U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB/A
(Amendment No. 1)
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31. 2005
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to ______________
For the Period Ended March 31, 2005
Commission file number 000-33415
CYBERLUX CORPORATION
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 91-2048178
------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
----------------------------------------
(Address of Principal Executive Offices)
(919) 474-9000
-------------------------
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
As of May 2, 2005, the Company had 33,991,780 shares of its par value $0.001
common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [x]
CYBERLUX CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending March 31, 2005
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets: March
31, 2005 (Unaudited) and December 31, 2004 (
Audited) 3
Condensed Consolidated Statements of Operations:
Three Months Ended March 31, 2005 and 2004
(Unaudited) 4
Condensed Consolidated Statements of Cash
Flows: Three Months Ended March 31, 2005 and
2004 (Unaudited) 5
Notes to Unaudited Condensed Consolidated
Financial Information: March 31, 2005 6-7
Item 2. Management Discussion and Analysis 8
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 20
2
CYBERLUX CORPORATION
BALANCE SHEETS
(UNAUDITED)
March 31, 2005 December 31, 2004
Unaudited Audited
------------ ------------
Assets
Current assets:
Cash & cash equivalents $ 10,460 $ 415,375
Accounts Receivable 13,429 --
Prepaid expenses 36,235 68,404
------------ ------------
Total current assets 60,124 483,779
Property, plant and equipment, net of accumulated
depreciation of $ 100,629 and $92,335, respectively 35,687 43,018
Other Assets:
Patents 61,739 30,544
------------ ------------
Total other assets 61,739 30,544
Total Assets $ 157,550 $ 557,341
============ ============
Liabilities and Deficiency in Stockholders' Equity
Current liabilities:
Accounts payable $ 166,376 $ 176,094
Accrued liabilities 347,320 323,408
Short-term notes payable - shareholders 394,595 399,080
Short-term notes payable 27,500 27,500
------------ ------------
Total current liabilities 935,791 926,082
Long-term liabilities:
Notes payable 1,282,045 1,355,069
------------ ------------
Total long-term liabilities 1,282,045 1,355,069
Deficiency Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, Class A,
113.3606 and 151.8606 shares issued and
outstanding as of March 31, 2005 and December 31, 2004 respectively 1 1
Preferred stock, $0.001 par value, 8,000,000 shares authorized, Class B,
800,000 and 0 shares issued and
outstanding as of March 31, 2005 and December 31, 2004 respectively 800 800
Common stock, $0.001 par value, 300,000,000 shares authorized, 30,871,338
and 23,770,233 shares issued and outstanding as of March 31, 2005 and
December 31,
2004 respectively 30,871 23,770
Additional paid-in capital 9,179,386 9,099,302
Accumulated deficit (11,271,344) (10,847,683)
------------ ------------
Deficiency in stockholders' equity (2,060,285) (1,723,810)
------------ ------------
Total liabilities and (deficiency) in stockholders' equity $ 157,550 $ 557,341
============ ============
The accompanying notes are an integral part of these financial statements
3
CYBERLUX CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31, 2005 March 31, 2004
Revenue $ 13,568 $ 9,968
Cost of goods sold (6,369) (8,395)
------------ ------------
Gross margin (loss) 7,199 1,573
Operating Expenses:
Marketing and advertising 21,323 --
Depreciation and amortization 8,294 18,291
Research and development 18,696
General and administrative expenses 339,840 268,798
------------ ------------
Total operating expenses 388,153 287,089
------------ ------------
(Loss) from operations (380,954) (285,516)
Other income/(expense)
Other Income 15,000 --
Interest income 300 --
Interest expense (43,006) (49,193)
------------ ------------
Net Loss before provision for income taxes
and preferred dividend (423,660) (319,709)
Income taxes (benefit) -- --
------------ ------------
Net loss (423,660) (319,709)
Preferred dividend - Beneficial conversion discount
on convertible preferred -- 400,000
------------ ------------
Net loss available to common stockholders $ (423,660) $ (719,709)
============ ============
Weighted average number of common shares
outstanding, basic and fully diluted 27,919,776 11,907,762
Net loss per share - Basic and fully diluted $ (0.02) $ (0.06)
Preferred dividend $ 24,000 $ 24,000
The accompanying notes are an integral part of these financial statements
4
Cyberlux Corporation
Condensed Statement of Cash Flows
(Unaudited)
For the Three Months Ended
March 31, 2005 March 31, 2004
Cash flows provided by (from-used in) operating activities
Net (loss) available to common stockholders $ (423,660) $ (719,709)
Depreciation and amortization 8,294 18,291
Beneficial conversion discount - preferred stock dividend -- 400,000
Shares issued for previously incurred debt 73,024 27,692
Warrants issued to consultants for services 14,160 --
Preferred shares issued for conversion of accrued
management fees -- 723,670
Preferred shares issued for previously incurred debt 76,330
Shares issued for consulting services 47,225
Shares issued for research and development
Decrease (increase) in accounts receivable (13,429) (9,816)
Decrease (increase) in deposits 236,000
(Increase) decrease in prepaid expenses 32,169 --
(Increase)/decrease in other assets (31,195) --
Increase (decrease) in accrued liabilities 23,912 (142,442)
(Decrease) increase in management fee payable-
related party -- (684,670)
(Decrease) increase in other accounts payable (9,718) --
------------ ------------
Net cash (used in) operating activities (326,442) (27,429)
Cash flows provided by (used in) investing activities
Payments for property, plant and equipment (963) (5,174)
------------ ------------
Cash (used in) investing activities (963) (5,174)
Cash flows provide by (used in) financing activities
(Payments for )/proceeds from short-term notes payable, net -- --
(Payments for )/proceeds from short-term notes
payable-shareholders (net) (4,485) (85,000)
Proceeds from advance deposits -- 32,403
(Payments for)/Proceeds from convertible long-term notes (73,024) --
Proceeds from issuance of common stock -- 88,186
Net cash provided by (used in)financing activities (77,510) 35,589
------------ ------------
Net increase (decrease) in cash (404,915) 2,986
============ ============
Cash - beginning 415,375 16,247
Cash - ending $ 10,460 $ 19,233
Supplemental disclosures:
Interest Paid $ -- $ 66,314
Income Taxes Paid -- --
Non-Cash investing and financing activities:
Shares issued for research and development and consulting -- 47,225
Shares issued for conversion of debt 73,024 27,692
Warrants issued in connection with financing -- --
Warrants issued to consultants for services 14,160
Shares issued in connection with loan -- 225,000
Beneficial conversion discount on convertible preferred stock -- 400,000
Convertible preferred shares issued for note payable and accrued interest - -- 76,330
Convertible preferred shares issued for accrued management fees -- 723,670
The accompanying notes are an integral part of these financial statements
5
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three-month period ended March
31, 2005, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2005. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated December 31, 2004
financial statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 2004.
Business and Basis of Presentation
Cyberlux Corporation (the "Company") is incorporated under the laws of the State
of Nevada. The Company, which has transitioned from a development state
enterprise, develops, manufactures and markets long-term portable lighting
products for commercial and industrial users. While the Company has generated
revenues from its sale of products, the Company has incurred expenses, and
sustained losses. Consequently, its operations are subject to all risks inherent
in the establishment of a new business enterprise. As of March 31, 2005, the
Company has accumulated losses of $11,271,344.
Estimates
The preparation of 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 financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Reclassification
Certain reclassifications have been made to conform prior periods' data to the
current presentation. These reclassifications had no effect on reported losses.
Stock-Based Compensation:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SF AS No. 123 to require
prominent disclosures in both armua1 and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of the related
option. The Company has adopted the annual disclosure provisions of SFAS No.148
in its financial reports for the year ended December 31,2002 and subsequent
years.
6
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note D):
For the three months ended March 31,
2004 2003
--------- ---------
Net loss attributable to common stockholders -as reported $(423,660) $(719,709)
Add. Total stock based employee compensation expense as
reported under intrinsic value method (APB No. 25) -- --
Deduct Total stock based employee compensation expense
as reported under fair value based method (SFAS No. 123) -- --
--------- ---------
Net loss -Pro Forma $(423,660) $(719,709)
--------- ---------
Net loss attributable to common stockholders - Pro forma $(423,660) $(719,709)
========= =========
Basic (and assuming dilution) loss per share - as reported $ (0.02) $ (0.06)
Basic (and assuming dilution) loss per share - Pro forma $ (0.02) $ (0.06)
NOTE B - RELATED PARTY TRANSACTIONS
From time to time, the Company's principal officers have advanced funds to the
Company for working capital purposes in the form of unsecured promissory notes,
accruing interest at 12% per annum. As of March 31, 2005 and December 31, 2004,
the balance due to the officers was $ 394,595 and $399,080, respectively.
NOTE C - SUBSEQUENT EVENTS
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0118 per share on conversion of notes payable.
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.011 per share on conversion of notes payable.
In May, 2005, the Company issued 1,035,221 shares of its common stock at $0.0108
per share on conversion of notes payable.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that are subject to
significant risks and uncertainties about us, our current and planned products,
our current and proposed marketing and sales, and our projected results of
operations. There are several important factors that could cause actual results
to differ materially from historical results and percentages and results
anticipated by the forward-looking statements. The Company has sought to
identify the most significant risks to its business, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurance that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risks before making an
investment decision with respect to the Company's stock. The following
discussion and analysis should be read in conjunction with the financial
statements of the Company and notes thereto. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment from our Management.
Overview
We have transitioned from a development stage enterprise to a Company actively
designing, developing manufacturing and marketing advanced lighting systems that
utilize white (and other) light emitting diodes as illumination elements.
We are developing and marketing new product applications of diodal illumination
(TM) that demonstrate added value over traditional lighting systems. Using
proprietary technology, we are creating a family of products for emergency and
security lighting offer extended light life and greater cost effectiveness than
other existing forms of illumination. We are expanding our marketing activity
into channels of retail, commercial and institutional sales.
Our target markets include long-term interim lighting needs in hotels,
hospitals, nursing homes, airports, shopping centers and multiple family
complexes; long-term evacuation solutions for theaters, office and public
buildings; reduced maintenance cost solutions for property managers as applied
to walkway, corridor or landscape lighting; and certain sensitive applications
for the military.
During the second quarter of 2004, we met with officials from the State of New
York who expressed interest in our long-term interim lighting solutions. We also
met with security administrators of the Metropolitan Transit Authority and the
Port Authority in the City of New York. The Metropolitan Transit Authority
requested that we submit a proposal to provide long term interim lighting pilot
installations in New York City's subway system to include passenger platforms,
rail cars and tunnel accesses. In June 2004, we submitted a proposal to the MTA
for a pilot program. In March 2005, we submitted an implementation proposal for
subway cars and stairwells. This program is currently being reviewed by the MTA.
As a result of our meeting with the Port Authority, we anticipate a similar
proposal request related to Newark, LaGuardia and JFK airports and the Holland
Tunnel system, although we have not received a proposal request as of the date
of this filing and no assurance can be given that we will receive a proposal
request.
Results of Operations
Three months ended March 31, 2005 compared to the three months ended March 31,
2004
REVENUES
Revenues for the three months ended March 31, 2005 were $ 13,568 and compares to
$9,968 for the same period ended March 31, 2004. Included in sales for the
quarter is a $10,000 contract with Kings Park School District of Long Island,
New York for the installation of our ELS products in a local middle school. This
installation is being hailed as a pilot project that could become a model for
emergency lighting throughout the State of New York.
8
COST OF SALES
Cost of sales for the first quarter were $6,369 and produced a gross margin on
sales of 53%. This compares to $8,395 in cost of sales for the quarter ended
March 31, 2004 which produced a gross margin of 16%.
OPERATING EXPENSES
Operating expenses for the quarter ended March 31, 2005 were $ 388,153 and
compares to $287,089 for the same period ended March, 31, 2004. Included in the
Quarter ended March 31, 2005 are $21,323 in expenses for market development and
literature. This compares to $0 for the first quarter of 2004.
As a result of limited capital resources and minimal revenues from operations
from its inception, the Company has relied on the issuance of equity securities
to non-employees in exchange for services. The Company's management enters into
equity compensation agreements with non-employees if it is in the best interest
of the Company under terms and conditions consistent with the requirements of
Financial Accounting Standards No. 123, Accounting for Stock Based Compensation.
In order conserve its limited operating capital resources, the Company
anticipates continuing to compensate non-employees for services during the next
twelve months. This policy may have a material effect on the Company's results
of operations during the next twelve months.
Liquidity and Capital Resources
As of March 31, 2005, we had a working capital deficit of $875,666. This
compares to a working capital deficit of $ 442,303 as of December 31, 2004. As a
result of our operating losses for the first three months ended March 31, 2005,
we generated a cash flow deficit of $ 326,442 from operating activities. Cash
flows used in investing activities was $963 during the quarter. Cash flows used
in financing activities were $77,510 on payment of short-term notes payable for
the first three months ended March 31, 2005.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required in order to meet our current and
projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits through the next twelve months. However, if thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.
Our independent certified public accountant has stated in their report included
in our December 31, 2004, Form 10-KSB, as amended, that we have incurred
operating losses in the last two years, and that we are dependent upon
management's ability to develop profitable operations. These factors among
others may raise substantial doubt about our ability to continue as a going
concern.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on April 22, 2005 for the sale
of (i) $1,500,000 in secured convertible notes and (ii) warrants to buy
25,000,000 shares of our common stock. The investors are obligated to provide us
with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 will be disbursed within five days of the filing of a
registration statement; and
o $400,000 will be disbursed within five days of the effectiveness of
a registration statement.
The proceeds received from the sale of the secured convertible notes will be
used for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
9
The secured convertible notes bear interest at 10%, mature three years from the
date of issuance, and are convertible into our common stock, at the investors'
option, at the lower of (i) $0.03 or (ii) 50% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date. The full principal
amount of the secured convertible notes is due upon default under the terms of
secured convertible notes. The warrants are exercisable until five years from
the date of issuance at a purchase price of $0.03 per share. In addition, the
conversion price of the secured convertible notes and the exercise price of the
warrants will be adjusted in the event that we issue common stock at a price
below the fixed conversion price, below market price, with the exception of any
securities issued in connection with the Securities Purchase Agreement. The
conversion price of the secured convertible notes and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholder's position. The selling stockholders have
contractually agreed to restrict their ability to convert or exercise their
warrants and receive shares of our common stock such that the number of shares
of common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock. In addition, we have granted the investors a security interest in
substantially all of our assets and intellectual property and registration
rights.
Since the conversion price will be less than the market price of the common
stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
secured convertible notes during the quarter in which they are issued, including
the second quarter of fiscal 2005 when $600,000 of secured convertible notes
were issued.
We will still need additional investments in order to continue operations to
cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
Application of Critical Accounting Policies
On June 30, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment, an amendment of FASB Statements No. 123
and 95, that would require companies to account for stock-based compensation to
employees using a fair value method as of the grant date. The proposed statement
addresses the accounting for transactions in which a Company receives employee
services in exchange for equity instruments such as stock options, or
liabilities that are based on the fair value of the Company's equity instruments
or that may be settled through the issuance of such equity instruments, which
includes the accounting for employee stock purchase plans. This proposed
statement would eliminate a Company's ability to account for share-based awards
to employees using APB Opinion 25, Accounting for Stock Issued to Employees but
would not change the accounting for transactions in which a company issues
equity instruments for services to non-employees or the accounting for employee
stock ownership plans. The proposed statement, if adopted, would be effective
for awards that are granted, modified, or settled in fiscal years beginning
after December 15, 2004. The Company is in the process of assessing the
potential impact of this proposed statement to the financial statements.
Non-GAAP Financial Measures
The financial statements appearing in this quarterly report on Form 10-QSB do
not contain any financial measures which are not in accordance with generally
accepted accounting procedures.
10
Inflation
In the opinion of management, inflation has not had a material effect on the
Company's financial condition or results of its operations
Off-Balance Sheet Arrangements
The Company does not maintain off-balance sheet arrangements nor does it
participate in non-exchange traded contracts requiring fair value accounting
treatment.
RISK FACTORS
Much of the information included in this quarterly report includes
or is based upon estimates, projections or other "forward-looking statements".
Such forward-looking statements include any projections or estimates made by us
and our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements"
involve various risks and uncertainties as outlined below. We caution the reader
that important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors
should consider carefully the risk factors set out below.
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We incurred net losses of $6,025,848 for the year ended December 31,
2004 and $1,494,556 for the year ended December 31, 2003. In addition, for the
quarter ended March 31, 2005, we incurred a net loss of $423,660. We cannot
assure you that we can achieve or sustain profitability on a quarterly or annual
basis in the future. Our operations are subject to the risks and competition
inherent in the establishment of a business enterprise. There can be no
assurance that future operations will be profitable. Revenues and profits, if
any, will depend upon various factors, including whether we will be able to
continue expansion of our revenue. We may not achieve our business objectives
and the failure to achieve such goals would have an adverse impact on us.
If We Are Unable to Obtain Additional Funding Our Business Operations Will be
Harmed and If We Do Obtain Additional Financing Our Then Existing Shareholders
May Suffer Substantial Dilution.
We will require additional funds to sustain and expand our sales and
marketing activities. We anticipate that we will require up to approximately
$900,000 to fund our continued operations for the next twelve months, depending
on revenue from operations. Additional capital will be required to effectively
support the operations and to otherwise implement our overall business strategy.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our marketing and development plans and
possibly cease our operations. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated March 17, 2005, our independent auditors
stated that our financial statements for the year ended December 31, 2003 were
prepared assuming that we would continue as a going concern. Our ability to
11
continue as a going concern is an issue raised as a result of losses for the
years ended December 31, 2004 and 2003 in the amounts of $6,025,848 and
$1,494,556, respectively. We continue to experience net operating losses. Our
ability to continue as a going concern is subject to our ability to generate a
profit and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
Our continued net operating losses increase the difficulty in meeting such goals
and there can be no assurances that such methods will prove successful.
If We Are Unable to Retain the Services of Messrs. Evans, Schmidt or Ringo, or
If We Are Unable to Successfully Recruit Qualified Managerial and Sales
Personnel Having Experience in Business, We May Not Be Able to Continue Our
Operations.
Our success depends to a significant extent upon the continued
service of Mr. Donald F. Evans, our Chief Executive Officer, Mr. Mark D.
Schmidt, our President and Mr. John Ringo, our Secretary and Corporate Counsel.
Loss of the services of Messrs. Evans, Schmidt or Ringo could have a material
adverse effect on our growth, revenues, and prospective business. We do not
maintain key-man insurance on the life of Messrs. Evans or Ringo. In addition,
in order to successfully implement and manage our business plan, we will be
dependent upon, among other things, successfully recruiting qualified managerial
and sales personnel having experience in business. Competition for qualified
individuals is intense. There can be no assurance that we will be able to find,
attract and retain existing employees or that we will be able to find, attract
and retain qualified personnel on acceptable terms.
Many Of Our Competitors Are Larger and Have Greater Financial and Other
Resources Than We Do and Those Advantages Could Make It Difficult For Us to
Compete With Them.
The lighting and illumination industry is extremely competitive and
includes several companies that have achieved substantially greater market
shares than we have, and have longer operating histories, have larger customer
bases, and have substantially greater financial, development and marketing
resources than we do. If overall demand for our products should decrease it
could have a materially adverse affect on our operating results.
Our Trademark and Other Intellectual Property Rights May Not be Adequately
Protected Outside the United States, Resulting in Loss of Revenue.
We believe that our trademarks, whether licensed or owned by us, and
other proprietary rights are important to our success and our competitive
position. In the course of our international expansion, we may, however,
experience conflict with various third parties who acquire or claim ownership
rights in certain trademarks. We cannot assure that the actions we have taken to
establish and protect these trademarks and other proprietary rights will be
adequate to prevent imitation of our products by others or to prevent others
from seeking to block sales of our products as a violation of the trademarks and
proprietary rights of others. Also, we cannot assure you that others will not
assert rights in, or ownership of, trademarks and other proprietary rights of
ours or that we will be able to successfully resolve these types of conflicts to
our satisfaction. In addition, the laws of certain foreign countries may not
protect proprietary rights to the same extent, as do the laws of the United
States.
Risks Relating to Our Current Financing Arrangement:
There Are a Large Number of Shares Underlying Our Secured
Convertible Notes and Warrants That May be Available for Future Sale and the
Sale of These Shares May Depress the Market Price of Our Common Stock.
As of May 2, 2005, we had 33,991,780 shares of common stock issued
and outstanding, secured convertible notes outstanding that may be converted
into an estimated 60,000,000 shares of common stock at current market prices and
outstanding warrants to purchase 10,000,000 shares of common stock.
Additionally, we have an obligation to sell secured convertible notes that may
be converted into an estimated 90,000,000 shares of common stock at current
market prices and issue warrants to purchase 15,000,000 shares of common stock
in the near future. Additionally, pursuant to a prior financing with the selling
stockholders, we still have outstanding secured convertible notes that may be
converted into an estimated 141,294,800 shares of common stock at current market
prices and outstanding warrants to purchase 2,250,000 shares of common stock. In
addition, the number of shares of common stock issuable upon conversion of the
outstanding secured convertible notes may increase if the market price of our
stock declines. All of the shares, including all of the shares issuable upon
12
conversion of the secured convertible notes and upon exercise of our warrants,
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock.
The Continuously Adjustable Conversion Price Feature of Our Secured Convertible
Notes Could Require Us to Issue a Substantially Greater Number of Shares, Which
Will Cause Dilution to Our Existing Stockholders.
Our obligation to issue shares upon conversion of our secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of our common stock that are issuable, upon conversion of our
secured convertible notes (excluding accrued interest), based on market prices
25%, 50% and 75% below the market price, as of May 10, 2005 of $0.03.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------- --------- ------------- --------- -----------
25% $.0225 $.01125 133,333,334 79.69%
50% $ .015 $ .0075 200,000,000 85.47%
75% $.0075 $.00375 400,000,000 92.17%
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
The Continuously Adjustable Conversion Price Feature of our Secured Convertible
Notes May Have a Depressive Effect on the Price of Our Common Stock.
The secured convertible notes are convertible into shares of our
common stock at a 50% discount to the trading price of the common stock prior to
the conversion. The significant downward pressure on the price of the common
stock as the selling stockholders convert and sell material amounts of common
stock could have an adverse effect on our stock price. In addition, not only the
sale of shares issued upon conversion or exercise of secured convertible notes,
series A convertible preferred stock and warrants, but also the mere perception
that these sales could occur, may adversely affect the market price of the
common stock.
The Issuance of Shares Upon Conversion of the Secured Convertible Notes and
Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to
Our Existing Stockholders.
The issuance of shares upon conversion of the secured convertible
notes and exercise of warrants may result in substantial dilution to the
interests of other stockholders since the selling stockholders may ultimately
convert and sell the full amount issuable on conversion. Although AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium
Partners II, LLC may not convert their secured convertible notes and/or exercise
their warrants if such conversion or exercise would cause them to own more than
4.9% of our outstanding common stock, this restriction does not prevent AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New
Millennium Partners II, LLC from converting and/or exercising some of their
holdings and then converting the rest of their holdings. In this way, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New
Millennium Partners II, LLC could sell more than this limit while never holding
more than this limit. There is no upper limit on the number of shares that may
be issued which will have the effect of further diluting the proportionate
equity interest and voting power of holders of our common stock, including
investors in this offering.
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Secured Convertible Notes and Registered Pursuant To This
Prospectus May Not Be Adequate And We May Be Required to File A Subsequent
Registration Statement Covering Additional Shares. If The Shares We Have
Allocated And Are Registering Herewith Are Not Adequate And We Are Required To
File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our
market price as a result of the issuance of shares upon conversion of the
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secured convertible notes, we have made a good faith estimate as to the amount
of shares of common stock that we are required to register and allocate for
conversion of the secured convertible notes. Accordingly, we have allocated and
plan to register 150,000,000 shares to cover the conversion of the secured
convertible notes. In the event that our stock price decreases, the shares of
common stock we have allocated for conversion of the secured convertible notes
and are registering hereunder may not be adequate. If the shares we have
allocated to the registration statement are not adequate and we are required to
file an additional registration statement, we may incur substantial costs in
connection with the preparation and filing of such registration statement.
If We Are Required for any Reason to Repay Our Outstanding Secured Convertible
Notes, We Would Be Required to Deplete Our Working Capital, If Available, Or
Raise Additional Funds. Our Failure to Repay the Secured Convertible Notes, If
Required, Could Result in Legal Action Against Us, Which Could Require the Sale
of Substantial Assets.
In April 2005, we entered into a Securities Purchase Agreement for
the sale of an aggregate of $1,500,000 principal amount of secured convertible
notes. The secured convertible notes are due and payable, with 10% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. Although we currently have $600,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $900,000. In addition, any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes, including a default interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the secured convertible notes will
be converted into shares of our common stock, in accordance with the terms of
the secured convertible notes. If we were required to repay the secured
convertible notes, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the notes when required, the
note holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
Risks Relating to Our Common Stock:
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be
reporting issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the OTC Bulletin Board. If we fail to
remain current on our reporting requirements, we could be removed from the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
14
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
Cautionary Factors that May Affect Future Results
Our annual report on December 31, 2004, Form 10-KSB, as amended, includes a
detailed list of cautionary factors that may affect future results. Management
believes that there have been no material changes to those factors listed,
however other factors besides those listed could adversely affect us. That
annual report can be accessed on EDGAR.
15
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. As of March 31, 2005,
the Company's management carried out an evaluation, under the supervision
of the Company's Chief Executive Officer and the Chief Financial Officer
of the effectiveness of the design and operation of the Company's system
of disclosure controls and procedures pursuant to the Securities and
Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based
upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
were effective, as of the date of their evaluation, for the purposes of
recording, processing, summarizing and timely reporting material
information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934.
b) Changes in internal controls. There were no changes in internal controls
over financial reporting, known to the Chief Executive Officer or Chief
Financial Officer that occurred during the period covered by this report
that has materially affected, or is likely to materially effect, the
Company's internal control over financial reporting.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
On April 18, 2001, we filed a civil complaint against Light Technology, Inc.,
Ervin J. Rachwal, Safe-Light Industries, LLC a/k/a JFER Innovations Group, LLC,
James Meyer and John Fleming alleging fraud, breach of contract, monies lent,
misappropriation of trade secrets, conspiracy and sought injunctive relief
against the defendants to prevent them from misappropriating trade secrets as
well as to recover monetary damages On May 11, 2001, the Court granted a
temporary injunction against the Defendants. On June 5, 2001, the Defendants
filed their Answer denying the allegations of the Complaint and filed a
counterclaim alleging fraud, violation of Trade Secret Act, breach of contract
and money lent.
On January 18, 2002, the Court granted the Defendants' Motion to Dissolve the
Injunction. On January 28, 2002, we filed a Motion for Rehearing or
Clarification of the Motion to Dissolve. A hearing on our Motion for Rehearing
or Clarification of the Motion to Dissolve was scheduled for March 18, 2002, but
was cancelled by the Court and has not been rescheduled. The injunction still
remains in effect until the Court rules on this Motion.
Background:
We came into contact with Light Technology, Inc. and Rachwal in early 2000. We
were seeking someone with the knowledge and expertise to assist us in the
development of an emergency light using white LEDs. Light Technology, Inc. and
Rachwal represented that they had such knowledge and expertise and could
finalize the development of our emergency light by September 30, 2000 so that we
could begin manufacturing and selling the emergency light by November 2000.
Rachwal and Light Technology, Inc. also advised us that we could acquire all the
assets of Light Technology, Inc. and the rights to Light Technology, Inc.'s
flashlight which also used white LEDs provided Rachwal was made an officer and
director of our company as well as be in charge of design work.
In order to evaluate this offer, we requested accounting and financial records
to verify the representations of Light Technology, Inc. and Rachwal and to
attempt to ascertain the value of Light Technology, Inc.. Despite repeated
attempts, Light Technology, Inc. and Rachwal were unable to provide adequate,
verifiable financial records. Nonetheless, in order allow Light Technology, Inc.
and Rachwal to proceed with the development of the emergency light in order to
meet the November shipping deadline, we entered into a Letter of Intent with
Light Technology, Inc. on June 12, 2000. This Letter of Intent also contained a
confidentiality clause protecting our interests. Pursuant to the Letter of
Intent we paid Light Technology, Inc. $100,000 to develop a prototype of an
emergency storm light and possible acquisition of the assets of Light
Technology, Inc. based upon an independent evaluation of the of the worth of the
assets. We hired the Sarasota CPA firm, Kerkering, Barbario & Co. to
independently do an evaluation of the Light Technology, Inc. assets. Kerkering,
Barbario came to the conclusion that Light Technology, Inc. had no verifiable
assets of any value. Furthermore, Light Technology, Inc. never developed and
produced a working model of the emergency storm light. We incurred meeting and
travel expenses of $36,401 associated with Light Technology, Inc. during the
period June through December 2000. $43,699 was expended for marketing expense in
anticipation of the promised delivery of the light. We also made loans to
defendant Safe-Light in the amount of $13,188 to assist in development and
marketing of its products based upon representation that the assets of
Safe-Light would be acquired by us.
We instituted our complaint against the defendants when we learned, through a
local newspaper article that Light Technology, Inc. and Safe-Light had merged
and had developed an emergency light. We had confidentiality rights with both
companies. The defendants breached their contracts with us by misappropriating
17
trade secrets and we are seeking monetary damages as well injunctive relief to
prevent them from capitalizing on the misappropriation of trade secrets. Despite
the news article in which Rachwal announced that Light Technology, Inc. had
developed an emergency light, he did not object to the injunction stating that
he did not have such a light.
There is no similarity between our product, the Home Safety Light, and Light
Technology, Inc.'s product, known as the Pal Light. Our product has 10 diodes
and provides a blanket of light to light up a room in the event of a power
outage. The Light Technology, Inc. product is a small flashlight that uses one
diode.
Light Technology, Inc. claims that we breached the contract terms of the letter
of intent and joint venture agreement by failing to maintain confidential
disclosed to us and intentionally disclosing confidential information to third
parties. Despite receiving $100,000 from us, defendants claim we failed to fund
the development of the light and claim that we owe them in excess of $100,000 by
breaching the letter of intent and joint venture agreement. Further, defendants
claim we failed to pay fees set forth in the licensing agreement notwithstanding
that the condition precedent to pay said fees (the successful completion of a
private placement by us, which was subsequently withdrawn due to market
conditions). Defendant Safe-Light alleges that we requested that they assist us
in raising funding for the products discussed in the complaint. We actually
loaned them funds for the development of their barricade light.
We intend to fully prosecute our claims and actions against the Defendants. We
deny the Defendants allegations alleged against us in their counterclaim. This
litigation is still in the discovery stage and the ultimate outcome cannot
presently be determined.
COURT: Circuit Court of the Twelfth Judicial District In and For Sarasota
County, Florida.
CASE NAME: Cyberlux Corporation, Plaintiff v. Ervin J. Rachwal, Light
Technology, Inc., Safe-Light Industries, LLC a/k/a JFER Innovations Group, LLC,
James Meyer and John Fleming.
CASE NUMBER: 2001 CA 005309 NC Div. C.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In January 2005, holders converted 33.5 shares of our Series A Preferred Stock
into 1,425,000 shares of our Common Stock at $.10 per share. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
In February 2005, holders converted 5 shares of our Series A Preferred Stock
into 250,000 shares of our Common Stock at $.10 per share. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
Sales subsequent to quarter ending March 31, 2005
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC on April 22, 2005 for the
sale of (i) $1,500,000 in secured convertible notes and (ii) a warrants to buy
25,000,000 shares of our common stock.
The investors are obligated to provide us with an aggregate of $1,500,000 as
follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $400,000 will be disbursed within five days of the effectiveness of
this prospectus.
The secured convertible notes bear interest at 10%, mature three years from the
date of issuance, and are convertible into our common stock, at the investors'
option, at the lower of (i) $0.03 or (ii) 50% of the average of the three lowest
18
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date. The full principal
amount of the secured convertible notes are due upon default under the terms of
secured convertible notes. In addition, we have granted the investors a security
interest in substantially all of our assets and intellectual property and
registration rights. The warrants are exercisable until five years from the date
of issuance at a purchase price of $0.03 per share. In addition the warrants
exercise price gets adjusted in the event we issue common stock at a price below
market, with the exception of any securities issued as of the date of this
warrant.
* All of the above offerings and sales were deemed to be exempt
under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933,
as amended. No advertising or general solicitation was employed in offering the
securities. The offerings and sales were made to a limited number of persons,
all of whom were accredited investors, business associates of Cyberlux or
executive officers of Cyberlux, and transfer was restricted by Cyberlux
Corporation in accordance with the requirements of the Securities Act of 1933.
In addition to representations by the above-referenced persons, we have made
independent determinations that all of the above-referenced persons were
accredited or sophisticated investors, and that they were capable of analyzing
the merits and risks of their investment, and that they understood the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
There have been no purchases of common stock of the Company by the Company or
its affiliates during the three months ended March 31, 2005.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule
15d-14(a), promulgated under the Securities and Exchange Act of 1934, as
amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule
15d 14(a), promulgated under the Securities and Exchange Act of 1934, as
amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
19
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYBERLUX CORPORATION
Date: May 19, 2005 By: /s/ DONALD F. EVANS
--------------------
Donald F. Evans
Chief Executive Officer (Principal
Executive Officer) and Chairman of the
Board of Directors
Date: May 19, 2005 By: /s/ DAVID D. DOWNING
---------------------
David D. Downing
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
20