<pre>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2008
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM__________ TO ___________
Commission File Number 33-3560 D
________________________
CONECTISYS CORPORATION
(Name of small business issuer in its charter)
Colorado 84-1017107
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25115 Avenue Stanford, Suite 320, Valencia, California 91355
(Address of Principal Executive Offices)
(661) 295-6763
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | | Accelerated filer | |
Non-accelerated filer | | Smaller reporting company |X|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No | |
As of May 19, 2008, there were 28,820,358,267 shares of the issuer's common
stock, no par value per share, outstanding.
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet as of March 31, 2008 (unaudited)........F-1
Condensed Consolidated Statements of Operations for the Six
Months Ended March 31, 2008 (unaudited) and 2006 (unaudited)
and the Cumulative Period From December 31, 1990 (Inception)
Through March 31, 2008 (unaudited).....................................F-3
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Cumulative Period From
December 31, 1990 (Inception) Through March 31, 2008 (unaudited).......F-4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 2008 (unaudited) and 2006 (unaudited) and
the Cumulative Period From December 31, 1990 (Inception) Through
March 31, 2008 (unaudited)............................................F-17
Notes to Condensed Consolidated Financial Statements (unaudited)...........F-20
Item 2. Management's Discussion and Analysis or Plan of Operation............2
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........10
Item 4. Controls and Procedures.............................................10
Item 4T. Controls and Procedures.............................................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........10
Item 3. Defaults Upon Senior Securities.....................................11
Item 4. Submission of Matters to a Vote of Security Holders.................12
Item 5. Other Information...................................................12
Item 6. Exhibits............................................................13
Signatures...................................................................14
Exhibits Filed with this Report on Form 10-QSB
ITEM 1. FINANCIAL STATEMENTS.
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2008 and September 30, 2007
<table>
March 31, Sept. 30,
2008 2007
Unaudited Audited
-------------- --------
Assets
Current assets
Cash and cash equivalents - 40,834
Note Receivable $ 95,000 -
Employee advance 12,756 1,000
Prepaid expenses 25,253 87,553
-------------- --------
Total current assets 133,009 129,387
Property and equipment, net of accumulated
depreciation of $388,926 87,791 98,183
Other assets
Deposits 4,698 4,698
Loan fees, net of accumulated
amortization of $508,077 23,703 23,392
---------- -------
Total assets $ 249,201 257,660
========== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<page>F-1
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2008 and September 30, 2007
March 31, Sept. 30,
2008 2007
Unaudited Audited
------------------ ----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Bank overdraft $ 7,139 -
Accounts payable 242,231 208,538
Accrued compensation 2,262,599 2,070,615
Due to officers 587 537
Accrued interest payable 447,842 360,614
Other current liabilities 109,677 14,352
Notes payable and current portion of
long-term debt 2,028,909 2,072,303
----------------- ---------
Total current liabilities 5,098,983 4,726,959
Long-term debt, net of current portion 4,393,899 3,789,300
Commitments and contingencies - -
SHAREHOLDERS' DEFICIT
Preferred stock - Class A, $1.00 par value;
1,000,000 shares authorized, 215,865 shares
issued and outstanding 215,865 215,865
Convertible preferred stock - Class B, $1.00
par value; 1,000,000 shares authorized,
-0- shares issued and outstanding 0 0
Common stock - no par value; 50,000,000,000
shares authorized, 28,820,358,267 and 23,177,633,821
respectfully shares issued and outstanding 30,198,396 29,538,421
Additional paid-in capital:
Convertible preferred stock - Class B, $1.00 par
value, 1,000,000 stock options exercisable 100,000 100,000
Common stock - no par value 67,620,000
warrants exercisable 1,373,082 1,372,514
Accumulated deficit during development stage (41,131,025) (39,485,599)
------------ ------------
Total shareholders' deficit (9,221,182) (8,258,599)
------------ ------------
Total liabilities and shareholders' deficit $ 249,201 257,660
================= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</table>
<page>F-2
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended March 31, 2008 and 2007
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2008
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
2008 2007 2008 2007 2008
Unaudited Unaudited Unaudited Unaudited Unaudited
Revenues $ 0 $ 0 $ 0 $ 0 $ 524,382
Cost of prototypes and samples 37,063 18,180 48,765 48,345 1,616,026
----------------- ----------------- ----------------- ----------------- -----------
Gross loss (37,063) (18,180) (48,765) (48,345) (1,091,644)
General and administrative expenses 378,278 333,561 761,912 672,304 26,304,627
Bad debt 0 0 0 0 1,680,522
Write-off of deposits
and intangible assets 0 0 0 0 1,331,714
----------------- ----------------- ----------------- ----------------- -----------
Loss from operations (415,341) (351,741) (810,677) (720,649) (30,408,507)
Other income (expenses)
Forgiveness of debt 0 0 0 0 504,462
Settlement 0 0 0 0 (125,000)
Other income 0 0 0 0 12,072
Interest income 0 875 0 3,753 111,542
Interest expense (431,019) (581,360) (834,949) (907,693) (11,288,094)
Minority interest 0 0 0 0 62,500
----------------- ----------------- ----------------- ----------------- -----------
Net loss $ (846,360)$ (932,226)$ (1,645,626) $ (1,624,589)$ (41,131,025)
================= ================= ================= ================= ============
Weighted-average shares outstanding 2,534,887,668 17,975,000,642 55,150,934,791 16,420,346,848
Net loss per share, basic and diluted (0.00) (0.00) (0.00) (0.00)
The accompanying notes are an integral part of these consolidated financial statements.
</table>
<page>F-3
<table>
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A and B No Par Value Paid in Subscription Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
---------- ---------- ----------- ---------- ---------- ----------- ----------- -----------
Balance, Dec. 1, 1990
(re-entry
development stage) 0 $ 0 10,609 $ 1,042,140 $ 0 $ 0 $(1,042,140)$ 0
Shares issued in exchange for:
Cash, Aug. 1993 0 0 1,000 1,000 0 0 0 1,000
Capital contribution,
Aug. 1993 0 0 2,000 515 0 0 0 515
Services, Mar. 1993 0 0 2,000 500 0 0 0 500
Services, Mar. 1993 0 0 1,200 600 0 0 0 600
Net loss for the year 0 0 0 0 0 0 (5,459) (5,459)
-------- ---------- ------------- -------- --------- ----------- ---------- ---------
Balance, November 30, 1993 0 0 16,809 1,044,755 0 0 (1,047,599) (2,844)
Shares issued in exchange for:
Services, May 1994 0 0 2,400 3,000 0 0 0 3,000
Cash, Sep. 1994 0 0 17,771 23,655 0 0 0 23,655
Services, Sep. 199 0 0 8,700 11,614 0 0 0 11,614
Cash, Sep. 1994 0 0 3,000 15,000 0 0 0 15,000
Cash, Oct. 1994 16,345 A 16,345 0 0 0 0 0 16,345
Cash, Sep. and Oct. 1994 0 1,320 33,000 0 0 0 33,000
Net loss for the year 0 0 0 0 0 0 (32,544) (32,544)
---------- ---------- ------------- ---------- -------- ---------- ------------ ---------
Balance, November 30, 1994 16,345 $ 16,345 50,000 $ 1,131,024 $ 0 $ 0 $(1,080,143) $ 67,226
The accompanying notes are an integral part of these consolidated financial statements.
<page>F-4
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Cash, February 13, 1995 - $ - 1,160 $ 232,000 $ - $ - $ - $ 232,000
Debt repayment, February 13,
1995 - - 2,040 408,000 - - - 408,000
Debt repayment, February 20,
1995 - - 4,778 477,810 - - - 477,810
Acquisition of assets, CIPI
February, 1995 - - 28,750 1,950,000 - - - 1,950,000
Acquisition of assets, April 5,
1995 - - 15,000 - - - - -
Cash and services, April and
May 1995 - - 16,000 800,000 - - - 800,000
Cash, June 1, 1995 - - 500 30,000 - - - 30,000
Acquisition of assets and
services, September 26, 1995 - - 4,000 200,000 - - - 200,000
Cash, September 28, 1995 - - 41 3,000 - - - 3,000
Acquisition of assets,
September 1995 - - 35,000 1,750,000 - - - 1,750,000
Return of assets, CIPI
September, 1995 - - (27,700) (1,950,000) - - - (1,950,000)
Net loss for the year - - - - - - (2,293,867) (2,293,867)
--------- ----------- -------- ----------- -------- ------------ ---------- -----------
Balance,
November 30, 1995 16,345 $ 16,345 129,569 $ 5,031,834 $ - $ - $(3,374,010)$ 1,674,169
Shares issued in exchange for:
Cash, February, 1996 - - 1,389 152,779 - - - 152,779
Debt repayment, February 1996 - - 10,000 612,000 - - - 612,000
Services, February, 1996 - - 3,160 205,892 - - - 205,892
Cash, March, 1996 - - 179 25,000 - - - 25,000
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-5
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares returned and canceled,
March, 1996 - $ - (15,000)$ - $ - $ - $ - $ -
Services, April, 1996 - - 13 2,069 - - - 2,069
Services, September, 1996 4,155 4,155 586 36,317 - - - 40,472
Services, October, 1996 - - 6,540 327,000 - - - 327,000
Debt repayment, November, 1996 - - 2,350 64,330 - - - 64,330
Net loss for the year - - - - - - (2,238,933) (2,238,933)
--------- ---------- ---------- ----------- ---------- --------- ------------ -----------
Balance,
November 30, 1996 20,500 $ 20,500 138,786 $ 6,457,221 $ - $ - $ (5,612,943) $ 864,778
Shares issued in exchange for:
Services, March, 1997 - - 228 6,879 - - - 6,879
Services, April, 1997 - - 800 13,120 - - - 13,120
Services, July, 1997 - - 1,500 16,200 - - - 16,200
Cash, July, 1997 - - 15,000 300,000 - - - 300,000
Services, August, 1997 - - 5,958 56,000 - - - 56,000
Adjustment for partial shares due
to reverse stock split (1:20) - - 113 - - - - -
Services, October, 1997 - - 1,469,666 587,865 - - - 587,865
Debt repayment, October, 1997 - - 1,540,267 620,507 - - - 620,507
Cash, October, 1997 - - 1,500,000 281,250 - - - 281,250
Services, November, 1997 - - 4,950 10,538 - - - 10,538
Net loss for the year - - - - - - (2,739,268) (2,739,268)
--------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Balance,
November 30, 1997 20,500 $ 20,500 4,677,268 $ 8,349,580 $ - $ - $(8,352,211)$ 17,869
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-6
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, December, 1997
through November, 1998 - $ - 2,551,610 $ 2,338,264 $ - $ - $ - $ 2,338,264
Debt repayment, April, 1998
through September, 1998 - - 250,000 129,960 - - - 129,960
Cash, January, 1998 through
July, 1998 - - 4,833,334 1,139,218 - - - 1,139,218
Acquisition of assets,
July, 1998 - - 300,000 421,478 - - - 421,478
Acquisition of remaining 20%
minority interest in
subsidiary, July, 1998 - - 50,000 59,247 - - - 59,247
Services, November, 1998 60,000 60,000 - - - - - 60,000
Net loss for the year - - - - - - (4,928,682) (4,928,682)
--------- ---------- ---------- ----------- ---------- ------------ ---------- -----------
Balance,
November 30, 1998 80,500 $ 80,500 12,662,212 $12,437,747 $ - $ - $(13,280,893)$ (762,646)
Shares issued in exchange for:
Shares returned and canceled,
December, 1998 - - (1,350,000) (814,536) - - - (814,536)
Services, December, 1998
through September, 1999 - - 560,029 349,454 150,000 - - 499,454
Cash, December, 1998
through September, 1999 - - 1,155,800 129,537 - - - 129,537
Debt repayment, Sept., 1999 39,520 39,520 960,321 197,500 100,000 - - 337,020
Net loss for the period - - - - - - (1,323,831) (1,323,831)
--------- ---------- ---------- ----------- -------- ------------ ---------- -----------
Balance,
September 30, 1999 120,020 $ 120,020 13,988,362 $12,299,702 $250,000 $ - $(14,604,724)$1,935,002)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-7
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares re-acquired and
canceled, October, 1999 - $ - (17,500)$ (12,000)$ - $ - $ - $ (12,000)
Shares issued in exchange for:
Services, October, 1999 through
September, 2000, valued from
$0.25 to $0.80 per share - - 2,405,469 990,949 - - - 990,949
Retainers, debt and accrued
liabilities, October, 1999
through September, 2000, valued
from $0.25 to $1.57 per share - - 2,799,579 1,171,638 - - - 1,171,638
Cash, October, 1999 through
September, 2000, with subscription
prices ranging from $0.25 to
$0.66 per share - - 2,295,482 839,425 - (15,450) - 823,975
Issuance of 563,500 consultant
stock options, March, 2000,
at an exercise price of $2.00
per share - - - - 214,130 - - 214,130
Reduction of exercise prices
on 2,600,000 officer and employee
common stock options, March, 2000,
to $0.38 and approximately $0.39
per share - - - - 1,113,610 - 1,113,610
Exercise of 2,056,346 common and
20,000 preferred officer stock
options, May, 2000, with
common stock exercise prices
ranging from $0.15 to approx.
$0.39 per share, in exchange
for officer debt 20,000 20,000 2,056,346 897,707 (407,735) - - 509,972
Issuance of 500,000 consultant
stock options, September, 2000,
with floating exercise prices
set at 15% below current market - - - - 65,000 - - 65,000
Net loss for the year - - - - - - (3,812,140) (3,812,140)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2000 140,020 $ 140,020 23,527,738 $16,187,421 $1,235,005 $ (15,450)$(18,416,864)$( 869,868)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-8
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2000 through
September, 2001, valued from
$0.11 to $0.40 per share - $ - 3,471,007 $ 572,790 $ - $ - $ - $ 572,790
Retainers, debt and accrued
liabilities, October, 2000
through September, 2001, valued
from $0.11 to $0.43 per share - - 3,688,989 487,121 - - - 487,121
Cash, October, 2000 through
March, 2001, with subscription
prices ranging from $0.075 to
$0.083 per share - - 1,045,500 78,787 - - - 78,787
Collection of stock subscription
receivable, October, 2000,
on 61,800 shares - - - - - 15,450 - 15,450
Exercise of 400,000 common
stock options, January, 2001,
at a exercise price of $0.085 per
share, in exchange for debt - - 400,000 86,000 (52,000) - - 34,000
Issuance of 1,000,000 common
stock warrants, April, 2001,
at an exercise price of $0.192
per share, in conjunction with
$300,000 principal value of
8% convertible debt - - - - 77,228 - - 77,228
Issuance of 2,000,000 consultant
stock options, September, 2001,
at a exercise price of $0.13 per
share - - - - 115,000 - - 115,000
Beneficial conversion option,
April, 2001 through September,
2001, pertaining to $300,000
principal value and accrued
interest on 8% convertible debt - - - - 155,027 - - 155,027
Net loss for the year - - - - - - (2,154,567) (2,154,567)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2001 140,020 $ 140,020 32,133,234 $17,412,119 $1,530,260 $ - $(20,571,431)$(1,489,032)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-9
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2001 through
September, 2002, valued from
$0.02 to $0.25 per share - $ - 2,180,000 $ 179,916 $ - $ - $ - $ 179,916
Debt and accrued liabilities,
October, 2001 through September,
2002, with common shares
valued from $0.01 to $0.15 per
share and preferred A shares
valued at $1.00 per share 60,000 60,000 10,948,077 428,563 - - - 488,563
Cash, October, 2001 through
September, 2001, with prices
ranging from $0.01 to $0.083
per share - - 5,833,334 200,000 - - - 200,000
Exercise of 550,000 common stock
options by a consultant at a
exercise price of $0.13 per share,
in exchange for debt - - 550,000 103,125 (31,625) - - 71,500
Issuance of 3,750,000 warrants,
April, 2002 through June, 2002,
at an exercise price of $0.045
per share, in conjunction with
$750,000 principal value of 12%
convertible debt - - - - 100,087 - - 100,087
Beneficial conversion option,
April 2002, through June, 2002,
pertaining to $750,000 principal
value of 12% convertible debt - - - - 649,913 - - 649,913
Conversion of $93,130 principal
value of 12% convertible debt
along with $6,916 accrued
interest, net of $69,233
convertible debt discount - - 12,667,178 111,515 (80,702) - - 30,813
Net loss for the year - - - - - - (2,346,732) (2,346,732)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2002 200,020 $ 200,020 64,311,823 $18,435,238 $2,167,933 $ - $(22,918,163)$(2,114,972)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-10
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October, 2002 through
July, 2003, valued from
$0.0012 to $0.0100 share - $ - 31,500,000 $ 134,000 $ - $ - $ - $ 134,000
Debt and accrued liabilities,
October, 2002 through September,
2003, valued from $0.0010 to
$0.0512 per share, including
transfer of $155,027
beneficial conversion option 162,134,748 704,774 (155,027) - - 549,747
Cash, November, 2002 through
September, 2003, with prices
ranging from $0.0010 to $0.100
per share - - 128,500,000 180,000 - - - 180,000
Issuance of 2,500,000 warrants,
November, 2002 through May, 2003,
at an exercise price of $0.005
per share, in conjunction with
$500,000 principal value of 12%
convertible debt - - - - 9,816 - - 9,816
Beneficial conversion option,
November, 2002, through May, 2003,
pertaining to $500,000 principal
value of 12% convertible debt - - - - 490,184 - - 490,184
Conversion of $193,665 principal
value of 12% convertible debt
along with $34,355 accrued
interest, net of $52,340
convertible debt discount - - 103,778,301 353,525 (177,845) - - 175,680
Net loss for the year - - - - - - (2,386,875) (2,386,875)
--------- ---------- ----------- ----------- ---------- ---------- ------------ -----------
Balance,
September 30, 2003 200,020 $ 200,020 490,224,872 $19,807,537 $2,335,061 $ - $(25,305,038)$(2,962,420)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-11
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ------------ -----------
Shares issued in exchange for:
Services, October 2003 through
August 2004 valued from
$0.0008 to $0.0026 per share 0 $ 0 57,300,000 $ 78,400 $ 0 $ 0 $ 0 $ 78,400
Issuance of 7,000,000 warrants
November 2003 through
September 2004 at exercise
Prices ranging from $0.002 to
$0.005 per share, in
conjunction with $2,000,000
principal value of 12%
convertible debt 0 0 0 0 9,447 0 0 9,447
Debt and accrued liabilities
December 2003 with
preferred stock class A
valued at $1.00 per share 15,845 A 15,845 0 0 0 0 0 15,845
Debt and accrued liabilities
November 2003 to September
2004 with common shares
valued from $0.001 to $0.0025
per share 0 0 156,625,000 163,575 0 0 0 163,575
Cash, November 2003 through
March 2004 with prices of
approximately $0.0010 0 0 74,670,000 75,000 0 0 0 75,000
per share
Re-characterization of beneficial
conversion option as derivative
conversion option , October 2003
pertaining to $963,205 of
convertible debt at
September 30, 2003 0 0 0 0 (881,550) 0 0 (881,550)
Conversion of $218,115 principal
value of 12% convertible debt
$327,172 of derivative
conversion option
along with $49,008 accrued
interest, net of $28,571
convertible debt discount 0 0 352,352,250 565,724 0 0 565,724
Net loss for the year 0 0 0 0 0 0 (4,228,827)(4,228,827)
--------- ---------- ----------- ----------- ----------- ---------- ------------ -----------
Balance, September 30, 2004 215,865 $215,865 1,131,172,122 $20,690,236 $1,462,958 $ 0 $(29,533,865)$(7,164,806)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-12
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
--------- ---------- ---------- ----------- ---------- ---------- ----------- ------------
Shares issued in exchange for:
Cash, January 2005 with a price
of $0.00125 per share 0 $ 0 4,000,000 $ 5,000 $ 0 $ 0 $ 0 % 5,000
Debt, accrued liabilities
and prepaid retainer
October 2004 to September
2005 with common shares
valued from $0.0004 to $0.0010
per share 0 0 591,300,000 473,362 0 0 0 473,362
Services, December 2004 through
August 2005 valued from
$0.0006 to $0.0010 per share 0 0 52,000,000 46,200 0 0 0 46,200
Issuance of 2,800,000 warrants
November 2004 through
September 2005 at an exercise
price of $0.0039 per share, in
conjunction with $1,400,000
principle value of 12%
convertible debt 0 0 0 0 3,756 0 0 3,756
Conversion of $2,529,378 principal
value of convertible debt,
$3,794,067 of derivative
conversion option
along with $104,410 accrued
interest, net of $973,565
convertible debt discount 0 0 5,610,392,876 5,454,290 0 0 5,454,290
Net loss for the year 0 0 0 0 0 0 (3,132,683) (3,132,683)
----------- -------- ------------- ----------- --------- ---------- ---------- -----------
Balance, September 30, 2005 215,865 $215,865 7,388,864,998 $26,669,088 $1,466,714$ 0 $(32,666,548) $(4,314,881)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-13
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
Deficit
Accumulated Total
Preferred Stock Common Stock Additional Stock During the Shareholders'
Class A No Par Value Paid-in Subscript. Development Equity
Shares Value Shares Value Capital Receivable Stage (Deficit)
-------- -------- ------------ ---------- --------- ---------- ----------- ------------
Shares issued in exchange for:
Cash, April through July 2006
with prices ranging from
$0.00015 to $0.00050 per share 0 $ 0 533,333,333 $125,000 $ 0 $ 0 $ 0 $ 125,000
Services, March 2006 valued
at approximately $0.00071 per share 0 0 4,368,872 3,100 0 0 0 3,100
Issuance of 20,320,000 warrants
September 2006 at an exercise
price of $0.0009 per share, in
conjunction with $1,270,000
principal value of 6%
convertible debt 0 0 0 0 4,551 0 0 4,551
Conversion of $547,376 principal
value of 8% and 12% convertible debt,
$821,065 of derivative conversion
option, along with $8,300 accrued
interest, net of $243,177
convertible debt discount 0 0 6,458,227,580 1,133,564 0 0 0 1,133,564
Net loss for the period 0 0 0 0 0 0 (3,052,297) (3,052,297)
---------- ---------- ------------- ----------- ---------- ------ ----------- ------------
Balance, September 30, 2006 215,865 $ 215,865 14,384,794,783 $27,930,753 $1,471,265 $ 0$(35,718,845) $(6,100,962)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-14
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
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:
Accrued liabilities, November,
2006, at a price of
approximately $0.0005 per share 0 $ 0 250,000,000 $ 124,165 $ 0 $ 0 $ 0 $ 124,165
Services, February, 2007, valued
at $0.0003 per share 0 0 75,000,000 22,500 0 0 0 22,500
Issuance of 19,000,000 warrants
February 2007 through September,
2007, at an exercise price of
$0.0009 per share, in conjunction
With $950,000 principal value of 6%
convertible debt 0 0 0 0 1,249 0 0 1,249
Conversion of $409,864 principal
value of 8% and 12% convertible
debt, $614,795 of derivative
conversion option, along with
$436,344 accrued interest 0 0 8,467,839,038 1,461,003 0 0 0 1,461,003
Net loss for the year 0 0 0 0 0 0 (3,766,554) (3,766,554)
--------- --------- -------------- ---------- --------- ------- ----------- -----------
Balance, September 30, 2007 215,865 $ 215,865 23,177,633,821 $29,538,421 $1,472,514 $ 0 $(39,485,399)$(8,258,599)
========= ========= ============== ========== ========= ======= ========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-15
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Cumulative Period from December 1, 1990 (Inception) Through March 31, 2008
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, October through March 2008
with prices ranging from
$0.00005 to $0.00050 per share 0 $ 0 1,000,000,000 $ 60,000 $ 0 $ 0 $ 0 $ 60,000
Services, November 2007, valued
at $0.0003 per share 0 0 25,000,000 2,500 0 0 0 2,500
Issuance o 16,000,000 warrants
October 2007 through March,
2008, at an exercise price of
$0.0009 per share, in conjunction
With $415,000 principal value of 6%
convertible debt 0 0 0 0 568 0 0 568
Conversion of $220,838 principal
value of 8% and 12% convertible
debt, $331,256 of derivative
conversion option, along with
$45,383 accrued interest 0 0 4,617,724 444 597,475 0 0 0 597,475
Net loss for the year 0 0 0 0 0 0 (1,645,626) (1,645,626)
--------- --------- -------------- ---------- --------- ------- ----------- -----------
Balance, March 31, 2008 215,865 $ 215,865 28,820,358,267 $30,198,396 $ 1,473,082 $ 0 $(41,131,025) $ (9,221,182)
========= ========= ============== ========== ========= ======= =========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>F-16
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2008 and 2007
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2008
<table>
Dec. 1, 1990
(Inception)
6 Months Ended 6 Months Ended Through
March 31, March 31, March 31,
2008 2007 2008
Unaudited Unaudited Unaudited
--------------- --------------- --------------
Cash flows from operating activities:
Net loss $ (1,645,626)$ (1,624,589))$ (41,131,025)
Adjustments to reconcile net (loss)
to net cash used in (provided by)
operating activities:
Provision for bad debt write-offs 0 0 1,422,401
Depreciation and amortization
Of property 11,902 10,692 1,778,528
Stock issued for services 2,500 22,500 7,673,473
Stock issued for interest 0 0 535,591
Settled damages 0 0 (25,000)
Minority interest 0 0 (62,500)
Write-off of deposits and
Intangible assets 0 0 1,331,714
Amortization of loan fees
and note discounts 375,414 501,491 5,340,931
Mark-to-market of derivative
conversion option 370,146 175,548 3,762,403
Forgiveness of debt 0 0 (504,462)
Changes in:
Accounts/employee advances
receivable (102,555) 0 (107,756)
Prepaid expenses and deposits 58,100 40,763 103,040
Increase (decrease) in liabilities
Accounts payable 51,290 (46,233) 2,529,861
Accrued compensation 191,984 16,108 3,434,607
Due to/from officers 50 42 631,348
Accrued interest and other current
liabilities 164,955 230,618 1,595,403
----------------- ----------------- -----------------
Total adjustments 1,123,786 984,289 29,439,582
----------------- ----------------- -----------------
Net cash used in
operating activities (521,848) (640,300) (11,691,443)
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-18
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2008 and 2007
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2008
Dec. 1, 1990
(Inception)
6 Months Ended 6 Months Ended Through
March 31, March 31, March 31,
2008 2007 2008
Unaudited Unaudited Unaudited
---------------- ---------------- --------------
Investing activities
Increase in notes receivable $ 0 $ 0 $ (1,322,500)
Cost of license & technology 0 0 (94,057)
Purchase of cds 0 333,119 0
Purchase of equipment (1,509) (7,494) (343,535)
----------------- ----------------- -----------------
Net cash provided by (used in)
investing activities (1,509) 325,625 (1,760,092)
Cash flows from financing activities
Common stock issuance 60,000 0 3,677,172
Stock warrant issuance 568 548 206,702
Preferred stock issuance 0 0 16,345
Proceeds from stock purchase 0 0 281,250
Loan fees from debt, other 0 (20,000) (599,555)
Proceeds from debt, related 0 0 206,544
Proceeds from debt, other 414,816 349,806 10,277,681
Payments on debt, related 0 0 (53,172)
Payments on debt, other 0 0 (604,536)
Decrease in stock
subscription receivable 0 0 35,450
Contributed capital 0 0 515
----------------- ----------------- -----------------
Net cash provided by
financing activities 475,384 330,354 13,444,396
----------------- ----------------- -----------------
Net increase (decrease) in cash and
cash equivalents (47,973) 15,679 ( 7,139)
Cash and cash equivalents at
beginning of period 40,834 19,936 0
----------------- ----------------- -----------------
Cash and cash equivalents at end
of period $ (7,139) $ 35,615 $ ( 7,139)
================= ================= =================
The accompanying notes are an integral part of these condensed consolidated financial statements.
<page>F-19
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 2008 and 2007
And the Cumulative Period
From December 31, 1990 (Inception) Through March 31, 2008
Dec. 1, 1990
(Inception)
6 Months Ended 6 Months Ended Through
March 31, March 31, March 31,
2008 2007 2008
Unaudited Unaudited Unaudited
-------------- -------------- --------------
Supplemental disclosures of
Cash flow information:
Cash paid for interest $ 3,422 $ 3,634 $ 709,719
Cash paid for income Taxes 0 0 20,050
Non-cash investing and financing activities
Common stock issued for
Note receivable 0 0 281,250
Prepaid expenses 0 0 264,748
Property and equipment 0 0 130,931
Licenses & technology 0 0 2,191,478
Acquisition of remaining
minority interest in subsidiary 0 0 59,247
Repayment of debt 552,093 277,500 14,590,223
Accrued services & interest 2,500 6,408 5,778,511
Preferred stock issued for
Services 0 75,845
Repayment of debt 0 0 119,520
Preferred stock options issued for
repayment of debt 0 0 100,000
Re-characterize beneficial
conversion option as debt 0 0 881,550
The accompanying notes are an integral part of these condensed consolidated financial statements.
</table>
<page>20
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements contained in the
Company's Annual Report on Form 10-KSB for the year ended September 30, 2007. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for the fair presentation have been included. The results
for the six months ended March 31, 2008 do not necessarily indicate the
results that may be expected for the full year.
Use of estimates
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could materially differ
from those estimates.
Net loss per common share - basic and diluted
Net loss per common share basic and diluted is based on the weighted average
number of common and common equivalent shares outstanding for the periods
presented. Common equivalent shares representing the common shares that would be
issued on exercise of convertible securities and outstanding stock options and
warrants reduced by the number of shares which could be purchased from the
related exercise proceeds are not included since their effect would be anti-
dilutive.
As of March 31, 2008, the Company had 28,820,358,267 shares of common stock
outstanding. If all of the Company's unexpired warrants and options were
exercised, and all the principal value and accrued interest on its outstanding
convertible debentures were converted, the Company's incremental common shares
(not included in the denominator of diluted loss per share because of their
anti-dilutive nature) would be as follows:
Class B preferred stock options 10,000,000
Convertible note holder - common stock warrants 57,620,000
--------------
Subtotal 67,620,000
Accrued officer compensation ($520,000),
convertible into common stock 616,823,358
Convertible note holder principal value
($3,072,634), accrued interest ($447,842)
assumed converted into common stock at
$0.000035 per share 100,585,028,571
---------------
Total potential common stock equivalents 101,269,471,929
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year's presentation.
<page>F-21
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 2. GOING CONCERN UNCERTAINTY
As of March 31, 2008, the Company had a deficiency in working capital of
approximately $7,000,000 and had incurred cumulative net losses since inception
of approximately $41,100,000, which raise substantial doubt about the Company's
ability to continue as a going concern.
Management's plans for correcting these deficiencies include the future sales
and licensing of the Company's products and technologies, the raising of capital
through the issuance of additional convertible debt securities and sales of
common stock, which are expected to help provide the Company with the liquidity
necessary to meet operating expenses. An investor group had previously advanced
the Company an aggregate amount of $6,335,000 through eighteen similar funding
tranches occurring in April 2002 through March 31, 2008. During the year ended
September 30, 2007, the same investor group advanced the Company an additional
$1,250,000. The Company received $250,000 in February 2007, $100,000 in march
2007, $100,000 in April 2007, $100,000 in May 2007, $100,000 in June 2007,
$100,000 in July 2007, $100,000 In August 2007, $100,000 in September 2007,
$100,000 in October 2007, $100,000 in November 2007, $100,000 in December 2007,
and $115,000 in March 2008, including certain fees payable, in connection with
this additional financing. Over the longer term, the Company plans to achieve
profitability through its operations from the sale and licensing of its H-
Net(TM) automatic meter-reading system. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of the recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue
in existence.
NOTE 3. PREPAID EXPENSES
The Company has accrued a prepaid expense of $80,000 as a staying bonus for its
Chief Executive Officer as per his employment contract (see NOTE 5). The staying
bonus was amortized over the calendar year 2007. The unamortized balance at
March 31, 2008 was $0.
At March 31, 2008, the balance in prepaid expenses totaled $ 25,253. Included
in prepaid expenses is $20,000 in an escrow account designated for key man life
insurance, a retainer for a law firm amounting to $2,002 and $3,251 in prepaid
taxes.
The company has paid a security deposit of $4,698 under its existing lease
agreement For office space in Valencia, California (see Note 10).
<page>F-22
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2008
NOTE 4. LOAN FEES
During the year ended September 30, 2006, the Company received an aggregate of
$1,270,000 from the same accredited investor group in exchange for 6%
convertible debentures maturing March 8, 2009, convertible at the lesser of
$0.005 per share and 40% of the average of the lowest three intra-day trading
prices of a share of common stock during the 20 trading days immediately
preceding conversion. These convertible debentures were accompanied by an
aggregate of 20,320,000 common stock warrants, exercisable over a five-year
period at a exercise price of $0.0009 per share. Loan fees associated with these
loans amounted to $20,000. As of September 30, 2006, aggregate loan fees
amounted to $539,555, and accumulated amortization of these loan fees was
$511,315.
During the year ended September 30, 2007, the Company received an aggregate of
$950,000 from the same accredited investor group in exchange for 6% convertible
debentures maturing February 13, 2010, convertible at the lesser of $0.03 per
share and 40% of the average of the lowest three intra-day trading prices Of a
share of common stock during the 20 trading days immediately preceding
Conversion. These convertible debentures were accompanied by an aggregate of
19,000,000 common stock warrants, exercisable over a seven-year period at an
Exercise price of $0.0009 per share. Loan fees associated with these loans
Amounted to $20,000.
During the six months ended March 31, 2008, the Company received an aggregate of
$415,000 from the same accredited investor group in exchange for 6% convertible
debentures maturing February 13, 2010, and March 28, 2011, convertible at the
lesser of $0.005 per share and 40% of the average of the lowest three intra-day
trading prices of a share of common stock during the 20 trading days immediately
preceding conversion. These convertible debentures were accompanied by an
aggregate of 16,000,000 common stock warrants, exercisable over a seven-year
period at a exercise price of $0.0009 per share. Loan fees associated with these
loans amounted to $25,000.
Total amortization of all loan fees during the six months ended March 31, 2008
amounted to $6,689, leaving an unamortized loan fee balance at March 31, 2008
of $23,703.
NOTE 5. DUE TO/FROM OFFICERS
The aggregate amount due officers at March 31, 2008 was $587 and interest
expense on the officer loans amounted to $51 for the six months ended March
31, 2008.
As of March 31, 2008, the Company owed its officers and former officers
$2,262,599 in accrued compensation. Of this amount, $520,000 was attributable
to aggregate staying bonuses payable to the President and former Chief Financial
Officer, Secretary and Treasurer of the Company as of January 31, 2006. An
additional $80,000 payable to the President on January 1, 2007 was amortized
over the 2007 calendar year. The staying bonuses are to be compensated for with
the Company's common stock, valued at the average bid and ask price for the
stock for the 30 days prior to each respective year-end issuance date. The
total common stock to be issued as staying bonuses amounted to 616,823,358 at
September 30, 2007, including 289,156,628 shares to pay the Chief Executive
Officer's January 1, 2006 staying bonus.
<page>F-23
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 6. CONVERTIBLE DEBENTURES
Convertible debentures at March 31, 2008, including convertible debentures
previously entirely converted to equity, secured by substantially all the assets
of the Company, consisted of the following:
<table>
Original Net Remaining Accrued Unexpired
Principal Proceeds to Principal (Unpaid) Warrants
Issuance Date Amount Company(1) Amount Interest(2) Issued
- ------------- ------------ ------------ ------------ ------------- ------------
March 29, 2002 $ 300,000 $ 225,000 $ -- $ -- --
May 10, 2002 150,000 129,000 -- -- --
June 17, 2002 300,000 238,000 -- -- --
November 27, 2002 200,000 144,000 -- -- 1,000,000
March 3, 2003 150,000 100,000 -- 27,720 750,000
May 12, 2003 150,000 100,000 -- 36,000 750,000
November 25, 2003 100,000 76,000 -- 24,000 500,000
December 3, 2003 50,000 31,000 -- 12,000 250,000
December 31, 2003 50,000 44,000 -- 12,000 250,000
February 18, 2004 50,000 35,000 -- 12,000 250,000
March 4, 2004 250,000 203,000 -- 59,048 1,250,000
April 19, 2004 250,000 165,000 -- -- 750,000
June 30, 2004 625,000 452,000 -- -- 1,875,000
September 9, 2004 625,000 482,000 -- -- 1,875,000
March 17, 2005 1,400,000 1,148,000 752,645 112,408 2,800,000
March 8, 2006 1,270,000 1,180,000 954,989 100,951 20,320,000
February 13, 2007 1,250,000 1,230,000 1,250,000 57,625 25,000,000
March 28, 2008 115,000 95,000 115,000 101 10,000,000
---------- ----------- ----------- ---------- ------------
Total $ 7,285,000 $ 6,077,000 $ 3,072,634 $ 513,853 67,620,000
========== =========== =========== ========== ============
</table>
<page>F-24
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 6. CONVERTIBLE DEBENTURES (continued)
Subtotal - convertible debentures $ 3,586,487
Less reclassified accrued interest (447,842)
Less prepaid interest offset ( 66,011)
------------
Subtotal principal value 3,072,634
Derivative conversion option - 150 percent of principal 4,608,952
Less unamortized note discount (1,383,601)
-----------
Net carrying value - convertible debentures $ 6,297,985
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. 9,823
-----------
Total - convertible debentures and notes $ 6,307,808
Current portion 2,028,909
-----------
Long-term portion $ 4,393,899
===========
As of March 31, 2008, five-year maturities of the notes payable, including
convertible debentures are as follows:
<table>
Derivative Unamortized Subsequent
Conversion Note Conversion Total
Principal Option Discount to Equity Due
---------- ---------- ---------- -------- ----------
Year ended March 31, 2009 817,457 1,211,452 0 0 2,028,909
Year ended March 31, 2010 900,000 1,350,000 (370,869) 0 1,879,131
Year ended March 31, 2011 1,365,000 2,047,500 (1,012,732) 0 2,399,768
Subsequent conversions to equity 0 0 0 0 0
---------- ---------- ---------- ------ ----------
Total notes payable $ 3,082,457 $ 4,608,952 (1,383,601) $ 0 $ 6,307,808
========== ========== ========== ====== =========
</table>
<page>F-25
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 7. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT
In order to provide working capital and financing for the Company's continued
research and development efforts, the Company has entered into a series of
securities purchase agreements and related agreements with an accredited
investor group (the "Purchasers") for the purchase of one-year to three-year
convertible debentures, which bear interest ranging from 6% to 12% per annum,
payable quarterly. The debentures are currently convertible into common stock
at prices ranging from the lesser of a fixed price ($0.005 to $0.06 per share)
and 40% of the average of the lowest three intra-day trading prices of a share
of common stock during the 20 trading days immediately preceding conversion. The
debentures have also been accompanied by the issuance of three-year to seven-
year common stock warrants (in amounts numbering from 3 to 20 times the related
convertible debt principal issued) and exercisable into the Company's common
stock at prices ranging from $0.0009 to $0.045 per share. As part of the
recording of the convertible debt transactions, a derivative conversion option
and amortizable convertible debt discount have been recognized. The carrying
value of the debt is net of the principal value, derivative conversion option,
and unamortized convertible debt discount components.
To the extent debentures issued by the Company are converted into shares of
common stock, the Company will not be obligated to repay the amounts converted.
The Company's convertible debentures and related warrants contain anti-dilution
provisions whereby, if the Company issues common stock or securities convertible
into or exercisable for common stock at a price less than the conversion or
exercise prices of the debentures or warrants, the conversion and exercise
prices of the debentures and/or warrants shall be adjusted as stipulated in the
agreements governing such debentures and warrants.
The cumulative history of the Company's convertible debt-related transactions
with the above accredited investor group is summarized as follows:
<page>F-26
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 7. SECURED CONVERTIBLE DEBENTURES - ASSOCIATED
DERIVATIVE CONVERSION OPTION AND CONVERTIBLE DEBT DISCOUNT (continued)
<table>
Net Net
Derivative Convertible Debt
Principal Conversion Debt Carrying Warrants
Period/Transaction Amount Option Discount Amount Outstanding
- ------------------ ---------- ---------- ---------- --------- -----------
Issuances $ 750,000 $ -- $ (750,000) $ -- 3,750,000
Amortization -- -- 279,115 279,115 --
Conversions (93,130) -- 69,233 (23,897) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2002 656,870 -- (401,652) 255,218 3,750,000
Issuances 500,000 -- (500,000) -- 2,500,000
Amortization -- -- 653,720 653,720 --
Conversions (193,665) -- 52,340 (141,325) --
---------- ---------- ---------- --------- -----------
Balance,
September 30, 2003 963,205 -- (195,592) 767,613 6,250,000
Re-characterize
Equity as Debt -- 881,550 -- 881,550 --
Bump-up Due to
Mark-to-Market -- 563,257 -- 563,257 --
Issuances 2,000,000 3,000,000 (2,000,000) 3,000,000 7,000,000
Amortization -- -- 673,705 673,705 --
Conversions (218,115) (327,172) 28,571 (516,716) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2004 2,745,090 4,117,635 (1,493,316) 5,369,409 13,250,000
Issuances 1,400,000 2,100,000 (1,400,000) 2,100,000 2,800,000
Expirations -- -- -- -- (3,750,000)
Amortization -- -- 693,992 693,992 --
Conversions (2,529,378) (3,794,067) 973,565 (5,349,880) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2005 1,615,712 2,423,568 (1,225,759 2,813,521 12,300,000
Issuances 1,270,000 1,905,000 (1,270,000) 1,905,000 20,320,000
Amortization -- -- 715,748 715,748 --
Conversions (547,376) (821,065) 243,177 (1,125,264) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2006 2,338,336 3,507,503 (1,536,834) 4,309,005 32,620,000
Issuances 950,000 1,425,000 (950,000) 1,425,000 19,000,000
Amortization -- -- 1,142,819 1,142,819 --
Conversions (409,864) (614,795) - (1,024,659) --
---------- ---------- ----------- --------- -----------
Balance,
September 30, 2007 $2,878,472 $4,317,708 $(1,344,015) $5,852,165 51,620,000
Issuances 300,000 450,000 (300,000) 450,000 6,000,000
Amortization -- -- 180,130 180,130 --
Conversions (148,338) (222,506) - (370,844) --
---------- ---------- ----------- --------- -----------
Balance,
December 31, 2007 $3,030,134 $4,545,202 $(1,463,885) $6,111,451 57,620,000
Issuances 115,000 172,500 (115,000) 172,500 10,000,000
Amortization -- -- 195,284 195,284 --
Conversions (72,500) (108,750) - (181,250) --
---------- ---------- ----------- --------- -----------
Balance,
March 31, 2008 $3,072,634 $4,608,952 $(1,383,601) $6,297,985 67,620,000
========== ========= =========== ========= ==========
</table>
<page>F-27
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 8. SHAREHOLDERS' DEFICIT
The Company's authorized capital stock consists of 50,000,000,000 shares of
common stock, no par value per share and 50,000,000 shares of preferred stock,
$1.00 par value per share. On June 28, 2006, the shareholders of the company
approved an increase in the amount of authorized shares of common stock from
15,000,000,000 to 50,000,000,000. Of the 50,000,000 authorized shares of
preferred stock, 1,000,000 shares have been designated as Class A Preferred
Stock and 1,000,000 shares have been designated as Class B Preferred Stock, and
the remaining 48,000,000 shares are undesignated. As of March 31, 2008, there
were 28,820,358,267 shares of the Company's common stock outstanding held by
approximately 700 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.
During October 2007 through March 31, 2008, the Company issued 4,617,724,446
shares of common stock in connection with the conversion of $220,838 of
principal, $381,256 of derivative conversion option and $45,383 of accrued
interest, for a total conversion amount of $552,093 of the Company's convertible
debentures.
NOTE 9. STOCK OPTIONS AND WARRANTS
During the fiscal year ended September 30, 1999, the Company issued to a note
holder options to purchase 500,000 shares of the Company's Class B preferred
stock at an exercise price of $5.00 per share. As consideration, the Company
reduced its debt to the note holder by $50,000 and received an extension of time
to pay-off its promissory note. The Company also issued to its Chief Executive
Officer options to purchase another 500,000 shares of the Company's Class B
preferred stock at an exercise price of $5.00 per share in exchange for a
reduction in debt of $50,000. Total consideration received on the above issued
options, as evidenced by debt reduction, was $100,000. These options were
initially exercisable through November 1, 2002 and are exercisable into common
stock at the rate of 10 common shares for each Class B preferred share. In
September 2001, the exercise price on the Class B preferred stock options was
adjusted to $2.50 per share and the exercise period was extended to November 1,
2005. In June 2002, the exercise price on the Class B preferred stock options
was adjusted to $0.50 per share. In January 2004, the exercise price on the
Class B preferred stock options was adjusted to $0.05 per share and the exercise
period was extended to November 1, 2009.
<page>F-28
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
The Company's Chief Executive Officer owns 215,865 shares of the Company's Class
A preferred stock, of which 15,845 shares were purchased during the year ended
September 30, 2004, and has options to purchase another 234,155 shares for $1.00
per share through November 1, 2009.
The Company has granted various common stock options and warrants to employees
and consultants. Generally, the options and warrants were granted at
approximately the fair market value of the Company's common stock at the date of
grant and vested immediately, except that when restricted common stock was
issued, the options and warrants were granted at an average discount to market
of 50% (ranging from between 20% to 75%).
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R").
On January 1, 2006. Accordingly, compensation costs for all share-based awards
to employees are measured based on the grant date fair value of those awards and
recognized over the period during which the employee is required to perform
service in exchange for the award (generally over the vesting period of the
award). The Company has no awards with market or performance conditions. Excess
tax benefits are defined by SFAS 123R (when applicable) will be recognized as an
addition to additional paid-in capital. Effective January 1, 2006 and for all
periods subsequent to that date, SFAS 123R supersedes the Company's previous
accounting under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R.
The Company adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions in SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the modified prospective transition method, the Company's
consolidated financial statements for prior periods were not restated to
reflect, and do not include, the effect of SFAS 123R.
No options were granted or vested during the interim periods presented, and all
options previously granted had completely vested before January 1, 2005.
Therefore no compensation costs were incurred under SFAS 123R and the actual net
loss equals the pro forma net loss for such interim periods.
All common stock options and warrants issued to consultants and other non-
employees have been recorded at the fair value of the services rendered and
equivalent to the market value (as discounted, if applicable) of the equity
instruments received in accordance with SFAS No. 123. The market value was
determined by utilizing an averaging convention of between 5 to 30 days of the
closing price of the Company's common shares as traded on the OTC Bulletin Board
(stock symbol CNES) through the grant date and applying certain mathematical
assumptions as required under the Black-Scholes model. Such assumptions were
generally the same as those mentioned above when making fair value disclosures
for the issuance of officer and employee stock options. These included the
risk-free annual rate of return, which ranged from 5% to 6% during the years
ended September 30, 2005 and 2004, and stock volatility, which is estimated to
be 190%.
At September 30, 2002, the Company had an aggregate of 8,807,154 common stock
options and a total of 1,000,000 Class B preferred stock options recorded as
additional paid-in capital at a value of $1,443,695. Of the common stock
options and warrants, 2,043,654 had been issued to officers and employees and
the remaining 6,763,500 had been issued to consultants and investors.
<page>F-29
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
In November 2002 through May 2003, 2,500,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $500,000 12%
convertible debenture financing arrangement (see Note 7 above). The allocated
cost of these warrants amounted to $9,816, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2003 of $1,453,511
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
As of September 30, 2003, the Company had an additional 4,852,205 common stock
options that had been granted to consultants and investors at exercise prices
ranging from $0.50 to $2.00 per share, expiring from November 1, 2003 through
January 16, 2005. Because these exercise prices were substantially above the
market price of the Company's common stock, no value was attributed to these
options at the time of grant. During the year ended September 30, 2004,
4,352,205 of these non-valued options expired, leaving a balance at September
30, 2004 of 500,000 options, exercisable at $1.00 per share and expiring January
16, 2005. The Company also granted a contingent issuance to its Chief Technical
Officer of 2,000,000 common stock options exercisable at $0.50 per share and
expiring December 31, 2004, which would not have vested until certain milestones
had been attained. These respective common stock options and contingent
issuances have been excluded from the summarized table below.
In November 2003 through December 2003, 1,000,000 seven-year common stock
warrants were issued to an accredited investor group in connection with a
$200,000 12% convertible debenture financing arrangement (see Note 6 above). The
allocated cost of these warrants amounted to $945.
In February 2004 and March 2004, 1,500,000 seven-year common stock warrants were
issued to an accredited investor group in connection with a $300,000 12%
convertible debenture financing arrangement (see Note 7 above). The allocated
cost of these warrants amounted to $1,417.
In April 2004, 750,000 seven-year common stock warrants were issued to an
accredited investor group in connection with a $250,000 12% convertible
debenture financing arrangement (see Note 7 above). The allocated cost of these
warrants amounted to $1,181.
In June 2004, 1,875,000 seven-year common stock warrants were issued to an
accredited investor group in connection with a $625,000 12% convertible
debenture financing arrangement (see Note 7 above). The allocated cost of these
warrants amounted to $2,952.
In September 2004, 1,875,000 seven-year common stock warrants were issued to an
accredited investor group in connection with a $625,000 12% convertible
debenture financing arrangement (see Note 7 above). The allocated cost of these
warrants amounted to $2,952, resulting in a recorded balance of stock options
and warrants exercisable at September 30, 2004 of $1,462,958 (including $100,000
attributable to 1,000,000 Class B preferred stock options noted above).
In March 2005 through September 2005, 2,800,000 five-year common stock warrants
were issued to an accredited investor group in connection with a $1,400,000 8%
convertible debenture financing arrangement (see Note 7 above). The allocated
cost of these warrants amounted to $3,756, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2005 of $1,466,714
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
During the year ended September 30, 2005, the 500,000 non-valued common stock
options and the 2,000,000 contingently issuable common stock options noted above
both expired. In addition, 6,300,000 previously-valued common stock options and
warrants expired, consisting of 4,750,000 warrants issued to convertible note
holders at exercise prices ranging from $0.045 to $0.192 per share, 1,450,000
common stock options issued to a consultant at an exercise price of $0.13 per
share, and 100,000 common stock options issued to a director at an exercise
price of $0.38 per share.
<page>F-30
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development
Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31,
2007
NOTE 9. STOCK OPTIONS AND WARRANTS (continued)
In March through July 2006, 20,320,000 five-year common stock warrants were
issued to an accredited investor group in connection with a $1,270,000 6%
convertible debenture financing arrangement (see Note 6 above). The allocated
cost of these warrants amounted to $4,551, resulting in a recorded balance of
stock options and warrants exercisable at both September 30, 2006 of 1,471,265
(including $100,000 attributable to 1,000,000 Class B preferred stock options
noted above).
In February through September 2007, 19,000,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $950,000 6%
convertible debenture financing arrangement (see NOTE 8 above). The allocated
cost of these warrants amounted to $1,249, resulting in a recorded balance of
stock options and warrants exercisable at September 30, 2007 of $1,472,514.
In October through December 2007, 6,000,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $300,000 6%
convertible debenture financing arrangement (see Note 6 above). The allocated
cost of these warrants amounted to $229, resulting in a recorded balance of
stock options and warrants exercisable at both September 30, 2007 and December
31, 2007 of $1,471,743 (including $100,000 attributable to 1,000,000 Class B
preferred stock options noted above).
In January through March 2008, 10,000,000 seven-year common stock warrants
were issued to an accredited investor group in connection with a $115,000 6.5%
convertible debenture financing arrangement (see Note 6 above). The allocated
cost of these warrants amounted to $339, resulting in a recorded balance of
stock options and warrants exercisable at both September 30, 2007 and March
31, 2008 of $1,473,082 (including $100,000 attributable to 1,000,000 Class B
preferred stock options noted above).
The common stock option and warrant activity during the six month periods
ended March 31, 2008 and December 31, 2007 is summarized as follows:
Common Stock Weighted
Options Average
and Exercise
Warrants Price
---------- --------
Balance outstanding, October 1, 2007 51,620,000 $ 0.0019
Granted 16,000,000 0.0009
Expired - -
---------- -------
Balance outstanding, March 31, 2008 67,620,000 $ 0.0016
Balance outstanding, October 1, 2007 14,243,654 $ 0.0056
Granted - -
Expired (1,943,654) 0.3800
----------- -------
Balance outstanding, March 31, 2008 12,300,000 $ 0.0050
========== =======
<page>F-31
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2008
The following table summarizes information about common stock options and
warrants at March 31, 2008:
Outstanding Exercisable
Common Weighted Weighted Common Weighted
Range of Stock Average Average Stock Average
Exercise Options/ Life Exercise Options/ Exercise
Prices Warrants (Months) Price Warrants Price
--------------- --------- ------- -------- ---------- --------
$ 0.0050 - $ 0.0050 1,000,000 20 $ 0.0050 1,000,000 $ 0.0050
$ 0.0050 - $ 0.0050 750,000 26 $ 0.0050 750,000 $ 0.0050
$ 0.0050 - $ 0.0050 750,000 28 $ 0.0050 750,000 $ 0.0050
$ 0.0050 - $ 0.0050 500,000 32 $ 0.0050 500,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 32 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 33 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 250,000 35 $ 0.0050 250,000 $ 0.0050
$ 0.0050 - $ 0.0050 1,250,000 35 $ 0.0050 1,250,000 $ 0.0050
$ 0.0020 - $ 0.0020 750,000 37 $ 0.0020 750,000 $ 0.0020
$ 0.0020 - $ 0.0020 1,875,000 42 $ 0.0020 1,875,000 $ 0.0020
$ 0.0020 - $ 0.0020 1,875,000 44 $ 0.0020 1,875,000 $ 0.0020
$ 0.0039 - $ 0.0039 316,066 44 $ 0.0039 316,066 $ 0.0039
$ 0.0039 - $ 0.0039 217,466 24 $ 0.0039 217,466 $ 0.0039
$ 0.0039 - $ 0.0039 1,087,330 24 $ 0.0039 1,087,330 $ 0.0039
$ 0.0039 - $ 0.0039 1,179,138 24 $ 0.0039 1,179,138 $ 0.0039
$ 0.0009 - $ 0.0009 5,920,000 35 $ 0.0009 5,920,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 35 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 35 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 1,600,000 35 $ 0.0009 1,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 9,600,000 35 $ 0.0009 9,600,000 $ 0.0009
$ 0.0009 - $ 0.0009 5,000,000 70 $ 0.0009 5,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 2,000,000 70 $ 0.0009 2,000,000 $ 0.0009
$ 0.0009 - $ 0.0009 10,000,000 70 $ 0.0009 10,000,000 $ 0.0009
- ------------------- ---------- -- -------- ---------- --------
$ 0.0009 - $ 0.0050 67,620,000 38 $ 0.0016 67,620,000 $ 0.0016
================== ========== == ======== ========== ========
<page>F-32
CONECTISYS CORPORATION AND SUBSIDIARIES (A Development Stage Company) NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008
NOTE 10. INCOME TAXES
Deferred income taxes consisted of the following at March 31, 2008:
Deferred tax asset, benefit
of net operating loss
carryforwards $ 13,000,000
Valuation allowance (13,000,000)
-----------
Net deferred tax asset $ -
===========
The valuation allowance fully offsets the net deferred tax asset, since it is
more likely than not that it would not be recovered. During the year ended
September 30, 2007, the deferred tax asset and valuation allowance were both
increased by $1,200,000.
As of March 31, 2008, the Company has approximately $33,300,000 in federal
and $21,600,000 in California net operating loss carryforwards. The federal net
operating loss carryforwards expire as follows: $2,700,000 in the year 2012,
$5,300,000 in 2018, $1,200,000 in 2019, $3,500,000 in 2020, $2,300,000 in 2021,
$2,200,000 in 2022, $2,100,000 in 2023, $4,200,000 in 2024 $3,100,000 in 2025,
$3,000,000 in 2026, and $3,700,000 in 2027. The California net operating loss
carryforwards expire as follows: $3,300,000 in 2013, $8,500,000 in 2014,
$3,100,000 in 2015, $3,000,000 in 2016, and $3,700,000 in 2017.
<page>F-33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. We intend that those forward-looking statements be subject to the
safe harbors created by those sections. These forward- looking statements
generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance, and
can generally be identified by the use of the words "believe," "intend," "plan,"
"expect," "forecast," "project," "may," "should," "could," "seek," "pro forma,"
"estimates," "continues," "anticipate" and similar words. The forward-looking
statements and associated risks may include, relate to, or be qualified by other
important factors, including, without limitation:
o our ability to obtain FCC approval of our H-Net(TM) wireless
meter reading products;
o the projected growth in the automated meter reading markets;
o our business strategy for establishing and expanding our
presence in these markets;
o our ability to successfully implement our business plans;
o our ability to hire and retain qualified personnel;
o anticipated trends in our financial condition and results of
operations;
o our ability to distinguish ourselves from our competitors; and
o uncertainties relating to economic conditions in the markets in
which we currently operate and in which we intend to operate in
the future.
These forward-looking statements necessarily depend upon assumptions and
estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the forward-
looking statements. We do not undertake to update, revise or correct any
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section of
our most recent annual report on Form 10-KSB could cause our financial results,
including our net income (loss) or growth in net income (loss) to differ
materially from prior results, which in turn could, among other things, cause
the price of our common stock to fluctuate substantially.
Overview
Since 1995, we have been engaged in the development of a low-cost
automatic meter reading, or AMR, solution. We have developed a low-cost AMR
solution that includes a proprietary system employing specialized hardware and
software that will allow for residential and commercial applications. Our
proprietary system is called H-NET(TM), which is a trademark of ConectiSys. Our
H-NET(TM) system is currently comprised of two principal components: our H-
NET(TM) 5.0 product, which itself is comprised of circuitry and a radio
transmitter, and our H-NET(TM) BaseStation. Our H- NET(TM) 5.0 product is a
component that is designed to be part of a digital energy meter to read and
wirelessly transmit meter data to our H-NET(TM) BaseStation. Our H-NET(TM)
BaseStation is designed to receive and relay the meter data over standard phone
lines to a central location where the data is compiled and utilized.
We are continuing the development of our H-NET(TM) system. Our recent
development efforts have focused on redesigning our H-NET(TM) circuitry from a
three-board circuit to a two-board circuit. This redesign was completed in
<page>2
November 2005 and testing of our new H-NET(TM) circuitry has begun. We
redesigned our H-NET(TM) circuitry to respond to redesigns of meter products by
meter manufacturers. These redesigns by meter manufacturers were directed at
reducing costs and resulted in reduced available space for integration of
circuitry from third-party technology providers such as ConectiSys.
In August 2004, we submitted to the FCC our H-NET(TM) 5.0 product for
approval for commercialization and sale and received FCC certification for this
product in December 2004. In December 2004, we submitted to the FCC our H-
NET(TM) BaseStation for approval for commercialization and sale and received FCC
certification for this product in March 2005. Concurrently with the development
of our H-NET(TM) BaseStation, which is a single-channel design, we have been
developing an eight-channel H-NET(TM) BaseStation. Our eight-channel H-NET(TM)
BaseStation is designed to communicate with up to 7,500 H-NET(TM) 5.0 product
installations per network due to its multiple channel design and to deliver
real-time energy consumption data at low-cost. In July 2005, we submitted to the
FCC our eight-channel H-NET(TM) BaseStation product for approval for
commercialization and sale and received FCC certification for this product in
January 2006.
We have not yet sold any H-NET(TM) systems. However, we are actively
pursuing sales of our H-NET(TM) systems with meter manufacturers and other
companies in the energy industry. We have a history of only inconsequential
revenues and have incurred significant losses since the beginning of the
development of our H-NET(TM) system. We have a significant accumulated deficit
and a deficiency in working capital. As a result of our financial condition, our
independent auditors have issued a report questioning our ability to continue as
a going concern.
We have recently completed and successfully demonstrated a significant
update of our H-NET(TM) system's hardware and software technologies in
cooperation with one of the major electric meter manufacturers. We believe that
this update will provide us with a product that has incorporated more advanced
wireless technologies with a more market- competitive and cost-effective design
and greater reliability. We are also pursuing different applications of our H-
NET(TM) technologies that may be synergistic with our current marketing plan in
markets in which we intend to compete.
Our continued operations are dependent on securing additional sources of
liquidity through debt and/or equity financing. We have received only minimal
funding during the first quarter of 2008 and through the filing of this report
and we are in immediate need of additional financing. If we are unable to
obtain funding soon, we will be unable to continue our operations and our
development of our H-NET(TM) system.
Critical Accounting Policies and Estimates
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.
The following discussion and analysis is based upon our financial
statements, which have been prepared using accounting principles generally
accepted in the United States of America. The preparation of our financial
statements requires management to make estimates and assumptions that affect the
reported amounts of revenue and expenses, and assets and liabilities, during the
periods reported. Estimates are used when accounting for certain items such as
depreciation, likelihood of realization of certain assets, employee compensation
programs and valuation of intangible assets. We base our estimates on
historical experience and other assumptions that we believe are reasonable under
the circumstances. Actual results may differ from our estimates.
<page>3
Going Concern Assumption
We have based our financial statements on the assumption of our
operations continuing as a going concern. As a result, we continue to
depreciate fixed assets and show certain debts as long-term. As of March 31,
2008, we had a deficiency in working capital of approximately $4.7 million and
had an accumulated deficit of approximately $40.3 million, which raise
substantial doubt about our ability to continue as a going concern. Our plans
for correcting these deficiencies include the future sales and licensing of our
products and technologies and the raising of capital through the issuance of
common stock, which are expected to help provide us with the liquidity necessary
to meet operating expenses. Over the longer-term, we plan to achieve
profitability through our operations from the sale and licensing of our H-NET
(TM) automatic meter-reading system. Our consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
the recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue our existence.
Stock-Based Compensation
Our compensation of consultants and employees with our capital stock is
recorded and/or disclosed at estimated market value. The volatile nature of the
price of our common stock causes wide disparities in certain valuations.
Statement of Financial Accounting Standards, or SFAS, No. 123,
"Accounting for Stock-based Compensation," or SFAS No. 123, established a fair
value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from non- employees
in exchange for equity instruments. We adopted this accounting standard on
January 1, 1996. SFAS No. 123 also encourages, but does not require, companies
to record compensation cost for stock- based employee compensation.
We adopted the provisions of SFAS No. 123 (Revised 2004), "Share-Based
Payment," or SFAS 123R, on January 1, 2006. Accordingly, compensation costs for
all share-based awards to employees are measured based on the grant date fair
value of those awards and recognized over the period during which the employee
is required to perform service in exchange for the award (generally over the
vesting period of the award). We have no awards with market or performance
conditions. Excess tax benefits as defined by SFAS 123R (when applicable) will
be recognized as an addition to additional paid-in capital. Effective January
1, 2006 and for all periods subsequent to that date, SFAS 123R supersedes our
previous accounting under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," or APB 25. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, or
SAB 107, relating to SFAS 123R. We have applied the provisions of SAB 107 in
our adoption of SFAS 123R.
We adopted SFAS 123R using the modified prospective transition method,
which provides for certain changes to the method for valuing share-based
compensation. The valuation provisions of SFAS 123R apply to new awards and to
awards that are outstanding at the effective date and subsequently modified or
cancelled. Estimated compensation expense for awards outstanding at the
effective date will be recognized over the remaining service period using the
compensation cost calculated for pro forma disclosure purposes under Financial
Accounting Standards Board, or FASB, Statement No. 123, "Accounting for Stock-
Based Compensation," or SFAS 123. In accordance with the modified prospective
transition method, our consolidated financial statements for prior periods were
not restated to reflect, and do not include, the effect of SFAS 123R.
<page>4
The value of the stock-based award is determined using a pricing model
whereby compensation cost is the excess of the fair market value of the stock as
determined by the model at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. Shares of our common stock
issued in exchange for goods or services are valued at the cost of the goods or
services received or at the market value of the shares issued, depending on the
ability to estimate the value of the goods or services received.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31,
2008 and 2007
We did not generate any revenues for the three months ended March 31,
2008 and 2007. Cost of prototypes and samples for the three months ended March
31, 2008 was $32,000 as compared to $18,000 for the same period in 2007,
representing an increase of $19,000, or 105%. This increase in cost of
prototypes and samples was primarily due to a increase in production of models
and prototypes of our H-Net(TM) products used for sales and marketing purposes.
General and administrative expenses increased by $45,000, or 13%, to
$318,000 for the three months ended March 31, 2008 as compared to $337,000 for
the same period in 2007. This increase was primarily due to additional testing
of H-Net.
Interest expense decreased by $150,000, or 26%, to $431,000 during the
three months ended March 31, 2008 as compared to $581,000 for the same period in
2007. This decrease in interest expense was primarily due to a decrease in net
borrowings outstanding under our convertible debentures and other debt during
the three months ended March 31, 2008 as compared to the same period in 2007,
resulting in a corresponding decrease in amortization of convertible debt
discount on these debentures.
Net loss for the three months ended March 31, 2008 decreased by $86,000,
or 9%, to $846,000 as compared to a net loss of $932,000 for the same period in
2007. The decrease in net loss primarily resulted from the decreases in general
and administrative expenses and interest expense, as discussed above.
Comparison of Results of Operations for the Six Months Ended March 31,
2008 and 2007
We did not generate any revenues for the six months ended March 31, 2008
and 2007. Cost of prototypes and samples for the six months ended March 31,
2008 was $12,000 as compared to $30,000 for the same period in 2007,
representing a decrease of $18,000, or 61%. This decrease in cost of prototypes
and samples was primarily due to a decrease in production of models and
prototypes of our H-Net(TM) products used for sales and marketing purposes.
General and administrative expenses increased by $45,000, or 13%, to
$384,000 for the six months ended March 31, 2008 as compared to $326,000 for the
same period in 2007. This increase was primarily due to additional H-Net
testing.
Interest expense increased by $78,000, or 23%, to $404,000 during the
six months ended March 31, 2008 as compared to $326,000 for the same period in
2007. This increase in interest expense was primarily due to an increase in net
borrowings outstanding under our convertible debentures and other debt during
the six months ended March 31, 2008 as compared to the same period in 2007,
resulting in a corresponding increase in amortization of convertible debt
discount on these debentures.
<page>5
Net loss for the six months ended March 31, 2008 increased by $107,000,
or 33%, to $404,000 as compared to a net loss of $326,000 for the same period in
2007. The increase in net loss primarily resulted from the increases in general
and administrative expenses and interest expense, as discussed above.
Liquidity and Capital Resources
Our continued operations are dependent on securing additional sources of
liquidity through debt and/or equity financing. We have received only minimal
funding during the first quarter of 2008 and through the filing of this report
and we are in immediate need of additional financing. If we are unable to
obtain funding soon, we will be unable to continue our operations and our
development of our H-NET(TM) system.
During the six months ended March 31, 2008, we financed our operations
solely through private placements of securities. We are actively pursuing sales
of our H-Net(TM) systems with meter manufacturers and other companies in the
energy industry. However, we have not yet sold any H-Net(TM) systems. We have a
history of only inconsequential revenues and have incurred significant losses
since the beginning of the development of our H-Net(TM) system. We have
significant accumulated and working capital deficits. As a result of our
financial condition, our independent auditors have issued a report questioning
our ability to continue as a going concern. Our consolidated financial
statements as of March 31, 2008 and for the years ended September 30, 2007 and
2006 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, 2008, we had a working capital deficit of approximately
$4.7 million and an accumulated deficit of approximately $40.3 million. As of
that date, we had approximately $23,000 in cash and cash equivalents. We had
accounts payable and accrued compensation expenses of approximately $2.2
million. We had other current liabilities, including amounts due to officers,
accrued interest and current portion of convertible debentures of approximately
$2.5 million, including debts incurred prior to the beginning of fiscal year
2007. To the extent convertible debentures or promissory notes that we have
issued are converted into shares of common stock, we will not be obligated to
repay the converted amounts.
Cash used in our operating activities totaled $331,000 for the six
months ended March 31, 2008 as compared to $316,000 for the six months ended
March 31, 2007. Cash used in our investing activities totaled $1,500 for the
six months ended March 31, 2008 as compared to cash provided by our investing
activities of $317,000 for the six months ended March 31, 2007. Cash provided
by our financing activities totaled $300,000 for the six months ended March 31,
2008 as compared to almost no cash provided by our financing activities for the
six months ended March 31, 2007. We raised all of the cash provided by our
financing activities during the six months ended March 31, 2008 from the
issuance of common stock, convertible notes and warrants.
Unpaid principal and accrued and unpaid interest on our convertible
debentures and notes becomes immediately due and payable from one to three years
from their dates of issuance, depending on the debenture or note, or earlier in
the event of a default. The events of default under the convertible debentures
and notes are similar to those customary for convertible debt securities,
including breaches of material terms, failure to pay amounts owed, delisting of
our common stock from the OTC Bulletin Board or failure to comply with the
conditions of listing on the OTC Bulletin Board and cross-defaults on other debt
securities.
<page>6
As of May 19, 2008, we were in default under our obligations to register
for resale shares of our common stock underlying certain of our outstanding
convertible debentures and notes due to our failure to timely register for
resale a sufficient number of shares of our common stock upon conversion of
those convertible debentures and notes. Our registration obligations require us
to register for resale 200% of all registrable securities, which are largely
comprised of the shares of common stock issuable upon conversion or exercise of
our outstanding convertible debentures, notes and warrants. We have
historically been unable to register for resale the full required amounts of
shares of common stock due in part to limitations in our available authorized
capital. As we have increased our authorized capital from time to time, we have
often been reluctant to utilize all or nearly all available authorized capital
to satisfy our registration obligations. This reluctance arises from our need
to maintain available authorized capital for other potential financing
transactions that we may need to conduct to fund our research and development
and otherwise maintain sufficient capital resources to fund our operations. In
addition, because the number of registrable securities is calculated based on a
discount to the prevailing market price of our common stock, and market prices
for our common stock have generally declined throughout the duration of our
convertible debenture and note financings, the number of registrable securities
has substantially increased. Accordingly, although we may have been in
compliance initially, the decline in market prices for our common stock has
caused us to fall out of compliance with our registration obligations.
As of May 19, 2008, we were also in default under our obligations to
make interest payments under nearly all of our outstanding convertible
debentures and notes due to our lack of liquidity to fund those interest
payments. Although we received substantial cash investments in connection with
our convertible debenture and note financing transactions, we have been
reluctant to make quarterly cash interest payments to our investors. This
reluctance arises from our need to maintain sufficient capital resources to fund
our research and development and our operations. However, on various occasions,
we have prepaid certain interest amounts in connection with convertible
debenture and note financing transactions. In these instances, we were able to
at least temporarily, and on occasion fully, comply with our interest payment
obligations until the convertible debentures or notes were fully converted into
shares of our common stock. In our most recent March 2008, February 2007 and
March 2006 convertible note financing transactions, we did not prepay any
interest amounts and we expect to continue indefinitely to be in default of our
obligations to make quarterly interest payments under those convertible notes as
well as numerous other convertible debentures and notes outstanding from prior
financing transactions.
As of May 19, 2008, we owed principal and unpaid interest on our
convertible debentures and notes in an aggregate amount of approximately $3.5
million, net of approximately $103,000 of prepaid interest, all of which we
believe would be immediately due and payable upon demand by the holders of our
secured convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H-
NET(TM) system, which would have a material and adverse effect on our business,
prospects, results of operations and financial condition. In addition, the
holders of our secured convertible debentures and notes were entitled to demand
immediate repayment of the outstanding principal amounts of the debentures and
notes and any accrued and unpaid interest. The cash required to repay such
amounts would likely have to be taken from our working capital. Since we rely
on our working capital to sustain our day to day operations and the development
of our H-NET(TM) system, a default on the convertible debentures or notes could
have a material and adverse effect on our business, prospects, results of
<page>7
operations or financial condition. However, as of that date, other than the
receipt of a notice of default, we were not aware of any action taken by the
holders of our secured convertible debentures and notes to pursue such rights,
and as of that date we also were not aware of any other legal or similar action
taken by those holders to enforce their rights or as a result of our defaults
under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange
Commission a portion of the shares of common stock underlying the convertible
debentures and notes under which we are in default and expect that the
convertible debentures and notes ultimately will be converted into shares of our
common stock and that we therefore will not be obligated to repay the
outstanding principal and accrued and unpaid interest amounts on those
debentures and notes.
As of May 19, 2008, we had issued the following secured convertible
debentures and notes, which provide for interest at the rate of 12% per annum,
except for the notes issued in March 2005 and March 2008, which provide for
interest at the rate of 8% per annum, and the notes issued in March 2006 and
February 2007, which provide for interest at the rate of 6% per annum, and
warrants to purchase common stock to various accredited inventors in connection
with debenture and note offering transactions:
<table>
Unexpired
Original Net Remaining Accrued and Warrants
Principal Proceeds to Principal Unpaid Issued in
Issuance Date Amount($)(1) ConectiSys($)(2) Amount($) Interest($)(2) Offering(#)
- --------------- ------------- ----------------- ----------- ---------------- -----------
November 27, 2002 $ 200,000 $ 144,000 $ - $ - 1,000,000
March 3, 2003 150,000 100,000 - 27,720 750,000
May 12, 2003 150,000 100,000 - 36,000 750,000
November 25, 2003 100,000 76,000 - 24,000 500,000
December 3, 2003 50,000 31,000 - 12,000 250,000
December 31, 2003 50,000 44,000 - 12,000 250,000
February 18, 2004 50,000 35,000 - 12,000 250,000
March 4, 2004 250,000 203,000 - 59,048 1,250,000
April 19, 2004 250,000 165,000 - - 750,000
June 30, 2004 625,000 452,000 - - 1,875,000
September 9, 2004 625,000 482,000 - - 1,875,000
March 17, 2005 1,400,000 1,148,000 752,645 216,496 2,800,000
March 8, 2006 1,270,000 1,180,000 954,989 108,015 20,320,000
February 13, 2007 1,250,000 1,145,000 1,250,000 66,871 25,000,000
March 28, 2008 115,000 95,000 115,000 1,235 10,000,000
------------ ------------- ----------- --------- -----------
Total: $6,535,000 $ 5,400,000 $3,072,634 $ 575,482 67,620,000
________________ ============ ============= ========== ========= ===========
(1) Amounts shown do not include additional convertible debentures
issued prior to November 27, 2002 having an aggregate original
principal amount of $750,000 that were fully converted to
equity.
(2) Amounts are approximate and represent net proceeds after
deducting expenses incurred in connection with the offering as
well as expenses for legal fees incurred in connection with
preparation of reports and statements filed with the Securities
and Exchange Commission.
(2) Amounts are approximate and represent accrued (and unpaid)
interest outstanding as of May 19, 2008. The total amount of
accrued and unpaid interest does not account for approximately
$103,000 of outstanding pre-paid interest.
</table>
Each of the above outstanding secured convertible debentures or notes,
except for the convertible notes issued in March 2005 and 2006, February 2007
and March 2008, are due one year following their respective issuance dates. The
convertible notes issued in March 2005 are due two years following their
issuance dates. The convertible notes issued in March 2006, February 2007 and
March 2008 are due three years following their issuance dates. The conversion
<page>8
price of our secured convertible debentures is the lower of 35% of the average
of the three lowest intra- day trading prices of a share of our common stock on
the OTC Bulletin Board during the twenty trading days immediately preceding the
conversion date, and either (a) $.06 for the June 2002 convertible debentures,
(b) $.01 for the November 2002, March and May 2003 convertible debentures, (c)
$.005 for the November and December 2003 and the February, March, April, June
and September 2004 convertible debentures and the March 2005 convertible notes,
or (d) $.03 for the March 2006, February 2007 and March 2008 convertible notes.
As of May 19, 2008, the applicable conversion price was approximately $0.000035
per share.
As indicated above, our consolidated financial statements as of March
31, 2008 and for the years ended September 30, 2007 and 2006 have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. As discussed in
this report and in the notes to our consolidated financial statements included
in this report, we have suffered recurring losses from operations and at March
31, 2008 had substantial net capital and working capital deficiencies. These
factors, among others, raised substantial doubt about our ability to continue as
a going concern and led our independent registered public accounting firm to
modify its unqualified report to include an explanatory paragraph related to our
ability to continue as a going concern. The consolidated financial statements
included in this document do not include any adjustments that might result from
the outcome of this uncertainty.
We have been, and currently are, working toward identifying and
obtaining new sources of financing. Our current convertible debenture and note
investors have provided us with an aggregate of approximately $7.3 million in
financing to date. No assurances can be given that they will provide any
additional financing in the future. Our current secured convertible debenture
and note financing documents contain notice and right of first refusal
provisions and the grant of a security interest in substantially all of our
assets in favor of the convertible debenture and note investors, all of which
provisions will restrict our ability to obtain debt and/or equity financing from
any investor other than our current investors.
Any future financing that we may obtain may cause significant dilution
to existing stockholders. Any debt financing or other financing of securities
senior to common stock that we are able to obtain will likely include financial
and other covenants that will restrict our flexibility. At a minimum, we expect
these covenants to include restrictions on our ability to pay dividends on our
common stock. Any failure to comply with these covenants would have a material
adverse effect on our business, prospects, financial condition, results of
operations and cash flows.
If adequate funds are not available, we may be required to delay, scale
back or eliminate portions of our operations and product and service development
efforts or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain of our technologies
or potential products or other assets. Accordingly, the inability to obtain such
financing could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also adversely
affect our ability to fund our continued operations and our product and service
development efforts that historically have contributed significantly to our
competitiveness.
Effect of Inflation
Inflation did not have any significant effect on our operations during
the three or six months ended March 31, 2008. Further, inflation is not
expected to have any significant effect on our future operations.
<page>9
Impact of New Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, has established a
recent accounting pronouncement.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defined fair value, established a framework for
measuring fair value and expands disclosures about fair-value measurements
required under other accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair value. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact of adopting SFAS
No. 157.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) has concluded,
based on his evaluation as of March 31, 2008 (the "Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) are effective to ensure that information required to
be disclosed by us in the reports filed or submitted by us under the Exchange
Act is accumulated, recorded, processed, summarized and reported to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding whether or not disclosure is
required.
There were no changes in our internal control over financial reporting,
as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our
most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 4T. CONTROLS AND PROCEDURES.
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In January 2008, we issued an aggregate of 527,835,615 shares of common
stock to four accredited investors upon conversion of an aggregate of $26,391.78
in principal and related interest on our convertible debentures.
In February 2008, we issued an aggregate of 1,007,052,053 shares of
common stock to four accredited investors upon conversion of an aggregate of
$50,352.60 in principal and related interest on our convertible debentures.
<page>10
The issuances of our securities described above were made in reliance
upon the exemption from registration available under Section 4(2) of the
Securities Act of 1933, as amended, as transactions not involving a public
offering. This exemption was claimed on the basis that these transactions did
not involve any public offering and the purchasers in each offering were
sophisticated and had sufficient access to the kind of information registration
would provide, including our most recent Annual Report on Form 10-KSB and our
most recent Quarterly Report on Form 10-QSB.
Dividend Policy
We have never paid cash dividends on our common stock and do not
currently intend to pay cash dividends on our common stock in the foreseeable
future. We are restricted from paying dividends on our common stock under state
law, and the terms of our secured convertible debentures. We currently
anticipate that we will retain any earnings for use in the continued development
of our business.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Unpaid principal and accrued and unpaid interest on our convertible
debentures and notes becomes immediately due and payable from one to three years
from their dates of issuance, depending on the debenture or note, or earlier in
the event of a default. The events of default under the convertible debentures
and notes are similar to those customary for convertible debt securities,
including breaches of material terms, failure to pay amounts owed, delisting of
our common stock from the OTC Bulletin Board or failure to comply with the
conditions of listing on the OTC Bulletin Board and cross-defaults on other debt
securities.
As of May 19, 2008, we were in default under our obligations to register
for resale shares of our common stock underlying certain of our outstanding
convertible debentures and notes due to our failure to timely register for
resale a sufficient number of shares of our common stock upon conversion of
those convertible debentures and notes. Our registration obligations require us
to register for resale 200% of all registrable securities, which are largely
comprised of the shares of common stock issuable upon conversion or exercise of
our outstanding convertible debentures, notes and warrants. We have
historically been unable to register for resale the full required amounts of
shares of common stock due in part to limitations in our available authorized
capital. As we have increased our authorized capital from time to time, we have
often been reluctant to utilize all or nearly all available authorized capital
to satisfy our registration obligations. This reluctance arises from our need
to maintain available authorized capital for other potential financing
transactions that we may need to conduct to fund our research and development
and otherwise maintain sufficient capital resources to fund our operations. In
addition, because the number of registrable securities is calculated based on a
discount to the prevailing market price of our common stock, and market prices
for our common stock have generally declined throughout the duration of our
convertible debenture and note financings, the number of registrable securities
has substantially increased. Accordingly, although we may have been in
compliance initially, the decline in market prices for our common stock has
caused us to fall out of compliance with our registration obligations.
As of May 19, 2008, we were also in default under our obligations to
make interest payments under nearly all of our outstanding convertible
debentures and notes due to our lack of liquidity to fund those interest
payments. Although we received substantial cash investments in connection with
our convertible debenture and note financing transactions, we have been
<page>11
reluctant to make quarterly cash interest payments to our investors. This
reluctance arises from our need to maintain sufficient capital resources to fund
our research and development and our operations. However, on various occasions,
we have prepaid certain interest amounts in connection with convertible
debenture and note financing transactions. In these instances, we were able to
at least temporarily, and on occasion fully, comply with our interest payment
obligations until the convertible debentures or notes were fully converted into
shares of our common stock. In our most recent March 2008, February 2007 and
March 2006 convertible note financing transactions, we did not prepay any
interest amounts and we expect to continue indefinitely to be in default of our
obligations to make quarterly interest payments under those convertible notes as
well as numerous other convertible debentures and notes outstanding from prior
financing transactions.
As of May 19, 2008, we owed principal and unpaid interest on our
convertible debentures and notes in an aggregate amount of approximately $3.5
million, net of approximately $103,000 of prepaid interest, all of which we
believe would be immediately due and payable upon demand by the holders of our
secured convertible debentures and notes.
As a result of the above defaults, the holders of our secured
convertible debentures and notes are entitled to pursue their rights to
foreclose upon their security interest in all of our assets. In the event that
the holders of our secured convertible debentures and notes foreclose upon their
security interest in all of our assets, we could lose all of our assets,
including our intellectual property and other technology associated with our H-
NET(TM) system, which would have a material and adverse effect on our business,
prospects, results of operations and financial condition. In addition, the
holders of our secured convertible debentures and notes were entitled to demand
immediate repayment of the outstanding principal amounts of the debentures and
notes and any accrued and unpaid interest. The cash required to repay such
amounts would likely have to be taken from our working capital. Since we rely
on our working capital to sustain our day to day operations and the development
of our H-NET(TM) system, a default on the convertible debentures or notes could
have a material and adverse effect on our business, prospects, results of
operations or financial condition. However, as of that date, other than the
receipt of a notice of default, we were not aware of any action taken by the
holders of our secured convertible debentures and notes to pursue such rights,
and as of that date we also were not aware of any other legal or similar action
taken by those holders to enforce their rights or as a result of our defaults
under those secured convertible debentures and notes.
We plan to register for resale with the Securities and Exchange
Commission a portion of the shares of common stock underlying the convertible
debentures and notes under which we are in default and expect that the
convertible debentures and notes ultimately will be converted into shares of our
common stock and that we therefore will not be obligated to repay the
outstanding principal and accrued and unpaid interest amounts on those
debentures and notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
<page>12
ITEM 6. EXHIBITS.
Exhibits
Exhibit No. Description
- ------------- -----------
10.1 Securities Purchase Agreement dated as of March 28, 2008 by and
between the Registrant and the purchasers named therein (**)
10.2 Form of Callable Secured Convertible Note due March 28, 2011
(**)
10.3 Form of Stock Purchase Warrant dated as of March 28, 2008 (**)
10.4 Registration Rights Agreement dated as of March 28, 2008 by and
between the Registrant and the investors named therein (**)
10.5 Security Agreement dated as of March 28, 2008 between the
Registrant and the secured parties named therein (**)
10.6 Intellectual Property Security Agreement dated as of March 28,
2008 between the Registrant and the secured parties named
therein (**)
10.7 Letter Agreement dated March 28, 2008 (**)
31.1 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (*)
31.2 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 (*)
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
__________
(*) Filed herewith.
(**) Filed as an exhibit to the Registrant's Current Report on Form
8-K for April 9, 2008 filed with the Securities and Exchange
Commission on April 10, 2008.
<page>12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONECTISYS CORPORATION
Date: May 19, 2008 By: /s/ ROBERT A. SPIGNO
-----------------------
Robert A. Spigno,
Chairman of the Board, President,
Chief Executive Officer and Chief
Financial Officer (principal
executive officer and principal
financial and accounting officer)
<page>14
EXHIBITS FILED WITH THIS REPORT ON FORM 10-Q
Exhibit No. Description
- ------------ -----------
31.1 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
<page>15