U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 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 June 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 August 9, 2006, the Company had 96,866,844 shares of its par value $0.001
common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
i
CYBERLUX CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending June 30, 2006
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
June 30, 2006 (Unaudited) and December 31, 2005 (Audited) 3
Condensed Consolidated Statements of Losses:
Three and Six Months Ended June 30, 2006 and 2005
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2006 and 2005 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Information: June 30, 2006 6-24
Item 2. Management Discussion and Analysis 25-36
Item 3. Controls and Procedures 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38-39
Item 3. Defaults Upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Security Holders 39
Item 5. Other Information 39
Item 6. Exhibits 39
Signatures 40
ii
Item 1. Financial Statements
CYBERLUX CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2006 2005
------------ ------------
ASSETS
Current assets:
Cash & cash equivalents $ 171,881 $ 475,656
Accounts receivable, net of allowance for doubtful accounts of $ -0- 16,966 9,424
Inventories, net of allowance of $111,052 and $110,821, respectively 180,600 338,097
Other current assets 38,851 42,814
------------ ------------
Total current assets 408,298 865,991
Property, plant and equipment, net of accumulated depreciation of $131,212 and
$118,105, respectively 59,104 63,133
------------ ------------
Total Assets $ 467,402 $ 929,124
============ ============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 481,414 $ 657,930
Accrued liabilities 1,463,330 782,586
Short-term notes payable - related parties 404,595 366,594
Short-term notes payable 764,118 542,783
------------ ------------
Total current liabilities 3,113,457 2,349,893
------------ ------------
Long-term liabilities:
Notes payable 1,315,088 351,419
Derivative liability relating to convertible debentures 4,329,728 6,809,449
Warrant liability relating to convertible debentures 3,172,490 3,352,025
------------ ------------
Total long-term liabilities 8,817,306 10,512,893
------------ ------------
Total liabilities 11,930,763 12,862,786
------------ ------------
Commitments and Contingencies
Series A convertible preferred stock, $0.001 par value; 200 shares designated,
51.4806 and 59.8606 issued and outstanding as of June 30, 2006 and
December 31, 2005, respectively 257,400 299,303
------------ ------------
DEFICIENCY IN STOCKHOLDERS' EQUITY
Class B convertible preferred stock, $0.001 par value, 800,000 shares designated;
800,000 shares issued and outstanding for June 30, 2006 and December 31, 2005 800 800
Common stock, $0.001 par value, 300,000,000 shares authorized; 96,775,237 and
75,608,334 shares issued and outstanding as of June 30, 2006 and
December 31, 2005, respectively 96,775 75,607
Subscription receivable (335,406) --
Additional paid-in capital 7,939,655 6,382,569
Accumulated deficit (19,422,585) (18,691,941)
------------ ------------
Deficiency in stockholders' equity (11,720,761) (12,232,965)
------------ ------------
Total liabilities and (deficiency) in stockholders' equity $ 467,402 $ 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 June 30, Six months ended June 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
----------- ------------------ ----------- ------------------
As restated-Note K As restated-Note K
------------------ ------------------
REVENUE: $ 83,026 $ 200 $ 130,226 $ 13,768
Cost of goods sold (20,980) (23,117) (74,667) (29,486)
----------- ------------ ----------- ------------
Gross margin (loss) 62,046 (22,917) 55,559 (15,718)
OPERATING EXPENSES:
Marketing and advertising 69,387 116,349 117,215 137,672
Impairment Loss -- -- -- 30,544
Depreciation and amortization 5,842 4,886 13,107 13,180
Research and development 75,537 100,884 114,363 119,580
General and administrative expenses 949,609 468,356 2,249,510 825,231
----------- ------------ ----------- ------------
Total operating expenses 1,100,375 690,475 2,494,195 1,126,207
NET LOSS FROM OPERATIONS (1,038,329) (713,392) (2,438,636) (1,141,925)
Other income/(expense):
Unrealized gain (loss) relating to adjustment
of derivative and warrant liability to fair
value of underlying securities 836,071 (15,919,769) 3,159,257 (17,932,014)
Interest income 38 -- 38 300
Debt forgiveness 36,799 -- 36,799 --
Interest expense (740,494) (479,780) (1,478,624) (719,098)
Debt acquisition costs (2,992) -- (9,479) (94,330)
----------- ------------ ----------- ------------
Net loss before provision for income taxes (908,906) (17,112,941) (730,644) (19,887,067)
Income taxes (benefit) -- -- -- --
----------- ------------ ----------- ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (908,906) $(17,112,941) $ (730,644) $(19,887,067)
=========== ============ =========== ============
Weighted average number of common shares
outstanding 88,460,138 41,216,067 84,395,457 34,604,651
=========== ============ =========== ============
Net income/(loss) per share - basic and fully
diluted $ (0.01) $ (0.42) $ (0.01) $ (0.57)
=========== ============ =========== ============
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
Six months ended June 30,
---------------------------------
2006 2005
----------- -------------------
Restated-See note K
-------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) available to common stockholders $ (730,644) $(19,887,067)
Adjustments to reconcile net income (loss) to cash used in operating
activities
Depreciation 13,107 13,180
Warrants issued in connection with services rendered -- 14,160
Common stock issued in connection with services rendered 1,169,289 29,000
Common stock issued in settlement of debt-related expense 31,655 339,238
Accretion of convertible notes payable 770,605 302,648
Unrealized (gain) loss on adjustment of derivative and warrant liability
to fair value of underlying securities (3,159,257) 17,932,014
Impairment loss on patent -- 30,544
(Increase) decrease in:
Accounts receivable (7,542) (10,000)
Inventories 157,497 --
Prepaid expenses and other assets 43,962 (119,080)
Increase (decrease) in:
Accounts payable (176,516) (11,537)
Accrued liabilities 680,744 56,518
----------- ------------
Net cash (used in) operating activities (1,207,099) (1,310,382)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (9,078) (30,856)
----------- ------------
Net cash used in investing activities: (9,078) (30,856)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible debenture 460,000 1,100,000
Net proceeds from borrowing on long term basis 414,402 --
Net proceeds (payments) to notes payable, related parties 38,000 (32,485)
----------- ------------
Net cash provided by (used in) financing activities: 912,402 1,067,515
----------- ------------
Net increase (decrease) in cash and cash equivalents (303,775) (273,723)
Cash and cash equivalents at beginning of period 475,656 415,375
----------- ------------
Cash and cash equivalents at end of period $ 171,881 $ 141,652
=========== ============
Supplemental disclosures:
Interest Paid $ 29,280 $ 75,103
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 $(3,159,257) $ 17,932,014
Common stock issued for services rendered $ 1,169,289 $ 29,000
Common stock issued in settlement of debt $ 31,655 $ 339,238
The accompanying notes are an integral part of these unaudited condensed
financial statements
5
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 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 six month periods
ended June 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 June 30, 2006, the Company has
accumulated losses of $19,422,585.
Revenue Recognition
Revenues are recognized in the period that services 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 June 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.
6
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)
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 June 30, 2006 and
December 31, 2005, allowance for doubtful receivable was $0.
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, 33,580,000 stock options were outstanding and
exercisable. The Company did not grant any stock options to employees during the
six months ended June 30, 2006. The Company did not recognize compensation
expense related to employees' stock options in the six months ended June 30,
2006. The impact on earnings for the remainder of Fiscal 2006 for stock based
compensation will depend on future stock option issuances.
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.
7
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)
Stock-Based Compensation (continued)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
loss per share would be as follows:
For the six
months ended June
30, 2005-As
restated-Note K
-----------------
Net loss attributable to common stockholders -as reported $(19,887,067)
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 loss -Pro Forma $(20,365,867)
Net loss attributable to common stockholders - Pro forma $(20,365,867)
Basic (and assuming dilution) loss per share -as reported $ (0.57)
Basic (and assuming dilution) loss per share - Pro forma $ (0.59)
In determining the compensation cost of stock options granted to employees
during the six months ended June 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:
Six Months
Ended
June 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.
Patents
During the year ended December 31, 2005, the Company management preformed an
evaluation of its intangble 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 six month period ended June 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.
8
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (continued)
Recent pronouncements
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
adopted this interpretation from January 1, 2006. The adoption of this
Interpretation did not have a material impact on its consolidated financial
position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company adopted of this SFAS with its restatements
included within.
On February 16, 2006 the Financial Accounting Standards Board (FASB) issued SFAS
155, "Accounting for Certain Hybrid Instruments," which amends SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS 155 allows financial instruments that have embedded
derivatives to be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host) if the holder elects to account for the whole
instrument on a fair value basis. SFAS 155 also clarifies and amends certain
other provisions of SFAS 133 and SFAS 140. This statement is effective for all
financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The Company does not expect its adoption of this new
standard to have a material impact on its 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 Company does not expect its
adoption of this new standard to have a material impact on its financial
position, results of operations or cash flows.
9
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at June 30, 2006 and December 31, 2005 are as follows:
June 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
10% note payable, unsecured and due on demand, accrued and unpaid interest due
when paid 15,000 --
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 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 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 168,600 --
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 violation
of the loan covenants (see below) 746,618 515,283
10
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (continued)
June 30, 2006 December 31, 2005
------------- -----------------
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
violation of the loan covenants (see below) 547,763 299,820
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 (see below) 181,918 49,680
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) 117,625 1,918
8% convertible debenture, due March 2009e 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 rights. (See below) 43,379 --
---------- --------
2,079,206 894,201
Less: current maturities (764,118) (542,783)
---------- --------
Notes payable and convertible debentures-long term portion $1,315,088 $351,418
========== ========
11
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (continued)
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 June 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.
This transaction, 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 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 June 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.
This transaction, 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 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 June 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.
12
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (continued)
This transaction, 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 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 June 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.
This transaction, 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 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 June 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.
13
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (continued)
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 June 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 $1,637,303 and $866,701 as of June 30, 2006
and December 31, 2005, respectively.
The following table summarizes the various components of the convertible
debentures as of June 30,, 2006 and December 31, 2005:
June 30, 2006 December 31, 2005
------------- -----------------
Convertible debentures $ 2,079,206 $ 894,201
Warrant liability 2,432,970 2,013,188
Derivative liability 4,329,728 6,809,449
----------- -----------
8,841,904 9,716,838
Cumulative adjustment of derivative and warrant liability to fair value (1,762,698) (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 (1,637,303) (866,701)
----------- -----------
$ 4,844,709 $ 3,961,961
=========== ===========
NOTE C-WARRANT LIABILITY
Total warrant liability as of June 30, 2006 and December 31, 2005 are comprised
of the following:
June 30, 2006 December 31, 2005
------------- -----------------
Fair value of warrants relating to convertible debentures $2,432,970 $2,013,188
Fair value of warrants relating to preferred stock-class A 398,797 1,147,334
Fair value of other outstanding warrants 340,723 191,504
---------- ----------
Total $3,172,490 $3,352,026
========== ==========
14
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
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 June 30, 2006, 3 of the Series A Preferred shareholders exercised the
conversion right and exchanged 8 shares of Series A Preferred for 419,032 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 June 30, 2006, $0 in
dividends were accumulated.
15
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE D -STOCKHOLDER'S EQUITY
Series A - Convertible Preferred stock (continued)
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."
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 June 30, 2006
and December 31, 2005, respectively.
o The expense relatinhg 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.
16
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE D -STOCKHOLDER'S EQUITY
Series A - Convertible Preferred stock (continued)
The fair value of the detachable warrants as of June 30, 2006 and December 31,
2005 were as follows:
June 30, 2006 December 31, 2005
------------- -----------------
Fair value of warrants relating to issuance of
convertible preferred stock: $398,797 $1,147,334
The Company recorded an Unrealized Gain (Loss) on the change in fair value of
these detachable warrants of $748,537 and $(452,242) for the six months ended
June 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 June 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.
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 June 30, 2006 $ 240,000 in
dividends were accumulated.
17
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE D -STOCKHOLDER'S EQUITY
Series B - Convertible Preferred stock (continued)
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 June 30, 2006 and December 31, 2005, the Company has
96,775,237 and 75,608,334 shares issued and outstanding, respectively.
During the six months ended June 30, 2006, holders converted 8.3 shares of
preferred stock - Class A into 419,032 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 in conjunction with the
exercise of employee stock options at $0.056 per share.
18
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 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
June 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 2.50 $0.01 100,000 $0.01
0.03 26,500,000 3.92 0.03 26,500,000 0.03
0.10 20,641,500 6.42 0.10 20,641,500 0.10
0.20 1,845,000 1.25 0.20 1,845,000 0.20
0.25 10,301,564 0.72 0.25 10,301,564 0.25
0.50 2,300,000 2.90 0.50 2,600,000 0.50
1.05 10,193,064 .72 1.05 10,193,064 1.05
Transactions involving the Company's warrant issuance are summarized as follows:
Weighted Average
Number of Shares 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 23,750,000 0.17
Exercised -- --
Canceled or expired (300,000) (0.50)
Outstanding at June 30, 2006 71,881,128 0.34
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 six months ended June 30, 2006, warrants totally 19,000,000 were issued
in connection with debt financing. The warrants are exercisable until seven
years after date of issuance at a purchase price of $0.10 per share. The
warrants have a reset provision should the Company issue shares below $0.10 per
share excluding conversion of related debt.
For the six months ended June 30, 2006, following warrants were issued in
connection with services rendered:
Number of warrants purchase price 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
19
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 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 June 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 7.46 $0.2125 2,000,000 $0.2125
0.2125 2,000,000 7.87 0.2125 2,000,000 0.2125
0.10 9,502,307 8.54 0.10 9,502,307 0.10
0.0295 4,000,000 9.1 0.0295 4,000,000 0.0295
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 -- --
Exercised (16,497,693) 0.037
Canceled or expired -- --
Outstanding at June 30, 2006: 17,502,307 $0.1367
During the six months r ended June 30, 2006, the Board of Directors voted to
exercise 16,497,693 of their options cashlessly to provide 8,772,206 share of
the Company's common stock to be used as collateral 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
(a)The expected option life is based on contractual expiration dates.
20
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE F -RELATED PARTY TRANSACTIONS
From time to time, the Company's principal officers have advanced funds to the
Company for working capital purposes in the form of unsecured promissory notes,
accruing interest at 12% per annum. As of June 30, 2006 and December 31, 2005 ,
the balance due to the officers was $404,595 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.
21
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 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 six months ended June 30,
--------------------------------------
2006 2005- As restated-Note K
----------- ------------------------
Net (loss) available to common stockholders $ (730,644) $(19,887,067)
Basic and diluted (loss) per share (0.01) (0.57)
Weighted average common shares outstanding 84,395,457 34,604,651
As of June 30,2006 and 2005, 207,021,887 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 $20,746 or 25% of total sales for the
three months ended June 30,, 2006.
Purchases from the Company's 2 major suppliers accounted for 100% of total
purchases for the three months ended June 30, 2006.
22
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
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 June 30, 2006, the Company incurred accumulated losses of
$19,422,585. The Company's current liabilities exceeded its current assets by
$2,705,159 as of June 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.
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 June 30, 2006 financial statements in accordance
with SFAS 154. The necessary corrections to apply the impact to the previously
issued June 30, 2005 financial statements are as follows:
23
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(Unaudited)
NOTE K-RESTATEMENT (continued)
For the six months ended June 30, 2005:
June 30, 2005 Amount increase
financial statement June 30, 2005 (decrease) in June
balance prior to financial statement 30, 2005 financial
restatement post restatement statements
------------------- ------------------- ------------------
Net (loss) $(1,357,255) $(19,887,067) $(18,529,812)
Loss per share-basic and fully diluted $ (0.04) $ (0.57) $ (0.53)
For the three months ended June 30, 2005:
June 30, 2005 Amount increase
financial statement June 30, 2005 (decrease) in June
balance prior to financial statement 30, 2005 financial
restatement post restatement statements
------------------- ------------------- ------------------
Net (loss) $(933,596) $(17,112,941) $(16,179,345)
Loss per share-basic and fully diluted $ (0.02) $ (0.42) $ (0.40)
The resulting effects on the prior period adjustments on the June 30, 2005 cash
flows by area are as follows:
June 30, 2005 cash
flow statement June 30,, 2005 cash flow Amount increase
balance prior to statement post (decrease) in June 30,
restatement restatement 2005 cash flow statement
------------------ ------------------------ ------------------------
Net cash from operating activities $(1,310,382) $(1,310,382) --
Net cash from investing activities (30,856) (30,856) --
Net cash from financing activities 1,067,515 1,067,515 --
24
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. "Diodal(TM)" is our trademark. 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 Aeon 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 Aeon task and accent lighting
products and Reliabright 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 Watchdog and BrightEye
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 June 1, 2006, we announced that we had entered into an agreement with
Kitchen Distributors of America (KDA) to showcase our Aeon products in all 11 of
its stores. Nine stores are in Chicago and two are in Philadelphia. We also have
a distribution agreement with KDA for the Aeon ProHB.
The Aeon ProHB offers the latest in solid state lighting solutions that
significantly increase performance and greatly improve lighting applications.
The Aeon ProHB gives a higher quality of light - up to 560 Lux, without
producing heat. 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 the current halogen and fluorescent lighting
and provides solutions for the residential and commercial market lighting needs,
including closets, cabinet interiors and under-cabinet lighting for kitchen
counters. In addition, certain Aeon products meet or exceed the energy and color
requirements of the EnergyStar Residential Lighting Fixture (RLF) program,
although EnergyStar currently does not have a program for LED lighting.
California's Title 24 energy efficiency requirements of greater than 40 lumens
per watt are also satisfied by Cyberlux's Aeon Pro E product which offers a
superior alternative to fluorescent task and accent lighting.
On June 12, 2006, we announced that we had entered into an agreement with
Kitchen & Bath Galleriesto to showcase our Aeon Pro LED lighting products.
Kitchen & Bath Galleries has seven locations in North Carolina and South
Carolina.
25
On June 19, 2006, we announced that we had signed a strategic alliance
agreement with UTEK Corporation, a specialty finance company focused on
technology transfer. The goal of the strategic alliance with UTEK is to further
expand unique intellectual property and technology portfolio. UTEK will utilize
its relationships among universities and government laboratories to identify and
review solid-state lighting technologies for us.
On June 28, 2006, we announced today that we had received the next field
use system order for our WatchDog Portable Covert Illumination System from the
United States Air Force (USAF). Additionally, as part of the procurement
process, the USAF Air Mobility Battlelab conducted a Best Value
Determination/Sole Source study that evaluated the WatchDog system against any
other available General Services Administration (GSA) contract-approved product
and determined that the WatchDog system is one-of-a-kind in its capabilities and
the only product that meets or exceeds the Battlelab's portable covert
illumination system requirements. The field order for the WatchDog system, which
costs $15,112 on the GSA contract, was placed by the Air Mobility Battlelab for
field deployment and use with the various USAF Commands.
The Watchdog advanced solid-state LED security lighting system was
developed by us in conjunction with the Air Mobility Battlelab for the United
States Air Force. The WatchDog provides security lighting for an exterior
boundary of 300 x 300 feet with either visible light or covert infrared light
that is compatible with night-vision goggles (NVGs). It was designed to protect
military assets on the ground, such as an airplane, by creating a 'lightless'
zone around the asset while illuminating the surrounding protection boundary. In
covert illumination mode, the system increases the visibility of NVGs by almost
4-fold. The BrightEye Portable Visible Illumination System is a high-powered
visible lighting system that provides over 600 feet of perimeter security
lighting and is a portable solution for high intensity lighting applications.
We were originally selected in a competitive review process that included
25 proposals from other companies to develop a lightweight, portable lighting
system for the USAF Air Mobility Battlelab for both visible lighting and
infrared lighting. We were selected during the USAF competitive review process
to develop the WatchDog Portable Covert Illumination System. The system weighs
less than 50 pounds, including batteries, can be quickly deployed, and with
highly efficient LED technology, the system can provide lighting for several
days with a single battery charge.
In May 2006, we gained approval from the GSA as a primary contractor for
our advanced solid-state lighting systems under Federal Supply Schedule 56 for
Specialty Lighting products. Under the terms of the Federal Supply Schedule
(FSS) contract, we can sell our advanced solid-state light-emitting diode (LED)
lighting systems to all government organizations including the various branches
of the military, the National Guard and the Department of Homeland Security
organizations.
On June 29, 2006, we announced that we had recently appeared on leading
electronic retailer QVC to offer the EverOn Multi-Purpose Emergency Light. The
EverOn uses the latest solid-state lighting technology that provides more than
60 hours of light using four AA batteries and is 90 percent more energy
efficient than conventional incandescent flashlights. During a blackout, EverOn
provides more light and is much safer than a candle.
The EverOn is packaged in our patented and field-proven hand- held
elliptical parabolic reflector product design, providing a practical, portable
emergency lighting solution for every consumer who has experienced the unease
and inconvenience of power outages caused by natural or man-made disasters.
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 bright
white light on the highest setting, all in a 7-inch by 3.5-inch by 2.4- inch
package.
The EverOn product builds on the demonstrated success of the original Home
Safety Light, which was launched successfully on QVC in October 2003. The EverOn
is over 40 percent more efficient and 30 percent brighter than our original Home
Safety Light product.
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, night-light level; a medium, room-filling light level; and a
high, spotlight level. In recent bench tests by Independent Testing
Laboratories, Inc., the EverOn Multi-Purpose Light was shown to operate for over
60 hours at the medium setting and over 30 hours at high setting using one set
of four AA batteries.
26
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.
Results of Operations
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
REVENUES
Revenues for the six months ended June 30, 2006 were $130,226 as compared
to $13,768 for the same period ended June 30, 2005.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2006 were $2,494,195
as compared to $1,126,207 for the same period ended June 30, 2005. Included in
the six months ended June 30, 2006 are $117,215 in expenses for market
development and literature. This compares to $137,672 for the six months ended
June 30, 2005. Additionally, we incurred non cash expenses relating to the
exercise of options and payments for services rendered totaling $ 1,169,289 for
the six month period ended June 30, 2006 as compared with $29,000 for same
period 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
conserve its 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.
Three months ended June 30, 2006 compared to the three months ended June 30,
2005
REVENUES
Revenues for the three months ended June 30, 2006 were $83,027 as compared
to $200 for the same period ended June 30, 2005.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 2006 were
$1,100,375 as compared to $690,475 for the same period ended June 30, 2005.
Included in the three months ended June 30, 2006 are $75,536 in expenses for
market development and literature. This compares to $103,633 for the three
months ended June 30, 2005. Additionally, we incurred non cash expenses relating
to the exercise of options and payments for services rendered totaling $407,038
for the three month period ended June 30, 2006 as compared with $29,000 for same
period in 2005.
27
Liquidity and Capital Resources
As of June 30, 2006, we had a working capital deficit of $2,705,159. As a
result of our operating losses for the six months ended June 30, 2006, we
generated a cash flow deficit of $1,207,099 from operating activities. Cash
flows used in investing activities was $9,078 during the six month period
through June 30, 2006. We met our cash requirements during this period through
the issuance of convertible debentures of $460,000 $414,402 from the issuance of
notes payable and advances of $38,000, net of repayments, to our officers and
shareholders and advances.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of
capitalization, we believe we have sufficient capital resources to meet
projected cash flow deficits through the next twelve months. However, if
thereafter, we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
Our independent certified public accountant has stated in their report
included in our December 31, 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 27, 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 investors purchased all of the
secured convertible notes on July 27, 2006.
The proceeds received from the sale of the secured convertible notes were
used for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
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) 50% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
is due upon default under the terms of secured convertible notes. The warrants
are exercisable until seven years from the date of issuance at a purchase price
of $0.06 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the secured convertible
notes and the exercise price of the warrants may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. As of the date of this filing, the conversion price for
the secured convertible debentures and the exercise price of the warrants have
not been adjusted. The selling stockholders have contractually agreed to
restrict their ability to convert or exercise their warrants and receive shares
of our common stock such that the number of shares of common stock held by them
and their affiliates after such conversion or exercise does not exceed 4.9% of
the then issued and outstanding shares of common stock. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights.
On May 19, 2006, we entered into a financing agreement with Smarthedge,
LLC whereby our Directors pledged 2,772, 206 shares of their personal common
stock as collateral for a loan in the amount of $103,403. The loan carries an
interest rate of 4.99% payable quarterly and has a maturity of June, 2009.
28
On June 20, 2006, we entered into a financing agreement with Smarthedge,
LLC whereby our Directors pledged 6,000,000 shares of their personal common
stock as collateral for a loan in the amount of $168,600. The loan carries an
interest rate of 4.99% payable quarterly and has a maturity of June, 2009.
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.
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.
Critical Accounting Policies
On February 16, 2006 the Financial Accounting Standards Board (FASB)
issued SFAS 155, "Accounting for Certain Hybrid Instruments," which amends SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to account for the
whole instrument on a fair value basis. SFAS 155 also clarifies and amends
certain other provisions of SFAS 133 and SFAS 140. This statement is effective
for all financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The Company does not expect its adoption of this new
standard to have a material impact on its financial position, results of
operations or cash flows.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision-making group, in
making decisions how to allocate resources and assess performance. The
information disclosed herein materially represents all of the financial
information related to the Company's principal operating segment.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47,
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143," which requires an entity to recognize a liability for
the fair value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. The Company is required to
adopt the provisions of FIN 47 no later than the first quarter of fiscal 2006.
The Company does not expect the adoption of this Interpretation to have a
material impact on its consolidated financial position, results of operations or
cash flows.
29
In May 2005 the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 154, "Accounting Changes and Error Corrections, a replacement of APB
Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also requires that
retrospective application of a change in accounting principle be limited to the
direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this Statement is issued. The
Company does not expect the adoption of this SFAS to have a material impact on
its consolidated financial position, results of operations or cash flows.
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.
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.
30
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 and $3,103,049 for the years ended
December 31, 2005 and 2004, respectively. For the six months ended June 30,
2006, we incurred a net loss of $730,644. As of June 30, 2006, we had an
accumulated deficit of $19,422,585. 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 $4
million to fund our continued operations for the next twelve months, depending
on revenue from operations. Additional capital will be required to effectively
support the operations and to otherwise implement our overall business strategy.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our marketing and development plans and
possibly cease our operations. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated March 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 year ended
December 31, 2005 in the amount of $9,410,657. 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.
31
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 50% of all
votes by our shareholders. As a result, these stockholders, acting together,
will have the ability to control substantially all matters submitted to our
stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Risks Relating to Our Current Financing Arrangement:
There Are a Large Number of Shares Underlying Our Secured Convertible Notes and
Warrants That May be Available for Future Sale and the Sale of These Shares May
Depress the Market Price of Our Common Stock.
As of August 9, 2006, we had 96,866,844 shares of common stock issued and
outstanding, secured convertible notes outstanding pursuant to our securities
purchase agreements dated September 23, 2004, April 22, 2005, October 24, 2005,
December 28, 2005, March 23, 2006 and July 24, 2006 that may be converted into
an estimated 45,140,295, 75,000,000, 40,000,000, 50,000,000, 35,714,286 and
25,000,000 shares of common stock at current market prices, respectively, and
outstanding warrants pursuant to our securities purchase agreements dated
September 23, 2004, April 22, 2005, October 24, 2005, December 28, 2005, March
23, 2006 and July 24, 2006, to purchase 2,250,000, 25,000,000, 800,000, 700,000,
19,000,000 and 15,000,000 shares of common stock, respectively. In addition, the
number of shares of common stock issuable upon conversion of the outstanding
secured convertible notes issued pursuant to the securities purchase agreements
dated September 23, 2004, April 22, 2005, October 24, 2005, December 28, 2005,
March 23, 2006 and July 24, 2006 may increase if the market price of our stock
declines. All of the shares, including all of the shares issuable upon
conversion of the secured convertible notes and upon exercise of our warrants,
may be sold without restriction when registered. The sale of these shares may
adversely affect the market price of our common stock.
32
The Continuously Adjustable Conversion Price Feature of Our Secured Convertible
Notes Could Require Us to Issue a Substantially Greater Number of Shares, Which
Will Cause Dilution to Our Existing Stockholders.
Our obligation to issue shares upon conversion of our secured convertible
notes is essentially limitless. The following is an example of the amount of
shares of our common stock that are issuable, upon conversion of our secured
convertible notes (excluding accrued interest), based on market prices 25%, 50%
and 75% below the market price, as of August 11, 2006 of $0.06.
September 2004, April 2005, October 2005 and July 2006 Secured Convertible
Notes, combined
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------- --------- ------------- ----------- -----------
25% $.045 $.0225 164,569,152 62.95%
50% $ .03 $ .015 246,853,727 71.82%
75% $.015 $.0075 493,707,454 83.60%
December 2005 and March 2006 Secured Convertible Notes, combined
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 65% Issuable Stock
------- --------- ------------- ----------- -----------
25% $.045 $.01575 76,190,477 44.03%
50% $ .03 $ .0105 114,285,715 54.12%
75% $.015 $.00525 228,571,429 70.23%
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
The Continuously Adjustable Conversion Price Feature of our Secured
Convertible Notes May Have a Depressive Effect on the Price of Our Common Stock.
The secured convertible notes issued in September 2004, April 2005,
October 2005 and July 2006 are convertible into shares of our common stock at a
50% discount to the trading price of the common stock prior to the conversion.
The secured convertible notes issued in December 2005 and March 2006 are
convertible into shares of our common stock at a 65% discount to the trading
price of the common stock prior to the conversion. The significant downward
pressure on the price of the common stock as the selling stockholders convert
and sell material amounts of common stock could have an adverse effect on our
stock price. In addition, not only the sale of shares issued upon conversion or
exercise of secured convertible notes, series B convertible preferred stock and
warrants, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
The Issuance of Shares Upon Conversion of the Secured Convertible Notes and
Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to
Our Existing Stockholders.
33
The issuance of shares upon conversion of the secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 4.9% of our
outstanding common stock, this restriction does not prevent AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II,
LLC from converting and/or exercising some of their holdings and then converting
the rest of their holdings. In this way, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC could
sell more than this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Secured Convertible Notes and Registered Pursuant To This
Registration Statement May Not Be Adequate And We May Be Required to File A
Subsequent Registration Statement Covering Additional Shares. If The Shares We
Have Allocated And Are Registering Herewith Are Not Adequate And We Are Required
To File An Additional Registration Statement, We May Incur Substantial Costs In
Connection Therewith.
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the secured
convertible notes, we have made a good faith estimate as to the amount of shares
of common stock that we are required to register and allocate for conversion of
the secured convertible notes. Accordingly, we have allocated and registered
300,000,000 shares to cover the conversion of the secured convertible notes. In
the event that our stock price decreases, the shares of common stock we have
allocated for conversion of the secured convertible notes and are registering
hereunder may not be adequate. If the shares we have allocated to the
registration statement are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in connection
with the preparation and filing of such registration statement.
If We Are Required for any Reason to Repay Our Outstanding Secured Convertible
Notes, We Would Be Required to Deplete Our Working Capital, If Available, Or
Raise Additional Funds. Our Failure to Repay the Secured Convertible Notes, If
Required, Could Result in Legal Action Against Us, Which Could Require the Sale
of Substantial Assets.
In September 2004, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $1,500,000 principal amount of secured convertible
notes. The secured convertible notes are due and payable, with 10% interest, two
years from the date of issuance, unless sooner converted into shares of our
common stock. In April 2005, we entered into a Securities Purchase Agreement for
the sale of an aggregate of $1,500,000 principal amount of secured convertible
notes. The secured convertible notes are due and payable, with 10% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. In October 2005, we entered into a Securities Purchase
Agreement for the sale of an aggregate of $800,000 principal amount of secured
convertible notes. The secured convertible notes are due and payable, with 10%
interest, three years from the date of issuance, unless sooner converted into
shares of our common stock. In December 2005, we entered into a Securities
Purchase Agreement for the sale of an aggregate of $700,000 principal amount of
secured convertible notes. The secured convertible notes are due and payable,
with 8% interest, three years from the date of issuance, unless sooner converted
into shares of our common stock. In March 2006, we entered into a Securities
Purchase Agreement for the sale of an aggregate of $500,000 principal amount of
secured convertible notes. The secured convertible notes are due and payable,
with 8% interest, three years from the date of issuance, unless sooner converted
into shares of our common stock. In July 2006, we entered into a Securities
Purchase Agreement for the sale of an aggregate of $500,000 principal amount of
secured convertible notes. The secured convertible notes are due and payable,
with 6% interest, three years from the date of issuance, unless sooner converted
into shares of our common stock. In addition, any event of default under our
secured convertible notes issued pursuant to our September 2004, April 2005,
October 2005, December 2005, March 2006 or July 2006 securities purchase
agreements, such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes, including a default interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the secured convertible notes will
be converted into shares of our common stock, in accordance with the terms of
the secured convertible notes. If we were required to repay the secured
convertible notes, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the notes when required, the
note holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
34
Risks Relating to Our Common Stock:
We Have Issued a Large Amount of Stock in Lieu of Cash for Payment of Expenses
and Expect to Continue this Practice in the Future. Such Issuances of Stock Will
Cause Dilution to Our Existing Stockholders.
Due to our limited economic resources, we try to issue stock in lieu of
cash for payment of expenses and services provided for us. In 2005, we issued
2,783,333 shares of common stock in exchange for expenses and services rendered.
We anticipate issuing shares of common stock whenever possible in lieu of cash
to conserve our financial position. The number of shares of common stock issued
is directly related to our stock price at the time of issuance. In the event
that our stock price drops, we will be required to issue larger amounts of
shares for expenses and services rendered, if the other party is willing to
accept stock at all. The issuance of shares of common stock will have the effect
of diluting the proportionate equity interest and voting power of holders of our
common stock, including investors in this offering.
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
35
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.
36
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 June 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.
37
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.
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.
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. 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.
In April 2006, we issued 320,289 shares of common stock at $0.073 per
share in exchange for services rendered.
In June.2006, we issued 2,084,484 shares of common stock at $0.08 per
share in exchange for services rendered.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC on July 26, 2006, for the
sale of (i) $500,000 in secured convertible notes and (ii) a warrants to
purchase 15,000,000 shares of our common stock.
The 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) 50% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date. The full principal
amount of the secured convertible notes are due upon default under the terms of
secured convertible notes. In addition, we have granted the investors a security
interest in substantially all of our assets and intellectual property and
registration rights. The warrants are exercisable until seven years from the
date of issuance at a purchase price of $0.06 per share. In addition the
warrants exercise price gets adjusted in the event we issue common stock at a
price below market, with the exception of any securities issued as of the date
of this warrant.
38
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Cyberlux or executive officers
of Cyberlux, and transfer was restricted by Cyberlux Corporation in accordance
with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
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.
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
20,2 005, 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.
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)
39
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: August 14, 2006 By: /s/ DONALD F. EVANS
----------------------------------
Donald F. Evans
Chief Executive Officer
(Principal Executive Officer) and
Chairman of the Board of Directors
Date: August 14, 2006 By: /s/ DAVID D. DOWNING
----------------------------------
David D. Downing
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
40