated September 1, 1999
between the Registrant and Robert Spigno (#) (4)
10.5 Amendment to Employment Agreement dated March 27, 2000 between
the Registrant and Robert Spigno (#) (4)
10.6 Employment Agreement dated August 1, 1998 between the
Registrant and Lawrence Muirhead (#) (2)
10.7 Employment Agreement dated October 2, 1995 between the
Registrant and Patricia Spigno (#) (4)
10.8 Amendment to Employment Agreement dated July 24, 1996 between
the Registrant and Patricia Spigno (#) (4)
10.9 Amendment to Employment Agreement dated September 1, 1999
between the Registrant and Patricia Spigno (#) (4)
10.10 Amendment to Employment Agreement dated March 27, 2000 between
the Registrant and Patricia Spigno (#) (4)
10.11 Convertible Note dated April 12, 2001 made by the Registrant
in favor of Laurus Master Fund, Ltd. (4)
10.12 Promissory Note Subscription Agreement dated April 12, 2001
between the Registrant and Laurus Master Fund, Ltd. (4)
10.13 Security Agreement dated April 12, 2001 between the Registrant
and Laurus Master Fund, Ltd. (4)
10.14 Letter Agreement dated September 26, 2001 between the
Registrant and Laurus Master Fund, Ltd. (4)
10.15 Letter Agreement dated April 2, 2002 between the Registrant
and Laurus Master Fund, Ltd. (4)
10.16 ConectiSys Corporation Non-Qualified Stock Option and Stock
Bonus Plan effective November 22, 1999(2)
|
10.17 Amended Non-Qualified Stock Option and Stock Bonus Plan
effective September 11, 2000 (3)
10.18 Amended Non-Qualified Stock Option and Stock Bonus Plan
effective September 11, 2001 (1)
10.19 Securities Purchase Agreement dated as of March 29, 2002 by
and between the Registrant and the purchasers named therein
(4)
10.20 Form of Secured Convertible Debenture due March 29, 2003 (4)
10.21 Registration Rights Agreement dated as of March 29, 2002 by
and between the Registrant and the investors named therein (4)
10.22 Security Agreement dated as of March 29, 2002 between the
Registrant and the secured parties named therein (4)
10.23 Form of Secured Convertible Debenture due May 10, 2003 (5)
10.24 Form of Secured Convertible Debenture due June 17, 2003 (7)
10.25 Securities Purchase Agreement dated as of November 27, 2002 by
and between the Registrant and the purchasers named therein (8)
10.26 Form of Secured Convertible Debenture due November 27, 2003
(8)
10.27 Registration Rights Agreement dated as of November 27, 2002 by
and between the Registrant and the investors named therein (8)
10.28 Security Agreement dated as of November 27, 2002 between the
Registrant and the secured parties named therein (8)
10.29 Intellectual Property Security Agreement dated as of November
27, 2002 between the Registrant and the secured parties named
therein (8)
10.30 Form of Secured Convertible Debenture due March 3, 2004 (9)
10.31 Form of Secured Convertible Debenture due May 12, 2004 (10)
10.32 Promissory Note dated September 1, 2003 made by the Registrant
in favor of Robert Spigno (#)
10.33 Promissory Note dated September 1, 2003 made by the Registrant
in favor of Patricia Spigno (#)
10.34 Promissory Note dated September 1, 2003 made by the Registrant
in favor of Black Dog Ranch, LLC
10.35 Letter Agreement dated October 3, 2003 between the Registrant
and the parties named therein (11)
|
10.36 Securities Purchase Agreement dated as of November 25, 2003 by
and between the Registrant and the purchasers named therein (11)
10.37 Form of Secured Convertible Debenture due November 25, 2004
(11)
10.38 Form of Common Stock Purchase Warrant dated as of November 25,
2003 (11)
10.39 Registration Rights Agreement dated as of November 25, 2003 by
and between the Registrant and the investors named therein
(11)
10.40 Security Agreement dated as of November 25, 2003 between the
Registrant and the secured parties named therein (11)
10.41 Intellectual Property Security Agreement dated as of November
25, 2003 between the Registrant and the secured parties named
therein (11)
10.42 Form of Secured Convertible Debenture due December 3, 2004
(11)
10.43 Form of Common Stock Purchase Warrant dated as of December 3,
2003 (11)
10.44 Form of Secured Convertible Debenture due December 31, 2004
(11)
10.45 Form of Common Stock Purchase Warrant dated as of December 31,
2003 (11)
10.46 Form of Secured Convertible Debenture due February 18, 2005
(12)
10.47 Form of Common Stock Purchase Warrant dated as of February 18,
2004 (12)
10.48 Amendment No. 1 to Securities Purchase Agreement dated as of
March 4, 2004 by and between the Registrant and the persons
named therein
10.49 Form of Secured Convertible Debenture due March 4, 2005 (12)
10.50 Form of Common Stock Purchase Warrant dated as of March 4,
2004 (12)
21.1 Subsidiaries of the Registrant (4)
23.1 Consent of Independent Certified Public Accountants
23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1) (*)
24.1 Power of Attorney (contained on the signature pages to this
registration statement)
_________________
(*) To be filed by amendment.
(#) Management contract or compensatory plan, contract or
arrangement required to be filed as an exhibit.
(1) Filed as an exhibit to the Registrant's Form S-8 filed with
the Securities and Exchange Commission on September 21, 2001
(Registration No. 333-69832) and incorporated herein by
reference.
|
(2) Filed as an exhibit to the Registrant's Form S-8 filed with
the Securities and Exchange Commission on December 6, 1999
(Registration No. 333-92181) and incorporated herein by
reference.
(3) Filed as an exhibit to the Registrant's Form S-8 filed with
the Securities and Exchange Commission on September 22, 2000
(Registration No. 333-46456) and incorporated herein by
reference.
(4) Filed as an exhibit to the Registrant's Form SB-2 filed with
the Securities and Exchange Commission on April 26, 2002
(Registration No. 333-87062) and incorporated herein by
reference.
(5) Filed as an exhibit to the Registrant's Form 10-QSB for the
quarter ended March 31, 2002 and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's Form SB-2/A No. 1
filed with the Securities and Exchange Commission on June 6,
2002 (Registration No. 333-87062) and incorporated herein by
reference.
(7) Filed as an exhibit to the Registrant's Form 10-QSB for the
quarter ended June 30, 2002 and incorporated herein by
reference.
(8) Filed as an exhibit to the Registrant's Form 10-KSB for the
year ended September 30, 2002 and incorporated herein by
reference.
(9) Filed as an exhibit to the Registrant's Form SB-2/A No. 1
filed with the Securities and Exchange Commission on May 2,
2003 (Registration No. 333-102781) and incorporated herein by
reference.
(10) Filed as an exhibit to the Registrant's Form 10-QSB for the
quarter ended June 30, 2003 and incorporated herein by
reference.
(11) Filed as an exhibit to the Registrant's Form 10-KSB for the
year ended September 30, 2003 and incorporated herein by
reference.
(12) Filed as an exhibit to the Registrant's Form 10-QSB for the
quarter ended December 31, 2003 and incorporated herein by
reference.
|
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To 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 (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; and
(iii) include any additional or changed material information on the plan of distribution.
(2) That, for determining liability under the Securities Act, each such post-effective amendment shall be treated as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any of the securities being registered that remain unsold at the end of the offering.
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.
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, in the city of Valencia, State of California, on June 25, 2004.
CONECTISYS CORPORATION
By:/S/ ROBERT A. SPIGNO ---------------------------- Robert A. Spigno, Chief Executive Officer and Chairman of the Board |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and directors of ConectiSys Corporation, a Colorado corporation, which is filing a registration statement on Form SB-2 with the Securities and Exchange Commission under the provisions of the Securities Act of 1933, as amended, hereby constitute and appoints Robert A. Spigno, their true and lawful attorney-in-fact and agent; with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign such registration statement and any or all amendments to the registration statement, including a prospectus or an amended prospectus therein, and all other documents in connection therewith to be filed 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 interests and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, 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.
Name Title Date
--------------------- ---------------------------- -------------------
/S/ ROBERT A. SPIGNO Chairman of the Board, June 25, 2004
ROBERT A. SPIGNO Chief Executive Officer
(principal executive officer)
and Director
/S/PATRICIA A. SPIGNO Chief Financial Officer, June 25, 2004
PATRICIA A. SPIGNO Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/S/LAWRENCE MUIRHEAD Chief Technology Officer and June 25, 2004
LAWRENCE MUIRHEAD Director
/S/MELISSA McGOUGH Corporate Administrator and June 25, 2004
MELISSA McGOUGH Director
|
EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
Exhibit
Number Description
------ -----------
4.8 Securities Purchase Agreement dated as of April 19, 2004 by
and between the Registrant and the purchasers named therein
4.9 Form of Secured Convertible Debenture due April 19, 2006
4.10 Form of Common Stock Purchase Warrant dated as of April 19,
2004
4.11 Registration Rights Agreement dated as of April 19, 2004 by
and between the Registrant and the investors named therein
4.12 Security Agreement dated as of April 19, 2004 between the
Registrant and the secured parties named therein
4.13 Intellectual Property Security Agreement dated as of April 19,
2004 between the Registrant and the secured parties named
therein
10.32 Promissory Note dated September 1, 2003 made by the Registrant
in favor of Robert Spigno (#)
10.33 Promissory Note dated September 1, 2003 made by the Registrant
in favor of Patricia Spigno (#)
10.34 Promissory Note dated September 1, 2003 made by the Registrant
in favor of Black Dog Ranch, LLC
10.48 Amendment No. 1 to Securities Purchase Agreement dated as of
March 4, 2004 by and between the Registrant and the persons
named therein
23.1 Consent of Independent Certified Public Accountants
24.1 Power of Attorney (contained on the signature pages to this
registration statement)
|
<pre>
Exhibit 4.8
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of April 19, 2004, by and among Conectisys Corporation, a Colorado corporation, with headquarters located at 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355 (the "Company"), and each of the purchasers set forth on the signature pages hereto (the "Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act");
B. Buyers desire to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement (i) 12% callable secured convertible debentures of the Company, in the form attached hereto as Exhibit "A", in the aggregate principal amount of One Million Five Hundred Thousand Dollars ($1,500,000) (together with any debenture(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "Debentures"), convertible into shares of common stock, no par value per share, of the Company (the "Common Stock"), upon the terms and subject to the limitations and conditions set forth in such Debentures and (ii) warrants, in the form attached hereto as Exhibit "B", to purchase Four Million, Five Hundred Thousand (4,500,000) shares of Common Stock (the "Warrants").
C. Each Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Debentures and number of Warrants as is set forth immediately below its name on the signature pages hereto; and
D. Contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as Exhibit "C" (the "Registration Rights Agreement"), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws.
NOW, THEREFORE, the Company and each of the Buyers severally (and not jointly) hereby agree as follows:
1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.
a. Purchase of Debentures and Warrants. On the Closing Date (as defined below), the Company shall issue and sell to each Buyer and each Buyer severally agrees to purchase from the Company such principal amount of Debentures and number of Warrants as is set forth immediately below such Buyer's name on the signature pages hereto.
b. Form of Payment. On the Closing Date (as defined below), (i) each Buyer shall pay the purchase price for the Debentures and the Warrants to be issued and sold to it at the Closing (as defined below) (the "Purchase Price") by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions, against delivery of the Debentures in the principal amount equal to the Purchase Price and the number of Warrants as is set forth immediately below such Buyer's name on the signature pages hereto, and (ii) the Company shall deliver such Debentures and Warrants duly executed on behalf of the Company, to such Buyer, against delivery of such Purchase Price.
c. Closing Date. Subject to the satisfaction (or written waiver) of the conditions thereto set forth in Section 6 and Section 7 below, the date and time of the issuance and sale of the Debentures and the Warrants pursuant to this Agreement (the "Closing Date") shall be 12:00 noon Pacific Standard Time on April 19, 2004 or such other mutually agreed upon time. The closing of the transactions contemplated by this Agreement (the "Closing") shall occur on the Closing Date at such location as may be agreed to by the parties.
2. BUYERS' REPRESENTATIONS AND WARRANTIES. Each Buyer severally (and not jointly) represents and warrants to the Company solely as to such Buyer that:
a. Investment Purpose. As of the date hereof, the Buyer is purchasing the Debentures and the shares of Common Stock issuable upon conversion of or otherwise pursuant to the Debentures (including, without limitation, such additional shares of Common Stock, if any, as are issuable (i) on account of interest on the Debentures, (ii) as a result of the events described in Sections 1.3 and 1.4(g) of the Debentures and Section 2(c) of the Registration Rights Agreement or (iii) in payment of the Standard Liquidated Damages Amount (as defined in Section 2(f) below) pursuant to this Agreement, such shares of Common Stock being collectively referred to herein as the "Conversion Shares") and the Warrants and the shares of Common Stock issuable upon exercise thereof (the "Warrant Shares" and, collectively with the Debentures, Warrants and Conversion Shares, the "Securities") for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act; provided, however, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act.
b. Accredited Investor Status. The Buyer is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor").
c. Reliance on Exemptions. The Buyer understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities.
d. Information. The Buyer and its advisors, if any, have been, and for so long as the Debentures and Warrants remain outstanding will continue to be, furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. The Buyer and its advisors, if any, have been, and for so long as the Debentures and Warrants remain outstanding will continue to be, afforded the opportunity to ask questions of the Company. Notwithstanding the foregoing, the Company has not disclosed to the Buyer any material nonpublic information and will not disclose such information unless such information is disclosed to the public prior to or promptly following such disclosure to the Buyer. Neither such inquiries nor any other due diligence investigation conducted by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant degree of risk.
e. Governmental Review. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Re-sale. The Buyer understands that (i) except as
provided in the Registration Rights Agreement, the sale or re-sale of the
Securities has not been and is not being registered under the 1933 Act or any
applicable state securities laws, and the Securities may not be transferred
unless (a) the Securities are sold pursuant to an effective registration
statement under the 1933 Act, (b) the Buyer shall have delivered to the
Company an opinion of counsel that shall be in form, substance and scope
customary for opinions of counsel in comparable transactions to the effect
that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from such registration, which opinion shall be
accepted by the Company, (c) the Securities are sold or transferred to an
"affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a
successor rule) ("Rule 144")) of the Buyer who agrees to sell or otherwise
transfer the Securities only in accordance with this Section 2(f) and who is
an Accredited Investor, (d) the Securities are sold pursuant to Rule 144, or
(e) the Securities are sold pursuant to Regulation S under the 1933 Act (or a
successor rule) ("Regulation S"), and the Buyer shall have delivered to the
Company an opinion of counsel that shall be in form, substance and scope
customary for opinions of counsel in corporate transactions, which opinion
shall be accepted by the Company; (ii) any sale of such Securities made in
reliance on Rule 144 may be made only in accordance with the terms of said
Rule and further, if said Rule is not applicable, any re-sale of such
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined
in the 1933 Act) may require compliance with some other exemption under the
1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither
the Company nor any other person is under any obligation to register such
Securities under the 1933 Act or any state securities laws or to comply with
the terms and conditions of any exemption thereunder (in each case, other than
pursuant to the Registration Rights Agreement). Notwithstanding the foregoing
or anything else contained herein to the contrary, the Securities may be
pledged as collateral in connection with a bona fide margin account or other
lending arrangement. In the event that the Company does not accept the
opinion of counsel provided by the Buyer with respect to the transfer of
Securities pursuant to an exemption from registration, such as Rule 144 or
Regulation S, within three (3) business days of delivery of the opinion to the
Company, the Company shall pay to the Buyer liquidated damages of three
percent (3%) of the outstanding amount of the Debentures per month plus
accrued and unpaid interest on the Debentures, prorated for partial months, in
cash or shares at the option of the Buyer ("Standard Liquidated Damages
Amount"). If the Buyer elects to be paid the Standard Liquidated Damages
Amount in shares of Common Stock, such shares shall be issued at the
Conversion Price at the time of payment.
g. Legends. The Buyer understands that the Debentures and the Warrants and, until such time as the Conversion Shares and Warrant Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Conversion Shares and Warrant Shares may bear a restrictive legend in substantially the following form (and a stop- transfer order may be placed against transfer of the certificates for such Securities):
"The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under said Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under said Act or unless sold pursuant to Rule 144 or Regulation S under said Act."
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by applicable state securities laws,
(a) such Security is registered for sale under an effective registration
statement filed under the 1933 Act or otherwise may be sold pursuant to Rule
144 or Regulation S without any restriction as to the number of securities as
of a particular date that can then be immediately sold, or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect
that a public sale or transfer of such Security may be made without
registration under the 1933 Act, which opinion shall be accepted by the
Company so that the sale or transfer is effected or (c) such holder provides
the Company with reasonable assurances that such Security can be sold pursuant
to Rule 144 or Regulation S. The Buyer agrees to sell all Securities,
including those represented by a certificate(s) from which the legend has been
removed, in compliance with applicable prospectus delivery requirements, if
any.
h. Authorization; Enforcement. This Agreement and the Registration Rights Agreement have been duly and validly authorized. This Agreement has been duly executed and delivered on behalf of the Buyer, and this Agreement constitutes, and upon execution and delivery by the Buyer of the Registration Rights Agreement, such agreement will constitute, valid and binding agreements of the Buyer enforceable in accordance with their terms.
i. Residency. The Buyer is a resident of the jurisdiction set forth immediately below such Buyer's name on the signature pages hereto.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Buyer that:
a. Organization and Qualification. The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, and, except as set forth on Schedule 3(a), validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. Schedule 3(a) sets forth a list of all of the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "Subsidiaries" means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest.
b. Authorization; Enforcement. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Debentures and the Warrants and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Debentures and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Debentures and the Warrants and the issuance and reservation for issuance of the Conversion Shares and Warrant Shares issuable upon conversion or exercise thereof) have been duly authorized by the Company's Board of Directors, except for the Stockholder Approval (as defined in Section 4(m)) and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) this Agreement has been duly executed and delivered by the Company by its authorized representative, and such authorized representative is the true and official representative with authority to sign this Agreement and the other documents executed in connection herewith and bind the Company accordingly, and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the Registration Rights Agreement, the Debentures and the Warrants, each of such instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.
c. Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of (i) 1,000,000,000 shares of Common Stock, of which
785,543,405 shares are issued and outstanding, no shares are reserved for
issuance pursuant to the Company's stock option plans, approximately
214,456,595 shares are reserved for issuance pursuant to securities (other
than the Debentures and the Warrants) exercisable for, or convertible into or
exchangeable for shares of Common Stock (plus the shares underlying the
convertible debenture and notes described in Schedule 3(c)) and 3,759,000,000
shares are reserved for issuance upon conversion of the Debentures and the
Additional Debentures (as defined in Section 4(l)) and exercise of the
Warrants and the Additional Warrants (as defined in Section 4(l)) (subject to
(A) adjustment pursuant to the Company's covenant set forth in Section 4(h)
below and (B) the Stockholder approval (as defined in Section 4(m)); and (ii)
50,000,000 shares of preferred stock of which 1,000,000 shares have been
designated as Class A Preferred Stock, 215,865 of which are issued and
outstanding with options outstanding to purchase 234,155 shares of Class A
Preferred Stock and of which 1,000,000 shares have been designated as Class B
Preferred of which no shares are issued and outstanding with options
outstanding to purchase 1,000,000 shares of Class B Preferred Stock. All of
such outstanding shares of capital stock are, or upon issuance will be, duly
authorized, validly issued, fully paid and nonassessable. No shares of
capital stock of the Company are subject to preemptive rights or any other
similar rights of the stockholders of the Company or any liens or encumbrances
imposed through the actions or failure to act of the Company. Except as
disclosed in Schedule 3(c), as of the effective date of this Agreement, (i)
there are no outstanding options, warrants, scrip, rights to subscribe for,
puts, calls, rights of first refusal, agreements, understandings, claims or
other commitments or rights of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for any shares of
capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries,
(ii) there are no agreements or arrangements under which the Company or any of
its Subsidiaries is obligated to register the sale of any of its or their
securities under the 1933 Act (except the Registration Rights Agreement) and
(iii) there are no anti-dilution or price adjustment provisions contained in
any security issued by the Company (or in any agreement providing rights to
security holders) that will be triggered by the issuance of the Debentures,
the Warrants, the Conversion Shares or Warrant Shares. The Company has
furnished to the Buyer true and correct copies of the Company's Articles of
Incorporation as in effect on the date hereof ("Articles of Incorporation"),
the Company's By-laws, as in effect on the date hereof (the "By-laws"), and
the terms of all securities convertible into or exercisable for Common Stock
of the Company and the material rights of the holders thereof in respect
thereto. The Company shall provide the Buyer with a written update of this
representation signed by the Company's Chief Executive or Chief Financial
Officer on behalf of the Company as of the Closing Date.
d. Issuance of Shares. Subject to the Stockholder Approval (as defined in Section 4(m), the Conversion Shares and Warrant Shares are duly authorized and reserved for issuance and, upon conversion of the Debentures and exercise of the Warrants in accordance with their respective terms, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof.
e. Acknowledgment of Dilution. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares and Warrant Shares upon conversion of the Debenture or exercise of the Warrants. The Company further acknowledges that its obligation to issue Conversion Shares and Warrant Shares upon conversion of the Debentures or exercise of the Warrants in accordance with this Agreement, the Debentures and the Warrants is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company.
f. No Conflicts. Subject to the Stockholder Approval (as defined in
Section 4(m)), the execution, delivery and performance of this Agreement, the
Registration Rights Agreement, the Debentures and the Warrants by the Company
and the consummation by the Company of the transactions contemplated hereby
and thereby (including, without limitation, the issuance and reservation for
issuance of the Conversion Shares and Warrant Shares) will not (i) conflict
with or result in a violation of any provision of the Articles of
Incorporation or By-laws or (ii) violate or conflict with, or result in a
breach of any provision of, or constitute a default (or an event which with
notice or lapse of time or both could become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture, patent, patent license or instrument to which the
Company or any of its Subsidiaries is a party, or (iii) result in a violation
of any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and regulations of any self-regulatory
organizations to which the Company or its securities are subject) applicable
to the Company or any of its Subsidiaries or by which any property or asset of
the Company or any of its Subsidiaries is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not, individually or in the aggregate, have a Material
Adverse Effect). Neither the Company nor any of its Subsidiaries is in
violation of its Articles of Incorporation, By-laws or other organizational
documents and neither the Company nor any of its Subsidiaries is in default
(and no event has occurred which with notice or lapse of time or both could
put the Company or any of its Subsidiaries in default) under, and neither the
Company nor any of its Subsidiaries has taken any action or failed to take any
action that would give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to
which the Company or any of its Subsidiaries is a party or by which any
property or assets of the Company or any of its Subsidiaries is bound or
affected, except for possible defaults as would not, individually or in the
aggregate, have a Material Adverse Effect. The businesses of the Company and
its Subsidiaries, if any, are not being conducted, and shall not be conducted
so long as a Buyer owns any of the Securities, in violation of any law,
ordinance or regulation of any governmental entity. Except as specifically
contemplated by this Agreement and as required under the 1933 Act and any
applicable state securities laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with,
any court, governmental agency, regulatory agency, self regulatory
organization or stock market or any third party in order for it to execute,
deliver or perform any of its obligations under this Agreement, the
Registration Rights Agreement, the Debentures or the Warrants in accordance
with the terms hereof or thereof or to issue and sell the Debentures and
Warrants in accordance with the terms hereof and to issue the Conversion
Shares upon conversion of the Debentures and the Warrant Shares upon exercise
of the Warrants. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof. The Company is not in violation of the listing requirements of the
Over-the-Counter Bulletin Board (the "OTCBB") and does not reasonably
anticipate that the Common Stock will be delisted by the OTCBB in the
foreseeable future. The Company and its Subsidiaries are unaware of any facts
or circumstances which might give rise to any of the foregoing.
g. SEC Documents; Financial Statements. The Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed
prior to the date hereof and all exhibits included therein and financial
statements and schedules thereto and documents (other than exhibits to such
documents) incorporated by reference therein, being hereinafter referred to
herein as the "SEC Documents"). The Company has delivered to each Buyer true
and complete copies of the SEC Documents, except for such exhibits and
incorporated documents. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and
the rules and regulations of the SEC promulgated thereunder applicable to the
SEC Documents, and none of the SEC Documents, at the time they were filed with
the SEC, contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. None of the statements made in any such SEC Documents
is, or has been, required to be amended or updated under applicable law
(except for such statements as have been amended or updated in subsequent
filings prior the date hereof). As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such
financial statements have been prepared in accordance with United States
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed
or summary statements) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Except as set
forth in the financial statements of the Company included in the SEC
Documents, the Company has no liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to
September 30, 2003 and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under generally
accepted accounting principles to be reflected in such financial statements,
which, individually or in the aggregate, are not material to the financial
condition or operating results of the Company.
h. Absence of Certain Changes. Since September 30, 2003, there has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company or any of its Subsidiaries.
i. Absence of Litigation. There is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such, that could have a Material Adverse Effect. Schedule 3(i) contains a complete list and summary description of any pending or threatened proceeding against or affecting the Company or any of its Subsidiaries, without regard to whether it would have a Material Adverse Effect. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.
j. Patents, Copyrights, etc.
(i) The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all patents, patent applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights ("Intellectual Property") necessary to enable it to conduct its business as now operated (and, except as set forth in Schedule 3(j) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future); there is no claim or action by any person pertaining to, or proceeding pending, or to the Company's knowledge threatened, which challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct its business as now operated (and, except as set forth in Schedule 3(j) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future); to the best of the Company's knowledge, the Company's or its Subsidiaries' current and intended products, services and processes do not infringe on any Intellectual Property or other rights held by any person; and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual Property.
(ii) All of the Company's computer software and computer hardware, and other similar or related items of automated, computerized or software systems that are used or relied on by the Company in the conduct of its business or that were, or currently are being, sold or licensed by the Company to customers (collectively, "Information Technology"), are Year 2000 Compliant. For purposes of this Agreement, the term "Year 2000 Compliant" means, with respect to the Company's Information Technology, that the Information Technology is designed to be used prior to, during and after the calendar Year 2000, and the Information Technology used during each such time period will accurately receive, provide and process date and time data (including, but not limited to, calculating, comparing and sequencing) from, into and between the 20th and 21st centuries, including the years 1999 and 2000, and leap-year calculations, and will not malfunction, cease to function, or provide invalid or incorrect results as a result of the date or time data, to the extent that other information technology, used in combination with the Information Technology, properly exchanges date and time data with it. The Company has delivered to the Buyers true and correct copies of all analyses, reports, studies and similar written information, whether prepared by the Company or another party, relating to whether the Information Technology is Year 2000 Compliant, if any.
k. No Materially Adverse Contracts, Etc. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect.
l. Tax Status. Except as set forth on Schedule 3(l), the Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax. Except as set forth on Schedule 3(l), none of the Company's tax returns is presently being audited by any taxing authority.
m. Certain Transactions. Except as set forth on Schedule 3(m) and except
for arm's length transactions pursuant to which the Company or any of its
Subsidiaries makes payments in the ordinary course of business upon terms no
less favorable than the Company or any of its Subsidiaries could obtain from
third parties and other than the grant of stock options disclosed on Schedule
3(c), none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company or any of its
Subsidiaries (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer,
director, or any such employee has a substantial interest or is an officer,
director, trustee or partner.
n. Disclosure. All information relating to or concerning the Company or any of its Subsidiaries set forth in this Agreement and provided to the Buyers pursuant to Section 2(d) hereof and otherwise in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed (assuming for this purpose that the Company's reports filed under the 1934 Act are being incorporated into an effective registration statement filed by the Company under the 1933 Act).
o. Acknowledgment Regarding Buyers' Purchase of Securities. The Company acknowledges and agrees that the Buyers are acting solely in the capacity of arm's length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by any Buyer or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyers' purchase of the Securities. The Company further represents to each Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.
p. No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the Securities to the Buyers. The issuance of the Securities to the Buyers will not be integrated with any other issuance of the Company's securities (past, current or future) for purposes of any stockholder approval provisions applicable to the Company or its securities.
q. No Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, transaction fees or similar payments relating to this Agreement or the transactions contemplated hereby.
r. Permits; Compliance. The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "Company Permits"), and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Since September 30, 2003, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect.
s. Environmental Matters.
(i) Except as set forth in Schedule 3(s), there are, to the Company's knowledge, with respect to the Company or any of its Subsidiaries or any predecessor of the Company, no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company's knowledge, threatened in connection with any of the foregoing. The term "Environmental Laws" means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, "Hazardous Materials") into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.
(ii) Other than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company or any of its Subsidiaries, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company's or any of its Subsidiaries' business.
(iii) Except as set forth in Schedule 3(s), there are no underground storage tanks on or under any real property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law.
t. Title to Property. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 3(t) or such as would not have a Material Adverse Effect. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect.
u. Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. The Company has provided to Buyer true and correct copies of all policies relating to directors' and officers' liability coverage, errors and omissions coverage, and commercial general liability coverage.
v. Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in
the judgment of the Company's board of directors, to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
w. Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.
x. Solvency. Except as set forth in Schedule 3(x), the Company, after giving effect to the transactions contemplated by this Agreement, will be solvent (i.e., the Company is able to pay its debts as they become due and payable) and currently the Company has no information that would lead it to reasonably conclude that the Company would not have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts become due and payable. The Company did not receive a qualified opinion from its auditors with respect to its most recent fiscal year end and, after giving effect to the transactions contemplated by this Agreement, does not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year.
y. No Investment Company. The Company is not, and upon the issuance and sale of the Securities as contemplated by this Agreement will not be an "investment company" required to be registered under the Investment Company Act of 1940 (an "Investment Company"). The Company is not controlled by an Investment Company.
z. Breach of Representations and Warranties by the Company. If the
Company breaches any of the representations or warranties set forth in this
Section 3, and in addition to any other remedies available to the Buyers
pursuant to this Agreement, the Company shall pay to the Buyer the Standard
Liquidated Damages Amount in cash or in shares of Common Stock at the option
of the Company, until such breach is cured. If the Company elects pay the
Standard Liquidated Damages Amounts in shares of Common Stock, such shares
shall be issued at the Conversion Price at the time of payment.
4. COVENANTS.
a. Best Efforts. The parties shall use their best efforts to satisfy timely each of the conditions described in Section 6 and 7 of this Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to the Buyers at the applicable closing pursuant to this Agreement under applicable securities or "blue sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to each Buyer on or prior to the Closing Date.
c. Reporting Status; Eligibility to Use Form S-3, SB-2 or Form
S-1. The Company's Common Stock is registered under Section 12(g) of the 1934 Act. The Company represents and warrants that it meets the requirements for the use of Form S-3 (of if Company is not eligible for the use of Form S-3 as of the Filing Date (as defined in the Registration Rights Agreement), the Company may use the form of registration for which it is eligible at that time) for registration of the sale by the Buyer of the Registrable Securities (as defined in the Registration Rights Agreement). So long as the Buyer beneficially owns any of the Securities, the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company further agrees to file all reports required to be filed by the Company with the SEC in a timely manner so as to become eligible, and thereafter to maintain its eligibility, for the use of Form S-3. The Company shall issue a press release describing the materials terms of the transaction contemplated hereby as soon as practicable following the Closing Date but in no event more than two (2) business days of the Closing Date, which press release shall be subject to prior review by the Buyers. The Company agrees that such press release shall not disclose the name of the Buyers unless expressly consented to in writing by the Buyers or unless required by applicable law or regulation, and then only to the extent of such requirement.
d. Use of Proceeds. The Company shall use the proceeds from the sale of the Debentures and the Warrants in the manner set forth in Schedule 4(d) attached hereto and made a part hereof and shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person (except in connection with its currently existing direct or indirect Subsidiaries)
e. Future Offerings. Subject to the exceptions described below, the
Company will not, without the prior written consent of a majority-in-interest
of the Buyers, not to be unreasonably withheld, negotiate or contract with any
party to obtain additional equity financing (including debt financing with an
equity component) that involves (A) the issuance of Common Stock at a discount
to the market price of the Common Stock on the date of issuance (taking into
account the value of any warrants or options to acquire Common Stock issued in
connection therewith) or (B) the issuance of convertible securities that are
convertible into an indeterminate number of shares of Common Stock or (C) the
issuance of warrants during the period (the "Lock-up Period") beginning on the
Closing Date and ending on the later of (i) one hundred eighty (180) days from
the Closing Date and (ii) ninety (90) days from the date the Registration
Statement (as defined in the Registration Rights Agreement) is declared
effective (plus any days in which sales cannot be made thereunder). In
addition, subject to the exceptions described below, the Company will not
conduct any equity financing (including debt with an equity component)
("Future Offerings") during the period beginning on the Closing Date and
ending two (2) years after the end of the Lock-up Period unless it shall have
first delivered to each Buyer, at least twenty (20) business days prior to the
closing of such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof and proposed definitive
documentation to be entered into in connection therewith, and providing each
Buyer an option during the fifteen (15) day period following delivery of such
notice to purchase its pro rata share (based on the ratio that the aggregate
principal amount of Debentures purchased by it hereunder bears to the
aggregate principal amount of Debentures purchased hereunder) of the
securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence and the preceding sentence are collectively referred to as the
"Capital Raising Limitations"). In the event the terms and conditions of a
proposed Future Offering are amended in any respect after delivery of the
notice to the Buyers concerning the proposed Future Offering, the Company
shall deliver a new notice to each Buyer describing the amended terms and
conditions of the proposed Future Offering and each Buyer thereafter shall
have an option during the fifteen (15) day period following delivery of such
new notice to purchase its pro rata share of the securities being offered on
the same terms as contemplated by such proposed Future Offering, as amended.
The foregoing sentence shall apply to successive amendments to the terms and
conditions of any proposed Future Offering. The Capital Raising Limitations
shall not apply to any transaction involving (i) issuances of securities in a
firm commitment underwritten public offering (excluding a continuous offering
pursuant to Rule 415 under the 1933 Act), (ii) issuances of securities as
consideration for a merger, consolidation or purchase of assets, or in
connection with any strategic partnership or joint venture (the primary
purpose of which is not to raise equity capital), or in connection with the
disposition or acquisition of a business, product or license by the Company or
(iii) issuances of restricted securities at a discount to the market price of
the Common Stock, provided that no registration rights are given to the
purchaser. The Capital Raising Limitations also shall not apply to the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of the date hereof or
to the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan approved
by the Stockholders of the Company. In the event that the Company completes a
Future
Offering on terms more favorable to another investor than the transaction contemplated hereby, the terms of the Debentures and the Warrants will be amended to reflect such more favorable terms.
f. Expenses. At the Closing, the Company shall reimburse Buyers for expenses incurred by it in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the other agreements to be executed in connection herewith ("Documents"), including, without limitation, attorneys' and consultants' fees and expenses, transfer agent fees, fees for stock quotation services, fees relating to any amendments or modifications of the Documents or any consents or waivers of provisions in the Documents, fees for the preparation of opinions of counsel, escrow fees, and costs of restructuring the transactions contemplated by the Documents. When possible, the Company must pay these fees directly, otherwise the Company must make immediate payment for reimbursement to the Buyers for all fees and expenses immediately upon written notice by the Buyer or the submission of an invoice by the Buyer If the Company fails to reimburse the Buyer in full within three (3) business days of the written notice or submission of invoice by the Buyer, the Company shall pay interest on the total amount of fees to be reimbursed at a rate of 15% per annum.
g. Financial Information. The Company agrees to send the following reports to each Buyer until such Buyer transfers, assigns, or sells all of the Securities: (i) within ten (10) days after the filing with the SEC, a copy of its Annual Report on Form 10-KSB, its Quarterly Reports on Form 10-QSB and any Current Reports on Form 8-K; (ii) within one (1) day after release, copies of all press releases issued by the Company or any of its Subsidiaries; and (iii) contemporaneously with the making available or giving to the stockholders of the Company, copies of any notices or other information the Company makes available or gives to such stockholders.
h. Authorization and Reservation of Shares. Subject to the Stockholder Approval (as defined in Section 4(m)), the Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion or exercise of the outstanding Debentures and Warrants and issuance of the Conversion Shares and Warrant Shares in connection therewith (based on the Conversion Price of the Debentures or Exercise Price of the Warrants in effect from time to time) and as otherwise required by the Debentures. The Company shall not reduce the number of shares of Common Stock reserved for issuance upon conversion of Debentures and exercise of the Warrants without the consent of each Buyer. The Company shall at all times maintain the number of shares of Common Stock so reserved for issuance at an amount ("Reserved Amount") equal to no less than two (2) times the number that is then actually issuable upon full conversion of the Debentures and Additional Debentures and upon exercise of the Warrants and the Additional Warrants (based on the Conversion Price of the Debentures or the Exercise Price of the Warrants in effect from time to time). If at any time the number of shares of Common Stock authorized and reserved for issuance ("Authorized and Reserved Shares") is below the Reserved Amount, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this Section 4(h), in the case of an insufficient number of authorized shares, obtain stockholder approval of an increase in such authorized number of shares, and voting the management shares of the Company in favor of an increase in the authorized shares of the Company to ensure that the number of authorized shares is sufficient to meet the Reserved Amount. If the Company fails to obtain such shareholder approval within thirty (30) days following the date on which the Reserved Amount exceeds the Authorized and Reserved Shares, the Company shall pay to the Borrower the Standard Liquidated Damages Amount, in cash or in shares of Common Stock at the option of the Buyer. If the Buyer elects to be paid the Standard Liquidated Damages Amount in shares of Common Stock, such shares shall be issued at the Conversion Price at the time of payment. In order to ensure that the Company has authorized a sufficient amount of shares to meet the Reserved Amount at all times, the Company must deliver to the Buyer at the end of every month a list detailing (1) the current amount of shares authorized by the Company and reserved for the Buyer; and (2) amount of shares issuable upon conversion of the Debentures and upon exercise of the Warrants and as payment of interest accrued on the Debentures for one year. If the Company fails to provide such list within five (5) business days of the end of each month, the Company shall pay the Standard Liquidated Damages Amount, in cash or in shares of Common Stock at the option of the Buyer, until the list is delivered. If the Buyer elects to be paid the Standard Liquidated Damages Amount in shares of Common Stock, such shares shall be issued at the Conversion Price at the time of payment.
i. Listing. The Company shall promptly secure the listing of the Conversion Shares and Warrant Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and, so long as any Buyer owns any of the Securities, shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares and Warrant Shares from time to time issuable upon conversion of the Debentures or exercise of the Warrants. The Company will obtain and, so long as any Buyer owns any of the Securities, maintain the listing and trading of its Common Stock on the OTCBB, the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New York Stock Exchange ("NYSE"), or the American Stock Exchange ("AMEX") and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. The Company shall promptly provide to each Buyer copies of any notices it receives from the OTCBB and any other exchanges or quotation systems on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems.
j. Corporate Existence. So long as a Buyer beneficially owns any
Debentures or Warrants, the Company shall maintain its corporate existence and
shall not sell all or substantially all of the Company's assets, except in the
event of a merger or consolidation or sale of all or substantially all of the
Company's assets, where the surviving or successor entity in such transaction
(i) assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii) is a publicly traded
corporation whose Common Stock is listed for trading on the OTCBB, Nasdaq,
Nasdaq SmallCap, NYSE or AMEX.
k. No Integration. The Company shall not make any offers or sales of any security (other than the Securities) under circumstances that would require registration of the Securities being offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be integrated with any other offering of securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities.
l. Subsequent Investments. The Company and the Buyers agree that, upon the filing by the Company of the Registration Statement to be filed pursuant to the Registration Rights Agreement (the "Filing Date"), the Buyers shall purchase additional debentures (the "Filing Debentures") in the aggregate principal amount of Six Hundred, Twenty Five Thousand Dollars ($625,000) and additional warrants (the "Filing Warrants") to purchase an aggregate of 1,875,000 shares of Common Stock, for an aggregate purchase price of Six Hundred, Twenty Five Thousand Dollars ($625,000), with the closing of such purchase to occur within fifteen (15) days of the Filing Date; provided, however, that the obligation of each Buyer to purchase the Filing Debentures and the Filing Warrants is subject to the satisfaction, at or before the closing of such purchase and sale, of the conditions set forth in Section 7. The Company and the Buyers further agree that, upon the declaration of effectiveness of the Registration Statement to be filed pursuant to the Registration Rights Agreement (the "Effective Date"), the Buyers shall purchase additional debentures (the "Effectiveness Debentures" and, collectively with the Filing Debentures, the "Additional Debentures") in the aggregate principal amount of Six Hundred, Twenty Five Thousand Dollars ($625,000) and additional warrants (the "Effectiveness Warrants" and, collectively with the Filing Warrants, the "Additional Warrants") to purchase an aggregate of 1,875,000 shares of Common Stock, for an aggregate purchase price of Six Hundred, Twenty Five Thousand Dollars ($625,000), with the closing of such purchase to occur within five (5) days of the Effective Date; provided, however, that the obligation of each Buyer to purchase the Effectiveness Debentures and the Effectiveness Warrants is subject to the satisfaction, at or before the closing of such purchase and sale, of the conditions set forth in Section 7; and, provided, further, that there shall not have been a Material Adverse Effect as of such effective date. The terms of the Additional Debentures and the Additional Warrants shall be identical to the terms of the Debentures and Warrants to be issued on the Closing Date. The Common Stock underlying the Additional Debentures and the Additional Warrants shall be Registrable Securities (as defined in the Registration Rights Agreement) and shall be included in the Registration Statement to be filed pursuant to the Registration Rights Agreement.
m. Stockholder Approval. The Company shall file a proxy statement or information statement with the SEC no later than April 30, 2004 and use its best efforts to obtain, on or before May 31, 2004 such approvals of the Company's stockholders as may be required to issue all of the shares of Common Stock issuable upon conversion or exercise of, or otherwise with respect to, the Debentures and the Warrants in accordance with Colorado law and any applicable rules or regulations of the OTCBB and Nasdaq, either through a reverse stock split of the Common Stock or an increase in authorized capital (the "Stockholder Approval"). The Company shall furnish to each Buyer and its legal counsel promptly (but in no event less than two (2) business days) before the same is filed with the SEC, one copy of the proxy statement or information statement and any amendment thereto, and shall deliver to each Buyer promptly each letter written by or on behalf of the Company to the SEC or the staff of the SEC, and each item of correspondence from the SEC or the staff of the SEC, in each case relating to such proxy statement or information statement (other than any portion thereof which contains information for which the Company has sought confidential treatment). The Company will promptly (but in no event more than three (3) business days) respond to any and all comments received from the SEC (which comments shall promptly be made available to each Buyer). The Company shall comply with the filing and disclosure requirements of Section 14 under the 1934 Act in connection with the Stockholder Approval. The Company represents and warrants that its Board of Directors has approved the proposal contemplated by this Section 4(m) and shall indicate such approval in the proxy statement or information statement used in connection with the Stockholder Approval.
n. Breach of Covenants. If the Company breaches any of the covenants set forth in this Section 4, and in addition to any other remedies available to the Buyers pursuant to this Agreement, the Company shall pay to the Buyers the Standard Liquidated Damages Amount, in cash or in shares of Common Stock at the option of the Company, until such breach is cured. If the Company elects to pay the Standard Liquidated Damages Amount in shares, such shares shall be issued at the Conversion Price at the time of payment.
5. TRANSFER AGENT INSTRUCTIONS. The Company shall issue irrevocable
instructions to its transfer agent to issue certificates, registered in the
name of each Buyer or its nominee, for the Conversion Shares and Warrant
Shares in such amounts as specified from time to time by each Buyer to the
Company upon conversion of the Debentures or exercise of the Warrants in
accordance with the terms thereof (the "Irrevocable Transfer Agent
Instructions"). Prior to registration of the Conversion Shares and Warrant
Shares under the 1933 Act or the date on which the Conversion Shares and
Warrant Shares may be sold pursuant to Rule 144 without any restriction as to
the number of Securities as of a particular date that can then be immediately
sold, all such certificates shall bear the restrictive legend specified in
Section 2(g) of this Agreement. The Company warrants that no instruction
other than the Irrevocable Transfer Agent Instructions referred to in this
Section 5, and stop transfer instructions to give effect to Section 2(f)
hereof (in the case of the Conversion Shares and Warrant Shares, prior to
registration of the Conversion Shares and Warrant Shares under the 1933 Act or
the date on which the Conversion Shares and Warrant Shares may be sold
pursuant to Rule 144 without any restriction as to the number of Securities as
of a particular date that can then be immediately sold), will be given by the
Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the
extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way the Buyer's obligations and
agreement set forth in Section 2(g) hereof to comply with all applicable
prospectus delivery requirements, if any, upon re-sale of the Securities. If
a Buyer provides the Company with (i) an opinion of counsel in form, substance
and scope customary for opinions in comparable transactions, to the effect
that a public sale or transfer of such Securities may be made without
registration under the 1933 Act and such sale or transfer is effected or (ii)
the Buyer provides reasonable assurances that the Securities can be sold
pursuant to Rule 144, the Company shall permit the transfer, and, in the case
of the Conversion Shares and Warrant Shares, promptly instruct its transfer
agent to issue one or more certificates, free from restrictive legend, in such
name and in such denominations as specified by such Buyer. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyers, by vitiating the intent and purpose of the
transactions contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5 may be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section, that the Buyers shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach and requiring immediate transfer, without the necessity of showing
economic loss and without any bond or other security being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Debentures and Warrants to a Buyer at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion:
a. The applicable Buyer shall have executed this Agreement and the Registration Rights Agreement, and delivered the same to the Company.
b. The applicable Buyer shall have delivered the Purchase Price in accordance with Section 1(b) above.
c. The representations and warranties of the applicable Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the applicable Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable Buyer at or prior to the Closing Date.
d. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation of each Buyer hereunder to purchase the Debentures and Warrants at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions, provided that these conditions are for such Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion:
a. The Company shall have executed this Agreement and the Registration Rights Agreement, and delivered the same to the Buyer.
b. The Company shall have delivered to such Buyer duly executed Debentures (in such denominations as the Buyer shall request) and Warrants in accordance with Section 1(b) above.
c. The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a majority-in-interest of the Buyers, shall have been delivered to and acknowledged in writing by the Company's Transfer Agent.
d. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Buyer shall have received a certificate or certificates, executed by the chief executive officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, but not limited to certificates with respect to the Company's Articles of Incorporation, By-laws and Board of Directors' resolutions relating to the transactions contemplated hereby.
e. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated by this Agreement. f. No event shall have occurred which could reasonably be expected to have a Material Adverse Effect on the Company. g. The Conversion Shares and Warrant Shares shall have been authorized for quotation on the OTCBB and trading in the Common Stock on the OTCBB shall not have been suspended by the SEC or the OTCBB. h. The Buyer shall have received an opinion of the Company's counsel, dated as of the Closing Date, in form, scope and substance reasonably |
satisfactory to the Buyer and in substantially the same form as Exhibit "D" attached hereto.
i. The Buyer shall have received an officer's certificate described in
Section 3(c) above, dated as of the Closing Date.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
b. Counterparts; Signatures by Facsimile. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.
c. Headings. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.
d. Severability. In the event that any provision of this Agreement is invalid or enforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.
e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be:
If to the Company:
Conectisys Corporation
24730 Avenue Tibbitts
Suite 130
Valencia, California 91355
Attention: Chief Executive Officer
Telephone: 661-295-6763
Facsimile: 661-295-5981
Email: rspigno@conectisys.com
With copy to:
Rutan & Tucker, LLP
611 Anton Boulevard
Suite 1400
Costa Mesa, California 92626
Attention: Larry Cerutti, Esq.
Telephone: 714-641-3450
Facsimile: 714-546-9035
Email: lcerutti@rutan.com
If to a Buyer: To the address set forth immediately below such Buyer's name on the signature pages hereto.
With copy to:
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street
51st Floor
Philadelphia, Pennsylvania 19103
Attention: Gerald J. Guarcini, Esq.
Telephone: 215-864-8625
Facsimile: 215-864-8999
Email: guarcini@ballardspahr.com
Each party shall provide notice to the other party of any change in address.
g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor any Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, subject to Section 2(f), any Buyer may assign its rights hereunder to any person that purchases Securities in a private transaction from a Buyer or to any of its "affiliates," as that term is defined under the 1934 Act, without the consent of the Company.
h. Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
i. Survival. The representations and warranties of the Company and the agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the closing hereunder notwithstanding any due diligence investigation conducted by or on behalf of the Buyers. The Company agrees to indemnify and hold harmless each of the Buyers and all their officers, directors, employees and agents for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in Sections 3 and 4 hereof or any of its covenants and obligations under this Agreement or the Registration Rights Agreement, including advancement of expenses as they are incurred.
j. Publicity. The Company and each of the Buyers shall have the right to review a reasonable period of time before issuance of any press releases, SEC, OTCBB or NASD filings, or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of each of the Buyers, to make any press release or SEC, OTCBB (or other applicable trading market) or NASD filings with respect to such transactions as is required by applicable law and regulations (although each of the Buyers shall be consulted by the Company in connection with any such press release prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon).
k. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
l. No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
m. Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that the Buyers shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this Agreement to be duly executed as of the date first above written.
CONECTISYS CORPORATION
/S/ ROBERT A SPIGNO Robert A. Spigno Chief Executive Officer |
AJW PARTNERS, LLC
By: SMS Group, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
RESIDENCE: Delaware
ADDRESS:
1044 Northern Boulevard
Suite 302
Roslyn, NY 11576
Facsimile: (516) 739-7115
Telephone: (516) 739-7110
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Debentures: $50,000
Number of Warrants: 150,000
Aggregate Purchase Price: $50,000
AJW OFFSHORE, LTD.
By: First Street Manager II, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
RESIDENCE: New York
ADDRESS:
1044 Northern Boulevard
Suite 302
Roslyn, NY 11576
Facsimile: (516) 739-7115
Telephone: (516) 739-7110.
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Debentures: $88,700 Number of Warrants: 266,100 Aggregate Purchase Price: $88,700 |
AJW QUALIFIED PARTNERS, LLC
By: AJW Manager, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
RESIDENCE: New York
ADDRESS:
1044 Northern Boulevard
Suite 302
Roslyn, NY 11576
Facsimile: (516) 739-7115
Telephone: (516) 739-7110
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Debentures: $101,125 Number of Warrants: 303,375 Aggregate Purchase Price: $101,125 |
NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By: First Street Manager II, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
RESIDENCE: New York
ADDRESS:
1044 Northern Boulevard
Suite 302
Roslyn, NY 11576
Facsimile: (516) 739-7115
Telephone: (516) 739-7110
AGGREGATE SUBSCRIPTION AMOUNT:
Aggregate Principal Amount of Debentures: $10,175 Number of Warrants: 30,525 Aggregate Purchase Price: $10,175 |
<pre>
Exhibit 4.9
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT.
CALLABLE SECURED CONVERTIBLE DEBENTURE
Valencia, California
April 19, 2004 $________
FOR VALUE RECEIVED, CONECTISYS CORPORATION, a Colorado corporation (hereinafter called the "Borrower"), hereby promises to pay to the order of ________________ or registered assigns (the "Holder") the sum of $________, on April 19, 2006 (the "Maturity Date"), and to pay interest on the unpaid principal balance hereof at the rate of twelve percent (12%) per annum from April 19, 2004 (the "Issue Date") until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. Any amount of principal or interest on this Debenture which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date thereof until the same is paid ("Default Interest"). Interest shall commence accruing on the issue date, shall be computed on the basis of a 365- day year and the actual number of days elapsed and shall be payable quarterly on March 31, June 30, September 30 and December 31 of each year beginning on June 30, 2004 provided, however, that the interest payments due on June 30, 2004, September 30, 2004, December 31, 2004 and March 31, 2005 shall be payable on the date hereof. All payments due hereunder (to the extent not converted into common stock, no par value per share, of the Borrower (the "Common Stock") in accordance with the terms hereof) shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Debenture. Whenever any amount expressed to be due by the terms of this Debenture is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Debenture is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Debenture, the term "business day" shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement, dated April 19, 2004, pursuant to which this Debenture was originally issued (the "Purchase Agreement").
This Debenture is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of stockholders of the Borrower and will not impose personal liability upon the holder thereof. The obligations of the Borrower under this Debenture shall be secured by that certain Security Agreement by and between the Borrower and the Holder of even date herewith.
The following terms shall apply to this Debenture:
ARTICLE I. CONVERSION RIGHTS
1.1 Conversion Right. The Holder shall have the right from time to time, and at any time on or prior to the earlier of (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount (as defined in Section 5.1 or any payments pursuant to Section 1.7, each in respect of the remaining outstanding principal amount of this Debenture to convert all or any part of the outstanding and unpaid principal amount of this Debenture into fully paid and non?assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price (the "Conversion Price") determined as provided herein (a "Conversion"); provided, however, that in no event shall the Holder be entitled to convert any portion of this Debenture in excess of that portion of this Debenture upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Debentures or the unexercised or unconverted portion of any other security of the Borrower (including, without limitation, the warrants issued by the Borrower pursuant to the Purchase Agreement) subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Debenture with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D?G thereunder, except as otherwise provided in clause (1) of such proviso. The number of shares of Common Stock to be issued upon each conversion of this Debenture shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit A (the "Notice of Conversion"), delivered to the Borrower by the Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York time on such conversion date (the "Conversion Date"). The term "Conversion Amount" means, with respect to any conversion of this Debenture, the sum of (1) the principal amount of this Debenture to be converted in such conversion plus (2) accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Debenture to the Conversion Date plus (3) Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder's option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights Agreement, dated as of April 19, 2004, executed in connection with the initial issuance of this Debenture and the other Debentures issued on the Issue Date (the "Registration Rights Agreement").
1.2 Conversion Price.
(a) Calculation of Conversion Price. The Conversion Price shall be the lesser of (i) the Variable Conversion Price (as defined herein) and (ii) the Fixed Conversion Price (as defined herein) (subject, in each case, to equitable adjustments for stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower's securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The "Variable Conversion Price" shall mean the Applicable Percentage (as defined herein) multiplied by the Market Price (as defined herein). "Market Price" means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the twenty (20) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent by the Holder to the Borrower via facsimile (the "Conversion Date"). "Trading Price" means, for any security as of any date, the intraday trading price on the Over-the-Counter Bulletin Board (the "OTCBB") as reported by a reliable reporting service mutually acceptable to and hereafter designated by Holders of a majority in interest of the Debentures and the Borrower or, if the OTCBB is not the principal trading market for such security, the intraday trading price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no intraday trading price of such security is available in any of the foregoing manners, the average of the intraday trading prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Debentures being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Debentures. "Trading Day" shall mean any day on which the Common Stock is traded for any period on the OTCBB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. "Applicable Percentage" shall mean 40.0%. The "Fixed Conversion Price" shall mean $0.005.
(b) Conversion Price During Major Announcements. Notwithstanding anything
contained in Section 1.2(a) to the contrary, in the event the Borrower (i)
makes a public announcement that it intends to consolidate or merge with any
other corporation (other than a merger in which the Borrower is the surviving
or continuing corporation and its capital stock is unchanged) or sell or
transfer all or substantially all of the assets of the Borrower or (ii) any
person, group or entity (including the Borrower) publicly announces a tender
offer to purchase 50% or more of the Borrower's Common Stock (or any other
takeover scheme) (the date of the announcement referred to in clause (i) or
(ii) is hereinafter referred to as the "Announcement Date"), then the
Conversion Price shall, effective upon the Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined below), be
equal to the lower of (x) the Conversion Price which would have been
applicable for a Conversion occurring on the Announcement Date and (y) the
Conversion Price that would otherwise be in effect. From and after the
Adjusted Conversion Price Termination Date, the Conversion Price shall be
determined as set forth in this Section 1.2(a). For purposes hereof,
"Adjusted Conversion Price Termination Date" shall mean, with respect to any
proposed transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this Section 1.2(b) has been made, the date
upon which the Borrower (in the case of clause (i) above) or the person, group
or entity (in the case of clause (ii) above) consummates or publicly announces
the termination or abandonment of the proposed transaction or tender offer (or
takeover scheme) which caused this Section 1.2(b) to become operative.
1.3 Authorized Shares. Subject to the Stockholder Approval (as defined in
Section 4(l) of the Purchase Agreement), the Borrower covenants that during
the period the conversion right exists, the Borrower will reserve from its
authorized and unissued Common Stock a sufficient number of shares, free from
preemptive rights, to provide for the issuance of Common Stock upon the full
conversion of this Debenture and the other Debentures issued pursuant to the
Purchase Agreement. The Borrower is required at all times to have authorized
and reserved two times the number of shares that is actually issuable upon
full conversion of the Debentures (based on the Conversion Price of the
Debentures or the Exercise Price of the Warrants in effect from time to time)
(the "Reserved Amount"). The Reserved Amount shall be increased from time to
time in accordance with the Borrower's obligations pursuant to Section 4(h) of
the Purchase Agreement. The Borrower represents that upon issuance, such
shares will be duly and validly issued, fully paid and non?assessable. In
addition, if the Borrower shall issue any securities or make any change to its
capital structure which would change the number of shares of Common Stock into
which the Debentures shall be convertible at the then current Conversion
Price, the Borrower shall at the same time make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Debentures. The Borrower (i) acknowledges that it has irrevocably
instructed its transfer agent to issue certificates for the Common Stock
issuable upon conversion of this Debenture, and (ii) agrees that its issuance
of this Debenture shall constitute full authority to its officers and agents
who are charged with the duty of executing stock certificates to execute and
issue the necessary certificates for shares of Common Stock in accordance with
the terms and conditions of this Debenture.
If, at any time a Holder of this Debenture submits a Notice of Conversion, and
the Borrower does not have sufficient authorized but unissued shares of Common
Stock available to effect such conversion in accordance with the provisions of
this Article I (a "Conversion Default"), subject to Section 4.8, the Borrower
shall issue to the Holder all of the shares of Common Stock which are then
available to effect such conversion. The portion of this Debenture which the
Holder included in its Conversion Notice and which exceeds the amount which is
then convertible into available shares of Common Stock (the "Excess Amount")
shall, notwithstanding anything to the contrary contained herein, not be
convertible into Common Stock in accordance with the terms hereof until (and
at the Holder's option at any time after) the date additional shares of Common
Stock are authorized by the Borrower to permit such conversion, at which time
the Conversion Price in respect thereof shall be the lesser of (i) the
Conversion Price on the Conversion Default Date (as defined below) and (ii)
the Conversion Price on the Conversion Date thereafter elected by the Holder
in respect thereof. In addition, the Borrower shall pay to the Holder
payments ("Conversion Default Payments") for a Conversion Default in the
amount of (x) the sum of (1) the then outstanding principal amount of this
Debenture plus (2) accrued and unpaid interest on the unpaid principal amount
of this Debenture through the Authorization Date (as defined below) plus (3)
Default Interest, if any, on the amounts referred to in clauses (1) and/or
(2), multiplied by (y) .24, multiplied by (z) (N/365), where N = the number of
days from the day the holder submits a Notice of Conversion giving rise to a
Conversion Default (the "Conversion Default Date") to the date (the
"Authorization Date") that the Borrower authorizes a sufficient number of
shares of Common Stock to effect conversion of the full outstanding principal
balance of this Debenture. The Borrower shall use its best efforts to
authorize a sufficient number of shares of Common Stock as soon as practicable
following the earlier of (i) such time that the Holder notifies the Borrower
or that the Borrower otherwise becomes aware that there are or likely will be
insufficient authorized and unissued shares to allow full conversion thereof
and (ii) a Conversion Default. The Borrower shall send notice to the Holder
of the authorization of additional shares of Common Stock, the Authorization
Date and the amount of Holder's accrued Conversion Default Payments. The
accrued Conversion Default Payments for each calendar month shall be paid in
cash or shall be convertible into Common Stock (at such time as there are
sufficient authorized shares of Common Stock) at the applicable Conversion
Price, at the Borrower's option, as follows:
(a) In the event of a payment in cash, cash payment shall be made to Holder by the fifth (5th) day of the month following the month in which it has accrued; and
(b) In the event of a payment in Common Stock, the Holder may convert such payment amount into Common Stock at the Conversion Price (as in effect at the time of conversion) at any time after the fifth day of the month following the month in which it has accrued in accordance with the terms of this Article I (so long as there is then a sufficient number of authorized shares of Common Stock).
The Borrower's election shall be made in writing to the Holder at any time prior to 6:00 p.m., New York, New York time, on the third day of the month following the month in which Conversion Default payments have accrued. If no election is made, the Holder receives cash. Nothing herein shall limit the Holder's right to pursue actual damages (to the extent in excess of the Conversion Default Payments) for the Borrower's failure to maintain a sufficient number of authorized shares of Common Stock, and each holder shall have the right to pursue all remedies available at law or in equity (including degree of specific performance and/or injunctive relief).
1.4 Method of Conversion.
(a) Mechanics of Conversion. Subject to Section 1.1, this Debenture may be converted by the Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section 1.4(b), surrendering this Debenture at the principal office of the Borrower.
(b) Surrender of Debenture Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Debenture in accordance with the terms hereof, the Holder shall not be required to physically surrender this Debenture to the Borrower unless the entire unpaid principal amount of this Debenture is so converted. The Holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Debenture upon each such conversion. In the event of any dispute or discrepancy, such records of the Borrower shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Debenture is converted as aforesaid, the Holder may not transfer this Debenture unless the Holder first physically surrenders this Debenture to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Holder a new Debenture of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal amount of this Debenture. The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted principal amount of this Debenture represented by this Debenture may be less than the amount stated on the face hereof.
(c) Payment of Taxes. The Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Debenture in a name other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder's account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid.
(d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within two (2) business days after such receipt (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Debenture) (such second business day being hereinafter referred to as the "Deadline") in accordance with the terms hereof and the Purchase Agreement (including, without limitation, in accordance with the requirements of Section 2(g) of the Purchase Agreement that certificates for shares of Common Stock issued on or after the effective date of the Registration Statement upon conversion of this Debenture shall not bear any restrictive legend).
(e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Debenture shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Debenture being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 6:00 p.m., New York, New York time, on such date.
(f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.
(g) Failure to Deliver Common Stock Prior to Deadline. Without in any way
limiting the Holder's right to pursue other remedies, including actual damages
and/or equitable relief, the parties agree that if delivery of the Common
Stock issuable upon conversion of this Debenture is more than three (3) days
after the Deadline (other than a failure due to the circumstances described in
Section 1.3 above, which failure shall be governed by such Section) the
Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond
the Deadline that the Borrower fails to deliver such Common Stock. Such cash
amount shall be paid to Holder by the fifth day of the month following the
month in which it has accrued or, at the option of the Holder (by written
notice to the Borrower by the first day of the month following the month in
which it has accrued), shall be added to the principal amount of this
Debenture, in which event interest shall accrue thereon in accordance with the
terms of this Debenture and such additional principal amount shall be
convertible into Common Stock in accordance with the terms of this Debenture.
1.5 Concerning the Shares. The shares of Common Stock issuable upon conversion of this Debenture may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) ("Rule 144") or (iv) such shares are transferred to an "affiliate" (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor (as defined in the Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Debenture have been registered under the Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Debenture that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SAID ACT."
The legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefor free of any transfer legend if (i) the Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act and the shares are so sold or transferred, (ii) such Holder provides the Borrower or its transfer agent with reasonable assurances that the Common Stock issuable upon conversion of this Debenture (to the extent such securities are deemed to have been acquired on the same date) can be sold pursuant to Rule 144 or (iii) in the case of the Common Stock issuable upon conversion of this Debenture, such security is registered for sale by the Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold. Nothing in this Debenture shall (i) limit the Borrower's obligation under the Registration Rights Agreement or (ii) affect in any way the Holder's obligations to comply with applicable prospectus delivery requirements upon the resale of the securities referred to herein.
1.6 Effect of Certain Events.
(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. "Person" shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Debenture is issued and outstanding and prior to conversion of all of the Debentures, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Debenture shall thereafter have the right to receive upon conversion of this Debenture, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Debenture been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Debenture to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Debenture) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not effect any transaction described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of stockholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Debenture) and (b) the resulting successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.
(c) Adjustment Due to Distribution. If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Borrower's shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "Distribution"), then the Holder of this Debenture shall be entitled, upon any conversion of this Debenture after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.
(d) Adjustment Due to Dilutive Issuance. If, at any time when any Debentures are issued and outstanding, the Borrower issues or sells, or in accordance with this Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Fixed Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a "Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Fixed Conversion Price will be reduced to the amount of the consideration per share received by the Borrower in such Dilutive Issuance; provided that only one adjustment will be made for each Dilutive Issuance.
The Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("Convertible Securities") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Fixed Conversion Price then in effect, then the Fixed Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.
Additionally, the Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Fixed Conversion Price then in effect, then the Fixed Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Fixed Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.
(e) Purchase Rights. If, at any time when any Debentures are issued and outstanding, the Borrower issues any convertible securities or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the Holder of this Debenture will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Debenture (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.6, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder of a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Debenture.
1.7 Trading Market Limitations. Unless permitted or not prohibited by the
applicable rules and regulations of the principal securities market on which
the Common Stock is then listed or traded, in no event shall the Borrower
issue upon conversion of or otherwise pursuant to this Debenture and the other
Debentures issued pursuant to the Purchase Agreement more than the maximum
number of shares of Common Stock that the Borrower can issue pursuant to any
rule of the principal United States securities market on which the Common
Stock is then traded (the "Maximum Share Amount"), which, as of the Issue Date
shall be 19.99% of the total shares outstanding on the Closing Date (as
defined in the Purchase Agreement), subject to equitable adjustment from time
to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring
after the date hereof. Once the Maximum Share Amount has been issued (the
date of which is hereinafter referred to as the "Maximum Conversion Date"), if
the Borrower fails to eliminate any prohibitions under applicable law or the
rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Borrower or any
of its securities on the Borrower's ability to issue shares of Common Stock in
excess of the Maximum Share Amount (a "Trading Market Prepayment Event"), in
lieu of any further right to convert this Debenture, and in full satisfaction
of the Borrower's obligations under this Debenture, the Borrower shall pay to
the Holder, within fifteen (15) business days of the Maximum Conversion Date
(the "Trading Market Prepayment Date"), an amount equal to 130% times the sum
of (a) the then outstanding principal amount of this Debenture immediately
following the Maximum Conversion Date, plus (b) accrued and unpaid interest on
the unpaid principal amount of this Debenture to the Trading Market Prepayment
Date, plus (c) Default Interest, if any, on the amounts referred to in clause
(a) and/or (b) above, plus (d) any optional amounts that may be added thereto
at the Maximum Conversion Date by the Holder in accordance with the terms
hereof (the then outstanding principal amount of this Debenture immediately
following the Maximum Conversion Date, plus the amounts referred to in clauses
(b), (c) and (d) above shall collectively be referred to as the "Remaining
Convertible Amount"). With respect to each Holder of Debentures, the Maximum
Share Amount shall refer to such Holder's pro rata share thereof determined in
accordance with Section 4.8 below. In the event that the sum of (x) the
aggregate number of shares of Common Stock issued upon conversion of this
Debenture and the other Debentures issued pursuant to the Purchase Agreement
plus (y) the aggregate number of shares of Common Stock that remain issuable
upon conversion of this Debenture and the other Debentures issued pursuant to
the Purchase Agreement, represents at least one hundred percent (100%) of the
Maximum Share Amount (the "Triggering Event"), the Borrower will use its best
efforts to seek and obtain Stockholder Approval (or obtain such other relief
as will allow conversions hereunder in excess of the Maximum Share Amount) as
soon as practicable following the Triggering Event and before the Maximum
Conversion Date. As used herein, "Stockholder Approval" means approval by the
stockholders of the Borrower to authorize the issuance of the full number of
shares of Common Stock which would be issuable upon full conversion of the
then outstanding Debentures but for the Maximum Share Amount.
1.8 Status as Stockholder. Upon submission of a Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder's allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder's rights as a Holder of such converted portion of this Debenture shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Borrower to comply with the terms of this Debenture. Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversion of any portion of this Debenture for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Borrower) the Holder shall regain the rights of a Holder of this Debenture with respect to such unconverted portions of this Debenture and the Borrower shall, as soon as practicable, return such unconverted Debenture to the Holder or, if the Debenture has not been surrendered, adjust its records to reflect that such portion of this Debenture has not been converted. In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 1.3) for the Borrower's failure to convert this Debenture.
ARTICLE II. CERTAIN COVENANTS
2.1 Distributions on Capital Stock. So long as the Borrower shall have any obligation under this Debenture, the Borrower shall not without the Holder's written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders' rights plan which is approved by a majority of the Borrower's disinterested directors.
2.2 Restriction on Stock Repurchases. So long as the Borrower shall have any obligation under this Debenture, the Borrower shall not without the Holder's written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower or any warrants, rights or options to purchase or acquire any such shares.
2.3 Borrowings. So long as the Borrower shall have any obligation under
this Debenture, the Borrower shall not, without the Holder's written consent,
create, incur, assume or suffer to exist any liability for borrowed money,
except (a) borrowings in existence or committed on the date hereof and of
which the Borrower has informed Holder in writing prior to the date hereof,
(b) indebtedness to trade creditors or lenders incurred in the ordinary course
of business or (c) borrowings, the proceeds of which shall be used to repay
this Debenture.
2.4 Sale of Assets. So long as the Borrower shall have any obligation under this Debenture, the Borrower shall not, without the Holder's written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.
2.5 Advances and Loans. So long as the Borrower shall have any obligation under this Debenture, the Borrower shall not, without the Holder's written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, credits or advances (a) in existence or committed on the date hereof and which the Borrower has informed Holder in writing prior to the date hereof, (b) made in the ordinary course of business or (c) not in excess of $50,000.
2.6 Contingent Liabilities. So long as the Borrower shall have any obligation under this Debenture, the Borrower shall not, without the Holder's written consent, assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection and except assumptions, guarantees, endorsements and contingencies (a) in existence or committed on the date hereof and which the Borrower has informed Holder in writing prior to the date hereof, and (b) similar transactions in the ordinary course of business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of Default") shall occur:
3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the principal hereof or interest thereon when due on this Debenture, whether at maturity, upon a Trading Market Prepayment Event pursuant to Section 1.7, upon acceleration or otherwise.
3.2 Conversion and the Shares. The Borrower fails to issue shares of Common Stock to the Holder (or announces or threatens that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Debenture (for a period of at least sixty (60) days, if such failure is solely as a result of the circumstances governed by Section 1.3 and the Borrower is using its best efforts to authorize a sufficient number of shares of Common Stock as soon as practicable), fails to transfer or cause its transfer agent to transfer (electronically or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Debenture as and when required by this Debenture or the Registration Rights Agreement, or fails to remove any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Debenture as and when required by this Debenture or the Registration Rights Agreement (or makes any announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for ten (10) days after the Borrower shall have been notified thereof in writing by the Holder.
3.3 Failure to Timely File Registration or Effect Registration. The Borrower fails to file the Registration Statement within fifteen (15) days following the Filing Date (as defined in the Registration Rights Agreement) or obtain effectiveness with the Securities and Exchange Commission of the Registration Statement within ninety (90) days following the Filing Date or such Registration Statement lapses in effect (or sales cannot otherwise be made thereunder effective, whether by reason of the Borrower's failure to amend or supplement the prospectus included therein in accordance with the Registration Rights Agreement or otherwise) for more than twenty (20) consecutive days or forty (40) days in any twelve month period after the Registration Statement becomes effective;
3.4 Breach of Covenants. The Borrower breaches any material covenant or other material term or condition contained in Sections 1.3, 1.6 or 1.7 of this Debenture, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the Purchase Agreement and such breach continues for a period of ten (10) days after written notice thereof to the Borrower from the Holder;
3.5 Breach of Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement and the Registration Rights Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Debenture, the Purchase Agreement or the Registration Rights Agreement;
3.6 Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed;
3.7 Judgments. Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any of its 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 Holder, which consent will not be unreasonably withheld;
3.8 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower;
3.9 Delisting of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange; or
3.10 Default Under Other Debentures. An Event of Default has occurred and is continuing under any of the other Debentures issued pursuant to the Purchase Agreement,
then, upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
of the Holders of a majority of the aggregate principal amount of the
outstanding Debentures issued pursuant to the Purchase Agreement exercisable
through the delivery of written notice to the Borrower by such Holders (the
"Default Notice"), and upon the occurrence of an Event of Default specified in
Section 3.6 or 3.8, the Debentures shall become immediately due and payable
and the Borrower shall pay to the Holder, in full satisfaction of its
obligations hereunder, an amount equal to the greater of (i) 130% times the
sum of (w) the then outstanding principal amount of this Debenture plus (x)
accrued and unpaid interest on the unpaid principal amount of this Debenture
to the date of payment (the "Mandatory Prepayment Date") plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus
(z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof
or pursuant to Section 2(c) of the Registration Rights Agreement (the then
outstanding principal amount of this Debenture to the date of payment plus the
amounts referred to in clauses (x), (y) and (z) shall collectively be known as
the "Default Sum") or (ii) the "parity value" of the Default Sum to be
prepaid, where parity value means (a) the highest number of shares of Common
Stock issuable upon conversion of or otherwise pursuant to such Default Sum in
accordance with Article I, treating the Trading Day immediately preceding the
Mandatory Prepayment Date as the "Conversion Date" for purposes of determining
the lowest applicable Conversion Price, unless the Default Event arises as a
result of a breach in respect of a specific Conversion Date in which case such
Conversion Date shall be the Conversion Date), multiplied by (b) the highest
Closing Price for the Common Stock during the period beginning on the date of
first occurrence of the Event of Default and ending one day prior to the
Mandatory Prepayment Date (the "Default Amount") and all other amounts payable
hereunder shall immediately become due and payable, all without demand,
presentment or notice, all of which hereby are expressly waived, together with
all costs, including, without limitation, legal fees and expenses, of
collection, and the Holder shall be entitled to exercise all other rights and
remedies available at law or in equity. If the Borrower fails to pay the
Default Amount within five (5) business days of written notice that such
amount is due and payable, then the Holder shall have the right at any time,
so long as the Borrower remains in default (and so long and to the extent that
there are sufficient authorized shares), to require the Borrower, upon written
notice, to immediately issue, in lieu of the Default Amount, the number of
shares of Common Stock of the Borrower equal to the Default Amount divided by
the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
4.2 Notices. Any notice herein required or permitted to be given shall be
in writing and may be personally served or delivered by courier or sent by
United States mail and shall be deemed to have been given upon receipt if
personally served (which shall include telephone line facsimile transmission)
or sent by courier or three (3) days after being deposited in the United
States mail, certified, with postage pre?paid and properly addressed, if sent
by mail. For the purposes hereof, the address of the Holder shall be as shown
on the records of the Borrower; and the address of the Borrower shall be 24370
Avenue Tibbitts, Suite 130, Valencia, California 91355, facsimile number:
661-295-5981). Both the Holder and the Borrower may change the address for
service by service of written notice to the other as herein provided.
4.3 Amendments. This Debenture and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term "Debenture" and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Debentures issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.
4.4 Assignability. This Debenture shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Each transferee of this Debenture must be an "accredited investor" (as defined in Rule 501(a) of the 1933 Act). Notwithstanding anything in this Debenture to the contrary, this Debenture may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.
4.5 Cost of Collection. If default is made in the payment of this Debenture, the Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys' fees.
4.6 Governing Law. THIS DEBENTURE SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS DEBENTURE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS DEBENTURE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
4.7 Certain Amounts. Whenever pursuant to this Debenture the Borrower is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Debenture may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Debenture and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Debenture at a price in excess of the price paid for such shares pursuant to this Debenture. The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Debenture into shares of Common Stock.
4.8 Allocations of Maximum Share Amount and Reserved Amount. The Maximum Share Amount and Reserved Amount shall be allocated pro rata among the Holders of Debentures based on the principal amount of such Debentures issued to each Holder. Each increase to the Maximum Share Amount and Reserved Amount shall be allocated pro rata among the Holders of Debentures based on the principal amount of such Debentures held by each Holder at the time of the increase in the Maximum Share Amount or Reserved Amount. In the event a Holder shall sell or otherwise transfer any of such Holder's Debentures, each transferee shall be allocated a pro rata portion of such transferor's Maximum Share Amount and Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Debentures shall be allocated to the remaining Holders of Debentures, pro rata based on the principal amount of such Debentures then held by such Holders.
4.9 Damages Shares. The shares of Common Stock that may be issuable to the Holder pursuant to Sections 1.3 and 1.4(g) hereof and pursuant to Section 2(c) of the Registration Rights Agreement ("Damages Shares") shall be treated as Common Stock issuable upon conversion of this Debenture for all purposes hereof and shall be subject to all of the limitations and afforded all of the rights of the other shares of Common Stock issuable hereunder, including without limitation, the right to be included in the Registration Statement filed pursuant to the Registration Rights Agreement. For purposes of calculating interest payable on the outstanding principal amount hereof, except as otherwise provided herein, amounts convertible into Damages Shares ("Damages Amounts") shall not bear interest but must be converted prior to the conversion of any outstanding principal amount hereof, until the outstanding Damages Amounts is zero.
4.10 Denominations. At the request of the Holder, upon surrender of this Debenture, the Borrower shall promptly issue new Debentures in the aggregate outstanding principal amount hereof, in the form hereof, in such denominations of at least $50,000 as the Holder shall request.
4.11 Purchase Agreement. By its acceptance of this Debenture, each Holder agrees to be bound by the applicable terms of the Purchase Agreement.
4.12 Notice of Corporate Events. Except as otherwise provided below, the
Holder of this Debenture shall have no rights as a Holder of Common Stock
unless and only to the extent that it converts this Debenture into Common
Stock. The Borrower shall provide the Holder with prior notification of any
meeting of the Borrower's shareholders (and copies of proxy materials and
other information sent to shareholders). In the event of any taking by the
Borrower of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other
distribution, any right to subscribe for, purchase or otherwise acquire
(including by way of merger, consolidation, reclassification or
recapitalization) any share of any class or any other securities or property,
or to receive any other right, or for the purpose of determining shareholders
who are entitled to vote in connection with any proposed sale, lease or
conveyance of all or substantially all of the assets of the Borrower or any
proposed liquidation, dissolution or winding up of the Borrower, the Borrower
shall mail a notice to the Holder, at least twenty (20) days prior to the
record date specified therein (or thirty (30) days prior to the consummation
of the transaction or event, whichever is earlier), of the date on which any
such record is to be taken for the purpose of such dividend, distribution,
right or other event, and a brief statement regarding the amount and character
of such dividend, distribution, right or other event to the extent known at
such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously
with the notification to the Holder in accordance with the terms of this
Section 4.12.
4.13 Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Debenture will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of this Debenture, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Debenture and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.
ARTICLE V. CALL OPTION
5.1 Call Option. Notwithstanding anything to the contrary contained in
this Article V, for not more than thirty (30) days from the date hereof, so
long as (i) no Event of Default or Trading Market Prepayment Event shall have
occurred and be continuing, (ii) the Borrower has a sufficient number of
authorized shares of Common Stock reserved for issuance upon full conversion
of the Debentures, and (iii) the Common Stock is trading at or below $.01 per
share, then at any time after the Issue Date, the Borrower shall have the
right, exercisable on not less than ten (10) Trading Days prior written notice
to the Holders of the Debentures (which notice may not be sent to the Holders
of the Debentures until the Borrower is permitted to prepay the Debentures
pursuant to this Section 5.1), to prepay all of the outstanding Debentures in
accordance with this Section 5.1. Any notice of prepayment hereunder (an
"Optional Prepayment") shall be delivered to the Holders of the Debentures at
their registered addresses appearing on the books and records of the Borrower
and shall state (1) that the Borrower is exercising its right to prepay all of
the Debentures issued on the Issue Date and (2) the date of prepayment (the
"Optional Prepayment Notice"). On the date fixed for prepayment (the
"Optional Prepayment Date"), the Borrower shall make payment of the Optional
Prepayment Amount (as defined below) to or upon the order of the Holders as
specified by the Holders in writing to the Borrower at least one (1) business
day prior to the Optional Prepayment Date. If the Borrower exercises its
right to prepay the Debentures, the Borrower shall make payment to the holders
of an amount in cash (the "Optional Prepayment Amount") equal to either (i)
130% (for payments occurring within thirty (30) days of the Issue Date), (ii)
140% (for prepayments occurring between thirty-one (31) and ninety (90) days
of the Issue Date), or (iii) 150% (for prepayments occurring after the
ninetieth (90th) day following the Issue Date), multiplied by the sum of (w)
the then outstanding principal amount of this Debenture plus (x) accrued and
unpaid interest on the unpaid principal amount of this Debenture to the
Optional Prepayment Date plus (y) Default Interest, if any, on the amounts
referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder
pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section 2(c) of the
Registration Rights Agreement (the then outstanding principal amount of this
Debenture to the date of payment plus the amounts referred to in clauses (x),
(y) and (z) shall collectively be known as the "Optional Prepayment Sum").
Notwithstanding notice of an Optional Prepayment, the Holders shall at all
times prior to the Optional Prepayment Date maintain the right to convert all
or any portion of the Debentures in accordance with Article I and any portion
of Debentures so converted after receipt of an Optional Prepayment Notice and
prior to the Optional Prepayment Date set forth in such notice and payment of
the aggregate Optional Prepayment Amount shall be deducted from the principal
amount of Debentures which are otherwise subject to prepayment pursuant to
such notice. If the Borrower delivers an Optional Prepayment Notice and fails
to pay the Optional Prepayment Amount due to the Holders of the Debentures
within two (2) business days following the Optional Prepayment Date, the
Borrower shall forever forfeit its right to redeem the Debentures pursuant to
this Section 5.1.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed in its name by its duly authorized officer this 19th day of April, 2004.
CONECTISYS CORPORATION
By:______________________________
Robert A. Spigno
Chief Executive Officer
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debentures)
The undersigned hereby irrevocably elects to convert $________principal amount of the Debenture (defined below) into shares of common stock, no par value per share ("Common Stock"), of Conectisys Corporation, a Colorado corporation (the "Borrower") according to the conditions of the convertible debentures of the Borrower dated as of April 19, 2004 (the "Debentures"), as of the date written below. If securities are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any. A copy of each Debenture is attached hereto (or evidence of loss, theft or destruction thereof).
The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system ( "DWAC Transfer").
Name of DTC Prime Broker:
Account Number:
In lieu of receiving shares of Common Stock issuable pursuant to this Notice of Conversion by way of a DWAC Transfer, the undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder's calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:
Name:
Address:
The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon conversion of the Debentures shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the "Act"), or pursuant to an exemption from registration under the Act.
Date of Conversion:___________________________ Applicable Conversion Price:____________________ Number of Shares of Common Stock to be Issued Pursuant to Conversion of the Debentures:______________ Signature:___________________________________ Name:______________________________________ Address:____________________________________
The Borrower shall issue and deliver shares of Common Stock to an overnight courier not later than three business days following receipt of the original Debenture(s) to be converted, and shall make payments pursuant to the Debentures for the number of business days such issuance and delivery is late.
<pre>
Exhibit 4.10
THIS WARRANT AND THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A SECURITIES PURCHASE AGREEMENT DATED AS OF APRIL 19, 2004, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER SAID ACT OR, AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE, CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER SUCH ACT.
Right to Purchase ________ Shares of Common Stock, no par value per share
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, _____________________ or its registered assigns, is entitled to purchase form Conectisys Corporation, a Colorado corporation (the "Company"), at any time or from time to time during the period specified in Paragraph 2 hereof, __________________ fully paid and nonassessable shares of the Company's Common Stock, no par value per share (the "Common Stock"), at an exercise price per share equal to $.002 (the "Exercise Price"). The term "Warrant Shares," as used herein, refers to the shares of Common Stock purchasable hereunder. The Warrant Shares and the Exercise Price are subject to adjustment as provided in Paragraph 4 hereof. The term "Warrants" means this Warrant and the other warrants issued pursuant to that certain Securities Purchase Agreement, dated April 19, 2004, by and among the Company and the Buyers listed on the execution page thereof (the "Securities Purchase Agreement").
This Warrant is subject to the following terms, provisions, and conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day
at the Company's principal executive offices (or such other office or agency
of the Company as it may designate by notice to the holder hereof), and upon
(i) payment to the Company in cash, by certified or official bank check or by
wire transfer for the account of the Company of the Exercise Price for the
Warrant Shares specified in the Exercise Agreement or (ii) if the resale of
the Warrant Shares by the holder is not then registered pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), delivery to the Company of a written notice of an
election to effect a "Cashless Exercise" (as defined in Section 11(c) below)
for the Warrant Shares specified in the Exercise Agreement. The Warrant
Shares so purchased shall be deemed to be issued to the holder hereof or such
holder's designee, as the record owner of such shares, as of the close of
business on the date on which this Warrant shall have been surrendered, the
completed Exercise Agreement shall have been delivered, and payment shall have
been made for such shares as set forth above. Certificates for the Warrant
Shares so purchased, representing the aggregate number of shares specified in
the Exercise Agreement, shall be delivered to the holder hereof within a
reasonable time, not exceeding three (3) business days, after this Warrant
shall have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of such holder or such other name as shall be designated by such
holder. If this Warrant shall have been exercised only in part, then, unless
this Warrant has expired, the Company shall, at its expense, at the time of
delivery of such certificates, deliver to the holder a new Warrant
representing the number of shares with respect to which this Warrant shall not
then have been exercised. In addition to all other available remedies at law
or in equity, if the Company fails to deliver certificates for the Warrant
Shares within three (3) business days after this Warrant is exercised, then
the Company shall pay to the holder in cash a penalty (the "Penalty") equal to
2% of the number of Warrant Shares that the holder is entitled to multiplied
by the Market Price for each day that the Company fails to deliver
certificates for the Warrant Shares. For example, if the holder is entitled
to 100,000 Warrant Shares and the Market Price is $2.00, then the Company
shall pay to the holder $4,000 for each day that the Company fails to deliver
certificates for the Warrant Shares. The Penalty shall be paid to the holder
by the fifth day of the month following the month in which it has accrued.
Notwithstanding anything in this Warrant to the contrary, in no event shall the holder of this Warrant be entitled to exercise a number of Warrants (or portions thereof) in excess of the number of Warrants (or portions thereof) upon exercise of which the sum of (i) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised Warrants and the unexercised or unconverted portion of any other securities of the Company (including the Debentures (as defined in the Securities Purchase Agreement)) subject to a limitation on conversion or exercise analogous to the limitation contained herein) and (ii) the number of shares of Common Stock issuable upon exercise of the Warrants (or portions thereof) with respect to which the determination described herein is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock. For purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided in clause (i) of the preceding sentence. Notwithstanding anything to the contrary contained herein, the limitation on exercise of this Warrant set forth herein may not be amended without (i) the written consent of the holder hereof and the Company and (ii) the approval of a majority of shareholders of the Company.
2. Period of Exercise. This Warrant is exercisable at any time or from time to time on or after the date on which this Warrant is issued and delivered pursuant to the terms of the Securities Purchase Agreement and before 6:00 p.m., New York, New York time on the fifth (5th) anniversary of the date of issuance (the "Exercise Period").
3. Certain Agreements of the Company. The Company hereby covenants and agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be validly issued, fully paid, and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof.
(b) Reservation of Shares. Subject to the Stockholder Approval (as defined in Section 4(l) of the Securities Purchase Agreement), during the Exercise Period, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant.
(c) Listing. The Company shall promptly secure the listing of the shares of Common Stock issuable upon exercise of the Warrant upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance upon exercise of this Warrant) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all shares of Common Stock from time to time issuable upon the exercise of this Warrant; and the Company shall so list on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system.
(d) Certain Actions Prohibited. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.
(e) Successors and Assigns. This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all the Company's assets.
4. Antidilution Provisions. During the Exercise Period, the Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Paragraph 4.
In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent.
(a) Adjustment of Exercise Price and Number of Shares upon Issuance of Common Stock. Except as otherwise provided in Paragraphs 4(c) and 4(e) hereof, if and whenever on or after the date of issuance of this Warrant, the Company issues or sells, or in accordance with Paragraph 4(b) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Market Price (as hereinafter defined) on the date of issuance (a "Dilutive Issuance"), then immediately upon the Dilutive Issuance, the Exercise Price will be reduced to a price determined by multiplying the Exercise Price in effect immediately prior to the Dilutive Issuance by a fraction, (i) the numerator of which is an amount equal to the sum of (x) the number of shares of Common Stock actually outstanding immediately prior to the Dilutive Issuance, plus (y) the quotient of the aggregate consideration, calculated as set forth in Paragraph 4(b) hereof, received by the Company upon such Dilutive Issuance divided by the Market Price in effect immediately prior to the Dilutive Issuance, and (ii) the denominator of which is the total number of shares of Common Stock Deemed Outstanding (as defined below) immediately after the Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of determining the adjusted Exercise Price under Paragraph 4(a) hereof, the following will be applicable:
(i) Issuance of Rights or Options. If the Company in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("Convertible Securities") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "Options") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Market Price on the date of issuance or grant of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options will, as of the date of the issuance or grant of such Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities, whether or not immediately
convertible (other than where the same are issuable upon the exercise of
Options) and the price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Market Price on the date of issuance,
then the maximum total number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities will, as of the date
of the issuance of such Convertible Securities, be deemed to be outstanding
and to have been issued and sold by the Company for such price per share. For
the purposes of the preceding sentence, the "price per share for which Common
Stock is issuable upon such conversion or exchange" is determined by dividing
(i) the total amount, if any, received or receivable by the Company as
consideration for the issuance or sale of all such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Company upon the conversion or exchange thereof at the time such
Convertible Securities first become convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities. No further adjustment to the
Exercise Price will be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(iii) Change in Option Price or Conversion Rate. If there is a change at any time in (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such change will be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible Securities. If, in any case, the total number of shares of Common Stock issuable upon exercise of any Option or upon conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to exercise such Option or to convert or exchange such Convertible Securities shall have expired or terminated, the Exercise Price then in effect will be readjusted to the Exercise Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of this Warrant will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non- surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Company.
(vi) Exceptions to Adjustment of Exercise Price. No adjustment to the Exercise Price will be made (i) upon the exercise of any warrants, options or convertible securities granted, issued and outstanding on the date of issuance of this Warrant; (ii) upon the grant or exercise of any stock or options which may hereafter be granted or exercised under any employee benefit plan, stock option plan or restricted stock plan of the Company now existing or to be implemented in the future, so long as the issuance of such stock or options is approved by a majority of the independent members of the Board of Directors of the Company or a majority of the members of a committee of independent directors established for such purpose; or (iii) upon the exercise of the Warrants.
(c) Subdivision or Combination of Common Stock. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Paragraph 4, the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price.
(e) Consolidation, Merger or Sale. In case of any consolidation of the Company with, or merger of the Company into any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then as a condition of such consolidation, merger or sale or conveyance, adequate provision will be made whereby the holder of this Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such case, the Company will make appropriate provision to insure that the provisions of this Paragraph 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant. The Company will not effect any consolidation, merger or sale or conveyance unless prior to the consummation thereof, the successor corporation (if other than the Company) assumes by written instrument the obligations under this Paragraph 4 and the obligations to deliver to the holder of this Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, the holder may be entitled to acquire.
(f) Distribution of Assets. In case the Company shall declare or make any distribution of its assets (including cash) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise, then, after the date of record for determining stockholders entitled to such distribution, but prior to the date of distribution, the holder of this Warrant shall be entitled upon exercise of this Warrant for the purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets which would have been payable to the holder had such holder been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to such distribution.
(g) Notice of Adjustment. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then, and in each such case, the Company shall give notice thereof to the holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Such calculation shall be certified by the Chief Financial Officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Market Price of a share of Common Stock on the date of such exercise.
(j) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Common Stock payable in shares of stock of any class or make any other distribution (including dividends or distributions payable in cash out of retained earnings) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the holders of the Common Stock any additional shares of stock of any class or other rights;
(iii) there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all its assets to, another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a
record shall be taken for determining the holders of Common Stock entitled to
receive any such dividend, distribution, or subscription rights or for
determining the holders of Common Stock entitled to vote in respect of any
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding-up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, notice of the date (or, if not then known, a
reasonable approximation thereof by the Company) when the same shall take
place. Such notice shall also specify the date on which the holders of Common
Stock shall be entitled to receive such dividend, distribution, or
subscription rights or to exchange their Common Stock for stock or other
securities or property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, as the
case may be. Such notice shall be given at least 30 days prior to the record
date or the date on which the Company's books are closed in respect thereto.
Failure to give any such notice or any defect therein shall not affect the
validity of the proceedings referred to in clauses (i), (ii), (iii) and (iv)
above.
(k) Certain Events. If any event occurs of the type contemplated by the adjustment provisions of this Paragraph 4 but not expressly provided for by such provisions, the Company will give notice of such event as provided in Paragraph 4(g) hereof, and the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock acquirable upon exercise of this Warrant so that the rights of the holder shall be neither enhanced nor diminished by such event.
(l) Certain Definitions.
(i) "Common Stock Deemed Outstanding" shall mean the number of shares of Common Stock actually outstanding (not including shares of Common Stock held in the treasury of the Company), plus (x) pursuant to Paragraph 4(b)(i) hereof, the maximum total number of shares of Common Stock issuable upon the exercise of Options, as of the date of such issuance or grant of such Options, if any, and (y) pursuant to Paragraph 4(b)(ii) hereof, the maximum total number of shares of Common Stock issuable upon conversion or exchange of Convertible Securities, as of the date of issuance of such Convertible Securities, if any.
(ii) "Market Price," as of any date, (i) means the average of the last reported sale prices for the shares of Common Stock on the Over-the-Counter Bulletin Board for the five (5) trading days immediately preceding such date as reported by Bloomberg Financial Markets, or (ii) if the Over-the-Counter Bulletin Board is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg Financial Markets, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Company or, at the option of a majority-in-interest of the holders of the outstanding Warrants by (b) an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the corporation. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder.
(iii) "Common Stock," for purposes of this Paragraph 4, includes the Common Stock, no par value per share, and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include only shares of Common Stock, no par value per share, in respect of which this Warrant is exercisable, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in Paragraph 4(e) hereof, the stock or other securities or property provided for in such Paragraph.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the holder of this Warrant or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the holder of this Warrant.
6. No Rights or Liabilities as a Shareholder. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company. No provision of this Warrant, in the absence of affirmative action by the holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
7. Transfer, Exchange, and Replacement of Warrant.
(a) Restriction on Transfer. This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of the Company referred to in Paragraph 7(e) below, provided, however, that any transfer or assignment shall be subject to the conditions set forth in Paragraph 7(f) hereof and to the applicable provisions of the Securities Purchase Agreement. Until due presentment for registration of transfer on the books of the Company, the Company may treat the registered holder hereof as the owner and holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary. Notwithstanding anything to the contrary contained herein, the registration rights described in Paragraph 8 are assignable only in accordance with the provisions of that certain Registration Rights Agreement, dated April 19, 2004, by and among the Company and the other signatories thereto (the "Registration Rights Agreement").
(b) Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the holder hereof at the office or agency of the Company referred to in Paragraph 7(e) below, for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares of Common Stock which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the holder hereof at the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Paragraph 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the holder or transferees) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Paragraph 7.
(e) Register. The Company shall maintain, at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares issuable hereunder), shall not be registered under the Securities Act of 1933, as amended (the "Securities Act") and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel, which opinion and counsel are acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under said Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act; provided that no such opinion, letter or status as an "accredited investor" shall be required in connection with a transfer pursuant to Rule 144 under the Securities Act. The first holder of this Warrant, by taking and holding the same, represents to the Company that such holder is acquiring this Warrant for investment and not with a view to the distribution thereof.
8. Registration Rights. The initial holder of this Warrant (and certain assignees thereof) is entitled to the benefit of such registration rights in respect of the Warrant Shares as are set forth in Section 2 of the Registration Rights Agreement.
9. Notices. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the holder of this Warrant shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to such holder at the address shown for such holder on the books of the Company, or at such other address as shall have been furnished to the Company by notice from such holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the office of the Company at 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355, Attention: Chief Executive Officer, or at such other address as shall have been furnished to the holder of this Warrant by notice from the Company. Any such notice, request, or other communication may be sent by facsimile, but shall in such case be subsequently confirmed by a writing personally delivered or sent by certified or registered mail or by recognized overnight mail courier as provided above. All notices, requests, and other communications shall be deemed to have been given either at the time of the receipt thereof by the person entitled to receive such notice at the address of such person for purposes of this Paragraph 9, or, if mailed by registered or certified mail or with a recognized overnight mail courier upon deposit with the United States Post Office or such overnight mail courier, if postage is prepaid and the mailing is properly addressed, as the case may be.
10. Governing Law. THIS WARRANT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS WARRANT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS WARRANT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
11. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may only be amended by an instrument in writing signed by the Company and the holder hereof.
(b) Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof.
(c) Cashless Exercise. Notwithstanding anything to the contrary contained in this Warrant, if the resale of the Warrant Shares by the holder is not then registered pursuant to an effective registration statement under the Securities Act, this Warrant may be exercised by presentation and surrender of this Warrant to the Company at its principal executive offices with a written notice of the holder's intention to effect a cashless exercise, including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "Cashless Exercise"). In the event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the holder shall surrender this Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, the numerator of which shall be the difference between the then current Market Price per share of the Common Stock and the Exercise Price, and the denominator of which shall be the then current Market Price per share of Common Stock. For example, if the holder is exercising 100,000 Warrants with a per Warrant exercise price of $0.75 per share through a cashless exercise when the Common Stock's current Market Price per share is $2.00 per share, then upon such Cashless Exercise the holder will receive 62,500 shares of Common Stock.
(d) Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Warrant will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Warrant, that the holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Warrant and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer.
CONECTISYS CORPORATION
By: _____________________________
Robert A. Spigno
Chief Executive Officer
Dated as of April 19, 2004
FORM OF EXERCISE AGREEMENT
Dated: ________ __, 200_
To: Conectisys Corporation
The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to purchase ________ shares of Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant in cash or by certified or official bank check in the amount of, or, if the resale of such Common Stock by the undersigned is not currently registered pursuant to an effective registration statement under the Securities Act of 1933, as amended, by surrender of securities issued by the Company (including a portion of the Warrant) having a market value (in the case of a portion of this Warrant, determined in accordance with Section 11(c) of the Warrant) equal to $_________. Please issue a certificate or certificates for such shares of Common Stock in the name of and pay any cash for any fractional share to:
Name: ______________________________
Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable.
and, if said number of shares of Common Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share paid in cash.
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No of Shares
, and hereby irrevocably constitutes and appoints ___________________________________ as agent and attorney-in-fact to transfer said Warrant on the books of the within-named corporation, with full power of substitution in the premises.
Dated: ________ __, 200_
Name:______________________________
Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable.
<pre>
Exhibit 4.11
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of April 19, 2004, by and among Kanakaris Wireless Conectisys Corporation, a Colorado corporation, with its headquarters located at 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355 (the "Company"), and each of the undersigned (together with their respective affiliates and any assignee or transferee of all of their respective rights hereunder, the "Initial Investors").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among the parties hereto, dated as of April 19, 2004 (the "Securities Purchase Agreement"), the Company has agreed, upon the terms and subject to the conditions contained therein, to issue and sell to the Initial Investors (i) callable secured convertible debentures in the aggregate principal amount of up to One Million Five Hundred Thousand Dollars ($1,500,000) (the "Debentures") that are convertible into shares of the Company's common stock (the "Common Stock"), upon the terms and subject to the limitations and conditions set forth in such Debentures and (ii) warrants (the "Warrants") to acquire an aggregate of 4,500,000 shares of Common Stock, upon the terms and conditions and subject to the limitations and conditions set forth in the Warrants; and
B. To induce the Initial Investors to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws;
NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Initial Investors hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the following meanings:
(i) "Investors" means the Initial Investors and any transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares issued or issuable upon conversion or otherwise pursuant to the Debentures (as defined in the Securities Purchase Agreement) including, without limitation, Damages Shares (as defined in the Debentures) issued or issuable pursuant to the Debentures, shares of Common Stock issued or issuable in payment of the Standard Liquidated Damages Amount (as defined in the Securities Purchase Agreement), shares issued or issuable in respect of interest or in redemption of the Debentures in accordance with the terms thereof) and Warrant Shares issuable, upon exercise or otherwise pursuant to the Warrants (as defined in the Securities Purchase Agreement), and any shares of capital stock issued or issuable as a dividend on or in exchange for or otherwise with respect to any of the foregoing.
(iv) "Registration Statement" means a registration statement of the Company under the 1933 Act.
b. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement or Convertible Debenture.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and, on or prior to forty-five (45) days from the date of Closing (the "Filing Date"), file with the SEC a Registration Statement on Form S-3 (or, if Form S-3 is not then available, on such form of Registration Statement as is then available to effect a registration of the Registrable Securities, subject to the consent of the Initial Investors, which consent will not be unreasonably withheld) covering the resale of the Registrable Securities underlying the Debentures and Warrants issued or issuable pursuant to the Securities Purchase Agreement, which Registration Statement, to the extent allowable under the 1933 Act and the rules and regulations promulgated thereunder (including Rule 416), shall state that such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of or otherwise pursuant to the Debentures and exercise of the Warrants to prevent dilution resulting from stock splits, stock dividends or similar transactions. The number of shares of Common Stock initially included in such Registration Statement shall be no less than an amount equal to two (2) times the sum of the number of Conversion Shares that are then issuable upon conversion of the Debentures and Additional Debentures (based on the Variable Conversion Price as would then be in effect and assuming the Variable Conversion Price is the Conversion Price at such time), and the number of Warrant Shares that are then issuable upon exercise of the Warrants, without regard to any limitation on the Investor's ability to convert the Debentures or exercise the Warrants. The Company acknowledges that the number of shares initially included in the Registration Statement represents a good faith estimate of the maximum number of shares issuable upon conversion of the Debentures and upon exercise of the Warrants.
b. Underwritten Offering. If any offering pursuant to a Registration Statement pursuant to Section 2(a) hereof involves an underwritten offering, the Investors who hold a majority in interest of the Registrable Securities subject to such underwritten offering, with the consent of a majority-in- interest of the Initial Investors, shall have the right to select one legal counsel and an investment banker or bankers and manager or managers to administer the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Company.
c. Payments by the Company. The Company shall use its best efforts to
obtain effectiveness of the Registration Statement as soon as practicable. If
(i) the Registration Statement(s) covering the Registrable Securities required
to be filed by the Company pursuant to Section 2(a) hereof is not filed by the
Filing Date or declared effective by the SEC on or prior to ninety (90) days
from the date of Closing, or (ii) after the Registration Statement has been
declared effective by the SEC, sales of all of the Registrable Securities
cannot be made pursuant to the Registration Statement, or (iii) the Common
Stock is not listed or included for quotation on the Nasdaq National Market
("Nasdaq"), the Nasdaq SmallCap Market ("Nasdaq SmallCap"), the New York Stock
Exchange (the "NYSE") or the American Stock Exchange (the "AMEX") after being
so listed or included for quotation, or (iv) the Common Stock ceases to be
traded on the Over-the-Counter Bulletin Board (the "OTC BB") prior to being
listed or included for quotation on one of the aforementioned markets, then
the Company will make payments to the Investors in such amounts and at such
times as shall be determined pursuant to this Section 2(c) as partial relief
for the damages to the Investors by reason of any such delay in or reduction
of their ability to sell the Registrable Securities (which remedy shall not be
exclusive of any other remedies available at law or in equity). The Company
shall pay to each holder of the Debentures or Registrable Securities an amount
equal to the then outstanding principal amount of the Debentures (and, in the
case of holders of Registrable Securities, the principal amount of Debentures
from which such Registrable Securities were converted) ("Outstanding Principal
Amount"), multiplied by the Applicable Percentage (as defined below) times the
sum of: (i) the number of months (prorated for partial months) after the
Filing Date or the end of the aforementioned ninety (90) day period and prior
to the date the Registration Statement is declared effective by the SEC,
provided, however, that there shall be excluded from such period any delays
which are solely attributable to changes required by the Investors in the
Registration Statement with respect to information relating to the Investors,
including, without limitation, changes to the plan of distribution, or to the
failure of the Investors to conduct their review of the Registration Statement
pursuant to Section 3(h) below in a reasonably prompt manner; (ii) the number
of months (prorated for partial months) that sales of all of the Registrable
Securities cannot be made pursuant to the Registration Statement after the
Registration Statement has been declared effective (including, without
limitation, when sales cannot be made by reason of the Company's failure to
properly supplement or amend the prospectus included therein in accordance
with the terms of this Agreement, but excluding any days during an Allowed
Delay (as defined in Section 3(f)); and (iii) the number of months (prorated
for partial months) that the Common Stock is not listed or included for
quotation on the OTC BB, Nasdaq, Nasdaq SmallCap, NYSE or AMEX or that trading
thereon is halted after the Registration Statement has been declared
effective. The term "Applicable Percentage" means two hundredths (.02). (For
example, if the Registration Statement becomes effective one (1) month after
the Filing Date, the Company would pay $5,000 for each $250,000 of Outstanding
Principal Amount. If thereafter, sales could not be made pursuant to the
Registration Statement for an additional period of one (1) month, the Company
would pay an additional $5,000 for each $250,000 of Outstanding Principal
Amount.) Such amounts shall be paid in cash or, at each Investor's option,
in shares of Common Stock priced at the Conversion Price (as defined in the
Debentures) on such payment date.
d. Piggy-Back Registrations. Subject to the last sentence of this
Section 2(d), if at any time prior to the expiration of the Registration
Period (as hereinafter defined) the Company shall determine to file with the
SEC a Registration Statement relating to an offering for its own account or
the account of others under the 1933 Act of any of its equity securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to
equity securities to be issued solely in connection with any acquisition of
any entity or business or equity securities issuable in connection with stock
option or other employee benefit plans), the Company shall send to each
Investor who is entitled to registration rights under this Section 2(d)
written notice of such determination and, if within fifteen (15) days after
the effective date of such notice, such Investor shall so request in writing,
the Company shall include in such Registration Statement all or any part of
the Registrable Securities such Investor requests to be registered, except
that if, in connection with any underwritten public offering for the account
of the Company the managing underwriter(s) thereof shall impose a limitation
on the number of shares of Common Stock which may be included in the
Registration Statement because, in such underwriter(s)' judgment, marketing or
other factors dictate such limitation is necessary to facilitate public
distribution, then the Company shall be obligated to include in such
Registration Statement only such limited portion of the Registrable Securities
with respect to which such Investor has requested inclusion hereunder as the
underwriter shall permit. Any exclusion of Registrable Securities shall be
made pro rata among the Investors seeking to include Registrable Securities in
proportion to the number of Registrable Securities sought to be included by
such Investors; provided, however, that the Company shall not exclude any
Registrable Securities unless the Company has first excluded all outstanding
securities, the holders of which are not entitled to inclusion of such
securities in such Registration Statement or are not entitled to pro rata
inclusion with the Registrable Securities; and provided, further, however,
that, after giving effect to the immediately preceding proviso, any exclusion
of Registrable Securities shall be made pro rata with holders of other
securities having the right to include such securities in the Registration
Statement other than holders of securities entitled to inclusion of their
securities in such Registration Statement by reason of demand registration
rights. No right to registration of Registrable Securities under this Section
2(d) shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter
or underwriters and, subject to the provisions of this Agreement, on the same
terms and conditions as other shares of Common Stock included in such
underwritten offering. Notwithstanding anything to the contrary set forth
herein, the registration rights of the Investors pursuant to this Section 2(d)
shall only be available in the event the Company fails to timely file, obtain
effectiveness or maintain effectiveness of any Registration Statement to be
filed pursuant to Section 2(a) in accordance with the terms of this Agreement.
e. Eligibility for Form S-3, SB-2 or S-1; Conversion to Form S-3. The
Company represents and warrants that it meets the requirements for the use of
Form S-3, SB-2 or S-1 for registration of the sale by the Initial Investors
and any other Investors of the Registrable Securities. The Company agrees to
file all reports required to be filed by the Company with the SEC in a timely
manner so as to remain eligible or become eligible, as the case may be, and
thereafter to maintain its eligibility, for the use of Form S-3. If the
Company is not currently eligible to use Form S-3, not later than five (5)
business days after the Company first meets the registration eligibility and
transaction requirements for the use of Form S-3 (or any successor form) for
registration of the offer and sale by the Initial Investors and any other
Investors of Registrable Securities, the Company shall file a Registration
Statement on Form S-3 (or such successor form) with respect to the Registrable
Securities covered by the Registration Statement on Form SB-2 or Form S-1,
whichever is applicable, filed pursuant to Section 2(a) (and include in such
Registration Statement on Form S-3 the information required by Rule 429 under
the 1933 Act) or convert the Registration Statement on Form SB-2 or Form S-1,
whichever is applicable, filed pursuant to Section 2(a) to a Form S-3 pursuant
to Rule 429 under the 1933 Act and cause such Registration Statement (or such
amendment) to be declared effective no later than forty-five (45) days after
filing. In the event of a breach by the Company of the provisions of this
Section 2(e), the Company will be required to make payments pursuant to
Section 2(c) hereof.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the Company shall have the following obligations:
a. The Company shall prepare promptly, and file with the SEC not later than the Filing Date, a Registration Statement with respect to the number of Registrable Securities provided in Section 2(a), and thereafter use its best efforts to cause such Registration Statement relating to Registrable Securities to become effective as soon as possible after such filing but in no event later than ninety (90) days from the date of Closing), and keep the Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of (i) the date on which all of the Registrable Securities have been sold and (ii) the date on which the Registrable Securities (in the opinion of counsel to the Initial Investors) may be immediately sold to the public without registration or restriction (including without limitation as to volume by each holder thereof) under the 1933 Act (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein not misleading.
b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statements and the prospectus used in connection with the Registration Statements as may be necessary to keep the Registration Statements effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statements until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statements. In the event the number of shares available under a Registration Statement filed pursuant to this Agreement is insufficient to cover all of the Registrable Securities issued or issuable upon conversion of the Debentures and exercise of the Warrants, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within fifteen (15) days after the necessity therefor arises (based on the market price of the Common Stock and other relevant factors on which the Company reasonably elects to rely). The Company shall use its best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof, but in any event within thirty (30) days after the date on which the Company reasonably first determines (or reasonably should have determined) the need therefor. The provisions of Section 2(c) above shall be applicable with respect to such obligation, with the ninety (90) days running from the day the Company reasonably first determines (or reasonably should have determined) the need therefor.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in a Registration Statement and its legal counsel (i)
promptly (but in no event more than two (2) business days) after the same is
prepared and publicly distributed, filed with the SEC, or received by the
Company, one copy of each Registration Statement and any amendment thereto,
each preliminary prospectus and prospectus and each amendment or supplement
thereto, and, in the case of the Registration Statement referred to in Section
2(a), each letter written by or on behalf of the Company to the SEC or the
staff of the SEC, and each item of correspondence from the SEC or the staff of
the SEC, in each case relating to such Registration Statement (other than any
portion of any thereof which contains information for which the Company has
sought confidential treatment), and (ii) promptly (but in no event more than
two (2) business days) after the Registration Statement is declared effective
by the SEC, such number of copies of a prospectus, including a preliminary
prospectus, and all amendments and supplements thereto and such other
documents as such Investor may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such Investor. The Company
will immediately notify each Investor by facsimile of the effectiveness of
each Registration Statement or any post-effective amendment. The Company will
promptly (but in no event more than five (5) business days) respond to any and
all comments received from the SEC (which comments shall promptly be made
available to the Investors upon request), with a view towards causing each
Registration Statement or any amendment thereto to be declared effective by
the SEC as soon as practicable, shall promptly file an acceleration request as
soon as practicable (but in no event more than two (2) business days)
following the resolution or clearance of all SEC comments or, if applicable,
following notification by the SEC that any such Registration Statement or any
amendment thereto will not be subject to review and shall promptly file with
the SEC a final prospectus as soon as practicable (but in no event more than
two (2) business days) following receipt by the Company from the SEC of an
order declaring the Registration Statement effective. In the event of a
breach by the Company of the provisions of this Section 3(c), the Company will
be required to make payments pursuant to Section 2(c) hereof.
d. The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by the Registration Statements under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investors who hold a majority in interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (a) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (b) subject itself to general taxation in any such jurisdiction, (c) file a general consent to service of process in any such jurisdiction, (d) provide any undertakings that cause the Company undue expense or burden, or (e) make any change in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders.
e. In the event Investors who hold a majority-in-interest of the Registrable Securities being offered in the offering (with the approval of a majority-in-interest of the Initial Investors) select underwriters for the offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering.
f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in any
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and use
its best efforts promptly to prepare a supplement or amendment to any
Registration Statement to correct such untrue statement or omission, and
deliver such number of copies of such supplement or amendment to each Investor
as such Investor may reasonably request; provided that, for not more than ten
(10) consecutive trading days (or a total of not more than twenty (20) trading
days in any twelve (12) month period), the Company may delay the disclosure of
material non-public information concerning the Company (as well as prospectus
or Registration Statement updating) the disclosure of which at the time is
not, in the good faith opinion of the Company, in the best interests of the
Company (an "Allowed Delay"); provided, further, that the Company shall
promptly (i) notify the Investors in writing of the existence of (but in no
event, without the prior written consent of an Investor, shall the Company
disclose to such investor any of the facts or circumstances regarding)
material non-public information giving rise to an Allowed Delay and (ii)
advise the Investors in writing to cease all sales under such Registration
Statement until the end of the Allowed Delay. Upon expiration of the Allowed
Delay, the Company shall again be bound by the first sentence of this Section
3(f) with respect to the information giving rise thereto.
g. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any Registration Statement, and, if such an order is issued, to obtain the withdrawal of such order at the earliest possible moment and to notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof.
h. The Company shall permit a single firm of counsel designated by the Initial Investors to review such Registration Statement and all amendments and supplements thereto (as well as all requests for acceleration or effectiveness thereof) a reasonable period of time prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects and will not request acceleration of such Registration Statement without prior notice to such counsel. The sections of such Registration Statement covering information with respect to the Investors, the Investor's beneficial ownership of securities of the Company or the Investors intended method of disposition of Registrable Securities shall conform to the information provided to the Company by each of the Investors.
i. The Company shall make generally available to its security holders as soon as practicable, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish, on the date that Registrable Securities are delivered to an underwriter, if any, for sale in connection with any Registration Statement or, if such securities are not being sold by an underwriter, on the date of effectiveness thereof (i) an opinion, dated as of such date, from counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters, if any, and the Investors and (ii) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and the Investors.
k. The Company shall make available for inspection by (i) any Investor,
(ii) any underwriter participating in any disposition pursuant to a
Registration Statement, (iii) one firm of attorneys and one firm of
accountants or other agents retained by the Initial Investors, (iv) one firm
of attorneys and one firm of accountants or other agents retained by all other
Investors, and (v) one firm of attorneys retained by all such underwriters
(collectively, the "Inspectors") all pertinent financial and other records,
and pertinent corporate documents and properties of the Company, including
without limitation, records of conversions by other holders of convertible
securities issued by the Company and the issuance of stock to such holders
pursuant to the conversions (collectively, the "Records"), as shall be
reasonably deemed necessary by each Inspector to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (b) the release of such Records is ordered pursuant to a subpoena
or other order from a court or government body of competent jurisdiction, or
(c) the information in such Records has been made generally available to the
public other than by disclosure in violation of this or any other agreement.
The Company shall not be required to disclose any confidential information in
such Records to any Inspector until and unless such Inspector shall have
entered into confidentiality agreements (in form and substance satisfactory to
the Company) with the Company with respect thereto, substantially in the form
of this Section 3(k). Each Investor agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, the Records
deemed confidential. Nothing herein (or in any other confidentiality
agreement between the Company and any Investor) shall be deemed to limit the
Investor's ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor prior to making such disclosure, and allow the Investor, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.
m. The Company shall (i) cause all the Registrable Securities covered by the Registration Statement to be listed on each national securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) to the extent the securities of the same class or series are not then listed on a national securities exchange, secure the designation and quotation, of all the Registrable Securities covered by the Registration Statement on Nasdaq or, if not eligible for Nasdaq, on Nasdaq SmallCap or, if not eligible for Nasdaq or Nasdaq SmallCap, on the OTC BB and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities.
n. The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold Registrable Securities being offered and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the managing underwriter or underwriters, if any, or the Investors may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Investors may request, and, within three (3) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an instruction in the form attached hereto as Exhibit 1 and an opinion of such counsel in the form attached hereto as Exhibit 2.
p. At the request of the holders of a majority-in-interest of the Registrable Securities, the Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and any prospectus used in connection with the Registration Statement as may be necessary in order to change the plan of distribution set forth in such Registration Statement.
q. From and after the date of this Agreement, the Company shall not, and shall not agree to, allow the holders of any securities of the Company to include any of their securities in any Registration Statement under Section 2(a) hereof or any amendment or supplement thereto under Section 3(b) hereof without the consent of the holders of a majority-in-interest of the Registrable Securities.
r. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investors of Registrable Securities pursuant to a Registration Statement.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the Investors shall have the following obligations:
a. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least three (3) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor.
b. Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statements hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statements.
c. In the event Investors holding a majority-in-interest of the Registrable Securities being registered (with the approval of the Initial Investors) determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from such Registration Statement.
d. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and any expenses in excess of those payable by the Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel selected by the Initial Investors pursuant to Sections 2(b) and 3(h) hereof shall be borne by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities,
(ii) the directors, officers, partners, employees, agents and each person who
controls any Investor within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), if any, (iii) any
underwriter (as defined in the 1933 Act) for the Investors, and (iv) the
directors, officers, partners, employees and each person who controls any such
underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each,
an "Indemnified Person"), against any joint or several losses, claims,
damages, liabilities or expenses (collectively, together with actions,
proceedings or inquiries by any regulatory or self-regulatory organization,
whether commenced or threatened, in respect thereof, "Claims") to which any of
them may become subject insofar as such Claims arise out of or are based upon:
(i) any untrue statement or alleged untrue statement of a material fact in a
Registration Statement or the omission or alleged omission to state therein a
material fact required to be stated or necessary to make the statements
therein not misleading; (ii) any untrue statement or alleged untrue statement
of a material fact contained in any preliminary prospectus if used prior to
the effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged
omission to state therein any material fact necessary to make the statements
made therein, in light of the circumstances under which the statements therein
were made, not misleading; or (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities (the matters in
the foregoing clauses (i) through (iii) being, collectively, "Violations").
Subject to the restrictions set forth in Section 6(c) with respect to the
number of legal counsel, the Company shall reimburse the Indemnified Person,
promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (i) shall not apply to a Claim arising out of
or based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person or
underwriter for such Indemnified Person expressly for use in connection with
the preparation of such Registration Statement or any such amendment thereof
or supplement thereto, if such prospectus was timely made available by the
Company pursuant to Section 3(c) hereof; (ii) shall not apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior
written consent of the Company, which consent shall not be unreasonably
withheld; and (iii) with respect to any preliminary prospectus, shall not
inure to the benefit of any Indemnified Person if the untrue statement or
omission of material fact contained in the preliminary prospectus was
corrected on a timely basis in the prospectus, as then amended or
supplemented, such corrected prospectus was timely made available by the
Company pursuant to Section 3(c) hereof, and the Indemnified Person was
promptly advised in writing not to use the incorrect prospectus prior to the
use giving rise to a Violation and such Indemnified Person, notwithstanding
such advice, used it. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
b. In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees severally and not jointly to
indemnify, hold harmless and defend, to the same extent and in the same manner
set forth in Section 6(a), the Company, each of its directors, each of its
officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, any
underwriter and any other stockholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person who
controls such stockholder or underwriter within the meaning of the 1933 Act or
the 1934 Act (collectively and together with an Indemnified Person, an
"Indemnified Party"), against any Claim to which any of them may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim
arises out of or is based upon any Violation by such Investor, in each case to
the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished to the Company by
such Investor expressly for use in connection with such Registration
Statement; and subject to Section 6(c) such Investor will reimburse any legal
or other expenses (promptly as such expenses are incurred and are due and
payable) reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) shall not apply to amounts paid in settlement
of any Claim if such settlement is effected without the prior written consent
of such Investor, which consent shall not be unreasonably withheld; provided,
further, however, that the Investor shall be liable under this Agreement
(including this Section 6(b) and Section 7) for only that amount as does not
exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.
c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such legal counsel shall be selected by Investors holding a majority-in-interest of the Registrable Securities included in the Registration Statement to which the Claim relates (with the approval of a majority-in-interest of the Initial Investors), if the Investors are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is actually prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under
Section 6 to the fullest extent permitted by law; provided, however, that (i)
no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall
be entitled to contribution from any seller of Registrable Securities who was
not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations under this Agreement)
by any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to:
a. make and keep public information available, as those terms are understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 4(c) of the Securities Purchase Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by the
Investors to any transferee of all or any portion of Registrable Securities
if: (i) the Investor agrees in writing with the transferee or assignee to
assign such rights, and a copy of such agreement is furnished to the Company
within a reasonable time after such assignment, (ii) the Company is, within a
reasonable time after such transfer or assignment, furnished with written
notice of (a) the name and address of such transferee or assignee, and (b) the
securities with respect to which such registration rights are being
transferred or assigned, (iii) following such transfer or assignment, the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act and applicable state securities laws, (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein, (v) such
transfer shall have been made in accordance with the applicable requirements
of the Securities Purchase Agreement, and (vi) such transferee shall be an
"accredited investor" as that term defined in Rule 501 of Regulation D
promulgated under the 1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with written consent of the Company, each of the Initial Investors (to the extent such Initial Investor still owns Registrable Securities) and Investors who hold a majority interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.
b. Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be:
If to the Company:
Conectisys Corporation
24730 Avenue Tibbitts
Suite 130
Valencia, California 91355
Attention: Chief Executive Officer
Telephone: 661-295-6763
Facsimile: 661-295-5981
Email: rspigno@conectisys.com
With copy to:
Rutan & Tucker, LLP
611 Anton Boulevard
Suite 1400
Costa Mesa, California 92626
Attention: Larry Cerutti, Esq.
Telephone: 714-641-3450
Facsimile: 714-546-9035
Email: lcerutti@rutan.com
If to an Investor: to the address set forth immediately below such Investor's name on the signature pages to the Securities Purchase Agreement.
With a copy to:
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street
51st Floor
Philadelphia, Pennsylvania 19103
Attention: Gerald J. Guarcini, Esq.
Telephone: 215-865-8625
Facsimile: 215-864-8999
Email: guarcini@ballardspahr.com
c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.
d. THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.
e. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.
f. This Agreement, the Warrants and the Securities Purchase Agreement (including all schedules and exhibits thereto) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement and the Securities Purchase Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.
g. Subject to the requirements of Section 9 hereof, this Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.
h. The headings in this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.
i. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.
j. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
k. Except as otherwise provided herein, all consents and other determinations to be made by the Investors pursuant to this Agreement shall be made by Investors holding a majority of the Registrable Securities, determined as if the all of the Debentures then outstanding have been converted into for Registrable Securities.
l. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to each Investor by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of any of the provisions under this Agreement, that each Investor shall be entitled, in addition to all other available remedies in law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.
m. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the Company and the undersigned Initial Investors have caused this Agreement to be duly executed as of the date first above written.
CONECTISYS CORPORATION
/S/ ROBERT A. SPIGNO Robert A. Spigno Chief Executive Officer |
AJW PARTNERS, LLC
By: SMS Group, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
AJW OFFSHORE, LTD.
By: First Street Manager II, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
AJW QUALIFIED PARTNERS, LLC
By: AJW Manager, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By: First Street Manager II, LLC
/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
<pre>
Exhibit 4.12
SECURITY AGREEMENT
SECURITY AGREEMENT (this "Agreement"), dated as of April 19, 2004, by and among Conectisys Corporation, a Colorado corporation ("Company"), and the secured parties signatory hereto and their respective endorsees, transferees and assigns (collectively, the "Secured Party").
W I T N E S S E T H:
WHEREAS, pursuant to a Securities Purchase Agreement, dated the date hereof, between Company and the Secured Party (the "Purchase Agreement"), Company has agreed to issue to the Secured Party and the Secured Party has agreed to purchase from Company certain of Company's 12% Secured Convertible Debentures, due two years from the date of issue (the "Debentures"), which are convertible into shares of Company's Common Stock, no par value (the "Common Stock"). In connection therewith, Company shall issue the Secured Party certain Common Stock purchase warrants dated as of the date hereof to purchase the number of shares of Common Stock indicated below each Secured Party's name on the Purchase Agreement (the "Warrants"); and
WHEREAS, in order to induce the Secured Party to purchase the Debentures, Company has agreed to execute and deliver to the Secured Party this Agreement for the benefit of the Secured Party and to grant to it a first priority security interest in certain property of Company to secure the prompt payment, performance and discharge in full of all of Company's obligations under the Debentures.
NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as "general intangibles" and "proceeds") shall have the respective meanings given such terms in Article 9 of the UCC.
(a) "Collateral" means the collateral in which the Secured Party is granted a security interest by this Agreement and which shall include the following, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith:
(i) All Goods of the Company, including, without limitations, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Company's businesses and all improvements thereto (collectively, the "Equipment"); and
(ii) All Inventory of the Company; and
(iii) All of the Company's contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, trademarks, service marks, trade styles, trade names, patents, patent applications, copyrights, deposit accounts, and income tax refunds (collectively, the "General Intangibles"); and
(iv) All Receivables of the Company including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each Receivable, including any right of stoppage in transit; and
(v) All of the Company's documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(iv) above.
(b) "Company" shall mean, collectively, Company and all of the subsidiaries of Company, a list of which is contained in Schedule A, attached hereto.
(c) "Obligations" means all of the Company's obligations under this Agreement and the Debentures, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later decreased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time.
(d) "UCC" means the Uniform Commercial Code, as currently in effect in the State of New York.
2. Grant of Security Interest. As an inducement for the Secured Party to purchase the Debentures and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Secured Party, a continuing security interest in, a continuing first lien upon, an unqualified right to possession and disposition of and a right of set-off against, in each case to the fullest extent permitted by law, all of the Company's right, title and interest of whatsoever kind and nature in and to the Collateral (the "Security Interest").
3. Representations, Warranties, Covenants and Agreements of the Company. The Company represents and warrants to, and covenants and agrees with, the Secured Party as follows:
(a) The Company has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations thereunder. The execution, delivery and performance by the Company of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. This Agreement constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creidtor's rights generally.
(b) The Company represents and warrants that it has no place of business or offices where its respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule A attached hereto;
(c) Except as set forth on Schedule C, the Company is the sole owner of the Collateral (except for non-exclusive licenses granted by the Company in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and is fully authorized to grant the Security Interest in and to pledge the Collateral. Except as set forth on Schedule C, there is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that have been filed in favor of the Secured Party pursuant to this Agreement or a security agreement executed prior to the date hereof) covering or affecting any of the Collateral. So long as this Agreement shall be in effect, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement or a security agreement executed prior to the date hereof), except as set forth on Schedule C.
(d) No part of the Collateral has been judged invalid or unenforceable. No written claim has been received that any Collateral or the Company's use of any Collateral violates the rights of any third party. There has been no adverse decision to the Company's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Company's right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of the Company, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority.
(e) The Company shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Party valid, perfected and continuing first priority liens in the Collateral.
(f) This Agreement creates in favor of the Secured Party a valid security interest in the Collateral securing the payment and performance of the Obligations and, upon making the filings described in the immediately following sentence, a perfected first priority security interest in such Collateral. Except for the filing of financing statements on Form-1 under the UCC with the jurisdictions indicated on Schedule B, attached hereto, no authorization or approval of or filing with or notice to any governmental authority or regulatory body is required either (i) for the grant by the Company of, or the effectiveness of, the Security Interest granted hereby or for the execution, delivery and performance of this Agreement by the Company or (ii) for the perfection of or exercise by the Secured Party of its rights and remedies hereunder.
(g) On the date of execution of this Agreement, the Company will deliver to the Secured Party one or more executed UCC financing statements on Form-1 with respect to the Security Interest for filing with the jurisdictions indicated on Schedule B, attached hereto and in such other jurisdictions as may be requested by the Secured Party.
(h) The execution, delivery and performance of this Agreement does not conflict with or cause a breach or default, or an event that with or without the passage of time or notice, shall constitute a breach or default, under any agreement to which the Company is a party or by which the Company is bound. No consent (including, without limitation, from stock holders or creditors of the Company) is required for the Company to enter into and perform its obligations hereunder.
(i) The Company shall at all times maintain the liens and Security
Interest provided for hereunder as valid and perfected first priority liens
and security interests in the Collateral in favor of the Secured Party until
this Agreement and the Security Interest hereunder shall terminate pursuant to
Section 11. The Company hereby agrees to defend the same against any and all
persons. The Company shall safeguard and protect all Collateral for the
account of the Secured Party. At the request of the Secured Party, the
Company will sign and deliver to the Secured Party at any time or from time to
time one or more financing statements pursuant to the UCC (or any other
applicable statute) in form reasonably satisfactory to the Secured Party and
will pay the cost of filing the same in all public offices wherever filing is,
or is deemed by the Secured Party to be, necessary or desirable to effect the
rights and obligations provided for herein. Without limiting the generality of
the foregoing, the Company shall pay all fees, taxes and other amounts
necessary to maintain the Collateral and the Security Interest hereunder, and
the Company shall obtain and furnish to the Secured Party from time to time,
upon demand, such releases and/or subordinations of claims and liens which may
be required to maintain the priority of the Security Interest hereunder.
(j) The Company will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by the Company in the ordinary course of business), sell or otherwise dispose of any of the Collateral without the prior written consent of the Secured Party.
(k) The Company shall keep and preserve its Equipment, Inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage.
(l) The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party's security interest therein.
(m) The Company shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Secured Party may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce its security interest in the Collateral including, without limitation, the execution and delivery of a separate security agreement with respect to the Company's intellectual property ("Intellectual Property Security Agreement") in which the Secured Party has been granted a security interest hereunder, substantially in a form acceptable to the Secured Party, which Intellectual Property Security Agreement, other than as stated therein, shall be subject to all of the terms and conditions hereof.
(n) The Company shall permit the Secured Party and its representatives and agents to inspect the Collateral at any time, and to make copies of records pertaining to the Collateral as may be requested by the Secured Party from time to time.
(o) The Company will take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral.
(p) The Company shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Company that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder.
(q) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Collateral is accurate and complete in all material respects as of the date furnished.
(r) Schedule A attached hereto contains a list of all of the subsidiaries of Company.
4. Defaults. The following events shall be "Events of Default":
(a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures;
(b) Any representation or warranty of the Company in this Agreement or in the Intellectual Property Security Agreement shall prove to have been incorrect in any material respect when made; and
(c) The failure by the Company to observe or perform any of its obligations hereunder or in the Intellectual Property Security Agreement for ten (10) days after receipt by the Company of notice of such failure from the Secured Party.
5. Duty To Hold In Trust. Upon the occurrence of any Event of Default and at any time thereafter, the Company shall, upon receipt by it of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations.
6. Rights and Remedies Upon Default. Upon occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Debentures, and the Secured Party shall have all the rights and remedies of a secured party under the UCC and/or any other applicable law (including the Uniform Commercial Code of any jurisdiction in which any Collateral is then located). Without limitation, the Secured Party shall have the following rights and powers:
(a) The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Company's premises or elsewhere, and make available to the Secured Party, without rent, all of the Company's respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form.
(b) The Secured Party shall have the right to operate the business of the Company using the Collateral and shall 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, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released.
7. Applications of Proceeds. The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys' fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Company will be liable for the deficiency, together with interest thereon, at the rate of 15% per annum (the "Default Rate"), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due to the gross negligence or willful misconduct of the Secured Party.
8. Costs and Expenses. The Company agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Company shall also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. The Company will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Debentures. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debentures and shall bear interest at the Default Rate.
9. Responsibility for Collateral. The Company assumes all liabilities and responsibility in connection with all Collateral, and the obligations of the Company hereunder or under the Debentures shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason.
10. Security Interest Absolute. All rights of the Secured Party and all Obligations of the Company hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Company, or a discharge of all or any part of the Security Interest granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Company expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, the Company's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Party to proceed against any other person or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Company waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby.
11. Term of Agreement. This Agreement and the Security Interest shall terminate on the date on which all payments under the Debentures have been made in full and all other Obligations have been paid or discharged. Upon such termination, the Secured Party, at the request and at the expense of the Company, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement.
12. Power of Attorney; Further Assurances.
(a) The Company authorizes the Secured Party, and does hereby make,
constitute and appoint it, and its respective officers, agents, successors or
assigns with full power of substitution, as the Company's true and lawful
attorney-in-fact, with power, in its own name or in the name of the Company,
to, after the occurrence and during the continuance of an Event of Default,
(i) endorse any notes, checks, drafts, money orders, or other instruments of
payment (including payments payable under or in respect of any policy of
insurance) in respect of the Collateral that may come into possession of the
Secured Party; (ii) to sign and endorse any UCC financing statement or any
invoice, freight or express bill, bill of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications and notices in
connection with accounts, and other documents relating to the Collateral;
(iii) to pay or discharge taxes, liens, security interests or other
encumbrances at any time levied or placed on or threatened against the
Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue
for monies due in respect of the Collateral; and (v) generally, to do, at the
option of the Secured Party, and at the Company's expense, at any time, or
from time to time, all acts and things which the Secured Party deems necessary
to protect, preserve and realize upon the Collateral and the Security Interest
granted therein in order to effect the intent of this Agreement and the
Debentures, all as fully and effectually as the Company might or could do; and
the Company hereby ratifies all that said attorney shall lawfully do or cause
to be done by virtue hereof. This power of attorney is coupled with an
interest and shall be irrevocable for the term of this Agreement and
thereafter as long as any of the Obligations shall be outstanding.
(b) On a continuing basis, the Company will make, execute, acknowledge, deliver, file and record, as the case may be, in the proper filing and recording places in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule B, attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a security interest in all the Collateral.
(c) The Company hereby irrevocably appoints the Secured Party as the Company's attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Company where permitted by law.
13. Notices. All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given when (i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof, (iii) if sent by nationally recognized overnight delivery service (receipt requested), the next business day or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses:
If to the Company:
Conectisys Corporation
24730 Avenue Tibbitts
Suite 130
Valencia, California 91355
Attention: Chief Executive Officer
Facsimile: 661-295-5981
With copies to:
Rutan & Tucker, LLP
611 Anton Boulevard
Suite 1400
Costa Mesa, California 92626
Attention: Larry Cerutti, Esq.
Telephone: 714-641-3450
Facsimile: 714-546-9035
Email: lcerutti@rutan.com
If to the Secured Party:
AJW Partners, LLC
AJW Offshore, Ltd.
AJW Qualified Partners, LLC
New Millennium Capital Partners II, LLC
1044 Northern Boulevard
Suite 302
Roslyn, NY 11576
Attention: Corey Ribotsky
Facsimile: 516-739-7115
With copies to:
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
Attention: Gerald J. Guarcini, Esq.
Facsimile: 215-864-8999
14. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder.
15. Miscellaneous.
(a) No course of dealing between the Company and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Debentures shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
(b) All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Debentures or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently.
(c) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto.
(d) In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction.
(e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise.
(f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns.
(g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.
(h) This Agreement shall be construed in accordance with the laws of the State of New York, except to the extent the validity, perfection or enforcement of a security interest hereunder in respect of any particular Collateral which are governed by a jurisdiction other than the State of New York in which case such law shall govern. Each of the parties hereto irrevocably submit to the exclusive jurisdiction of any New York State or United States Federal court sitting in Manhattan county over any action or proceeding arising out of or relating to this Agreement, and the parties hereto hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such New York State or Federal court. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto further waive any objection to venue in the State of New York and any objection to an action or proceeding in the State of New York on the basis of forum nonconveniens.
(i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
(j) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.
CONECTISYS CORPORATION
By: /S/ ROBERT A. SPIGNO
Robert A. Spigno
Chief Executive Officer
|
AJW PARTNERS, LLC
By: SMS Group, LLC
By: /S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
AJW OFFSHORE, LTD.
By: First Street Manager II, LLC
By: /S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
AJW QUALIFIED PARTNERS, LLC
By: AJW Manager, LLC
By: /S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By: First Street Manager II, LLC
By: /S/ COREY S. RIBOTSKY
Corey S. Ribotsky
Manager
|
SCHEDULE A
Principal Place of Business of the Company:
24730 Avenue Tibbitts, Suite 130, Valencia, California 91355
Locations Where Collateral is Located or Stored:
24730 Avenue Tibbitts, Suite 130, Valencia, California 91355
List of Subsidiaries of the Company:
TechniLink Technology Manufacturing, Inc. (conditionally dissolved)
eEnergyService.com
United Telemetry Company
SCHEDULE B
Jurisdictions:
Conectisys Corp. (California)
Conectisys Corp. (Colorado)
TechniLink Technology Manufacturing, Inc. (conditionally dissolved)
(California)
eEnergy Service.com (Nevada)
eEnergy Service.com (California)
United Telemetry Company (Nevada)
SCHEDULE C
The Company has granted a security interest in its assets to AJW Partners, LLC, New Millennium Capital Partners II, LLC, AJW Offshore, Ltd. (formerly AJW/New Millennium Offshore, Ltd.) and AJW Qualified Partners, LLC (formerly Pegasus Capital Partners, LLC) pursuant to a Security Agreement dated as of March 29, 2002, a Security Agreement dated as of November 27, 2002 and a Security Agreement dated as of November 25, 2003. In addition, the Company has granted security interest in its intellectual property to such parties pursuant to an Intellectual Property Security Agreement dated as of November 27, 2002 and an Intellectual Property Security Agreement dated as of November 25, 2003.
<pre>
Exhibit 4.13
INTELLECTUAL PROPERTY SECURITY AGREEMENT
INTELLECTUAL PROPERTY SECURITY AGREEMENT (this "Agreement" dated as of April 19, 2004, by and among Conectisys Corporation, a Colorado corporation (the "Company"), and the secured parties signatory hereto and their respective endorsees, transferees and assigns (collectively, the "Secured Party").
W I T N E S S E T H :
WHEREAS, pursuant to a Securities Purchase Agreement, dated the date hereof, between Company and the Secured Party (the "Purchase Agreement"), Company has agreed to issue to the Secured Party and the Secured Party has agreed to purchase from Company certain of Company's 12% Secured Convertible Debentures, due two years from the date of issue (the "Debentures"), which are convertible into shares of Company's Common Stock, no par value per share (the "Common Stock"). In connection therewith, Company shall issue the Secured Party certain Common Stock purchase warrants dated as of the date hereof to purchase the number of shares of Common Stock indicated below each Secured Party's name on the Purchase Agreement (the "Warrants"); and
WHEREAS, in order to induce the Secured Party to purchase the Debentures, Company has agreed to execute and deliver to the Secured Party this Agreement for the benefit of the Secured Party and to grant to it a first priority security interest in certain Intellectual Property (defined below) of Company to secure the prompt payment, performance and discharge in full of all of Company's obligations under the Debentures and exercise and discharge in full of Company's obligations under the Warrants; and
NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Purchase Agreement and used herein are so used as so defined; and the following terms shall have the following meanings:
"Software Intellectual Property" shall mean:
(a) all software programs (including the H-Net(TM) System and all source code, object code and all related applications and data files), whether now owned, upgraded, enhanced, licensed or leased or hereafter acquired by the Company, above;
(b) all computers and electronic data processing hardware and firmware associated therewith;
(c) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such software, hardware and firmware described in the preceding clauses (a) through (c) and
(d) all rights with respect to all of the foregoing, including, without limitation, any and all upgrades, modifications, copyrights, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and substitutions, replacements, additions, or model conversions of any of the foregoing.
"Copyrights" shall mean (a) all copyrights, registrations and applications for registration, issued or filed, including any reissues, extensions or renewals thereof, by or with the United States Copyright Office or any similar office or agency of the United States, any state thereof, or any other country or political subdivision thereof, or otherwise, including, all rights in and to the material constituting the subject matter thereof, including, without limitation, any referred to in Schedule B hereto, and (b) any rights in any material which is copyrightable or which is protected by common law, United States copyright laws or similar laws or any law of any State, including, without limitation, any thereof referred to in Schedule B hereto.
"Copyright License" shall mean any agreement, written or oral, providing for a grant by the Company of any right in any Copyright, including, without limitation, any thereof referred to in Schedule B hereto.
"Intellectual Property" shall means, collectively, the Software Intellectual Property, Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks, Trademark Licenses and Trade Secrets.
"Obligations" means all of the Company's obligations under this Agreement and the Debentures, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later decreased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time.
"Patents" shall mean (a) all letters patent of the United States or any other country or any political subdivision thereof, and all reissues and extensions thereof, including, without limitation, any thereof referred to in Schedule B hereto, and (b) all applications for letters patent of the United States and all divisions, continuations and continuations-in-part thereof or any other country or any political subdivision, including, without limitation, any thereof referred to in Schedule B hereto.
"Patent License" shall mean all agreements, whether written or oral, providing for the grant by the Company of any right to manufacture, use or sell any invention covered by a Patent, including, without limitation, any thereof referred to in Schedule B hereto.
"Security Agreement" shall mean the a Security Agreement, dated the date hereof between Company and the Secured Party.
"Trademarks" shall mean (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state thereof or any other country or any political subdivision thereof, or otherwise, including, without limitation, any thereof referred to in Schedule B hereto, and (b) all reissues, extensions or renewals thereof.
"Trademark License" shall mean any agreement, written or oral, providing for the grant by the Company of any right to use any Trademark, including, without limitation, any thereof referred to in Schedule B hereto.
"Trade Secrets" shall mean common law and statutory trade secrets and all other confidential or proprietary or useful information and all know-how obtained by or used in or contemplated at any time for use in the business of the Company (all of the foregoing being collectively called a "Trade Secret"), whether or not such Trade Secret has been reduced to a writing or other tangible form, including all documents and things embodying, incorporating or referring in any way to such Trade Secret, all Trade Secret licenses, including each Trade Secret license referred to in Schedule B hereto, and including the right to sue for and to enjoin and to collect damages for the actual or threatened misappropriation of any Trade Secret and for the breach or enforcement of any such Trade Secret license.
2. Grant of Security Interest. In accordance with Section 3(m) of the Security Agreement, to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Secured Party, a continuing security interest in, a continuing first lien upon, an unqualified right to possession and disposition of and a right of set-off against, in each case to the fullest extent permitted by law, all of the Company's right, title and interest of whatsoever kind and nature in and to the Intellectual Property (the "Security Interest").
3. Representations and Warranties. The Company hereby represents and warrants, and covenants and agrees with, the Secured Party as follows:
(a) The Company has the requisite corporate power and authority to enter into this Agreement and otherwise to carry out its obligations thereunder. The execution, delivery and performance by the Company of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. This Agreement constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally.
(b) The Company represents and warrants that it has no place of business or offices where its respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where the Intellectual Property is stored or located, except as set forth on Schedule A attached hereto;
(c) The Company is the sole owner of the Intellectual Property (except for non-exclusive licenses granted by the Company in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, and is fully authorized to grant the Security Interest in and to pledge the Intellectual Property. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that have been filed in favor of the Secured Party pursuant to this Agreement) covering or affecting any of the Intellectual Property. So long as this Agreement shall be in effect, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement), except for a financing statement covering assets acquired by the Company after the date hereof, provided that the value of the Intellectual Property covered by this Agreement along with the Collateral (as defined in the Security Agreement) is equal to at least 150% of the Obligations.
(d) The Company shall at all times maintain its books of account and records relating to the Intellectual Property at its principal place of business and its Intellectual Property at the locations set forth on Schedule A attached hereto and may not relocate such books of account and records unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that the necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Party valid, perfected and continuing first priority liens in the Intellectual Property to the extent they can be perfected through such filings.
(e) This Agreement creates in favor of the Secured Party a valid security interest in the Intellectual Property securing the payment and performance of the Obligations and, upon making the filings required hereunder, a perfected first priority security interest in such Intellectual Property to the extent that it can be perfected through such filings.
(f) Upon request of the Secured Party, the Company shall execute and deliver any and all agreements, instruments, documents, and papers as the Secured Party may request to evidence the Secured Party's security interest in the Intellectual Property and the goodwill and general intangibles of the Company relating thereto or represented thereby, and the Company hereby appoints the Secured Party its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations have been fully satisfied and are paid in full.
(g) The execution, delivery and performance of this Agreement does not conflict with or cause a breach or default, or an event that with or without the passage of time or notice, shall constitute a breach or default, under any agreement to which the Company is a party or by which the Company is bound. No consent (including, without limitation, from stock holders or creditors of the Company) is required for the Company to enter into and perform its obligations hereunder.
(h) The Company shall at all times maintain the liens and Security Interest provided for hereunder as valid and perfected first priority liens and security interests in the Intellectual Property to the extent they can be perfected by filing in favor of the Secured Party until this Agreement and the Security Interest hereunder shall terminate pursuant to Section 11. The Company hereby agrees to defend the same against any and all persons. The Company shall safeguard and protect all Intellectual Property for the account of the Secured Party. Without limiting the generality of the foregoing, the Company shall pay all fees, taxes and other amounts necessary to maintain the Intellectual Property and the Security Interest hereunder, and the Company shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest hereunder.
(i) The Company will not transfer, pledge, hypothecate, encumber, license (except for non-exclusive licenses granted by the Company in the ordinary course of business), sell or otherwise dispose of any of the Intellectual Property without the prior written consent of the Secured Party.
(j) The Company shall locate and store any and all of the source and object code for the H-Net(TM) System in the safe deposit box referenced on Schedule A attached hereto, and only Robert A. Spigno, the Chief Executive Officer of the Company, and Lawrence Muirhead, the Chief Technology Officer of the Company, shall have access to such code without the prior written consent of the Secured Party.
(k) The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any substantial change in the Intellectual Property, and of the occurrence of any event which would have a material adverse effect on the value of the Intellectual Property or on the Secured Party's security interest therein.
(l) The Company shall permit the Secured Party and its representatives and agents to inspect the Intellectual Property at any time, and to make copies of records pertaining to the Intellectual Property as may be requested by the Secured Party from time to time.
(m) The Company will take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Intellectual Property.
(n) The Company shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Intellectual Property and of any other information received by the Company that may materially affect the value of the Intellectual Property, the Security Interest or the rights and remedies of the Secured Party hereunder.
(o) All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Intellectual Property is accurate and complete in all material respects as of the date furnished.
(p) Schedule A attached hereto contains a list of all of the subsidiaries of Company.
(q) Schedule B attached hereto includes all Licenses, and all Patents and Patent Licenses, if any, owned by the Company in its own name as of the date hereof. Schedule B hereto also includes all Trademarks and Trademark Licenses, if any, owned by the Company in its own name as of the date hereof. Schedule B hereto includes all Copyrights and Copyright Licenses, if any, owned by the Company in its own name as of the date hereof. To the best of the Company's knowledge, each License, Patent, Trademark and Copyright is valid, subsisting, unexpired, enforceable and has not been abandoned. Except as set forth in Schedule B, none of such Licenses, Patents, Trademarks and Copyrights is the subject of any licensing or franchise agreement. To the best of the Company's knowledge, no holding, decision or judgment has been rendered by any Governmental Body which would limit, cancel or question the validity of any License, Patent, Trademark or Copyright. No action or proceeding is pending (i) seeking to limit, cancel or question the validity of any License, Patent, Trademark or Copyright, or (ii) which, if adversely determined, would have a material adverse effect on the value of any License, Patent, Trademark or Copyright. The Company has used and will continue to use for the duration of this Agreement, proper statutory notice in connection with its use of the Patents, Trademarks and Copyrights and consistent standards of quality in products leased or sold under the Patents, Trademarks and Copyrights.
(r) With respect to any Intellectual Property:
(i) such Intellectual Property is subsisting and has not been adjudged invalid or unenforceable, in whole or in part;
(ii) such Intellectual Property is valid and enforceable;
(iii) the Company has made all necessary filings and recordations to protect its interest in such Intellectual Property, including, without limitation, recordations of all of its interests in the Patents, Patent Licenses, Trademarks and Trademark Licenses in the United States Patent and Trademark Office and in corresponding offices throughout the world and its claims to the Copyrights and Copyright Licenses in the United States Copyright Office and in corresponding offices throughout the world;
(iv) other than as set forth in Schedule B, the Company is the exclusive owner of the entire and unencumbered right, title and interest in and to such Intellectual Property and no claim has been made that the use of such Intellectual Property infringes on the asserted rights of any third party; and
(v) the Company has performed and will continue to perform all acts and has paid all required fees and taxes to maintain each and every item of Intellectual Property in full force and effect throughout the world, as applicable.
(s) Except with respect to any Trademark or Copyright that the Company shall reasonably determine is of negligible economic value to the Company, the Company shall
(i) maintain each Trademark and Copyright in full force free from any claim of abandonment for non-use, maintain as in the past the quality of products and services offered under such Trademark or Copyright; employ such Trademark or Copyright with the appropriate notice of registration; not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark or Copyright unless the Secured Party shall obtain a perfected security interest in such mark pursuant to this Agreement; and not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark or Copyright may become invalidated;
(ii) not, except with respect to any Patent that it shall reasonably determine is of negligible economic value to it, do any act, or omit to do any act, whereby any Patent may become abandoned or dedicated; and
(iii) notify the Secured Party immediately if it knows, or has reason to know, that any application or registration relating to any Patent, Trademark or Copyright may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, United States Copyright Office or any court or tribunal in any country) regarding its ownership of any Patent, Trademark or Copyright or its right to register the same or to keep and maintain the same.
(t) Whenever the Company, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Patent, Trademark or Copyright with the United States Patent and Trademark Office, United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof or acquire rights to any new Patent, Trademark or Copyright whether or not registered, report such filing to the Secured Party within five business days after the last day of the fiscal quarter in which such filing occurs.
(u) The Company shall take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the Patents, Trademarks and Copyrights, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.
(v) In the event that any Patent, Trademark or Copyright included in the Intellectual Property is infringed, misappropriated or diluted by a third party, promptly notify the Secured Party after it learns thereof and shall, unless it shall reasonably determine that such Patent, Trademark or Copyright is of negligible economic value to it, which determination it shall promptly report to the Secured Party, promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as it shall reasonably deem appropriate under the circumstances to protect such Patent, Trademark or Copyright. If the Company lacks the financial resources to comply with this Section 3(t), the Company shall so notify the Secured Party and shall cooperate fully with any enforcement action undertaken by the Secured Party on behalf of the Company.
4. Defaults. The following events shall be "Events of Default":
(a) The occurrence of an Event of Default (as defined in the Debentures) under the Debentures;
(b) Any representation or warranty of the Company in this Agreement or in the Security Agreement shall prove to have been incorrect in any material respect when made;
(c) The failure by the Company to observe or perform any of its obligations hereunder or in the Security Agreement for ten (10) days after receipt by the Company of notice of such failure from the Secured Party; and
(d) Any breach of, or default under, the Warrants.
5. Duty To Hold In Trust. Upon the occurrence of any Event of Default and at any time thereafter, the Company shall, upon receipt by it of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Debentures or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party for application to the satisfaction of the Obligations.
6. Rights and Remedies Upon Default. Upon occurrence of any Event of Default and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder and under the Debentures, and the Secured Party shall have all the rights and remedies of a secured party under the UCC and/or any other applicable law (including the Uniform Commercial Code of any jurisdiction in which any Intellectual Property is then located). Without limitation, the Secured Party shall have the following rights and powers:
(a) The Secured Party shall have the right to take possession of the Intellectual Property and, for that purpose, enter, with the aid and assistance of any person, any premises where the Intellectual Property, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Intellectual Property and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Company's premises or elsewhere, and make available to the Secured Party, without rent, all of the Company's respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Intellectual Property in saleable or disposable form.
(b) The Secured Party shall have the right to operate the business of the Company using the Intellectual Property and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Intellectual Property, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Secured Party may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Intellectual Property, the Secured Party may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Intellectual Property being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released.
7. Applications of Proceeds. The proceeds of any such sale, lease or other disposition of the Intellectual Property hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Intellectual Property, to the reasonable attorneys' fees and expenses incurred by the Secured Party in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Intellectual Property, and then to satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Intellectual Property, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Company will be liable for the deficiency, together with interest thereon, at the rate of 15% per annum (the "Default Rate"), and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Intellectual Property, unless due to the gross negligence or willful misconduct of the Secured Party.
8. Costs and Expenses. The Company agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Company shall also pay all other claims and charges which in the reasonable opinion of the Secured Party might prejudice, imperil or otherwise affect the Intellectual Property or the Security Interest therein. The Company will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Intellectual Property, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Debentures. Until so paid, any fees payable hereunder shall be added to the principal amount of the Debentures and shall bear interest at the Default Rate.
9. Responsibility for Intellectual Property. The Company assumes all liabilities and responsibility in connection with all Intellectual Property, and the obligations of the Company hereunder or under the Debentures and the Warrants shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Intellectual Property or its unavailability for any reason.
10. Security Interest Absolute. All rights of the Secured Party and all Obligations of the Company hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Debentures, the Warrants or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Debentures, the Warrants or any other agreement entered into in connection with the foregoing; (c) any exchange, release or nonperfection of any of the Intellectual Property, or any release or amendment or waiver of or consent to departure from any other Intellectual Property for, or any guaranty, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Intellectual Property; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Company, or a discharge of all or any part of the Security Interest granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Company expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Intellectual Property or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event, the Company's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Party to proceed against any other person or to apply any Intellectual Property which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy. The Company waives any defense arising by reason of the application of the statute of limitations to any obligation secured hereby.
11. Term of Agreement. This Agreement and the Security Interest shall terminate on the date on which all payments under the Debentures have been made in full and all other Obligations have been paid or discharged. Upon such termination, the Secured Party, at the request and at the expense of the Company, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement.
12. Power of Attorney; Further Assurances.
(a) The Company authorizes the Secured Party, and does hereby make,
constitute and appoint it, and its respective officers, agents, successors or
assigns with full power of substitution, as the Company's true and lawful
attorney-in-fact, with power, in its own name or in the name of the Company,
to, after the occurrence and during the continuance of an Event of Default,
(i) endorse any notes, checks, drafts, money orders, or other instruments of
payment (including payments payable under or in respect of any policy of
insurance) in respect of the Intellectual Property that may come into
possession of the Secured Party; (ii) to sign and endorse any UCC financing
statement or any invoice, freight or express bill, bill of lading, storage or
warehouse receipts, drafts against debtors, assignments, verifications and
notices in connection with accounts, and other documents relating to the
Intellectual Property; (iii) to pay or discharge taxes, liens, security
interests or other encumbrances at any time levied or placed on or threatened
against the Intellectual Property; (iv) to demand, collect, receipt for,
compromise, settle and sue for monies due in respect of the Intellectual
Property; and (v) generally, to do, at the option of the Secured Party, and at
the Company's expense, at any time, or from time to time, all acts and things
which the Secured Party deems necessary to protect, preserve and realize upon
the Intellectual Property and the Security Interest granted therein in order
to effect the intent of this Agreement, the Debentures and the Warrants, all
as fully and effectually as the Company might or could do; and the Company
hereby ratifies all that said attorney shall lawfully do or cause to be done
by virtue hereof. This power of attorney is coupled with an interest and
shall be irrevocable for the term of this Agreement and thereafter as long as
any of the Obligations shall be outstanding.
(b) On a continuing basis, the Company will make, execute, acknowledge, deliver, file and record, as the case may be, in the proper filing and recording places in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule C, attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a security interest in all the Intellectual Property.
(c) The Company hereby irrevocably appoints the Secured Party as the Company's attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Intellectual Property without the signature of the Company where permitted by law.
13. Notices. All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given when (i) if delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of proof of sending thereof, (iii) if sent by nationally recognized overnight delivery service (receipt requested), the next business day or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses:
If to the Company:
Conectisys Corporation
24730 Avenue Tibbitts
Suite 130
Valencia, California 91355
Attention: Chief Executive Officer
Telephone: 661-295-6763
Facsimile: 661-295-5981
Email: rspigno@conectisys.com
With copy to:
Rutan & Tucker, LLP
611 Anton Boulevard
Suite 1400
Costa Mesa, California 92626
Attention: Larry Cerutti, Esq.
Telephone: 714-641-3450
Facsimile: 714-546-9035
Email: lcerutti@rutan.com
If to the Secured Party:
AJW Partners, LLC
AJW Offshore, Ltd.
AJW Qualified Partners, LLC
New Millennium Capital Partners II, LLC
1044 Northern Boulevard
Suite 302
Roslyn, New York 11576
Attention: Corey Ribotsky
Facsimile: 516-739-7115
With copies to:
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
Attention: Gerald J. Guarcini, Esquire
Facsimile: 215-864-8999
14. Other Security. To the extent that the Obligations are now or hereafter secured by property other than the Intellectual Property or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder.
15. Miscellaneous.
(a) No course of dealing between the Company and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Debentures shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.
(b) All of the rights and remedies of the Secured Party with respect to the Intellectual Property, whether established hereby or by the Debentures or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently.
(c) This Agreement and the Security Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto. Except as specifically set forth in this Agreement, no provision of this Agreement may be modified or amended except by a written agreement specifically referring to this Agreement and signed by the parties hereto.
(d) In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction.
(e) No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise.
(f) This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns.
(g) Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.
(h) This Agreement shall be construed in accordance with the laws of the State of New York, except to the extent the validity, perfection or enforcement of a security interest hereunder in respect of any particular Intellectual Property which are governed by a jurisdiction other than the State of New York in which case such law shall govern. Each of the parties hereto irrevocably submit to the exclusive jurisdiction of any New York State or United States Federal court sitting in Manhattan county over any action or proceeding arising out of or relating to this Agreement, and the parties hereto hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in such New York State or Federal court. The parties hereto agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The parties hereto further waive any objection to venue in the State of New York and any objection to an action or proceeding in the State of New York on the basis of forum non conveniens.
(i) EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
(j) This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written.
CONECTISYS CORPORATION
By: /S/ ROBERT A. SPIGNO Robert A. Spigno Chief Executive Officer |
AJW PARTNERS, LLC
By: SMS Group, LLC
By: /S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
AJW OFFSHORE, LTD.
By: First Street Manager II, LLC
By: /S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
AJW OFFSHORE, LTD.
By: First Street Manager II, LLC
By: /S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
NEW MILLENNIUM CAPITAL PARTNERS II, LLC
By: First Street Manager II, LLC
By: /S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
SCHEDULE A
Principal Place of Business of the Company:
24730 Avenue Tibbitts, Suite 130, Valencia, California 91355
Locations Where Intellectual Property is Located or Stored:
24730 Avenue Tibbitts, Suite 130, Valencia, California 91355
Bank of America
23929 Valencia Blvd.
Valencia, CA 91355
Safe Deposit Box No.: 5639L
List of Subsidiaries of the Company:
TechniLink Technology Manufacturing, Inc. (conditionally dissolved)
eEnergyService.com
United Telemetry Company
SCHEDULE B
A. Licenses, Patents and Patent Licenses
Registration or
Patent Application or Registration No. Country Filing Date None. B. Trademarks and Trademark Licenses Registration or Trademark Application or Registration No. Country Filing Date H-Net 75/653178 USA 3-3-99 H-Net 75/653026 USA 3-3-99 H-Net 75/653027 USA 3-3-99 C. Copyrights and Copyright Licenses Registration or Name Application or Registration No. Country Filing Date None. D. Trade Secrets and Trade Secret Licenses |
Registration or
Name Application or Registration No. Country Filing Date
H-Net(TM) System N/A N/A N/A
SCHEDULE C
Jurisdictions:
Conectisys Corp. (California)
Conectisys Corp. (Colorado)
TechniLink Technology Manufacturing, Inc. (conditionally dissolved)
(California)
eEnergy Service.com (Nevada)
eEnergy Service.com (California)
United Telemetry Company (Nevada)
<pre>
Exhibit 10.32
PROMISSORY NOTE
Borrower: Conectisys Corp. of Valencia, CA
Lender: Robert Spigno
Principal Amount: $36,000.00
FOR VALUE RECEIVED, Conectisys Corp. promises to pay to Robert Spigno at such address as may be provided in writing to Conectisys Corp., the principal sum of thirty-six thousand ( $36,000.00 ) USD, with interest payable on the unpaid principal at the rate of 18.0 percent per annum, calculated monthly not in advance.
This Note is repayable in full within 60 days of Robert Spigno providing Conectisys Corp. with written notice of demand.
At any time while not in default under this Note, Conectisys Corp. may pay the outstanding balance then owing under this Note to Robert Spigno without further bonus or penalty.
This Note will be construed in accordance with and governed by the laws of the State of California.
All costs, expenses and expenditures including, and without limitation, the complete legal costs incurred by Robert Spigno in enforcing this Note as a result of any default by Conectisys Corp., will be added to the principal then outstanding and will immediately be paid by Conectisys Corp..
This Note will enure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of Conectisys Corp. and Robert Spigno. Conectisys Corp. waives presentment for payment, notice of non-payment, protest and notice of protest.
IN WITNESS WHEREOF Conectisys Corp. has duly affixed its signature by a duly authorized officer under seal on this 1st day of September, 2003.
SIGNED, SEALED, AND DELIVERED this 1st day of September, 2003.
Conectisys Corp.
/S/ Patricia Spigno --------------------- |
<pre>
Exhibit 10.33
PROMISSORY NOTE
Borrower: Conectisys Corp. of Valencia, CA
Lender: Patricia Spigno
Principal Amount: $50,000.00
FOR VALUE RECEIVED, Conectisys Corp. promises to pay to Patricia Spigno at such address as may be provided in writing to Conectisys Corp., the principal sum of Fifity thousand ( $50,000.00 ) USD, with interest payable on the unpaid principal at the rate of 18.0 percent per annum, calculated monthly not in advance.
This Note is repayable in full within 60 days of Patricia Spigno providing Conectisys Corp. with written notice of demand.
At any time while not in default under this Note, Conectisys Corp. may pay the outstanding balance then owing under this Note to Patricia Spigno without further bonus or penalty.
This Note will be construed in accordance with and governed by the laws of the State of California.
All costs, expenses and expenditures including, and without limitation, the complete legal costs incurred by Patricia Spigno in enforcing this Note as a result of any default by Conectisys Corp., will be added to the principal then outstanding and will immediately be paid by Conectisys Corp..
This Note will enure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of Conectisys Corp. and Patricia Spigno. Conectisys Corp. waives presentment for payment, notice of non-payment, protest and notice of protest.
IN WITNESS WHEREOF Conectisys Corp. has duly affixed its signature by a duly authorized officer under seal on this 1st day of September, 2003.
SIGNED, SEALED, AND DELIVERED this 1st day of September, 2003.
Conectisys Corp.
/S/ Robert Spigno -------------------- |
<pre>
Exhibit 10.34
PROMISSORY NOTE
Borrower: Conectisys Corp. of Valencia, CA
Lender: Black Dog Ranch, LLC.
Principal Amount: $170,000.00
FOR VALUE RECEIVED, Conectisys Corp. promises to pay to Black Dog Ranch, LLC. at such address as may be provided in writing to Conectisys Corp., the principal sum of one hundred seventy thousand ( $170,000.00 ) USD, with interest payable on the unpaid principal at the rate of 18.0 percent per annum, calculated monthly not in advance.
This Note will be repaid in full on September 1, 2004.
At any time while not in default under this Note, Conectisys Corp. may pay the outstanding balance then owing under this Note to Black Dog Ranch, LLC. without further bonus or penalty.
This Note will be construed in accordance with and governed by the laws of the State of California.
All costs, expenses and expenditures including, and without limitation, the complete legal costs incurred by Black Dog Ranch, LLC. in enforcing this Note as a result of any default by Conectisys Corp., will be added to the principal then outstanding and will immediately be paid by Conectisys Corp..
This Note will enure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of Conectisys Corp. and Black Dog Ranch, LLC.. Conectisys Corp. waives presentment for payment, notice of non-payment, protest and notice of protest.
IN WITNESS WHEREOF Conectisys Corp. has duly affixed its signature by a duly authorized officer under seal on this 1st day of September, 2003.
SIGNED, SEALED, AND DELIVERED
this 1st day of September, 2003.
Conectisys Corp.
/S/ Robert Spigno --------------------- |
<pre>
Exhibit 10.48
AMENDMENT NO. 1 TO SECURITIES PURCHASE AGREEMENT
This Amendment No. 1 to Securities Purchase Agreement, dated as of March 4, 2004, shall serve to amend the Securities Purchase Agreement (the "Agreement"), dated as of November 25, 2003, by and among Conectisys Corporation, a Colorado corporation (the "Company"), with its headquarters located at 24730 Avenue Tibbitts, Suite 130, Valencia, California 91355, and each of the Buyers set forth in the Agreement.
1. The undersigned parties hereby agree to amend Section 1(d) of the Agreement to provide that the Buyers will fund $250,000 on the date hereof, instead of the final $50,000 to be funded as provided in the Agreement.
2. The Company agrees to use the proceeds of the funding referred to in Paragraph 1 as set forth on Schedule A hereto.
3. All other provisions of the Agreement shall remain in full force and effect.
[Signature Page Follows]
ACCEPTED AND AGREED:
CONECTISYS CORPORATION
By:/S/ ROBERT A. SPIGNO
Robert A. Spigno
Chief Executive Officer
|
AJW PARTNERS, LLC
By: SMS Group, LLC
By:/S/ COREY S. RIBOTSKY
Corey S. Ribotsky
Manager
|
AJW OFFSHORE, LTD.
By: First Street Manager II, LLC
By:/S/ COREY S. RIBOTSKY Corey S. Ribotsky Manager |
AJW QUALIFIED PARTNERS, LLC
By: AJW Manager, LLC
By:/S/ COREY S. RIBOTSKY
Corey S. Ribotsky
Manager
|
<pre>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
ConectiSys Corporation
We hereby consent to the use in the prospectus constituting a part of the foregoing Registration Statement on Form SB-2 of our report dated January 6, 2004, relating to the consolidated financial statements of ConectiSys Corporation appearing in the Company's Annual Report on Form 10-KSB as of September 30, 2003 and for the years ended September 30, 2003 and 2002.
We also consent to the reference to us under the caption "Experts" in the prospectus constituting a part of the foregoing Registration Statement on Form SB-2.
/S/ Hurley & Company
Hurley & Company
Granada Hills, California
June 25, 2004
|