As filed with the Securities and Exchange Commission on September 19, 2006
An Exhibit List can be found on page II-9.
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
CYBERLUX CORPORATION
(Name of small business issuer in its charter)
NEVADA 3674 91-2048178
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
4625 CREEKSTONE DRIVE, SUITE 100
RESEARCH TRIANGLE PARK
DURHAM, NORTH CAROLINA 27703
(919) 474-9700
(Address and telephone number of principal executive offices
and principal place of business)
DON F. EVANS, CHIEF EXECUTIVE OFFICER
CYBERLUX CORPORATION
4625 CREEKSTONE DRIVE, SUITE 100
RESEARCH TRIANGLE PARK
DURHAM, NORTH CAROLINA 27703
(919) 474-9700
(Name, address and telephone number of agent for service)
Copies to:
GREGORY SICHENZIA, ESQ.
SICHENZIA ROSS FRIEDMAN FERENCE LLP
1065 AVENUE OF THE AMERICAS, 21ST FLR.
NEW YORK, NEW YORK 10018
(212) 930-9700
(212) 930-9725 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) MAXIMUM MAXIMUM REGISTRATION FEE
OFFERING AGGREGATE
PRICE PER OFFERING PRICE
SHARE (2)
-------------------------------------------------------------------------------------------------------------
Common stock, $.001 par 263,333,334 (3) $.05 $13,166,667 $1,408.83
value issuable upon
conversion of Secured
Convertible Notes
-------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 800,000 (4) $.10 $ 80,000 $ 8.56
value issuable upon exercise
of Warrants
-------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 700,000 (5) $.15 $ 105,000 $ 11.24
value issuable upon exercise
of Warrants
-------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 19,000,000 (6) $.10 $ 1,900,000 $ 203.30
value issuable upon exercise
of Warrants
-------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par 15,000,000 (7) $.06 $ 900,000 $ 96.30
value issuable upon exercise
of Warrants
-------------------------------------------------------------------------------------------------------------
Total 298,833,334 $16,151,667 $1,728.23
-------------------------------------------------------------------------------------------------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of warrants held
by the selling stockholders. In addition to the shares set forth in the table,
the amount to be registered includes an indeterminate number of shares issuable
upon conversion of the secured convertible notes and exercise of the warrants,
as such number may be adjusted as a result of stock splits, stock dividends and
similar transactions in accordance with Rule 416. The number of shares of common
stock registered hereunder represents a good faith estimate by us of the number
of shares of common stock issuable upon conversion of the secured convertible
notes and upon exercise of the warrants. For purposes of estimating the number
of shares of common stock to be included in this registration statement, we
calculated a good faith estimate of the number of shares of our common stock
that we believe will be issuable upon conversion of the secured convertible
notes and upon exercise of the warrants to account for market fluctuations, and
antidilution and price protection adjustments, respectively. Should the
conversion ratio result in our having insufficient shares, we will not rely upon
Rule 416, but will file a new registration statement to cover the resale of such
additional shares should that become necessary. In addition, should a decrease
in the exercise price as a result of an issuance or sale of shares below the
then current market price, result in our having insufficient shares, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on September 14, 2006, which was $.05 per share.
(3) Includes a good faith estimate of the shares underlying secured convertible
notes to account for market fluctuations.
(4) Includes a good faith estimate of the shares underlying warrants issued
pursuant to the Securities Purchase Agreement dated October 24, 2005,
exercisable at $.10 per share, to account for antidilution protection
adjustments.
3
(5) Includes a good faith estimate of the shares underlying warrants issued
pursuant to the Securities Purchase Agreement dated December 28, 2005,
exercisable at $.15 per share, to account for antidilution protection
adjustments.
(6) Includes a good faith estimate of the shares underlying warrants issued
pursuant to the Securities Purchase Agreement dated March 31, 2006, exercisable
at $.10 per share, to account for antidilution protection adjustments.
(7) Includes a good faith estimate of the shares underlying warrants issued
pursuant to the Securities Purchase Agreement dated July 27, 2006, exercisable
at $.06 per share, to account for antidilution protection adjustments.
----------
PURSUANT TO RULE 429 PROMULGATED UNDER THE SECURITIES ACT OF 1933, THE
ENCLOSED PROSPECTUS CONSTITUTES A COMBINED PROSPECTUS ALSO RELATING TO AN
AGGREGATE OF UP TO 64,567,319 SHARES OF OUR COMMON STOCK THAT WERE PREVIOUSLY
REGISTERED FOR SALE IN A REGISTRATION STATEMENT, AS AMENDED, ON FORM SB-2,
REGISTRATION NO. 333-119716. AS SUCH, THIS PROSPECTUS ALSO CONSTITUTES
POST-EFFECTIVE AMENDMENT NO. 4 TO THE REGISTRATION STATEMENT ON FORM SB-2,
REGISTRATION NO. 333-119716, WHICH SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY
WITH THE EFFECTIVENESS OF THIS REGISTRATION STATEMENT ON FORM SB-2 IN ACCORDANCE
WITH SECTION 8(C) OF THE SECURITIES ACT OF 1933.
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
4
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, SEPTEMBER 19, 2006
CYBERLUX CORPORATION
298,833,334 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up
to 298,833,334 shares of our common stock, including up to 263,333,334 shares of
common stock underlying secured convertible notes in a principal amount of
$4,000,000 and up to 35,500,000 issuable upon the exercise of common stock
purchase warrants. $1,500,000 of the secured convertible notes are convertible
into our common stock at the lower of $0.03 or 50% of the average of the three
lowest intraday trading prices for the common stock on a principal market for
the 20 trading days before but not including the conversion date.
$800,000 of the secured convertible notes are convertible into our
common stock at the lower of $0.06 or 50% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date.
$1,200,000 of the secured convertible notes are convertible into our
common stock at the lower of $0.10 or 45% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date.
The remaining $500,000 of the secured convertible notes are convertible
into our common stock at the lower of $0.10 or 50% of the average of the three
lowest intraday trading prices for the common stock on a principal market for
the 20 trading days before but not including the conversion date. The selling
stockholders may sell common stock from time to time on the Over-The-Counter
Bulletin Board at the prevailing market price or in negotiated transactions. The
selling stockholders may be deemed underwriters of the shares of common stock
which they are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "CYBL". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on September 14, 2006, was
$.05.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _____, 2006.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Cyberlux Corporation with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
5
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements 7
Prospectus Summary 8
Risk Factors 12
Use Of Proceeds 18
Market For Common Equity And Related Stockholder Matters 31
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 32
Description Of Business 40
Description Of Properties 45
Legal Proceedings 46
Management 47
Executive Compensation 48
Certain Relationships And Related Transactions 50
Security Ownership Of Certain Beneficial Owners And Management 51
Description Of Securities 53
Commission's Position On Indemnification For Securities Act
Liabilities 60
Plan Of Distribution 61
Selling Stockholders 63
Legal Matters 65
Experts 65
Available Information 65
Index to Consolidated Financial Statements 66
6
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any prospectus supplement contain forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events.
In some cases, you can identify forward-looking statements by words
such as "may," "should," "expect," "plan," "could," "anticipate," "intend,"
"believe," "estimate," "predict," "potential," "goal," or "continue" or similar
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements.
Unless we are required to do so under U.S. federal securities laws or
other applicable laws, we do not intend to update or revise any forward-looking
statements.
7
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
CYBERLUX CORPORATION
Our efforts have been principally devoted to designing, developing and
marketing advanced lighting systems that utilize white (and other) light
emitting diodes as illumination elements. We are developing and marketing new
product applications of diodal illumination(TM) that demonstrate added value
over traditional lighting systems. Using proprietary technology, we are creating
a family of products for emergency and security lighting offer extended light
life and greater cost effectiveness than other existing forms of illumination.
We are expanding our marketing activity into channels of retail, commercial and
institutional sales.
For the year ended December 31, 2005, we generated $54,523 in revenue
and a net loss of $9,410,657. For the six months ended June 30, 2006, we
generated $130,226 in revenue and a net loss of $730,644. As a result of
recurring losses from operations, our auditors, in their report dated March 16,
2006, have expressed substantial doubt about our ability to continue as going
concern.
Our principal offices are located at 4625 Creekstone Drive, Suite 100,
Research Triangle Park, Durham, North Carolina 27703, and our telephone number
is (919) 474-9700. We are a Nevada corporation. We maintain websites at
www.cyberlux.com and www.luxSel.com. The information contained on those websites
is not deemed to be a part of this prospectus.
The Offering
Common stock offered by
selling stockholders............. Up to 298,833,334 shares, including the
following:
- up to 263,333,334 shares of common stock
underlying secured convertible notes in
the principal amount of $2,500,000
(includes a good faith estimate of the
shares underlying secured convertible
notes to account for market fluctuations
and antidilution protection adjustments,
respectively),
- up to 15,000,000 shares of common stock
issuable upon the exercise of common stock
purchase warrants at an exercise price of
$.06 per share (includes a good faith
estimate of the shares underlying warrants
to account for antidilution protection
adjustments);
- up to 19,800,000 shares of common stock
issuable upon the exercise of common stock
purchase warrants at an exercise price of
$.10 per share (includes a good faith
estimate of the shares underlying warrants
to account for antidilution protection
adjustments); and
- up to 700,000 shares of common stock
issuable upon the exercise of common stock
purchase warrants at an exercise price of
$.15 per share (includes a good faith
estimate of the shares underlying warrants
to account for antidilution protection
adjustments).
8
Common stock to be
outstanding after the
offering......................... Up to 396,362,491 shares
Use of proceeds.................. We will not receive any proceeds from the
sale of the common stock. However, we will
receive the sale price of any common stock
we sell to the selling stockholders upon
exercise of the warrants. We expect to use
the proceeds received from the exercise of
the warrants, if any, for general working
capital purposes. However, AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners
II, LLC will be entitled to exercise up to
35,500,000 warrants on a cashless basis at
any time if the shares of common stock
underlying the warrants are not then
registered pursuant to an effective
registration statement. In the event that
AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd., or New Millennium
Partners II, LLC exercise the warrants on a
cashless basis, then we will not receive any
proceeds from the exercise of those
warrants. In addition, we have received
gross proceeds $2,500,000 from the sale of
the secured convertible notes. The proceeds
received from the sale of the secured
convertible notes will be used for business
development purposes, working capital needs,
pre-payment of interest, payment of
consulting and legal fees and purchasing
inventory.
Over-The-Counter Bulletin Board
Symbol........................... CYBL
The above information regarding common stock to be outstanding after
the offering is based on 97,529,157 shares of common stock outstanding as of
September 13, 2006 and assumes the subsequent conversion of our issued secured
convertible notes and exercise of warrants by our selling stockholders.
9
OCTOBER 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on October 24, 2005
for the sale of (i) $800,000 in secured convertible notes and (ii) warrants to
buy 800,000 shares of our common stock, exercisable for five years from the date
of issuance at a purchase price of $0.10 per share of common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on October 24, 2005.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
selling stockholders' option, at the lower of (i) $0.06 or (ii) 50% of the
average of the three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. Accordingly, there is in fact no limit on the number of
shares into which the notes may be converted. As of September 13, 2006, the
average of the three lowest intraday trading prices for our common stock during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin Board
was $.04 and, therefore, the conversion price for the secured convertible notes
was $.02. Based on this conversion price, the $800,000 secured convertible
notes, excluding interest, were convertible into 40,000,000 shares of our common
stock.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock.
DECEMBER 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on December 28,
2005 for the sale of (i) $700,000 in secured convertible notes and (ii) warrants
to buy 700,000 shares of our common stock, exercisable for five years from the
date of issuance at a purchase price of $0.15 per share of common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on December 28, 2005.
The secured convertible notes bear interest at 8%, mature three years
from the date of issuance, and are convertible into our common stock, at the
selling stockholders' option, at the lower of (i) $0.10 or (ii) 45% of the
average of the three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. Accordingly, there is in fact no limit on the number of
shares into which the notes may be converted. As of September 13, 2006, the
average of the three lowest intraday trading prices for our common stock during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin Board
was $.04 and, therefore, the conversion price for the secured convertible notes
was $.018. Based on this conversion price, the $700,000 secured convertible
notes, excluding interest, were convertible into 38,888,889 shares of our common
stock.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock.
MARCH 2006 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on March 27, 2006
for the sale of (i) $500,000 in secured convertible notes and (ii) warrants to
buy 19,000,000 shares of our common stock, exercisable for five years from the
date of issuance at a purchase price of $0.10 per share of common stock.
10
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on March 27, 2006.
The secured convertible notes bear interest at 8%, mature three years
from the date of issuance, and are convertible into our common stock, at the
selling stockholders' option, at the lower of (i) $0.10 or (ii) 45% of the
average of the three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. Accordingly, there is in fact no limit on the number of
shares into which the notes may be converted. As of September 13, 2006, the
average of the three lowest intraday trading prices for our common stock during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin Board
was $.04 and, therefore, the conversion price for the secured convertible notes
was $.018. Based on this conversion price, the $500,000 secured convertible
notes, excluding interest, were convertible into 27,777,778 shares of our common
stock.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock.
JULY 2006 SECURITIES PURCHASE AGREEMENT
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
buy 15,000,000 shares of our common stock, exercisable for five years from the
date of issuance at a purchase price of $0.06 per share of common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on July 27, 2006.
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
selling stockholders' 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. Accordingly, there is in fact no limit on the number of
shares into which the notes may be converted. As of September 13, 2006, the
average of the three lowest intraday trading prices for our common stock during
the preceding 20 trading days as reported on the Over-The-Counter Bulletin Board
was $.04 and, therefore, the conversion price for the secured convertible notes
was $.02. Based on this conversion price, the $500,000 secured convertible
notes, excluding interest, were convertible into 25,000,000 shares of our common
stock.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a
complete description of the secured convertible notes.
11
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
RISKS RELATING TO OUR BUSINESS:
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We incurred net losses of $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.
12
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 September 13, 2006, we had 97,529,157 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 45,394,058, 75,000,000, 40,000,000, 38,888,889,
27,777,778 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.
13
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 September 13, 2006 of $0.05.
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% $ .0375 $ .01875 197,753,662 66.97%
50% $ .025 $ .0125 296,630,493 75.26%
75% $ .0125 $ .00625 593,260,986 85.88%
DECEMBER 2005 AND MARCH 2006 SECURED CONVERTIBLE NOTES, COMBINED
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 55% Issuable Stock
------- --------- ------------- ----------- -----------
25% $ .0375 $ .016875 71,111,112 42.17%
50% $ .025 $ .01125 106,666,667 52.24%
75% $ .0125 $ .005625 213,333,334 68.63%
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 55% 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.
14
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC
may not convert their secured convertible notes and/or exercise their warrants
if such conversion or exercise would cause them to own more than 4.9% of our
outstanding common stock, this restriction does not prevent AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II,
LLC from converting and/or exercising some of their holdings and then converting
the rest of their holdings. In this way, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC could
sell more than this limit while never holding more than this limit. There is no
upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
IN THE EVENT THAT OUR STOCK PRICE DECLINES, THE SHARES OF COMMON STOCK ALLOCATED
FOR CONVERSION OF THE SECURED CONVERTIBLE NOTES AND REGISTERED PURSUANT TO THIS
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.
15
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.
16
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.
17
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will not
receive any proceeds from the sale of shares of common stock in this offering.
However, we will receive the sale price of any common stock we sell to the
selling stockholders upon exercise of the warrants. In connection with the
securities purchase agreement dated October 24, 2005, we issued to the investors
800,000 warrants, which are exercisable at $0.03 per share for a period of five
years from issuance. If the investors were to exercise all 800,000 million
warrants issued pursuant to the securities purchase agreement, we would receive
$24,000. In the event that our stock price does not exceed the warrant exercise
price of $0.03 per share, it is unlikely that the investors would exercise the
warrants, in which case would we not receive any of the proceeds from the sale
of the warrants. In connection with the securities purchase agreement dated
December 28, 2005, we issued to the investors 700,000 warrants, which are
exercisable at $0.15 per share for a period of five years from issuance. If the
investors were to exercise all 700,000 million warrants issued pursuant to the
securities purchase agreement, we would receive $105,000. In the event that our
stock price does not exceed the warrant exercise price of $0.15 per share, it is
unlikely that the investors would exercise the warrants, in which case would we
not receive any of the proceeds from the sale of the warrants. In connection
with the securities purchase agreement dated March 27, 2006, we issued to the
investors 19,000,000 warrants, which are exercisable at $0.10 per share for a
period of five years from issuance. If the investors were to exercise all
19,000,000 million warrants issued pursuant to the securities purchase
agreement, we would receive $1,900,000. In the event that our stock price does
not exceed the warrant exercise price of $0.10 per share, it is unlikely that
the investors would exercise the warrants, in which case would we not receive
any of the proceeds from the sale of the warrants. In connection with the
securities purchase agreement dated July 27, 2006, we issued to the investors
15,000,000 warrants, which are exercisable at $0.06 per share for a period of
five years from issuance. If the investors were to exercise all 15,000,000
million warrants issued pursuant to the securities purchase agreement, we would
receive $900,000. In the event that our stock price does not exceed the warrant
exercise price of $0.06 per share, it is unlikely that the investors would
exercise the warrants, in which case would we not receive any of the proceeds
from the sale of the warrants.
We expect to use the proceeds received from the exercise of the
warrants, if any, for general working capital purposes. However, AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., and New Millennium
Partners II, LLC will be entitled to exercise all 36,500,000 warrants on a
cashless basis at any time if the shares of common stock underlying the warrants
are not then registered pursuant to an effective registration statement. In the
event that AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd.,
or New Millennium Partners II, LLC exercise the warrants on a cashless basis,
then we will not receive any proceeds from the exercise of those warrants. In
addition, we have received gross proceeds $2,500,000 from the sale of the
secured convertible notes. The proceeds received from the sale of the secured
convertible notes will be used for business development purposes, working
capital needs, pre-payment of interest, payment of consulting and legal fees and
purchasing inventory.
OCTOBER 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on October 24, 2005
for the sale of (i) $800,000 in secured convertible notes and (ii) warrants to
purchase 800,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on October 24, 2005.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.06; or
o 50% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
18
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.06 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.03. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon
default under the terms of secured convertible notes. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date of the Securities Purchase
Agreement. In the event that we breach any representation or warranty regarding
the condition of our company as set forth in the Securities Purchase Agreement,
we are liable to pay liquidated damages in shares or cash, at the election of
the investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest. In the event that
we breach any covenant as set forth in the Securities Purchase Agreement,
including the failure to comply with blue sky laws, timely file all public
reports, use the proceeds from the sale of the secured convertible notes in the
agreed upon manner, obtain written consent from the investors to negotiate or
contract with a party to for additional financing, reserve and have authorized
the required number of shares of common stock or the maintenance of our shares
of common stock on an exchange or automated quotation system, then we are liable
to pay liquidated damages in shares or cash, at the election of the investors,
equal to three percent of the outstanding amount of the secured convertible
notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the
secured convertible notes) under the secured convertible
notes;
o Any representation or warranty we made in the Security
Agreement or in the Intellectual Property Security Agreement
shall prove to have been incorrect in any material respect
when made;
o The failure by us to observe or perform any of our obligations
under the Security Agreement or in the Intellectual Property
Security Agreement for ten (10) days after receipt of notice
of such failure from the investors; and
o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
19
o Do not issue shares of common stock upon receipt of a
conversion notice;
o Fail to file a registration statement within 45 days after
October 24, 2005 or fail to have the registration statement
effective within 90 days after October 24, 2005;
o Breach any material covenant or other material term or
condition in the secured convertible notes or the Securities
Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or
trustee for us or any of our subsidiaries or for a substantial
part of our of our subsidiaries' property or business, or such
a receiver or trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be
entered or filed against us or any of our subsidiaries or any
of our property or other assets for more than $50,000, and
shall remain unvacated, unbonded or unstayed for a period of
twenty (20) days unless otherwise consented to by the
investors;
o Institute or have instituted against us or any of our
subsidiaries any bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under
any bankruptcy law or any law for the relief of debtors;
o Fail to maintain the quotation of our common stock on one of
the OTCBB or an equivalent replacement exchange, the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York
Stock Exchange, or the American Stock Exchange; or
o Default under any other secured convertible note issued
pursuant to the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose,
enter, with the aid and assistance of any person, any premises
where the collateral, or any part thereof, is or may be placed
and remove the same, and we shall assemble the collateral and
make it available to the investors at places which the
investors shall reasonably select, whether at our premises or
elsewhere, and make available to the investors, without rent,
all of our respective premises and facilities for the purpose
of the investors taking possession of, removing or putting the
collateral in saleable or disposable form; and
o To operate our business using the collateral and shall have
the right to assign, sell, lease or otherwise dispose of and
deliver all or any part of the collateral, at public or
private sale or otherwise, either with or without special
conditions or stipulations, for cash or on credit or for
future delivery, in such parcel or parcels and at such time or
times and at such place or places, and upon such terms and
conditions as the investors may deem commercially reasonable,
all without (except as shall be required by applicable statute
and cannot be waived) advertisement or demand upon or notice
to us or our right of redemption, which we expressly waived.
Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable
law which cannot be waived, purchase all or any part of the
collateral being sold, free from and discharged of all trusts,
claims, right of redemption and equities by us, which we
waived and released.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.03 per share. The selling stockholders will be
entitled to exercise the warrants on a cashless basis at any time if the shares
of common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In the event that the selling stockholder
exercises the warrants on a cashless basis, then we will not receive any
proceeds. In addition, the exercise price of the warrants will be adjusted in
the event we issue common stock at a price below market, with the exception of
any securities issued as of the date of this warrant or issued in connection
with the secured convertible notes issued pursuant to the Securities Purchase
Agreement, dated October 24, 2005.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
20
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related
documents are incorporated by reference as exhibits to our Form SB-2
registration statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
notes is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $800,000 of notes on September 13, 2006, a conversion price of
$0.02 per share, the number of shares issuable upon conversion would be:
$800,000/$.02= 40,000,000 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of September 13, 2006 of $0.05.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------- --------- ------------- ------------- -----------
25% $ .0375 $ .01875 42,666,667 30.43%
50% $ .025 $ .0125 64,000,000 39.62%
75% $ .0125 $ .00625 128,000,000 56.76%
DECEMBER 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on December 28,
2005 for the sale of (i) $700,000 in secured convertible notes and (ii) warrants
to purchase 700,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on December 28, 2005.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.10; or
o 45% 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.
21
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.10 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.10. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon
default under the terms of secured convertible notes. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date of the Securities Purchase
Agreement. In the event that we breach any representation or warranty regarding
the condition of our company as set forth in the Securities Purchase Agreement,
we are liable to pay liquidated damages in shares or cash, at the election of
the investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest. In the event that
we breach any covenant as set forth in the Securities Purchase Agreement,
including the failure to comply with blue sky laws, timely file all public
reports, use the proceeds from the sale of the secured convertible notes in the
agreed upon manner, obtain written consent from the investors to negotiate or
contract with a party to for additional financing, reserve and have authorized
the required number of shares of common stock or the maintenance of our shares
of common stock on an exchange or automated quotation system, then we are liable
to pay liquidated damages in shares or cash, at the election of the investors,
equal to three percent of the outstanding amount of the secured convertible
notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the
secured convertible notes) under the secured convertible
notes;
o Any representation or warranty we made in the Security
Agreement or in the Intellectual Property Security Agreement
shall prove to have been incorrect in any material respect
when made;
o The failure by us to observe or perform any of our obligations
under the Security Agreement or in the Intellectual Property
Security Agreement for ten (10) days after receipt of notice
of such failure from the investors; and
o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
22
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a
conversion notice;
o Fail to file a registration statement within 45 days after
December 28, 2005 or fail to have the registration statement
effective within 90 days after December 28, 2005;
o Breach any material covenant or other material term or
condition in the secured convertible notes or the Securities
Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or
trustee for us or any of our subsidiaries or for a substantial
part of our of our subsidiaries' property or business, or such
a receiver or trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be
entered or filed against us or any of our subsidiaries or any
of our property or other assets for more than $50,000, and
shall remain unvacated, unbonded or unstayed for a period of
twenty (20) days unless otherwise consented to by the
investors;
o Institute or have instituted against us or any of our
subsidiaries any bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under
any bankruptcy law or any law for the relief of debtors;
o Fail to maintain the quotation of our common stock on one of
the OTCBB or an equivalent replacement exchange, the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York
Stock Exchange, or the American Stock Exchange; or
o Default under any other secured convertible note issued
pursuant to the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose,
enter, with the aid and assistance of any person, any premises
where the collateral, or any part thereof, is or may be placed
and remove the same, and we shall assemble the collateral and
make it available to the investors at places which the
investors shall reasonably select, whether at our premises or
elsewhere, and make available to the investors, without rent,
all of our respective premises and facilities for the purpose
of the investors taking possession of, removing or putting the
collateral in saleable or disposable form; and
o To operate our business using the collateral and shall have
the right to assign, sell, lease or otherwise dispose of and
deliver all or any part of the collateral, at public or
private sale or otherwise, either with or without special
conditions or stipulations, for cash or on credit or for
future delivery, in such parcel or parcels and at such time or
times and at such place or places, and upon such terms and
conditions as the investors may deem commercially reasonable,
all without (except as shall be required by applicable statute
and cannot be waived) advertisement or demand upon or notice
to us or our right of redemption, which we expressly waived.
Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable
law which cannot be waived, purchase all or any part of the
collateral being sold, free from and discharged of all trusts,
claims, right of redemption and equities by us, which we
waived and released.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.15 per share. The selling stockholders will be
entitled to exercise the warrants on a cashless basis at any time if the shares
of common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In the event that the selling stockholder
exercises the warrants on a cashless basis, then we will not receive any
proceeds. In addition, the exercise price of the warrants will be adjusted in
the event we issue common stock at a price below market, with the exception of
any securities issued as of the date of this warrant or issued in connection
with the secured convertible notes issued pursuant to the Securities Purchase
Agreement, dated December 28, 2005.
23
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related
documents are incorporated by reference as exhibits to our Form SB-2
registration statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
notes is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $700,000 of notes on September 13, 2006, a conversion price of
$0.018 per share, the number of shares issuable upon conversion would be:
$700,000/$.018= 38,888,889 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of September 13, 2006 of $0.05.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 55% Issuable Stock
------- --------- ------------- ------------- -----------
25% $ .0375 $ .016875 41,481,482 29.84%
50% $ .025 $ .01125 62,222,223 38.95%
75% $ .0125 $ .005625 124,444,446 56.06%
MARCH 2006 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on March 27, 2006
for the sale of (i) $500,000 in secured convertible notes and (ii) warrants to
purchase 19,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on March 27, 2006.
The secured convertible notes bear interest at 8%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.10; or
24
o 45% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.10 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.10. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon
default under the terms of secured convertible notes. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date of the Securities Purchase
Agreement. In the event that we breach any representation or warranty regarding
the condition of our company as set forth in the Securities Purchase Agreement,
we are liable to pay liquidated damages in shares or cash, at the election of
the investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest. In the event that
we breach any covenant as set forth in the Securities Purchase Agreement,
including the failure to comply with blue sky laws, timely file all public
reports, use the proceeds from the sale of the secured convertible notes in the
agreed upon manner, obtain written consent from the investors to negotiate or
contract with a party to for additional financing, reserve and have authorized
the required number of shares of common stock or the maintenance of our shares
of common stock on an exchange or automated quotation system, then we are liable
to pay liquidated damages in shares or cash, at the election of the investors,
equal to three percent of the outstanding amount of the secured convertible
notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the
secured convertible notes) under the secured convertible
notes;
o Any representation or warranty we made in the Security
Agreement or in the Intellectual Property Security Agreement
shall prove to have been incorrect in any material respect
when made;
o The failure by us to observe or perform any of our obligations
under the Security Agreement or in the Intellectual Property
Security Agreement for ten (10) days after receipt of notice
of such failure from the investors; and
o Any breach of, or default under, the Warrants.
An event of default under the secured convertible notes occurs if we:
25
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a
conversion notice;
o Fail to file a registration statement within 45 days after
March 27, 2006 or fail to have the registration statement
effective within 90 days after March 27, 2006;
o Breach any material covenant or other material term or
condition in the secured convertible notes or the Securities
Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or
trustee for us or any of our subsidiaries or for a substantial
part of our of our subsidiaries' property or business, or such
a receiver or trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be
entered or filed against us or any of our subsidiaries or any
of our property or other assets for more than $50,000, and
shall remain unvacated, unbonded or unstayed for a period of
twenty (20) days unless otherwise consented to by the
investors;
o Institute or have instituted against us or any of our
subsidiaries any bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under
any bankruptcy law or any law for the relief of debtors;
o Fail to maintain the quotation of our common stock on one of
the OTCBB or an equivalent replacement exchange, the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York
Stock Exchange, or the American Stock Exchange; or
o Default under any other secured convertible note issued
pursuant to the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose,
enter, with the aid and assistance of any person, any premises
where the collateral, or any part thereof, is or may be placed
and remove the same, and we shall assemble the collateral and
make it available to the investors at places which the
investors shall reasonably select, whether at our premises or
elsewhere, and make available to the investors, without rent,
all of our respective premises and facilities for the purpose
of the investors taking possession of, removing or putting the
collateral in saleable or disposable form; and
o To operate our business using the collateral and shall have
the right to assign, sell, lease or otherwise dispose of and
deliver all or any part of the collateral, at public or
private sale or otherwise, either with or without special
conditions or stipulations, for cash or on credit or for
future delivery, in such parcel or parcels and at such time or
times and at such place or places, and upon such terms and
conditions as the investors may deem commercially reasonable,
all without (except as shall be required by applicable statute
and cannot be waived) advertisement or demand upon or notice
to us or our right of redemption, which we expressly waived.
Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable
law which cannot be waived, purchase all or any part of the
collateral being sold, free from and discharged of all trusts,
claims, right of redemption and equities by us, which we
waived and released.
26
The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.10 per share. The selling stockholders will be
entitled to exercise the warrants on a cashless basis at any time if the shares
of common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In the event that the selling stockholder
exercises the warrants on a cashless basis, then we will not receive any
proceeds. In addition, the exercise price of the warrants will be adjusted in
the event we issue common stock at a price below market, with the exception of
any securities issued as of the date of this warrant or issued in connection
with the secured convertible notes issued pursuant to the Securities Purchase
Agreement, dated March 27, 2006.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related
documents are incorporated by reference as exhibits to our Form SB-2
registration statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
notes is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $500,000 of notes on September 13, 2006, a conversion price of
$0.018 per share, the number of shares issuable upon conversion would be:
$500,000/$.018= 27,777,778 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of September 13, 2006 of $0.05.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 55% Issuable Stock
------- --------- ------------- ------------- -------------
25% $ .0375 $ .016875 29,629,630 23.30%
50% $ .025 $ .01125 44,444,445 31.30%
75% $ .0125 $ .005625 88,888,890 47.68%
JULY 2006 SECURITIES PURCHASE AGREEMENT
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.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on July 27, 2006.
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:
27
o $0.10; or
o 50% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.10 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.10. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon
default under the terms of secured convertible notes. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date of the Securities Purchase
Agreement. In the event that we breach any representation or warranty regarding
the condition of our company as set forth in the Securities Purchase Agreement,
we are liable to pay liquidated damages in shares or cash, at the election of
the investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest. In the event that
we breach any covenant as set forth in the Securities Purchase Agreement,
including the failure to comply with blue sky laws, timely file all public
reports, use the proceeds from the sale of the secured convertible notes in the
agreed upon manner, obtain written consent from the investors to negotiate or
contract with a party to for additional financing, reserve and have authorized
the required number of shares of common stock or the maintenance of our shares
of common stock on an exchange or automated quotation system, then we are liable
to pay liquidated damages in shares or cash, at the election of the investors,
equal to three percent of the outstanding amount of the secured convertible
notes per month plus accrued and unpaid interest.
In connection with the Securities Purchase Agreement, we executed a
Security Agreement and an Intellectual Property Security Agreement in favor of
the investors granting them a first priority security interest in all of our
goods, inventory, contractual rights and general intangibles, receivables,
documents, instruments, chattel paper, and intellectual property. Under the
Security Agreement and Intellectual Property Security Agreement, events of
default occur upon:
o The occurrence of an event of default (as defined in the
secured convertible notes) under the secured convertible
notes;
o Any representation or warranty we made in the Security
Agreement or in the Intellectual Property Security Agreement
shall prove to have been incorrect in any material respect
when made;
o The failure by us to observe or perform any of our obligations
under the Security Agreement or in the Intellectual Property
Security Agreement for ten (10) days after receipt of notice
of such failure from the investors; and
o Any breach of, or default under, the Warrants.
28
An event of default under the secured convertible notes occurs if we:
o Fail to pay the principal or interest when due;
o Do not issue shares of common stock upon receipt of a
conversion notice;
o Fail to file a registration statement within 45 days after
July 27, 2006 or fail to have the registration statement
effective within 90 days after July 27, 2006;
o Breach any material covenant or other material term or
condition in the secured convertible notes or the Securities
Purchase Agreement;
o Breach any representation or warranty made in the Securities
Purchase Agreement or other document executed in connection
therewith;
o Apply for or consent to the appointment of a receiver or
trustee for us or any of our subsidiaries or for a substantial
part of our of our subsidiaries' property or business, or such
a receiver or trustee shall otherwise be appointed;
o Have any money judgment, writ or similar process shall be
entered or filed against us or any of our subsidiaries or any
of our property or other assets for more than $50,000, and
shall remain unvacated, unbonded or unstayed for a period of
twenty (20) days unless otherwise consented to by the
investors;
o Institute or have instituted against us or any of our
subsidiaries any bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under
any bankruptcy law or any law for the relief of debtors;
o Fail to maintain the quotation of our common stock on one of
the OTCBB or an equivalent replacement exchange, the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York
Stock Exchange, or the American Stock Exchange; or
o Default under any other secured convertible note issued
pursuant to the Securities Purchase Agreement.
Upon occurrence of any event of default under either the Security
Agreement or the Intellectual Property Security Agreement, the investors shall
have the right to exercise all of the remedies conferred under the Security
Agreement, the Intellectual Property and under the secured convertible notes,
and the investors shall have all the rights and remedies of a secured party
under the Uniform Commercial Code and/or any other applicable law (including the
Uniform Commercial Code of any jurisdiction in which any collateral is then
located). The investors shall have the following rights and powers:
o To take possession of the collateral and, for that purpose,
enter, with the aid and assistance of any person, any premises
where the collateral, or any part thereof, is or may be placed
and remove the same, and we shall assemble the collateral and
make it available to the investors at places which the
investors shall reasonably select, whether at our premises or
elsewhere, and make available to the investors, without rent,
all of our respective premises and facilities for the purpose
of the investors taking possession of, removing or putting the
collateral in saleable or disposable form; and
o To operate our business using the collateral and shall have
the right to assign, sell, lease or otherwise dispose of and
deliver all or any part of the collateral, at public or
private sale or otherwise, either with or without special
conditions or stipulations, for cash or on credit or for
future delivery, in such parcel or parcels and at such time or
times and at such place or places, and upon such terms and
conditions as the investors may deem commercially reasonable,
all without (except as shall be required by applicable statute
and cannot be waived) advertisement or demand upon or notice
to us or our right of redemption, which we expressly waived.
Upon each such sale, lease, assignment or other transfer of
collateral, the investors may, unless prohibited by applicable
law which cannot be waived, purchase all or any part of the
collateral being sold, free from and discharged of all trusts,
claims, right of redemption and equities by us, which we
waived and released.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.06 per share. The selling stockholders will be
entitled to exercise the warrants on a cashless basis at any time if the shares
of common stock underlying the warrants are not then registered pursuant to an
effective registration statement. In the event that the selling stockholder
exercises the warrants on a cashless basis, then we will not receive any
proceeds. In addition, the exercise price of the warrants will be adjusted in
the event we issue common stock at a price below market, with the exception of
any securities issued as of the date of this warrant or issued in connection
with the secured convertible notes issued pursuant to the Securities Purchase
Agreement, dated July 27, 2006.
29
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
The conversion price of the secured convertible notes and the exercise
price of the warrants may be adjusted in certain circumstances such as if we pay
a stock dividend, subdivide or combine outstanding shares of common stock into a
greater or lesser number of shares, or take such other actions as would
otherwise result in dilution of the selling stockholder's position.
The selling stockholders have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them and their affiliates in the aggregate after such conversion
or exercise does not exceed 4.99% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreements and related
documents are incorporated by reference as exhibits to our Form SB-2
registration statement relating to this prospectus.
SAMPLE CONVERSION CALCULATION
The number of shares of common stock issuable upon conversion of the
notes is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $500,000 of notes on September 13, 2006, a conversion price of
$0.02 per share, the number of shares issuable upon conversion would be:
$500,000/$.02= 25,000,000 shares
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of September 13, 2006 of $0.05.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 55% Issuable Stock
------- --------- ------------- ----------- -----------
25% $ .0375 $ .01875 26,666,667 21.47%
50% $ .025 $ .0125 40,000,000 29.08%
75% $ .0125 $ .00625 80,000,000 45.06%
30
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"CYBL".
For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High($) Low ($)
------- -------
2004
First Quarter 0.53 0.19
Second Quarter 0.85 0.27
Third Quarter 0.55 0.23
Fourth Quarter 0.35 0.06
2005
First Quarter 0.07 0.02
Second Quarter 0.20 0.02
Third Quarter 0.15 0.05
Fourth Quarter 0.15 0.06
2006
First Quarter 0.12 0.06
Second Quarter 0.10 0.05
Third Quarter (1) 0.07 0.04
(1) As of September 13, 2006.
HOLDERS
As of September 13, 2006, we had approximately 209 holders of our
common stock. The number of record holders was determined from the records of
our transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is Pacific
Stock Transfer Company, 500 E. Warm Springs Road, Suite 240, Las Vegas, Nevada
89119.
We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends to stockholders in the
foreseeable future. In addition, any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements, and such
other factors as the Board of Directors deem relevant.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of
our financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
OVERVIEW
We are 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.
32
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.
33
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.
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.
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our financial statements; we believe the following critical accounting
policies involve the most complex, difficult and subjective estimates and
judgments:
o stock-based compensation; and
o revenue recognition.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148 - Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS
No. 123 - Accounting for Stock-Based Compensation, providing alternative methods
of voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2002.
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by APB No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the provisions of APB No. 25, compensation expense is measured at the
grant date for the difference between the fair value of the stock and the
exercise price.
REVENUE RECOGNITION
For revenue from product sales, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
34
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 COMPARED.
Revenues for the year ended December 31, 2005 were $54,523. This
compares to revenues of $23,803 for the year ended December 31, 2004.
Cost of goods sold were $235,767 for 2005 compared with $160,260 for
2004. Much of the design effort on the ELS product was costed into the product
installation for the City of Cleveland.
Operating expenses for the year ended December 31, 2005 were
$2,911,761 compared with $3,364,159 for the year ended December 31, 2004.
Included in expenses for 2005 was $217,798 for consulting services compared with
$1,382,387 for the previous year. Most of this expense was the result of issuing
common stock of the Company, recorded at the market price on the date of the
awards, in lieu of cash payments. The services provided included product design,
market development and capital fund-raising services.
MARKET FUND SERVICES
DEVELOPMENT RAISING PERFORMED
---------- --------- --------------------
CASH PAYMENTS
Dan Neustedter 645.00 Business Development
Geiger & Associates 15,000.00 Business Development
K3 Enterprises, Inc. 3,660.00 Business Development
STOCK PAYMENTS
Michael Goldberg 21,000.00 Legal Services
Robert Rubin 3,000.00 Business Development
Jay Isley 5,000.00 Engineering
3CD Consulting, Inc. 97,000.00 Business Development
Sichenzia Ross etal. 58,333.30 Legal Services
Warrants Jay Isley 14,160.00 Engineering
159,465.00 58,333.30
35
12/31/2005 12/31/2004
-------------------------------
Salaries & Benefits 1,046,548 977,529
Marketing and advertising 276,714 109,651
Rent 52,706 35,954
Insurance 55,257 8,389
Depreciation and amortization 25,769 47,686
Research and development 30,544 0
Legal Expense 229,175 64,229
Accounting Services 146,901 63,915
Investor Relations 27,758 62,354
Travel, Living and Entertainment 150,909 167,035
Office Expenses 152,064 53,609
-------------------------------
2,693,963 1,981,772
Operating expenses for 2005 also include $499,618 representing costs
incurred in the design and pre-production of three products to be marketed
during the second quarter of 2005. Accounting practices have historically
attempted to match revenues and costs; however, in compliance with the
requirements of FASB number 2, we have taken these costs to expense during the
year 2005.
Interest expense for 2005 was $1,623,781 compared to $325,840 for
2004. Included in interest expense for 2005 is $1,206,487 which was booked to
recognize the imbedded beneficial conversion feature of the $4,500,000
convertible notes payable entered into during the 3rd and 4th quarters of 2004
and 2005.
The net loss realized for 2005 was $9,410,657, or $0.17 per share on
an average of 54,490,102 shares outstanding and compares to net income of
$3,103,049, or $0.19 per share on an average of 16,701,174 shares outstanding
for the year 2004.
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.
36
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.
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.
37
We will still need additional investments in order to continue
operations to cash flow break even. Additional investments are being sought, but
we cannot guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
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.
38
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.
39
BUSINESS
OVERVIEW
We are a Nevada corporation that was incorporated on May 17, 2000. We
were founded to design, develop, market and sell advanced lighting systems that
utilize light emitting diodes as illumination elements. White diodes are a
relatively new phenomenon that offer major advances in illumination technology.
Our diodes consume 92% less energy than incandescent counterparts to produce
comparable light output. In electrochemical (battery powered) applications, this
diminution of energy consumption positions our lighting solutions as more
durable and reliable than other interim lighting alternatives. In standard
alternating current electrical applications, the calculated life of LEDs as
lighting elements is over 20 years versus 750 hours for traditional incandescent
light bulbs. These exceptional performance characteristics, diminutive energy
consumption and extended life, have prompted diode implementation in traffic
lights and automotive brake lights, but have not yet significantly occurred in
our area of focus, diodal illumination (tm). Diodal illumination is the
production of light through the use of white light emitting diodes. A light
emitting diode is a chemical compound that produces a visible light when an
electrical current is applied. This production of light through a diode is
contrasted with light from a typical light bulb, in which light is produced as a
by-product of a burning filament contained within a vacuum globe. The diode uses
92% less energy to produce comparable light to that of a traditional light bulb.
To address the tremendous opportunity in the $12 billion general
lighting market, we have developed a line of LED lighting products and fixtures
for residential, commercial, military and homeland security markets, including
kitchen and closet task lighting and emergency lighting products. We design and
engineer products that adapt technology advancements from semiconductor
manufacturers, including Cree, Inc., for use by the general public and military.
We have created breakthrough solid-state lighting technology that
provides energy efficient and cost effective lighting solutions. Several
products are designed to address emergencies, such as power outages and critical
security lighting needs. Other products bring "heatless" light into the home for
closets, cabinets, bookcases and counters. The solid-state semiconductors,
trademarked by Cyberlux as diodal(TM) lighting elements, consume 92 percent less
energy than conventional incandescent lighting elements and perform for more
than 10 years in contrast to 750 hours for traditional light bulbs.
With the exception of our initial Home Safety Light product (the first
generation of our current EverOn(TM) product), 2005 marked the first year for
all of our current products and the first year of significant revenues. With
established and developing sales channels and a robust range of products now
available for the market, we believe that we are poised to seize significant
opportunities in the growing solid-state lighting market in 2006 and beyond.
MARKET OPPORTUNITY
Light Emitting Diodes, or LEDs, are leading to a fundamental shift in the
lighting industry, creating market competition in ways that challenge
traditional players, including General Electric. This shift represents a similar
evolution driven by solid-state technology in semiconductors and TVs. What has
been a vertically-integrated industry dominated by giants is now becoming more
"horizontal," with layers that resemble the structure of the computer industry.
The cost of LEDs is decreasing as technology advances are made, while the
brightness and quality of light produced by LEDs is increasing. Opportunities
are emerging for us to develop next-generation lighting solutions and accelerate
adoption of LED lighting, as new market prospects are unfolding.
According to market research firm iSuppli, the market for LEDs for
general illumination applications will expand to $875 million in 2010, rising at
a Compound Annual Growth Rate (CAGR) of 52.3 percent from $94 million in 2004.
By 2010, LEDs will have grown to account for a significant portion of the
worldwide general illumination market, which amounted to $12 billion in 2004.
This shift in the lighting industry over the next 10 years will cause a
fundamental change in the way lighting is installed, maintained and operated,
both in terms of energy efficiency and longevity. For example, our Aeon(TM)
product for under-cabinet and task lighting comes with a 15-year guarantee on
the life of the lighting element. That is fundamentally different from anything
consumers have experienced before. It represents a trend that will include a
transforming of lighting fixtures along with a change to semiconductor
solid-state lighting elements to replace incandescent and fluorescent bulbs.
40
Energy efficiency is also a market driver. The United States Congress
recently passed the "Next Generation Lighting Initiative Act", which recognizes
the remarkable beneficial impact of solid-state lighting on the global economy.
The Act states in its preamble, "...it is in the economic and energy security
interest of the United States to encourage the development of white light
emitting diodes by providing financial assistance to firms, or a consortium of
firms, and supporting research organizations in the lighting development
sector." We began our research and development activity in practical
applications for inorganic white light emitting diodes years before the Senate
Bill was introduced.
LED solid-state lighting technology and products address a key
component in the Federal Energy Policy adopted in August 2005. The Energy Policy
was supported by the National Electrical Contractors Association - the voice of
the $100 billion industry responsible for bringing lighting, power, and
communications to buildings and communities across the United States.
Through $14.5 billion in new tax credits and deductions, the policy
emphasizes a renewed commitment to innovation to supplement a revitalization of
the nation's overburdened electrical infrastructure, and encourages energy
efficiency and modernization in federal and private buildings. By addressing
incentives for the production and use of alternative energy sources, including
solid-state LED lighting technology, the federal government will help drive the
adoption of next-generation lighting solutions.
PRINCIPAL PRODUCTS
EMERGENCY, SECURITY AND COMMERCIAL LIGHTING PRODUCTS
Every time a hurricane or ice storm hits, causing widespread power
outages that last for days, weeks or months, the absence of realistic emergency
lighting solutions becomes more evident. The need can strike at any time. The
power grid failure and subsequent power outage which darkened the Midwest and
spread to Northeastern United States and parts of Canada in August of 2003,
dramatized that nature is not the only culprit. The term "emergency lighting" is
typically applied to short-term evacuation lights in public buildings which
perform for 60 to 90 minutes to allow occupants to flee a burning building.
Electrical power grid failure is a far different problem than that of evacuating
a building. We have solved the problem of grid failure blackouts with long-term
emergency lighting.
Reliabright(TM)
The Reliabright(TM) products provide 80 hours of bright light from one
battery charge. The system is activated by proprietary sensors that detect a
loss of power in the building's electrical system. This breakthrough in light
management has enabled us to apply our technology and develop new products to
solve problems in the transportation industry, in heatless lighting solutions
for homeowners, and security solutions for the U.S. Military.
In 2005, we installed the Reliabright(TM) emergency lighting system in
the Emergency Situation Room at Kings Park High School, Kings Park, New York.
This pilot program demonstrates the potential to use LED solid-state lighting to
prepare schools and other shelters throughout the county to provide assistance
to communities in the aftermath of natural disasters, terrorist attacks,
electric grid failures and any other calamity that can cause widespread
electricity blackouts.
In a similar pilot project, we installed a solid-state semiconductor
lighting system in the emergency management "war room" for the City of
Cleveland. That project was in response to the widespread power blackouts in
2003.
41
Military Portable Boundary Security System
Reliabright(TM) products also represent the foundation technology for
many of our lighting products in development, including an innovative Portable
Covert Illumination System for security lighting for the U.S. Military. We are
working with Concurrent Technologies Corporation (CTC) to develop an LED
solution for a lightweight, portable lighting system to provide security for
U.S. Air Force aircraft.
The same technology can be used for commercial and emergency response
needs, such as quickly providing widespread lighting solutions in shelters
during events similar to the problems at the New Orleans Superdome in the
aftermath of Hurricane Katrina.
EverOn(TM)
The EverOn(TM) product is the latest in solid-state lighting technology
and provides more than 500 hours of light at the low, amber setting using four
AA batteries and is 90 percent more energy efficient than conventional lanterns
or incandescent flashlights. The EverOn(TM) 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. Designed originally
to provide consumers with portable, long-lasting, emergency lighting during the
hurricane season, the new EverOn(TM) is a sturdy, virtually indestructible,
lighting product that provides over 500 hours of light on the low, amber
setting, 60 hours of comfortable room-filling light on the medium setting and
over 30 hours of intensely bright white light on the highest setting, all in a 7
inch by 3.5 inch by 2.4 inch package.
Emergency Management officials in Collier County, Fla. relied on the
Home Safety Light, the previous version of the EverOn(TM), as an emergency
lighting source in hurricane shelters and for victims needing medical assistance
in the aftermath of Hurricane Dennis in July 2005. In August, Collier County
officials announced that `they have listed the EverOn(TM) Emergency Light to be
a standard product in their disaster relief inventory.
The EverOn(TM) product builds on the demonstrated success of our
original Home Safety Light product, which was launched on QVC in October of 2003
and generated over $8,000 per minute in sales. EverOn(TM), which is over 40
percent more efficient and 30 percent brighter than the original Home Safety
Light product, is expected to be sold on QVC in the near future.
RelyOn(TM)
The RelyOn(TM) ultra-bright light with power plant is a new product
designed to provide homeowners and professionals with a portable, long-lasting
work and emergency light. RelyOn(TM) is the first product to use Cree's latest
3-watt solid-state lighting technology, providing superior performance over
conventional lighting products
Delivering more than 60 hours of light on a single charge, the
RelyOn(TM) can be recharged from a wall outlet or a vehicle charging port
(cigarette lighter port) using included AC and DC power adapters. As a power
plant, the RelyOn(TM) can recharge mobile phones and other 12-volt DC devices
through a built-in power port.
The powerful, solid-state semiconductor light head, featuring three
Cree 3-watt XLamp(TM) 7090 high power white LEDs, provides over 250 lumens and
may be focused as an intense spotlight beam or adjusted to generate a blanket of
light similar to a table lamp. The intensity of the light can be adjusted for
both spotlight and floodlight settings. A digital display shows the remaining
hours of light available on the existing charge.
RESIDENTIAL LIGHTING
Aeon
The Aeon products bring solid-state lighting into the residential and
commercial market for use in closets, cabinet interiors, bookcases,
under-cabinet lighting and kitchen counters. The Aeon task and accent lighting
products are made with solid-state, light-emitting diodes and do not require
bulbs. The result is a product that is maintenance-free, "cool to the touch"with
long-lasting energy-efficiency, including a 15-year guarantee that the lighting
elements will not need to be replaced.
42
It can be set on low, medium and high levels of intensity, and because
of its sleek, thin fixture, it requires a much less intrusive trim line rather
than the thicker trim line that is needed to block a direct view of a
fluorescent light.
We believe that Aeon has the potential to become the favorite of
kitchen and interior designers due to its remarkable performance characteristics
of several optional shades of white light, three levels of light intensity and
its "cool to the touch" safety feature. The choice of electrical connections
(plug-in, hard-wired or battery powered) adds to the fixture's flexibility.
SPECIALTY LIGHTING
KeOn(TM) KeyCap
The KeOn(TM) KeyCap is the practical lighting solution for every
consumer who carries keys. Each patented KeOn(TM) is a sturdy elastic surround
that fits standard key heads and delivers a bright beam of light down the key
shaft. When its miniaturized button is depressed, the KeOn(TM) KeyCap directs
light precisely into the intended keyhole or other targeted surfaces.
DISTRIBUTION METHODS OF OUR PRODUCTS
Consistent with our sales objectives, the reliable manufacture of
proprietary component parts and assembly of finished products required exacting
coordination of resources to provide detailed working drawings to tool
manufacturers for injection molded parts and optics; precise circuitry diagrams
to receive diodes, resistors and capacitors into the electronics platform;
source identification for volume supplies of batteries and diodes; packaging
considerations for presentation of product and corresponding dimensions of
containment's for shipping and display; and an experienced contract assembly
organization with an extensive infrastructure capable of collation and inventory
of all component parts.
During the Fall of 2000, we identified Shelby County Community
Services, Shelbyville, Illinois, as a contract manufacture and assembly
organization that was positioned to meet our requirements. Shelby County
Community Services has over a decade of successful performance on behalf of
Fortune 100 companies and represented the quality of management, performance and
fiscal stability that we sought to employ in the production process.
We have a Proprietary Product Manufacturing Agreement with Shelby
County Community Services that provides for Shelby County Community Services to
assemble, test, package, warehouse finished good inventory, palletize and ship
per purchase orders for shipment FOB Shelbyville. In the Summer of 2004, we
renewed our relationship with Shelby County Community Services. Shelby County
Community Services will continue to serve as the warehousing and distribution
center for our products, which are to be manufactured abroad. Shelby County
Community Services no longer assembles or tests our products. Their role now
only involves receiving shipments of our goods from our contract manufacturers,
warehousing our products and shipping them to our customers. Shelby County
Community Services also coordinates customs protocols and manages incoming
inventories.
Sales are made through our websites, on-air marketing on QVC and
through distributor agreements we have with various vendors. Our internet site
is serviced by Shelby County Community Services through a fulfillment operations
agreement whereby Shelby County Community Services receives a daily batched
summary of internet sales through an email link established by us and United
Parcel Service. The software validates the address of the customer and advises
shipping mode (next day, two day or ground), computes shipping and handling
charges then prints the appropriate waybill at the shipping office of Shelby
County Community Services. Packages are shipped within 24 hours of receipt of
the email summary of business for the preceding day's orders. Shelby County
Community Services coordinates materials inventory with our approved vendors
based upon purchase orders or blanket orders for products.
43
Our internal engineering staff provides detailed working drawings for
injection molded parts to tool manufacturers. Similarly, our proprietary
circuitry design is managed by our internal engineering staff, and we have
contracted with Ningbo Ningshing International, Inc. of Ningbo, China, which
manufactures our product components and ships them to SCCS where the product
components are assembled, packaged, warehoused and shipped. The initial
production capacity at SCCS is 80,000 product units per month, which can be
increased by 50% with a four month lead time to undertake expansion of
facilities.
We have engaged Philippe Becker Design, Inc. to produce, coordinate and
manage our corporate and product marketing activities. Philippe Becker Design,
Inc . has broad-based experience in developing the corporate and product
marketing required to launch technology companies. The role of Philippe Becker
Design, Inc is to integrate marketing, sales, product and customer support
activities and messages to optimize customer acquisition and retention..
Philippe Becker Design, Inc serves as the liaison for the preparation and
delivery of selling materials to the individual selling firms and an information
conduit to management for production and finished goods inventory issues.
We have retained CWR & Partners, LLP as our public relations firm
responsible for the strategic and tactical communications for Cyberlux. CWR &
Partners, LLP is a marketing communications firm that assists Cyberlux in
communicating to our target audiences of customers, prospects, the media,
policymakers, employees, opinion leaders and shareholders. CWR & Partners, LLP
draws on a wide array of disciplines, fueled by strategy and creativity, to aid
Cyberlux in achieving our tactical and strategic goals.
We have retained two technology product sales firms, Smart Products,
Inc., Westwood, NJ, and Duggan & Brown, Chicago, IL, to represent our product
line over the range of channels addressed for distribution. The individual firms
have been selected based upon established relationships with certain commercial
and retail channels and proven track records of sales to those channels.
REGULATION
Our advertising and sales practices concerning our products are
regulated by the Federal Trade Commission and state consumer protection laws.
Such regulations include restrictions on the manner that we promote the sale of
our products. We believe we are in material compliance with such regulations. We
believe that we will be able to comply in all material respects with laws and
regulations governing the conduct of business operations in general. We are not
aware of any pending government regulations that may adversely affect our
business.
RESEARCH AND DEVELOPMENT ACTIVITIES
We anticipate continuing to incur research and development expenditures
in connection with the development of our Wireless Lighting System during the
next twelve months.
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
COMPETITION
The lighting and illumination industry is extremely competitive. Our
ReliaBright(TM) products address the long-term blackout emergency lighting needs
with battery powered (60 hours) lighting solutions for hotels, hospitals, adult
care centers and high-rise apartments, and long-term evacuation lighting
solutions for commercial buildings. The ReliaBright(TM) products are
competitively positioned as a price-competitive, new technology introduction
into an existing product category, where General Electric, Bodine and Lithonia
are the key competitors with products that use traditional lighting technology.
The Aeon "Task & Accent" lighting products address residential closet lighting,
interior cabinet accent lighting and under cabinet counter lighting as heatless
long-term (75,000 hours of life) lighting solutions for the homeowner. This
unique lighting resource for cabinetmakers, contractors and do-it-yourselfers
offers three levels of light from soft white diodal(TM) elements that are cool
to the touch and easy to install. The Aeon products are competitively positioned
as a premium priced new technology introduction into an existing product
category, where General Electric, Philips and Sea Gull Lighting are the key
competitors with products that use traditional lighting technology. We believe
that our lighting solid-state technology will provide a 40 to 60 percent
reduction in maintenance costs for property managers through replacement of
walkway, corridor or landscape lighting elements and 68 percent reduction in
energy costs for those fixtures.
44
INTELLECTUAL PROPERTY
We have one trademark registered with the United States Patent &
Trademark Office and have filed eight other applications that are currently
being processed. The marks that we have filed and/or received trademark
registration for are as follows:
Serial or Registration or
Trademark Registration No. Filing Date
--------- ---------------- -----------
EVERON Ser. No. 78804638 February 1, 2006
KEON Ser. No. 78804631 February 1, 2006
RELYON Ser. No. 78803400 January 31, 2006
FOCUSON Ser. No. 78803391 January 31, 2006
CAMPLIGHT Ser. No. 78483758 September 15, 2004
SENSORBRIGHT Ser. No. 78483755 September 15, 2004
FOCALBRIGHT Ser. No. 78432845 June 10, 2004
RELIABRIGHT Ser. No. 78421509 May 19, 2004
CYBERLUX Reg. No. 2757137 August 26, 2003
EMPLOYEES
We currently have 11 full time employees. Our employees are primarily
at the executive level based upon our role in coordination of outsource
contracts for manufacturing and other production considerations. Currently,
there exist no organized labor agreements or union agreements between us and our
employees. We have employment agreements with the following executive officers:
Donald F. Evans, Chairman and CEO, Mark D. Schmidt, President and COO, Alan H.
Ninneman, Senior Vice President and John W. Ringo, Secretary and Corporate
Counsel. We believe that our relations with our employees are good.
DESCRIPTION OF PROPERTIES
We maintain our principal office at 4625 Creekstone Drive, Suite 100,
Research Triangle Park, Durham, North Carolina 27703. Our telephone number at
that office is (919) 474-9700 and our facsimile number is (919) 474-9712. We
lease 2,405 square feet of office space. The lease expires on December 31, 2008.
The monthly rent is $3,457, subject to an annual cost of living increase. We
believe that our current office space and facilities are sufficient to meet our
present needs and do not anticipate any difficulty securing alternative or
additional space, as needed, on terms acceptable to us. We maintain websites at
www.cyberlux.com and www.luxSel.com. The information contained on those websites
is not deemed to be a part of this prospectus.
45
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.
46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
--------------------------------------------------------------------------------
Donald F. Evans 71 Chief Executive Officer and Chairman of the Board of
Directors
Mark D. Schmidt 41 President, Chief Operating Officer and Director
John W. Ringo 61 Secretary, Corporate Counsel and Director
Alan H. Ninneman 62 Senior Vice President and Director
David D. Downing 56 Chief Financial Officer and Treasurer
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are three seats on our board of directors.
Currently, our Directors are not compensated for their services.
Officers are elected by the Board of Directors and serve until their successors
are appointed by the Board of Directors. Biographical resumes of each officer
and director are set forth below.
DONALD F. EVANS. Mr. Evans has been our Chief Executive Officer and
Chairman of the Board since May 2000. Between 1979 and May 2000, Mr. Evans was
the Managing Partner of Research Econometrics, a North Carolina based
corporation, where Mr. Evans began an investigative research study into the
feasibility of a long-term electrochemical interim lighting system. From June
1996 until March 1999, Mr. Evans represented the investment interest of Research
Econometrics in Waste Reduction Products Corporation, a privately held North
Carolina corporation Mr. Evans also served on the Board of Directors of Waste
Reduction Products Corporation. Mr. Evans graduated from the University of North
Carolina, Chapel Hill, NC with a BS Degree in Economics.
MARK D. SCHMIDT. Mr. Schmidt has been our President, Chief Operating
Officer and Director since May 2003. From December 1999 until December 2002, Mr.
Schmidt was a founder and executive of Home Director, Inc., the IBM Home
Networking Division spin-off company and a public company. Mr. Schmidt is a
former IBM executive with over 15 years of consumer marketing, business
management and venture startup experience. Mr. Schmidt graduated Summa Cum Laude
with a Bachelor of Science Degree in Engineering from North Carolina State
University and earned an MBA Degree from the Fuqua School of Business at Duke
University.
JOHN W. RINGO. Mr. Ringo has been our Secretary, Corporate Counsel and
a Director since May 2000. Since 1990, Mr. Ringo has been in private practice in
Marietta, GA specializing in corporate and securities law. He is a former Staff
Attorney with the U. S. Securities and Exchange Commission, a member of the Bar
of the Supreme Court of the United States, the Kentucky Bar Association and the
Georgia Bar Association. Mr. Ringo graduated from the University of Kentucky in
Lexington, KY with a BA Degree in Journalism. Subsequently, he received a Juris
Doctor Degree from the University of Kentucky College of Law.
ALAN H. NINNEMAN. Mr. Ninneman has been our Senior Vice President and a
Director since May 2000. From 1992 until April 2000, Mr. Ninneman was a Chief
Executive Officer of City Software, Inc. based in Albuquerque, New Mexico. He
was a senior support analyst for Tandem Computer, San Jose, California from 1982
to 1985; senior business analyst at Apple Computer, Cupertino, California from
1985 to 1987; and Director of Operations at Scorpion Technologies, Inc., San
Jose, California. Mr. Ninneman attended Elgin Community College, Elgin, IL and
subsequently majored in business administration at Southern Illinois University,
Carbondale, IL.
DAVID D. DOWNING. Mr. Downing has been our Chief Financial Officer and
Treasurer since May 2000. Mr. Downing joined Marietta Industrial Enterprises,
Inc., Marietta, Ohio in November 1991 as its Chief Financial Officer. He was
elected to the Board of Directors of that Company in January 1994. He has been a
Director of American Business Parks, Inc., Belpre, Ohio since January 1998 and
served as a director of Agri-Cycle Products, Inc. from May 1998 until April
2001. Mr. Downing graduated from Grove City College, Grove City, PA with a BA
Degree in Accounting.
47
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation of the Company's
newly elected executive officers and directors during of the years 2005, 2004
and 2003. The remuneration described in the table represents compensation
received from Cyberlux Corporation and does not include the cost to the Company
of benefits furnished to the named executive officers, including premiums for
health insurance and other benefits provided to such individual that are
extended in connection with the conduct of the Company's business. The value of
such benefits cannot be precisely determined, but the executive officers named
below did not receive other compensation in excess of the lesser of $50,000 or
10% of such officer's cash compensation.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
------------------------ ------- --------- --------- --------- --------- --------- ------------ --------------
Donald F. Evans 2005 180,000 0 0 -- 4,250,000 -- --
CEO & Chairman 2004 180,000 0 0 -- 550,000 -- $ 275,103 (1)
2003 180,000 0 0 -- 700,000 -- --
------------------------ ------- --------- --------- --------- --------- --------- ------------ --------------
John W. Ringo 2005 76,000 0 0 -- 1,500,000 -- --
Secretary and 2004 70,500 0 0 -- 400,000 -- $ 166,915 (1)
Corporate Counsel 2003 102,000 0 0 -- 250,000 --
------------------------ ------- --------- --------- --------- --------- --------- ------------ --------------
Alan H. Ninneman 2005 76,000 0 0 -- 1,000,000 -- --
Senior Vice President 2004 70,500 0 0 -- 400,000 -- $ 80,652 (1)
2003 102,000 0 0 -- 250,000
------------------------ ------- --------- --------- --------- --------- --------- ------------ --------------
Mark D. Schmidt 2005 180,000 0 0 -- 4,000,000 -- --
President & COO 2004 120,000 0 0 -- 650,000 -- $ 101,000 (1)
2003 120,000 0 0 -- 550,000 -- --
------------------------ ------- --------- --------- --------- --------- --------- ------------ --------------
(1) Such employee received 1 share of Series B Convertible Preferred Stock,
$1.00 par value, in exchange for the cancellation of debt for every $1 of
management fees previously owed. Each share of Series B Convertible Preferred
Stock in entitled to receive a dividend of 13% per annum, is convertible into 10
shares of our common stock and has the right to cast 10 times the number of
shares of common stock that the preferred stock is convertible into.
Annual compensation began accruing in the form of management fees as of July
2000. The compensation indicated in the table is the annualized amount of salary
to be paid the respective officers in accordance with their employment
agreements.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
-------------------------------------------------------------------------------
Donald F. Evans 4,250,000 14.37% $0.10 /Sh 2011
-------------------------------------------------------------------------------
John W. Ringo 1,500,000 5.07% $0.10 /Sh 2011
-------------------------------------------------------------------------------
Alan H. Ninneman 1,000,000 3.38% $0.10 /Sh 2011
-------------------------------------------------------------------------------
Mark D. Schmidt 4,000,000 13.52% $0.10 /Sh 2011
-------------------------------------------------------------------------------
Donald F. Evans 7,500,000 25.35% $0.0295 /Sh 2012
-------------------------------------------------------------------------------
John W. Ringo 500,000 1.69% $0.0295 /Sh 2012
-------------------------------------------------------------------------------
Alan H. Ninneman 500,000 1.69% $0.0295 /Sh 2012
-------------------------------------------------------------------------------
Mark D. Schmidt 5,500,000 18.59% $0.0295 /Sh 2012
-------------------------------------------------------------------------------
The closing price of common stock on January 10, 2005 was $0.04, which is the
date of the options exercisable at $0.10 per share were issued. The closing
price of common stock on November 15, 2005 was $0.12, which is the date of the
options exercisable at $0.0295 per share were issued.
48
STOCK OPTION PLANS
We have created an Employee Stock Option Plan for incentive/retention
of current key employees and as an inducement to employment of new employees.
The 2003 plan, which sets aside 2,000,000 shares of common stock for purchase by
employees, was made effective by the Board of Directors.
On September 2, 2003, our Board approved a 2004 Incentive Stock Option
Plan, which will provide 2,000,000 shares to underwrite options.
On April 8, 2004 our Board approved the 2005 Incentive Stock Option
Plan that provides for 12,000,000 shares to underwrite options and on January
10, 2005, the Board approved the 2006 Plan that provides for 18,000,000 shares
to underwrite options.
The stock option plans are administered directly by our board of
directors.
Subject to the provisions of the stock option plans, the board will
determine who shall receive stock options, the number of shares of common stock
that may be purchased under the options, the time and manner of exercise of
options and exercise prices.
As of June 30, 2006, there were 17,502,307 stock options granted under
the plans that were outstanding.
EMPLOYMENT AGREEMENTS
DONALD F. EVANS
On July 1, 2000, we entered into an eight-year employment contract with
Donald F. Evans to serve as Chief Executive Officer, which was amended on
January 1, 2003. The base salary under the agreement is $180,000 per annum, plus
benefits.
ALAN H. NINNEMAN
On July 1, 2000, we entered into an eight-year employment contract with
Alan H. Ninneman to serve as Senior Vice President, which was amended on January
1, 2003. The base salary under the agreement is $102,000 per annum, plus
benefits.
JOHN W. RINGO
On July 1, 2000, we entered into an eight-year employment contract with
John W. Ringo to serve as Secretary and Corporate Counsel, which was amended on
January 1, 2003. The base salary under the agreement is $102,000 per annum, plus
benefits.
MARK D. SCHMIDT
On May 1, 2003, we entered into an employment contract with Mark D. Schmidt to
serve as Executive Vice President and Chief Operating Officer until June 30,
2008. The base salary under the agreement is $180,000 per annum, plus benefits.
49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We owed certain management fees, which were for accrued salaries for
Messrs. Evans, Ninneman, Ringo and Schmidt consistent with employment
agreements. These fees were as follows: $400,505 to Don Evans, $243,000 to John
Ringo, $263,000 to Alan Ninneman and $101,000 to Mark Schmidt for a total of
$1,007,505. In addition, certain officers loaned funds to us in exchange for
promissory notes. The promissory notes included $3,000 to Don Evans, $3,745 to
Al Ninneman and $184,830 to Dave Downing.
In 2004, we issued 800,000 shares of Series B Convertible Preferred
Stock to officers and directors in exchange for $723,670 of these management
fees and $76,330 of the loan from Dave Downing, on a basis of 1 share of Series
B Convertible Preferred Stock for $1 of debt owned. The management fees
converted include $275,103 by Don Evans, $166,915 by John Ringo, $180,652 to
Alan Ninneman and $101,000 to Mark Schmidt. Each share of Series B Convertible
Preferred Stock in entitled to receive a dividend of 13% per annum, is
convertible into 10 shares of our common stock and has the right to cast 10
times the number of shares of common stock that the preferred stock is
convertible into. The Board of Directors, exercising their business judgment,
determined that it was in the Company's best interest to issue shares of Series
B convertible preferred stock in lieu of accrued management fees. The Board of
Directors determined that the terms of the transaction were as fair to the
Company as any transactions that could have been made with unaffiliated parties.
Currently, there are still outstanding promissory notes totaling
366,595, which include $249,350 in unpaid management fees and promissory notes
to officers totaling $117,245. The unpaid management fees include $90,916 owed
to Don Evans; $82,348 to Al Ninneman and $76,085 to John Ringo. The outstanding
promissory notes to officers include $3,745 to Al Ninneman, $3,000 to Don Evans,
$2,000 to Mark Schmidt and $108,500 to Dave Downing. The promissory notes were
issued to officers who lent us funds for working capital purposes. The
promissory notes are payable on demand and accrue interest at an annual rate of
12%.
We have consulting agreements with outside contractors, certain of whom
are also our stockholders. The agreements are generally for a term of 12 months
from inception and renewable automatically from year to year unless either we or
the consultant terminates such engagement by written notice. None of the
consultants who are shareholders own 5% or more of our issued and outstanding
shares of common stock.
Promissory notes were issued to certain officers for loans to the
Company for working capital. These Notes are listed as payable upon demand and
accrue interest at 12% per annum. Don F. Evans, David D. Downing, Mark Schmidt
and Alan H. Ninneman loaned $3,000, $108,500, $2,000 and $3,745, respectively.
The terms of transactions in this section are as fair to the Company as any
transactions that could have been made with unaffiliated parties.
We have no policy regarding entering into transactions with affiliated
parties.
50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 13, 2006:
o by each person who is known by us to beneficially own more
than 5% of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
We have issued 800,000 shares of Series B Convertible Preferred Stock
to our officers and directors which are convertible into 8 million shares of
common stock and, in the aggregate, have the right to cast 80 million votes in
any vote by our shareholders. Combined with the number of shares of common stock
held by our officers and directors, they have the right to cast approximately
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
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
-----------------------------------------------------------------------------------------------------
Donald F. Evans Common Stock 16,422,784 (3) 16.36% 3.99%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Mark D. Schmidt Common Stock 11,240,977 (4) 11.65% 2.76%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Alan H. Ninneman Common Stock 4,516,773 (5) 5.06% 1.13%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
John W. Ringo Common Stock 4,574,403 (6) 5.11% 1.14%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
David Downing Common Stock 2,013,300 (7) 2.32% *
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
All Officers and Directors Common Stock 38,768,237 (8) 32.06% 8.98%
As a Group (5 persons)
===============================================
Donald F. Evans Preferred B 275,103 34.39% 34.39%
Mark D. Schmidt Preferred B 101,000 12.63% 12.63%
Alan H. Ninneman Preferred B 180,652 22.58% 22.58%
John W. Ringo Preferred B 166,915 20.86% 20.86%
David Downing Preferred B 76,330 9.54% 9.54%
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* Less than 1 %.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of September 13, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based upon 97,529,157 shares issued and outstanding on September 13, 2006.
For common stock holders, the percentage reflects the percentage of votes each
holder can vote at a meeting of shareholders.
(3) Percentage based on 396,362,491 shares of common stock outstanding after the
offering, assuming all shares registered in this offering are sold.
(4) Includes currently exercisable options to purchase 12,216,754 shares of
common stock and 275,103 shares of Series B convertible preferred stock
convertible into 2,751,030 shares of common stock and entitled to cast
27,510,300 votes at any meeting of shareholders.
(5) Includes currently exercisable options to purchase 10,030,977 shares of
common stock and 101,000 shares of Series B convertible preferred stock
convertible into 1,010,000 shares of common stock and entitled to cast
10,100,000 votes at any meeting of shareholders.
(6) Includes currently exercisable options to purchase 2,060,253 shares of
common stock and 180,652 shares of Series B convertible preferred stock
convertible into 1,806,520 shares of common stock and entitled to cast
18,065,200 votes at any meeting of shareholders.
(7) Includes currently exercisable options to purchase 2,455,253 shares of
common stock and 166,915 shares of Series B convertible preferred stock
convertible into 1,669,150 shares of common stock and entitled to cast
16,691,500 votes at any meeting of shareholders.
(8) Includes currently exercisable options to purchase 750,000 shares of common
stock and 76,330 shares of Series B convertible preferred stock convertible into
763,300 shares of common stock and entitled to cast 7,633,000 votes at any
meeting of shareholders.
(8) Includes currently exercisable options to purchase 27,513,237 shares of
common stock and 800,000 shares of Series B convertible preferred stock
convertible into 8,000,000 shares of common stock and entitled to cast
80,000,000 votes at any meeting of shareholders.
52
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 700,000,000 shares of common stock,
par value $.001. As of September 13, 2006, there were 97,529,157 shares of
common stock outstanding. Holders of the common stock are entitled to one vote
per share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Pacific Stock Transfer Company, located in Las Vegas,
Nevada, as independent transfer agent or registrar.
PREFERRED STOCK
Our Articles of Incorporation authorize the issuance of 5,000,000
shares of preferred stock, $0.001 par value per share, the designation and
rights of which are to be determined by our Board of Directors. Our Board of
Directors has authority, without action by the shareholders, to issue all or any
portion of the authorized but unissued preferred stock in one or more series and
to determine the voting rights, preferences as to dividends and liquidation,
conversion rights, and other rights of such series. We consider it desirable to
have preferred stock available to provide increased flexibility in structuring
possible future acquisitions and financing and in meeting corporate needs which
may arise. If opportunities arise that would make desirable the issuance of
preferred stock through either public offering or private placements, the
provisions for preferred stock in our Articles of Incorporation would avoid the
possible delay and expense of a shareholder's meeting, except as may be required
by law or regulatory authorities. Issuance of the preferred stock could result,
however, in a series of securities outstanding that will have certain
preferences with respect to dividends and liquidation over the common stock
which would result in dilution of the income per share and net book value of the
common stock.
Issuance of additional common stock pursuant to any conversion right
which may be attached to the terms of any series of preferred stock may also
result in dilution of the net income per share and the net book value of the
common stock. The specific terms of any series of preferred stock will depend
primarily on market conditions, terms of a proposed acquisition or financing,
and other factors existing at the time of issuance. Our Board of Directors may
issue additional preferred stock in future financing, but has no current plans
to do so at this time. The issuance of Preferred Stock could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock.
As of September 13, 2006, we 51.4806 shares of our Series A Convertible
Preferred Stock issued and outstanding. Each share is convertible into 50,000
shares of common stock. The Series A Convertible Preferred have the following
designations and rights:
Maturity: Perpetual Preferred
Dividend: 12% per annum. The dividend shall be payable semi-
annually in cash or common stock at our option.
Fixed Conversion Price: The Series A Convertible Preferred shall be
convertible into common stock at $0.10 per share.
Stated Value: $5,000 per share
Mandatory Conversion: Beginning 180 days from the effective date of this
registration statement, if the closing bid price
for our common stock exceeds $1.50 for a period of
10 consecutive trading days, we have the right to
force the holders to convert the Series A
Convertible Preferred into common stock at the
applicable conversion price.
53
Limitations on
Conversion. Each holder of the Series A Convertible Preferred
shares shall not convert the shares into common
stock such that the number of shares of common
stock issued after the conversion would exceed,
when aggregated with all other shares of common
stock owned by such holder at such time, in excess
of 4.99% of our then issued and outstanding shares
of common stock.
No Voting Rights. The holders of the Series A convertible shares
have no voting rights until their shares are
converted to common shares.
The Board of Directors, pursuant to our Articles of Incorporation and
By-Laws, authorized Series B Convertible Preferred Stock which was issued to
officers and directors in order to convert accrued management fees and other
liabilities into 800,000 shares of the Series B Preferred Stock. The Series B
Convertible Preferred Stock has the following designations and rights:
Term: Perpetual Preferred
Dividend: 12% per annum
Conversion: Each share of the Series B Convertible Preferred
Stock may be converted to 10 shares of Cyberlux
common stock at the option of the bearer.
Voting Rights: Except with respect to transactions upon which the
Series B Preferred stock shall be entitled to vote
separately, the Series B Preferred Stock shall have
superior voting rights equal to ten times the number
of shares of Common Stock such holder of Series B
Preferred Stock would receive upon conversion of
such holder's shares of Series B Preferred Stock.
The conversion price is $0.10 per share.
OPTIONS
There are currently 17,502,307 options outstanding. 4,000,000 options
are exercisable at $0.0295 per share, 9,502,307 are exercisable at $0.10 per
share and 4,000,000 options are exercisable at $0.2125 per share. The options
expire between 2009 and 2011. The closing price of common stock on January 10,
2005 was $0.04, which is the date of the options exercisable at $0.10 per share
were issued. The closing price of common stock on November 15, 2005 was $0.12,
which is the date of the options exercisable at $0.0295 per share were issued.
WARRANTS
In connection with a Securities Purchase Agreement dated September 23,
2004, we issued 2,250,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.50 per share.
In connection with a Securities Purchase Agreement dated April 22,
2005, we issued 25,000,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.03 per share.
In connection with a Securities Purchase Agreement dated October 24,
2005, we issued 800,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.10 per share.
In connection with a Securities Purchase Agreement dated December 28,
2005, we issued 700,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.15 per share.
54
In connection with a Securities Purchase Agreement dated March 27,
2006, we issued 19,000,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.10 per share.
In connection with a Securities Purchase Agreement dated July 27, 2005,
we issued 15,000,000 warrants to purchase shares of common stock. The warrants
are exercisable until five years from the date of issuance at a purchase price
of $0.06 per share.
In addition, in connection with a private placement offering, we have
issued 8,543,064 Series A and 8,543,064 Series B warrants. The Series A warrants
are exercisable at $0.25 per share and the Series B warrants are exercisable at
$1.05 per share. The Series A warrants expire in 2006 and the Series B warrants
expire in 2008. In addition, we issued Placement Agent warrants to the placement
agent in the private placement offering. We issued a total of 100,000 placement
agents warrants exercisable at $0.01 per share, 1,550,000 placement agent
warrants exercisable at $0.10 per share, 1,550,000 placement agent warrants
exercisable at $0.25 per share and 1,550,000 placement agent warrants
exercisable at $1.05 per share. All placement agent warrants expire in 2008.
In addition, we have 58,500 warrants outstanding exercisable at $0.10
per share, which expire in 2008. We have 605,000 warrants outstanding
exercisable at $0.20 per share, which expire in 2006. We have 1,441,500 warrants
outstanding exercisable at $0.25 per share, of which 1,350,000 expire in 2005
and 91,500 expire in 2008. We have 300,000 warrants outstanding exercisable at
$0.50 per share, which expire in 2006. We have 605,000 warrants outstanding
exercisable at $0.20 per share, which expire in 2006.
CONVERTIBLE SECURITIES
Not including approximately 105,098,435 shares of common stock issuable
upon exercise of outstanding options and warrants, approximately 45,394,058
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated September 23, 2004, approximately 75,000,000
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated April 22, 2005, approximately 40,000,000
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated October 24, 2005, approximately 38,888,889
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated December 28, 2005, approximately 27,777,778
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated March 27, 2006, and approximately 25,000,000
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated July 27, 2006.
SEPTEMBER 2004 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on September 23,
2004 for the sale of (i) $1,500,000 in secured convertible notes, and (ii)
warrants to purchase 2,250,000 shares of our common stock.
The investors provided us with an aggregate of $1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The notes bear interest at 10%, mature two years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
55
o $0.72; or
o 50% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.60 per share. Prepayment of the notes is to be
made in cash equal to 150% of the outstanding principal and accrued interest.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
The full principal amount of the secured convertible notes are due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.50 per share. In addition, we have granted the investors a security interest
in substantially all of our assets and intellectual property and registration
rights.
APRIL 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on April 22, 2005
for the sale of (i) $1,500,000 in secured convertible notes, and (ii) warrants
to purchase 25,000,000 shares of our common stock.
The investors provided us with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
The notes bear interest at 10%, mature three years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
o $0.03; or
o 50% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.03 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
56
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.03. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes are due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.03 per share. In addition, we have granted the investors a security interest
in substantially all of our assets and intellectual property and registration
rights.
OCTOBER 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on October 24, 2005
for the sale of (i) $800,000 in secured convertible notes and (ii) warrants to
purchase 800,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on October 24, 2005.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.06; or
o 50% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.06 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.03. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon default
under the terms of secured convertible notes. In addition, we have granted the
investors a security interest in substantially all of our assets and
intellectual property and registration rights.
57
DECEMBER 2005 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on December 28,
2005 for the sale of (i) $700,000 in secured convertible notes and (ii) warrants
to purchase 700,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on December 28, 2005.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.10; or
o 45% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.10 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.10. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon default
under the terms of secured convertible notes. In addition, we have granted the
investors a security interest in substantially all of our assets and
intellectual property and registration rights.
MARCH 2006 SECURITIES PURCHASE AGREEMENT
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on March 27, 2006
for the sale of (i) $500,000 in secured convertible notes and (ii) warrants to
purchase 19,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on March 27, 2006.
The secured convertible notes bear interest at 8%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of:
o $0.10; or
o 45% 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.
58
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.10 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.10. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon default
under the terms of secured convertible notes. In addition, we have granted the
investors a security interest in substantially all of our assets and
intellectual property and registration rights.
JULY 2006 SECURITIES PURCHASE AGREEMENT
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.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors purchased all of the
secured convertible notes on July 27, 2006.
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:
o $0.10; or
o 50% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.10 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten
trading days prior written notice to the holders of the secured convertible
notes. For notice purposes, a trading day is any day on which our common stock
is traded for any period on the OTC Bulletin Board. Notwithstanding the notice
of prepayment, the holders of the secured convertible notes have the right at
all times to convert all or any portion of the secured convertible notes prior
to payment of the prepayment amount.
59
We also has a partial call option under the terms of the secured
convertible notes in any month in which the current price of our common stock is
below $0.10. Under the terms of the partial call option, we have the right to
pay the outstanding principal amount of the secured convertible notes plus
one-month's interest for that month, which will stay any conversions of the
secured convertible notes by the holders for that month. The principal amount of
the secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes is due upon
default under the terms of secured convertible notes. In addition, we have
granted the investors a security interest in substantially all of our assets and
intellectual property and registration rights.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest
extent permitted by Nevada law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Articles of Incorporation, as amended, is to eliminate our rights and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in our
Articles of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
60
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and
regulations of any state or the United States;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
61
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
62
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants unless the selling
stockholders exercise the warrants on a cashless basis, which can be done at any
time if the shares of common stock underlying the warrants are not then
registered pursuant to an effective registration statement. Assuming all the
shares registered below are sold by the selling stockholders, none of the
selling stockholders will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants* Conversion (1) Offering** Offering** (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Offshore, Ltd. 90,310,800 48.08% Up to 5,025,161 (2) 4.9% 5,025,161 (2) 4.9%
(3) 161,450,800
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Qualified 54,585,867 35.88% Up to 5,025,161 (2) 4.9% 5,025,161 (2) 4.9%
Partners, LLC (3) 97,332,534
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Partners, LLC 19,762,500 16.85% Up to 5,025,161 (2) 4.9% 5,025,161 (2) 4.9%
(3) 35,367,500
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
New Millennium 2,507,500 2.51% Up to 5,025,161 (2) 4.9% 5,025,161 (2) 4.9%
Capital Partners 4,482,500
II, LLC (3) shares of
common stock
* This column represents an estimated number based on conversion priceS as of a
recent date of September 13, 2006 of $.02 and $.018, divided into the principal
amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.9% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of
the secured convertible notes and exercise of warrants, based on current market
prices. Because the number of shares of common stock issuable upon conversion of
the secured convertible notes is dependent in part upon the market price of the
common stock prior to a conversion, the actual number of shares of common stock
that will be issued upon conversion will fluctuate daily and cannot be
determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on September 13, 2006,
the conversion prices would have been $.02 and $.018.
63
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd. is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by AJW
Offshore, Ltd. AJW Qualified Partners, LLC is a private investment fund that is
owned by its investors and managed by AJW Manager, LLC, of which Corey S.
Ribotsky and Lloyd A. Groveman are the fund managers, have voting and investment
control over the shares listed below owned by AJW Qualified Partners, LLC. New
Millennium Capital Partners II, LLC, is a private investment fund that is owned
by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by New Millennium Capital Partners II,
LLC. We have been notified by the selling stockholders that they are not
broker-dealers or affiliates of broker-dealers and that they believe they are
not required to be broker-dealers.
(4) Assumes that all securities registered will be sold.
64
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Russell Bedford Stefanou Mirchandani LLP, independent registered public
accounting firm, have audited, as set forth in their report thereon appearing
elsewhere herein, our financial statements at December 31, 2005 and 2004 and for
the years then ended that appear in the prospectus. The financial statements
referred to above are included in this prospectus with reliance upon the
independent registered public accounting firm's opinion based on their expertise
in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of Cyberlux Corporation,
filed as part of the registration statement, and it does not contain all
information in the registration statement, as certain portions have been omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at 100 F Street, N.E., Washington D.C. 20549. Copies of
such material can be obtained from the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. Because we file
documents electronically with the SEC, you may also obtain this information by
visiting the SEC's Internet website at http://www.sec.gov.
65
INDEX TO FINANCIAL STATEMENTS
CYBERLUX CORPORATION
INDEX TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2005 and December 31, 2004
Page
--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-1
--------------------------------------------------------------------------------
Balance Sheet at December 31, 2005 and 2004 F-2
--------------------------------------------------------------------------------
Statements of Operations for the Years ended December 31, 2005 F-3
and 2004 and for the Period May 17, 2000 (Date of Inception)
through December 31, 2005
--------------------------------------------------------------------------------
Statement of Deficiency in Stockholders' Equity for the F-4 - F-8
Period May 17, 2000 (Date of Inception) through December 31,
2005
--------------------------------------------------------------------------------
Statements of Cash Flows for the Years ended December 31, F-9 - F10
2005 and 2004 and for the Period May 17, 2000 (Date of
Inception) through December 31, 2005
--------------------------------------------------------------------------------
Notes to Financial Statements F-11 - F-28
--------------------------------------------------------------------------------
Condensed Balance Sheets: F-29
June 30, 2006 (Unaudited) and December 31, 2005 (Audited)
--------------------------------------------------------------------------------
Condensed Statements of Losses: F-30
Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)
--------------------------------------------------------------------------------
Condensed Statements of Cash Flows: F-31
Six Months Ended June 30, 2006 and 2005 (Unaudited)
--------------------------------------------------------------------------------
Notes to Unaudited Condensed Financial Statements F-32 - F-41
--------------------------------------------------------------------------------
66
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Cyberlux Corporation
North Carolina 28370-2010
We have audited the accompanying consolidated balance sheets of Cyberlux
Corporation (the "Company"), as of December 31, 2005 and 2004 and the related
consolidated statements of losses, deficiency in stockholders' equity, and cash
flows for each of the two years ended December 31, 2005. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2005 and 2004, and the results of its operations and
its cash flows for each of the two years ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note L to the
consolidated financial statements, the Company has suffered recurring losses
from operations. This raises substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note L. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in the Note N to the financial statements, the Company restated the
balance sheets as of December 31, 2004 and 2003 and related statement of
operations, cash flow and deficiency in stockholders' equity for the years then
ended.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
----------------------------------------
Russell Bedford Stefanou Mirchandani LLP
Certified Public Accountants
New York, NY
March 16, 2006
F-1
CYBERLUX CORPORATION
BALANCE SHEETS
December 31,
2005 2004
------------ -----------
(As restated-Note N)
ASSETS
Current assets:
Cash and cash equivalents $ 475,656 $ 415,375
Accounts receivable, net of allowance for doubtful accounts of $0 (Note A) 9,424 --
Inventories, net of allowance of $110,821 and $0, respectively (Note A) 338,097 --
Other current assets 42,813 68,404
------------ -----------
Total current assets 865,991 483,779
Property, plant and equipment, net of accumulated depreciation of $118,105
and $92,335 as of December 31, 2005 and 2004, respectively (Note B) 63,133 43,018
Other Assets:
Patents (Note A) -- 30,544
------------ -----------
$ 929,124 $ 557,341
============ ===========
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note C) $ 657,929 $ 176,094
Accrued liabilities (Note C) 782,586 325,969
Short-term notes payable - related parties (Note H) 366,594 399,080
Short-term notes payable (Note D) 542,783 27,500
------------ -----------
Total current liabilities 2,349,893 928,643
------------ -----------
Long-term liabilities:
Notes payable (Note D) 351,418 80,822
Derivative liability relating to convertible debentures (Note D) 6,809,449 1,490,576
Warrant liability relating to convertible debentures (Note E) 3,352,026 1,185,245
------------ -----------
Total long-term liabilities 10,512,893 2,756,643
------------ -----------
Total liabilities 12,862,786 3,685,286
------------ -----------
Commitments and contingencies
Series A convertible preferred stock, $0.001 par value, 5,000,000 shares
authorized; 59.8606 and 151.8606 shares issued and outstanding as of December 31,
2005 and 2004, respectively (Note F) 299,303 759,303
------------ -----------
DEFICIENCY IN STOCKHOLDERS' EQUITY (Note F)
Series B convertible preferred stock, $0.001 par value, 8,000,000 shares
authorized, 800,000 shares issued and outstanding as of December 31, 2005 and 2004 800 800
Common stock, $0.001 par value, 300,000,000 shares authorized, 75,608,334 and
23,770,233 shares issued and outstanding as of December 31, 2005 and 2004,
respectively 75,607 23,770
Additional paid-in capital 6,382,570 5,369,466
Accumulated deficit (18,691,941) (9,281,284)
------------ -----------
Deficiency in stockholders' equity
(12,232,964) (3,887,248)
------------ -----------
$ 929,124 $ 557,341
============ ===========
The accompanying notes are an integral part of these financial statements
F-2
CYBERLUX CORPORATION
STATEMENTS OF OPERATIONS
Year ended December 31,
2005 2004
------------- ------------
(As restated-Note N)
REVENUES:
Net sales $ 54,523 $ 23,803
Cost of goods sold (235,767) (160,260)
------------- ------------
Gross (loss) (181,245) (136,457)
------------- ------------
OPERATING EXPENSES:
Depreciation and amortization 25,769 47,686
Impairment loss (Note A) 30,544 --
Research and development 499,618 391,421
General and administrative expenses 2,355,830 2,925,052
------------- ------------
Total operating expenses 2,911,761 3,364,159
------------- ------------
(LOSS) FROM OPERATIONS: (3,043,006) (3,500,616)
Other income (expense)
Unrealized gain (loss) relating to adjustment of derivative and warrant liability
to fair value of underlying securities (Note D & E) (4,485,654) 7,922,926
Interest income 349 282
Interest expense (1,623,781) (325,840)
Debt acquisition costs (208,565) (193,703)
------------- ------------
Net income/(loss) before provision for income taxes
and preferred dividend (9,410,657) 3,903,049
Preferred dividend-beneficial conversion discount on convertible preferred- (800,000)
Income taxes (benefit) -- --
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (9,410,657) $ 3,103,049
============= ============
Weighted average number of common shares outstanding, basic 54,490,102 16,701,174
============= ============
Weighted average number of common shares outstanding, fully diluted 211,355,239 48,201,174
============= ============
Net income/(loss) per share - basic (Note J) $ (0.17) $ 0.19
============= ============
Net income/(loss) per share - fully diluted (Note J) $ (0.17) $ 0.06
============= ============
Preferred dividend $ 96,000 $ 96,000
============= ============
The accompanying notes are an integral part of these financial statements
F-3
CYBERLUX CORPORATION
STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Series B Convertible
Preferred
-------------------------- Additional
Stock Common Common Stock Paid in
Shares Amount Shares Amount Capital
----------- ------------ ------------ ------------ ------------
Balance as of January 1, 2004-As restated -- $ -- 8,049,141 $ 8,049 $ 1,174,096
(Note N)
Preferred stock, Class B, issued in January,
2004 as compensation for management fees at
$1.00 per share 800,000 800 -- -- 799,200
Collected balance due from stock subscription -- -- -- -- --
Common stock issued in January, 2004 in
exchange for services rendered at $0.37 per
share -- -- 2,585,000 2,585 953,865
Common stock issued in January, 2004 for
settlement of debt at $0.25 per share -- -- 110,764 111 27,580
Common stock issued in March, 2004 in
exchange for services rendered at $0.21 per
share -- -- 1,200,000 1,200 250,800
Common stock cancelled with return of
collateral deposit with factor -- -- (450,000) (450) (89,550)
Sale of common stock in May, 2004 at $0.10
per share -- -- 5,310,000 5,310 525,690
Common stock issued in May, 2004 for
settlement of debt at $0.10 per share -- -- 50,000 50 4,950
Common stock issued in June, 2004 in
exchange for services rendered at $0.08 per
share -- -- 1,760,000 1,760 129,600
Common stock subscription received -- -- -- -- --
Common stock issued in July, 2004 in
exchange for services rendered at $0.40 per
share -- -- 100,000 100 39,900
Common stock issued in July, 2004 as payment
of stock subscription -- -- 100,000 100 9,900
Common stock issued in July, 2004 in
connection with conversion of preferred
stock, Class A -- -- 200,000 200 19,800
Common stock issued in August, 2004 in
connection with exercise of warrants at
$0.25 per share -- -- 701,000 701 174,549
Common stock issued September, 2004 in
connection with exercise of warrants at
$0.25 per share -- -- 200,000 200 49,800
Common stock issued in October, 2004 for
services rendered at $0.25 per share -- -- 690,000 690 171,810
Common stock issued in October, 2004 as
settlement of debt at $0.15 per share -- -- 140,019 140 20,869
Common stock issued in November, 2004 as
payment towards convertible debentures -- -- 1,035,221 1,035 107,663
Common stock issued in December, 2004, as
payment towards convertible debentures -- -- 1,035,221 1,035 35,197
Common stock issued in December, 2004 to
preferred stockholders, class A as
registration rights penalty -- -- 203,867 204 89,497
Common stock issued in December, 2004 in
connection with conversion of preferred
stock, Class A -- -- 750,000 750 74,250
Beneficial conversion feature of convertible
debenture -- -- -- -- 800,000
Net Income -- -- -- -- --
----------- ------------ ------------ ------------ ------------
Balance December 31, 2004:-(as restated-Note N) $ 800,000 800 23,770,233 $ 23,770 $ 5,369,466
Common stock issued in January, 2005 in
connection with conversion of preferred
stock, Class A -- -- 1,675,000 1,675 165,825
Common stock issued in January, 2005 as
payment towards convertible debentures -- -- 2,070,442 2,070 37,578
Common stock issued in February, 2005 in
connection with conversion of preferred
stock, Class A -- -- 250,000 250 24,750
Common stock issued in February, 2005 as
payment towards convertible debentures -- -- 1,035,221 1,035 8,106
Common stock issued in March, 2005 as
payment towards convertible debentures -- -- 2,070,442 2,071 22,165
Common stock issued in April, 2005 in
connection with conversion of preferred
stock, Class A -- -- 250,000 250 24,750
Common stock issued in April, 2005 for
services rendered at $0.3 per share -- -- 800,000 800 23,200
Common stock issued in April, 2005 as
payment towards convertible debentures -- -- 2,070,442 2,070 21,533
Common stock issued in May, 2005 as payment
towards convertible debentures -- -- 10,535,221 10,535 86,405
Common stock issued in May, 2005 in
connection with conversion of preferred
stock, Class A -- -- 1,075,000 1,075 106,425
Common stock issued in June, 2005 in
exchange for services rendered at $0.02 per
share -- -- 250,000 250 4,750
Common stock issued in June, 2005 as payment
towards convertible debentures -- -- 17,100,000 17,100 128,570
Common stock issued in July, 2005 as payment
towards convertible debentures -- -- 9,573,000 9,573 71,798
Common stock issued in July, 2005 in
connection with conversion of preferred
stock, Class A -- -- 775,000 775 76,725
Common stock issued in August, 2005 in
exchange for services rendered at $0.097 per
share -- -- 1,000,000 1,000 96,000
Common stock issued in September, 2005 in
connection with conversion of preferred
stock, Class A -- -- 250,000 250 24,750
Common stock issued in October, 2005 in
exchange for services rendered at $0.07 per
share -- -- 400,000 400 27,600
Common stock issued in October, 2005 in
connection with conversion of preferred
stock, Class A -- -- 125,000 125 12,375
Common stock issued in November, 2005 in
connection with conversion of preferred
stock, Class A -- -- 200,000 200 19,800
Common stock issued in December, 2005 in
exchange for services rendered at $0.091 per
share 333,333 333 30,000
Net loss -- -- --
----------- ------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 2005 800,000 $ 800 75,608,334 $ 75,607 $ 6,382,570
=========== ============ ============ ============ ============
Total
Stock (Deficiency in)
Subscription Accumulated Stockholders'
Receivable Deficit Equity
------------ ------------ --------------
Balance as of January 1, 2004-As restated $ (276,186) $(12,384,333) $(11,478,374)
(Note N)
Preferred stock, Class B, issued in January,
2004 as compensation for management fees at
$1.00 per share -- -- 800,000
Collected balance due from stock subscription 276,186 -- 276,186
Common stock issued in January, 2004 in
exchange for services rendered at $0.37 per
share -- -- 956,450
Common stock issued in January, 2004 for
settlement of debt at $0.25 per share -- -- 27,691
Common stock issued in March, 2004 in
exchange for services rendered at $0.21 per
share -- -- 252,000
Common stock cancelled with return of
collateral deposit with factor -- -- (90,000)
Sale of common stock in May, 2004 at $0.10
per share -- -- 531,000
Common stock issued in May, 2004 for
settlement of debt at $0.10 per share -- -- 5,000
Common stock issued in June, 2004 in
exchange for services rendered at $0.08 per
share -- -- 131,360
Common stock subscription received 22,500 -- 22,500
Common stock issued in July, 2004 in
exchange for services rendered at $0.40 per
share -- -- 40,000
Common stock issued in July, 2004 as payment
of stock subscription (10,000) -- --
Common stock issued in July, 2004 in
connection with conversion of preferred
stock, Class A -- -- 20,000
Common stock issued in August, 2004 in
connection with exercise of warrants at
$0.25 per share (12,500) -- 162,750
Common stock issued September, 2004 in
connection with exercise of warrants at
$0.25 per share -- -- 50,000
Common stock issued in October, 2004 for
services rendered at $0.25 per share -- -- 172,500
Common stock issued in October, 2004 as
settlement of debt at $0.15 per share -- -- 21,009
Common stock issued in November, 2004 as
payment towards convertible debentures -- -- 108,698
Common stock issued in December, 2004, as
payment towards convertible debentures -- -- 36,232
Common stock issued in December, 2004 to
preferred stockholders, class A as
registration rights penalty -- -- 89,701
Common stock issued in December, 2004 in
connection with conversion of preferred
stock, Class A -- -- 75,000
Beneficial conversion feature of convertible
debenture -- -- 800,000
Net Income -- 3,103,049 3,103,049
------------ ------------ ------------
Balance December 31, 2004:-(as restated-Note N) $ -- $ (9,281,284) $ (3,887,248)
Common stock issued in January, 2005 in
connection with conversion of preferred
stock, Class A -- -- 167,500
Common stock issued in January, 2005 as
payment towards convertible debentures -- -- 39,648
Common stock issued in February, 2005 in
connection with conversion of preferred
stock, Class A -- -- 25,000
Common stock issued in February, 2005 as
payment towards convertible debentures -- -- 9,141
Common stock issued in March, 2005 as
payment towards convertible debentures -- -- 24,236
Common stock issued in April, 2005 in
connection with conversion of preferred
stock, Class A -- -- 25,000
Common stock issued in April, 2005 for
services rendered at $0.3 per share -- -- 24,000
Common stock issued in April, 2005 as
payment towards convertible debentures -- -- 23,603
Common stock issued in May, 2005 as payment
towards convertible debentures -- -- 96,940
Common stock issued in May, 2005 in
connection with conversion of preferred
stock, Class A -- -- 107,500
Common stock issued in June, 2005 in
exchange for services rendered at $0.02 per
share -- -- 5,000
Common stock issued in June, 2005 as payment
towards convertible debentures -- -- 145,670
Common stock issued in July, 2005 as payment
towards convertible debentures -- -- 81,371
Common stock issued in July, 2005 in
connection with conversion of preferred
stock, Class A -- -- 77,500
Common stock issued in August, 2005 in
exchange for services rendered at $0.097 per
share -- -- 97,000
Common stock issued in September, 2005 in
connection with conversion of preferred
stock, Class A -- -- 25,000
Common stock issued in October, 2005 in
exchange for services rendered at $0.07 per
share -- -- 28,000
Common stock issued in October, 2005 in
connection with conversion of preferred
stock, Class A -- -- 12,500
Common stock issued in November, 2005 in
connection with conversion of preferred
stock, Class A -- -- 20,000
Common stock issued in December, 2005 in
exchange for services rendered at $0.091 per
share 30,333
Net loss -- (9,410,657) (9,410,657)
------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 2005 $ -- $(18,691,941) $(12,232,964)
============ ============ ============
The accompanying notes are an integral part of these financial statements
F-4
CYBERLUX CORPORATION
STATEMENTS OF CASH FLOWS
For the Year Ended
2005 2004
----------- -----------
(As restated-Note N)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) available to common stockholders $(9,410,657) $ 3,103,049
Adjustments to net income (loss) to net cash used on operating activities:
Depreciation and amortization 25,769 47,686
Unrealized (gain)/loss related to the adjustment of derivative and warranty
liability to fair value of underlying securities 4,485,654 (7,922,926)
Impairment of patent costs 30,544
Preferred dividend-beneficial conversion feature 800,000
Common stock options issued in connection with services rendered -- --
Common stock issued for previously incurred debt -- 288,326
Common stock issued as payment in settlement of debt 420,608 144,931
Common stock issued (canceled) for factoring deposit -- (90,000)
Common stock issued in connection with services rendered 184,333 1,552,307
Preferred stock issued as payment for accrued management fees -- 723,670
Preferred stock issued for previously incurred debt -- 76,330
Warrants issued in connection with services rendered -- --
Accretion of convertible notes payable 785,879 80,822
(Increase) decrease in:
Deposits -- 236,000
Accounts receivable (9,424) --
Inventories (338,097) --
Prepaid expenses 25,590 (68,404)
Other assets -- (30,544)
Increase (decrease) in:
Accrued interest 307,433 --
Accrued liabilities 347,115 389,781
Management fee payable-related party -- (996,508)
Other accounts payable 481,836 (120,293)
----------- -----------
Net cash (used in) operating activities (2,663,417) (1,785,773)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (45,884) (21,859)
----------- -----------
Net cash (used in) investing activities (45,884) (21,859)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of short-term notes payable, net -- (292,500)
(Payments of ) proceeds from short-term notes payable-shareholders, net (32,485) 191,235
Proceeds from issuance of convertible notes payable 2,802,067 1,186,281
Proceeds from issuance of preferred stock -- 79,308
Proceeds from issuance of commons stock subscription -- 276,186
Proceeds from issuance of common stock -- 766,250
----------- -----------
Net cash provided by financing activities 2,769,582 2,206,760
----------- -----------
Net increase in cash and cash equivalents 60,281 399,128
Cash and cash equivalents at beginning of period 415,375 16,247
----------- -----------
Cash and cash equivalents at end of period $ 475,656 $ 415,375
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 87,044 $ 75,103
Cash paid during the period for taxes -- --
NON CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized (gain)/loss related to the adjustment of derivative and warranty
liability to fair value of underlying securities 4,485,654 (7,922,926)
Common stock options issued in connection with services rendered -- --
Common stock issued in connection with services rendered 184,333 1,552,307
Common stock issued for previously incurred debt -- 288,326
Common stock issued in settlement of debt 420,608 144,931
Common stock issued (canceled) for factoring deposit -- (90,000)
Convertible preferred shares issued for accrued management fees -- 723,670
Convertible preferred shares issued for note payable and accrued interest -- 76,330
Warrants issued in connection with financing 757,366 --
Warrants issued to consultants for services 14,160 349,173
The accompanying notes are an integral part of these financial statements
F-5
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES
GENERAL
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
BUSINESS AND BASIS OF PRESENTATION
Cyberlux Corporation (the "Company") is incorporated on May 17, 2000 under the
laws of the State of Nevada. Untill 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 December 31, 2005, the Company
has accumulated losses of $18,691,941.
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 December 31, 2005 and 2004, the Company did not have any defer
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.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.
FOREIGN CURRENCY TRANSLATION
The Company translates the foreign currency financial statements in accordance
with the requirements of Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation." Assets and liabilities are translated at current
exchange rates, and related revenue and expenses are translated at average
exchange rates in effect during the period. Resulting translation adjustments
are recorded as a separate component in stockholders' equity. Foreign currency
translation gains and losses are included in the statement of operations.
INVENTORIES
Inventories are stated at the lower of cost or market determined by the average
cost method. The Company provides inventory allowances based on estimates of
obsolete inventories. Inventories consist of products available for sale to
distributors and customers as well as raw material.
F-6
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Components of inventories as of December 31, 2005 and 2004 are as follows:
2005 2004
--------- -------
Component parts $ 223,299 $ --
Finished goods 225,619 --
-------
448,918 --
Less: allowance for obsolete inventory (110,821) (--)
--------- -------
$ 338,097 $ --
========= =======
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. When retired or otherwise disposed,
the related carrying value and accumulated depreciation are removed from the
respective accounts and the net difference less any amount realized from
disposition, is reflected in earnings. For financial statement purposes,
property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives as follows:
Furniture and fixtures 7 years
Office equipment 3 to 5 years
Manufacturing equipment 3 years
ADVERTISING COSTS
The Company expenses all costs of marketing and advertising as incurred.
Marketing and advertising costs totaled $276,714 and $100,132 for the year ended
December 31, 2005 and 2004, respectively.
RESEARCH AND DEVELOPMENT
The Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs".
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. The Company expenditures
were $499,618 and $391,421 on research and product development for the year
ended December 31, 2005 and 2004, respectively.
RECLASSIFICATION
Certain reclassifications have been made to prior periods' data to conform to
the current presentation. These reclassifications had no effect on reported
losses.
IMPAIRMENT OF LONG LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144 ). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes ill circumstances indicate that the carrying amount
of an asset may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undercounted cash flows. Should impairment in value
be indicated, the carrying value of intangible assets will be adjusted, based on
estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset. SF AS No. 144 also requires assets to be disposed of
be reported at the lower of the carrying amount or the fair value less costs to
sell.
F-7
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 2005and
2004. The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments include
cash and accounts payable. Fair values were assumed to approximate carrying
values for cash and payables because they are short term in nature and their
carrying amounts approximate fair values or they are payable on demand.
CONCENTRATIONS OF CREDIT RISK
Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit. The Company periodically reviews its trade receivables
in determining its allowance for doubtful accounts. At December 31, 2005 and
2004, allowance for doubtful receivable was $0.
STOCK-BASED COMPENSATION:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both armua1 and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of the related
option. The Company has adopted the annual disclosure provisions of SFAS No.148
in its financial reports for the year ended December 31, 2002 and subsequent
years.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note F):
For the year ended December 31,
2005 2004
-------------- -----------
Net (loss) income - as reported $ (9,410,657) $ 3,103,049
Add: Total stock based employee compensation expense as
reported under intrinsic value method (APB. No. 25) -- 105,000
Deduct: Total stock based employee compensation expense as
reported under fair value based method (SFAS No. 123) (830,400) (658,800)
-------------- -----------
Net (loss) income - Pro Forma $ (10,241,057) $ 2,549,249
Net (loss) income attributable to common stockholders - Pro
forma $ (10,241,057) $ 2,549,249
(Loss) Income per share - as reported - basic (Note J) $ (0.17) $ 0.19
(Loss) Income per share - as reported - diluted (Note J) $ (0.17) $ 0.06
(Loss) Income per share - proforma - basic $ (0.19) $ 0.15
(Loss) Income per share - proforma - diluted $ (0.19) $ 0.05
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. 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 will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006.
F-8
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
The Company follows Statement of Financial Accounting Standards No.130,
Disclosures About Segments of an Enterprise and Related Information. The Company
operates as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
INCOME TAXES
The Company follows Statement of Financial Accounting Standard No.109,
Accounting for Income Taxes (SFAS No.109) for recording the provision for income
taxes. Deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability during
each period. If available evidence suggests that it is more likely than not that
some portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse
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 year ended December 31, 2005 to reduce the
carrying value of the patents to $ 0. Considerable management judgement is
necessary to estimate the fair value. Accordingly, actual results could vary
significantly from management's estimates.
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
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
F-9
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
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.
NOTE B - PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment at December 31, 2005 and 2004 are as follows:
2005 2004
------- -------
Furniture and fixtures $43,974 $17,404
Office and computer equipment 33,884 14,569
Manufacturing equipment 103,380 103,380
------- -------
181,238 135,353
Less: accumulated depreciation (118,105) (92,335)
$63,133 $43,018
======= =======
During the years ended December 31, 2005 and 2004, depreciation expense charged
to operations was $25,769 and $47,686, respectively.
NOTE C - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2005 and 2004 are as
follows:
2005 2004
Accounts payable $657,929 $ 176,094
Accrued interest 389,569 82,136
Accrued payroll and payroll taxes 22,642 3,185
Other accrued liabilities 370,375 240,648
----------- ----------
Total $ 1,440,515 $ 502,063
F-10
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE D-NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at December 31, 2005 and 2004 are as follows:
2005 2004
-------- -------
10% convertible note payable, unsecured and due September, 2003; accrued and
unpaid interest due at maturity; Note holder has the option to convert 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. The Company is in violation of the loan
covenants.
25,000 25,000
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) 515,283 80,822
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) 299,820 --
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) $0.6 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 covenents (see below) 49,680 --
8% 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) $0.10 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) 1,918 --
-------- -------
894,201 108,322
Less: current maturities (542,783) (27,500)
-------- -------
Notes payable and convertible debentures-long term portion $351,418 $80,822
======== =======
F-11
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE D-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 December 31, 2005, 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 December 31, 2005, 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 December 31, 2005, 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.
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 December 31, 2005, 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.
F-12
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE D-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
These transactions, to the extent that it is to be satisfied with common stock
of the Company would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible host debt conversion feature, the Company is
required to record a liability relating to both the detachable warrants and
embedded convertible feature of the notes payable (included in the liabilities
as a "derivative liability").
The accompanying financial statements comply with current requirements relating
to warrants and embedded derivatives as described in FAS 133, EITF 98-5 and
00-27, and APB 14 as follows:
o The Company allocated the proceeds received between convertible debt
and detachable warrants based upon the relative fair market values
on the dates the proceeds were received.
o Subsequent to the initial recording, the increase in the fair value
of the detachable warrants, determined under the Black-Scholes
option pricing formula and the increase in the intrinsic value of
the embedded derivative in the conversion feature of the convertible
debentures are accrued as adjustments to the liabilities at December
31, 2005 and 2004, 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 $866,698 and $80,822 as of December 31, 2005
and 2004, respectively.
The following table summarizes the various components of the convertible
debentures as of December 31, 2005 and 2004:
2005 2004
---------- ----------
Convertible debentures $894,201 $108,322
Warrant liability 2,013,188 131,511
Derivative liability 6,809,449 1,490,576
9,716,835 1,730,409
Cumulative adjustment of derivative and warrant liability to fair value (4,322,637) (122,087)
Cumulative unrealized loss related to conversion of convertible note to
common shares charged to interest expense (565,539) (144,931)
Cumulative accretion of principal related to convertible debentures (866,701) (80,822)
Total convertible debentures: $3,961,961 $1,382,569
NOTE E-WARRANT LIABILITY
Total warrant liability as of December 31, 2005 and 2004 is comprised of the
following:
2005 2004
---------- ----------
Fair value of warrants relating to convertible debentures $2,013,188 $131,511
Fair value of warrants relating to preferred stock-class A 1,147,334 906,419
Fair value of other outstanding warrants 191,504 147,315
---------- ----------
Total $3,352,026 $1,185,245
========== ==========
NOTE F -STOCKHOLDER'S EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
The Company has also authorized 5,000,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred"), with a par value of $.001 per share.
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.
F-13
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE F -STOCKHOLDER'S EQUITY (CONTINUED)
The Series A Preferred stated conversion price of $.10 per shares is subject to
certain anti-dultion provsions in the event the Company issues shares fo its
common stock or common stock equivilants 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.
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.
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 ($5,000.00 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 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 year ended December 31, 2005, $ -0- in
dividends were accumulated.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series A Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series A Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $5,000.00 per share, and the holders of
the Series A Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series A Preferred being sometimes referred to as
the "Liquidation Payments."
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.
F-14
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE F -STOCKHOLDER'S EQUITY (CONTINUED)
..
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 December 31, 2005 and 2004, respectively.
o The expense relating to the increase in the fair value of the
Company's stock reflected in the change in the fair value of the
warrants noted above) is included as an other comprehensive income
item of an unrealized gain or loss arising from convertible
financing on the Company's balance sheet.
The fair value of the detachable warrants as of December 31, 2005 and 2004
were as follows:
2005 2004
---------- --------
Fair value of warrants relating to issuance of convertible preferred stock: $1,147,334 $906,419
The Company recorded an Unrealized Gain (Loss) on the change in fair value of
these detachable warrants of $(240,915) and $5,092,521 for December 31, 2005 and
2004, respectively.
SERIES B CONVERTIBLE PREFERRED STOCK
The Company has also authorized 8,000,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred"), with a par value of $.001 per share.
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 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 year ended December 31, 2005 $ 192,000 in
dividends were accumulated.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series B Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series B Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $1.00 per share, and the holders of the
Series B Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series B Preferred being sometimes referred to as
the "Liquidation Payments."
F-15
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE F -STOCKHOLDER'S EQUITY (CONTINUED)
COMMON STOCK
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share. As of December 31, 2005 and 2004, the Company has 75,608,334
and 23,770,233 shares issued and outstanding, respectively.
During the three months ended March 31, 2005, holders converted 38.5 shares of
preferred stock - Class A into 1,925,000 shares of common stock. Each share of
preferred stock is convertible into 50,000 shares of common stock.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0248 per share on conversion of notes payable.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0135 per share on conversion of notes payable.
In February, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00883 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.01358 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00983 per share on conversion of notes payable.
During the three months ended June 30, 2005, holders converted 26.5 shares of
preferred stock - Class A into 1,325,000 shares of common stock. Each share of
preferred stock is convertible into 50,000 shares of common stock
In April, 2005, the Company issued 800,000 shares of its common stock at $0.03
per share in exchange for services.
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0118 per share on conversion of notes payable.
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.011 per share on conversion of notes payable.
In May, 2005, the Company issued 1,035,221 shares of its common stock at $0.0108
per share on conversion of notes payable.
In May, 2005, the Company issued 1,600,000 shares of its common stock at $0.0105
per share on conversion of notes payable.
In May, 2005, the Company issued 1,100,000 shares of its common stock at $0.0103
per share on conversion of notes payable.
In May, 2005, the Company issued 1,700,000 shares of its common stock at $0.0088
per share on conversion of notes payable.
In May, 2005, the Company issued 1,700,000 shares of its common stock at $0.0085
per share on conversion of notes payable.
In May, 2005, the Company issued 3,400,000 shares of its common stock at $0.0083
per share on conversion of notes payable.
In June, 2005, the Company issued 250,000 shares of its common stock at $0.02
per share in exchange for services.
In June, 2005, the Company issued 6,800,000 shares of its common stock at
$0.0083 per share on conversion of notes payable.
In June, 2005, the Company issued 2,400,000 shares of its common stock at
$0.0092 per share on conversion of notes payable.
In June, 2005, the Company issued 7,900,000 shares of its common stock at
$0.0085 per share on conversion of notes payable.
In July, 2005, the Company issued 9,573,000 shares of its common stock at
$0.0085 per share on conversion of notes payable.
In August, 2005, the Company issued 1,000,000 shares of its common stock at
$0.097 per share in exchange for services.
During the three months ended September 30, 2005, holders converted 20.5 shares
of preferred stock - Class A into 1,025,000 shares of common stock. Each share
of preferred stock is convertible into 50,000 shares of common stock.
In October, 2005, the Company issued 400,000 shares of its common stock at $0.07
per share in exchange for services.
F-16
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE F -STOCKHOLDER'S EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
In December, 2005, the Company issued 333,333 shares of its common stock at
$0.091 per share in exchange for services.
During the three months ended December 31, 2005, holders converted 6.5 shares of
preferred stock - Class A into 325,000 shares of common stock at. Each share of
preferred stock is convertible into 50,000 shares of common stock.
NOTE G -STOCK OPTIONS AND WARRANTS
CLASS A WARRANTS
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
shareholders at December 31,2005.
Warrants Outstanding Warrants Exercisable
-------------------- ---------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ 0.03 25,000,000 5 $ 0.03 25,000,000 $ 0.03
0.10 891,500 5 0.10 891,500 0.10
0.15 699,500 5 0.15 699,500 0.15
0.20 1,845,000 3 0.20 1,845,000 0.20
0.25 8,751,564 2 0.25 8,751,564 0.25
0.50 2,600,000 5 0.50 2,600,000 0.50
1.05 8,643,064 2 1.05 8,643,064 1.05
48,430,628 3.85 $ 0.29 48,430,628 $ 0.29
Transactions involving the Company's warrant issuance are summarized as follows:
Weighted Average
Number of Shares Price Per Share
Outstanding at December 31, 2003 15,895,000 $ 0.54
Granted 12,156,128 0.39
Exercised (851,000) (0.25)
Canceled or expired (3,919,000) (0.25)
Outstanding at December 31, 2004 23,281,128 $ 0.58
Granted 26,499,500 0.03
Exercised -- --
Canceled or expired (1,350,000) (0.25)
Outstanding at December 31, 2005 48,430,628 $ 0.29
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.
F-17
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE G -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.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ 0.2125 2,000,000 4 $ 0.2125 2,000,000 $ 0.2125
0.2125 2,000,000 5 0.2125 2,000,000 0.2125
0.10 12,000,000 6 0.10 12,000,000 0.10
0.0295 17,580,000 7.5 0.0295 17,580,000 0.0295
33,580,000 6.6 $ 0.076 33,580,000 $ 0.076
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
Outstanding at December 31, 2003 2,000,000 $0.2125
Granted 2,000,000 $0.2125
Exercised -- --
Canceled or expired -- --
Outstanding at December 31, 2004 4,000,000 $0.2125
Granted 29,580,000 $0.058
Exercised -- --
Canceled or expired -- --
Outstanding at December 31, 2005 33,580,000 $0.076
The weighted-average fair value of stock options granted to employees during the
year ended December 31, 2005 and 2004 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
For the years ended December 31,
2005 2004
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2% 2%
Expected stock price volatility 255% 149%
Expected dividend payout -- --
Expected option life-years (a) 7 6
(a)The expected option life is based on contractual expiration dates.
F-18
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE G -STOCK OPTIONS AND WARRANTS (CONTINUED)
If the Company recognized compensation cost for the stock options and warrants
for the non-qualified employee stock option plan in accordance with SF AS
No.123, the Company's pro forma net loss and net loss per share (basic) would
have been $(10,469,042 ) and $( 0.18 ) for the year ended December 31, 2005 and
net income of $2,030,718 and $0.04 for the year ended December 31, 2004,
respectively.
NOTE H -RELATED PARTY TRANSACTIONS
The Company incurred management fees to its officers totaling $0 and $445,9970
during the years ended December 31, 2005 and December 31, 2004, respectively.
Unpaid management fees aggregate $ 0 and $0 as of December 31, 2004 and 2003,
respectively. In May, 2004 the Board of Directors converted $723,670 in unpaid
management fees to Preferred Class B shares of the Company at a rate of $1.00
per preferred share. The Company also issued notes payable to officers in the
amount of $283,835 for the balance of the unpaid management fees.
From time to time, the Company's principal officers have advanced funds to the
Company for working capital purposes in the form of unsecured promissory notes,
accruing interest at 12% per annum. As of December 31, 2005 and 2004, the
balance due to the officers was $366,595 and $399,080, respectively.
NOTE I -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.
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.
F-19
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE I -COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (continued)
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 J- (LOSS) INCOME PER SHARE
The following table presents the computation of basic and diluted (loss) income
per share:
For the year ended December 31,
2005 2004
Net income (loss) available to common stockholders $ (9,410,657) $ 3,103,049
Basic income/(loss) per share (0.17) $ 0.19
Fully diluted income/(loss) per share $ (0.17) $ 0.06
Weighted average common shares outstanding (basic) 54,490,102 16,701,174
Weighted average common shares outstanding (fully diluted) 211,355,239 48,201,174
As of December 31, 2005, 156,865,137 potential shares were excluded from the
shares used to calculate diluted loss per share as their inclusion would reduce
net loss per share.
NOTE K - INCOME TAXES
The Company has adopted Financial Accounting Standards No. 109, which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statement or
tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant. A management estimate that at December 31, 2005, the Company has
available for federal income tax purposes a net operating loss carry forward of
approximately $18,500,000, expiring in the year 2023, that may be used to offset
future taxable income. Due to significant changes in the Company's ownership,
the future use of its existing net operating losses may be limited.
The Company has provided a valuation reserve against the full amount of the net
operating loss benefit, since in the opinion of management based upon the
earnings history of the Company; it is more likely than not that the benefits
will not be realized.
Components of deferred tax asset as of December 31, 2005 and 2004 are as
follows:
Non current:
2005 2004
----------- -----------
Net operating loss carry forward $ 6,300,000 $ 2,900,000
Valuation allowance (6,300,000) (2,900,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
F-20
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE L- 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 December 31, 2005, the Company incurred accumulated losses of
$18,691,941. The Company's current liabilities exceeded its current assets by
$1433,902 as of December 31, 2005. 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 M - BUSINESS CONCENTRATION
Sales to 5 major customers approximated $20,006 or 37% of total sales for the
year ended December 31, 2005.
Purchases from the Company's 5 major suppliers approximated $418,530 or 81% of
total purchases for the year ended December 31, 2005.
Sales to 1 major customer totaled $10,000 or 42% for the year ended December 31,
2004.
NOTE N- 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 D 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 common stock, convertible debt and warrants have been restated to
reflect the relative fair value method.
In accordance with Accounting Principles Board Opinion, Accounting Changes (APB
20) the necessary corrections to apply the accounting principles on the
aformentioned transactions are currently reflected in the reported 2004
financial information. The impact to the previously issued 2004 financial
statements is as follows:
2004 financial 2004 financial Account increase
statement balance prior statement balance post (decrease) in 2004
to restatement restatement financials
----------------------- ---------------------- -------------------
Net income (loss): $ (6,825,848) $ 3,103,049 $ 9,928,897
Equity (deficit) $ (1,723,810) $ (3,887,248) $ (2,163,438)
Assets $ 557,341 $ 557,341 $ --
Liabilities $ 2,281,151 $ 3,685,286 $ 1,404,135
Income (loss) per share-basic $ (0.41) $ 0.19 $ 0.60
Income (loss) per share-fully diluted $ (0.41) $ 0.06 $ 0.47
F-21
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE N- RESTATEMENT (CONTINUED)
The resulting effects on the prior period adjustments on 2004 cash flows by area
are as follows:
2004 cash flow 2004 cash flow Amount increase
statement statement (decrease) in 2004
balance prior balance post cash flow
to restatement restatement statement
--------------- --------------- -------------------
Net cash from operating activities $ (1,954,562) $ (1,785,773) $ 168,788
Net cash from investing activities $ (21,859) $ (21,859) $ --
Net cash from financing activities $ 2,375,548 $ 2,206,760 $ (168,788)
NOTE O- SUBSEQUENT EVENTS
March 2006 Stock Purchase Agreement
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on March 27, 2006, for the
sale of (i) $500,000 in secured convertible notes, and (ii) warrants to purchase
19,000,000 shares of our common stock.
The notes bear interest at 8%, mature three years from the date of issuance, and
are convertible into our common stock, at the investors' option, at the lower
of:
o $0.10; or
o 55% of the average of the three lowest intraday trading prices
for the common stock on the Over-The-Counter Bulletin Board
for the 20 trading days before but not including the
conversion date.
We have a call option under the terms of the secured convertible notes. The call
option provides us with the right to prepay all of the outstanding secured
convertible notes at any time, provided we are not in default and our stock is
trading at or below $.13 per share. Prepayment of the notes is to be made in
cash equal to either (i) 125% of the outstanding principal and accrued interest
for prepayments occurring within 30 days following the issue date of the secured
convertible notes; (ii) 135% of the outstanding principal and accrued interest
for prepayments occurring between 31 and 60 days following the issue date of the
secured convertible notes; and (iii) 150% of the outstanding principal and
accrued interest for prepayments occurring after the 60th day following the
issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading days
prior written notice to the holders of the secured convertible notes. For notice
purposes, a trading day is any day on which our common stock is traded for any
period on the OTC Bulletin Board. Notwithstanding the notice of prepayment, the
holders of the secured convertible notes have the right at all times to convert
all or any portion of the secured convertible notes prior to payment of the
prepayment amount.
We also have a partial call option under the terms of the secured convertible
notes in any month in which the current price of our common stock is below
$0.13. Under the terms of the partial call option, we have the right to pay the
outstanding principal amount of the secured convertible notes plus one-month's
interest for that month, which will stay any conversions of the secured
convertible notes by the holders for that month. The principal amount of the
secured convertible notes to be repaid is determined by dividing the then
outstanding principal amount of the notes by the maturity of the notes in
months, or 36.
The full principal amount of the secured convertible notes are due upon default
under the terms of secured convertible notes. The warrants are exercisable until
seven years from the date of issuance at a purchase price of $0.10 per share. In
addition, we have granted the investors a security interest in substantially all
of our assets and intellectual property and registration rights.
March 2006 Loan
On March 30, 2006 we entered into a financing agreement with the International
Capital Group, LLC whereby our Directors pledged 4,000,000 shares of their
personal common stock as collateral for a loan in the amount of $152,400. The
loan carries an interest rate of 4.99% payable quarterly and has a maturity of
March 31, 2009.
F-22
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE O- SUBSEQUENT EVENTS (CONTINUED)
Conversions
On March 3, 2006 the holders of the Secured Convertible Note dated September 23,
2004 exercised a partial conversion and were issued 791,369 shares of common
stock at a conversion price of $0.04 per share.
Holders of 8.38 Series A Preferred Stock were issued 419,032 shares of the
Company's common stock.
F-23
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
F-24
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
F-25
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
F-26
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.
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.
F-27
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), Share-Based Payment" which is a revision
of FASB Statement No. 123, "Accounting for Stock-Based Compensation". Statement
123R supersedes APB opinion No. 25, "Accounting for Stock Issued to Employees",
and amends FASB Statement No. 95, "Statement of Cash Flows". Generally, the
approach in Statement 123R is similar to the approach described in Statement
123. However, Statement 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro-forma disclosure is no longer an
alternative. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123(R). This statement does not
address the accounting for employee share ownership plans, which are subject to
AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company had to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. The Company
implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective
method. The fair value of each option grant issued after January 1, 2006 will be
determined as of grant date, utilizing the Black-Scholes option pricing model.
The amortization of each option grant will be over the remainder of the vesting
period of each option grant.
As more fully described in the financial statements included in Form 10-KSB for
the year ended December 31, 2005, the Company granted stock options over the
years to employees of the Company under a non-qualified employee stock option
plan. As of December 31, 2005, 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.
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:
F-28
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
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.
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.
F-29
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
---------------------------------------------------------------------------------------------------------------------------
F-30
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 notincluding, conversion date. The Company granted the note 117,625 1,918
holder a security interest insubstantially all of the Company's assets and
intellectual property and registration rights (see below)
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 43,379 --
holder a security interest in substantially all of the Company's assets and ----------- --------
intellectual property and registration rights. (See below)
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
========== =========
---------------------------------------------------------------------------------------------------------------------------
F-31
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.
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.
F-32
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
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.
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, December 31,
2006 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 (1,762,698) (4,322,637)
liability to fair value
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, December 31,
2006 2005
--------------------------------------------------------------------------------
Fair value of warrants relating to convertible $2,432,970 $2,013,188
debentures
Fair value of warrants relating to preferred 398,797 1,147,334
stock-class A
Fair value of other outstanding warrants 340,723 191,504
---------- ----------
Total $3,172,490 $3,352,026
========== ==========
--------------------------------------------------------------------------------
F-33
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.
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.
F-34
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY
SERIES A - CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 relating to the increase in the fair value of the Company's stock
reflected in the change in the fair value of the warrants noted above) is
included as an other comprehensive income item of an unrealized gain or loss
arising from convertible financing on the Company's balance sheet.
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.
F-35
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY
SERIES B - CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders of record of the Series B Preferred shall be entitled to receive
cumulative dividends at the rate of twelve percent per annum (12%) on the face
value ($1.00 per share) when, if and as declared by the Board of Directors, if
ever. All dividends, when paid, shall be payable in cash, or at the option of
the Company, in shares of the Company's common stock. Dividends on shares of the
Series B Preferred that have not been redeemed shall be payable quarterly in
arrears, when, if and as declared by the Board of Directors, if ever, on a
semi-annual basis. No dividend or distribution other than a dividend or
distribution paid in Common Stock or in any other junior stock shall be declared
or paid or set aside for payment on the Common Stock or on any other junior
stock unless full cumulative dividends on all outstanding shares of the Series B
Preferred shall have been declared and paid. These dividends are not recorded
until declared by the Company. For the period ended June 30, 2006 $ 240,000 in
dividends were accumulated.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series B Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series B Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $1.00 per share, and the holders of the
Series B Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series B Preferred being sometimes referred to as
the "Liquidation Payments."
COMMON STOCK
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share. As of 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.
F-36
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
Weighted Average Weighted Exercisable
Remaining Average Weighted
Exercise Number Contractual Exercise Number Average
Price Outstanding Life (years) 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
Number of Average
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:
------------------------------------------------------
Numberof warrants purchase price per Term (years)
share:
------------------------------------------------------
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
------------------------------------------------------
F-37
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
Remaining Weighted Weighted
Contractual Average Average
Exercise Number 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.
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.
F-38
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
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.
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.
F-39
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
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,
--------------------------------------------------------------------------------
2005- As
2006 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.
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:
F-40
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
NOTE K-RESTATEMENT (CONTINUED)
For the six months ended June 30, 2005:
----------------------------------------------------------------------------
Amount
June 30, 2005 June 30, 2005 increase
financial financial (decrease) in
statement statement June 30, 2005
balance prior post financial
to restatement 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:
----------------------------------------------------------------------------
Amount
June 30, 2005 June 30, 2005 increase
financial financial (decrease) in
statement statement June 30, 2005
balance prior post financial
to restatement 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 Amount increase
cash flow June 30,, 2005 (decrease) in
statement cash flow June 30, 2005
balance prior statement post cash flow
to restatement restatement 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 --
----------------------------------------------------------------------------
F-41
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Nevada law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 1,728.23
Accounting fees and expenses 10,000.00*
Legal fees and expenses 40,000.00*
Miscellaneous 3,271.77*
------------
TOTAL $ 55,000.00*
============
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On October 1, 2003, we entered into an agreement with Consulting for
Strategic Growth 1, Ltd. ("CFSG"), in which CFSG would provide consulting
services in the form of investor relations and public relations. On January 27,
2004, in consideration for services rendered, Stanley Wunderlich, Chairman of
CFSG was issued 125,000 shares of our common stock at $0.001 per share and
Bonnie Stretch, pubic relations for CFSG, was issued 25,000 shares of our Common
stock at $0.001 per share. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On October 30, 2003, we entered into an agreement with Roccus Capital
Partners, LLC ("RCP") and Alliance Advisors (`AA") in which RCP and AA would
provide strategic advisement to us. On January 27, 2004, as an engagement fee,
Richard L. Berkley and Marc A. Heskell, principals of RCP and Alan Sheinwald,
principal of AA were each issued 75,000 shares of our common stock at $0.001 per
share. These issuances were private transactions pursuant to Section 4(2) of the
Securities Act.
On December 1, 2003, we entered into an agreement with CFSG, in which CFSG
would provide consulting services in the form of investor relations and public
relations. In consideration for services to be rendered, on January 27, 2004,
Stanley Wunderlich was issued 60,000 shares of our common stock at $0.001 per
share with 10,000 shares issued each month based upon performance criteria
satisfactory to both parties. This issuance was a private transaction pursuant
to Section 4(2) of the Securities Act.
On January 27, 2004, we issued 700,000 shares of our Common stock at $0.01
per share to Titan Entertainment Group pursuant to a consulting services
agreement in which Titan Entertainment Group would create strategic business
relationships for us. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On January 27, 2004, we issued 600,000 shares of our Common stock at $0.01
per share to Michael J. Stern pursuant to a consulting services agreement in
which Michael J. Stern would create strategic business relationships for us.
This issuance was a private transaction pursuant to Section 4(2) of the
Securities Act.
On January 27, 2004, we issued 600,000 shares of our Common stock at $0.01
per share to KBK Ventures, Inc. pursuant to a consulting services agreement in
which KBK Ventures would create strategic business relationships for us. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27, 2004, we issued 800,000 shares of our Common stock at $0.01
per share to 3CD Consulting, LLC pursuant to a consulting services agreement in
which 3CD Consulting would create strategic business relationships for us. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27,2004, we issued 600,000 shares of our Common stock at $0.01
per share to Ronald E. Gee pursuant to a consulting services agreement in which
Ronald E. Gee would create strategic business relationships us. This issuance
was a private transaction pursuant to Section 4(2) of the Securities Act.
On January 27, 2004, we issued 155 shares of Series A Preferred Stock
(with a stated value of $5,000 per share and a conversion price of $0.10 per
share) and warrants to purchase an aggregate of 15,500,000 of our common stock.
This private placement was exempt from registration pursuant to Section 4(2) of
the Securities Act.
On January 27, 2004, we issued 40,000 shares of our Common stock at $0.001
per share to Donald F. Huffman in consideration of services on our behalf. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27, 2004, we issued 10,000 shares of our common stock at $0.001
per share to Robert Rubin in consideration of services on our behalf. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27, 2004, Brian Scott converted a $20,000 promissory note dated
April 1, 2003 in the amount of $20,000 into 80,000 shares of the our common
stock at $0.25 per share. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
II-2
On April 5, 2004, we issued 450,000 shares of our common stock issued to
Capital Funding Solutions as collateral pursuant to a factoring agreement were
cancelled.
In May 2004, we issued 5,310,000 shares of our common stock at $0.10 per
share and 5,310,000 warrants exercisable at $0.25 per share. This issuance was a
private transaction pursuant to Section 4(2) of the Securities Act
On May 25, 2004, we issued 15.861 shares of Series A Preferred Stock (with
a stated value of $5,000 per share and a conversion price of $0.10 per share)
and warrants to purchase an aggregate of 793,065 of our common stock. This
private placement was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On June 4, 2004, we issued 30,500 stock purchase warrants exercisable at
$0.25 per share and 19,500 stock purchase warrants exercisable at $0.10 per
share each to Marc Haskell, Richard Berkley and Alan Sheinwald pursuant to a
consulting agreement. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On June 4, 2004, Michael Kelly converted a promissory note in the amount
of $5.000 into 50,000 shares of our common stock at $0.10 per share. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On June 4, 2004, we issued 30,000 shares of our common stock valued at
$.10 per share to Forma Designs, Inc. for services rendered. This issuance was a
private transaction pursuant to Section 4(2) of the Securities Act.
On June 4, 2004, we issued 310,000 stock purchase warrants to Dennis Oon,
Gary Murphy, Brian Kramen and Ed English exercisable at $0.20 per share for
services rendered. This issuance was a private transaction pursuant to Section
4(2) of the Securities Act.
On June 8, 2004, we issued 975,000 shares of our common stock valued at
$.10 per share and 975,000 stock purchase warrants exercisable at $0.25 per
share pursuant to an agreement in which Current Capital would provide investor
relation services for us. This issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act.
On June 8, 2004, we issued 375,000 shares of our common stock valued at
$.10 per share and 375,000 stock purchase warrants exercisable at $0.25 per
share to Advisory Group Ltd. pursuant to an agreement in which Advisory Group
Ltd. would provide investor relation services for us. This issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act.
On June 8, 2004, we issued 200,000 shares of our common stock valued at
$.10 per share to Phil Snowden and C. Clark Burns pursuant to a consulting
agreement. This issuance was a private transaction pursuant to Section 4(2) of
the Securities Act.
On June 16, 2004, we issued 60,000 shares of our common stock valued at
$.10 per share and 100,000 stock purchase warrants exercisable at $0.50 each to
Frank Maresca Associate, Inc., William Schnell & Associates, Inc. and Bruce W.
Geiger & Associates, Inc. pursuant to a consulting agreement. This issuance was
a private transaction pursuant to Section 4(2) of the Securities Act.
On July 14, 2004, we issued 100,000 shares of our Common Stock to John
Hanemaayer at $0.10 per share. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
On July 15, 2004, we issued 100,000 stock purchase warrants exercisable at
$0.20 per share to Michael G. Konicek for services rendered. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On July 30, 2004, we issued 100,000 shares of our Common Stock to David
Bomberg pursuant to a consulting agreement. This issuance was a private
transaction pursuant to Section 4(2) of the Securities Act.
II-3
On August 24, 2004, we issued 701,000 shares of our Common Stock against
exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On August 24, 2004, holders of 4 shares of our Series A Convertible
Preferred Stock exercised their rights to convert into 200,000 shares of our
Common Stock. This issuance was exempt from registration pursuant to Section
4(2) of the Securities Act.
On September 17, 2004, we issued 200,000 shares of our Common Stock
against exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On September 17, 2004, we issued 150,000 stock purchase warrants to Donald
B. Hutton for services rendered at $0.25 per share. This issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC on September 23, 2004 for
the sale of (i) $1,500,000 in secured convertible notes and (ii) a warrants to
buy 2,250,000 shares of our common stock.
The investors provided us with the funds as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The secured convertible notes bear interest at 10%, mature two years from
the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.72 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
are due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.50 per share. In addition the warrants exercise price gets adjusted in the
event we issue common stock at a price below market, with the exception of any
securities issued as of the date of this warrant.
On October 11, 2004, we issued 50,000 stock purchase warrants exercisable
at $0.20 per share to Fleetwood Associates for services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On October 18, 2004, we issued 500,000 shares of our Common Stock to
Greenfield Capital, LLC pursuant to a placement agent agreement. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On October 18, 2004, Dolores and Ray L. Jennings converted a promissory
note in the amount of $21,002.85 into 140,019 shares of our Common Stock at
$0.15 per share. This issuance was a private transaction pursuant to Section
4(2) of the Securities Act.
On October 18, 2004, we issued 90,000 shares of our Common Stock to
Dolores and Ray L. Jennings for services rendered. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On October 18, 2004, we issued 100,000 shares of our Common Stock to
Sichenzia Ross Friedman Ference LLP for legal services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
II-4
On November 8, 2004, we issued 250,000 stock purchase warrants
exercisable at $0.20 per share to RoBrady Capital, LLC for services rendered.
This issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On November 8, 2004, we issued 50,000 stock purchase warrants exercisable
at $0.20 per share to Stephen W. Gropp for services rendered. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 50,000 stock purchase warrants exercisable
at $0.20 per share to Timothy C. Dudgeon for services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 200,000 stock purchase warrants exercisable
at $0.20 per share to William Walker for services rendered. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On December 10, 2004, we issued 203,867 shares of our Common Stock to our
Series A Preferred Shareholders at $0.44 per share as a penalty for late
registration of the underlying stock. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
On December 14, 2004, we issued 200,000 stock purchase warrants
exercisable at $0.20 per share to William Walker for services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On December 14, 2004, we issued 200,000 stock purchase warrants
exercisable at $0.20 per share to Hunter H. Bostfor services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
In December 2004, holders converted 15 shares of our Series A Preferred
Stock into 750,000 shares of our Common Stock at $.10 per share. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
In January 2005, holders converted 33.5 shares of our Series A Preferred
Stock into 1,425,000 shares of our Common Stock at $.10 per share. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
In February 2005, holders converted 5 shares of our Series A Preferred
Stock into 250,000 shares of our Common Stock at $.10 per share. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC on April 22, 2005 for the
sale of (i) $1,500,000 in secured convertible notes and (ii) a warrants to buy
25,000,000 shares of our common stock.
The investors provided us with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
II-5
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.03 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
are due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.03 per share. In addition the warrants exercise price gets adjusted in the
event we issue common stock at a price below market, with the exception of any
securities issued as of the date of this warrant.
During the three months ended June 30, 2005, we issued 1,325,000 shares of
common stock for the conversion of 26.5 shares of Class A preferred stock.
In April, 2005, we issued 800,000 shares of our common stock at $0.03 per
share in exchange for services rendered.
In June, 2005, we issued 250,000 shares of our common stock at $0.02 per
share in exchange for services rendered.
During the three months ended September 30, 2005, we issued 1,025,000
shares of common stock for the conversion of 20.5 shares of Class A preferred
stock.
In July 2005, we issued 9,573,000 shares of common stock $0.0085 per share
on conversion of notes payable.
In August, 2005, we issued 1,000,000 shares of our common stock at $0.097
per share in exchange for services rendered.
During the three months ended December 31, 2005, we issued 325,000 shares
of common stock upon conversion of 6.5 shares of Class A preferred stock.
In October 2005, we issued 400,000 shares of common stock at $0.07 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 October 24, 2005 for the
sale of (i) $800,000 in secured convertible notes and (ii) warrants to buy
800,000 shares of our common stock.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.06 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
are due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.10 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.
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 December 28, 2005 for the
sale of (i) $700,000 in secured convertible notes and (ii) warrants to buy
700,000 shares of our common stock.
The secured convertible notes bear interest at 8%, 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) 55% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
are due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.12 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.
II-6
In December 2005, we issued 333,333 shares of common stock at $0.09 per
share in exchange for services rendered.
During the three months ended March 31, 2006, we issued 419,032 shares of
common stock for the conversion of 8.4 shares of Series A preferred stock.
In March 2006, we issued 791,369 shares of common stock at $0.04 per share
on conversion of notes payable.
In January 2006, we issued 3,000,000 shares of common stock at $0.084 per
share, 100,000 shares of common stock at $0.113 per share and 10,000 shares at
$0.095, in exchange for services rendered.
In February 2006, we issued 1,500,000 shares of common stock at $0.092 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 March 27, 2006, for the
sale of (i) $500,000 in secured convertible notes and (ii) a warrants to
purchase 19,000,000 shares of our common stock.
The Notes bear interest at 8%, 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) 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 the conversion date. The full principal
amount of the secured convertible notes are due upon default under the terms of
secured convertible notes. In addition, we have granted the investors a security
interest in substantially all of our assets and intellectual property and
registration rights. The warrants are exercisable until five years from the date
of issuance at a purchase price of $0.10 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.
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.
II-7
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 December 28, 2005 for the
sale of (i) $700,000 in secured convertible notes and (ii) warrants to buy
700,000 shares of our common stock.
The secured convertible notes bear interest at 8%, 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) 55% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
are due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.12 per share. In addition the warrants exercise price gets adjusted in the
event we issue common stock at a price below market, with the exception of any
securities issued as of the date of this warrant.
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Cyberlux or executive officers
of Cyberlux, and transfer was restricted by Cyberlux Corporation in accordance
with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
II-8
ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2. References
to "the Company" in this Exhibit List mean Cyberlux Corporation, a Nevada
corporation.
Exhibit No. Description
3.1 Articles of Incorporation, dated as of May 17, 2000, filed as an
exhibit to the registration statement on Form 10-SB filed with the
Commission on December 17, 2001 and incorporated herein by
reference.
3.2 Certificate of Amendment to the Articles of Incorporation, dated as
of April 3, 2003, filed as an exhibit to the registration statement
on Form SB-2 filed with the Commission on April 30, 2003 and
incorporated herein by reference.
3.3 Bylaws of Cyberlux Corporation, filed as an exhibit to the
registration statement on Form 10-SB filed with the Commission on
December 17, 2001 and incorporated herein by reference.
3.4 Certificate of Designation of Series A Preferred Stock, filed as an
exhibit to the current report on Form 8-K filed with the Commission
on January 8, 2004 and incorporated herein by reference.
4.1 Securities Purchase Agreement, dated as of September 23, 2004, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as Exhibit 4.1 to the current report on Form
8-K filed with the Commission on September 29, 2004 and incorporated
herein by reference.
4.2 Secured Convertible Note issued to AJW Offshore, Ltd., dated
September 23, 2004, filed as Exhibit 4.2 to the current report on
Form 8-K filed with the Commission on September 29, 2004 and
incorporated herein by reference.
4.3 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated September 23, 2004, filed as Exhibit 4.3 to the current report
on Form 8-K filed with the Commission on September 29, 2004 and
incorporated herein by reference.
4.4 Secured Convertible Note issued to AJW Partners, LLC, dated
September 23, 2004, filed as Exhibit 4.4 to the current report on
Form 8-K filed with the Commission on September 29, 2004 and
incorporated herein by reference.
4.5 Secured Convertible Note issued to New Millennium Capital Partners
II, LLC, dated September 23, 2004, filed as Exhibit 4.5 to the
current report on Form 8-K filed with the Commission on September
29, 2004 and incorporated herein by reference.
4.6 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
September 23, 2004, filed as Exhibit 4.6 to the current report on
Form 8-K filed with the Commission on September 29, 2004 and
incorporated herein by reference.
4.7 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated September 23, 2004, filed as Exhibit 4.7 to the current report
on Form 8-K filed with the Commission on September 29, 2004 and
incorporated herein by reference.
4.8 Common Stock Purchase Warrant with AJW Partners, LLC, dated
September 23, 2004, filed as Exhibit 4.8 to the current report on
Form 8-K filed with the Commission on September 29, 2004 and
incorporated herein by reference.
4.9 Common Stock Purchase Warrant with New Millennium Capital Partners
II, LLC, dated September 23, 2004, filed as Exhibit 4.9 to the
current report on Form 8-K filed with the Commission on September
29, 2004 and incorporated herein by reference.
II-9
4.10 Registration Rights Agreement, dated as of September 23, 2004, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as Exhibit 4.10 to the current report on
Form 8-K filed with the Commission on September 29, 2004 and
incorporated herein by reference.
4.11 Security Agreement, dated as of September 23, 2004, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd. and New Millennium Capital Partners II, LLC,
filed as Exhibit 4.11 to the current report on Form 8-K filed with
the Commission on September 29, 2004 and incorporated herein by
reference.
4.12 Intellectual Property Security Agreement, dated as of September 23,
2004, by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as Exhibit 4.12 to the current
report on Form 8-K filed with the Commission on September 29, 2004
and incorporated herein by reference.
4.13 Guaranty and Pledge Agreement, dated as of September 23, 2004, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., New Millennium Capital Partners
II, LLC and Donald F. Evans, filed as Exhibit 4.13 to the current
report on Form 8-K filed with the Commission on September 29, 2004
and incorporated herein by reference.
4.14 Secured Convertible Note issued to AJW Offshore, Ltd., dated
October 20, 2004.
4.15 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated October 20, 2004.
4.16 Secured Convertible Note issued to AJW Partners, LLC, dated
October 20, 2004.
4.17 Secured Convertible Note issued to New Millennium Capital Partners
II, LLC, dated October 20, 2004.
4.18 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
October 20, 2004.
4.19 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated October 20, 2004.
4.20 Common Stock Purchase Warrant with AJW Partners, LLC, dated October
20, 2004.
4.21 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated October 20, 2004.
4.22 Secured Convertible Note issued to AJW Offshore, Ltd., dated
November 18, 2004.
4.23 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated November 18, 2004.
4.24 Secured Convertible Note issued to AJW Partners, LLC, dated
November 18, 2004.
4.25 Secured Convertible Note issued to New Millennium Capital Partners
II, LLC, dated November 18, 2004.
4.26 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
November 18, 2004.
4.27 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated November 18, 2004.
4.28 Common Stock Purchase Warrant with AJW Partners, LLC, dated November
18, 2004.
II-10
4.29 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated November 18, 2004.
4.30 Securities Purchase Agreement, dated as of April 22, 2005, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as an exhibit to the current report on Form
8-K filed with the Commission on April 28, 2005 and incorporated
herein by reference.
4.31 Secured Convertible Note issued to AJW Offshore, Ltd., dated April
22, 2005, filed as an exhibit to the current report on Form 8-K
filed with the Commission on April 28, 2005 and incorporated herein
by reference.
4.32 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.33 Secured Convertible Note issued to AJW Partners, LLC, dated April
22, 2005, filed as an exhibit to the current report on Form 8-K
filed with the Commission on April 28, 2005 and incorporated herein
by reference.
4.34 Secured Convertible Note issued to New Millennium Capital Partners
II, LLC, dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.35 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
April 22, 2005, filed as an exhibit to the current report on Form
8-K filed with the Commission on April 28, 2005 and incorporated
herein by reference.
4.36 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.37 Common Stock Purchase Warrant with AJW Partners, LLC, dated April
22, 2005, filed as an exhibit to the current report on Form 8-K
filed with the Commission on April 28, 2005 and incorporated herein
by reference.
4.38 Common Stock Purchase Warrant with New Millennium Capital Partners
II, LLC, dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.39 Registration Rights Agreement, dated as of April 22, 2005, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as an exhibit to the current report on Form
8-K filed with the Commission on April 28, 2005 and incorporated
herein by reference.
4.40 Security Agreement, dated as of April 22, 2005, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd. and New Millennium Capital Partners II, LLC,
filed as an exhibit to the current report on Form 8-K filed with the
Commission on April 28, 2005 and incorporated herein by reference.
4.41 Intellectual Property Security Agreement, dated as of April 22,
2005, by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC, filed as an exhibit to the current report
on Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.42 Guaranty and Pledge Agreement, dated as of April 22, 2005, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., New Millennium Capital Partners
II, LLC and Donald F. Evans, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
II-11
4.43 Securities Purchase Agreement, dated as of October 23, 2005, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.44 Secured Convertible Note issued to AJW Offshore, Ltd., dated
October 23, 2005.
4.45 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated October 23, 2005.
4.46 Secured Convertible Note issued to AJW Partners, LLC, dated
October 23, 2005.
4.47 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC.
4.48 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
October 23, 2005.
4.49 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated October 23, 2005.
4.50 Common Stock Purchase Warrant with AJW Partners, LLC, dated October
23, 2005.
4.51 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated October 23, 2005.
4.52 Registration Rights Agreement, dated as of October 23, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.53 Security Agreement, dated as of October 23, 2005, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd. and New Millennium Capital Partners II,
LLC.
4.54 Intellectual Property Security Agreement, dated as of October 23,
2005, by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC.
4.55 Securities Purchase Agreement, dated as of December 28, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.56 Secured Convertible Note issued to AJW Offshore, Ltd., dated
December 28, 2005.
4.57 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated December 28, 2005.
4.58 Secured Convertible Note issued to AJW Partners, LLC, dated
December 28, 2005.
4.59 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC.
4.60 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
December 28, 2005.
4.61 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated December 28, 2005.
4.62 Common Stock Purchase Warrant with AJW Partners, LLC, dated December
28, 2005.
4.63 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated December 28, 2005.
II-12
4.64 Registration Rights Agreement, dated as of December 28, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.65 Security Agreement, dated as of December 28, 2005, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd. and New Millennium Capital Partners II,
LLC.
4.66 Intellectual Property Security Agreement, dated as of December
28, 2005, by and among Cyberlux Corporation, AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC.
4.67 Securities Purchase Agreement, dated as of March 27, 2006, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.68 Secured Convertible Note issued to AJW Offshore, Ltd., dated
March 27, 2006.
4.69 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated March 27, 2006.
4.70 Secured Convertible Note issued to AJW Partners, LLC, dated March
27, 2006.
4.71 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC.
4.72 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
March 27, 2006.
4.73 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated March 27, 2006.
4.74 Common Stock Purchase Warrant with AJW Partners, LLC, dated March
27, 2006.
4.75 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated March 27, 2006.
4.76 Registration Rights Agreement, dated as of March 27, 2006, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.77 Security Agreement, dated as of March 27, 2006, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd. and New Millennium Capital Partners II,
LLC.
4.78 Intellectual Property Security Agreement, dated as of March 27,
2006, by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC.
4.79 Securities Purchase Agreement, dated as of July 27, 2006, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.80 Secured Convertible Note issued to AJW Offshore, Ltd., dated July
27, 2006.
4.81 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated July 27, 2006.
4.82 Secured Convertible Note issued to AJW Partners, LLC, dated July
27, 2006.
II-13
4.83 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC.
4.84 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
July 27, 2006.
4.85 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated July 27, 2006.
4.86 Common Stock Purchase Warrant with AJW Partners, LLC, dated July 27,
2006.
4.87 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated July 27, 2006.
4.88 Registration Rights Agreement, dated as of July 27, 2006, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC.
4.89 Security Agreement, dated as of July 27, 2006, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd. and New Millennium Capital Partners II,
LLC.
4.90 Intellectual Property Security Agreement, dated as of July 27,
2006, by and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New Millennium
Capital Partners II, LLC.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (to be
filed by amendment).
10.1 Donald F. Evans Employment Agreement, dated as of July 1, 2000,
filed as an exhibit to the registration statement on Form 10-SB
filed with the Commission on December 17, 2001 and incorporated
herein by reference.
10.2 Alan H. Ninneman Employment Agreement, dated as of July 1, 2000,
filed as an exhibit to the registration statement on Form 10-SB
filed with the Commission on December 17, 2001 and incorporated
herein by reference.
10.3 John W. Ringo Employment Agreement, dated as of July 1, 2000, filed
as an exhibit to the registration statement on Form 10-SB filed with
the Commission on December 17, 2001 and incorporated herein by
reference.
10.4 Donald F. Evans Amended Employment Agreement, dated as of January 1,
2003, filed as an exhibit to the registration statement on Form SB-2
filed with the Commission on April 30, 2003 and incorporated herein
by reference.
10.5 Alan H. Ninneman Amended Employment Agreement, dated as of January
1, 2003, filed as an exhibit to the registration statement on Form
SB-2 filed with the Commission on April 30, 2003 and incorporated
herein by reference.
10.6 John W. Ringo Amended Employment Agreement, dated as of January 1,
2003, filed as an exhibit to the registration statement on Form SB-2
filed with the Commission on April 30, 2003 and incorporated herein
by reference.
10.7 Mark D. Schmidt Employment Agreement, dated as of May 1, 2003, filed
as an exhibit to the quarterly report on Form 10-QSB filed with the
Commission on August 19, 2003 and incorporated herein by reference.
10.8 Proprietary Product Manufacturing Agreement, dated as April 24,
2001, by and between Cyberlux Corporation and Shelby County
Community Services, Inc., filed as an exhibit to the registration
statement on Form 10-SB filed with the Commission on December 17,
2001 and incorporated herein by reference.
II-14
10.9 Design Agreement, dated as of March 2, 2001, by and between Cyberlux
Corporation and ROBRADY Design, filed as an exhibit to the
registration statement on Form 10-SB/A filed with the Commission on
February 4, 2001 and incorporated herein by reference.
10.10 Series A Convertible Preferred Stock Purchase Agreement, dated as of
December 31, 2003, by and among Cyberlux Corporation and the
purchasers set forth therein, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 8, 2004 and
incorporated herein by reference.
10.11 Registration Rights Agreement, dated as of December 31, 2003, by and
among Cyberlux Corporation and the purchasers of Series A
Convertible Preferred Stock set forth therein, filed as an exhibit
to the current report on Form 8-K filed with the Commission on
January 8, 2004 and incorporated herein by reference.
10.12 Form of Series A Warrant issued in connection with the sale of
Series A Convertible Preferred Stock, filed as an exhibit to the
current report on Form 8-K filed with the Commission on January 8,
2004 and incorporated herein by reference.
10.13 Form of Series B Warrant issued in connection with the sale of
Series A Convertible Preferred Stock, filed as an exhibit to the
current report on Form 8-K filed with the Commission on January 8,
2004 and incorporated herein by reference.
10.14 Lock-up Agreement, dated as of December 31, 2003, by and among
Cyberlux Corporation and certain officers and directors of Cyberlux
Corporation, filed as an exhibit to the current report on Form 8-K
filed with the Commission on January 8, 2004 and incorporated herein
by reference.
14.1 Code of Conduct, filed as an exhibit to the annual report on Form
10-KSB filed with the Commission on April 15, 2005 and incorporated
herein by reference.
23.1 Consent of Russell Bedford Stefanou Mirchandani LLP (filed
herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of a prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, and
(iii) Include any additional or changed material information on the
plan of distribution.
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(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities
of the undersigned small business issuer pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned small business issuer
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be filed pursuant to
Rule 424;
(ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned small business issuer or used or referred to
by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to
the offering containing material information about the undersigned small
business issuer or its securities provided by or on behalf of the undersigned
small business issuer; and
(iv) Any other communication that is an offer in the offering made
by the undersigned small business issuer to the purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Durham,
State of North Carolina, on September 19, 2006.
CYBERLUX CORPORATION
BY: /S/ DONALD F. EVANS
---------------------------------------
DONALD F. EVANS, CHIEF EXECUTIVE
OFFICER, PRINCIPAL EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
BY: /S/ DAVID D. DOWNING
---------------------------------------
DAVID D. DOWNING, CHIEF FINANCIAL
OFFICER, PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/s/ DONALD F. EVANS Chief Executive Officer September 19, 2006
-------------------------------- (Principal Executive Officer) and
Donald F. Evans Chairman of the Board of Directors
/s/ DAVID D. DOWNING Chief Financial Officer September 19, 2006
-------------------------------- (Principal Financial Officer and
David D. Downing Principal Accounting Officer)
/s/ MARK D. SCHMIDT President, Chief Operating Officer September 19, 2006
-------------------------------- and Director
Mark D. Schmidt
/s/ JOHN W. RINGO Secretary, Corporate Counsel September 19, 2006
-------------------------------- and Director
John W. Ringo
/s/ ALAN H. NINNEMAN Senior Vice President and Director September 19, 2006
--------------------------------
Alan H. Ninneman
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