U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended September 30, 2006.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to ______________
For the Period Ended September 30, 2006
Commission file number 000-33415
CYBERLUX CORPORATION
(Name of Small Business Issuer in Its Charter)
Nevada 91-2048178
(State of Incorporation) (IRS Employer Identification No.)
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
(Address of Principal Executive Offices)
(919) 474-9700
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
As of November 13, 2006, the Company had 111,229,157 shares of its par value
$0.001 common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
1
CYBERLUX CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending September 30, 2006
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 2006 (Unaudited) and December 31, 2005
(Audited) 3
Condensed Consolidated Statements of Losses:
Three and Nine Months Ended September 30, 2006 and
2005 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2006 and 2005 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Information: September 30, 2006 6-21
Item 2. Management Discussion and Analysis 22
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 20
2
CYBERLUX CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2006 2005
------------ ------------
ASSETS
Current assets:
Cash & cash equivalents $ 75,106 $ 475,656
Accounts receivable, net of allowance for doubtful
accounts of $ -0- 175,003 9,424
Inventories, net of allowance of $111,052 and
$110,821, respectively 235,094 338,097
Other current assets 32,420 42,814
------------ ------------
Total current assets 517,623 865,991
Property, plant and equipment, net of accumulated
depreciation of $136,236 and $118,105, respectively 58,448 63,133
------------ ------------
Total Assets $ 576,071 $ 929,124
============ ============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 396,877 $ 657,930
Accrued liabilities 1,593,041 782,586
Short-term notes payable - related parties 353,595 366,594
Short-term notes payable 862,897 542,783
------------ ------------
Total current liabilities 3,206,410 2,349,893
------------ ------------
Long-term liabilities:
Notes payable 1,639,398 351,419
Derivative liability relating to convertible
debentures 6,886,518 6,809,449
Warrant liability relating to convertible debentures 4,119,442 3,352,025
------------ ------------
Total long-term liabilities 12,645,358 10,512,893
------------ ------------
Total liabilities 15,851,768 12,862,786
------------ ------------
Commitments and Contingencies Series A convertible
preferred stock, $0.001 par value; 200 shares
designated, 39.4806 and 59.8606 issued and
outstanding as of September 30, 2006 and
December 31, 2005, respectively 197,400 299,303
------------ ------------
DEFICIENCY IN STOCKHOLDERS' EQUITY
Class B convertible preferred stock, $0.001
par value, 800,000 shares designated; 800,000
shares issued and outstanding for September 30, 2006
and December 31, 2005 800 800
Common stock, $0.001 par value, 300,000,000 shares
authorized; 98,004,157 and 75,608,334 shares issued
and outstanding as of September 30, 2006 and
December 31, 2005, respectively 98,004 75,607
Subscription receivable (335,406) --
Additional paid-in capital 8,752,526 6,382,569
Accumulated deficit (23,989,021) (18,691,941)
------------ ------------
Deficiency in stockholders' equity
(15,473,097) (12,232,965)
------------ ------------
Total liabilities and (deficiency) in stockholders'
equity $ 576,071 $ 929,124
============ ============
The accompanying notes are an integral part of these unaudited condensed
financial statements
3
CYBERLUX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Unaudited
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
As restated- As restated-
Note K Note K
------------ ------------ ------------ ------------
REVENUE: $ 222,855 $ 12,434 $ 353,081 $ 26,202
Cost of goods sold (178,483) (75,503) (253,150) (104,989)
------------ ------------ ------------ ------------
Gross margin (loss) 44,373 (63,069) 99,931 (78,787)
OPERATING EXPENSES:
Marketing and advertising 29,548 97,717 146,763 235,389
Impairment Loss -- -- -- 30,544
Depreciation and amortization 5,024 5,893 18,131 19,073
Research and development 45,760 142,537 160,123 262,117
General and administrative
expenses 1,220,626 539,263 3,470,136 1,364,494
------------ ------------ ------------ ------------
Total operating expenses 1,300,958 785,410 3,795,153 1,911,617
NET LOSS FROM OPERATIONS (1,256,586) (848,479) (3,695,222) (1,990,404)
Other income/(expense) Unrealized
gain (loss) relating to adjustment of
derivative and warrant liability to
fair value of underlying securities (2,723,742) 13,385,414 435,515 (4,546,600)
Interest income 27 49 65 349
Debt forgiveness -- -- 36,799 --
Interest expense (569,062) (300,009) (2,047,686) (1,019,107)
Debt acquisition costs (17,072) (107,144) (26,551) (201,474)
------------ ------------ ------------ ------------
Net Income (loss) before
provision for income taxes (4,566,435) 12,129,831 (5,297,080) (7,757,236)
Income taxes (benefit) -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE
TO COMMON STOCKHOLDERS $ (4,566,435) $ 12,129,831 $ (5,297,080) $ (7,757,236)
============ ============ ============ ============
Weighted average number of
common shares
outstanding-basic 97,176,885 72,881,110 88,702,751 47,503,678
============ ============ ============ ============
Weighted average number of
common shares
outstanding-fully diluted 97,176,885 72,881,110 88,702,751 47,503,678
============ ============ ============ ============
Net income/(loss) per share - basic $ (0.05) $ 0.17 $ (0.06) $ (0.16)
============ ============ ============ ============
Net income/(loss) per
share-fully diluted $ (0.05) Note A $ (0.06) $ (0.16)
============ ============ ============ ============
Preferred dividend $ 24,000 $ 24,000 $ 24,000 $ 24,000
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited condensed
financial statements
4
CYBERLUX, INC
CONDENSED STATEMENTS OF CASH FLOW
Unaudited
Nine months ended
September 30,
2006 2005
----------- -----------
Restated-
See note K
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) available to common stockholders $(5,297,080) $(7,757,236)
Adjustments to reconcile net income (loss) to cash
used in operating activities
Depreciation 18,131 19,073
Warrants issued in connection with services
rendered -- 14,160
Fair value of options issued to officers and
employees 721,500 --
Common stock issued in connection with services
rendered 1,201,889 126,000
Common stock issued in settlement of debt 31,655 420,608
Accretion of convertible notes payable 1,208,694 547,762
Unrealized (gain) loss on adjustment of derivative
and warrant liability to fair value of underlying
securities (435,515) 4,546,600
Impairment loss on patent -- 30,544
(Increase) decrease in:
Accounts receivable (165,579) (2,454)
Inventories 103,003 (443,312)
Prepaid expenses and other assets 55,079 (31,316)
Increase (decrease) in:
Accounts payable (266,740) 566,331
Accrued liabilities 810,455 113,600
----------- -----------
Net cash (used in) operating activities (2,014,507) (1,849,640)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (13,446) (35,867)
----------- -----------
Net cash used in investing activities: (13,446) (35,867)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible debenture 1,240,000 1,500,000
Net proceeds from borrowing on long term basis 399,403 --
Net proceeds (payments) to notes payable, related
parties (12,000) (12,485)
----------- -----------
Net cash provided by (used in) financing
activities: 1,627,403 1,487,515
----------- -----------
Net increase (decrease) in cash and cash
equivalents (400,550) (397,992)
Cash and cash equivalents at beginning of period 475,656 415,375
----------- -----------
Cash and cash equivalents at end of period $ 75,106 $ 17,383
=========== ===========
Supplemental disclosures:
Interest Paid $ 39,349 $ 82,470
Income Taxes Paid -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized (gain) loss in adjustment of derivative
and warrant liability to fair value of underlying
securities (435,515) 4,546,600
Fair value of options issued to officers and
employees 721,500 --
Common stock issued for services rendered 1,201,889 126,000
Common stock issued in settlement of debt 31,655 420,608
Warrants issued for services rendered -- 14,160
The accompanying notes are an integral part of these unaudited condensed
financial statements
5
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES
GENERAL
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three and nine month periods
ended September 30, 2006, are not necessarily indicative of the results that may
be expected for the year ended December 31, 2006. The unaudited condensed
financial statements should be read in conjunction with the December 31, 2005
financial statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 2005.
BUSINESS AND BASIS OF PRESENTATION
Cyberlux Corporation (the "Company") is incorporated on May 17, 2000 under the
laws of the State of Nevada. Until December 31, 2004, the Company was a
development state enterprise as defined under Statement on Financial Accounting
Standards No.7, Development Stage Enterprises ("SFAS No.7"). The Company
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 September 30, 2006, the
Company has accumulated losses of $23,989,021.
REVENUE RECOGNITION
Revenues are recognized in the period that products are provided. For revenue
from product sales, the Company recognizes revenue in accordance with Staff
Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superseded
Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
("SAB101"). 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. At September 30, 2006 and December 31, 2005, the Company did not
have any deferred revenue.
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.
RECLASSIFICATION
Certain reclassifications have been made to prior periods' data to conform to
the current presentation. These reclassifications had no effect on reported
losses.
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. The Company periodically reviews its trade receivables
in determining its allowance for doubtful accounts. At September 30, 2006 and
December 31, 2005, allowance for doubtful receivable was $0.
6
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), Share-Based Payment" which is a revision
of FASB Statement No. 123, "Accounting for Stock-Based Compensation". Statement
123R supersedes APB opinion No. 25, "Accounting for Stock Issued to Employees",
and amends FASB Statement No. 95, "Statement of Cash Flows". Generally, the
approach in Statement 123R is similar to the approach described in Statement
123. However, Statement 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro-forma disclosure is no longer an
alternative. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123(R). This statement does not
address the accounting for employee share ownership plans, which are subject to
AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company had to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. The Company
implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective
method. The fair value of each option grant issued after January 1, 2006 will be
determined as of grant date, utilizing the Black-Scholes option pricing model.
The amortization of each option grant will be over the remainder of the vesting
period of each option grant.
As more fully described in the financial statements included in Form 10-KSB for
the year ended December 31, 2005, the Company granted stock options over the
years to employees of the Company under a non-qualified employee stock option
plan. As of December 31, 2005, 34,000,000 stock options were outstanding and
exercisable.
In prior years, the Company applied the intrinsic-value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," to account for the issuance of stock options to employees and
accordingly compensation expense related to employees' stock options were
recognized in the prior year financial statements to the extent options granted
under stock incentive plans had an exercise price less than the market value of
the underlying common stock on the date of grant.
Had compensation 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 loss
per share would be as follows:
For the three months For the nine months
ended September 30, ended September 30,
2005-As restated 2005-As restated-Note K
Note K
Net Income (loss) attributable to common stockholders -as reported $ 12,129,831 $ (7,757,236)
Add. Total stock based employee compensation expense as
reported under intrinsic value method (APB No. 25) -- --
Deduct Total stock based employee compensation expense --
as reported under fair value based method (SFAS No. 123) (478,800)
Net Income (loss) -Pro Forma $ 12,129,831 $ (8,236,036)
Net Income (loss) attributable to common stockholders - Pro forma $ (8,236,036)
$ 12,129,831
Basic (and assuming dilution) loss per share -as reported $ 0.17 $ (0.16)
Basic (and assuming dilution) loss per share - Pro forma $ 0.17 $ (0.18)
For the nine months ended September 30, 2006, the Company granted 14,430,000
stock options to employees with an exercise price of $0.04 per share expiring
ten years from date of issuance. The fair value of the options was determined
using the Black-Scholes option pricing model with the following assumptions:
expected dividend yield: 0%; volatility 364%; risk free interest rate 5.04%. The
fair value of $721,500 was recorded as a current period charge to earnings.
7
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
In determining the compensation cost of stock options granted to employees
during the nine months ended September 30, 2005, as specified by SFAS No. 123,
the fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model and the weighted average
assumptions used in these calculations are summarized as follows:
Nine Months
Ended
September
30, 2005
--------------
Risk-free interest rate 2%
Expected life of options Granted 6 yrs
Expected Volatility 250%
Expected dividend yield 0%
(a)The expected option life is based on contractual expiration dates.
NET INCOME (LOSS) PER COMMON SHARE
----------------------------------
The Company computes earnings per share under Financial Accounting Standard No.
128, "Earnings Per Share" ("SFAS 128"). Net loss per common share is computed by
dividing net loss by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding during the year. Dilutive common
stock equivalents consist of shares issuable upon conversion of convertible
preferred shares and the exercise of the Company's stock options and warrants
(calculated using the treasury stock method). For the three months ended
September 31, 2005, common stock equivalents derived from shares issuable in
conversion of the Callable Secured Convertible Notes are not considered in the
calculation of the weighted average number of common shares outstanding because
they would be anti-dilutive, thereby decreasing the net loss per share.
PATENTS
During the year ended December 31, 2005, the Company management preformed an
evaluation of its intangible assets (Patents) for purposes of determining the
implied fair value of the assets at December 31, 2005. The test indicated that
the recorded remaining book value of its patens exceeded its fair value, as
determined by discounted cash flows. As a result, upon completion of the
assessment, management recorded a non-cash impairment charge of $30,544, net of
tax, or $0.00 per share during the nine month period ended September 30, 2005 to
reduce the carrying value of the patents to $0. Considerable management judgment
is necessary to estimate the fair value. Accordingly, actual results could vary
significantly from management's estimates.
RECENT PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155. "Accounting for certain Hybrid
Financial Instruments an amendment of FASB Statements No. 133 and 140," or SFAS
No. 155. SFAS No. 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement No. 133, establishes a requirement
to evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. We do not expect the adoption of SFAS 155 to have a material
impact on our consolidated financial position, results of operations or cash
flows.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing
of Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The adoption of SFAS No.156 did
not have a material impact on the Company's financial position and results of
operations.
8
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
In July 2006, the FASB issued Interpretation No. 48 (FIN 48). "Accounting for
uncertainty in Income Taxes". FIN 48 clarifies the accounting for Income Taxes
by prescribing the minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. It also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition and clearly scopes
income taxes out of SFAS 5, "Accounting for Contingencies". FIN 48 is effective
for fiscal years beginning after December 15, 2006. We have not yet evaluated
the impact of adopting FIN 48 on our consolidated financial position, results of
operations and cash flows.
In September 2006 the Financial Account Standards Board (the "FASB") issued its
Statement of Financial Accounting Standards 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. FAS 157 effective date is for fiscal
years beginning after November 15, 2007. The Company does not expect adoption of
this standard will have a material impact on its financial position, operations
or cash flows.
In September 2006 the FASB issued its Statement of Financial Accounting
Standards 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans". This Statement improves financial reporting by requiring
an employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting by
requiring an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
effective date for an employer with publicly traded equity securities is as of
the end of the fiscal year ending after December 15, 2006. The Company does not
expect adoption of this standard will have a material impact on its financial
position, operations or cash flows
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at September 30, 2006 and December 31, 2005 are as follows:
September 30, 2006 December 31, 2005
------------------- ------------------
10% convertible note payable, unsecured and due September, 2003; accrued
and unpaid interest due at maturity; Note holder has the option to
convert note principal together with accrued and unpaid interest to the
Company's common stock at a rate of $0.50 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 $0.50 per share.
- 25,000
4.99% note payable, unsecured and due March 2009, accrued and unpaid
interest due at maturity. Shareholders secured debt with shares of
Company's common stock-See Note L 152,400 -
4.99% note payable, unsecured and due June 2009, accrued and unpaid
interest due at maturity. Shareholders secured debt with shares of
Company's common stock-See Note L 103,403 -
4.99% note payable, unsecured and due June 2009, accrued and unpaid
interest due at maturity. Shareholders secured debt with shares of
Company's common stock-See Note L 168,600 -
9
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
September 30, 2006 December 31, 2005
------------------- ------------------
10% convertible debenture, due two years from the date of the note with
interest 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 or
b) 50% of the average of the three lowest intraday trading prices for
the common stock on a principal market for twenty days before, but not
including, conversion date. The Company granted the note holder a
security interest in substantially all of the Company's assets and
intellectual property and registration rights. The Company is in 860,397 515,283
violation of the loan covenants (see below)
10% convertible debenture, due three years from date of the note with
interest 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 or
b) 50% of the average of the three lowest intraday trading prices for
the common stock on a principal market for twenty days before, but not
including, conversion date. The Company granted the note holder a
security interest in substantially all of the Company's assets and
intellectual property and registration rights. The Company is in 673,790 299,820
violation of the loan covenants (see below)
10% convertible debenture, due October 2008 with interest payable
quarterly during the life of the note. The note is convertible into the
Company's common stock at the lower of a) $0.6 or b) 50% of the average
of the three lowest intraday trading prices for the common stock on a
principal market for twenty days before, but not including, conversion
date. The Company granted the note holder a security interest in
substantially all of the Company's assets and intellectual property and
registration rights. The Company is in violation of the loan covenants 249,132 49,680
(see below)
8% convertible debenture, due December 2008 with interest payable
quarterly during the life of the note. The note is convertible into the
Company's common stock at the lower of a) $0.10 or b) 35% of the average
of the three lowest intraday trading prices for the common stock on a
principal market for twenty days before, but not including, conversion
date. The Company granted the note holder a security interest in
substantially all of the Company's assets and intellectual property and
registration rights (see below) 176,438 1,918
8% convertible debenture, due March 2009 with interest payable quarterly
during the life of the note. The note is convertible into the Company's
common stock at the lower of a)$0.10 or b) 55% of the average of the
three lowest intraday trading prices for the common stock on a principal
market for twenty days before, but not including, conversion date. The
Company granted the note holder a security interest in substantially all
of the Company's assets and intellectual property and registration 85,388 -
rights. (See below)
6% convertible debenture, due July 2009 with interest payable quarterly
during the life of the note. The note is convertible into the Company's
common stock at the lower of a)$0.10 or b) 40% of the average of the
three lowest intraday trading prices for the common stock on a principal
market for twenty days before, but not including, conversion date. The
Company granted the note holder a security interest in substantially all
of the Company's assets and intellectual property and registration 29,224
rights. (See below)
10
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
September 30, 2006 December 31, 2005
------------------- ------------------
6% convertible debenture, due September 2009 with interest payable
quarterly during the life of the note. The note is convertible into the
Company's common stock at the lower of a)$0.10 or b) 40% of the average
of the three lowest intraday trading prices for the common stock on a
principal market for twenty days before, but not including, conversion
date. The Company granted the note holder a security interest in
substantially all of the Company's assets and intellectual property and
registration rights. (See below) 1,023 -
----- -
2,502,295 894,201
Less: current maturities (862,897) (542,783)
--------- ---------
Notes payable and convertible debentures-long term portion $1,639,398 $351,418
========== ========
The Company entered into a Securities Purchase Agreement with four accredited
investors on September 23, 2004 for the issuance of an aggregate of $1,500,000
of convertible notes ("Convertible Notes") and attached to the Convertible Notes
were warrants to purchase 2,250,000 shares of the Company's common stock. The
Convertible Notes accrue interest at 10% per annum, payable quarterly, and are
due two years from the date of the note. The note holder has the option to
convert any unpaid note principal to the Company's common stock at a rate of the
lower of a) $0.72 or b) 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, conversion date.
As of September 30, 2006, the Company issued to investors of the Convertible
Notes a total amount of $1,500,000 in exchange for net proceeds of $1,186,281.
The proceeds that the Company received were net of prepaid interest of $50,000
and related fees and costs of $263,719.
The Company entered into a Securities Purchase Agreement with four accredited
investors on April 23, 2005 for the issuance of an aggregate of $1,500,000 of
convertible notes ("Convertible Notes") and attached to the Convertible Notes
were warrants to purchase 25,000,000 shares of the Company's common stock. The
Convertible Notes accrue interest at 10% per annum, payable quarterly, and are
due three years from the date of the note. The note holder has the option to
convert any unpaid note principal to the Company's common stock at a rate of the
lower of a) $0.03 or b) 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, conversion date.
As of September 30, 2006, the Company issued to investors of the Convertible
Notes a total amount of $1,500,000 in exchange for total proceeds of $1,352,067.
The proceeds that the Company received were net of prepaid interest of $72,933
representing the first eight month's interest and related fees and costs of
$75,000.
The Company entered into a Securities Purchase Agreement with four accredited
investors on October 24, 2005 for the issuance of $800,000 of convertible notes
("Convertible Notes") and attached to the Convertible Notes were warrants to
purchase 800,000 shares of the Company's common stock. The Convertible Note
accrues interest at 10% per annum, payable quarterly, and are due three years
from the date of the note. The note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of a) $0.06
or b) 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, conversion date.
As of September 30, 2006, the Company issued to investors of the Convertible
Notes a total amount of $800,000 in exchange for total proceeds of $775,000. The
proceeds that the Company received were net of related fees and costs of
$25,000.
The Company entered into a Securities Purchase Agreement with four accredited
investors on December 28, 2005 for the issuance of $700,000 of convertible notes
("Convertible Notes") and attached to the Convertible Notes were warrants to
purchase 700,000 shares of the Company's common stock. The Convertible Note
accrues interest at 8% per annum, payable quarterly, and are due three years
from the date of the note. The note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of a) $0.10
or b) 35% 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, conversion date.
As of September 30, 2006, the Company issued to investors of the Convertible
Notes a total amount of $700,000 in exchange for total proceeds of $675,000. The
proceeds that the Company received were net of related fees and costs of
$25,000.
The Company entered into a Securities Purchase Agreement with four accredited
investors on March 31, 2006 for the issuance of $500,000 of convertible notes
("Convertible Notes") and attached to the Convertible Notes were warrants to
purchase 19,000,000 shares of the Company's common stock. The Convertible Note
accrues interest at 8% per annum, payable quarterly, and are due three years
from the date of the note. The note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of a) $0.10
or b) 55% 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, conversion date.
As of September 30, 2006, the Company issued to investors of the Convertible
Notes a total amount of $500,000 in exchange for total proceeds of $460,000. The
proceeds that the Company received were net of related fees and costs of
$40,000.
11
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
The Company entered into a Securities Purchase Agreement with four accredited
investors on July 28, 2006 for the issuance of $500,000 of convertible notes
("Convertible Notes") and attached to the Convertible Notes were warrants to
purchase 15,000,000 shares of the Company's common stock. The Convertible Note
accrues interest at 6% per annum, payable quarterly, and are due three years
from the date of the note. The note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of a) $0.10
or b) 40% 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, conversion date.
As of September 30, 2006, the Company issued to investors of the Convertible
Notes a total amount of $500,000 in exchange for total proceeds of $490,000. The
proceeds that the Company received were net of related fees and costs of
$10,000.
The Company entered into a Securities Purchase Agreement with four accredited
investors on September 26, 2006 for the issuance of $280,000 of convertible
notes ("Convertible Notes") and attached to the Convertible Notes were warrants
to purchase 10,000,000 shares of the Company's common stock. The Convertible
Note accrues interest at 6% per annum, payable quarterly, and are due three
years from the date of the note. The note holder has the option to convert any
unpaid note principal to the Company's common stock at a rate of the lower of a)
$0.10 or b) 40% 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, conversion date.
As of September 30, 2006, the Company issued to investors of the Convertible
Notes a total amount of $280,000 in exchange for total proceeds of $259,858. The
proceeds that the Company received were net of related fees and costs of
$20,142.
These transactions, to the extent that it is to be satisfied with common stock
of the Company would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible host debt conversion feature, the Company is
required to record a liability relating to both the detachable warrants and
embedded convertible feature of the notes payable (included in the liabilities
as a "derivative liability").
The accompanying financial statements comply with current requirements relating
to warrants and embedded derivatives as described in FAS 133, EITF 98-5 and
00-27, and APB 14 as follows:
o The Company allocated the proceeds received between convertible debt and
detachable warrants based upon the relative fair market values on the
dates the proceeds were received.
o Subsequent to the initial recording, the increase in the fair value of the
detachable warrants, determined under the Black-Scholes option pricing
formula and the increase in the intrinsic value of the embedded derivative
in the conversion feature of the convertible debentures are accrued as
adjustments to the liabilities at September 30, 2006 and December 31,
2005, respectively.
o The expense relating to the increase in the fair value of the Company's
stock reflected in the change in the fair value of the warrants and
derivatives (noted above) is included as an other comprehensive income
item of an unrealized gain or loss arising from convertible financing on
the Company's balance sheet.
o Accreted principal of $2,075,392 and $866,701 as of September 30, 2006 and
December 31, 2005, respectively.
The following table summarizes the various components of the convertible
debentures as of September 30,, 2006 and December 31, 2005:
September 30, December 31,
2006 2005
--------------- ---------------
Convertible debentures $ 2,502,295 $ 894,201
Warrant liability 3,682,678 2,013,188
Derivative liability 6,886,518 6,809,449
--------------- ---------------
13,071,491 9,716,838
Cumulative adjustment of derivative and
warrant liability to fair value (4,789,197) (4,322,637)
Cumulative unrealized loss relating to
conversion of convertible notes to
common shares charged to interest expense (597,194) (565,539)
Cumulative accretion of principal related to
convertible debentures (2,075,392) (866,701)
--------------- ---------------
$ 5,609,708 $ 3,961,961
=============== ===============
12
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE C-WARRANT LIABILITY
Total warrant liability as of September 30, 2006 and December 31, 2005 are
comprised of the following:
September 30, December 31,
2006 2005
--------------- ---------------
Fair value of warrants relating to
convertible debentures $ 3,682,678 $ 2,013,188
Fair value of warrants relating to
preferred stock-class A 108,565 1,147,334
Fair value of other outstanding warrants 328,199 191,504
--------------- ---------------
Total $ 4,119,442 $ 3,352,026
=============== ===============
NOTE D -STOCKHOLDER'S EQUITY
SERIES A - CONVERTIBLE PREFERRED STOCK
The Company has also authorized 5,000,000 shares of Preferred Stock, with a par
value of $.001 per share.
On December 30, 2003, the Company filed a Certificate of Designation creating a
Series A Convertible Preferred Stock classification for 200 shares.
The Series A Preferred stated conversion price of $.10 per shares is subject to
certain anti-dilution provisions in the event the Company issues shares of its
common stock or common stock equivalents below the stated conversion price.
Changes to the conversion price are charged to operations and included in
unrealized gain (loss) relating to adjustment of derivative and warrant
liability to fair value of underlying securities.
In December, 2003, the Company issued 155 shares of its Series A Preferred
stock, valued at $5,000 per share. The stock 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.
In May, 2004, the Company issued 15.861 shares of its Series A Preferred stock,
valued at $5,000 per share. The stock 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.
As of December 31, 2004, 7 of the Series A Preferred shareholders exercised the
conversion right and exchanged 19 shares of Series A Preferred for 950,000
shares of the Company's common stock.
As of December 31, 2005, 20 of the Series A Preferred shareholders exercised the
conversion right and exchanged 92 shares of Series A Preferred for 4,600,000
shares of the Company's common stock.
As of September 30, 2006, 6 of the Series A Preferred shareholders exercised the
conversion right and exchanged 20.3 shares of Series A Preferred for 1,019,032
shares of the Company's common stock
The holders of the Series A Preferred shall have the right to vote, separately
as a single class, at a meeting of the holders of the Series A Preferred or by
such holders' written consent or at any annual or special meeting of the
stockholders of the Corporation on any of the following matters: (i) the
creation, authorization, or issuance of any class or series of shares ranking on
a parity with or senior to the Series A Preferred with respect to dividends or
upon the liquidation, dissolution, or winding up of the Corporation, and (ii)
any agreement or other corporate action which would adversely affect the powers,
rights, or preferences of the holders of the Series A Preferred.
The holders of record of the Series A Preferred shall be entitled to receive
cumulative dividends at the rate of twelve percent per annum (12%) on the face
value ($5,000 per share) when, if and as declared by the Board of Directors, if
ever. All dividends, when paid, shall be payable in cash, or at the option of
the Company, in shares of the Company's common stock. Dividends on shares of the
Series A Preferred that have not been redeemed shall be payable quarterly in
arrears, when, if and as declared by the Board of Directors, if ever, on a
semi-annual basis. No dividend or distribution other than a dividend or
distribution paid in Common Stock or in any other junior stock shall be declared
or paid or set aside for payment on the Common Stock or on any other junior
stock unless full cumulative dividends on all outstanding shares of the Series A
Preferred shall have been declared and paid. These dividends are not recorded
until declared by the Company. As of the period ended September 30, 2006, $0 in
dividends were accumulated.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series A Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series A Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $5,000.00 per share, and the holders of
the Series A Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series A Preferred being sometimes referred to as
the "Liquidation Payments."
13
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY
SERIES A - CONVERTIBLE PREFERRED STOCK (CONTINUED)
Because the Series A Shares include a redemption feature that is outside of the
control of the Company and the stated conversion price is subject to reset, the
Company has classified the Series A Shares outside of stockholders' equity in
accordance with Emerging Issues Task Force ("EITF") Topic D-98, "Classification
and Measurement of Redeemable Securities." In accordance with EITF Topic D-98,
the fair value at date of issuance was recorded outside of stockholders' equity
in the accompanying balance sheet. Dividends on the Series A Shares are
reflected as a reduction of net income (loss) attributable to common
stockholders.
In connection with the issuance of the Series A Preferred and related warrants,
the holders were granted certain registration rights in which the Company agreed
to timely file a registration statement to register the common shares and the
shares underlying the warrants, obtain effectiveness of the registration
statement by the SEC within ninety-five (95) days of December 31, 2003, and
maintain the effectiveness of this registration statement for a preset time
thereafter. In the event the Company fails to timely perform under the
registration rights agreement, the Company agrees to pay the holders of the
Series A Preferred liquidated damages in an amount equal to 1.5% of the
aggregate amount invested by the holders for each 30-day period or pro rata for
any portion thereof following the date by which the registration statement
should have been effective. The initial registration statement was filed and
declared effective by the SEC within the allowed time , however the Company has
not maintained the effectiveness of the registration statement to date.
Accordingly, the Company issued 203,867 shares of common stock as liquidated
damages on December 10, 2004. The Company has not been required to pay any
further liquidated damages in connection with the filing or on-going
effectiveness of the registration statement.
The Company is required to record a liability relating to the detachable
warrants as described in FAS 133, EITF 98-5 and 00-27, and APB 14. As such:
o Subsequent to the initial recording, the increase in the fair value of the
detachable warrants, determined under the Black- Scholes option pricing
formula, are accrued as adjustments to the liabilities at September 30,
2006 and December 31, 2005, respectively.
o The expense relating to the increase in the fair value of the Company's
stock reflected in the change in the fair value of the warrants (noted
above) is included as an other comprehensive income item of an unrealized
gain or loss arising from convertible financing on the Company's balance
sheet.
The fair value of the detachable warrants as of September 30, 2006 and December
31, 2005 were as follows:
September 30, December 31,
2006 2005
--------------- ---------------
Fair value of warrants relating to
issuance of convertible preferred $108,565 $1,147,334
stock:
The Company recorded an Unrealized Gain (Loss) on the change in fair value of
these detachable warrants of $1,038,769 and $(452,242) for the nine months ended
September 30, 2006 and 2005, respectively.
SERIES B - CONVERTIBLE PREFERRED STOCK
On February 19, 2004, the Company filed a Certificate of Designation creating a
Series B Convertible Preferred Stock classification for 800,000 shares.
In January, 2004, the Company issued 800,000 shares of its Series B Preferred 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 shares of the Series B Preferred are non voting and convertible, at the
option of the holder, into common shares at $0.10 per share per share. The
shares issued were valued at $1.00 per share, which represented the fair value
of the common stock the shares are convertible into. 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.
None of the Series B Preferred shareholders have exercised their conversion
right and there are 800,000 shares of Series B Preferred shares issued and
outstanding at September 30, 2006 and December 31, 2005.
The holders of the Series B Preferred shall have the right to vote, separately
as a single class, at a meeting of the holders of the Series B Preferred or by
such holders' written consent or at any annual or special meeting of the
stockholders of the Corporation on any of the following matters: (i) the
creation, authorization, or issuance of any class or series of shares ranking on
a parity with or senior to the Series B Preferred with respect to dividends or
upon the liquidation, dissolution, or winding up of the Corporation, and (ii)
any agreement or other corporate action which would adversely affect the powers,
rights, or preferences of the holders of the Series B Preferred.
14
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY (CONTINUED)
SERIES B - CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders of record of the Series B Preferred shall be entitled to receive
cumulative dividends at the rate of twelve percent per annum (12%) on the face
value ($1.00 per share) when, if and as declared by the Board of Directors, if
ever. All dividends, when paid, shall be payable in cash, or at the option of
the Company, in shares of the Company's common stock. Dividends on shares of the
Series B Preferred that have not been redeemed shall be payable quarterly in
arrears, when, if and as declared by the Board of Directors, if ever, on a
semi-annual basis. No dividend or distribution other than a dividend or
distribution paid in Common Stock or in any other junior stock shall be declared
or paid or set aside for payment on the Common Stock or on any other junior
stock unless full cumulative dividends on all outstanding shares of the Series B
Preferred shall have been declared and paid. These dividends are not recorded
until declared by the Company. For the period ended September 30, 2006 $ 264,000
in dividends were accumulated.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series B Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series B Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $1.00 per share, and the holders of the
Series B Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series B Preferred being sometimes referred to as
the "Liquidation Payments."
COMMON STOCK
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share. As of September 30, 2006 and December 31, 2005, the Company
has 98,004,157 and 75,608,334 shares issued and outstanding, respectively.
During the nine months ended September 30, 2006, holders converted 20.3 shares
of preferred stock - Class A into 1,019,032 shares of common stock. Each share
of preferred stock is convertible into 50,000 shares of common stock.
In January, 2006, the Company issued 3,000,000 shares of its common stock at
$0.084 per share in exchange for services.
In January, 2006, the Company issued 100,000 shares of its common stock at
$0.113 per share in exchange for services.
In February, 2006, the Company issued 10,000 shares of its common stock at
$0.095 per share in exchange for services.
In February, 2006, the Company issued 1,500,000 shares of its common stock at
$0.092 per share in exchange for services.
In February, 2006, the Company issued 791,369 shares of its common stock at
$0.04 per share on conversion of notes payable.
In March, 2006, the Company issued 4,000,000 shares in conjunction with the
exercise of employee stock options at $0.09 per share.
In April 2006, the Company issued 492,752 shares of its common stock at $0.073
per share in exchange for services.
In May 2006, the Company issued 2,772,206 shares in conjunction with the
exercise of employee stock options at $0.081 per share
In May 2006, the Company issued 600,000 shares of its common stock at $0.08 per
share in exchange for services.
In June 2006, the Company issued 1,481,484 shares of its common stock at $0.08
per share in exchange for services.
In June 2006, the Company issued 6,000,000 shares of its common stock in
conjunction with the exercise of employee stock options at $0.056 per share.
In July 2006, the Company issued 50,000 shares of its common stock at $0.042 per
share in exchange for services.
In August 2006, the Company issued 541,667 shares of its common stock for
approximately $0.05 per share in exchange for services.
In September 2006, the company issued 37,313 shares of its common stock at
$0.067 per share in exchange for services.
15
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE E-STOCK OPTIONS AND WARRANTS
Class A Warrants
The following table summarizes the changes in warrants outstanding and related
prices for the shares of the Company's common stock issued to shareholders at
September 30, 2006:
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Price Outstanding Life (years) Exercise price Exercisable Exercise Price
----------------- ----------------- ------------------------ ---------------- ------------ ---------------------
$0.01 100,000 2.25 $0.01 100,000 $0.01
0.03 26,500,000 3.67 0.03 26,500,000 0.03
0.06 25,000,000 6.99 0.06 25,000,000 0.03
0.10 20,641,500 6.17 0.10 20,641,500 0.10
0.20 1,845,000 1.00 0.20 1,845,000 0.20
0.25 10,301,564 0.47 0.25 10,301,564 0.25
0.50 2,300,000 2.65 0.50 2,300,000 0.50
1.05 10,193,064 .47 1.05 10,193,064 1.05
Transactions involving the Company's warrant issuance are summarized as follows:
Number of Weighted
Shares Average
Price Per Share
Outstanding at December 31, 2004 21,931,128 $ 0.90
Granted 26,500,000 0.03
Exercised -- --
Canceled or expired -- --
Outstanding at December 31, 2005 48,431,128 0.42
Granted 48,750,000 0.11
Exercised -- --
Canceled or expired (300,000) (0.50)
Outstanding at September 30, 2006 96,881,128 0.27
Warrants granted during the period ended December 31, 2005 totaling 26,499,500
were 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 on 25,000,000 warrants, $0.10 per share on 800,000 warrants and $0.15 per
share on 699,500 warrants.
For the nine months ended September 30, 2006, warrants totally 44,000,000 were
issued in connection with debt financing. The warrants are exercisable until
seven years after date of issuance with 19,000,000 at a purchase price of $0.10
per share, 25,000,000 at $0.06 per share. The 19,000,000 warrants have a reset
provision should the Company issue shares below $0.10 per share excluding
conversion of related debt.
For the nine months ended September 30, 2006, following warrants were issued in
connection with services rendered:
purchase price
Number of warrant per share: Term (years)
1,550,000 $0.10 2.75
1,550,000 $0.25 2.75
1,550,000 $1.05 2.75
100,000 $0.01 2.75
16
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE E-STOCK OPTIONS AND WARRANTS (CONTINUED)
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 at September 30,
2006:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
------------- ----------------- ----------------- --------------- ---------------- ---------------
$0.2125 2,000,000 7.21 $0.2125 2,000,000 $0.2125
0.2125 2,000,000 7.62 0.2125 2,000,000 0.2125
0.10 9,502,307 8.29 0.10 9,502,307 0.10
0.0295 4,000,000 8.85 0.0295 4,000,000 0.0295
0.04 14,430,000 9.82 0.04 14,430,000 0.04
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
------------------ ------------------
Outstanding at December 31, 2004: 16,000,000 $0.2125
Granted 18,000,000 0.058
Exercised - -
Canceled or expired - -
Outstanding at December 31, 2005: 34,000,000 $0.076
Granted 14,430,000 $0.04
Exercised (16,497,693) 0.037
Canceled or expired - -
Outstanding at September 30, 2006: 31,932,307 $0.07815
During the nine months ended September 30, 2006, the Board of Directors voted to
exercised 16,497,693 of their options cashlessly to provide 12,772,206 share of
the Company's common stock to be used as colleral in support of short-term
financing.
The weighted-average fair value of stock options granted to employees during the
year ended December 31, 2005 and the weighted-average significant assumptions
used to determine those fair values, using a Black-Scholes option pricing model
are as follows:
For the year ended December 31,2005:
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2%
Expected stock price volatility 255%
Expected dividend payout -
Expected option life-years (a) 7
7
(a)The expected option life is based on contractual expiration dates.
During the nine months ended September 30, 2006, the Company granted 14,430,000
employee stock options with an exercise price of $0.04 expiring ten years from
issuance. The fair value (determined as described below) of $721,500 was charged
to current period earnings.
The weighted-average fair value of stock options granted to employees during the
nine months ended September 30, 2006 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
17
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE E-STOCK OPTIONS AND WARRANTS (CONTINUED)
For the nine months ended September 30,2006:
Risk-free interest rate at grant date 5.04%
Expected stock price volatility 364%
Expected dividend payout -
Expected option life-years (a) 10
(a)The expected option life is based on contractual expiration dates.
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 September 30, 2006 and December 31,
2005 , the balance due to the officers was $353,595 and $366,595, 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.
Operating Lease Commitments
The Company leases office space in Durham, NC on a five year lease expiring
April, 2008 for an annualized rent payment of $43,127. Additionally the Company
leases warehouse space on a month to month basis for $550 per month. At December
31, 2005, schedule of the future minimum lease payments is as follows:
2006 $43,127
2007 43,127
2008 14,376
2009 -
2010 -
Litigation
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity. Listed below is a brief description of
pending litigation:
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.
18
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE G -COMMITMENTS AND CONTINGENCIES
LITIGATION (CONTINUED)
On January 26, 2006, the parties signed a Mutual Release and Settlement
Agreement and Stipulation for Dismissal with Prejudice. Under the terms of the
Mutual Release and Settlement, the Company paid Zykronix $50,000 and Zykronix
returned our prototypes and design files.
On February 6, 2006 the Court entered an Order for Dismissal with Prejudice,
with Reservation of Limited Jurisdiction for the purpose of enforcing the Mutual
Release and Settlement Agreement. The terms of the Mutual Release and Settlement
Agreement have been met to the satisfaction of both parties.
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 enrichment. 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.
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.
NOTE H- LOSS PER SHARE
The following table presents the computation of basic and diluted (loss) income
per share:
For the nine months ended
September 30,
2006 2005
As restated
Note K
------------ ------------
Net (loss) available to common stockholders $ (5,297,080) $ (7,757,236)
Basic and diluted (loss) per share (0.06) (0.16)
Weighted average common shares outstanding 88,702,751 47,503,678
As of September 30,2006 and 2005, 241,386,485 and 230,583,333 potential shares
were excluded from the shares used to calculate loss per share as their
inclusion would reduce net loss per share.
NOTE I - BUSINESS CONCENTRATION
Sales to 3 major customers approximated $109,476 or 49% of total sales for the
three months ended September 30, 2006.
Purchases from the Company's 3 major suppliers accounted for 93% of total
purchases for the three months ended September 30, 2006.
NOTE J- 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, as of September 30, 2006, the Company incurred accumulated losses of
$23,989,021. The Company's current liabilities exceeded its current assets by
$2,688,787 as of September 30, 2006. 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. 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.
19
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
NOTE K-RESTATEMENT
During 2005, it was determined the correct application of accounting principles
had not been applied in the 2004 and 2003 accounting for convertible debentures
and detachable warrants (See note B above).
The original accounting for the debentures and detachable warrants, the Company
recognized an imbedded beneficial conversion feature present in the convertible
note and allocated a portion of the proceeds equal to the intrinsic value of
that feature to additional paid in capital. Accordingly, the proceeds attributed
to the common stock, convertible debt and warrants have been restated to reflect
the relative fair value method.
The accounting principles on the aforementioned transactions are currently
reflected in the accompanying September 30, 2006 financial statements in
accordance with SFAS 154. The necessary corrections to apply the impact to the
previously issued September 30, 2005 financial statements are as follows: For
the nine months ended September 30, 2005:
Amount
September 30, increase
September 30, 2005 (decrease) in
2005 financial financial September 30,
statement statement 2005
balance prior post financial
to restatement restatement statements
-------------- ------------- --------------
Net (loss) $ (2,799,717) $ (7,757,236) $ (4,957,519)
Loss per share-basic and $ (0.06) $ (0.16) $ (0.10)
fully diluted
For the three months ended September 30, 2005:
Amount
September 30, increase
September 30, 2005 (decrease) in
2005 financial financial September 30,
statement statement 2005
balance prior post financial
to restatement restatement statements
-------------- ------------- --------------
Net Income (loss) $ (1,442,462) $ 12,129,831 $ 13,572,293
Income (Loss) per $ (0.02) $ 0.17 $ 0.19
share-basic and fully
diluted-See note A
The resulting effects on the prior period adjustments on the September 30, 2005
cash flows by area are as follows:
September 30, 2005
cash flow Amount increase
statement balance September 30, 2005 (decrease) in September
prior to cash flow statement 30, 2005 cash flow
restatement post restatement statement
------------------- ------------------- ------------------------
Net cash from operating $ (1,849,640) $ (1,849,640) --
activities
Net cash from investing (35,867) (35,867) --
activities
Net cash from financing 1,487,515 1,487,515 --
activities
NOTE L - SUBSEQUENT EVENTS.
On November 9, 2006, the Company was notified it is in default of the loan
agreements dated March and June 2006. Shareholders have secured these
convertible notes with shares of the Company's Common stock. The Company is
presently reviewing its options to address the default.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that are
subject to significant risks and uncertainties about us, our current and planned
products, our current and proposed marketing and sales, and our projected
results of operations. There are several important factors that could cause
actual results to differ materially from historical results and percentages and
results anticipated by the forward-looking statements. The Company has sought to
identify the most significant risks to its business, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurance that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risks before making an
investment decision with respect to the Company's stock. The following
discussion and analysis should be read in conjunction with the financial
statements of the Company and notes thereto. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment from our Management.
OVERVIEW
We 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, 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 homeland security
services such as border control and airport security.
On July 13, 2006, we announced today that the we had received an
additional order for our Aeon ProHB lighting from the Center for History, in
Wheaton, IL. The Museum placed a new order, valued at $11,454, after testing the
Aeon lights for 30 new custom cases for the Fairways, Greens & Clubs Golf
Gallery at the Center.
The Museum chose the Aeon lighting because the technology of the LED
lighting does not produce UV rays or heat; both elements can destroy old
documents and fabrics. Unlike traditional lighting used in most museums, the
Aeon LED lighting can be left on for days without causing harm to fragile items
on display. LED lighting showcases Museum quality pieces in color corrected
light which brings out the true colors of an item without damaging it.
Our Aeon product line includes the Aeon ProHB products, which produce up
to 560 lux of illumination. The Aeon products are energy efficient, generate
virtually no heat, and are maintenance-free with an industry-leading light-life
guarantee of up to 15 years depending on the model purchased. The Aeon next
generation LED lighting technology, based on solid-state semiconductors instead
of conventional light bulbs, is an alternative to current halogen and
fluorescent lighting.
On July 17, 2006, we announced that Bottom Line Energy Management, Inc.
purchased EverOn Lights for installation in Michigan apartment buildings.
21
Bottom Line Energy Management, Inc., a Michigan based contractor, is
involved in the maintenance of commercial buildings and apartment complexes.
Bottom Line Energy Management, Inc. purchased 210 EverOn Lights for an initial
installation in closets of apartment buildings after presenting proposals to the
building owners and demonstrating the capabilities of the EverOn and the cost
savings they could achieve versus running electrical wiring to the closets and
installing lighting fixtures.
The EverOn uses the latest solid-state lighting technology that provides
more than 60 hours of light using four AA batteries and is 75 percent more
energy efficient than conventional incandescent flashlights. Designed originally
to provide homeowners with portable, long-lasting, emergency lighting during the
hurricane season, the new EverOn is a sturdy, virtually indestructible, lighting
product that provides over 60 hours of comfortable room-filling light on the
medium setting and over 30 hours of intensely bright white light on the highest
setting, all in a 7 inch by 3.5 inch by 2.4 inch package.
The EverOn contains six bright white and four amber diodal(tm) lighting
elements that never require replacement. The EverOn has three light settings
including a low, nightlight level; a medium, room-filling light level; and a
high, spotlight level. The EverOn builds on our patent for lighting systems
capable of generating long-term interim lighting, including the lighting device
and associated methods for providing emergency or temporary lighting.
Specifically, the patent addresses an electrochemical lighting system capable of
providing prolonged illumination with the use of light emitting diodes (LEDs) as
the illumination source. The patent embodies lighting devices capable of
providing long-term interim lighting via an array of LEDs, the means for
providing electrical energy to the LED array, the capability of multi-level
light intensity consistent with light longevity and power source relationships
including conventional A/C, solar, various electrochemical assemblies or all
other means of electrical energy support.
On July 26, 2006, we announced that we had recorded our highest sales
volume to-date for our EverOn product on our e-commerce site, www.luxsel.com.
Over the past ninety days, sales of the EverOn product have increase 58%
compared to the prior period. With month-to-month increases of 14% in May, 24%
in June and 20% in July, the EverOn product is now being discovered by consumers
as an every-day utility light that greatly exceeds the performance of
traditional flashlights.
The EverOn has been ordered by hundreds of consumers who refer to the
product as 'the marathon light with a life of its own.' The sales increase is
largely due to the overall flexibility of the EverOn as a lighting source used
during the many blackouts across the country but also as an everyday utilitarian
home product. Consumers are raving about the EverOn as a closet light, a camping
must-have, a lighting solution for tool sheds, cars, boats or babies' rooms.
On August 2, 2006, we announced a new addition to our growing product line
-- the FocusOn(TM). FocusOn(TM) is a patent-pending solid-state lighting product
designed to illuminate 'For Sale' signs at night so that home sales continue
after dark.
This is a value-added sales tool for property owners and real estate
brokerage companies. The product has been previewed with major retailers and
selected franchised real estate brokerages. The FocusOn will be sold in hardware
stores and home improvement outlets for use by property owners and direct to
residential real estate brokerages for agency sales.
The FocusOn(TM) operates on 4 D-Cell batteries, lighting both sides of the
sign. Using a microprocessor controlled timer, the lights operate for 4 hours
per night for more than 30 days on one set of batteries. The FocusOn(TM)
features two light heads that fold out to an optimum lighting distance from the
sign's face and contain two super-bright energy-efficient solid-state LEDs that
illuminate the sign. The unit is encased in a waterproof cylinder that is
secured to the horizontal sign support with a clamp channel and plastic tie
straps.
On August 9, 2006, we announced the hiring of Lewis Gordon, General
Manager, Worldwide Retail Sales. Gordon will focus on global sales for the
EverOn; the KeOn; the RelyOn; and the newly introduced FocusOn "for sale sign"
illumination product.
22
Gordon has an established track record of leading national sales and
business development efforts for consumer product companies. He has a history of
increasing market penetration through establishing new channel partnerships and
growing business with national retail stores. Most recently, he was with United
Storage Technologies as Vice President of Sales/Business Development where he
maintained partnerships with major retailers including Wal-Mart and Sam's Club
and also brought in new distribution channel partners. Prior to United Storage
Technologies, Gordon was with American Tack & Hardware where he led sales and
customer service, growing the sales revenue from $48 million to $88 million.
Between August 22 and 24, 2006, we showcased our line of emergency
management products at the TREXPO (Tactical Response Exposition) East at Dulles
Expo & Conference Center in Chantilly, VA. TREXPO East is the nation's most high
profile exposition for tactical response equipment, technology, and services for
law enforcement, military, security, and federal agencies.
On August 28, 2006, we announced today that the company has entered into
an agreement with Clive Christian to showcase the Aeon products in its showrooms
worldwide. Clive Christian delivers luxurious, classic kitchen designs, as well
as traditional home furnishings.
On September 5, 2006, we announced that the company has entered into an
agreement with Kaba Ilco Corporation to distribute its Keon KeyCap throughout
North America. The first order has been shipped. Marketed under the KeyCaps
brand by Kaba Ilco, our patented Keon is a practical lighting solution for every
consumer who carries keys and provides a focused, bright diodal(tm) beam of
light that illuminates a path to its corresponding lock or other targeted
surfaces. Our Keon directs a beam of bright light down the key shaft onto
walkways, stairways, doors and locksets. Each Keon features a pliable neoprene
surround containing micro-electronics that fits snugly around standard key
heads. The LED light is activated by gently pressing the cap between thumb and
forefinger. The product is practically weightless and eliminates bulk from your
key-ring.
On September 14, 2006, we announced today that we had entered into an
agreement with Cottonwood Fine Kitchen Furniture to include the Aeon products in
its cabinetry in dealerships throughout the country. Cottonwood is a manufacture
of handcrafted built-to-order fine furniture. The company sells its furniture
through 30 dealerships located across the country. They offer kitchen cabinets,
bathroom suites, utility rooms, entertainment centers, display cases and other
design/build furniture. All furniture is made to order and will now include the
Aeon ProHB as an option for customers.
On September 27, 2006, we announced that we have been selected to provide
a new high-performance solid-state LED lighting system for the United States Air
Force Air Mobility Battlelab. The new lighting system is a state-of- the-art LED
lighting system resulting from the adaptation of two existing
commercial-off-the-shelf systems, the WatchDog Portable Covert Illumination
System and the BrightEye Portable Visible Illumination System. Both COTS systems
are currently available through GSA Schedule 56 and GSA Advantage. The Air
Mobility Battlelab (AMB) explores high-payoff concepts, technologies, and
tactics to advance the USAF distinctive capabilities of Rapid Global Mobility
and Agile Combat Support. The AMB previously selected us to adapt our
commercially available portable lighting system to meet AMB requirements and
deliver the WatchDog Portable Covert Illumination System as the perimeter covert
lighting solution for the protection of landed aircraft assets and attendant
personnel. The performance characteristics of the WatchDog system support other
potential applications of the technology to reduce mobility response time;
reduce deployable support structure; and enable USAF members to do their jobs
better, faster and with less expense.
The new system is designed as a portable visible and infrared illumination
system for force protection, aircraft maintenance, expeditionary airbase force
protection, general mission lighting and other high intensity lighting
applications. Using advanced battery power and contained in a wheeled carrying
case, the objective of the new system is to replace the space-consuming bulk,
noise and energy consumption problems of the current generator powered
incandescent lighting systems, for appropriate missions, with an easily deployed
wheeled case advanced solid-state lighting system.
On Sept. 28, 2006, we announced that the Aeon ProHB under cabinet and
interior cabinet lighting will be showcased in two homes in the Fall 2006 Parade
of Homes. Sponsored by the Home Builders Association, the Parade of Homes took
place September 30 & October 1, 2006, October 6 - 8, 2006, and October 13 - 15,
2006.
23
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2005
Revenues
Revenues for the nine months ended September 30, 2006 were $353,081 as
compared to $26,202 for the same period ended September 30, 2005. Our expended
sales reflects our greater market penetration compared to the same period last
year
Operating Expenses
Operating expenses for the nine months ended September 30, 2006 were
$3,795,153 as compared to $1,911,617 for the same period ended September 30,
2005. Included in the nine months ended September 30, 2006 are $146,763 in
expenses for market development and literature. This compares to $235,389 for
the nine months ended September 30, 2005. Additionally we incurred non cash
expenses relating to the fair value of options issued and non cash payment for
services rendered of $1,923,389 compared to $140,160 for the same period last
year.
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005
Revenues
Revenues for the three months ended September 30, 2006 were $222,855 as
compared to $12,434 for the same period ended September 30, 2005. Our increased
sales reflect our expanded sales efforts and a greater market penetration.
Operating Expenses
Operating expenses for the three months ended September 30, 2006 were
$1,300,958 as compared to $785,410 for the same period ended September 30, 2005.
Included in the three months ended September 30, 2006 are $29,548 in expenses
for market development and literature. This compares to $97,717 for the three
months ended September 30, 2005.
Additionally, incurred $721,500 as an non cash expense for the fair value
of options issued to officers and key employees as compared to $-0- in 2005
As a result of limited capital resources and minimal revenues from
operations from its 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2006, we had a working capital deficit of $2,688,787.
This compares to a working capital deficit of $1,483,902 as of December 31,
2005. As a result of our operating losses for the nine months ended September
30, 2006, we generated a cash flow deficit of $2,014,507 from operating
activities. Cash flows used in investing activities was $13,446 for the nine
months ended September 30, 2006. Cash flows from financing activities provided
$1,627,403 from the issuance of convertible notes payable and borrowing on a
long term basis, net of repayments for the nine months ended September 30, 2006.
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.
24
By adjusting our operations and development to the level of
capitalization, we believe we have sufficient capital resources to meet
projected cash flow deficits through the next twelve months. However, if
thereafter, we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
Our independent certified public accountant has stated in their report
included in our December 31, 2005, Form 10-KSB, as amended, that we have
incurred operating losses in the last two years, and that we are dependent upon
management's ability to develop profitable operations. These factors among
others may raise substantial doubt about our ability to continue as a going
concern.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on July 28, 2006, for the sale
of (i) $500,000 in secured convertible notes and (ii) warrants to purchase
15,000,000 shares of our common stock.
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.
The secured convertible notes bear interest at 6%, mature three years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.10 or (ii) 40% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for the 20 trading days before but not including the conversion date. The full
principal amount of the secured convertible notes is due upon default under the
terms of secured convertible notes. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.10 per share. In
addition, the conversion price of the secured convertible notes and the exercise
price of the warrants will be adjusted in the event that we issue common stock
at a price below the fixed conversion price, below market price, with the
exception of any securities issued in connection with the Securities Purchase
Agreement. The conversion price of the secured convertible notes and the
exercise price of the warrants may be adjusted in certain circumstances such as
if we pay a stock dividend, subdivide or combine outstanding shares of common
stock into a greater or lesser number of shares, or take such other actions as
would otherwise result in dilution of the selling stockholder's position. The
selling stockholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
Since the conversion price will be less than the market price of the
common stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
secured convertible notes during the quarter in which they are issued
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on September 26, 2006, for the
sale of (i) $280,000 in secured convertible notes and (ii) warrants to purchase
10,000,000 shares of our common stock.
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.
The secured convertible notes bear interest at 6%, mature three years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.10 or (ii) 40% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for the 20 trading days before but not including the conversion date. The full
principal amount of the secured convertible notes is due upon default under the
terms of secured convertible notes. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.10 per share. In
addition, the conversion price of the secured convertible notes and the exercise
price of the warrants will be adjusted in the event that we issue common stock
at a price below the fixed conversion price, below market price, with the
exception of any securities issued in connection with the Securities Purchase
Agreement. The conversion price of the secured convertible notes and the
exercise price of the warrants may be adjusted in certain circumstances such as
if we pay a stock dividend, subdivide or combine outstanding shares of common
stock into a greater or lesser number of shares, or take such other actions as
would otherwise result in dilution of the selling stockholder's position. The
selling stockholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
Since the conversion price will be less than the market price of the
common stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
secured convertible notes during the quarter in which they are issued
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.
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.
25
CRITICAL ACCOUNTING POLICIES
In February 2006, the FASB issued SFAS No. 155. "Accounting for certain
Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140,"
or SFAS No. 155. SFAS No. 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of Statement No. 133, establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS 155 is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. We do not expect the adoption of SFAS 155 to have a material
impact on our consolidated financial position, results of operations or cash
flows.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for
Servicing of Financial Assets - an amendment to FASB Statement No. 140.
Statement 156 requires that an entity recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by
entering into a service contract under certain situations. The new standard is
effective for fiscal years beginning after September 15, 2006. The adoption of
SFAS No.156 did not have a material impact on the Company's financial position
and results of operations.
In July 2006, the FASB issued Interpretation No. 48 (FIN 48). "Accounting
for uncertainty in Income Taxes". FIN 48 clarifies the accounting for Income
Taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition and clearly
scopes income taxes out of SFAS 5, "Accounting for Contingencies". FIN 48 is
effective for fiscal years beginning after December 15, 2006. We have not yet
evaluated the impact of adopting FIN 48 on our consolidated financial position,
results of operations and cash flows.
In September 2006 the Financial Account Standards Board (the "FASB")
issued its Statement of Financial Accounting Standards 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice. FAS 157
effective date is for fiscal years beginning after November 15, 2007. The
Company does not expect adoption of this standard will have a material impact on
its financial position, operations or cash flows.
In September 2006 the FASB issued its Statement of Financial Accounting
Standards 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans". This Statement improves financial reporting by requiring
an employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting by
requiring an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. The
effective date for an employer with publicly traded equity securities is as of
the end of the fiscal year ending after December 15, 2006. The Company does not
expect adoption of this standard will have a material impact on its financial
position, operations or cash flows
NON-GAAP FINANCIAL MEASURES
The financial statements appearing in this quarterly report on Form 10-QSB
do not contain any financial measures which are not in accordance with generally
accepted accounting procedures.
INFLATION
In the opinion of management, inflation has not had a material effect on
our financial condition or results of its operations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain off-balance sheet arrangements nor do we participate in
non-exchange traded contracts requiring fair value accounting treatment.
26
PRODUCT RESEARCH AND DEVELOPMENT
We anticipate incurring approximately $500,000 in research and development
expenditures in connection with the development of our portable boundary
lighting system, Aeon cabinet lighting and RelyOn 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.
RISK FACTORS
Much of the information included in this quarterly report includes or is
based upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements"
involve various risks and uncertainties as outlined below. We caution the reader
that important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors
should consider carefully the risk factors set out below.
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We incurred net losses of $9,410,657 for the year ended December 31, 2005
and $3,103,049 for the year ended December 31, 2004. For the nine months ended
September 30, 2006, we incurred a net loss of $5,297,080. As of September 30,
2006, we had an accumulated deficit of $23,989,021. 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
$2,000,000 to fund our continued operations for the next twelve months,
depending on revenue from operations. [this number is way too low based upon
your losses for the year] 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.
27
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 16, 2006, our independent auditors stated that
our financial statements for the year ended December 31, 2005 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, 2005 and 2004 in the amounts of $9,410,657 and $3,103,049,
respectively. We continue to experience net operating losses. Our ability to
continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
Our continued net operating losses increase the difficulty in meeting such goals
and there can be no assurances that such methods will prove successful.
IF WE ARE UNABLE TO RETAIN THE SERVICES OF MESSRS. EVANS, SCHMIDT OR RINGO, OR
IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL AND SALES
PERSONNEL HAVING EXPERIENCE IN BUSINESS, WE MAY NOT BE ABLE TO CONTINUE OUR
OPERATIONS.
Our success depends to a significant extent upon the continued service of
Mr. Donald F. Evans, our Chief Executive Officer, Mr. Mark D. Schmidt, our
President and Mr. John Ringo, our Secretary and Corporate Counsel. Loss of the
services of Messrs. Evans, Schmidt or Ringo could have a material adverse effect
on our growth, revenues, and prospective business. We do not maintain key-man
insurance on the life of Messrs. Evans or Ringo. In addition, in order to
successfully implement and manage our business plan, we will be dependent upon,
among other things, successfully recruiting qualified managerial and sales
personnel having experience in business. Competition for qualified individuals
is intense. There can be no assurance that we will be able to find, attract and
retain existing employees or that we will be able to find, attract and retain
qualified personnel on acceptable terms.
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO
COMPETE WITH THEM.
The lighting and illumination industry is extremely competitive and
includes several companies that have achieved substantially greater market
shares than we have, and have longer operating histories, have larger customer
bases, and have substantially greater financial, development and marketing
resources than we do. If overall demand for our products should decrease it
could have a materially adverse affect on our operating results.
OUR TRADEMARK AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY
PROTECTED OUTSIDE THE UNITED STATES, RESULTING IN LOSS OF REVENUE.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
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:
28
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.
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 2005, we issued
2,783,333 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.
29
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
30
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934
as of September 30, 2006. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are designed at a
reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
We regularly review our system of internal control over financial
reporting and make changes to our processes and systems to improve controls and
increase efficiency, while ensuring that we maintain an effective internal
control environment. Changes may include such activities as implementing new,
more efficient systems, consolidating activities, and migrating processes.
There were no changes in our internal control over financial reporting
that occurred during the period covered by this Quarterly Report on Form 10-QSB
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
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
entered into an agreement with Greenfield Capital Partners LLC in June 2004 to
act as financial advisor in connection with and equity offering. On October 27,
2006, we entered into a settlement with Greenfield, pursuant to which we issued
2,700,000 shares of common stock in settlement of all 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 enrichment. We entered into an agreement with
Alliance Advisors in October 2003 for services to perform, including
introduction to investors for the raising of equity capital in exchange for
payment of certain fees. 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.
CASE NO. 2006- CV529 - DISTRICT COURT, BOULDER COUNTY, COLORADO
On May 22, 2006, William Walker filed a complaint against us and our CEO,
Donald F. Evans, in District Court, Boulder County, Colorado, claiming unpaid
wages in the amount of $32,972 and an unpaid check not paid when presented in
the amount of $3,675. On July 17, 2006, we filed a counterclaim against Walker
for breach of fiduciary duty. We believe his claims are without merit and we
intend to vigorously defend these claims.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended September 30, 2006, we issued 600,000 shares
of common stock upon the conversion of 12 shares of Class A preferred stock.
In July 2006, we canceled 8,000,000 shares of common stock which were to
be issued pursuant to financing agreement which was terminated.
In July 2006, we issued 50,000 shares of our common stock at $0.042 per
share; in August 2006, we issued 41,667 shares of common stock at $0.06 per
share; and in September 2006, we issued 37,313 shares of common stock at $0.067
in exchange for services rendered.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
We are currently in default pursuant to secured convertible notes issued
pursuant to securities purchase agreements dated September 23, 2004, April 22,
2005 and October 24, 2005, as amended (the "SPAs"). Pursuant to the SPAs, we are
obligated to have two times the number of shares that the secured convertible
notes are convertible into registered pursuant to an effective registration
statement. We filed a registration statement on Form SB-2, as amended, that was
declared effective by the Securities and Exchange Commission on November 12,
2004. As a result of the drop in our stock price, the shares of common stock
underlying the secured convertible notes that were registered on the SB-2 are
not sufficient to cover the conversion of the secured convertible notes issued
pursuant to the September 23, 2004 SPA.
32
In addition, pursuant to the April 22, 2005 and October 24, 2005 SPA, we
were required to file a registration statement within 45 days of closing and
have the registration statement effective within 105 days of closing. On May 20,
2005, we filed a registration statement on Form SB-2 registering shares
underlying the convertible notes. This registration statement is currently being
review and has not been declared effective.
On November 9, 2006, we were notified that we were in default of the loan
agreements dated March and June 2006. Shareholders have secured these
convertible notes with shares of our Common stock. We are presently reviewing
its options to address the default.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule
15d-14(a), promulgated under the Securities and Exchange Act of 1934, as
amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule
15d 14(a), promulgated under the Securities and Exchange Act of 1934, as
amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
33
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYBERLUX CORPORATION
Date: November 14, 2006 By: /s/ DONALD F. EVANS
--------------------
Donald F. Evans
Chief Executive Officer (Principal
Executive Officer) and Chairman of the
Board of Directors
Date: November 14, 2006 By: /s/ DAVID D. DOWNING
---------------------
David D. Downing
Chief Financial Officer (Principal
Financial Officer and Principal Accounting
Officer)
34