SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2005
Commission file number 000-33415
CYBERLUX CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA 91-2048178
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4625 CREEKSTONE DRIVE, SUITE 100
RESEARCH TRIANGLE PARK
DURHAM, NORTH CAROLINA 27703
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(Address of principal executive offices) (zip code)
Issuer's Telephone Number: (919) 474-9700
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title if Class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ x ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
Form 10-KSB.
Yes [ ] No [ x ] Delinquent filers are disclosed herein.
Total revenues for Fiscal Year 2005 were $54,523.
The aggregate market value of the Common Stock held by non-affiliates (as
affiliates are defined in Rule 12b-2 of the Exchange Act) of the registrant,
computed by reference to the average of the high and low price on March 31,
2006, was $5,341,292.78.
As of March 31, 2006 there were 85,428,735 shares of issuer's common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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CYBERLUX CORPORATION
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
Page
PART I ----
Item 1. Business.................................................. 1
Item 2. Properties................................................ 6
Item 3. Legal Proceedings......................................... 7
Item 4. Submission of Matters to a Vote of Security Holders....... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Management's Discussion and Analysis of Financial
Condition and Results Of Operations....................... 18
Item 7. Financial Statements...................................... 31
Item 8. Changes in and Disagreements with Accountants on
Auditing and Financial Disclosure......................... 32
Item 8A. Controls and Procedures................................... 32
Item 8B. Other Information......................................... 32
PART III
Item 9. Directors and Executive Officers of the Registrant........ 33
Item 10. Executive Compensation.................................... 36
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................ 39
Item 12. Certain Relationships and Related Transactions............ 40
PART IV
Item 13. Exhibits.................................................. 42
Item 14. Principal Accountant Fees and Services .... .............. 48
Signatures.......................................................... 49
This Form 10-KSB contains forward-looking statements within the meaning of
the federal securities laws. These forward-looking statements are necessarily
based on certain assumptions and are subject to significant risks and
uncertainties. These forward-looking statements are based on management's
expectations as of the date hereof, and the Company does not undertake any
responsibility to update any of these statements in the future. Actual future
performance and results could differ from that contained in or suggested by
these forward-looking statements as a result of factors set forth in this Form
10-KSB (including those sections hereof incorporated by reference from other
filings with the Securities and Exchange Commission), in particular as set forth
in the "Management's Discussion and Analysis and Results of Operation" under
Item 6.
In this form 10-KSB references to "Cyberlux", "the Company", "we," "us,"
and "our" refer to Cyberlux Corporation.
PART I
ITEM 1. DESCRIPTION OF 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.
1
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.
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.
2
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.
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.
3
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.
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.
4
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 coordinates customs protocols and manages incoming
inventories.
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.
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 Luxhall, Ltd. 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 Largemouth Communications, Inc. as our public relations
firm responsible for the strategic and tactical communications for Cyberlux.
Largemouth Communications, Inc. 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 Largemouth
Communications, Inc. 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.
5
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.
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
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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.
ITEM 2. DESCRIPTION OF PROPERTY
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 annual report.
6
ITEM 3. 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.
COURT: CIRCUIT COURT OF THE TWELFTH JUDICIAL DISTRICT IN AND FOR SARASOTA
COUNTY, FLORIDA.
CASE NAME: CYBERLUX CORPORATION, PLAINTIFF V. ERVIN J. RACHWAL, LIGHT
TECHNOLOGY, INC., SAFE-LIGHT INDUSTRIES, LLC A/K/A JFER INNOVATIONS GROUP, LLC,
JAMES MEYER AND JOHN FLEMING.
On April 18, 2001, we filed a civil complaint against Light Technology,
Inc., Ervin J. Rachwal, Safe-Light Industries, LLC a/k/a JFER Innovations Group,
LLC, James Meyer and John Fleming alleging fraud, breach of contract, monies
lent, misappropriation of trade secrets, conspiracy and sought injunctive relief
against the defendants to prevent them from misappropriating trade secrets as
well as to recover monetary damages On May 11, 2001, the Court granted a
temporary injunction against the Defendants. On June 5, 2001, the Defendants
filed their Answer denying the allegations of the Complaint and filed a
counterclaim alleging fraud, violation of Trade Secret Act, breach of contract
and money lent.
On January 18, 2002, the Court granted the Defendants' Motion to Dissolve
the Injunction. On January 28, 2002, we filed a Motion for Rehearing or
Clarification of the Motion to Dissolve. A hearing on our Motion for Rehearing
or Clarification of the Motion to Dissolve was scheduled for March 18, 2002, but
was cancelled by the Court and has not been rescheduled. In accordance with
Florida's Rules of Civil Procedure, when a Motion to dissolve is granted, this
order is stayed and the injunction remains in effect until the Court rules on a
Motion for Rehearing or Clarification of the Motion to Dissolve. Therefore, the
injunction still remains in effect until the Court rules on this Motion.
BACKGROUND:
We came into contact with Light Technology, Inc. and Rachwal in early
2000. We were seeking someone with the knowledge and expertise to assist us in
the development of an emergency light using white LEDs. Light Technology, Inc.
and Rachwal represented that they had such knowledge and expertise and could
finalize the development of our emergency light by September 30, 2000 so that we
could begin manufacturing and selling the emergency light by November 2000.
Rachwal and Light Technology, Inc. also advised us that we could acquire all the
assets of Light Technology, Inc. and the rights to Light Technology, Inc.'s
flashlight which also used white LEDs provided Rachwal was made an officer and
director of our company as well as be in charge of design work.
In order to evaluate this offer, we requested accounting and financial
records to verify the representations of Light Technology, Inc. and Rachwal and
to attempt to ascertain the value of Light Technology, Inc.. Despite repeated
attempts, Light Technology, Inc. and Rachwal were unable to provide adequate,
verifiable financial records. Nonetheless, in order allow Light Technology, Inc.
and Rachwal to proceed with the development of the emergency light in order to
meet the November shipping deadline, we entered into a Letter of Intent with
Light Technology, Inc. on June 12, 2000. This Letter of Intent also contained a
confidentiality clause protecting our interests. Pursuant to the Letter of
Intent we paid Light Technology, Inc. $100,000 to develop a prototype of an
emergency storm light and possible acquisition of the assets of Light
Technology, Inc. based upon an independent evaluation of the of the worth of the
assets. We hired the Sarasota CPA firm, Kerkering, Barbario & Co. to
independently do an evaluation of the Light Technology, Inc. assets. Kerkering,
Barbario came to the conclusion that Light Technology, Inc. had no verifiable
assets of any value. Furthermore, Light Technology, Inc. never developed and
produced a working model of the emergency storm light. We incurred meeting and
travel expenses of $36,401 associated with Light Technology, Inc. during the
period June through December 2000. $43,699 was expended for marketing expense in
anticipation of the promised delivery of the light. During this time, we also
came into contact with Safe-Light. We had discussions with Safe-Light regarding
a potential acquisition, however, there was never a definitive agreement
concerning our acquisition of Safe-Light. We also made loans to defendant
Safe-Light in the amount of $13,188 to assist in development and marketing of
its products based upon the discussions that the assets of Safe-Light would be
acquired by us.
7
We instituted our complaint against the defendants when we learned,
through a local newspaper article that Light Technology, Inc. and Safe-Light had
merged and had developed an emergency light. We had confidentiality rights with
both companies. The defendants breached their contracts with us by
misappropriating trade secrets and we are seeking monetary damages as well
injunctive relief to prevent them from capitalizing on the misappropriation of
trade secrets. Despite the news article in which Rachwal announced that Light
Technology, Inc. had developed an emergency light, he did not object to the
injunction stating that he did not have such a light. Our injunction prohibits
the defendants from claiming rights to our Storm Light blueprints.
There is no similarity between our product, the Home Safety Light, and
Light Technology, Inc.'s product, known as the Pal Light. Our product has 10
diodes and provides a blanket of light to light up a room in the event of a
power outage. The Light Technology, Inc. product is a small flashlight that uses
one diode.
Light Technology, Inc. claims that we breached the contract terms of the
letter of intent and joint venture agreement by failing to maintain confidential
disclosed to us and intentionally disclosing confidential information to third
parties. Despite receiving $100,000 from us, defendants claim we failed to fund
the development of the light and claim that we owe them in excess of $100,000 by
breaching the letter of intent and joint venture agreement. Further, defendants
claim we failed to pay fees set forth in the licensing agreement notwithstanding
that the condition precedent to pay said fees (the successful completion of a
private placement by us, which was subsequently withdrawn due to market
conditions). Defendant Safe-Light alleges that we requested that they assist us
in raising funding for the products discussed in the complaint. We actually
loaned them funds for the development of their barricade light.
We intend to fully prosecute our claims and actions against the
Defendants. We deny the Defendants allegations alleged against us in their
counterclaim. This litigation is still in the discovery stage and the ultimate
outcome cannot presently be determined. We have incurred approximately $25,000
in legal fees and $15,000 in other litigation-related expenses in connection
with this case, however, we have not spent any money this year in connection
with this case nor do we intend at this point in spending significant amounts of
money going forward since the case has not been active for the last few years.
On November 17, 2005, we filed a Motion Notice of Dismissal based on lack
of prosecution. On January 25, 2006, the Court issued a Final Order of
Dismissal.
CASE NO. O5CV3704 - DISTRICT COURT, CITY AND COUNTY OF DENVER, STATE OF COLORADO
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 amd Stipulation for Dismissal with Prejudice. Under the terms of the
Mutual Release and Settlement, we 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.
8
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 $107,000 for
breach of contract, fraud, fraudulent concealment and misrepresentation. We
entered into an agreement with Greenfield Capital Partners LLC in June 2004 to
act as financial advisor in connection with and equity offering. We believe that
their claims are without merit and we intend to vigorously defend these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"CYBL".
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High($) 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 0.05
Third Quarter 0.15 0.05
Fourth Quarter 0.15 0.06
2006
First Quarter 0.12 0.06
Second Quarter (1) 0.08 0.06
(1) As of April 5, 2006
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 700,000,000 shares of common stock, par
value $.001. As of March 31, 2006, there were 85,428,735 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
non-assessable.
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.
10
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 March 31, 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 a
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.
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 our 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.
11
OPTIONS
There are currently options outstanding that have been issued to our
officers and directors to purchase 27,513,237 shares of our common stock.
WARRANTS
In connection with a Securities Purchase Agreement dated September 23,
2004, we issued warrants to purchase 2,250,000 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 warrants to purchase 25,000,000 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 warrants to purchase 800,000 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 warrants to purchase 700,000 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.
In addition, in connection with a private placement offering, we have
issued 8,643,064 Series A and 8, 643,064 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 on December 31,2006
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 $0.25 per
share, which expire in 2008. We have 91,500 warrants outstanding exercisable at
$0.10 per share, which expire in 2008. We have 350,000 warrants outstanding
exercisable at $0.50 per share, which expire on May 28, 2006.
CONVERTIBLE SECURITIES
Not including approximately 83,010,628 shares of common stock issuable
upon exercise of outstanding options and warrants, approximately 25,939,462
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated September 23, 2004, approximately 50,000,000
shares of common stock are issuable, based on current market prices, upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated April 22, 2005. approximately 22,857,143
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 and approximately
22,222,222 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.
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. As of March 31, 2006, $597,194.10
of the secured convertible notes has been converted and $902,805.90 remains
outstanding.
The investors provided us with an aggregate of $1,500,000 as follows:
12
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The notes bear interest at 10%, mature two years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
o $0.72; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on the Over-The-Counter Bulletin Board for the 20
trading days before but not including the conversion date.
We have a call option under the terms of the secured convertible notes.
The call option provides us with the right to prepay all of the outstanding
secured convertible notes at any time, provided we are not in default and our
stock is trading at or below $.60 per share. Prepayment of the notes is to be
made in cash equal to 150% of the outstanding principal and accrued interest.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
The full principal amount of the secured convertible notes are due upon
default under the terms of secured convertible notes. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.50 per share. In addition, we have granted the investors a security interest
in substantially all of our assets and intellectual property and registration
rights.
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.
13
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 $0.03. 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 STOCK 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.
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 $0.06; 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 $.03 per share. Prepayment of the notes is to be
made in cash equal to either (i) 125% of the outstanding principal and accrued
interest for prepayments occurring within 30 days following the issue date of
the secured convertible notes; (ii) 135% of the outstanding principal and
accrued interest for prepayments occurring between 31 and 60 days following the
issue date of the secured convertible notes; and (iii) 150% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the secured convertible notes.
Our right to repay the notes is exercisable on not less than ten trading
days prior written notice to the holders of the secured convertible notes. For
notice purposes, a trading day is any day on which our common stock is traded
for any period on the OTC Bulletin Board. Notwithstanding the notice of
prepayment, the holders of the secured convertible notes have the right at all
times to convert all or any portion of the secured convertible notes prior to
payment of the prepayment amount.
We also 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 $0.10. 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 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
$0.10 per share. In addition, we have granted the investors a security interest
in substantially all of our assets and intellectual property and registration
rights.
14
DECEMBER 2005 STOCK 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.
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 35% 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 $.09 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 five years from the date of issuance at a purchase price of
$0.15 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 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.
15
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.
PENNY STOCK REGULATION.
Shares of our common stock are subject to rules adopted by the Securities
and Exchange Commission that regulate broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks are generally equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in those
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from those rules, deliver a standardized risk disclosure prepared by the
Securities and Exchange Commission, which contains the following:
o A description of the nature and level of risk in the market for
penny stocks in both public offerings and secondary trading;
o A description of the broker's or dealer's duties to the customer and
of the rights and remedies available to the customer with respect to
violation to such duties or other requirements of securities' laws;
o A brief, clear, narrative description of a dealer market, including
"bid" and "ask" prices for penny stocks and the significance of the
spread between the "bid" and "ask" price;
o A toll-free telephone number for inquiries on disciplinary actions;
o Definitions of significant terms in the disclosure document or in
the conduct of trading in penny stocks; and
o Such other information and in such form (including language, type,
size and format), as the Securities and Exchange Commission shall
require by rule or regulation.
Prior to effecting any transaction in a penny stock, the broker-dealer
also must provide the customer the following:
o The bid and offer quotations for the penny stock;
o The compensation of the broker-dealer and its salesperson in the
transaction;
o The number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity of
the market for such stock; and
o Monthly account statements showing the market value of each penny
stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in
a penny stock not otherwise exempt from those rules, the broker-dealer must make
a special written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser's written acknowledgment of the
receipt of a risk disclosure statement, a written agreement to transactions
involving penny stocks, and a signed and dated copy of a written suitably
statement.
16
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. Holders of shares of our common stock may have difficulty selling
those shares because our common stock will probably be subject to the penny
stock rules for an indeterminate period of time.
RECENT SALES OF UNREGISTERED SECURITIES
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.
In December 2005, we issued 333,333 shares of common stock at $0.09 per
share in exchange for services rendered.
17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULT
OF OPERATIONS.
This report contains forward-looking statements. Actual results and events
could differ materially from those projected, anticipated, or implicit, in the
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this report.
With the exception of historical matters, the matters discussed herein are
forward-looking statements that involve risks and uncertainties. Forward-looking
statements include, but are not limited to, statements concerning anticipated
trends in revenues and net income, projections concerning operations and
available cash flow. Our actual results could differ materially from the results
discussed in such forward-looking statements. The following discussion of our
financial condition and results of operations should be read in conjunction with
our financial statements and the related notes thereto appearing elsewhere
herein.
OVERVIEW
We are in the development stage and our efforts have been principally
devoted to designing, developing and marketing advanced lighting systems that
utilize white (and other) light emitting diodes as illumination elements.
We are developing and marketing new product applications of solid-state
diodal illumination (TM) that demonstrate added value over traditional lighting
systems. Using proprietary technology, we are creating a family of products for
task and accent lighting, emergency and security lighting, and specialized
lighting systems for military and homeland security. Our solid-state lighting
technology offers extended light life and greater cost effectiveness than other
existing forms of illumination. We are expanding our marketing activity into
channels of retail, commercial, institutional and military sales.
With our task and accent lighting, the target markets include kitchen and
bath cabinet manufacturers and designer and installation contractors for the
residential market. In the commercial markets, our task and accent lighting
products and emergency and security lighting products address the lighting needs
in hotels, hospitals, nursing homes, airports, shopping centers and multiple
family complexes; long-term evacuation solutions for theaters, office and public
buildings; reduced maintenance cost solutions for property managers as applied
to walkway, corridor or landscape lighting. For our retail products, our target
customers include the home improvement and consumer goods retailers. For the
military and homeland security products, our target markets include all branches
of the military and all government organizations providing security services
such as border control and airport security.
In April of 2005, we began the development of a portable boundary security
lighting product for the military that will provide night-vision compatible
infrared lighting and intense, bright white lighting capability in a portable
configuration for fast, effective deployment. As of June 30, 2005, we completed
the first phase of development and expect final development to be complete in
the third quarter of 2005.
In April of 2005, we completed the fulfillment of a contract with Kings
Park School District of Long Island, New York for the installation of our
Emergency Lighting System in a local middle school. The objective of the pilot
project was to provide a local school with long-term interim lighting solution
so the Kings Park community will have a well-lit emergency shelter in the event
of a natural or manmade disaster. In May of 2005, the completed project was
presented to the Kings Park School District administration and we hope the pilot
could become a model for emergency lighting throughout other school districts.
In the second quarter of 2005, we developed a working relationship with
Cree, Inc., a leading manufacturer of light-emitting diode components. We plan
on developing products that utilize the Cree solid-state lighting technology. We
anticipate announcing our first product based on Cree technology in the third
quarter of 2005.
In May 2005, we introduced the Aeon (TM) "Task & Accent" lighting products
to address residential closet lighting, interior cabinet accent lighting and
under cabinet counter lighting with virtually heatless, long-term (75,000 hours
of life) lighting solutions for the homeowner. This unique lighting resource for
cabinetmakers, contractors and do-it-yourselfers offers three levels of light
from soft white diodal(TM) elements that are cool to the touch and easy to
install. The Aeon closet, cabinet and counter lighting was unveiled at the
Kitchen & Bath Industries Trade Show in Las Vegas, NV on May 10, 2005. Our
general lighting technology will provide a 40 to 60 percent reduction in
maintenance costs for property managers through the replacement of walkway,
corridor or landscape lighting elements and 68 percent reduction in energy costs
for those fixtures. In May, we began establishing the Aeon dealer network as our
channel of distribution for the Aeon products. As of June 30, 2005, we have 26
dealers representing 15 of the top 25 North American housing markets. We are
continuing to build the Aeon dealer network with qualify dealers and hope that
the Aeon dealer channel will cover many of top 50 North American housing markets
by year end.
18
In March of 2005, we submitted a proposal to the MTA that to providing
emergency lighting for only the subway cars and platforms. The proposal also
called for an initial subway car installation trial to prove the capability and
value of our technology. In April of 2005, we met with the Vice President of
Engineering for the MTA and discussed our proposal and the timing for a trial
within the subway system. Based on this meeting and the resulting discussions of
the time period required to accomplish our trial objectives, we understand the
MTA is still evaluating the trial proposal but this is not a priority at this
point and no determination can be made at this time as to when the MTA will make
a decision on our proposal. Therefore, we plan to address the Port Authority
with a similar proposal for an initial subway car installation trial to prove
the capability and value of our technology. This program will be formally
submitted in the third quarter of 2005.
In June of 2005, we completed the development of the Keon(TM) KeyCap, a
new product designed to provide consumers with a long-lasting, slender sleeve of
electronics that turns a standard key into a lighting device. The patented
Keon(TM) KeyCap is the practical lighting solution for every consumer who
carries keys. Each Keon(TM) is a sturdy elastic surround that fits standard key
heads and features an electronics package that focuses a bright diodaltm beam of
light down the key shaft. When its miniaturized button is depressed, the
Keon(TM) directs light precisely into the intended keyhole or other targeted
surfaces. We anticipate supply and sales will begin on the Keon(TM) in the third
quarter of 2005.
In June of 2005, we received confirmation that our Aeon Pro E "Task &
Accent" home lighting meets California's Title 24 new residential energy
requirements of 40 lumens per watt. Verified by Independent Testing
Laboratories, Inc., a third-party independent testing firm, the Aeon Pro E
product was confirmed to operate at 55 lumens per watt. The Title 24 California
energy requirements went into effect in 1978 to decrease California's energy
consumption. Since then, the legislation has saved the state more than $36
billion in electricity and natural gas costs. The Title 24 standards will be
revised in October of 2005 and the new standard of 40 lumens per watt will be
required. ITL was founded 50 years ago, is one of the most experienced
independent testing labs in the country and provides accurate, unbiased
information on virtually every type of lighting to lighting manufacturers,
designers, architects and the government. Exceeding the Title 24 standards opens
up the California market to our Aeon Pro E line and makes these products one of
the only alternatives to traditional task and accent lighting for the home. The
55 lumen per watt efficiency of the Aeon Pro E products is an industry-leading
efficacy and one that surpasses California's Title 24 requirements of 40 lumens
per watt. We anticipate that sales of the Aeon Pro E to grow in the fourth
quarter of 2005 when the new standards are in force.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated 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 consolidated 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.
19
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by APB No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the provisions of APB No. 25, compensation expense is measured at the
grant date for the difference between the fair value of the stock and the
exercise price.
REVENUE RECOGNITION
For revenue from product sales, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
RESULTS OF OPERATIONS
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
20
For the
Years Ended
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
Impairment Loss 30,544 0
Research and development 499,618 391,421
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
TOTAL 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.
21
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, we had a working capital deficit of $1,483,902.
As a result of our operating losses for the year ended December 31. 2005, we
generated a cash flow deficit of $2,663,417 from operating activities. Cash
flows used in investing activities was $45,884 during the year ended December
31, 2005. We met our cash requirements during this period through the issuance
of $3,000,000 Convertible Notes Payable.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of
capitalization, we believe we have sufficient capital resources to meet
projected cash flow deficits through the next twelve months. However, if
thereafter, we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
Our independent certified public accountant has stated in their report,
dated as of March 16, 2006, that we have incurred operating losses 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.
October 2005 Stock 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. The investors purchased all of the secured
convertible notes on Octrober 24, 2005.
The proceeds received from the sale of the secured convertible notes were
used for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
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
is due upon default under the terms of secured convertible notes. The warrants
are exercisable until five years from the date of issuance at a purchase price
of $0.10 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the secured convertible
notes and the exercise price of the warrants may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. 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.
December 2005 Stock 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. The investors purchased all of the secured
convertible notes on Octrober 24, 2005.
The proceeds received from the sale of the secured convertible notes were
used for business development purposes, working capital needs, pre-payment of
interest, payment of consulting and legal fees and purchasing inventory.
22
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) 35% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
is due upon default under the terms of secured convertible notes. The warrants
are exercisable until five years from the date of issuance at a purchase price
of $0.15 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.
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 investors purchased all of the
secured convertible notes on March 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 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
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 $0.10 per share. In addition, the conversion price of the secured convertible
notes and the exercise price of the warrants will be adjusted in the event that
we issue common stock at a price below the fixed conversion price, below market
price, with the exception of any securities issued in connection with the
Securities Purchase Agreement. The conversion price of the secured convertible
notes and the exercise price of the warrants may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution of the selling
stockholder's position. 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.
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.
23
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.
PRODUCT RESEARCH AND DEVELOPMENT
We anticipate continuing to incur research and development expenditures in
connection with the development of our Advanced Ilumination Systems during the
next twelve months. We anticipate that we will expend approximately $800,000 in
this endeavor.
24
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
ACQUISITION OR DISPOSITION OF PLANT AND EQUIPMENT
We do not anticipate the sale of any significant property, plant or
equipment during the next twelve months. We do not anticipate the acquisition of
any significant property, plant or equipment during the next 12 months.
RISK FACTORS
Much of the information included in this annual report includes or is
based upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
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 a net loss of $9,410,657 for the year ended December 31, 2005
compared to a net income of $3,103,049 for the year ended December 31, 2004. 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. We need additional funding for for research and
development, increasing inventory, marketing and general and administrative
expenses. Although this amount is less than our net losses in the past, we
expect to decrease our general and administrative expenses by eliminating most
of our consulting fees. In the event that we cannot significantly reduce our
consulting fees, we will need to raise additional funds to continue our
operations. Additional capital will be required to effectively support the
operations and to otherwise implement our overall business strategy. There can
be no assurance that financing will be available in amounts or on terms
acceptable to us, if at all. The inability to obtain additional capital will
restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our marketing and development plans and possibly
cease our operations. Any additional equity financing may involve substantial
dilution to our then existing shareholders.
25
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.
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 50.3% 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;
26
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 March 31, 2006, we had 85,428,735 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
and December 28, 2005 that may be converted into an estimated 25,939,462,
50,000,000, 22,857,143 and 22,222,222 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
and December 28, 2005, to purchase 2,250,000, 25,000,000, 800,000 and 700,000
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 and December 28, 2005 may increase if the
market price of our stock declines. All of the shares, including all of the
shares issuable upon conversion of the secured convertible notes and upon
exercise of our warrants, may be sold without restriction. The sale of these
shares may adversely affect the market price of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SECURED CONVERTIBLE
NOTES COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH
WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our secured convertible
notes is essentially limitless. The following is an example of the amount of
shares of our common stock that are issuable, upon conversion of our secured
convertible notes (excluding accrued interest), based on market prices 25%, 50%
and 75% below the market price, as of March 31, 2006 of $0.07.
SEPTEMBER 2004, APRIL 2005 AND OCTOBER 2005 SECURED CONVERTIBLE NOTES, COMBINED
-------------------------------------------------------------------------------
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------- --------- ------------- ----------- -----------
25% $ .0525 $ .02625 122,204,997 58.86%
50% $ .035 $ .0175 183,307,495 68.21%
75% $ .0175 $ .00875 366,614,990 81.10%
DECEMBER 2005 SECURED CONVERTIBLE NOTES
---------------------------------------
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 55% Issuable Stock
------- --------- ------------- ---------- -----------
25% $ .0525 $ .023625 29,629,630 25.75%
50% $ .035 $ .01575 44,444,445 34.22%
75% $ .0175 $ .007875 88,888,889 50.99%
27
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 and
October 2005 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 are convertible into shares of our
common stock at a 65% discount to the trading price of the common stock prior to
the conversion. The significant downward pressure on the price of the common
stock as the selling stockholders convert and sell material amounts of common
stock could have an adverse effect on our stock price. In addition, not only the
sale of shares issued upon conversion or exercise of secured convertible notes,
series B convertible preferred stock and warrants, but also the mere perception
that these sales could occur, may adversely affect the market price of the
common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
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.
28
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 addition, any event of default under our
secured convertible notes issued pursuant to our September 2004, April 2005,
October 2005 or December 2005 securities purchase agreements, such as our
failure to repay the principal or interest when due, our failure to issue shares
of common stock upon conversion by the holder, our failure to timely file a
registration statement or have such registration statement declared effective,
breach of any covenant, representation or warranty in the Securities Purchase
Agreement or related convertible note, the assignment or appointment of a
receiver to control a substantial part of our property or business, the filing
of a money judgment, writ or similar process against our company in excess of
$50,000, the commencement of a bankruptcy, insolvency, reorganization or
liquidation proceeding against our company and the delisting of our common stock
could require the early repayment of the secured convertible notes, including a
default interest rate of 15% on the outstanding principal balance of the notes
if the default is not cured with the specified grace period. We anticipate that
the full amount of the secured convertible notes will be converted into shares
of our common stock, in accordance with the terms of the secured convertible
notes. If we were required to repay the secured convertible notes, we would be
required to use our limited working capital and raise additional funds. If we
were unable to repay the notes when required, the note holders could commence
legal action against us and foreclose on all of our assets to recover the
amounts due. Any such action would require us to curtail or cease operations.
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.
29
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
TRENDS, RISKS AND UNCERTAINTIES
We have sought to identify what we believe to be the most significant
risks to our business, but we cannot predict whether, or to what extent, any of
such risks may be realized nor can we guarantee that we have identified all
possible risks that might arise. Investors should carefully consider all of such
risk factors before making an investment decision with respect to our Common
Stock.
30
ITEM 7. FINANCIAL STATEMENTS
CYBERLUX CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Registered Certified Public Accounting Firm F-1
Balance Sheets as of December 31, 2005 and 2004 F-2
Statements of Operations for the years ended December 31, 2005
and 2004 F-3
Statement of Deficiency in Stockholders' Equity for the two years
ended December 31, 2005 F-4
Statements of Cash Flows for the years ended December 31, 2005
and 2004 F-5
Notes to Financial Statements F-6 - F-27
31
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
-----------------------------------------------------------------
To the Board of Directors
Cyberlux Corporation
Durham, North Carolina
We have audited the accompanying balance sheets of Cyberlux Corporation (the
"Company"), as of December 31, 2005 and 2004 and the related 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 financial statements referred to above present fairly, in
all material respects, the 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 financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note L to the financial
statements, the Company has suffered recurring losses from operations. This
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 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, 200 shares designated;
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, 800,000 shares
designated, 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: (3,093,006) (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 and 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
Stock Common Common Stock Paid in Subscription
Shares Amount Shares Amount Capital Receivable
------- ------- ----------- ------------ ----------- ------------
Balance as of January 1, 2004-As restated
(Note N) -- $ -- 8,049,141 $ 8,049 $ 1,174,096 $ (276,186)
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 -- -- -- -- -- 276,186
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 -- -- -- -- -- 22,500
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 (10,000)
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 (12,500)
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
(Deficiency in)
Accumulated Stockholders'
Deficit Equity
------------ ---------------
Balance as of January 1, 2004-As restated
(Note N) $(12,384,333) $ (11,478,374)
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
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
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 -- --
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 -- 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 $18,641,941.
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.
F-6
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-7
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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. 14.
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.
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.
F-8
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 G):
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-9
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 26.
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.
F-10
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RECENT PRONOUNCEMENTS (CONTINUED)
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.
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.
F-11
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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-12
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-13
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.
F-14
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE D-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
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.
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.
F-15
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE D-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
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 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.
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.
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.
F-16
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE F -STOCKHOLDER'S EQUITY (CONTINUED)
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-17
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
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 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.
F-18
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE F -STOCKHOLDER'S EQUITY (CONTINUED)
..
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series B Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series B Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $1.00 per share, and the holders of the
Series B Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series B Preferred being sometimes referred to as
the "Liquidation Payments."
COMMON STOCK
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share. As of 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.
F-19
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE F -STOCKHOLDER'S EQUITY (CONTINUED)
COMMON STOCK (CONTINUED)
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.
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.
F-20
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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
Exercise Number Remaining Contractual Average Number Average
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:
Number of Weighted Average
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-21
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
Remaining Average Average
Exercise Number Contractual life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
-------- ----------- ---------------- -------- ----------- --------
$ 0.2125 2,000,000 4 $ 0.2125 2,000,000 $ 0.2125
0.2125 2,000,000 5 0.2125 2,000,000 0.2125
0.10 12,000,000 6 0.10 12,000,000 0.10
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-22
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 January 26, 2006, the parties signed a Mutual Release and Settlement
Agreement amd Stipulation for Dismissal with Prejudice. Under the terms of the
Mutual Release and Settlement, we 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 fpr 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.
F-23
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE I -COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (continued)
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.
On April 18, 2001, we filed a civil complaint against Light Technology, Inc.,
Ervin J. Rachwal, Safe-Light Industries, LLC a/k/a JFER Innovations Group, LLC,
James Meyer and John Fleming alleging fraud, breach of contract, monies lent,
misappropriation of trade secrets, conspiracy and sought injunctive relief
against the defendants to prevent them from misappropriating trade secrets as
well as to recover monetary damages On May 11, 2001, the Court granted a
temporary injunction against the Defendants. On June 5, 2001, the Defendants
filed their Answer denying the allegations of the Complaint and filed a
counterclaim alleging fraud, violation of Trade Secret Act, breach of contract
and money lent.
On January 18, 2002, the Court granted the Defendants' Motion to Dissolve the
Injunction. On January 28, 2002, we filed a Motion for Rehearing or
Clarification of the Motion to Dissolve. A hearing on our Motion for Rehearing
or Clarification of the Motion to Dissolve was scheduled for March 18, 2002, but
was canceled by the Court and has not been rescheduled. In accordance with
Florida's Rules of Civil Procedure, when a Motion to dissolve is granted, this
order is stayed and the injunction remains in effect until the Court rules on a
Motion for Rehearing or Clarification of the Motion to Dissolve. Therefore, the
injunction still remains in effect until the Court rules on this Motion.
On November 17, 2005, we filed a Motion Notice of Dismissal based on lack of
prosecution. On January 25, 2006, the Court issued a Final Order of Dismissal.
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.
F-24
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE K - INCOME TAXES (CONTINUED)
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 are as follows:
Non current:
Net operating loss carry forward $ 6,300,000
Valuation allowance (6,300,000)
-----------
Net deferred tax asset $ --
===========
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
$18,641,941. 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.
F-25
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 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
The resulting effects on the prior period adjustments on 2004 cash flows by area
are as follows:
Amount increase
2004 cash flow 2004 cash flow (decrease) in 2004
statement balance statement balance cash flow
prior to restatement post 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:
F-26
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE O- SUBSEQUENT EVENTS (CONTINUED)
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.
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-27
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A - CONTROLS AND PROCEDURES
A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As of December 31,
2005, the Company's management carried out an evaluation, under the
supervision of the Company's Chief Executive Officer and Chief
Financial Officer of the effectiveness of the design and operation
of the Company's system of disclosure controls and procedures
pursuant to the Securities and Exchange Act, Rule 13a-15(e) and
15d-15(e) under the Exchange Act). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were not effective,
as of the date of their evaluation, for the purposes of recording,
processing, summarizing and timely reporting material information
required to be disclosed in reports filed by the Company under the
Securities Exchange Act of 1934. Please see the subsection
"Significant Deficiencies In Disclosure Controls And Procedures Or
Internal Controls" below.
B) CHANGES IN INTERNAL CONTROLS. There were no changes in internal
controls over financial reporting that occurred during the period
covered by this report that has materially affected, or is likely to
materially effect, the Company's internal control over financial
reporting.
SIGNIFICANT DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR INTERNAL
CONTROLS
During our preparation of our Form 10-KSB for the year ended December 31, 2005,
which did not occur until the quarter ended March 31, 2006, we identified
certain material weaknesses. These material weaknesses will result in the
restatement of previously reported financial statements. As defined by the
Public Company Accounting Oversight Board Auditing Standard No.2, a material
weakness is a significant control deficiency or a combination of significant
control deficiencies that result in there being more than a remote likelihood
that a material misstatement in the annual or interim financial statements will
not be prevented or detected. These deficiencies and issues include:
o During the financial reporting process, we determined that we lacked
adequate accounting staff.
o Inability to timely close our books and financial reporting
requirement.
o Need for restatement of prior financial statements as a result of a
recent SEC interpretation of accounting for common stock and
warrants with registration rights under EITF 00-19.
Lack of Adequare Accounting Staff
Previously, in connection with the preparation of the books and records
for this annual report on Form 10-KSB, we relied solely upon our Chief Financial
Officer to handle the financial accounting. As a result of recent
interpretations by the SEC regarding certain accounting standards, as discussed
below, together with an increase in our business operations, we realized that we
do not have enough personnel that are qualified to handle all of our accounting
requirements.
Inability to Timely Close Our Books
Resulting mainly from the lack of adequate accounting staff, as discussed
above, we were unable to timely close our financial books and records for the
year ended December 31, 2005. As a result, we were unable to provide the
required information to our independent auditors on a timely basis.
Restatement of Prior Financial Statements
In accordance with Emerging Issues Task Force ("EITF") 00-19, "Accounting
for Derivative Financial Instruments Indexed To, and Potentially Settled in the
Company's Own Stock," and EITF 05-04, "The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to EITF 00-19," because the
maximum potential liquidated damages for failure to maintain an effective
registration statement is greater than the difference in fair values between
registered and unregistered shares, the value of the common stock subject to
registration should be classified as temporary equity. Additionally, in
accordance with EITF 00-19 and the terms of the above warrants, the fair value
of the warrants should be recorded as a liability, with an offsetting reduction
to shareholders' equity. The warrant liability is initially measured at fair
value using the Black-Scholes option pricing model, and is then re-valued at
each reporting date, with changes in the fair value reported as non-cash charges
or credits to earnings.
The SEC recently announced its interpretation of the accounting for common
stock and warrants with registration rights under EITF 00-19. The SEC concluded
that for agreements containing registration rights where significant liquidated
damages could be required to be paid to the holder of the instrument in the
event the issuer fails to maintain the effectiveness of a registration statement
for a preset time period, the common stock subject to such liquidated damages
does not meet the tests required for shareholders' equity classification, and
accordingly must be reflected between liabilities and shareholders' equity in
the balance sheet until the conditions are eliminated. In analyzing instruments
under EITF 00-19, the SEC concluded that the likelihood or probability related
to the failure to maintain an effective registration statement is not a factor.
As a result, we have restated our financial statements for the year ended
December 31, 2004 and will need to restate the interim financial statements for
the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. We
believe that this change does not reflect upon the controls in place as we
believe this will be a one-time restatement due to the recent interpretation of
accounting rules by the SEC in December 2005.
REMEDIATION TO OUR DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS
In response to the significant deficiencies in our internal controls and
procedures disclosed above, we took actions during the first quarter of 2006 to
correct these issues. In order to remediate the weakness resulting from our lack
of adaquate accounting staff, we have engaged an independent contractor with
extensive CFO-level management and SEC reporting experience in public companies
to assist in the closing process.
In order to remediate the timely closing of our books, in addition to the
independent contractor that we have engaged, we are in the process of developing
closing checklists delineating tasks, preparation responsibilities, and review
responsibilities targeting specific completion dates. The checklist will provide
evidentiary support of work performed and reviewed. Specific checklist will be
developed for non-quarter end months, quarter end months, and the annual close.
These checklists will be implemented in the 2nd quarter 2006 close process and
utilized in the preparation of the 2nd quarter 2006 Form 10-QSB and subsequent
period ends.
As these changes to our internal controls and procedures did not occur
until after December 31, 2005, we believe these changes will be effective for
the quarter ended June 30, 2006, however, we will be unsure until they are
tested at that time.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the directors and executive officers of the Company,
their ages and positions held with the Company, as follows
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.
33
LIMITATION OF LIABILITY OF DIRECTORS
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.
ELECTION OF DIRECTORS AND OFFICERS.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified.
No Executive Officer or Director of the Company has been the subject of
any order, judgment, or decree of any Court of competent jurisdiction, or any
regulatory agency permanently or temporarily enjoining, barring suspending or
otherwise limiting him from acting as an investment advisor, underwriter, broker
or dealer in the securities industry, or as an affiliated person, director or
employee of an investment company, bank, savings and loan association, or
insurance company or from engaging in or continuing any conduct or practice in
connection with any such activity or in connection with the purchase or sale of
any securities.
No Executive Officer or Director of the Company has been convicted in any
criminal proceeding (excluding traffic violations) or is the subject of a
criminal proceeding which is currently pending.
No Executive Officer or Director of the Company is the subject of any
pending legal proceedings.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Cyberlux Corporation executive officers and directors,
and persons who beneficially own more than ten percent of the Company's common
stock, to file initial reports of ownership and reports of changes in ownership
with the SEC. Executive officers, directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish Cyberlux
Corporation with copies of all Section 16(a) forms they file. Based upon a
review of the copies of such forms furnished to the Company and written
representations from Company executive officers and directors, the Company
believes that during the year ended 2005, the officers and directors filed all
of their respective Section 16(a) reports on a timely basis.
AUDIT COMMITTEE
We do not have an Audit Committee, our board of directors during 2005,
performed some of the same functions of an Audit Committee, such as:
recommending a firm of independent certified public accountants to audit the
annual financial statements; reviewing the independent auditors independence,
the financial statements and their audit report; and reviewing management's
administration of the system of internal accounting controls. We do not
currently have a written audit committee charter or similar document.
34
NOMINATING COMMITTEE
We do not have a Nominating Committee or Nominating Committee Charter. Our
board of directors performed some of the functions associated with a Nominating
Committee. We have elected not to have a Nominating Committee at this time,
however, our Board of Directors intend to continually evaluate the need for a
Nominating Committee.
CODE OF CONDUCT
On March 4, 2005, we adopted a written code of conduct that governs all of
our officers, directors, employees and contractors. The code of conduct relates
to written standards that are reasonably designed to deter wrongdoing and to
promote:
(1) Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
(2) Full, fair, accurate, timely and understandable disclosure in
reports and documents that are filed with, or submitted to, the
Commission and in other public communications made by an issuer;
(3) Compliance with applicable governmental laws, rules and regulations;
(4) The prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
(5) Accountability for adherence to the code.
COMPENSATION COMMITTEE
We currently do not have a compensation committee of the board of
directors. Until a formal committee is established, if at all, our entire board
of directors will review all forms of compensation provided to our executive
officers, directors, consultants and employees including stock compensation and
loans.
35
ITEM 10. EXECUTIVE COMPENSATION
TERMINATION OF EMPLOYMENT
There are no compensatory plans or arrangements, including payments to be
received from the Company, with respect to any person associated with the
Company which would in any way result in payments to any such person because of
his resignation, retirement, or other termination of such person's employment
with the Company or its subsidiaries, or any change in control of the Company,
or a change in the person's responsibilities following a change in control of
the Company.
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 - -
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 - -
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 - -
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 - -
2003 120,000 0 - 550,000 - -
----------------------- ---- ------- ----- ---------- ---------- --------- ------- ------------
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.
36
OPTION/SAR GRANTS IN LAST FISCAL YEAR
---------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
---------------------------------------------------------------------------
Donald F. Evans 4,250,000 35.42% $0.10 /Sh 2011
---------------------------------------------------------------------------
John W. Ringo 1,500,000 12.5% $0.10 /Sh 2011
---------------------------------------------------------------------------
Alan H. Ninneman 1,000,000 8.33% $0.10 /Sh 2011
---------------------------------------------------------------------------
Mark D. Schmidt 4,000,000 33.33% $0.10 /Sh 2011
---------------------------------------------------------------------------
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 March 31, 2006, there were 27,513,237 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.
37
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.
38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information, to the best of the Company's
knowledge, about the beneficial ownership of its common stock on March 31, 2006
relating to the beneficial ownership of the Company's common stock by those
persons known to beneficially own more than 5% of the Company's capital stock
and by its directors and executive officers. The percentage of beneficial
ownership for the following table is based on 85,428,735 shares of common stock
outstanding.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and does not necessarily indicate beneficial
ownership for any other purpose. Under these rules, beneficial ownership
includes those shares of common stock over which the stockholder has sole or
shared voting or investment power. It also includes shares of common stock that
the stockholder has a right to acquire within 60 days through the exercise of
any option, warrant or other right. The percentage ownership of the outstanding
common stock, however, is based on the assumption, expressly required by the
rules of the Securities and Exchange Commission, that only the person or entity
whose ownership is being reported has converted options or warrants into shares
of our common stock.
NAME AND ADDRESS NUMBER OF PERCENTAGE OF
OF OWNER TITLE OF CLASS SHARES OWNED(1) CLASS (2)
-------------------------- -------------- --------------- -------------
Donald F. Evans Common Stock 16,422,784(3) 16.36%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Mark D. Schmidt Common Stock 11,240,977(4) 11.65%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Alan H. Ninneman Common Stock 4,516,773(5) 5.06%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
John W. Ringo Common Stock 4,574,403(6) 5.11%
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%
As a Group (5 persons)
=========================================
Donald F. Evans Preferred B 275,103 34.38%
Mark D. Schmidt Preferred B 101,000 12.62%
Alan H. Ninneman Preferred B 180,652 22.58%
John W. Ringo Preferred B 166,915 20.86%
David Downing Preferred B 76,330 9.54%
39
* 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 March 31, 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 85,428,735 shares issued and outstanding on March 31, 2006.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We owed certain management fees, which were for accrued salaries for
Messrs. Evans, Ninneman, Ringo and Schmidt consistent with employment
agreements. These fees were as follows: $400,505 to Don Evans, $243,000 to John
Ringo, $263,000 to Alan Ninneman and $101,000 to Mark Schmidt for a total of
$1,007,505. In addition, certain officers loaned funds to us in exchange for
promissory notes. The promissory notes included $3,000 to Don Evans, $3,745 to
Al Ninneman and $184,830 to Dave Downing.
In 2004, we issued 800,000 shares of Series B Convertible Preferred Stock
to officers and directors in exchange for $723,670 of these management fees and
$76,330 of the loan from Dave Downing, on a basis of 1 share of Series B
Convertible Preferred Stock for $1 of debt owned. The management fees converted
include $275,103 by Don Evans, $166,915 by John Ringo, $180,652 to Alan Ninneman
and $101,000 to Mark Schmidt. These shares of Series B Convertible Preferred
Stock have certain conversion rights and superior voting privileges as further
described in the "Description of Securities" section herein. The Board of
Directors, exercising their business judgment, determined that it was in the
Company's best interest to issue shares of Series B convertible preferred stock
in lieu of accrued management fees. The Board of Directors determined that the
terms of the transaction were as fair to the Company as any transactions that
could have been made with unaffiliated parties.
Currently, there are still outstanding promissory notes totaling 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%.
40
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.
41
PART IV
ITEM 13. EXHIBITS
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.
42
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.
4.29 Common Stock Purchase Warrant with New Millennium Capital Partners
II, LLC, dated November 18, 2004.
43
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.
44
4.1 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.
4.2 Secured Convertible Note issued to AJW Offshore, Ltd., dated
October 23, 2005.
4.3 Secured Convertible Note issued to AJW Qualified Partners, LLC,
dated October 23, 2005.
4.4 Secured Convertible Note issued to AJW Partners, LLC, dated
October 23, 2005.
4.5 Secured Convertible Note issued to New Millennium Capital Partners
II, LLC.
4.6 Common Stock Purchase Warrant issued to AJW Offshore, Ltd., dated
October 23, 2005.
4.7 Common Stock Purchase Warrant with AJW Qualified Partners, LLC,
dated October 23, 2005.
4.8 Common Stock Purchase Warrant with AJW Partners, LLC, dated
October 23, 2005.
4.9 Common Stock Purchase Warrant with New Millennium Capital Partners
II, LLC, dated October 23, 2005.
4.10 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.
4.11 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.
4.12 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.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent, filed as
an exhibit to the registration statement on Form SB-2 filed with
the Commission on May 20, 2005 and incorporated herein by
reference.
10.1 Donald F. Evans Employment Agreement, dated as of July 1, 2000,
filed as an exhibit to the registration statement on Form 10-SB
filed with the Commission on December 17, 2001 and incorporated
herein by reference.
10.2 Alan H. Ninneman Employment Agreement, dated as of July 1, 2000,
filed as an exhibit to the registration statement on Form 10-SB
filed with the Commission on December 17, 2001 and incorporated
herein by reference.
10.3 John W. Ringo Employment Agreement, dated as of July 1, 2000,
filed as an exhibit to the registration statement on Form 10-SB
filed with the Commission on December 17, 2001 and incorporated
herein by reference.
10.4 Donald F. Evans Amended Employment Agreement, dated as of January
1, 2003, filed as an exhibit to the registration statement on Form
SB-2 filed with the Commission on April 30, 2003 and incorporated
herein by reference.
45
10.5 Alan H. Ninneman Amended Employment Agreement, dated as of January
1, 2003, filed as an exhibit to the registration statement on Form
SB-2 filed with the Commission on April 30, 2003 and incorporated
herein by reference.
10.6 John W. Ringo Amended Employment Agreement, dated as of January 1,
2003, filed as an exhibit to the registration statement on Form
SB-2 filed with the Commission on April 30, 2003 and incorporated
herein by reference.
10.7 Mark D. Schmidt Employment Agreement, dated as of May 1, 2003,
filed as an exhibit to the quarterly report on Form 10-QSB filed
with the Commission on August 19, 2003 and incorporated herein by
reference.
10.8 Proprietary Product Manufacturing Agreement, dated as April 24,
2001, by and between Cyberlux Corporation and Shelby County
Community Services, Inc., filed as an exhibit to the registration
statement on Form 10-SB filed with the Commission on December 17,
2001 and incorporated herein by reference.
10.9 Design Agreement, dated as of March 2, 2001, by and between
Cyberlux Corporation and ROBRADY Design, filed as an exhibit to
the registration statement on Form 10-SB/A filed with the
Commission on February 4, 2001 and incorporated herein by
reference.
10.10 Series A Convertible Preferred Stock Purchase Agreement, dated as
of December 31, 2003, by and among Cyberlux Corporation and the
purchasers set forth therein, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 8, 2004
and incorporated herein by reference.
10.11 Registration Rights Agreement, dated as of December 31, 2003, by
and among Cyberlux Corporation and the purchasers of Series A
Convertible Preferred Stock set forth therein, filed as an exhibit
to the current report on Form 8-K filed with the Commission on
January 8, 2004 and incorporated herein by reference.
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.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14
and Rule 15d-14(a), promulgated under the Securities and Exchange
Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14
and Rule 15d 14(a), promulgated under the Securities and Exchange
Act of 1934, as amended.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer).
46
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer).
47
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by Russell
Bedford Stefanou Mirchandani LLP for the audit of the registrant's annual
financial statements and review of the financial statements included in the
registrant's Form 10-QSB or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for fiscal years 2005 and 2004 were $146,900 and $56,650 respectively.
AUDIT-RELATED FEES
None.
TAX FEES
None.
ALL OTHER FEES
None.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITORS
We currently do not have a designated Audit Committee, and accordingly,
our Board of Directors' policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are
required to periodically report to our Board of Directors regarding the extent
of services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Board of
Directors may also pre-approve particular services on a case-by-case basis.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
our behalf by the undersigned, thereunto duly authorized.
CYBERLUX CORPORATION
Dated: April 19, 2006 By: /s/ DONALD F. EVANS
--------------------------
Donald F. Evans
Chief Executive Officer
(Principal Executive Officer)
Dated: April 19, 2006 By: /s/ DAVID D. DOWNING
--------------------------
David D. Downing
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ DONALD F. EVANS Chief Executive Officer and April 19, 2006
-------------------- Chairman of the Board of Directors
Donald F. Evans
/s/ MARK D. SCHMIDT President, Chief Operating Officer April 19, 2006
-------------------- and Director
Mark D. Schmidt
/s/ JOHN W. RINGO Secretary, Corporate Counsel April 19, 2006
-------------------- and Director
John W. Ringo
/s/ ALAN H. NINNEMAN Senior Vice President and Director April 19, 2006
--------------------
Alan H. Ninneman
49