As filed with the Securities and Exchange Commission on November 9, 2005
An Exhibit List can be found on page II-7.
Registration No. 333-125111
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
CYBERLUX CORPORATION
(Name of small business issuer in its charter)
NEVADA 3674 91-2048178
(State or other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
4625 CREEKSTONE DRIVE, SUITE 100
RESEARCH TRIANGLE PARK
DURHAM, NORTH CAROLINA 27703
(919) 474-9000
(Address and telephone number of principal executive offices
and principal place of business)
DON F. EVANS, CHIEF EXECUTIVE OFFICER
CYBERLUX CORPORATION
4625 CREEKSTONE DRIVE, SUITE 100
RESEARCH TRIANGLE PARK
DURHAM, NORTH CAROLINA 27703
(919) 474-9000
(Name, address and telephone number of agent for service)
Copies to:
GREGORY SICHENZIA, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION FEE
OFFERING AGGREGATE
PRICE PER OFFERING PRICE
SHARE (2)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $.001 par 300,000,000 (3) $.02 $6,000,000 $706.20
value issuable upon
conversion of Secured
Convertible Notes
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 25,000,000 (4) $.03 $750,000 $88.28
value issuable upon exercise
of Warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 325,000,000 $6,750,000 $794.48
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of warrants held
by the selling stockholders. In addition to the shares set forth in the table,
the amount to be registered includes an indeterminate number of shares issuable
upon conversion of the secured convertible notes and exercise of the warrants,
as such number may be adjusted as a result of stock splits, stock dividends and
similar transactions in accordance with Rule 416. The number of shares of common
stock registered hereunder represents a good faith estimate by us of the number
of shares of common stock issuable upon conversion of the secured convertible
notes and upon exercise of the warrants. For purposes of estimating the number
of shares of common stock to be included in this registration statement, we
calculated a good faith estimate of the number of shares of our common stock
that we believe will be issuable upon conversion of the secured convertible
notes and upon exercise of the warrants to account for market fluctuations, and
antidilution and price protection adjustments, respectively. Should the
conversion ratio result in our having insufficient shares, we will not rely upon
Rule 416, but will file a new registration statement to cover the resale of such
additional shares should that become necessary. In addition, should a decrease
in the exercise price as a result of an issuance or sale of shares below the
then current market price, result in our having insufficient shares, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on May 19, 2005, which was $.02 per share.
(3) Includes a good faith estimate of the shares underlying secured convertible
notes to account for market fluctuations.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $.03 per share to account for antidilution protection adjustments.
(5) $441.38 fee previously paid.
----------
PURSUANT TO RULE 429 PROMULGATED UNDER THE SECURITIES ACT OF 1933, THE
ENCLOSED PROSPECTUS CONSTITUTES A COMBINED PROSPECTUS ALSO RELATING TO AN
AGGREGATE OF UP TO 64,567,319 SHARES OF OUR COMMON STOCK THAT WERE PREVIOUSLY
REGISTERED FOR SALE IN A REGISTRATION STATEMENT, AS AMENDED, ON FORM SB-2,
REGISTRATION NO. 333-119716. AS SUCH, THIS PROSPECTUS ALSO CONSTITUTES
POST-EFFECTIVE AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT ON FORM SB-2,
REGISTRATION NO. 333-119716, WHICH SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY
WITH THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT ON FORM SB-2 IN ACCORDANCE
WITH SECTION 8(C) OF THE SECURITIES ACT OF 1933.
3
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
4
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 9, 2005
CYBERLUX CORPORATION
325,000,000 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
325,000,000 shares of our common stock, including up to 300,000,000 shares of
common stock underlying secured convertible notes in a principal amount of
$2,407,881.16 and up to 25,000,000 issuable upon the exercise of common stock
purchase warrants. $907,881.16 of the secured convertible notes are convertible
into our common stock at the lower of $0.72 or 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 remaining
$1,500,000 of the secured convertible notes are convertible into our common
stock at the lower of $0.03 or 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 selling stockholders may
sell common stock from time to time on the Over-The-Counter Bulletin Board at
the prevailing market price or in negotiated transactions. The selling
stockholders may be deemed underwriters of the shares of common stock which they
are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "CYBL". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on November 7, 2005, was
$.11.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _____, 2005.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Cyberlux Corporation with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
5
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements 7
Prospectus Summary 8
Risk Factors 11
Use Of Proceeds 17
Market For Common Equity And Related Stockholder Matters 23
Management's Discussion And Analysis Of Financial Condition And
Results Of Operations 25
Description Of Business 34
Description Of Properties 38
Legal Proceedings 39
Management 41
Executive Compensation 42
Certain Relationships And Related Transactions 45
Security Ownership Of Certain Beneficial Owners And Management 46
Description Of Securities 48
Commission's Position On Indemnification For Securities Act
Liabilities 51
Plan Of Distribution 53
Selling Stockholders 55
Legal Matters 62
Experts 63
Available Information 63
Index to Consolidated Financial Statements 64
6
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any prospectus supplement contain forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events.
In some cases, you can identify forward-looking statements by words such
as "may," "should," "expect," "plan," "could," "anticipate," "intend,"
"believe," "estimate," "predict," "potential," "goal," or "continue" or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements.
Unless we are required to do so under U.S. federal securities laws or
other applicable laws, we do not intend to update or revise any forward-looking
statements.
7
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
CYBERLUX CORPORATION
We are in the development stage and our efforts have been principally
devoted to designing, developing 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.
For the year ended December 31, 2004, we generated $23,803 in revenue and
a net loss of $6,025,848. For the six months ended June 30, 2005, we generated
$13,768 in revenue and a net loss of $1,357,255. As a result of recurring losses
from operations and a net deficit in both working capital and stockholders'
equity, our auditors, in their report dated March 17, 2005, have expressed
substantial doubt about our ability to continue as going concern.
Our principal offices are located at 4625 Creekstone Drive, Suite 100,
Research Triangle Park, Durham, North Carolina 27703, and our telephone number
is (919) 474-9000. We are a Nevada corporation. We maintain websites at
www.cyberlux.com and www.luxSel.com. The information contained on those websites
is not deemed to be a part of this prospectus.
The Offering
Common stock offered by selling stockholders............... Up to 325,000,000 shares,
including the following:
- up to 300,000,000 shares of
common stock underlying secured
convertible notes in the
principal amount of
$2,407,881.16 (includes a good
faith estimate of the shares
underlying secured convertible
notes to account for market
fluctuations and antidilution
protection adjustments,
respectively), and
- up to 25,000,000 shares of
common stock issuable upon the
exercise of common stock
purchase warrants at an exercise
price of $.03 per share
(includes a good faith estimate
of the shares underlying
warrants to account for
antidilution protection
adjustments).
Common stock to be outstanding after the offering.......... Up to 400,075,001 shares
Use of proceeds........................................... We will not receive any proceeds
from the sale of the common
stock. However, we will receive
the sale price of any common
stock we sell to the selling
stockholders upon exercise of
8
the warrants. We expect to use
the proceeds received from the
exercise of the warrants, if
any, for general working capital
purposes. However, AJW Partners,
LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd., and New
Millennium Partners II, LLC will
be entitled to exercise up to
25,000,000 warrants on a
cashless basis at any time if
the shares of common stock
underlying the warrants are not
then registered pursuant to an
effective registration
statement. In the event that AJW
Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore,
Ltd., or New Millennium Partners
II, LLC exercise the warrants on
a cashless basis, then we will
not receive any proceeds from
the exercise of those warrants.
In addition, we have received
gross proceeds $1,500,000 from
the sale of the secured
convertible notes. 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.
Over-The-Counter Bulletin Board Symbol..................... CYBL
The above information regarding common stock to be outstanding after the
offering is based on 75,075,001 shares of common stock outstanding as of
November 7, 2005 and assumes the subsequent conversion of our issued secured
convertible notes and exercise of warrants by our selling stockholders.
SEPTEMBER 2004 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on September 23, 2004 for the
sale of (i) $1,500,000 in secured convertible notes and (ii) warrants to buy
2,250,000 shares of our common stock. Pursuant to a registration statement on
Form SB-2 (333-119716) declared effective with the SEC on November 12, 2004, we
previously registered 22,222,224 shares of common stock underlying the secured
convertible notes and 4,500,000 shares of common stock underlying the warrants.
We are registering 100,000,000 shares in this offering underlying these secured
convertibles notes. As of November 4, 2005, $592,118.84 of the secured
convertible notes has been converted and $907,881.16 remains outstanding.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes. The investors provided us with an aggregate of
$1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The secured convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock, at the selling
stockholders' option, at the lower of (i) $0.72 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.
Accordingly, there is in fact no limit on the number of shares into which the
notes may be converted. As of November 8, 2005, the average of the three lowest
intraday trading prices for our common stock during the preceding 20 trading
days as reported on the Over-The-Counter Bulletin Board was $.06 and, therefore,
the conversion price for the secured convertible notes was $.03. Based on this
conversion price, the $907,881.16 remaining of the secured convertible notes,
excluding interest, are convertible into 30,262,706 shares of our common stock.
9
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. See the "Selling Stockholders"
and "Risk Factors" sections for a complete description of the secured
convertible notes.
APRIL 2005 SECURITIES PURCHASE AGREEMENT
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, exercisable for five years from the date
of issuance at a purchase price of $0.03 per share of common stock.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes and warrants. The investors provided us with an
aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
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
selling stockholders' 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 the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. Accordingly, there is in fact no limit on the number of
shares into which the notes may be converted. As of November 8, 2005, the
average of the three lowest intraday trading prices for our common stock during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin Board
was $.06 and, therefore, the conversion price for the secured convertible notes
was $.03. Based on this conversion price, the $1,500,000 secured convertible
notes, excluding interest, were convertible into 50,000,000 shares of our common
stock.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Partners II, LLC 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.
See the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the secured convertible notes.
10
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS:
-------------------------------
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. For the six months ended
June 30, 2005, we incurred a net loss of $1,357,255. As of June 30, 2005, we had
an accumulated deficit of $12,204,938. 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. We need additional funding for for research and
development, increasing inventory, marketing and general and administrative
expenses. Although this amount is less than our net losses in the past, we
expect to decrease our general and administrative expenses by eliminating most
of our consulting fees. In the event that we cannot significantly reduce our
consulting fees, we will need to raise additional funds to continue our
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 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
11
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.
OUR PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS OWN A CONTROLLING INTEREST IN
OUR VOTING STOCK AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.
We have issued 800,000 shares of Series B Convertible Preferred Stock
to our officers and directors which are convertible into 8 million shares of
common stock and, in the aggregate, have the right to cast 80 million votes in
any vote by our shareholders. Combined with the number of shares of common stock
held by our officers and directors, they have the right to cast approximately
70% of all votes by our shareholders. As a result, these stockholders, acting
together, will have the ability to control substantially all matters submitted
to our stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
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.
12
As of November 7, 2005, we had 75,075,001 shares of common stock issued
and outstanding, secured convertible notes outstanding pursuant to our
securities purchase agreements dated September 23, 2004 and April 22, 2005, that
may be converted into an estimated 80,272,706 shares of common stock at current
market prices and outstanding warrants pursuant to our securities purchase
agreements dated September 23, 2004 and April 22, 2005, to purchase 20,583,333
shares of common stock. In addition, the number of shares of common stock
issuable upon conversion of the outstanding secured convertible notes issued
pursuant to the securities purchase agreements dated September 23, 2004 and
April 22, 2005 may increase if the market price of our stock declines. All of
the shares, including all of the shares issuable upon conversion of the secured
convertible notes and upon exercise of our warrants, may be sold without
restriction. The sale of these shares may adversely affect the market price of
our common stock.
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 November 7, 2005 of $0.11.
SEPTEMBER 2004 SECURED CONVERTIBLE NOTES
----------------------------------------
NUMBER % OF
% BELOW PRICE PER WITH DISCOUNT OF SHARES OUTSTANDING
MARKET SHARE AT 50% ISSUABLE STOCK
------ ----- ------ -------- -----
25% $.0825 $.04125 22,009,241 22.67%
50% $.055 $.0275 33,013,861 30.54%
75% $.0275 $.01375 66,027,721 46.79%
APRIL 2005 SECURED CONVERTIBLE NOTES
------------------------------------
FIXED CONVERSION NUMBER % OF
% BELOW PRICE PER OR WITH DISCOUNT OF SHARES OUTSTANDING
MARKET SHARE AT 50% ISSUABLE STOCK
------ ----- ------ -------- -----
25% $.0825 $.03 50,000,000 39.98%
50% $.055 $.0275 54,545,455 42.08%
75% $.0275 $.01375 109,090,910 59.24%
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.
13
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
REGISTRATION STATEMENT 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 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 registered
300,000,000 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 September 2004, 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, two
years from the date of issuance, unless sooner converted into shares of our
common stock. 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. In addition, any event of default under our secured
convertible notes issued pursuant to our September 23, 2004 or April 22, 2005
securities purchase agreements, 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.
14
RISKS RELATING TO OUR COMMON STOCK:
-----------------------------------
WE HAVE ISSUED A LARGE AMOUNT OF STOCK IN LIEU OF CASH FOR PAYMENT OF EXPENSES
AND EXPECT TO CONTINUE THIS PRACTICE IN THE FUTURE. SUCH ISSUANCES OF STOCK WILL
CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Due to our limited economic resources, we try to issue stock in lieu of
cash for payment of expenses and services provided for us. In 2004, we issued
6,335,000 shares of common stock in exchange for expenses and services rendered,
and we issued 800,000 shares of series B convertible preferred stock to officers
and directors in exchange for the retirement of debt owed to them. We anticipate
issuing shares of common stock whenever possible in lieu of cash to conserve our
financial position. The number of shares of common stock issued is directly
related to our stock price at the time of issuance. In the event that our stock
price drops, we will be required to issue larger amounts of shares for expenses
and services rendered, if the other party is willing to accept stock at all. The
issuance of shares of common stock will have the effect of diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
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.
15
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.
16
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholders upon exercise of the warrants. In connection with the securities
purchase agreement dated September 23, 2004, we issued to the investors
2,250,000 warrants, which are exercisable at $0.50 per share for a period of
five years from issuance. If the investors were to exercise all 2,250,000
warrants issued pursuant to the securities purchase agreement, we would receive
$1,125,000. In the event that our stock price does not exceed the warrant
exercise price of $0.50 per share, it is unlikely that the investors would
exercise the warrants, in which case would we not receive any of the proceeds
from the sale of the warrants. We expect to use the proceeds received from the
exercise of the warrants, if any, for general working capital purposes. In
connection with the securities purchase agreement dated April 22, 2005, we are
obligated to issue to the investors 25 million warrants, which are exercisable
at $0.03 per share for a period of five years from issuance. If the investors
were to exercise all 25 million warrants issued pursuant to the securities
purchase agreement, we would receive $750,000. In the event that our stock price
does not exceed the warrant exercise price of $0.03 per share, it is unlikely
that the investors would exercise the warrants, in which case would we not
receive any of the proceeds from the sale of the warrants. We expect to use the
proceeds received from the exercise of the warrants, if any, for general working
capital purposes. However, AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC will be entitled to exercise
all 25,000,000 warrants on a cashless basis at any time if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., or New Millennium Partners II, LLC exercise
the warrants on a cashless basis, then we will not receive any proceeds from the
exercise of those warrants. In addition, we have received gross proceeds
$1,500,000 from the sale of the secured convertible notes. 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.
SEPTEMBER 2004 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on September 23, 2004 for the
sale of (i) $1,000,000 in secured convertible notes and (ii) warrants to buy
2,250,000 shares of our common stock. Pursuant to a registration statement on
Form SB-2 (333-119716) declared effective with the SEC on November 12, 2004, we
previously registered 22,222,224 shares of common stock underlying the secured
convertible notes and 4,500,000 shares of common stock underlying the warrants.
We are registering 100,000,000 shares in this offering underlying these secured
convertibles notes. As of November 4, 2005, $592,118.84 of the secured
convertible notes has been converted and $907,881.16 remains outstanding.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes. The investors provided us with an aggregate of
$1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The secured convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.72; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
17
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.60 per share. Prepayment of the notes is to be
made in cash equal to 150% of the outstanding principal and accrued interest.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
The full principal amount of the secured convertible notes is 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. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date that the investors distributed
the final $500,000. In the event that we breach any representation or warranty
regarding the condition of our company as set forth in the Securities Purchase
Agreement, we are liable to pay liquidated damages in shares or cash, at the
election of the investors, equal to three percent of the outstanding amount of
the secured convertible notes per month plus accrued and unpaid interest. In the
event that we breach any covenant as set forth in the Securities Purchase
Agreement, including the failure to comply with blue sky laws, timely file all
public reports, use the proceeds from the sale of the secured convertible notes
in the agreed upon manner, obtain written consent from the investors to
negotiate or contract with a party to for additional financing, reserve and have
authorized the required number of shares of common stock or the maintenance of
our shares of common stock on an exchange or automated quotation system, then we
are liable to pay liquidated damages in shares or cash, at the election of the
investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the secured
convertible notes) under the secured convertible notes;
o Any representation or warranty we made in the Security Agreement or
in the Intellectual Property Security Agreement shall prove to have
been incorrect in any material respect when made;
o The failure by us to observe or perform any of our obligations under
the Security Agreement or in the Intellectual Property Security
Agreement for ten (10) days after receipt of notice of such failure
from the investors; and
o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a conversion
notice;
o Breach any material covenant or other material term or condition in
the secured convertible notes or the Securities Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or trustee for
us or any of our subsidiaries or for a substantial part of our of
our subsidiaries' property or business, or such a receiver or
trustee shall otherwise be appointed;
18
o Have any money judgment, writ or similar process shall be entered or
filed against us or any of our subsidiaries or any of our property
or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the investors;
o Institute or have instituted against us or any of our subsidiaries
any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors;
o Fail to maintain the quotation of our common stock on one of the
OTCBB or an equivalent replacement exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
the American Stock Exchange; or
o Default under any other secured convertible note issued pursuant to
the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose, enter,
with the aid and assistance of any person, any premises where the
collateral, or any part thereof, is or may be placed and remove the
same, and we shall assemble the collateral and make it available to
the investors at places which the investors shall reasonably select,
whether at our premises or elsewhere, and make available to the
investors, without rent, all of our respective premises and
facilities for the purpose of the investors taking possession of,
removing or putting the collateral in saleable or disposable form;
and
o To operate our business using the collateral and shall have the
right to assign, sell, lease or otherwise dispose of and deliver all
or any part of the collateral, at public or private sale or
otherwise, either with or without special conditions or
stipulations, for cash or on credit or for future delivery, in such
parcel or parcels and at such time or times and at such place or
places, and upon such terms and conditions as the investors may deem
commercially reasonable, all without (except as shall be required by
applicable statute and cannot be waived) advertisement or demand
upon or notice to us or our right of redemption, which we expressly
waived. Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable law
which cannot be waived, purchase all or any part of the collateral
being sold, free from and discharged of all trusts, claims, right of
redemption and equities by us, which we waived and released.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.50 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis at any time if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes issued pursuant to the Securities Purchase Agreement, dated
September 23, 2004.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
19
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related
documents are incorporated by reference as exhibits to our Form SB-2
registration statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the notes
is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of the remaining $907,881.16 of notes on November 8, 2005, a
conversion price of $0.03 per share, the number of shares issuable upon
conversion would be:
$907,881.16/$.03 = 30,262,706 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of November 7, 2005 of $0.11.
NUMBER % OF
% BELOW PRICE PER WITH DISCOUNT OF SHARES OUTSTANDING
MARKET SHARE AT 50% ISSUABLE STOCK
------ ----- ------ -------- -----
25% $.0825 $.04125 22,009,241 22.67%
50% $.055 $.0275 33,013,861 30.54%
75% $.0275 $.01375 66,027,721 46.79%
APRIL 2005 SECURITIES PURCHASE AGREEMENT
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 purchase
25,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes and warrants. The investors provided us with an
aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
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:
o $0.03; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
20
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.03 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.03. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is 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. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date that the investors distributed
the final $400,000. In the event that we breach any representation or warranty
regarding the condition of our company as set forth in the Securities Purchase
Agreement, we are liable to pay liquidated damages in shares or cash, at the
election of the investors, equal to three percent of the outstanding amount of
the secured convertible notes per month plus accrued and unpaid interest. In the
event that we breach any covenant as set forth in the Securities Purchase
Agreement, including the failure to comply with blue sky laws, timely file all
public reports, use the proceeds from the sale of the secured convertible notes
in the agreed upon manner, obtain written consent from the investors to
negotiate or contract with a party to for additional financing, reserve and have
authorized the required number of shares of common stock or the maintenance of
our shares of common stock on an exchange or automated quotation system, then we
are liable to pay liquidated damages in shares or cash, at the election of the
investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the secured
convertible notes) under the secured convertible notes;
o Any representation or warranty we made in the Security Agreement or
in the Intellectual Property Security Agreement shall prove to have
been incorrect in any material respect when made;
o The failure by us to observe or perform any of our obligations under
the Security Agreement or in the Intellectual Property Security
Agreement for ten (10) days after receipt of notice of such failure
from the investors; and o Any breach of, or default under, the
Warrants.
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
21
o Do not issue shares of common stock upon receipt of a conversion
notice;
o Fail to file a registration statement within 45 days after April 22,
2005 or fail to have the registration statement effective within 90
days after April 22, 2005;
o Breach any material covenant or other material term or condition in
the secured convertible notes or the Securities Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or trustee for
us or any of our subsidiaries or for a substantial part of our of
our subsidiaries' property or business, or such a receiver or
trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be entered or
filed against us or any of our subsidiaries or any of our property
or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the investors;
o Institute or have instituted against us or any of our subsidiaries
any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors;
o Fail to maintain the quotation of our common stock on one of the
OTCBB or an equivalent replacement exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
the American Stock Exchange; or
o Default under any other secured convertible note issued pursuant to
the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose, enter,
with the aid and assistance of any person, any premises where the
collateral, or any part thereof, is or may be placed and remove the
same, and we shall assemble the collateral and make it available to
the investors at places which the investors shall reasonably select,
whether at our premises or elsewhere, and make available to the
investors, without rent, all of our respective premises and
facilities for the purpose of the investors taking possession of,
removing or putting the collateral in saleable or disposable form;
and
o To operate our business using the collateral and shall have the
right to assign, sell, lease or otherwise dispose of and deliver all
or any part of the collateral, at public or private sale or
otherwise, either with or without special conditions or
stipulations, for cash or on credit or for future delivery, in such
parcel or parcels and at such time or times and at such place or
places, and upon such terms and conditions as the investors may deem
commercially reasonable, all without (except as shall be required by
applicable statute and cannot be waived) advertisement or demand
upon or notice to us or our right of redemption, which we expressly
waived. Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable law
which cannot be waived, purchase all or any part of the collateral
being sold, free from and discharged of all trusts, claims, right of
redemption and equities by us, which we waived and released.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.03 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis at any time if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes issued pursuant to the Securities Purchase Agreement, dated
April 22, 2005.
22
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related
documents are incorporated by reference as exhibits to our Form SB-2
registration statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the notes
is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $1,500,000 of notes on November 8, 2005, a conversion price of
$0.03 per share, the number of shares issuable upon conversion would be:
$1,500,000/$.03 = 50,000,000 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of November 7, 2005 of $0.11.
FIXED CONVERSION NUMBER % OF
% BELOW PRICE PER OR WITH DISCOUNT OF SHARES OUTSTANDING
MARKET SHARE AT 50% ISSUABLE STOCK
------ ----- ------ -------- -----
25% $.0825 $.03 50,000,000 39.98%
50% $.055 $.0275 54,545,455 42.08%
75% $.0275 $.01375 109,090,910 59.24%
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"CYBL".
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
23
HIGH($) LOW ($)
------ --------
2003
Third Quarter (1) 1.05 0.10
Fourth Quarter 0.55 0.12
2004
First Quarter 0.53 0.19
Second Quarter 0.85 0.27
Third Quarter 0.55 0.23
Fourth Quarter 0.35 0.06
2005
First Quarter 0.07 0.02
Second Quarter 0.20 0.02
Third Quarter 0.15 0.05
Fourth Quarter (2) 0.15 0.06
(1) Our stock first traded on July 13, 2003.
(2) As of November 7, 2005.
HOLDERS
As of November 7, 2005, we had approximately 210 holders of our common
stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is Pacific
Stock Transfer Company, 500 E. Warm Springs Road, Suite 240, Las Vegas, Nevada
89119.
We have never declared or paid any cash dividends on our common stock. We
do not anticipate paying any cash dividends to stockholders in the foreseeable
future. In addition, any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deem relevant.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
OVERVIEW
We are in the development stage and our efforts have been principally
devoted to designing, developing 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 solid-state
diodal illumination (TM) that demonstrate added value over traditional lighting
systems. Using proprietary technology, we are creating a family of products for
task and accent lighting, emergency and security lighting, and specialized
lighting systems for military and homeland security. Our solid-state lighting
technology offers extended light life and greater cost effectiveness than other
existing forms of illumination. We are expanding our marketing activity into
channels of retail, commercial, institutional and military sales.
With our task and accent lighting, the target markets include kitchen and
bath cabinet manufacturers and designer and installation contractors for the
residential market. In the commercial markets, our task and accent lighting
products and emergency and security lighting products address the 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. For our retail products, our target
customers include the home improvement and consumer goods retailers. For the
military and homeland security products, our target markets include all branches
of the military and all government organizations providing security services
such as border control and airport security.
In April of 2005, we began the development of a portable boundary security
lighting product for the military that will provide night-vision compatible
infrared lighting and intense, bright white lighting capability in a portable
configuration for fast, effective deployment. As of June 30, 2005, we completed
the first phase of development and expect final development to be complete in
the third quarter of 2005.
In April of 2005, we completed the fulfillment of a contract with Kings
Park School District of Long Island, New York for the installation of our
Emergency Lighting System in a local middle school. The objective of the pilot
project was to provide a local school with long-term interim lighting solution
so the Kings Park community will have a well-lit emergency shelter in the event
of a natural or manmade disaster. In May of 2005, the completed project was
presented to the Kings Park School District administration and we hope the pilot
could become a model for emergency lighting throughout other school districts.
In the second quarter of 2005, we developed a working relationship with
Cree, Inc., a leading manufacturer of light-emitting diode components. We plan
on developing products that utilize the Cree solid-state lighting technology. We
anticipate announcing our first product based on Cree technology in the third
quarter of 2005.
25
In May 2005, we introduced the Aeon (TM) "Task & Accent" lighting products
to address residential closet lighting, interior cabinet accent lighting and
under cabinet counter lighting with virtually heatless, long-term (75,000 hours
of life) lighting solutions for the homeowner. This unique lighting resource for
cabinetmakers, contractors and do-it-yourselfers offers three levels of light
from soft white diodal(TM) elements that are cool to the touch and easy to
install. The Aeon closet, cabinet and counter lighting was unveiled at the
Kitchen & Bath Industries Trade Show in Las Vegas, NV on May 10, 2005. Our
general lighting technology will provide a 40 to 60 percent reduction in
maintenance costs for property managers through the replacement of walkway,
corridor or landscape lighting elements and 68 percent reduction in energy costs
for those fixtures. In May, we began establishing the Aeon dealer network as our
channel of distribution for the Aeon products. As of June 30, 2005, we have 26
dealers representing 15 of the top 25 North American housing markets. We are
continuing to build the Aeon dealer network with qualify dealers and hope that
the Aeon dealer channel will cover many of top 50 North American housing markets
by year end.
In March of 2005, we submitted a proposal to the MTA that to providing
emergency lighting for only the subway cars and platforms. The proposal also
called for an initial subway car installation trial to prove the capability and
value of our technology. In April of 2005, we met with the Vice President of
Engineering for the MTA and discussed our proposal and the timing for a trial
within the subway system. Based on this meeting and the resulting discussions of
the time period required to accomplish our trial objectives, we understand the
MTA is still evaluating the trial proposal but this is not a priority at this
point and no determination can be made at this time as to when the MTA will make
a decision on our proposal. Therefore, we plan to address the Port Authority
with a similar proposal for an initial subway car installation trial to prove
the capability and value of our technology. This program will be formally
submitted in the third quarter of 2005.
In June of 2005, we completed the development of the Keon KeyCap (TM), a
new product designed to provide consumers with a long-lasting, slender sleeve of
electronics that turns a standard key into a lighting device. The patented Keon
KeyCap (TM) is the practical lighting solution for every consumer who carries
keys. Each Keon is a sturdy elastic surround that fits standard key heads and
features an electronics package that focuses a bright diodaltm beam of light
down the key shaft. When its miniaturized button is depressed, the Keon directs
light precisely into the intended keyhole or other targeted surfaces. We
anticipate supply and sales will begin on the Keon in the third quarter of 2005.
In June of 2005, we received confirmation that our Aeon Pro E "Task &
Accent" home lighting meets California's Title 24 new residential energy
requirements of 40 lumens per watt. Verified by Independent Testing
Laboratories, Inc., a third-party independent testing firm, the Aeon Pro E
product was confirmed to operate at 55 lumens per watt. The Title 24 California
energy requirements went into effect in 1978 to decrease California's energy
consumption. Since then, the legislation has saved the state more than $36
billion in electricity and natural gas costs. The Title 24 standards will be
revised in October of 2005 and the new standard of 40 lumens per watt will be
required. ITL was founded 50 years ago, is one of the most experienced
independent testing labs in the country and provides accurate, unbiased
information on virtually every type of lighting to lighting manufacturers,
designers, architects and the government. Exceeding the Title 24 standards opens
up the California market to our Aeon Pro E line and makes these products one of
the only alternatives to traditional task and accent lighting for the home. The
55 lumen per watt efficiency of the Aeon Pro E products is an industry-leading
efficacy and one that surpasses California's Title 24 requirements of 40 lumens
per watt. We anticipate that sales of the Aeon Pro E to grow in the fourth
quarter of 2005 when the new standards are in force.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and judgments that affect our reported assets, liabilities, revenues, and
expenses, and the disclosure of contingent assets and liabilities. We base our
estimates and judgments on historical experience and on various other
assumptions we believe to be reasonable under the circumstances. Future events,
however, may differ markedly from our current expectations and assumptions.
While there are a number of significant accounting policies affecting our
financial statements; we believe the following critical accounting policies
involve the most complex, difficult and subjective estimates and judgments:
26
o stock-based compensation; and
o revenue recognition.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148 - Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS
No. 123 - Accounting for Stock-Based Compensation, providing alternative methods
of voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2002.
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by APB No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the provisions of APB No. 25, compensation expense is measured at the
grant date for the difference between the fair value of the stock and the
exercise price.
REVENUE RECOGNITION
For revenue from product sales, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004
REVENUES
Revenues for the six months ended June 30, 2005 were $ 13,768 as compared
to $21,206 for the same period ended June 30, 2004. Included in sales for the
six months 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.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2005 were $1,078,628
as compared to $2,184,526 for the same period ended June 30, 2004. Included in
the six months ended June 30, 2005 are $137,672 in expenses for market
development and literature. This compares to $10,380 for the six months ended
June 30, 2004.
As a result of limited capital resources and minimal revenues from
operations from our inception, we have relied on the issuance of equity
securities to non-employees in exchange for services. Our management enters into
equity compensation agreements with non-employees if it is in our best interest
under terms and conditions consistent with the requirements of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation. In order
to conserve our limited operating capital resources, we anticipate continuing to
compensate non-employees for services during the next twelve months. This policy
may have a material effect on our results of operations during the next twelve
months.
27
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 COMPARED.
Revenues for the year ended December 31, 2004 were $23,803 and include
$9,974 for the pilot installation of our new ELS product for the City of
Cleveland, Ohio. This compares to revenues of $74,238 for the year ended
December 31, 2003.
Cost of goods sold were $160,260 for 2004 compared with $161,984 for 2003.
Much of the design effort on the ELS product was costed into the product
installation for the City of Cleveland.
Operating expenses for the year ended December 31, 2004 were $4,098,444
compared with $1,268,802 for the year ended December 31, 2003. Operating
expenses for consulting services for the year ended December 31, 2004 were
$2,116,672 and most of this expense was the result of issuance of common stock
of the Company, recorded at the market price on the date of the awards, in lieu
of cash payments. The parties who received shares provided either market
development or capital fund-raising services.
MARKET FUND SERVICES
DEVELOPMENT RAISING PERFORMED
------------------ ------------------ -----------------------------
CASH PAYMENTS
-------------
New Edison 72,900.00 Marketing and Sales
Dudgeon Enterprises 15,000.00 Business Development
Geiger & Associates 21,000.00 Business Development
Burns & Associates 11,756.25 Business Development
Phil Snowden 11,756.25 Business Development
Miscellaneous 14,800.85 Business Development
STOCK PAYMENTS
--------------
Greenfield Capital 125,000.00 Investment Banking
Sichenzia Ross et al. 25,000.00 Legal Services
Current Capital 243,750.00 Investor Relations
Advisory Group, Ltd. 93,750.00 Investor Relations
David Bromberg 40,000.00 Investor Relations
Phil Snowden 10,000.00 Business Development
Clark Burns 10,000.00 Business Development
Frank Marasca 15,000.00 Business Development
William Schnell 15,000.00 Business Development
Bruce Geiger 15,000.00 Business Development
NIR Warrants 216,285.00 Investment Banking
Black-Scholes Calculation 182,969.00 941,905.00 **
---------------------------
Note** These entries were recorded based on the Black-Scholes calculations
that were performed to establish the fair market value of stock
awarded in exchange for services.
The other $1,981,722 million in operating expenses for the year ended
December 31, 2004 included:
28
Business development sevices provided by consultants included
introductions into new ventures for us, including projects or potential projects
with the military, school districts, municipalities and airports.
Investor relation sevices provided by consultants consisted of promotions
of our company and our products.
Year Ended 12/31/2004
----------
Salaries & Benefits 977,529
Marketing and advertising 109,651
Rent 35,954
Insurance 8,389
Depreciation and amortization 47,686
Research and development 391,421
Legal Expense 64,229
Accounting Services 63,915
Investor Relations 62,354
Travel, Living and Entertainment 167,035
Office Expenses 53,609
---------
1,981,772
Operating expenses for 2004 also include $296,008 representing costs
incurred in the design and pre-production of three products to be marketed
during the second quarter of 2005. Accounting practices have historically
attempted to match revenues and costs; however, in compliance with the
requirements of FASB number 2, we have taken these costs to expense during the
year 2004.
Interest expense for 2004 was $1,600,087 compared to $138,008 for 2003.
Included in interest expense for 2004 is $1,500,000 which was booked to
recognize the imbedded beneficial conversion feature of the $1,500,000
convertible notes payable entered into during the 3rd and 4th quarters of 2004.
The net loss realized for 2004 was $6,825,848, or $0.41 per share on an
average of 16,701,174 shares outstanding and compares to a net loss of
$2,230,806, or $0.29 per share on an average of 7,652,012 shares outstanding for
the year 2003.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we had a working capital deficit of $630,134. 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 six months ended June 30, 2005, we
generated a cash flow deficit of $1,310,382 from operating activities. Cash
flows used in investing activities was $30,856 during the quarter. Cash flows
from financing activities provided $1,067,515 from the issuance of convertible
notes payable for the first six months ended June 30, 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,
dated as of March 17, 2005, 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.
29
September 2004 Securities Purchase Agreement
--------------------------------------------
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors, AJW Partners, LLC, AJW
Qualified Partners LLC, AJW Offshore, Ltd. and New Millennium Capital Partners
II, LLC, on September 23, 2004 for the sale of (i) $1,500,000 in secured
convertible notes and (ii) warrants to buy 2,250,000 shares of our common stock.
The investors provided us with an aggregate of $1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The proceeds received from the sale of the secured convertible notes were
used for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory. As of
November 4, 2005, $592,118.84 of the convertible debentures has been converted
and $907,881.16 remains outstanding.
The secured convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.72 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board 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 $0.50 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. As of the date of this filing, the conversion price for
the secured convertible debentures and the exercise price of the warrants have
not been adjusted. 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.
April 2005 Securities Purchase Agreement
----------------------------------------
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors, AJW Partners, LLC, AJW
Qualified Partners LLC, AJW Offshore, Ltd. and New Millennium Capital Partners
II, LLC, 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 provided us with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
The proceeds received from the sale of the secured convertible notes were
used for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
30
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 the
Over-The-Counter Bulletin Board 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. As of the date of this filing, the conversion price for
the secured convertible debentures and the exercise price of the warrants have
not been adjusted. 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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS No. 141), and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The FASB also
issued Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" (SFAS No. 143),
and Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144) in August and
October 2001, respectively.
SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method. The adoption of SFAS No. 141 had no material impact
on the Company's financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 142. Under the new
rules, the Company will no longer amortize goodwill and other intangible assets
with indefinite lives, but such assets will be subject to periodic testing for
impairment. On an annual basis, and when there is reason to suspect that their
values have been diminished or impaired, these assets must be tested for
impairment, and write-downs to be included in results from operations may be
necessary. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption.
Any goodwill impairment loss recognized as a result of the transitional
goodwill impairment test will be recorded as a cumulative effect of a change in
accounting principle no later than the end of fiscal year 2002. The adoption of
SFAS No. 142 had no material impact on the Company's financial statements
31
SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS No. 143 will not have
a material impact on its results of operations and financial position upon
adoption. The Company plans to adopt SFAS No. 143 effective January 1, 2003.
SFAS No. 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS No. 144
superseded Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS No. 121), and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions". The Company adopted
SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 had no
material impact on Company's financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that a similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9", which removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with Statements
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets. In addition, this Statement amends SFAS No. 144, Accounting for the
Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
The requirements relating to acquisitions of financial institutions are
effective for acquisitions for which the date of acquisition is on or after
October 1, 2002. The provisions related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible assets are
effective on October 1, 2002. The adoption of this Statement did not have a
material impact to the Company's financial position or results of operations as
the Company has not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual 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 transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
32
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected to
change to the fair value based method of accounting for stock-based employee
compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
PRODUCT RESEARCH AND DEVELOPMENT
We anticipate incurring approximately $500,000 in research and development
expenditures in connection with the development of our Wireless Lighting System,
Aeon cabinet lighting and Cyclone Power Light Plant during the next twelve
months.
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
ACQUISITION OR DISPOSITION OF PLANT AND EQUIPMENT
We do not anticipate the sale of any significant property, plant or
equipment during the next twelve months. We do not anticipate the acquisition of
any significant property, plant or equipment during the next 12 months.
33
BUSINESS
OVERVIEW
We are a Nevada corporation that was incorporated on May 17, 2000. We were
founded to design, develop, market and sell advanced lighting systems that
utilize Gallium Nitride light emitting diodes as illumination elements. White
diodes are a relatively new phenomenon that offers major advances in
illumination technology. Our Gallium Nitride diodes consume 92% less energy than
incandescent or fluorescent counterparts to produce comparable light output. In
electrochemical (battery powered) applications, this diminution of energy
consumption positions our lighting solutions as more durable and reliable than
other interim lighting alternatives. In standard alternating current electrical
applications, the calculated life of Gallium Nitride diodes as lighting elements
is over 20 years versus 750 hours for traditional incandescent light bulbs.
These exceptional performance characteristics, diminutive energy consumption and
extended life, have prompted Gallium Nitride diode implementation in traffic
lights and automotive brake lights, but have not yet significantly occurred in
our area of focus, diodal illumination (tm). Diodal illumination is the
production of light through the use of white light emitting diodes. A light
emitting diode is a chemical compound (gallium nitride, GaN) that produces a
visible light when an electrical current is applied. This production of light
through a diode is contrasted with light from a typical light bulb, in which
light is produced as a by-product of a burning filament contained within a
vacuum globe. The diode uses 92% less energy to produce comparable light to that
of a traditional light bulb. Our diodal illumination differs from traditional
LEDs, or light emitting diodes in several ways, such as:
(a) traditional LEDs involve the use of colored lights, including blue,
red, green and amber while our diodal illumination involves only
white light;
(b) our diodal illumination uses only gallium nitride, while traditional
LEDs use multiple gases and chemical compounds; and
(c) traditional LEDs cannot produce large amounts of wattage while our
diodal illumination can create wattage equal to or in excess of
current fluorescent lighting.
PRINCIPAL PRODUCTS AND PRINCIPAL MARKETS
We have introduced our first product, the Cyberlux Home Safety Light. Our
Home Safety Light accounted for 58% of revenues in 2004 and 0% for the period of
January 1, 2005 to date. Our production strategy has required the
identification, qualification and engagement of a variety of talents in
industrial design, integrated circuit board production, multi-cavity steel
injection mold fabrication, component part assembly, performance testing and
packaging to fulfill the tasks associated with finished goods delivery.. We are
now planning to broaden our product line into optoelectronic technology and
expand our marketing activity into various channels of retail and institutional
sales. Our product line, consisting of the Home Safety Light, the Cyclone PLP
(Power Light Plant), the Power-Outage Adapter, the Task & Accent Light and the
KeyCap LockLight, employ single use standard alkaline or lithium ion constant
charge reusable batteries in different applications. These fixtures express
superior characteristics in brightness, extended light life and durability
through diodal(TM) illumination, an optoelectronic descriptor trademarked by
Cyberlux.
During the early stages of research for long-term interim light solutions,
all experimentation was confined to incandescent, fluorescent and, to a more
limited extent, fiber optics as illumination sources. The recurring problem with
these lighting elements was the inefficient use of electrical energy. For
example, in an incandescent bulb, 95% of the electrical energy consumed is
dissipated as radiant heat, not light. The discovery of the bright white Gallium
Nitride diode provides an alternative that can produce the long-term interim
light source that was to be the objective of our product development activities.
Unlike light bulbs that are brittle glass globes surrounding a fragile wire
filament in a vacuum, light emitting diodes are extraordinarily efficient solid
state semiconductors that are practically indestructible. Diodes are
manufactured from chemical compounds mixed with phosphors, which transform
electrical energy to visible light without heat. When electrical current is
applied to a diode, the energy creates electromagnetic radiation, which occurs
as light.
The power outage that struck the Midwest to the Northeastern United States
and parts of Canada in August of 2003 dramatized the absence of realistic
emergency lighting solutions in North America. This event was followed by the
hurricane season of 2004 during which millions of property owners in Florida
34
were without conventional power for days up to several weeks. The recurring
power losses are directly attributable to the grid system which delivers
electrical power to the North American Continent. Storm activity or power surges
may cause electrical power line damage which then causes grid collapse due to
the domino effect of failing systems. Typically, in the event of a power outage,
"emergency lighting" is utilized, which is short-term evacuation lights in
public and private buildings which perform for 60 to 90 minutes. Long-term
electrical power grid failure is a far different problem. We have developed an
alternative to typical "emergency lighting" for grid failure blackouts with
long-term emergency lighting using its Reliabrighttm family of battery powered
products that provide 60 hours (3,600 minutes) of bright light from one battery
charge.
Shortly after the blackout of August 2003, we were invited to propose an
emergency lighting redundancy system for the City of Cleveland, Ohio where the
power-outage darkened most of the city's buildings and homes. We reviewed
existing systems and then demonstrated our Reliabrighttm Emergency Lighting
System (ELS) over a three-month period beginning in December, 2003. In March of
2004, we were awarded a non-competitive bid contract by the City to begin
implementation of our Reliabrighttm ELS and ELU products in Cleveland's Public
Utilities Building. The nature and purpose of Reliabrighttm is its ability to
provide 60 hours of light during blackouts in bathrooms, stairwells, elevators,
corridors, equipment rooms and interior offices from its custom sealed
constant-charge battery pack and expandable diodaltm lighting element
configuration. The Reliabrighttm ELS retrofits into existing ceiling tiles in
bathrooms, elevators or offices and the ELU is wall mounted in corridors,
stairwells and equipment rooms. Our Reliabrighttm Emergency Lighting System
accounted for 42% of our revenues in 2004 and 100% for the period of January 1,
2005 to date.
Our initial product, the Home Safety Light (HSL), is an efficient portable
fixture that provides a full week of light from one set of AA batteries compared
to over 20 sets of replacement batteries required by other portable lights to
produce comparable light life. A proprietary intelligent circuit board provides
three levels of light intensity controlled by a simple push button. The
parabolic reflector broadcasts a blanket of light that can illuminate an entire
room, corridor, stairwell or other strategic location. The unit may be
hand-held, placed on a level platform or suspended from a wall-mounted hook. At
the moderate light level, it provides a full week of reliable bright light.
Because the patented HSL's performance characteristics are ideal for
recreational boating and camping as well as home safety, certain modifications
and package designs were implemented to create the CampLamptm which address the
needs of outdoor markets.
The Cyclone PLP (Power Light Plant) is a heavy-duty, rugged, portable
fixture that is actually a "perpetual source of light". The Cyclone is powered
by our proprietary sealed ConstaChargetm lead-acid battery that is maintained at
full charge by linkage to a standard electrical wall outlet or by linkage to a
vehicle's charge port or its cigarette lighter. The fixture operates its
articulated lens head for 60 hours of light from one charge session and can be
renewed to full charge in approximately 4 hours. The PLP has an integrated
charge port to enable recharge of a cell phone or other DC device and a reverse
current flow switch that can trickle charge a disabled automobile battery
through connection to the vehicle's internal charge port. The articulated lens
head arm has the ability to rotate through graduated ratchet points to provide
rigid focus of a powerful beam in task related applications. A 180 degree
rotation of the lens head when the fixture is upended to a vertical stance
positions the light source as a useful table lamp.
Our Power-Outage Adapter is a patented "intelligent electrical wall
outlet" that replaces an existing wall outlet, continues to perform as an
electrical outlet used by a variety of power cords, but now provides a new
dimension of service as an emergency lighting system. The Adapter contains a
constant charge battery, three sensors and three diodaltm lighting elements. One
sensor detects motion in a darkened space and illuminates one diode in the lower
lens to provide a guide light for movement; a second sensor detects loss of
power in the building's electrical system and illuminates two ultra-bright
diodes in the upper lens to wash the attendant wall with light; and a third
sensor detects ambient light in the space and deactivates the system. The Power
Outage Adapter will be marketed to hospitals, eldercare facilities and hotels in
the third quarter of 2005.
The "Heatless" new Task & Accent light is a fixture of several different
lengths which offer alternatives for its application in closets, cabinets and
under cabinet counter lighting. This product has the potential to become the
favorite of kitchen and interior designers owing to its remarkable performance
characteristics of several optional shades of white light, three levels of light
intensity and its "cool to the touch" safety feature. The choice of electrical
35
connections as plug-in, hard-wired or battery powered adds to the fixture's
flexibility and its light life of 75,000 hours contributes to its leadership
role in energy efficiency, durability and longevity.
Our patented KeyCaptm LockLight provides an inexpensive solution for a key
chain light source. This unique fixture is encased in an elastic fabric that
easily fits over the head of any variety of keys. The slender circuitry is
positioned to reside at the side of the key with the diode facing the lockset
entry down the shaft of the key which brightly, and precisely, illuminates the
keyhole. The KeyCaptm, which will be marketed three to a package surrounding
plastic facsimiles of keys, is a practical, lightweight, addition to every
consumer's key chain.
CUSTOMERS
Our major customers to date include the City of Cleveland and the Kings
Park, New York school district. We have previously sold our Home Safety Light to
QVC in 2003, and we are in discussions with them for the purchase and sale of
our Home Safety Light for the third quarter of 2005, although no agreement has
been reached and no assurances can be given that we will reach an agreement with
QVC.
Our Home Safety Light is targeted to all consumers to be used in the event
of emergency. The Home Safety Light is designed to provide extended lighting
from two AA batteries for use during blackouts, hurricanes, power failures or in
areas of the house where traditional lighting is either not required or needed,
such as attics. Our Reliabright Emergency Lighting System is targeted to
corporations, building owners, school districts, governments and the military to
provide long-term emergency lighting solutions. Our Power Outage Adapter will be
marketed to hospitals, eldercare facilities and hotels. Our Aeon "Task & Accent"
lighting products will be targeted to home, office and business owners as well
as residential and commercial builders.
DISTRIBUTION METHODS OF OUR PRODUCTS
Consistent with our sales objectives, the reliable manufacture and
distribution of proprietary component parts and assembly of finished products
required exacting coordination of resources to provide detailed working drawings
to tool manufacturers for injection molded parts and optics; precise circuitry
diagrams to receive diodes, resistors and capacitors into the electronics
platform; source identification for volume supplies of batteries and diodes;
packaging considerations for presentation of product and corresponding
dimensions of containment's for shipping and display; and an experienced
contract assembly organization with an extensive infrastructure capable of
collation and inventory of all component parts.
Robrady Design, Inc., our industrial design firm, provides detailed
working drawings for injection molded parts to tool manufacturers in the US and
abroad. Our products are manufactured both in the United States and abroad. We
have contracted on a per-order basis with manufacturing facilities in China,
Taiwan, Mexico, Puerto Rico and Canada. We are responsible for choosing our
manufacturing facilities. We have no standing contracts with any manufacturing
facilities, and we engage such facilities on an as-needed basis.
We contract for our diodes with Nichia Corporation, Lumileds, Inc. and
Cree, Inc. Plastic parts and production molds are contracted for on a product by
product basis with MegaHertz Magnetics Corporation which has offices in Boulder,
CO and Shanghai, China. Packaging design is contracted with Phillipe Becker
Design in San Francisco, CA where prototype clamshell and blister pack packages
are produced for duplication by printers and plastic mold fabricators in China.
During the Fall of 2000, we identified Shelby County Community Services,
Shelbyville, Illinois, as a contract manufacture and assembly organization that
was positioned to meet our requirements for assembly and distribution of our
products. Shelby County Community Services has over a decade of successful
performance on behalf of Fortune 100 companies and represented the quality of
management, performance and fiscal stability that we sought to employ in the
distribution process.
36
We have a Proprietary Product Manufacturing Agreement with Shelby County
Community Services that provides for Shelby County Community Services to
assemble, test, package, warehouse finished good inventory, palletize and ship
per purchase orders for shipment FOB Shelbyville. In the Summer of 2004, we
renewed our relationship with Shelby County Community Services. Shelby County
Community Services will continue to serve as the warehousing and distribution
center for our products, which are to be manufactured abroad. Shelby County
Community Services no longer assembles or tests our products. Their role now
only involves receiving shipments of our goods from our contract manufacturers,
warehousing our products and shipping them to our customers. Shelby County
Community Services also coordinates customs protocols and manages incoming
inventories.
Sales are made through our websites, on-air marketing on QVC and through
distributor agreements we have with various vendors. Our internet site is
serviced by Shelby County Community Services through a fulfillment operations
agreement whereby Shelby County Community Services receives a daily batched
summary of internet sales through an email link established by us and United
Parcel Service. The software validates the address of the customer and advises
shipping mode (next day, two day or ground), computes shipping and handling
charges then prints the appropriate waybill at the shipping office of Shelby
County Community Services. Packages are shipped within 24 hours of receipt of
the email summary of business for the preceding day's orders. Shelby County
Community Services coordinates materials inventory with our approved vendors
based upon purchase orders or blanket orders for products. SCCS can currently
ship 80,000 product units per month, which can be increased by 50% with a four
month lead time to undertake expansion of facilities.
We have engaged Forma Designs, Inc. to produce, coordinate and manage our
corporate and product marketing activities. Forma Designs, Inc. has broad-based
experience in developing the corporate and product marketing required to launch
technology companies. The role of Forma Designs, Inc. is to integrate marketing,
sales, product and customer support activities and messages to optimize customer
acquisition and retention. Forma Designs, Inc. serves as the liaison for the
preparation and delivery of selling materials to the individual selling firms
and an information conduit to management for production and finished goods
inventory issues.
We have retained Capstrat, Inc. as our public relations firm responsible
for the strategic and tactical communications for Cyberlux. Capstrat is a
marketing communications firm that assists Cyberlux in communicating to our
target audiences of customers, prospects, the media, policymakers, employees,
opinion leaders and shareholders. Capstrat draws on a wide array of disciplines,
fueled by strategy and creativity, to aid Cyberlux in achieving our tactical and
strategic goals.
We have retained two technology product sales firms, Smart Products, Inc.,
Westwood, NJ, and New Edison, LLC, Longmont, CO, to represent our product line
over the range of channels addressed for distribution. The individual firms have
been selected based upon established relationships with certain commercial and
retail channels and proven track records of sales to those channels.
INDUSTRY BACKGROUND
A research study by Research Econometrics, LLP in April 1999 attempted to
identify a new approach to the development of an electrochemical (battery
powered), portable, interim lighting system capable of providing safe
illumination for extended periods of time to property owners deprived of
electrical service caused by power outages. Although power outages have come to
be a recurring phenomenon due to anomalies in electrical service distribution
networks, the focus of the initial study was on disruptions caused by severe
storm activity along the Atlantic and Gulf States' coastlines and the
corresponding affected inland electrical grids. The National Weather Service
labels annual storm activity as the Hurricane Season, which is officially
monitored from June 1st to November 30th each year. Other deficiency outages not
related to weather have been labeled by the press as rolling blackouts. The loss
of electrical power related to tropical and subtropical storms can be wide
spread and cover extensive regional segments surrounding the matrix of the
storm. It is the incidence of power outages that identified the need for a
reliable, durable, safe and economical interim lighting system for property
owners and the general population in areas affected by these seasonally severe
weather systems. The research conducted to identify an optimum interim lighting
system led to the discovery of a new illumination technology (optoelectronics).
REGULATION
Our advertising and sales practices concerning the Home Safety Light and
the Wireless Interim Lighting Systems are regulated by the Federal Trade
Commission and state consumer protection laws. Such regulations include
restrictions on the manner that we promote the sale of our products. We believe
we are in material compliance with such regulations. We believe that we will be
able to comply in all material respects with laws and regulations governing the
conduct of business operations in general. We are not aware of any pending
government regulations that may adversely affect our business.
37
RESEARCH AND DEVELOPMENT ACTIVITIES
We anticipate continuing to incur research and development expenditures in
connection with the development of our Wireless Lighting System during the next
twelve months.
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
COMPETITION
The lighting and illumination industry is extremely competitive. Our
ReliaBright products address the long-term blackout emergency lighting needs
with battery powered (60 hours) lighting solutions for hotels, hospitals, adult
care centers and high-rise apartments, and long-term evacuation lighting
solutions for commercial buildings. The ReliaBright products are competitively
positioned as a price-competitive, new technology introduction into an existing
product category, where General Electric, Bodine and Lithonia are the key
competitors with products that use traditional lighting technology. The Aeon
"Task & Accent" lighting products address residential closet lighting, interior
cabinet accent lighting and under cabinet counter lighting as heatless long-term
(75,000 hours of life) lighting solutions for the homeowner. This unique
lighting resource for cabinetmakers, contractors and do-it-yourselfers offers
three levels of light from soft white diodal(TM) elements that are cool to the
touch and easy to install. The Aeon products are competitively positioned as a
premium priced new technology introduction into an existing product category,
where General Electric, Philips and Sea Gull Lighting are the key competitors
with products that use traditional lighting technology. We believe that our
lighting solid-state technology will provide a 40 to 60 percent reduction in
maintenance costs for property managers through replacement of walkway, corridor
or landscape lighting elements and 68 percent reduction in energy costs for
those fixtures.
EMPLOYEES
We currently have eight (8) full time employees. Our employees are
primarily at the executive level based upon our role in coordination of
outsource contracts for manufacturing and other production considerations.
Currently, there exist no organized labor agreements or union agreements between
us and our employees. We have employment agreements with the following executive
officers: Donald F. Evans, Chairman and CEO, Mark D. Schmidt, President and COO,
Alan H. Ninneman, Senior Vice President and John W. Ringo, Secretary and
Corporate Counsel. We believe that our relations with our employees are good.
DESCRIPTION OF PROPERTIES
We maintain our principal office at 4625 Creekstone Drive, Suite 100,
Research Triangle Park, Durham, North Carolina 27703. Our telephone number at
that office is (919) 474-9700 and our facsimile number is (919) 474-9712. We
lease 2,405 square feet of office space. The lease expires on December 31, 2008.
The monthly rent is $3,457, subject to an annual cost of living increase. We
believe that our current office space and facilities are sufficient to meet our
present needs and do not anticipate any difficulty securing alternative or
additional space, as needed, on terms acceptable to us. We maintain websites at
www.cyberlux.com and www.luxSel.com. The information contained on those websites
is not deemed to be a part of this prospectus.
38
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. In accordance with
Florida's Rules of Civil Procedure, when a Motion to dissolve is granted, this
order is stayed and the injunction remains in effect until the Court rules on a
Motion for Rehearing or Clarification of the Motion to Dissolve. Therefore, 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. During this time, we also
came into contact with Safe-Light. We had discussions with Safe-Light regarding
a potential acquisition, however, there was never a definitive agreement
concerning our acquisition of Safe-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 the discussions 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 trade secrets and we are seeking monetary damages as well
39
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. Our injunction prohibits
the defendants from claiming rights to our Storm Light blueprints.
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. We have incurred approximately $25,000
in legal fees and $15,000 in other litigation-related expenses in connection
with this case, however, we have not spent any money this year in connection
with this case nor do we intend at this point in spending significant amounts of
money going forward since the case has not been active for the last few years.
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.
On May 17, 2005, Zykronix, Inc., a Colorado corporation, filed a complaint
against us and our President, Mark Schmidt, in the District Court, City and
County of Denver, State of Colorado (Case No. O5CV3704) claiming damages in the
amount of $211,323.75 and costs for breach of contract, unjust enrichment and
fraud by Mark Schmidt. We previously entered into a contract with Zykronix for
them to produce prototypes for several of our new products, which we believe
they never satisfactorily completed.
On June 22, 2005, we filed our Answer and Counterclaim against Zykronix,
claiming damages and costs in the amount of $2,850,000 for breach of contract,
unjust enrichment and negligent misrepresentation. At the same time, Mark
Schmidt filed a Motion to Dismiss since Zykronix failed to adequately plead a
claim for fraud. On August 24, 2005, the Motion to Dismiss was denied. The case
is currently in discovery. We believe that their claims are without merit and we
will vigorously defend these claims.
INDEX NUMBER: 602727/05 - SUPREME COURT OF THE STATE OF
NEW YORK, COUNTY OF NEW YORK
On July 27, 2005, Alliance Care Services, Inc. d/b/a Alliance Advisors, a
New York corporation, filed a complaint against us in the Supreme Court of the
State of New York, County of New York, claiming damages in the amount of not
less than $500,000 and costs for breach of contract, breach of duty of good
faith and fair dealing and unjust unrichment. We filed our answer on October 4,
2005 denying all claims. This case is currently in discovery. We believe that
their claims are without merit and we intend to vigorously defend these claims.
STATEMENT OF CLAIM - ARBITRATION BEFORE THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
On October 21, 2005, Greenfield Capital Partners LLC filed a statement of
claim against us in arbitration before the National Association of Securities
Dealers, Inc. Greenfield claims damages and costs in the amount of $107,000 for
breach of contract, fraud, fraudulent concealment and misrepresentation. We
believe that their claims are without merit and we intend to vigorously defend
these claims.
40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
--------------------------------------------------------------------------------
Donald F. Evans 70 Chief Executive Officer and Chairman of the
Board of Directors
Mark D. Schmidt 40 President, Chief Operating Officer and Director
William P. Walker 42 Senior Vice President
John W. Ringo 60 Secretary, Corporate Counsel and Director
Alan H. Ninneman 61 Senior Vice President and Director
David D. Downing 55 Chief Financial Officer and Treasurer
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are three seats on our board of directors.
Currently, our Directors are not compensated for their services. Officers
are elected by the Board of Directors and serve until their successors are
appointed by the Board of Directors. Biographical resumes of each officer and
director are set forth below.
DONALD F. EVANS. Mr. Evans has been our Chief Executive Officer and
Chairman of the Board since May 2000. Between 1979 and May 2000, Mr. Evans was
the Managing Partner of Research Econometrics, a North Carolina based
corporation, where Mr. Evans began an investigative research study into the
feasibility of a long-term electrochemical interim lighting system. From June
1996 until March 1999, Mr. Evans represented the investment interest of Research
Econometrics in Waste Reduction Products Corporation, a privately held North
Carolina corporation Mr. Evans also served on the Board of Directors of Waste
Reduction Products Corporation. Mr. Evans graduated from the University of North
Carolina, Chapel Hill, NC with a BS Degree in Economics.
MARK D. SCHMIDT. Mr. Schmidt has been our President, Chief Operating
Officer and Director since May 2003. From December 1999 until December 2002, Mr.
Schmidt was a founder and executive of Home Director, Inc., the IBM Home
Networking Division spin-off company and a public company. Mr. Schmidt is a
former IBM executive with over 15 years of consumer marketing, business
management and venture startup experience. Mr. Schmidt graduated Summa Cum Laude
with a Bachelor of Science Degree in Engineering from North Carolina State
University and earned an MBA Degree from the Fuqua School of Business at Duke
University.
WILLIAM P. WALKER. Mr. Walker has been our Senior Vice President, Business
Development & Sales since January 2005. From March 2004 until December 2004, Mr.
Walker was the founding principal in New Edison, LLC, a marketing consulting
firm focused on the emerging solid-state lighting industry. From October 2002
until February 2004, Mr. Walker was the Vice President of Sales for CorAccess
Systems, a Golden, Colorado leading residential technology company. From
February 2001through October 2002, Mr. Walker was the Vice President at GE
Smart, a start-up joint venture between Microsoft and GE, where he developed and
implemented the sales and marketing strategies. From May 1996 until February
2001, Mr. Walker was the Founder and CEO of Wizer Home Technologies, a large
home technology integrations company. Mr. Walker graduated from the University
of Wyoming with a BS Degree in Business Administration.
JOHN W. RINGO. Mr. Ringo has been our Secretary, Corporate Counsel and a
Director since May 2000. Since 1990, Mr. Ringo has been in private practice in
Marietta, GA specializing in corporate and securities law. He is a former Staff
Attorney with the U. S. Securities and Exchange Commission, a member of the Bar
of the Supreme Court of the United States, the Kentucky Bar Association and the
Georgia Bar Association. Mr. Ringo graduated from the University of Kentucky in
Lexington, KY with a BA Degree in Journalism. Subsequently, he received a Juris
Doctor Degree from the University of Kentucky College of Law.
ALAN H. NINNEMAN. Mr. Ninneman has been our Senior Vice President and a
Director since May 2000. From 1992 until April 2000, Mr. Ninneman was a Chief
Executive Officer of City Software, Inc. based in Albuquerque, New Mexico. He
was a senior support analyst for Tandem Computer, San Jose, California from 1982
41
to 1985; senior business analyst at Apple Computer, Cupertino, California from
1985 to 1987; and Director of Operations at Scorpion Technologies, Inc., San
Jose, California. Mr. Ninneman attended Elgin Community College, Elgin, IL and
subsequently majored in business administration at Southern Illinois University,
Carbondale, IL.
DAVID D. DOWNING. Mr. Downing has been our Chief Financial Officer and
Treasurer since May 2000. Mr. Downing joined Marietta Industrial Enterprises,
Inc., Marietta, Ohio in November 1991 as its Chief Financial Officer. He was
elected to the Board of Directors of that Company in January 1994. He has been a
Director of American Business Parks, Inc., Belpre, Ohio since January 1998 and
served as a director of Agri-Cycle Products, Inc. from May 1998 until April
2001. Mr. Downing graduated from Grove City College, Grove City, PA with a BA
Degree in Accounting.
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO
and each of our most highly-compensated executive officers whose total annual
salary and bonus for the fiscal year ending December 31, 2004, 2003 and 2002
exceeded $100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
OTHER
ANNUAL RESTRICTED OPTIONS LTIP
NAME & PRINCIPAL SALARY BONUS COMPEN- STOCK SARS PAYOUTS ALL OTHER
POSITION YEAR ($) ($) SATION ($) AWARDS($) (#) ($) COMPENSATION
------------------------ ---- ------- ------ ---------- ------------- ------- ------------ --------
Donald F. Evans 2004 180,000 0 0 -- 550,000 -- $275,103(1)
CEO & Chairman 2003 180,000(2) 0 0 -- 700,000 -- --
2002 98,004(2) 0 0 -- -- -- --
------------------------ ---- ------- ------ ---------- ------------- ------- ------------ --------
John W. Ringo 2004 70,500 0 0 -- 400,000 -- $166,915(1)
Secretary and 2003 102,000(3) 0 0 -- 250,000 -- --
Corporate Counsel 2002 69,000(3) 0 0 -- -- -- --
------------------------ ---- ------- ------ ---------- ------------- ------- ------------ --------
Alan H. Ninneman 2004 70,500 0 0 -- 400,000 -- $180,652(1)
Senior Vice President 2003 102,000(4) 0 0 -- 250,000 -- --
2002 78,000(4) 0 0 -- -- -- --
------------------------ ---- ------- ------ ---------- ------------- ------- ------------ --------
Mark D. Schmidt 2004 180,000 0 0 -- 650,000 -- $101,000(1)
President & COO 2003 120,000(5) 0 0 -- 550,000 -- --
2002 -- - - -- -- -- --
------------------------ ---- ------- ------ ---------- ------------- ------- ------------ --------
(1) Such employee received 1 share of Series B Convertible Preferred
Stock, $1.00 par value, in exchange for the cancellation of debt for every
$1 of management fees previously owed. Please see "Description of
Securities - Preferred Stock" for a complete discussion of the material
terms of the Series B Convertible Preferred Stock.
(2) $165,000 of Mr. Evans' 2003 salary and all of his 2002 salary were
accrued and thereafter paid in shares of series B preferred stock.
(3) All of Mr. Ringo's 2003 salary and $64,915 of his 2002 salary was
accrued and thereafter paid in shares of series B preferred stock. Mr.
Ringo received a note payable for $4,085 of his 2002 salary.
(4) $92,000 of Mr. Ninneman's 2003 salary and all of his 2002 salary was
accrued and thereafter paid in shares of series B preferred stock.
(5) $101,000 of Mr. Schmidt's 2003 salary was accrued and thereafter paid
in shares of series B preferred stock.
Annual compensation began accruing in the form of management fees as of
July 2000. The compensation indicated in the table is the annualized
amount of salary to be paid the respective officers in accordance with
their employment agreements.
42
OPTION/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
--------------------------------------------------------------------------------
Donald F. Evans 550,000 %27.5 $0.2125 /Sh 2010
--------------------------------------------------------------------------------
John W. Ringo 400,000 %20.0 $0.2125 /Sh 2010
--------------------------------------------------------------------------------
Alan H. Ninneman 400,000 %20.0 $0.2125 /Sh 2010
--------------------------------------------------------------------------------
Mark D. Schmidt 650,000 %32.5 $0.2125 /Sh 2010
--------------------------------------------------------------------------------
STOCK OPTION PLANS
We have created an Employee Stock Option Plan for incentive/retention of
current key employees and as an inducement to employment of new employees. The
2003 plan, which sets aside 2,000,000 shares of common stock for purchase by
employees, was made effective by the Board of Directors.
On September 2, 2003, our Board approved a 2004 Incentive Stock Option
Plan, which will provide 2,000,000 shares to underwrite options.
On April 8, 2004 our Board approved the 2005 Incentive Stock Option Plan
that provides for 12,000,000 shares to underwrite options and on January 10,
2005, the Board approved the 2006 Plan that provides for 18,000,000 shares to
underwrite options.
The stock option plans are administered directly by our board of
directors.
Subject to the provisions of the stock option plans, the board will
determine who shall receive stock options, the number of shares of common stock
that may be purchased under the options, the time and manner of exercise of
options and exercise prices.
As of December 31, 2004, there were 2,000,000 stock options granted under
the 2003 plan that were outstanding.
EMPLOYMENT AGREEMENTS
DONALD F. EVANS
---------------
On July 1, 2000, we entered into an eight-year employment contract with
Donald F. Evans to serve as Chief Executive Officer, which was amended on
January 1, 2003. The base salary under the agreement is $180,000 per annum, plus
benefits.
ALAN H. NINNEMAN
----------------
On July 1, 2000, we entered into an eight-year employment contract with
Alan H. Ninneman to serve as Senior Vice President, which was amended on January
1, 2003. The base salary under the agreement is $102,000 per annum, plus
benefits.
43
JOHN W. RINGO
-------------
On July 1, 2000, we entered into an eight-year employment contract with
John W. Ringo to serve as Secretary and Corporate Counsel, which was amended on
January 1, 2003. The base salary under the agreement is $102,000 per annum, plus
benefits.
MARK D. SCHMIDT
---------------
On May 1, 2003, we entered into an employment contract with Mark D.
Schmidt to serve as Executive Vice President and Chief Operating Officer until
June 30, 2008. The base salary under the agreement is $180,000 per annum, plus
benefits.
44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We owed certain management fees, which were for accrued salaries for
Messrs. Evans, Ninneman, Ringo and Schmidt consistent with employment
agreements. These fees were as follows: $400,505 to Don Evans, $243,000 to John
Ringo, $263,000 to Alan Ninneman and $101,000 to Mark Schmidt for a total of
$1,007,505. In addition, certain officers loaned funds to us in exchange for
promissory notes. The promissory notes included $3,000 to Don Evans, $3,745 to
Al Ninneman and $184,830 to Dave Downing.
In 2004, we issued 800,000 shares of Series B Convertible Preferred Stock
to officers and directors in exchange for $723,670 of these management fees and
$76,330 of the loan from Dave Downing, on a basis of 1 share of Series B
Convertible Preferred Stock for $1 of debt owned. The management fees converted
include $275,103 by Don Evans, $166,915 by John Ringo, $180,652 to Alan Ninneman
and $101,000 to Mark Schmidt. These shares of Series B Convertible Preferred
Stock have certain conversion rights and superior voting privileges as further
described in the "Description of Securities" section herein. The Board of
Directors, exercising their business judgment, determined that it was in the
Company's best interest to issue shares of Series B convertible preferred stock
in lieu of accrued management fees. The Board of Directors determined that the
terms of the transaction were as fair to the Company as any transactions that
could have been made with unaffiliated parties.
Currently, there are still outstanding promissory notes totaling $386,595,
which include $249,350 in unpaid management fees and promissory notes to
officers totaling $137,245. The unpaid management fees include $90,916 owed to
Don Evans; $82,348 to Al Ninneman and $76,085 to John Ringo. The outstanding
promissory notes to officers include $3,745 to Al Ninneman, $23,000 to Don
Evans, $2,000 to Mark Schmidt and $108,500 to Dave Downing. The promissory notes
were issued to officers who lent us funds for working capital purposes. The
promissory notes are payable on demand and accrue interest at an annual rate of
12%.
We have consulting agreements with outside contractors, certain of whom
are also our stockholders. The agreements are generally for a term of 12 months
from inception and renewable automatically from year to year unless either we or
the consultant terminates such engagement by written notice. None of the
consultants who are shareholders own 5% or more of our issued and outstanding
shares of common stock.
Promissory notes were issued to certain officers for loans to the Company
for working capital. These Notes are listed as payable upon demand and accrue
interest at 12% per annum. Don F. Evans, David D. Downing, Mark Schmidt and Alan
H. Ninneman loaned $23,000, $108,500, $2,000 and $3,745, respectively. The terms
of transactions in this section are as fair to the Company as any transactions
that could have been made with unaffiliated parties.
We have no policy regarding entering into transactions with affiliated
parties.
45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 7, 2005:
o by each person who is known by us to beneficially own more than 5%
of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
We have issued 800,000 shares of Series B Convertible Preferred Stock to
our officers and directors which are convertible into 8 million shares of common
stock and, in the aggregate, have the right to cast 80 million votes in any vote
by our shareholders. Combined with the number of shares of common stock held by
our officers and directors, they have the right to cast approximately 70% of all
votes by our shareholders. As a result, these stockholders, acting together,
will have the ability to control substantially all matters submitted to our
stockholders for approval
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
-----------------------------------------------------------------------------------------------------
Donald F. Evans Common Stock 28,965,300 (4) 28.23% 6.77%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Mark D. Schmidt Common Stock 10,300,000 (5) 12.09% 2.51%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Alan H. Ninneman Common Stock 18,715,200 (6) 20.09% 4.48%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
John W. Ringo Common Stock 17,141,500 (7) 18.68% 4.11%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
David Downing Common Stock 8,133,000 (8) 9.83% 1.99%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
All Officers and Directors Common Stock 83,255,000 (9) 53.69% 17.34%
As a Group (5 persons)
===============================================
Donald F. Evans Preferred B 275,103 34.39% 34.39%
Mark D. Schmidt Preferred B 101,000 12.63% 12.63%
Alan H. Ninneman Preferred B 180,652 22.58% 22.58%
John W. Ringo Preferred B 166,915 20.86% 20.86%
David Downing Preferred B 76,330 9.54% 9.54%
46
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of November 7, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 75,075,001 shares issued and outstanding on November 7, 2005. For
common stock holders, the percentage reflects the percentage of votes each
holder can vote at a meeting of shareholders.
(3) Percentage based on 400,075,001 shares of common stock outstanding after the
offering, assuming all shares registered in this offering are sold.
(4) Includes 275,103 shares of Series B convertible preferred stock convertible
into 2,751,030 shares of common stock and currently have the right to cast
27,510,300 votes at a meeting of shareholders.
(5) Includes 101,000 shares of Series B convertible preferred stock convertible
into 1,010,000 shares of common stock and currently have the right to cast
10,100,000 votes at a meeting of shareholders.
(6) Includes 180,652 shares of Series B convertible preferred stock convertible
into 1,806,520 shares of common stock and currently have the right to cast
18,065,200 votes at a meeting of shareholders.
(7) Includes 166,915 shares of Series B convertible preferred stock convertible
into 1,669,150 shares of common stock and currently have the right to cast
16,691,500 votes at a meeting of shareholders.
(8) Includes 76,330 shares of Series B convertible preferred stock convertible
into 763,300 shares of common stock and currently have the right to cast
7,633,000 votes at a meeting of shareholders.
(9) Includes 800,000 shares of Series B convertible preferred stock convertible
into 8,000,000 shares of common stock and currently have the right to cast
80,000,000 votes at a meeting of shareholders.
47
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 700,000,000 shares of common stock, par
value $.001. As of November 7, 2005, there were 75,075,001 shares of common
stock outstanding. Holders of the common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Pacific Stock Transfer Company, located in Las Vegas,
Nevada, as independent transfer agent or registrar.
PREFERRED STOCK
Our Articles of Incorporation authorize the issuance of 5,000,000
shares of preferred stock, $0.001 par value per share, the designation and
rights of which are to be determined by our Board of Directors. Our Board of
Directors has authority, without action by the shareholders, to issue all or any
portion of the authorized but unissued preferred stock in one or more series and
to determine the voting rights, preferences as to dividends and liquidation,
conversion rights, and other rights of such series. We consider it desirable to
have preferred stock available to provide increased flexibility in structuring
possible future acquisitions and financing and in meeting corporate needs which
may arise. If opportunities arise that would make desirable the issuance of
preferred stock through either public offering or private placements, the
provisions for preferred stock in our Articles of Incorporation would avoid the
possible delay and expense of a shareholder's meeting, except as may be required
by law or regulatory authorities. Issuance of the preferred stock could result,
however, in a series of securities outstanding that will have certain
preferences with respect to dividends and liquidation over the common stock
which would result in dilution of the income per share and net book value of the
common stock.
Issuance of additional common stock pursuant to any conversion right which
may be attached to the terms of any series of preferred stock may also result in
dilution of the net income per share and the net book value of the common stock.
The specific terms of any series of preferred stock will depend primarily on
market conditions, terms of a proposed acquisition or financing, and other
factors existing at the time of issuance. Our Board of Directors may issue
additional preferred stock in future financing, but has no current plans to do
so at this time. The issuance of Preferred Stock could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock.
As of November 7, 2005, we 113.3606 shares of our Series A Convertible
Preferred Stock issued and outstanding. Each share is convertible into 50,000
shares of common stock. The Series A Convertible Preferred have the following
designations and rights:
Maturity: Perpetual Preferred
Dividend: 12% per annum. The dividend shall be payable
semi-annually in cash or common stock at our
option.
Fixed Conversion Price: The Series A Convertible Preferred shall be
convertible into common stock at $0.10 per
share.
Stated Value: $5,000 per share
Mandatory Conversion: Beginning 180 days from the effective date of
this registration statement, if the closing
bid price for our common stock exceeds $1.50
for a period of 10 consecutive trading days,
we have the right to force the holders to
convert the Series A Convertible Preferred
into common stock at the applicable conversion
price.
48
Limitations on Conversion. Each holder of the Series A Convertible
Preferred shares shall not convert the shares
into common stock such that the number of
shares of common stock issued after the
conversion would exceed, when aggregated with
all other shares of common stock owned by such
holder at such time, in excess of 4.99% of our
then issued and outstanding shares of common
stock.
No Voting Rights. The holders of the Series A convertible shares
have no voting rights until their shares are
converted to common shares.
The Board of Directors, pursuant to our Articles of Incorporation and
By-Laws, authorized Series B Convertible Preferred Stock which was issued to
officers and directors in order to convert accrued management fees and other
liabilities into 800,000 shares of the Series B Preferred Stock. The Series B
Convertible Preferred Stock has the following designations and rights:
Term: Perpetual Preferred
Dividend: 12% per annum
Conversion: Each share of the Series B Convertible
Preferred Stock may be converted to 10 shares
of Cyberlux common stock at the option of the
bearer.
Voting Rights: Except with respect to transactions
upon which the Series B Preferred stock shall
be entitled to vote separately, the Series B
Preferred Stock shall have superior voting
rights equal to ten times the number of shares
of Common Stock such holder of Series B
Preferred Stock would receive upon conversion
of such holder's shares of Series B Preferred
Stock. The conversion price is $0.10 per
share.
OPTIONS
There are currently options outstanding that have been issued to our
officers and directors to purchase 2,000,000 shares of our common stock at a
purchase price of $0.001, which expire in 2010.
WARRANTS
In connection with a Securities Purchase Agreement dated September 23,
2004, we issued 2,250,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.50 per share.
In connection with a Securities Purchase Agreement dated April 22, 2005,
we issued 25,000,000 warrants to purchase shares of common stock. The warrants
are exercisable until five years from the date of issuance at a purchase price
of $0.03 per share.
49
In addition, in connection with a private placement offering, we have
issued 8,543,064 Series A and 8,543,064 Series B warrants. The Series A warrants
are exercisable at $0.25 per share and the Series B warrants are exercisable at
$1.05 per share. The Series A warrants expire in 2006 and the Series B warrants
expire in 2008. In addition, we issued Placement Agent warrants to the placement
agent in the private placement offering. We issued a total of 100,000 placement
agents warrants exercisable at $0.01 per share, 1,550,000 placement agent
warrants exercisable at $0.10 per share, 1,550,000 placement agent warrants
exercisable at $0.25 per share and 1,550,000 placement agent warrants
exercisable at $1.05 per share. All placement agent warrants expire in 2008.
In addition, we have 58,500 warrants outstanding exercisable at $0.10 per
share, which expire in 2008. We have 605,000 warrants outstanding exercisable at
$0.20 per share, which expire in 2006. We have 1,441,500 warrants outstanding
exercisable at $0.25 per share, of which 1,350,000 expire in 2005 and 91,500
expire in 2008. We have 300,000 warrants outstanding exercisable at $0.50 per
share, which expire in 2006. We have 605,000 warrants outstanding exercisable at
$0.20 per share, which expire in 2006.
CONVERTIBLE SECURITIES
Not including approximately 42,453,065 shares of common stock issuable
upon exercise of outstanding options and warrants, approximately 30,262,706
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated September 23, 2004, approximately 50,000,000
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated April 22, 2005.
SEPTEMBER 2004 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on September 23, 2004 for the
sale of (i) $1,500,000 in secured convertible notes, and (ii) warrants to
purchase 2,250,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes. The investors provided us with an aggregate of
$1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The notes bear interest at 10%, mature two years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
o $0.72; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.60 per share. Prepayment of the notes is to be
made in cash equal to 150% of the outstanding principal and accrued interest.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
The full principal amount of the secured convertible notes are 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
$0.50 per share. In addition, we have granted the investors a security interest
in substantially all of our assets and intellectual property and registration
rights.
50
APRIL 2005 SECURITIES PURCHASE AGREEMENT
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 purchase
25,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying these
secured convertible notes and warrants. The investors provided us with an
aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
The 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:
o $0.03; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.03 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.03. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes are 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, we have granted the investors a security interest
in substantially all of our assets and intellectual property and registration
rights.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
51
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
52
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
53
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
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.
54
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants unless the selling stockholders
exercise the warrants on a cashless basis, which can be done at any time if the
shares of common stock underlying the warrants are not then registered pursuant
to an effective registration statement. Assuming all the shares registered below
are sold by the selling stockholders, none of the selling stockholders will
continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
TOTAL
TOTAL SHARES OF PERCENTAGE PERCENTAGE
COMMON STOCK OF COMMON SHARES OF BENEFICIAL OF COMMON
ISSUABLE UPON STOCK, COMMON STOCK BENEFICIAL PERCENTAGE OF OWNERSHIP STOCK OWNED
CONVERSION OF ASSUMING INCLUDED IN OWNERSHIP COMMON STOCK AFTER THE AFTER
NAME NOTES FULL PROSPECTUS BEFORE THE OWNED BEFORE OFFERING OFFERING
AND/OR WARRANTS* CONVERSION (1) OFFERING** OFFERING** (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Offshore, Ltd. 51,029,701 40.47% Up to 3,868,217 (2) 4.9% -- --
(3) 169,000,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Qualified 41,305,591 35.49% Up to 3,868,217 (2) 4.9% -- --
Partners, LLC (3) 117,000,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Partners, LLC 12,702,033 14.47% Up to 3,868,217 (2) 4.9% -- --
(3) 32,500,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
New Millennium 2,475,381 3.19% Up to 2,475,381 3.19% -- --
Capital Partners 6,500,000
II, LLC (3) shares of
common stock
* This column represents an estimated number based on a conversion price as of a
recent date of November 8, 2005 of $.03, divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.9% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
55
(1) Includes a good faith estimate of the shares issuable upon conversion of
the secured convertible notes and exercise of warrants, based on current market
prices. Because the number of shares of common stock issuable upon conversion of
the secured convertible notes is dependent in part upon the market price of the
common stock prior to a conversion, the actual number of shares of common stock
that will be issued upon conversion will fluctuate daily and cannot be
determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on November 8, 2005,
the conversion price would have been $.03.
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd. is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by AJW
Offshore, Ltd. AJW Qualified Partners, LLC is a private investment fund that is
owned by its investors and managed by AJW Manager, LLC, of which Corey S.
Ribotsky and Lloyd A. Groveman are the fund managers, have voting and investment
control over the shares listed below owned by AJW Qualified Partners, LLC. New
Millennium Capital Partners II, LLC, is a private investment fund that is owned
by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by New Millennium Capital Partners II,
LLC. We have been notified by the selling stockholders that they are not
broker-dealers or affiliates of broker-dealers and that they believe they are
not required to be broker-dealers.
(4) Assumes that all securities registered will be sold.
TERMS OF SECURED CONVERTIBLE NOTES
SEPTEMBER 2004 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on September 23, 2004 for the
sale of (i) $1,000,000 in secured convertible notes and (ii) warrants to buy
2,250,000 shares of our common stock. Pursuant to a registration statement on
Form SB-2 (333-119716) declared effective with the SEC on November 12, 2004, we
previously registered 22,222,224 shares of common stock underlying the secured
convertible notes and 4,500,000 shares of common stock underlying the warrants.
We are registering 100,000,000 shares in this offering underlying these secured
convertibles notes. As of November 4, 2005, $592,118.84 of the secured
convertible notes has been converted and $907,881.16 remains outstanding.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes. The investors provided us with an aggregate of
$1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
56
The secured convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.72; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.60 per share. Prepayment of the notes is to be
made in cash equal to 150% of the outstanding principal and accrued interest.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
The full principal amount of the secured convertible notes is 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. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date that the investors distributed
the final $500,000. In the event that we breach any representation or warranty
regarding the condition of our company as set forth in the Securities Purchase
Agreement, we are liable to pay liquidated damages in shares or cash, at the
election of the investors, equal to three percent of the outstanding amount of
the secured convertible notes per month plus accrued and unpaid interest. In the
event that we breach any covenant as set forth in the Securities Purchase
Agreement, including the failure to comply with blue sky laws, timely file all
public reports, use the proceeds from the sale of the secured convertible notes
in the agreed upon manner, obtain written consent from the investors to
negotiate or contract with a party to for additional financing, reserve and have
authorized the required number of shares of common stock or the maintenance of
our shares of common stock on an exchange or automated quotation system, then we
are liable to pay liquidated damages in shares or cash, at the election of the
investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the secured
convertible notes) under the secured convertible notes;
o Any representation or warranty we made in the Security Agreement or
in the Intellectual Property Security Agreement shall prove to have
been incorrect in any material respect when made;
o The failure by us to observe or perform any of our obligations under
the Security Agreement or in the Intellectual Property Security
Agreement for ten (10) days after receipt of notice of such failure
from the investors; and
o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a conversion
notice;
o Breach any material covenant or other material term or condition in
the secured convertible notes or the Securities Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
57
o Apply for or consent to the appointment of a receiver or trustee for
us or any of our subsidiaries or for a substantial part of our of
our subsidiaries' property or business, or such a receiver or
trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be entered or
filed against us or any of our subsidiaries or any of our property
or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the investors;
o Institute or have instituted against us or any of our subsidiaries
any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors;
o Fail to maintain the quotation of our common stock on one of the
OTCBB or an equivalent replacement exchange, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
the American Stock Exchange; or
o Default under any other secured convertible note issued pursuant to
the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose, enter,
with the aid and assistance of any person, any premises where the
collateral, or any part thereof, is or may be placed and remove the
same, and we shall assemble the collateral and make it available to
the investors at places which the investors shall reasonably select,
whether at our premises or elsewhere, and make available to the
investors, without rent, all of our respective premises and
facilities for the purpose of the investors taking possession of,
removing or putting the collateral in saleable or disposable form;
and
o To operate our business using the collateral and shall have the
right to assign, sell, lease or otherwise dispose of and deliver all
or any part of the collateral, at public or private sale or
otherwise, either with or without special conditions or
stipulations, for cash or on credit or for future delivery, in such
parcel or parcels and at such time or times and at such place or
places, and upon such terms and conditions as the investors may deem
commercially reasonable, all without (except as shall be required by
applicable statute and cannot be waived) advertisement or demand
upon or notice to us or our right of redemption, which we expressly
waived. Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable law
which cannot be waived, purchase all or any part of the collateral
being sold, free from and discharged of all trusts, claims, right of
redemption and equities by us, which we waived and released.
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.50 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis at any time if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes issued pursuant to the Securities Purchase Agreement, dated
September 23, 2004.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
58
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 their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related
documents are incorporated by reference as exhibits to our Form SB-2
registration statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
notes is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of the remaining $907,881.16 of notes on November 8, 2005, a
conversion price of $0.03 per share, the number of shares issuable upon
conversion would be:
$907,881.16/$.03 = 30,262,706 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of November 7, 2005 of $0.11.
NUMBER % OF
% BELOW PRICE PER WITH DISCOUNT OF SHARES OUTSTANDING
MARKET SHARE AT 50% ISSUABLE STOCK
------ ----- ------ -------- -----
25% $.0825 $.04125 22,009,241 22.67%
50% $.055 $.0275 33,013,861 30.54%
75% $.0275 $.01375 66,027,721 46.79%
APRIL 2005 SECURITIES PURCHASE AGREEMENT
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 provided us with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
59
The 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:
o $0.03; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.03 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.03. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
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. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date that the investors distribute
the final $400,000. In the event that we breach any representation or warranty
regarding the condition of our company as set forth in the Securities Purchase
Agreement, we are liable to pay liquidated damages in shares or cash, at the
election of the investors, equal to three percent of the outstanding amount of
the secured convertible notes per month plus accrued and unpaid interest. In the
event that we breach any covenant as set forth in the Securities Purchase
Agreement, including the failure to comply with blue sky laws, timely file all
public reports, use the proceeds from the sale of the secured convertible notes
in the agreed upon manner, obtain written consent from the investors to
negotiate or contract with a party to for additional financing, reserve and have
authorized the required number of shares of common stock or the maintenance of
our shares of common stock on an exchange or automated quotation system, then we
are liable to pay liquidated damages in shares or cash, at the election of the
investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the secured
convertible notes) under the secured convertible notes;
o Any representation or warranty we made in the Security Agreement or
in the Intellectual Property Security Agreement shall prove to have
been incorrect in any material respect when made;
o The failure by us to observe or perform any of our obligations under
the Security Agreement or in the Intellectual Property Security
Agreement for ten (10) days after receipt of notice of such failure
from the investors; and
60
t 6 12 o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a conversion
notice;
o Fail to file a registration statement within 45 days after April 22,
2005 or fail to have the registration statement effective within 90
days after April 22, 2005;
o Breach any material covenant or other material term or condition in
the secured convertible notes or the Securities Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or trustee for
us or any of our subsidiaries or for a substantial part of our of
our subsidiaries' property or business, or such a receiver or
trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be entered or
filed against us or any of our subsidiaries or any of our property
or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the investors;
o Institute or have instituted against us or any of our subsidiaries
any bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law
or any law for the relief of debtors;
o Fail to maintain the listing of our common stock on one of the OTCBB
or an equivalent replacement exchange, the Nasdaq National Market,
the Nasdaq SmallCap Market, the New York Stock Exchange, or the
American Stock Exchange; or
o Default under any other secured convertible note issued pursuant to
the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose, enter,
with the aid and assistance of any person, any premises where the
collateral, or any part thereof, is or may be placed and remove the
same, and we shall assemble the collateral and make it available to
the investors at places which the investors shall reasonably select,
whether at our premises or elsewhere, and make available to the
investors, without rent, all of our respective premises and
facilities for the purpose of the investors taking possession of,
removing or putting the collateral in saleable or disposable form;
and
o To operate our business using the collateral and shall have the
right to assign, sell, lease or otherwise dispose of and deliver all
or any part of the collateral, at public or private sale or
otherwise, either with or without special conditions or
stipulations, for cash or on credit or for future delivery, in such
parcel or parcels and at such time or times and at such place or
places, and upon such terms and conditions as the investors may deem
commercially reasonable, all without (except as shall be required by
applicable statute and cannot be waived) advertisement or demand
upon or notice to us or our right of redemption, which we expressly
waived. Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable law
which cannot be waived, purchase all or any part of the collateral
being sold, free from and discharged of all trusts, claims, right of
redemption and equities by us, which we waived and released.
61
The warrants are exercisable until five years from the date of issuance at
a purchase price of $0.03 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis at any time if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes issued pursuant to the Securities Purchase Agreement, dated
April 22, 2005.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreement and related documents
are filed with the SEC as exhibits to our Form SB-2 relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the notes
is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $1,500,000 of notes on November 8, 2005, a conversion price of
$0.03 per share, the number of shares issuable upon conversion would be:
$1,500,000/$.03 = 50,000,000 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of November 7, 2005 of $0.11.
FIXED CONVERSION NUMBER % OF
% BELOW PRICE PER OR WITH DISCOUNT OF SHARES OUTSTANDING
MARKET SHARE AT 50% ISSUABLE STOCK
------ ----- ------ -------- -----
25% $.0825 $.03 50,000,000 39.98%
50% $.055 $.0275 54,545,455 42.08%
75% $.0275 $.01375 109,090,910 59.24%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
62
EXPERTS
Russell Bedford Stefanou Mirchandani LLP, independent registered public
accounting firm, have audited, as set forth in their report thereon appearing
elsewhere herein, our financial statements at December 31, 2004 and 2003 and for
the years then ended that appear in the prospectus. The financial statements
referred to above are included in this prospectus with reliance upon the
independent registered public accounting firm's opinion based on their expertise
in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Cyberlux Corporation, filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of
such material can be obtained from the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. Because we file
documents electronically with the SEC, you may also obtain this information by
visiting the SEC's Internet website at http://www.sec.gov.
63
INDEX TO FINANCIAL STATEMENTS
CYBERLUX CORPORATION
INDEX TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and December 31, 2003
Page
--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-1
--------------------------------------------------------------------------------
Balance Sheet at December 31, 2004 and 2003 F-2
--------------------------------------------------------------------------------
Statements of Operations for the Years ended December 31, 2004 F-3
and 2003 and for the Period May 17, 2000 (Date of Inception)
through December 31, 2004
--------------------------------------------------------------------------------
Statement of Deficiency in Stockholders' Equity for the F-4 - F-9 Period May 17,
2000 (Date of Inception) through December 31,
2004
--------------------------------------------------------------------------------
Statements of Cash Flows for the Years ended December 31, F-10 - F11
2004 and 2003 and for the Period May 17, 2000 (Date of
Inception) through December 31, 2004
--------------------------------------------------------------------------------
Notes to Financial Statements F-12 - F-21
--------------------------------------------------------------------------------
Condensed Balance Sheets: F-22
June 30, 2005 (Unaudited) and December 31, 2004 (Audited)
--------------------------------------------------------------------------------
Condensed Statements of Losses: F-23
Three and Six Months Ended June 30, 2005 and 2004 (Unaudited)
--------------------------------------------------------------------------------
Condensed Statement of Deficiency in Stockholders' Equity: F-24
Six Months Ended June 30, 2005 and 2004 (Unaudited)
--------------------------------------------------------------------------------
Condensed Statements of Cash Flows: F-25
Six Months Ended June 30, 2005 and 2004 (Unaudited)
--------------------------------------------------------------------------------
Notes to Unaudited Condensed Financial Statements F-26 - F-27
--------------------------------------------------------------------------------
64
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Cyberlux Corporation
North Carolina 28370-2010
We have audited the accompanying balance sheets of Cyberlux Corporation
(the "Company"), as of December 31, 2004 and 2003 and the related statements of
losses, deficiency in stockholders' equity, and cash flows for the two years
then ended and for the period May 17, 2000 (Date of Inception) through December
31, 2004. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2004 and 2003 and for the period May 17, 2000 (Date of Inception) through
December 31, 2004, and the results of its operations and its cash flows for the
two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note I to the
financial statements, the Company has suffered recurring losses from operations.
This raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note I. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
----------------------------------------
Russell Bedford Stefanou Mirchandani LLP
Certified Public Accountants
McLean, Virginia
March 17, 2005
F-1
CYBERLUX CORPORATION
(A Development Stage Company)
Balance Sheets
December 31, December 31,
2004 2003
------------ ------------
Assets
Current assets:
Cash & cash equivalents $ 415,375 $ 16,247
Prepaid expenses 68,404 --
------------ ------------
Total current assets 483,779 16,247
Property, plant and equipment, net of accumulated
depreciation of $ 92,335 and $44,649, respectively 43,018 68,845
Other Assets:
Deposits - escrow -- 236,000
Patents, at cost 30,544 --
------------ ------------
Total other assets 30,544 236,000
Total Assets $ 557,341 $ 321,092
============ ============
Liabilities and Deficiency in Stockholders' Equity
Current liabilities:
Accounts payable $ 176,094 $ 296,388
Accrued liabilities 323,408 104,976
Management fees payable - related party (Note E) -- 996,508
Short-term notes payable - shareholders (Note E) 399,080 207,845
Short-term notes payable (Note B) 27,500 320,000
------------ ------------
Total current liabilities 926,082 1,925,717
Long-term liabilities:
Notes payable - (Note B) 1,355,069 --
Warrants payable convertible preferred -- 347,610
------------ ------------
Total long-term liabilities 1,355,069 347,610
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, Class A,
151.8606 and 0 shares issued and
outstanding as of December 31, 2004 and 2003 respective1y 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 December 31, 2004 and 2003 respecti800y 800 --
Common stock, $0.001 par value, 300,000,000 shares authorized, 23,770,233
and 8,049,141 shares issued and outstanding as of December 31, 2004 and
December 31,
2003 respectively 23,770 8,049
Additional paid-in capital 9,099,302 2,337,736
Subscriptions receivable -- (276,186)
Accumulated deficit (10,847,683) (4,021,835)
------------ ------------
Deficiency in stockholders' equity (1,723,810) (1,952,235)
------------ ------------
Total liabilities and (deficiency) in stockholders' $ 557,341 $ 321,092
============ ============
The accompanying notes are an integral part of these financial statements
F-2
CYBERLUX CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Period
May 17, 2000
For the For the (Inception) to
Year Ended Year Ended December 31
Dec. 31, 2004 Dec. 31, 2003 2004
Revenue $ 23,803 $ 74,238 $ 98,041
Cost of goods sold (160,260) (161,984) (322,244)
------------ ------------ ------------
Gross (loss) (136,457) (87,746) (224,203)
Operating Expenses:
Marketing and advertising 109,651 20,820 257,519
Depreciation and amortization 47,686 246,598 386,086
Organization costs -- 25,473
Research and development 391,421 635,485
Management and consulting services - related party 445,997 504,000 1,717,319
General and administrative expenses 3,103,689 497,384 3,992,767
Total operating expenses 4,098,444 1,268,802 7,014,649
(Loss) from operations (4,234,901) (1,356,548) (7,238,852)
Other income/(expense)
Interest income 282 321
Interest expense (1,600,087) (138,008) (1,881,760)
Debt acquisition costs (191,142) (191,142)
Net loss before preferred dividend (6,025,848) (1,494,556) (9,311,433)
Preferred dividend - Beneficial conversion discount
on convertible preferred 800,000 736,250 1,536,250
Net loss available to common stockholders $ (6,825,848) $ (2,230,806) $(10,847,683)
Weighted average number of common shares
outstanding, basic and fully diluted 16,701,174 7,652,012
Net loss per share - Basic and fully diluted $ (0.41) $ (0.29)
Preferred dividend $ 96,000
The accompanying notes are an integral part of these financial statements
F-3
Cyberlux Corporation
(A Development Stage Company)
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
FROM INCEPTION THROUGH DECEMBER 31, 2004
DEFICIENCY
COMMON STOCK PREFERRED STOCK ACCUMULATED
-------------------- ----------------- ADDITIONAL STOCK DURING TOTAL IN
PAID-IN SUBSCRIPTION DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE EQUTIY
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Common shares issued in
May 2000 to founders in
exchange for cash at $. 001
per share 1,640,000 $1,640 $560 $2,200
Common shares issued in May
2000 in exchange for
research and development
services valued at $.09
per share 750,000 750 68,003 68,753
Common shares issued in
May 2000 in exchange for
services valued @ $. 05 per
share 875,000 875 35,710 36,585
Common shares issued in
July 2000 in exchange for
convertible debt at $ .15
per share 288,000 288 39,712 40,000
Capital
contributed by principal
shareholders - - 16,000 16,000
Common shares issued in
November 2000 for cash in
connection with private
placement at $. 15 per
share 640,171 640 95,386 96,026
Common shares issued in
November 2000 in exchange
for services valued @ $. 15
per share hares issued for
consulting services 122,795 123 18,296 18,419
Net (loss)
-- -- -- -- -- -- (454,651) (454,651)
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Balance, December 31, 2000
4,315,966 $4,316 -- -- $273,667 -- ($454,651) ($176,668)
Common shares issued in
January, 2001 in exchange
for convertible debt at $
.15 per share 698,782 $699 $104,118 $104,817
Stock options issued in May
2001, valued at $. 15 per
option, in exchange for
services 52,500 52,500
Warrant issued in May 2001,
valued at $. 15 per
warrant, in exchange for
placement of debt 75,000 75,000
Common shares issued in
September 2001 for cash in
connection with exercise of
warrant at $.15 per share 3,000 3 447 450
Common shares issued in
September 2001 for cash in
connection with exercise of
warrant at $.10 per share 133,000 133 13,167 13,300
Common shares issued in
November 2001 for cash in
connection with exercise of
warrant at $.0001 per share 500,000 500 - 500
Common shares issued in
November 2001 for cash in
connection with exercise of
options at $.0001 per share 350,000 350 - 350
Common shares issued in
December 2001 in exchange
for convertible debt at $
.50 per share 133,961 134 66,847 66,981
Common shares
issued in December 2001 in
exchange for debt at $ .50
per share 17,687 18 8,825 8,843
Net (loss)
-- -- -- -- -- -- (636,274) (636,274)
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Balance, December 31, 2001 6,152,396 $6,152 594,571 -- (1,090,925) (490,202)
The accompanying notes are an integral part of these financial statements
F-4
Cyberlux Corporation
(A Development Stage Company)
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
FROM INCEPTION THROUGH DECEMBER 31, 2004 (Continued)
DEFICIENCY
COMMON STOCK PREFERRED STOCK ACCUMULATED
-------------------- ----------------- ADDITIONAL STOCK DURING TOTAL IN
PAID-IN SUBSCRIPTION DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE EQUITY
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Common shares issued in May
2002 in exchange for
services valued at $. 70
per share 70,000 $70 $49,930 -- $ 50,000
Common shares issued i
Nov, 2002 in exchange for
services valued at $0.25
per share 150,000 150 37,350 37,500
Common shares issued in
Dec. 2002 as rights
offering at $0.25 per share 256,000 256 63,744 64,000
Subscription Receivable for
10,000 shares issued -2,500 -2,500
Net loss
-- -- -- -- -- -- -700,104 ($700,104)
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Balance at December 31, 2002 6,628,396 $6,628 $745,593 ($2,500) ($1,791,029) ($1,041,308)
Common shares issued in
March, 2003 for cash in
connection with exercise of
options at $0.001 per share 250,000 $250 $250
Funds received for stock
subscription 2,500 2,500
Common Shares issued to
Cornell Capital Partners in
March, 2003 in connection
with Loan Commitment valued
at $0.75 per share 300,000 300 224,700 225,000
Common shares issues in
March, 2003 in exchange for
services valued at $0.75
per share 13,333 14 9,987 10,001
Robrady Design Note was
converted into 196,120
Shares @ .25 Per share. 196,120 196 48,833 49,029
Common Shares issued to
Mark Schmidt for services
in June, 2003. The 200,000
shares were issued at $0.25
per share. 200,000 200 49,800 50,000
Common Shares issued to
Capital Funding Solutions
September 2003. 450,000
shares were issued at $0.20
per share. Shares secure a
sales factoring agreement 450,000 450 89,550 90,000
Common shares issued on
11/12/03 for consulting
services valued at .50 per
share to Tom & Cheryl Rose 11,292 11 5,634 5,645
Preferred shares issued in
December 2003 valued at
$5,000 per share, Class A - 155 1 $774,999 (276,186) -- 498,814
Warrants on convertible
preferred shares -347,610 -347,610
Beneficial conversion
discount on convertible
preferred shares 736,250 736,250
Net (Loss) (2,230,806) (2,236,806)
The accompanying notes are an integral part of these financial statements
F-5
Cyberlux Corporation
(A Development Stage Company)
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
FROM INCEPTION THROUGH DECEMBER 31, 2004 (Continued)
ADDITIONAL
PAID IN
COMMON STOCK PREFERRED STOCK CAPITAL
------------ --------------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balance, December 31, 2003 8,049,141 $ 8,049 155 $ 1 $ 2,337,736
Issuance of Convertible preferred shares 800,000 800 799,200
Class B in January, 2004 for accrued
management fees at $1 per share
Collected Balance of Stock Subscriptions
Receivable
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 260,000 260 95,940
Common Shares issued in January,
2004 in exchange for services valued
at $0..37 per share 225,000 225 83,025
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 2,100,000 2,100 774,900
Shares issued for note payable @ $.25
in January, 2004 110,764 111 27,580
Shares issued for consulting services
@ $0.21 per share 1,200,000 1,200 250,800
Beneficial conversion discount -
preferred stock dividend with respect
to convertible preferred shares Class B 800,000
Warrants issued in exchange for
services in April, 2004 243,000
Common shares cancelled for return of (450,000) (450) (89,550)
collateral deposit with factor
Common shares issued in May for
Private Placement at $0.10/Share 5,310,000 5,310 525,690
Class A preferred shares issued for
cash at $5,000 per share in May, 2004 15.861 79,307
Warrants on convertible preferred
Class A Shares (58,915)
Common shares issued in exchange for
note payable at $.10/share in June, 2004 50,000 50 4,950
Common Shares issued in June, 1,560,000 1,560 154,440
2004 in exchange for services valued
at $0..10 per share
Common Shares issued in June, 200,000 200 19,800
2004 in exchange for services valued
at $0.10 per share
Subscription received in advance for
shares to be issued
Common Shares issued in exchange for
services adjusted for issue prices (44,640)
Common Shares issued in July,
2004 in exchange for services valued
at $0.40 per share 100,000 100 39,900
Common shares issued in July, 2004 for
private placement at $0.10/Share 100,000 100 9,900
F-6
Common shares issued in August, 2004 for
Conversion of Preferred "A" Shares 200,000 200 (4) (200)
Common shares issued in August, 2004 for
Exercise of warrants at $0.25/Share 701,000 701 174,549
Warrants issued to consultants for
services 106,172
Beneficial conversion feature of
convertible debentures (Note D)
Common shares issued in September for
Exercise of warrants at $0..25/Share 200,000 200 49,800
Options issued to employees as
Incentive Compensation 275,000
Common Shares issued in October,
2004 in exchange for services valued
at $0.25 per share 690,000 690 171,810
Shares issued in October, 2004
for note payable at $0.15 pershare 140,019 140 20,863
Shares issued in November, 2004
for note payable at $0.105 pershare 1,035,221 1,035 107,663
Shares issued in December, 2004
for note payable at $0.035 pershare 1,035,221 1,035 35,197
Shares issued in December, 2004
as a penalty for late registration to
Preferred "A" shareholders 203,867 204 89,498
Shares issued in December, 2004
for conversion of Preferred "A" shares 750,000 750 (15) -- (750)
Beneficial conversion feature of
convertible debentures (Note D) 1,000,000
Warrants issued for services 516,637
Net (Loss)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 23,770,233 23,770 800,152 801 9,099,302
The accompanying notes are an integral part of these financial statements
F-7
DEFICIENCY
ACCUMULATED
STOCK DURING TOTAL IN
SUBSCRIPTION DEVELOPMENT STOCKHOLDERS'
RECEIVABLE STAGE EQUITY
------------- ------------- -------------
Balance, December 31, 2003 $ (276,186) $ (4,021,835) $ (1,952,235)
Issuance of Convertible preferred shares 800,000
Class B in January, 2004 for accrued
management fees at $1 per share
Collected Balance of Stock Subscriptions
Receivable 276,186 276,186
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 96,200
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 83,250
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 777,000
Shares issued for note payable @ $.25
in January, 2004 27,691
Shares issued for consulting services
@ $0.21 per share 252,000
Beneficial conversion discount -
preferred stock dividend with respect
to convertible preferred shares Class B 800,000
Warrants issued in exchange for
services in April, 2004 243,000
Common shares cancelled for return of (90,000)
collateral deposit with factor
Common shares issued in May for
Private Placement at $0.10/Share 531,000
Class A preferred shares issued for
cash at $5,000 per share in May, 2004 79,307
Warrants on convertible preferred
Class A Shares (58,915)
Common shares issued in exchange for
note payable at $.10/share in June, 2004 5,000
Common Shares issued in June, 156,000
2004 in exchange for services valued
at $0..10 per share
Common Shares issued in June, 20,000
2004 in exchange for services valued
at $0.10 per share
F-8
Subscription received in advance for
shares to be issued 22,500 22,500
Common Shares issued in exchange for
services adjusted for issue prices (44,640)
Common Shares issued in July,
2004 in exchange for services valued
at $0.40 per share 40,000
Common shares issued in July, 2004 for
private placement at $0.10/Share (10,000) --
Common shares issued in August, 2004 for
Conversion of Preferred "A" Shares --
Common shares issued in August, 2004 for
Exercise of warrants at $0.25/Share (12,500) 162,750
Warrants issued to consultants for
services 106,172
Beneficial conversion feature of
convertible debentures (Note D) 500,000 500,000
Common shares issued in September for
Exercise of warrants at $0..25/Share 50,000
Options issued to employees as
Incentive Compensation 275,000
Common Shares issued in October,
2004 in exchange for services valued
at $0.25 per share 172,500
Shares issued in October, 2004
for note payable at $0.15 pershare 21,003
Shares issued in November, 2004
for note payable at $0.105 pershare 108,698
Shares issued in December, 2004
for note payable at $0.035 pershare 36,232
Shares issued in December, 2004
as a penalty for late registration to
Preferred "A" shareholders 89,702
Shares issued in December, 2004
for conversion of Preferred "A" shares --
Beneficial conversion feature of
convertible debentures (Note D) 1,000,000
Warrants issued for services 516,637
Net (Loss) (6,825,848) (6,825,848)
------------- ------------- -------------
Balance, December 31, 2004 -- (10,847,683) (1,723,810)
The accompanying notes are an integral part of these financial statements
F-9
Cyberlux Corporation
(A Development Stage Company)
Statement of Cash Flows
FOR THE PERIOD
MAY 17, 2000
(INCEPTION) TO
FOR THEYEAR ENDED FOR THEYEAR ENDED DECEMBER 31,
DECEMBER 31, 2004 DECEMBER 31, 2003 2004
----------------- ----------------- ---------------
Cash flows from operating activities
Net (loss) available to common stockholders $ (6,825,848) $ (2,230,806) $ (10,847,683)
Depreciation and amortization 47,686 246,598 386,086
Beneficial conversion discount - preferred stock dividend 800,000 736,250 1,536,250
Amortization of debt discount - beneficial conversion 1,500,000 1,500,000
feature of convertible note (Note D)
Stock options issued for consulting services 107,504
Stock options issued as compensation 275,000 275,000
Shares issued for previously incurred debt 288,326 49,029 337,355
Warrants issued to consultants for services 516,637 516,637
Shares issued/(cancelled) for factoring deposit (90,000) 90,000 -
Loan extension write off -
Preferred shares issued for conversion of accrued
management fees 723,670 723,670
Preferred shares issued for previously incurred debt 76,330 76,330
Accrued expenses relating to escrow deposits 23,814 23,814
Shares issued for consulting services 1,494,955 65,646 1,828,059
Shares issued for research and development 68,753
Decrease (increase) in deposits 236,000 (227,386) -
(Increase) decrease in prepaid expenses (68,404) (68,404)
(Increase)/decrease in other assets (30,544) 20,000 (30,544)
Increase (decrease) in accurued liabilities 218,432 60,549 323,408
(Decrease) increase in management fee payable-
related party (996,508) 450,000 -
(Decrease) increase in other accounts payable (120,294) 200,417 176,094
Net cash used in operating activities (1,954,562) (515,889) (3,067,671)
Cash flows from investing activities
Payments for property, plant and equipment (21,859) (11,000) (135,353)
Cash used in investing activities (21,859) (11,000) (135,353)
Cash flows from financing activities
(Payments for )/proceeds from short-term notes payable, net (292,500) (45,000) 27,500
Proceeds from short-term notes payable-shareholders (net) 191,235 84,300 399,080
Proceeds from issuance of preferred stock 79,308 475,000 554,308
Capital contributed by shareholders 276,186 292,186
Proceeds from convertible long-term notes 1,355,069 1,355,069
Proceeds from issuance of common stock 766,250 2,750 990,256
Net cash provided by financing activities 2,375,548 517,050 3,618,399
----------------- ----------------- -----------------
Net increase (decrease) in cash 399,128 (9,839) 415,375
Cash - beginning 16,247 26,086 -
Cash - ending $ 415,375 $ 16,247 $ 415,375
F-10
Supplemental disclosures:
Interest Paid 75,103 18,425 143,003
Income Taxes Paid -- -- --
Non-Cash investing and financing activities:
Shares issued for research and development and consulting -- 68,753
Shares issued for conversion of debt 288,326 49,029 337,355
Warrants issued in connection with financing 406,525 -- 481,525
Warrants issued to consultants for services 349,173 349,173
Options issued in connection with services -- -- 107,504
Shares issued in connection with services 1,494,955 65,646 1,828,059
Shares issued in connection with loan -- 225,000 225,000
Shares issued in connection with factoring (90,000) 90,000 --
Amortization of debt discount - beneficial conversion 1,500,000 1,500,000
feature of convertible note (Note D)
Warrants payable (detachable) with convertible preferred
shares (347,610) 347,610 --
Beneficial conversion discount on convertible preferred
stock 800,000 736,250 1,536,250
Convertible preferred shares issued for previously incurred debt 76,330 76,330
Convertible preferred shares issued for accrued management fees 723,670 723,670
The accompanying notes are an integral part of these financial statements
F-11
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE A-SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
Business and Basis of Presentation Cyberlux Corporation (the "Company") is
incorporated under the laws of the State of Nevada. The Company is in the
development stage as defined under Statement on Financial Accounting Standards
No.7, Development Stage Enterprises ("SF AS No.7") and is seeking to develop and
market long-term portable lighting products for commercial and industrial us. To
date the Company has generated little revenue, 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 December 31, 2004, the
Company has accumulated losses of $10,847,683.
The Company is in the development stage and its efforts have been principally
devoted to designing, developing and marketing advanced lighting systems that
utilize white (and other) light emitting diodes as illumination elements.
The Company's common stock has been listed on the NASDAQ OTC Electronic Bulletin
Board sponsored by the National Association of Securities Dealers, Inc. under
the symbol "CYBL" since July 11,2003.
REVENUE RECOGNITION
-------------------
For revenue from product sales, the Company recognizes revenue in accordance
with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), MULTIPLE
DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21 on
the Company's financial position and results of operations was not significant.
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.
CASH AND CASH EQUIVALENTS
-------------------------
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property and equipment are recorded at cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized and
depreciated over their estimated useful lives. Depreciation is calculated using
the straight-line method over the estimated useful lives
ADVERTISING COSTS
-----------------
The Company expenses all costs of advertising as incurred. Advertising costs
totaled $100,132 and $20,820 in 2004 and 2003 respectively.
IMPAIRMENT OF LONG LIVED ASSETS
-------------------------------
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144 ). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes ill circumstances indicate that the carrying amount
of an asset may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undercounted cash flows. Should an impairment in
value be indicated, the carrying value of intangible assets will be adjusted,
based on estimates of future discounted cash flows resulting from the use and
ultimate disposition of the asset. SF AS No. 144 also requires assets to be
disposed of be reported at the lower of the carrying amount or the fair value
less costs to sell.
F-12
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 2004 and
2003. The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments include
cash and accounts payable. Fair values were assumed to approximate carrying
values for cash and payables because they are short term in nature and their
carrying amounts approximate fair values or they are payable on demand.
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit.
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.
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 year ended December 31,
2004 2003
----------- -----------
Net loss attributable to common stockholders -as reported $(6,825,848) $(2,230,806)
Add. Total stock based employee compensation expense as
reported under intrinsic value method (APB No. 25) 105,000 --
Deduct Total stock based employee compensation expense
as reported under fair value based method (SFAS No. 123) (658,800) (106,800)
Net loss -Pro Forma $(7,379,648) $(2,337,606)
Net loss attributable to common stockholders - Pro forma $(7,379,648) $(2,337,606)
Basic (and assuming dilution) loss per share -as reported $ (0.41) $ (0.29)
Basic (and assuming dilution) loss per share - Pro forma $ (0.44) $ (0.31)
LOSS PER SHARE
--------------
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No.128 (SF AS #128) Earnings Per Share. Basic loss per
share is computed by dividing losses available to common stockholders by the
weighted average number of common shares outstanding during the period.
SEGMENT REPORTING
-----------------
The Company follows Statement of Financial Accounting Standards No.130,
Disclosures About Segments of an Enterprise and Related Information. The Company
operates as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
F-13
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
INCOME TAXES
------------
The Company follows Statement of Financial Accounting Standard No.109,
Accounting for Income Taxes (SFAS No.109) for recording the provision for income
taxes. Deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability during
each period. If available evidence suggests that it is more likely than not that
some portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse
RECENT PRONOUNCEMENTS
---------------------
In November, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs - an amendment of ARB No. 43, Chapter 4. This statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing", to clarify
the accounting for normal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that"... under certain circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. "This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during the
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
In December, 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67" (SFAS
152). The amendments made by Statement 152. This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP 04-2), Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance of SOP 04-2. This Statement id effective for financial statements for
fiscal years beginning after June 15, 2005, with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations, or cash
flows.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised, 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year, 2005. Currently the Company accounts for its share-based
payment transactions under the provisions of APB25, which does not necessarily
require the recognition of compensation costs in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of ooperations in the tird quarter of
fiscal year 2005 and thereafter.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions ("SFAS 153"). This Statement
amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Under SFAS 153, if
a nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value if determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in the fiscal periods that begin after
June 15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
F-14
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at December 31, 2004 and 2003 are as follows:
2004 2003
10 % convertible note payable, unsecured and due September, 2003; accrued and
unpaid interest due at maturity ; Note holder has the option to convert unpaid
note principal together with accrued and unpaid interest to the Company's common
stock at a rate of $ .50 per share. The company was in violation of the loan
covenants. $2,500 $2,500
10% convertible notes payable, unsecured and due March, 2003; accrued and unpaid
interest due at maturity; Note holder has the option to convert unpaid note
principal together with accrued and unpaid interest to the Company's common
stock at a rate of $ 1.00 per share. The Company is in violation of the loan
covenants. -0- 7,500
10% convertible notes payable, unsecured and due March, 2003; accrued and unpaid
interest due at maturity; Note holder has the option to convert unpaid note
principal together with accrued and unpaid interest to the Company's common
stock at a rate of $ .50 per share. The Company is in violation of the loan
covenants. 25,000 25,000
10% notes payable, unsecured and due March, 2003; accrued and unpaid interest
due at maturity; Note holder has the option to convert unpaid note principal
together with accrued and unpaid interest to the Company's common stock at a
rate of $ 1.00 per share. -0- 10,000
18% note payable, interest payable monthly and due June, 2003; note secured by
Company's assets and pledge of 3,265,000 shares of the Company's common stock
owned by Company's principal shareholders and officers; Note holder has the
option to convert unpaid note principal together with accrued and unpaid
interest to the Company's common stock at the lower of $ .15 per share or a
price per share equal to 85 % of the average daily bid price over the ten
preceding days prior to the date of conversion. The Company is in violation of
the loan covenants. This note was paid off and settled subsequently in January
2004. -0- 195,000
10% Convertible note payable, unsecured and due October 2003; accrued and unpaid
interest due at maturity. Note holder has the option to convert the unpaid note
principal together with accrued and unpaid interest to the Company's common
stock at $ .25 per share. The Note was redeemed in March, 2004 for a combination
of common stock and cash. -0- 75,000
10% convertible note payable, unsecured and due October 2003 ; accrued and
unpaid interest due at maturity; Note holder has the option to convert unpaid
note principal together with accrued and unpaid interest to the Company's common
stock at the rate of $ .10 per share. The Company is in violation of the loan
covenants. The note was converted to common stock in June, 2004 -0- 5,000
10% convertible note payable in the original amount of $1,500,000, and due
September, 2006. Interest is payable quarterly during the life of the note. The
note is convertible into the Company's common stock at the lower of a) $0.72; b)
50% of the average of the three lowest intraday trading prices for the common
stock. The full principal amount of the secured convertible notes is due upon a
default under the terms of the secured convertible notes. The note is secured by
substantially all of the Company's assets, including the assets of wholly owned
subsidiaries and intellectual property. As of December 31, 2004 the Note holder
has converted $144,931 of the principal to common stock of the Company. 1,355,069
---------------------------------
1,382,569 320,000
Less: current portion (27,500) (320,000)
---------------------------------
$1,355,069 $ --
F-15
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued)
In accordance with the Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the convertible note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid in capital. During the year ended December 31, 2004, the
Company recognized and measured an aggregate of $1,500,000 of the proceeds,
which is equal to the intrinsic value of the imbedded beneficial conversion
feature, to additional paid in capital as a discount against the convertible
note. The debt discount attributed to the beneficial conversion feature is
expensed immediately as interest expense since the note can be converted to
common shares at any time.
In connection with the placement of the convertible note, the Company issued
non-detachable warrants granting the holders the right to acquire 2,250,000
shares of the Company's common stock at $0.50 per share. The Company valued the
warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and
the following assumptions: contractual terms of 5 years, an average risk free
interest rate of 2.0%, a dividend yield of 0%, and a volatility of 149%.
NOTE C -STOCKHOLDER'S EQUITY
COMMON STOCK
------------
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share.
During May, 2000, the Company issued 1,640,000 shares of its common stock to its
founders in exchange for cash of $2,200.
During May 2000, the Company issued 750,000 shares of its common stock in
exchange for research and development and organizational costs paid for by
Research Econometrics, LLP the totaling $68,753. The stock issued was valued at
approximately $.09 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
During May 2000, the Company issued 875,000 shares of its common stock to an
officer of the Company for consulting services valued at $36,585. The stock
issued was valued at approximately $.05 per share, which represents the fair
value of the stock issued, which did not differ materially from the value of the
services rendered.
In May, 2000 the Company issued $40,000 of notes payable convertible into the
Company's common stock at a price equal to $.15 per share. In July 2000, the
holders of the notes payable elected to convert $40,000 of the notes, plus
accrued interest, in exchange for 288,000 shares of the Company's common stock.
In November, 2000 the Company issued 640,171 shares of common stock in exchange
for $ 96,026 in connection With a private placement memorandum, net of costs.
During November 2000, the Company issued 122,795 shares of its common stock in
exchange for services totaling $18,419. The stock issued was valued at
approximately $0.15 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January 2001, holders of the Company's convertible notes payable elected to
convert $104,817 of debt in exchange for 698,782 shares of the Company's common
stock.
In May, 2001, the Company granted certain officers of the Company options to
purchase 350,000 shares the Company's common stock at its par value for services
rendered.. The options issued were valued at $ .15 per share, or $52,500 which
represents the fair value of the option issued, which did not differ materially
from the value of the services received. In November, 2001, the officers elected
to exercise their options to purchase the stock for $350.
In connection with the placement of the Company's Note Payable in October, 2001,
the Company issued warrants to purchase 500,000 shares of the Company's common
stock at par value to the holders of the Note. The warrant agreement expires
October 22, 2004, and is callable upon election by the Company. The 500,000
warrants are valued at $0.15 per warrant, or $75,000, which represents the fair
value of the warrants, issued and is being amortized over the life of the loan.
The warrant was exercised in November, 2001. Amortization expense of $ 50,000
and $12,500 was charged to operations in 2002 and 2001,respectively.
During the year ended December 31, 2001, certain warrant holders elected to
convert their warrants to 636,000 shares of the Company's $0.00 1 par value
common stock for cash of $ 14,250.
F-16
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE C -STOCKHOLDER'S EQUITY (Continued)
In December 2001, holders of the Company's convertible notes payable elected to
convert $ 75,824 of debt in exchange for 151,648 shares of the Company's common
stock.
During May 2002, the Company issued 70,000 shares of its common stock in
exchange for services totaling $49,998. The stock issued was valued at
approximately $.70 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
During November 2002, the Company issued 150,000 shares of its common stock in
exchange for services totaling $ 37,500. The stock issued was valued at
approximately $.25 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In December, 2002 the Company issued 256,000 shares of common stock in exchange
for $ 64,000 for cash in connection with a private placement memorandum, net of
costs.
In May, 2003, the holder of a $49,030 note payable exchanged the unpaid
principal together with accrued interest for 196,120 shares of the Company's
common stock.
In June, 2003, the Company issued 200,000 shares of its common stock in exchange
for services totaling $ 50,000. The stock issued was valued at approximately
$.25 per share, which represents the fair value of the stock issued, which did
not differ materially from the value of the services rendered.
In September, 2003, the Company issued 450,000 shares of its common stock in
exchange for services totaling $ 90,000. The stock issued was valued at
approximately $.20 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In November, 2003, the Company issued 11,292 shares of its common stock in
exchange for services totaling $ 5,645. The stock issued was valued at
approximately $.50 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January, 2004, the Company collected the balance of its subscriptions
receivable of $276,186.
In January, 2004, the holders of $27,691 in notes payable exchanged the unpaid
principal together with accrued interest for 110,764 shares of the Company's
common stock.
In January, 2004, the Company issued 2,585,000 shares of its common stock in
exchange for services totaling $ 956,450. The stock issued was valued at
approximately $.37 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January, 2004, the Company issued 1,200,000 shares of its common stock in
exchange for services totaling $ 252,000. The stock issued was valued at
approximately $.21 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In April, 2004, the Company received back and cancelled 450,000 shares of its
common stock for return of collateral deposit with factor at $90,000.
In April, 2004, the Company issued warrants to consultants for services of
$243,000 which represents the fair value of the warrants issued, which did not
differ materially from the value of the services rendered.
In April, 2004, the Company issued 2,000,000 options to purchase common stock at
$0.2125 per share to employees of the Company. The company recognized $275,000
as stock-based compensation and additional paid in capital, which is equal to
the intrinsic value of the stock on the date of the award.
In May, 2004, the Company issued 5,310,000 shares of common stock at $0.10 per
share for private placement for cash. In connection with the offering, the
investors received a warrant to purchase the Company's common stock for each
share of common stock purchased ("Class A Warrants"). The warrants have an
exercise price of $0.25 per share and expire on June 30, 2004.
F-17
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE C -STOCKHOLDER'S EQUITY (Continued)
In May, 2004, the Company issued 50,000 shares of common stock at $0.10 per
share on conversion of notes payable.
In June, 2004, the Company issued 1,760,000 shares of its common stock in
exchange for services totaling $ 176,000. The stock issued was valued at
approximately $.10 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In July, 2004 the Company issued 100,000 shares of common stock in exchange for
services rendered to the Company valued at $40,000. The shares were issued at
$0.40 per share which represents the fair value of the stock issued which did
not materially differ from the value of the services rendered.
In July, 2004 the Company issued 100,000 shares of common stock at $0.10 for
private placement for cash.
In August 2004, the Company issued 651,000 shares of common stock against
exercise of warrants at $0.25 per share for $150,250 in cash and balance $12,500
was adjusted out of cash received in June 2004.
In August 2004, the Company issued 200,000 shares of common stock for exercise
of warrants at $0.25 per share for cash.
In August, 2004, holders converted 4 shares of preferred stock - Class A into
200,000 of common stock at $.10 per share.
In September 2004, the Company recognized and measured an aggregate of $500,000
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and expensed as
interest.
In September, 2004, the Company issued warrants to consultants for services for
$106,173 which represents the fair value of the warrants issued, which did not
differ materially from the value of the services rendered.
In October, 2004, the Company issued 690,000 shares of its common stock in
exchange for services totaling $ 172,500. The stock issued was valued at
approximately $.25 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In October, 2004, the Company issued 140,019 shares of its common stock at $0.15
per share on conversion of notes payable.
In October, 2004, the Company recognized and measured an aggregate of $500,000
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and expensed as
interest.
In November, 2004, the Company recognized and measured an aggregate of $500,000
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and expensed as
interest.
In November, 2004, the Company issued 1,035,221 shares of its common stock at
$0.105 per share on conversion of notes payable.
In December, 2004, the Company issued 1,035,221 shares of its common stock at
$0.035 per share on conversion of notes payable.
In December, 2004, holders converted 15 shares of preferred stock - Class A into
750,000 shares of common stock at $.10 per share.
In December, 2004, the Company issued 203,867 shares of its common stock to
holders of preferred - Class A stock as a penalty for late registration of the
underlying common shares. The Company recorded an expense of $0.44 per share in
the amount of $89,702.
Preferred Stock
The Company has also authorized 5,000,000 shares of preferred Class A stock,
with a par value of $.001 per share.
In December, 2003, the Company issued 155 shares of its convertible preferred
stock -class A, valued at $5,000 per share. This has a stated value of $5,000
per share and a conversion price of $0.10 per share and warrants to purchase an
aggregate of 15,500,000 shares of our common stock. The Company recorded
beneficial conversion discount for the year ended December 31, 2003 of $736,250.
In May, 2004, the Company issued 15.861 shares of its convertible preferred
stock - class A, valued at $5,000 per share. This has a stated value of $5,000
per share and a conversion price of $0.10 per share and warrants to purchase an
aggregate of 1,600,000 shares of our common stock.
The Company has also authorized 8,000,000 shares of preferred Class B stock,
with a par value of $.001 per share.
F-18
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE C -STOCKHOLDER'S EQUITY (Continued)
In January, 2004, the Company issued 800,000 shares of its preferred stock -
class B in lieu of certain accrued management service fees payable and notes
payable including interest payable thereon totaling $800,000 to officers of the
company. The stock issued was valued at $1.00 per share, which represents the
fair value of the stock. The shares of preferred stock are convertible into
common shares at $0.20 per share which was amended in April, 2004 to $0.10 per
share. In connection with the transaction, the Company recorded a beneficial
conversion discount of $800,000 - preferred dividend relating to the issuance of
the convertible preferred stock. The preferred stock - class B accumulates
interest, payable as dividends at the rate of 12% per annum. For the year ended
December 31, 2004 $96,000 in dividends were accumulated. These dividends are not
recorded until declared by the Company.
NOTE D -STOCK OPTIONS
Class A Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
shareholders at December 31,2004.
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------- ---------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICES
--------------- ----------- --------------------- -------------- ----------- ---------------
$ 0.10 91,500 5 $ 0.10 91,500 $ 0.10
0.20 1,445,000 4 0.20 1,445,000 0.20
0.25 10,101,564 3 0.25 10,101,164 0.25
0.50 2,600,000 5 0.50 2,600,000 0.50
$ 1.05 8,643,064 3 1.05 8,643,064 1.05
22,881,128 3.30 $ 0.58 22,881,128 $ 0.58
Transactions involving the Company's warrant issuance are summarized as follows:
NUMBER OF SHARES WEIGHTED AVERAGE
PRICE PER SHARE
---------------- ----------------
Outstanding at December 31,2003 15,895,000 $ 0.54
Granted 11,756,128 0.39
Exercised ( 851,000) 0.25
Canceled or expired (3,919,000) 0.25
Outstanding at December 31, 2004 22,881,128 $0 .58
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- ---------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICES
--------------- ----------- --------------------- -------------- ----------- ---------------
$ 0.2125 2,000,000 5 $ 0.2125 2,000,000 $ 0.2125
0.2975 2,000,000 6 0.2125 2,000,000 0.2125
4.000.000 5.5 $ 0.2125 4.000.000 $ 0.2125
F-19
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE D -STOCK OPTIONS (Continued)
Transactions involving stock options issued to employees are summarized as
follows:
WEIGHTED AVERAGE
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
Outstanding at December 31, 2003 2,000,000 $0.2125
Granted 2,000,000 0.2125
Exercised -- --
Canceled or expired -- --
Outstanding at December 31, 2004 4.000.000 $0.2125
The weighted-average fair value of stock options granted to employees during the
period ended December 31, 2004 and 2003 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2004 2003
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2.0% 1.02%
Expected stock price volatility 149% 26%
Expected dividend payout -- --
Expected option life-years (a) 6 5
(a)The expected option life is based on contractual expiration dates.
If the Company recognized compensation cost for the stock options and warrants
for the non-qualified employee stock option plan in accordance with SF AS
No.123, the Company's pro forma net loss and net loss per share would have been
$( 7,379,648 ) and $( 0.44 ) for the year ended December 31,2004 and
$(2,337,606) and $(0.31) for the year ended December 31, 2003, respectively.
NOTE E -RELATED PARTY TRANSACTIONS
The Company entered into a sub-lease agreement with Research Econometrics, LLP,
which provides the Company the ability to continue the research and development
efforts of the Electrochemical Portable Power Plant and Lighting System. The
agreement is on a month-to-month basis. Total rental expense for the years
ending December 31, 2004 and 2003 was $ 0 and $8,814, respectively.
The Company incurred management fees to its officers totaling $445,997 and
$504,000 during the years ended December 31, 2004 and December 31, 2003,
respectively. Unpaid management fees aggregate $ 0 and $996,508 as of December
31, 2004 and 2003, respectively. In May, 2004 the Board of Directors converted
$723,670 in unpaid management fees to Preferred Class B shares of the Company at
a rate of $1.00 per preferred share. The Company also issued notes payable to
officers in the amount of $283,835 for the balance of the unpaid management
fees.
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 December 31, 2004 and 2003, the
balance due to the officers was $ 399,080 and $207,845, respectively.
NOTE F -COMMITMENTS AND CONTINGENCIES
Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. The Agreements are generally for a term of 12
months from inception and renewable automatically from year to year unless
either the Company or Consultant terminates such engagement by written notice.
NOTE G- LOSSES PER SHARE
The following table presents the computation of basic and diluted losses per
share:
2004 2003
Net loss available to Common stockholders $(6,825,848) $(2,230,806)
Basic and diluted loss per share (0.41) (0.29)
Weighted average common shares outstanding 16,701,174 7,652,012
F-20
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE H- INCOME TAXES
The Company has adopted Financial Accounting Standards No.109, which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statement or
tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant. At December 31,2004 and 2003, the Company has available for
federal income tax purposes a net operating loss carry forward of approximately
$ 8,500,000, expiring in the year 2023, that may be used to offset future
taxable income. The Company has provided a valuation reserve against the full
amount of the net operating loss benefit, since in the opinion of management
based upon the earnings history of the Company, it is more likely than not that
the benefits will not be realized.
Components of deferred tax assets as of December 31,2004 are as follows:
Non current:
Net operating loss carry forward $ 2,900,000
Valuation allowance $(2,900,000)
Net deferred tax asset --
The realization of these net operating loss carry forwards is dependent upon
generating taxable income prior to the related year of expiration. The amount of
carry forward that may be utilized in any future tax year may also be subject to
certain limitations, including limitations as a result of certain stockholder
ownership changes in which may be beyond the control of the Company.
NOTE I- GOING CONCERN MATTERS
The accompanying statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the accompanying financial statements
during the years ended December 31,2004 and 2003, the Company incurred losses
from operations of $(6,025,848) and $(1,494,556), respectively. These factors
among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The Company is actively pursuing additional equity financing through discussions
with investment bankers and private investors. There can be no assurance the
Company will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts,
management believes that the Company can continue to operate. However, no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems.
The Company's existence is dependent upon management's ability to develop
profitable operations and resolve its liquidity problems. The Company has raised
approximately $ 2,121,319 in cash through issuances of Common Stock and debt
during the year ended December 31, 2004 and $ 475,000 in cash through issuance
of Preferred Stock during the year ended December 31, 2003. Management has been
focused on increasing sales and cutting operating expenses, both to improve
gross margins and to reduce the monthly overhead costs. Recurring losses and
liquidity issues raise doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
By adjusting its operations and development to the level of capitalization,
management believes it has sufficient capital resources to meet projected cash
flow deficits. However, if during that period or 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. Investment capital or debt facilities may be difficult to
obtain and there can be no assurance that additional capital or debt will be
available or, if available, will be at terms acceptable to the Company. The
Company is focusing on opportunities to increase revenues and grow margins while
continuing to reduce monthly expenses in an attempt to turn cash flow positive
and profitable.
NOTE J-SUBSEQUENT EVENTS
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0248 per share on conversion of notes payable.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0135 per share on conversion of notes payable.
In February, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00883 per share on conversion of notes payable.
F-21
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.01358 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00983 per share on conversion of notes payable.
F-22
CYBERLUX CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2005 DECEMBER 31,
UNAUDITED 2004
------------ ------------
Assets
Current assets:
Cash & cash equivalents $ 141,652 $ 415,375
Accounts Receivable - allowance for doubtful accounts of $ 0 10,000 --
Prepaid expenses 156,792 68,404
------------ ------------
Total current assets 308,444 483,779
Property, plant and equipment, net of accumulated
depreciation of $ 104,825 and $92,335, respectively 60,694 43,018
Other Assets:
Patents 78,270 30,544
------------ ------------
Total Assets $ 447,408 $ 557,341
============ ============
Liabilities and Deficiency in Stockholders' Equity
Current liabilities:
Accounts payable $ 164,556 $ 176,094
Accrued liabilities 379,927 323,408
Short-term notes payable - shareholders 366,595 399,080
Short-term notes payable 27,500 27,500
------------ ------------
Total current liabilities 938,578 926,082
Long-term liabilities:
Convertibel debentures, net of discounts (Note B) 1,107,497 1,355,069
Deficiency in Stockholders' equity:
Preferred stock, $0.001 par value, 200 shares authorized, Class A, 86.8606 and
151.8606 shares issued and
outstanding as of June 30, 2005 and December 31, 2004 respectively 1 1
Preferred stock, $0.001 par value, 800,000 shares authorized, Class B, 800,000
issued and outstanding
as of June 30, 2005 and December 31, 2004 800 800
Common stock, $0.001 par value, 300,000,000 shares authorized, 62,952,001 and
23,770,233 shares issued and outstanding as of June 30, 2005 and December 31,
2004, respectively 62,952 23,770
Additional paid-in capital 10,542,519 9,099,302
Accumulated deficit (12,204,939) (10,847,683)
------------ ------------
Deficiency in stockholders' equity (1,598,667) (1,723,810)
------------ ------------
Total liabilities and (deficiency) in stockholders' equity $ 447,408 $ 557,341
============ ============
The accompanying notes are an integral part of these unaudited
condensed financial statements
F-23
CYBERLUX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------ ------------ ------------ ------------
Revenue $ 200 $ 11,238 $ 13,768 $ 21,206
Cost of goods sold (23,117) (7,992) (29,487) (16,387)
------------ ------------ ------------ ------------
Gross margin (loss) (22,917) 3,246 (15,718) 4,819
Operating Expenses:
Marketing and advertising 116,349 21,830 137,672 10,380
Depreciation and amortization 4,886 13,361 13,180 31,652
Research and development 100,883 34,086 119,580 34,086
General and administrative expenses 468,356 447,435 808,196 1,876,908
Total operating expenses 690,475 516,712 1,078,628 1,953,026
(Loss) from operations (713,392) (513,466) (1,094,346) (1,948,207)
Other income/(expense)
Other Income -- (10,441) -- 4,559
Interest income 0 62 300 62
Interest expense (125,873) (5,434) (168,879) (54,627)
Debt acquisition costs (94,331) (94,331)
Net Loss before provision for income taxes
and preferred dividend (933,596) (529,279) (1,357,255) (1,998,213)
Income taxes (benefit) -- -- --
Net loss (933,596) (529,279) (1,357,255) (1,998,213)
Preferred dividend - Beneficial conversion discount
on convertible preferred -- (800,000)
Net loss available to common stockholders $ (933,596) $ (529,279) $ (1,357,255) $ (2,798,213)
Weighted average number of common shares
outstanding, basic and fully diluted 41,216,067 15,169,191 34,604,651 13,004,736
Net loss per share - Basic and fully diluted $ (0.02) $ (0.03) $ (0.04) $ (0.22)
Preferred dividend $ 24,000 $ 24,000 $ 48,000 $ 24,000
The accompanying notes are an integral part of these unaudited
condensed financial statements
F-24
Cyberlux Corporation
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
PERIOD JANUARY 1, 2005 THROUGH JUNE 30, 2005
(Unaudited)
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK DEFICIENCY IN
------------------ --------------- PAID IN SUBSCRIPTION DEFICIENCY STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE ACCUMULATED EQUITY
---------- ------ ------- ------ ---------- ------------ ----------- -------------
Balance, December 31, 2004 23,770,233 $23,771 $800,152 $ 801 $9,099,302 $ -- $(10,847,684) $ (1,723,810)
Shares issued in January, 2005 for
Preferred A conversion 1,675,000 1,675 (34) -- (1,675) -- -- --
Shares issued in January, 2005 for
note payable at $0.0248 per share 1,035,221 1,035 -- -- 24,638 -- -- 25,673
Shares issued in January, 2005 for
note payable at $0.0135 per share 1,035,221 1,035 -- -- 12,940 -- -- 13,975
Shares issued in February, 2005
for Preferred A conversion 250,000 250 (5) -- (250) -- -- --
Shares issued in February, 2005
for note payable at $0.00883 per
share 1,035,221 1,035 -- -- 8,106 -- -- 9,141
Shares issued in March, 2005 for
note payable at $0.01358 per share 1,035,221 1,035 -- -- 13,024 -- -- 14,059
Shares issued in March, 2005 for
note payable at $0.00983 per share 1,035,221 1,036 -- -- 9,141 -- -- 10,177
Warrants issued in March in
exchange for services -- -- -- -- 14,160 -- -- 14,160
Shares issued in April, 2005 for
Preferred A conversion 250,000 250 (5) -- (250) --
Common Shares issued in April,
2005 in exchange for services
valued at $0.03 per share 800,000 800 23,200 24,000
Shares issued in April, 2005 for
note payable at $0.0118 per share 1,035,221 1,035 11,181 12,216
Shares issued in April, 2005 for
note payable at $0.011 per share 1,035,221 1,035 10,352 11,387
Shares issued in May, 2005 for
note payable at $0.0108 per share 1,035,221 1,035 10,145 11,180
Shares issued in May, 2005 for
note payable at $0.0105 per share 1,600,000 1,600 15,200 16,800
Shares issued in May, 2005 for
note payable at $0.0103 per share 1,100,000 1,100 10,230 11,330
Shares issued in May, 2005 for
note payable at $0.0088 per share 1,700,000 1,700 13,260 14,960
Shares issued in May, 2005 for
note payable at $0.0085 per share 1,700,000 1,700 12,750 14,450
Shares issued in May, 2005 for
note payable at $0.0083 per share 3,400,000 3,400 24,820 28,220
Shares issued in June, 2005 for
Preferred A conversion 1,075,000 1,075 (22) (1,075) --
Common Shares issued in June,
2005 in exchange for services
valued at $0.02 per share 250,000 250 4,750 5,000
Shares issued in June, 2005 for
note payable at $0.0083 per share 6,800,000 6,800 49,640 56,440
Shares issued in June, 2005 for
note payable at $0.0092 per share 2,400,000 2,400 19,680 22,080
Shares issued in June, 2005 for
note payable at $0.0085 per share 7,900,000 7,900 59,250 67,150
Beneficial conversion feature of
convertible debentures (Note D) 1,100,000 1,100,000
Net (Loss) -- -- -- -- -- -- (1,357,255) (1,357,255)
---------- ------ ------- ------ ---------- ------------ ----------- -------------
Balance, June 30, 2005 62,952,001 $62,952 $800,087 $ 801 $10,542,519 $ -- $(12,204,939) $ (1,598,667)
The accompanying notes are an integral part of these unaudited
condensed financial statements
F-25
Cyberlux Corporation
Condensed Statement of Cash Flows
(Unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004
----------- -----------
Cash flows provided by (from-used in) operating activities
Net (loss) available to common stockholders $(1,357,255) $(2,798,213)
Depreciation and amortization 13,180 31,652
Beneficial conversion discount - preferred stock dividend -- 800,000
Amortization of debt discount - beneficial conversion
feature of convertible note (Note D) 91,667 --
Shares issued for previously incurred debt -- 32,691
Warrants issued to consultants for services 14,160 243,000
Warrants issued in connection with financing --
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 29,000 1,327,810
Shares issued for factoring agreement (90,000)
Decrease (increase) in accounts receivable (10,000) (10,804)
(Increase) decrease in prepaid expenses (88,389) --
(Increase) decrease in other assets (47,726) 130,450
Increase (decrease) in accrued interest 50,976 (55,541)
Increase (decrease) in accrued liabilities 5,543 (223,798)
(Decrease) increase in management fee payable-
related party -- (723,670)
(Decrease) increase in other accounts payable (11,537) --
Net cash (used in) operating activities (1,310,382) (536,423)
Cash flows provided by (used in) investing activities
Payments for property, plant and equipment (30,856) (19,266)
Cash (used in) investing activities (30,856) (19,266)
Cash flows provide by (used in) financing activities
Payments for (proceeds from) short-term notes payable, net -- (255,000)
(Payments for ) proceeds from short-term notes
payable-shareholders (net) (32,485) (95,100)
Proceeds from advance deposits -- 22,500
(Payments for) Proceeds from convertible long-term notes 1,100,000 --
Proceeds from issuance of preferred stock 79,308
Proceeds from subscriptions receivable 276,186
Issuance of common stock 543,000
Net cash provided by (used in)financing activities 1,067,515 570,894
----------- -----------
Net increase (decrease) in cash (273,723) 15,205
Cash - beginning 415,375 16,247
Cash - ending $ 141,652 $ 31,452
Supplemental disclosures:
Interest Paid $ 9,537 110,167
Income Taxes Paid --
Non-Cash investing and financing activities:
Shares issued for research and development and consulting 29,000 1,327,810
Shares issued for conversion of debt -- 32,692
Warrants issued in connection with financing 273,967 --
Warrants issued to consultants for services 14,160 243,000
Warrants issued detachable with convertible preferred shares 58,915
Shares issued in connection with factoring -- (90,000)
Beneficial conversion discount on convertible preferred stock -- 800,000
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 unaudited
condensed financial statements
F-26
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 six-month period ended June 30,
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 June 30, 2005, the
Company has accumulated losses of $12,204,939.
REVENUE RECOGNITION
For revenue from product sales, the Company recognizes revenue in accordance
with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), MULTIPLE
DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21 on
the Company's consolidated financial position and results of operations was not
significant.
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.
CASH AND CASH EQUIVALENTS
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are recorded at cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized and
depreciated over their estimated useful lives. Depreciation is calculated using
the straight-line method over the estimated useful lives
F-27
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
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.
IMPAIRMENT OF LONG LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144 ). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes ill circumstances indicate that the carrying amount
of an asset may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undercounted cash flows. Should impairment in value
be indicated, the carrying value of intangible assets will be adjusted, based on
estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset. SF AS No. 144 also requires assets to be disposed of
be reported at the lower of the carrying amount or the fair value less costs to
sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of June 30, 2005 and 2004.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash and
accounts payable. Fair values were assumed to approximate carrying values for
cash and payables because they are short term in nature and their carrying
amounts approximate fair values or they are payable on demand.
CONCENTRATIONS OF CREDIT RISK
Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit.
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 SFAS 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.
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):
F-28
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders -as reported $ (933,596) $ (529,279) $(1,357,255) $(2,798,213)
Add. Total stock based employee
compensation expense as reported
under intrinsic value method
(APB No. 25) -- -- -- 0
Deduct Total stock based employee
compensation expense as reported
under fair value based method
(SFAS No. 123) -- -- (478,800) 0
Net loss -Pro Forma $ (933,596) $ (529,279) $(1,836,055) $(2,798,213)
Net loss attributable to common
stockholders - Pro forma $ (933,596) $ (529,279) $(1,836,055) $(2,798,213)
Basic (and assuming dilution)
loss per share -as reported $ (0.02) $ (0.03) $ (0.04) $ (0.22)
Basic (and assuming dilution)
loss per share - Pro forma $ (0.02) $ (0.03) $ (0.05) $ (0.22)
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised, 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year, 2005. Currently the Company accounts for its share-based
payment transactions under the provisions of APB25, which does not necessarily
require the recognition of compensation costs in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of operations in the third quarter of
fiscal year 2005 and thereafter.
LOSS PER SHARE
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No.128 (SF AS #128) Earnings Per Share. Basic loss per
share is computed by dividing losses available to common stockholders by the
weighted average number of common shares outstanding during the period.
SEGMENT REPORTING
The Company follows Statement of Financial Accounting Standards No.130,
Disclosures About Segments of an Enterprise and Related Information. The Company
operates as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
F-29
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company follows Statement of Financial Accounting Standard No.109,
Accounting for Income Taxes (SFAS No.109) for recording the provision for income
taxes. Deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability during
each period. If available evidence suggests that it is more likely than not that
some portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse
RECENT PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised, 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year, 2005. Currently the Company accounts for its share-based
payment transactions under the provisions of APB25, which does not necessarily
require the recognition of compensation costs in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of operations in the third quarter of
fiscal year 2005 and thereafter.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions ("SFAS 153"). This Statement
amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Under SFAS 153, if
a nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value if determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in the fiscal periods that begin after
June 15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
F-30
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE B- ACQUISITION OF INTANGIBLE ASSETS
The cost to acquire the intangible assets has been preliminarily allocated to
the assets acquired according to the estimated fair values. The Company has
adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby the Company
periodically test its intangible assets for impairment. On an annual basis, and
when there is reason to suspect that their values have been diminished or
impaired, these assets are tested for impairment, and write-downs will be
included in results from operations.
The identifiable intangible assets acquired and their carrying value at June 30,
2005 are:
WEIGHTED AVERAGE
GROSS ACCUMULATED RESIDUAL AMORTIZATION
CARRYING AMORTIZATION NET VALUE PERIOD (YEARS)
AMOUNT
---------------------------------------------------------------------------------
Amortizable Intangible Assets:
Patents $61,739 $( --) $61,739 $ -- 10.0
Total $61,739 $( --) $61,739 $ -- 10.0
Total amortization expense charged to operations for the six month ended
June 30, 2005 and 2004 were $ -0-.
Estimated amortization expense as of June 30, 2005 is as follows:
2005 $ 3,087
2006 6,174
2007 6,174
2008 6,174
2009 6,174
2010 and after 33,956
Total $ 61,739
F-31
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE C-NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at June 30, 2005 and December 31 2004 are as follows:
2005 2004
----------- -----------
10 % convertible note payable, unsecured and due September, 2003; accrued and
unpaid interest due at maturity ; Note holder has the option to convert unpaid
note principal together with accrued and unpaid interest to the Company's common
stock at a rate of $ .50 per share. The company is in violation of the loan
covenants $ 2,500 $ 2,500
10% convertible notes payable, unsecured and due March, 2003; accrued and unpaid
interest due at maturity; Note holder has the option to convert unpaid note
principal together with accrued and unpaid interest to the Company's common
stock at a rate of $ .50 per share. The Company is in violation of the loan
covenants 25, 000 25,000
,
10% convertible note payable in the original amount of $1,500,000, and due
September, 2006. Interest is payable quarterly during the life of the note. The
note is convertible into the Company's common stock at the lower of a) $0.72; b)
50% of the average of the three lowest intraday trading prices for the common
stock. The full principal amount of the secured convertible notes is due upon a
default under the terms of the secured convertible notes. The note is secured by
substantially all of the Company's assets, including the assets of wholly owned
subsidiaries and intellectual property. As of June 30, 2005 the Note holder has
converted $484,169 of the principal to common stock of the Company 1,015,831 1,355,069
10% convertible note payable in the original amount of $1,100,000, and due July
19, 2008. Interest is payable quarterly during the life of the note. The note is
convertible into the Company's common stock at the lower of a) $0.03; b) 50% of
the average of the three lowest intraday trading prices for the common stock The
full principal amount of the secured convertible notes is due upon a default
under the terms of the secured convertible notes. The note is secured by
substantially all of the Company's assets, including the assets of wholly owned
subsidiaries and intellectual property. The discount on the note is 1,008,333
related to beneficial interest of conversion features and warrants. 91,666 -0-
----------- -------
1,134,997 1,1382,568
Less: current portion (27,500) (27,500)
----------- -------
Total $ 1,107,497 $ 1,355,069
NOTE D -STOCKHOLDER'S EQUITY
PREFERRED STOCK
The Company has authorized 200 shares of Preferred Class A stock, with a par
value of $.001 per share. As of June 30, 2005, the Company has 86.8606 shares of
Preferred Class A shares issued and outstanding
The Company has authorized 800,000 shares of Preferred Class B stock, with a par
value of $.001 per share. As of June 30, 2005, the Company has 800,000 shares of
Preferred Class B shares issued and outstanding. The Preferred Class B shares
accumulates interest, payable as dividends at the rate of 12% per annum. For the
year ended December 31, 2004 $96,000 in dividends were accumulated. For the
period ended June 30, 2005 an additional $48,000 in dividends were accumulated.
These dividends are not recorded until declared by the Company.
F-32
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE D -STOCKHOLDER'S EQUITY (Continued)
COMMON STOCK
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share. As of June 30, 2005, the Company has 62,952,001 shares
issued and outstanding.
During the three months ended March 31, 2005, holders converted 38.5 shares of
preferred stock - Class A into 1,925,000 shares of common stock at $.10 per
share.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0248 per share on conversion of notes payable.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0135 per share on conversion of notes payable.
In February, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00883 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.01358 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00983 per share on conversion of notes payable.
During the three months ended June 30, 2005, holders converted 26.5 shares of
preferred stock - Class A into 1,325,000 shares of common stock at $.10 per
share.
In April, 2005, the Company issued 800,000 shares of its common stock at $0.03
per share in exchange for services.
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.
In May, 2005, the Company issued 1,600,000 shares of its common stock at $0.0105
per share on conversion of notes payable.
In May, 2005, the Company issued 1,100,000 shares of its common stock at $0.0103
per share on conversion of notes payable.
In May, 2005, the Company issued 1,700,000 shares of its common stock at $0.0088
per share on conversion of notes payable.
In May, 2005, the Company issued 1,700,000 shares of its common stock at $0.0085
per share on conversion of notes payable.
In May, 2005, the Company issued 3,400,000 shares of its common stock at $0.0083
per share on conversion of notes payable.
In June, 2005, the Company issued 250,000 shares of its common stock at $0.02
per share in exchange for services.
In June, 2005, the Company issued 6,800,000 shares of its common stock at
$0.0083 per share on conversion of notes payable.
In June, 2005, the Company issued 2,400,000 shares of its common stock at
$0.0092 per share on conversion of notes payable.
In June, 2005, the Company issued 7,900,000 shares of its common stock at
$0.0085 per share on conversion of notes payable.
F-33
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE E -STOCK OPTIONS
CLASS A WARRANTS
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
shareholders at June 30,2005.
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------- ----------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
NUMBER REMAINING CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- --------------------- -------- ----------- --------
$0.03 18,333,333 5 $ 0.03 18,333,333 $ 0.03
0.10 91,500 4 $ 0.10 91,500 0.10
0.20 1,845,000 3 0.20 1,845,000 0.20
0.25 8,751,564 2 0.25 8,751,564 0.25
0.50 2,600,000 5 0.50 2,600,000 0.50
$1.05 8,643,064 2 1.05 8,643,064 1.05
---------- -------- -------- ----------- --------
40,264,461 3.61 $ 0.34 40,264,461 $ 0.34
=========== ===========
Transactions involving the Company's warrant issuance are summarized as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
----------- ----------------
Outstanding at December 31,2004 22,881,128 $ 0.58
Granted 18,733,333 0.03
Exercised -- --
Canceled or expired (1,350,000) (0.25)
---------- -----
Outstanding at June 30, 2005 40,264,461 $0.34
========== =====
Warrants granted during the period ended June 30, 2005 include 18,333,333 issued
in connection with debt financing. The warrants are exercisable until five years
after the date of issuance at a purchase price of $0.03 per share. In addition
the exercise price is adjusted in the event common stock is issued at a price
below the market, with the exception of any securities issued as of the date of
the warrant. In addition, 400,000 warrants were issued at $0.20 in exchange for
services.
EMPLOYEE STOCK OPTIONS
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
F-34
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE E -STOCK OPTIONS (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ---------------- -------- ----------- --------
$ 0.2125 2,000,000 4 $ 0.2125 2,000,000 $ 0.2125
0.2125 2,000,000 5 0.2125 2,000,000 0.2125
0.10 12,000,000 6 0.10 12,000,000 0.10
---------- ---------- --------
16,000,000 5.6 $ 0.1281 16,000,000 $ 0.1281
========== ========== ========
Transactions involving stock options issued to employees are summarized as
follows:
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
---------- ----------------
Outstanding at December 31, 2004 4,000,000 $0.2125
Granted 12,000,000 $ 0.10
Exercised -- --
Canceled or expired -- --
---------- -------
Outstanding at June 30, 2005 16,000,000 $0.1281
========== =======
F-35
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE E -STOCK OPTIONS (CONTINUED)
The weighted-average fair value of stock options granted to employees during the
period ended June 30, 2005 and 2004 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
FOR THE SIX MONTHS ENDED
JUNE 30
2005 2004
----- -----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2% 1.5%
Expected stock price volatility 250% 149%
Expected dividend payout -- --
Expected option life-years (a) 6 6
(a)The expected option life is based on contractual expiration dates.
If the Company recognized compensation cost for the stock options and warrants
for the non-qualified employee stock option plan in accordance with SF AS
No.123, the Company's pro forma net loss and net loss per share would have been
$(1,836,055) and $(0.05) for the six months ended June 30,2005 and $(1,858,483)
and $(0.14) for the three months ended June 30, 2004, respectively.
NOTE F -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 June 30, 2005 and December 31, 2004,
the balance due to the officers was $ 366,595 and $399,080, respectively.
NOTE G -COMMITMENTS AND CONTINGENCIES
Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. The Agreements are generally for a term of 12
months from inception and renewable automatically from year to year unless
either the Company or Consultant terminates such engagement by written notice.
NOTE H- LOSSES PER SHARE
The following table presents the computation of basic and diluted losses per
share:
FOR THE SIX MONTHS ENDED JUNE 30,
2005 2004
---- ----
Net loss available to Common stockholders $ (1,357,255) $ (2,798,213)
Basic and diluted loss per share (0.04) (0.22)
Weighted average common shares outstanding 34,604,651 13,004,736
F-36
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE I- GOING CONCERN MATTERS
The accompanying statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the accompanying financial statements
for the six months ended June 30, 2005 and for the period from inception through
December 31,2004, the Company incurred losses from operations of $(1,357,255)
and $(10,847,683), respectively. These factors among others may indicate that
the Company will be unable to continue as a going concern for a reasonable
period of time.
The Company is actively pursuing additional equity financing through discussions
with investment bankers and private investors. There can be no assurance the
Company will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts,
management believes that the Company can continue to operate. However, no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems.
The Company's existence is dependent upon management's ability to develop
profitable operations and resolve it's liquidity problems. Management
anticipates the Company will attain profitable status and improve its liquidity
through the continued developing, marketing and selling of its services and
additional equity investment in the Company. The accompanying financial
statements do not include any adjustments that might result should the Company
be unable to continue as a going concern.
NOTE J - SUBSEQUENT EVENTS
In July 2005, the Company issued 12,700,000 shares of its common stock at
$0.0085 per share on conversion of notes payable.
F-37
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 794.48
Accounting fees and expenses 10,000.00*
Legal fees and expenses 40,000.00*
Miscellaneous 4,205.52
-------------
TOTAL $ 55,000.00*
=============
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During November 2002, we issued 150,000 shares of our common stock in
exchange for services totaling $37,500. The stock issued was valued at $0.25 per
share, which represents the fair value of the stock issued, which did not differ
materially from the value of the services rendered.
In December 2002, we issued 256,000 shares of common stock for $64,000 in
connection with a private placement memorandum, net of costs.
On October 1, 2003, we entered into an agreement with Consulting for
Strategic Growth 1, Ltd. ("CFSG"), in which CFSG would provide consulting
services in the form of investor relations and public relations. On January 27,
2004, in consideration for services rendered, Stanley Wunderlich, Chairman of
CFSG was issued 125,000 shares of our common stock at $0.001 per share and
Bonnie Stretch, pubic relations for CFSG, was issued 25,000 shares of our Common
stock at $0.001 per share. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On October 30, 2003, we entered into an agreement with Roccus Capital
Partners, LLC ("RCP") and Alliance Advisors (`AA") in which RCP and AA would
provide strategic advisement to us. On January 27, 2004, as an engagement fee,
Richard L. Berkley and Marc A. Heskell, principals of RCP and Alan Sheinwald,
principal of AA were each issued 75,000 shares of our common stock at $0.001 per
share. These issuances were private transactions pursuant to Section 4(2) of the
Securities Act.
On December 1, 2003, we entered into an agreement with CFSG, in which CFSG
would provide consulting services in the form of investor relations and public
relations. In consideration for services to be rendered, on January 27, 2004,
Stanley Wunderlich was issued 60,000 shares of our common stock at $0.001 per
share with 10,000 shares issued each month based upon performance criteria
satisfactory to both parties. This issuance was a private transaction pursuant
to Section 4(2) of the Securities Act.
On January 27, 2004, we issued 700,000 shares of our Common stock at $0.01
per share to Titan Entertainment Group pursuant to a consulting services
agreement in which Titan Entertainment Group would create strategic business
relationships for us. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On January 27, 2004, we issued 600,000 shares of our Common stock at $0.01
per share to Michael J. Stern pursuant to a consulting services agreement in
which Michael J. Stern would create strategic business relationships for us.
This issuance was a private transaction pursuant to Section 4(2) of the
Securities Act.
On January 27, 2004, we issued 600,000 shares of our Common stock at $0.01
per share to KBK Ventures, Inc. pursuant to a consulting services agreement in
which KBK Ventures would create strategic business relationships for us. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27, 2004, we issued 800,000 shares of our Common stock at $0.01
per share to 3CD Consulting, LLC pursuant to a consulting services agreement in
which 3CD Consulting would create strategic business relationships for us. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27,2004, we issued 600,000 shares of our Common stock at $0.01
per share to Ronald E. Gee pursuant to a consulting services agreement in which
Ronald E. Gee would create strategic business relationships us. This issuance
was a private transaction pursuant to Section 4(2) of the Securities Act.
On January 27, 2004, we issued 155 shares of Series A Preferred Stock
(with a stated value of $5,000 per share and a conversion price of $0.10 per
share) and warrants to purchase an aggregate of 15,500,000 of our common stock.
This private placement was exempt from registration pursuant to Section 4(2) of
the Securities Act.
On January 27, 2004, we issued 40,000 shares of our Common stock at $0.001
per share to Donald F. Huffman in consideration of services on our behalf. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
II-2
On January 27, 2004, we issued 10,000 shares of our common stock at $0.001
per share to Robert Rubin in consideration of services on our behalf. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27, 2004, Brian Scott converted a $20,000 promissory note dated
April 1, 2003 in the amount of $20,000 into 80,000 shares of the our common
stock at $0.25 per share. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On April 5, 2004, we issued 450,000 shares of our common stock issued to
Capital Funding Solutions as collateral pursuant to a factoring agreement were
cancelled.
In May 2004, we issued 5,310,000 shares of our common stock at $0.10 per
share and 5,310,000 warrants exercisable at $0.25 per share. This issuance was a
private transaction pursuant to Section 4(2) of the Securities Act
On May 25, 2004, we issued 15.861 shares of Series A Preferred Stock (with
a stated value of $5,000 per share and a conversion price of $0.10 per share)
and warrants to purchase an aggregate of 793,065 of our common stock. This
private placement was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On June 4, 2004, we issued 30,500 stock purchase warrants exercisable at
$0.25 per share and 19,500 stock purchase warrants exercisable at $0.10 per
share each to Marc Haskell, Richard Berkley and Alan Sheinwald pursuant to a
consulting agreement. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On June 4, 2004, Michael Kelly converted a promissory note in the amount
of $5.000 into 50,000 shares of our common stock at $0.10 per share. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On June 4, 2004, we issued 30,000 shares of our common stock valued at
$.10 per share to Forma Designs, Inc. for services rendered. This issuance was a
private transaction pursuant to Section 4(2) of the Securities Act.
On June 4, 2004, we issued 310,000 stock purchase warrants to Dennis Oon,
Gary Murphy, Brian Kramen and Ed English exercisable at $0.20 per share for
services rendered. This issuance was a private transaction pursuant to Section
4(2) of the Securities Act.
On June 8, 2004, we issued 975,000 shares of our common stock valued at
$.10 per share and 975,000 stock purchase warrants exercisable at $0.25 per
share pursuant to an agreement in which Current Capital would provide investor
relation services for us. This issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act.
On June 8, 2004, we issued 375,000 shares of our common stock valued at
$.10 per share and 375,000 stock purchase warrants exercisable at $0.25 per
share to Advisory Group Ltd. pursuant to an agreement in which Advisory Group
Ltd. would provide investor relation services for us. This issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act.
On June 8, 2004, we issued 200,000 shares of our common stock valued at
$.10 per share to Phil Snowden and C. Clark Burns pursuant to a consulting
agreement. This issuance was a private transaction pursuant to Section 4(2) of
the Securities Act.
On June 16, 2004, we issued 60,000 shares of our common stock valued at
$.10 per share and 100,000 stock purchase warrants exercisable at $0.50 each to
Frank Maresca Associate, Inc., William Schnell & Associates, Inc. and Bruce W.
Geiger & Associates, Inc. pursuant to a consulting agreement. This issuance was
a private transaction pursuant to Section 4(2) of the Securities Act.
On July 14, 2004, we issued 100,000 shares of our Common Stock to John
Hanemaayer at $0.10 per share. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
II-3
On July 15, 2004, we issued 100,000 stock purchase warrants exercisable at
$0.20 per share to Michael G. Konicek for services rendered. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On July 30, 2004, we issued 100,000 shares of our Common Stock to David
Bomberg pursuant to a consulting agreement. This issuance was a private
transaction pursuant to Section 4(2) of the Securities Act.
On August 24, 2004, we issued 701,000 shares of our Common Stock against
exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On August 24, 2004, holders of 4 shares of our Series A Convertible
Preferred Stock exercised their rights to convert into 200,000 shares of our
Common Stock. This issuance was exempt from registration pursuant to Section
4(2) of the Securities Act.
On September 17, 2004, we issued 200,000 shares of our Common Stock
against exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On September 17, 2004, we issued 150,000 stock purchase warrants to Donald
B. Hutton for services rendered at $0.25 per share. This issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act.
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 September 23, 2004 for
the sale of (i) $1,500,000 in secured convertible notes and (ii) a warrants to
buy 2,250,000 shares of our common stock.
The investors provided us with the funds as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The secured convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.72 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board 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
$0.50 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.
On October 11, 2004, we issued 50,000 stock purchase warrants exercisable
at $0.20 per share to Fleetwood Associates for services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On October 18, 2004, we issued 500,000 shares of our Common Stock to
Greenfield Capital, LLC pursuant to a placement agent agreement. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On October 18, 2004, Dolores and Ray L. Jennings converted a promissory
note in the amount of $21,002.85 into 140,019 shares of our Common Stock at
$0.15 per share. This issuance was a private transaction pursuant to Section
4(2) of the Securities Act.
II-4
On October 18, 2004, we issued 90,000 shares of our Common Stock to
Dolores and Ray L. Jennings for services rendered. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On October 18, 2004, we issued 100,000 shares of our Common Stock to
Sichenzia Ross Friedman Ference LLP for legal services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 250,000 stock purchase warrants exercisable
at $0.20 per share to RoBrady Capital, LLC for services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 50,000 stock purchase warrants exercisable
at $0.20 per share to Stephen W. Gropp for services rendered. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 50,000 stock purchase warrants exercisable
at $0.20 per share to Timothy C. Dudgeon for services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 200,000 stock purchase warrants exercisable
at $0.20 per share to William Walker for services rendered. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On December 10, 2004, we issued 203,867 shares of our Common Stock to our
Series A Preferred Shareholders at $0.44 per share as a penalty for late
registration of the underlying stock. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
On December 14, 2004, we issued 200,000 stock purchase warrants
exercisable at $0.20 per share to William Walker for services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On December 14, 2004, we issued 200,000 stock purchase warrants
exercisable at $0.20 per share to Hunter H. Bostfor services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
In December 2004, holders converted 15 shares of our Series A Preferred
Stock into 750,000 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 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.
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 provided us with an aggregate of $1,500,000 as follows:
II-5
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
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 the
Over-The-Counter Bulletin Board 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.
During the three months ended June 30, 2005, we issued 1,325,000 shares of
common stock for the conversion of 26.5 shares of Class A preferred stock.
In April, 2005, we issued 800,000 shares of our common stock at $0.03 per
share in exchange for services rendered.
In June, 2005, we issued 250,000 shares of our common stock at $0.02 per
share in exchange for services rendered.
* 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.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
II-6
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Cyberlux Corporation, a Nevada
corporation.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation, dated as of May 17, 2000, filed as
an exhibit to the registration statement on Form 10-SB filed
with the Commission on December 17, 2001 and incorporated
herein by reference.
3.2 Certificate of Amendment to the Articles of Incorporation,
dated as of April 3, 2003, filed as an exhibit to the
registration statement on Form SB-2 filed with the Commission
on April 30, 2003 and incorporated herein by reference.
3.3 Bylaws of Cyberlux Corporation, filed as an exhibit to the
registration statement on Form 10-SB filed with the Commission
on December 17, 2001 and incorporated herein by reference.
3.4 Certificate of Designation of Series A Preferred Stock, filed
as an exhibit to the current report on Form 8-K filed with the
Commission on January 8, 2004 and incorporated herein by
reference.
4.1 Securities Purchase Agreement, dated as of September 23, 2004,
by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as Exhibit 4.1 to the current
report on Form 8-K filed with the Commission on September 29,
2004 and incorporated herein by reference.
4.2 Secured Convertible Note issued to AJW Offshore, Ltd., dated
September 23, 2004, filed as Exhibit 4.2 to the current report
on Form 8-K filed with the Commission on September 29, 2004
and incorporated herein by reference.
4.3 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated September 23, 2004, filed as Exhibit 4.3 to the
current report on Form 8-K filed with the Commission on
September 29, 2004 and incorporated herein by reference.
4.4 Secured Convertible Note issued to AJW Partners, LLC, dated
September 23, 2004, filed as Exhibit 4.4 to the current report
on Form 8-K filed with the Commission on September 29, 2004
and incorporated herein by reference.
4.5 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated September 23, 2004, filed as Exhibit
4.5 to the current report on Form 8-K filed with the
Commission on September 29, 2004 and incorporated herein by
reference.
4.6 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated September 23, 2004, filed as Exhibit 4.6 to the current
report on Form 8-K filed with the Commission on September 29,
2004 and incorporated herein by reference.
4.7 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated September 23, 2004, filed as Exhibit 4.7 to the
current report on Form 8-K filed with the Commission on
September 29, 2004 and incorporated herein by reference.
4.8 Common Stock Purchase Warrant with AJW Partners, LLC, dated
September 23, 2004, filed as Exhibit 4.8 to the current report
on Form 8-K filed with the Commission on September 29, 2004
and incorporated herein by reference.
4.9 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated September 23, 2004, filed as Exhibit
4.9 to the current report on Form 8-K filed with the
Commission on September 29, 2004 and incorporated herein by
reference.
II-7
4.10 Registration Rights Agreement, dated as of September 23, 2004,
by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as Exhibit 4.10 to the current
report on Form 8-K filed with the Commission on September 29,
2004 and incorporated herein by reference.
4.11 Security Agreement, dated as of September 23, 2004, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as Exhibit 4.11 to the current report
on Form 8-K filed with the Commission on September 29, 2004
and incorporated herein by reference.
4.12 Intellectual Property Security Agreement, dated as of
September 23, 2004, by and among Cyberlux Corporation, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd.
and New Millennium Capital Partners II, LLC, filed as Exhibit
4.12 to the current report on Form 8-K filed with the
Commission on September 29, 2004 and incorporated herein by
reference.
4.13 Guaranty and Pledge Agreement, dated as of September 23, 2004,
by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., New Millennium
Capital Partners II, LLC and Donald F. Evans, filed as Exhibit
4.13 to the current report on Form 8-K filed with the
Commission on September 29, 2004 and incorporated herein by
reference.
4.14 Secured Convertible Note issued to AJW Offshore, Ltd., dated
October 20, 2004.
4.15 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated October 20, 2004.
4.16 Secured Convertible Note issued to AJW Partners, LLC, dated
October 20, 2004.
4.17 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated October 20, 2004.
4.18 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated October 20, 2004.
4.19 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated October 20, 2004.
4.20 Common Stock Purchase Warrant with AJW Partners, LLC, dated
October 20, 2004.
4.21 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated October 20, 2004.
4.22 Secured Convertible Note issued to AJW Offshore, Ltd., dated
November 18, 2004.
4.23 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated November 18, 2004.
4.24 Secured Convertible Note issued to AJW Partners, LLC, dated
November 18, 2004.
4.25 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated November 18, 2004.
4.26 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated November 18, 2004.
4.27 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated November 18, 2004.
4.28 Common Stock Purchase Warrant with AJW Partners, LLC, dated
November 18, 2004.
II-8
4.29 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated November 18, 2004.
4.30 Securities Purchase Agreement, dated as of April 22, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005
and incorporated herein by reference.
4.31 Secured Convertible Note issued to AJW Offshore, Ltd., dated
April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.32 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005
and incorporated herein by reference.
4.33 Secured Convertible Note issued to AJW Partners, LLC, dated
April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.34 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated April 22, 2005, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
April 28, 2005 and incorporated herein by reference.
4.35 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005
and incorporated herein by reference.
4.36 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005
and incorporated herein by reference.
4.37 Common Stock Purchase Warrant with AJW Partners, LLC, dated
April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.38 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated April 22, 2005, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
April 28, 2005 and incorporated herein by reference.
4.39 Registration Rights Agreement, dated as of April 22, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005
and incorporated herein by reference.
4.40 Security Agreement, dated as of April 22, 2005, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.41 Intellectual Property Security Agreement, dated as of April
22, 2005, by and among Cyberlux Corporation, AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
April 28, 2005 and incorporated herein by reference.
4.42 Guaranty and Pledge Agreement, dated as of April 22, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., New Millennium
Capital Partners II, LLC and Donald F. Evans, filed as an
exhibit to the current report on Form 8-K filed with the
Commission on April 28, 2005 and incorporated herein by
reference.
II-9
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent, filed
as an exhibit to the registration statement on Form SB-2 filed
with the Commission on May 20, 2005 and incorporated herein by
reference.
10.1 Donald F. Evans Employment Agreement, dated as of July 1,
2000, filed as an exhibit to the registration statement on
Form 10-SB filed with the Commission on December 17, 2001 and
incorporated herein by reference.
10.2 Alan H. Ninneman Employment Agreement, dated as of July 1,
2000, filed as an exhibit to the registration statement on
Form 10-SB filed with the Commission on December 17, 2001 and
incorporated herein by reference.
10.3 John W. Ringo Employment Agreement, dated as of July 1, 2000,
filed as an exhibit to the registration statement on Form
10-SB filed with the Commission on December 17, 2001 and
incorporated herein by reference.
10.4 Donald F. Evans Amended Employment Agreement, dated as of
January 1, 2003, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on April 30,
2003 and incorporated herein by reference.
10.5 Alan H. Ninneman Amended Employment Agreement, dated as of
January 1, 2003, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on April 30,
2003 and incorporated herein by reference.
10.6 John W. Ringo Amended Employment Agreement, dated as of
January 1, 2003, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on April 30,
2003 and incorporated herein by reference.
10.7 Mark D. Schmidt Employment Agreement, dated as of May 1, 2003,
filed as an exhibit to the quarterly report on Form 10-QSB
filed with the Commission on August 19, 2003 and incorporated
herein by reference.
10.8 Proprietary Product Manufacturing Agreement, dated as April
24, 2001, by and between Cyberlux Corporation and Shelby
County Community Services, Inc., filed as an exhibit to the
registration statement on Form 10-SB filed with the Commission
on December 17, 2001 and incorporated herein by reference.
10.9 Design Agreement, dated as of March 2, 2001, by and between
Cyberlux Corporation and ROBRADY Design, filed as an exhibit
to the registration statement on Form 10-SB/A filed with the
Commission on February 4, 2001 and incorporated herein by
reference.
10.10 Series A Convertible Preferred Stock Purchase Agreement, dated
as of December 31, 2003, by and among Cyberlux Corporation and
the purchasers set forth therein, filed as an exhibit to the
current report on Form 8-K filed with the Commission on
January 8, 2004 and incorporated herein by reference.
10.11 Registration Rights Agreement, dated as of December 31, 2003,
by and among Cyberlux Corporation and the purchasers of Series
A Convertible Preferred Stock set forth therein, filed as an
exhibit to the current report on Form 8-K filed with the
Commission on January 8, 2004 and incorporated herein by
reference.
II-10
10.12 Form of Series A Warrant issued in connection with the sale of
Series A Convertible Preferred Stock, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
January 8, 2004 and incorporated herein by reference.
10.13 Form of Series B Warrant issued in connection with the sale of
Series A Convertible Preferred Stock, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
January 8, 2004 and incorporated herein by reference.
10.14 Lock-up Agreement, dated as of December 31, 2003, by and among
Cyberlux Corporation and certain officers and directors of
Cyberlux Corporation, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 8,
2004 and incorporated herein by reference.
14.1 Code of Conduct, filed as an exhibit to the annual report on
Form 10-KSB filed with the Commission on April 15, 2005 and
incorporated herein by reference.
23.1 Consent of Russell Bedford Stefanou Mirchandani LLP (filed
herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
II-11
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-12
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Durham,
State of North Carolina, on November 9, 2005.
CYBERLUX CORPORATION
By: /s/ DONALD F. EVANS
------------------------------------------------------
Donald F. Evans, Chief Executive Officer, Principal
Executive Officer and Chairman of the Board of Directors
By: /s/ DAVID D. DOWNING
------------------------------------------------------
David D. Downing, Chief Financial Officer, Principal
Financial Officer and Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ DONALD F. EVANS Chief Executive Officer November 9, 2005
----------------------- (Principal Executive Officer) and
Donald F. Evans Chairman of the Board of Directors
/s/ DAVID D. DOWNIN Chief Financial Officer November 9, 2005
------------------------ (Principal Financial Officer and
David D. Downin Principal Accounting Officer)
/s/ MARK D. SCHMIDT President, Chief Operating Officer November 9, 2005
------------------------ and Director
Mark D. Schmidt
/s/ JOHN W. RINGO Secretary, Corporate Counsel November 9, 2005
------------------------ and Director
John W. Ringo
/s/ ALAN H. NINNEMAN Senior Vice President and Director November 9, 2005
------------------------
Alan H. Ninneman
II-13