U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31, 2006
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to ______________
For the Period Ended March 31, 2006
Commission file number 000-33415
CYBERLUX CORPORATION
(Name of Small Business Issuer in Its Charter)
Nevada 91-2048178
(State of Incorporation) (IRS Employer Identification No.)
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
(Address of Principal Executive Offices)
(919) 474-9700
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ x ]
As of May 10, 2006, the Company had 85,921,487 shares of its par value $0.001
common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
i
CYBERLUX CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending March 31, 2006
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
March 31, 2006 (Unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Losses:
Three Months Ended March 31, 2006 and 2005 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2006 and 2005 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Information: March 31, 2006 6-22
Item 2. Management Discussion and Analysis 23
Item 3. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 36
Item 3. Defaults Upon Senior Securities 37
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits 37
Signatures 38
ii
ITEM 1. FINANCIAL STATEMENTS
CYBERLUX CORPORATION
CONDENSED BALANCE SHEETS
March 31, December 31,
2006 2005
------------ ------------
Unaudited
ASSETS
Current assets:
Cash & cash equivalents $ 208,086 $ 475,656
Accounts receivable, net of allowance for doubtful accounts of $ 0 50,442 9,424
Inventories, net of allowance of $111,052 and $110,821, respectively 177,058 338,097
Other current assets 73,411 42,814
------------ ------------
Total current assets 508,997 865,991
Property, plant and equipment, net of accumulated depreciation of $125,370
and $118,105, respectively 62,961 63,133
------------ ------------
Total Assets $ 571,958 $ 929,124
============ ============
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 351,859 $ 657,930
Accrued liabilities 1,062,415 782,586
Short-term notes payable - related parties (Note F) 352,095 366,594
Short-term notes payable (Note B) 676,577 542,783
------------ ------------
Total current liabilities 2,442,946 2,349,893
------------ ------------
Long-term liabilities:
Notes payable (Note B) 752,217 351,418
Derivative liability relating to convertible debentures (Note B) 4,280,427 6,809,449
Warrant liability relating to convertible debentures (Note C) 4,057,862 3,352,026
------------ ------------
Total long-term liabilities 9,090,505 10,512,893
------------ ------------
Total liabilities 11,533,452 12,862,786
------------ ------------
Commitments and Contingencies (Note G) -- --
Series A convertible preferred stock, $0.001 par value; 200 shares
designated, 51.4806 and 59.8606 issued and outstanding as of March 31,
2006 and December 31, 2005, respectively 257,400 299,303
------------ ------------
DEFICIENCY IN STOCKHOLDERS' EQUITY (Note D)
Class B convertible preferred stock, $0.001 par value, 800,000 shares
designated; 800,000 shares issued and outstanding for March 31, 2006 and
December 31, 2005 800 800
Common stock, $0.001 par value, 300,000,000 shares authorized; 85,428,795
and 75,608,334 shares issued and outstanding as of March 31, 2006 and
December 31, 2005, respectively 85,429 75,607
Additional paid-in capital 7,208,557 6,382,569
Accumulated deficit (18,513,679) (18,691,941)
------------ ------------
Deficiency in stockholders' equity (11,218,893) (12,232,965)
------------ ------------
Total liabilities and (deficiency) in stockholders' equity $ 571,958 $ 929,124
============ ============
The accompanying notes are an integral part of these financial statements
3
CYBERLUX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
Unaudited
Three months ended March 31,
2006 2005
------------- -------------
As restated-Note K
------------------
REVENUE: $ 47,200 $ 13,568
Cost of goods sold (53,687) (6,369)
------------- -------------
Gross margin (loss) (6,487) 7,199
OPERATING EXPENSES:
Marketing and advertising 47,828 21,323
Impairment Loss -- 30,544
Depreciation and amortization 7,265 8,294
Research and development 38,826 18,696
General and administrative expenses 1,299,901 356,875
------------- -------------
Total operating expenses 1,393,820 435,732
NET (LOSS) FROM OPERATIONS (1,400,307) (428,533)
Other income/(expense)
Unrealized gain (loss) relating to adjustment of derivative and
warrant liability to fair value of underlying securities 2,323,186 (2,012,245)
Interest income -- 300
Interest expense (738,130) (239,318)
Debt acquisition costs (6,487) --
------------- -------------
Net income/(loss) before provision for income taxes 178,262 (2,679,796)
Income taxes (benefit) -- --
------------- -------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 178,262 $ (2,679,796)
============= =============
Weighted average number of common shares outstanding, basic 80,285,613 27,919,776
============= =============
Weighted average number of common shares
outstanding, fully diluted 334,282,061 204,473,391
============= =============
Net income/(loss) per share - basic $ $ (0.10)
============= =============
Net income/(loss) per share - fully diluted $ -- $ (0.10)
============= =============
Preferred dividend $ 24,000 $ 24,000
============= =============
The accompanying notes are an integral part of these financial statements
4
CYBERLUX, INC
CONDENSED STATEMENTS OF CASH FLOW
Unaudited
Three months ended March 31,
2006 2005
----------- -----------
Restated-See Note K
-------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) available to common stockholders $ 178,262 $(2,679,796)
Adjustments to reconcile net income (loss) to cash used in operating
activities
Depreciation 7,265 8,294
Common stock issued in connection with services rendered 762,250 --
Common stock issued in settlement of debt 31,655 73,024
Accretion of convertible notes payable 367,196 123,288
Unrealized (gain) loss on adjustment of derivative and warrant liability to
fair value of underlying securities (2,323,186) 2,012,245
Impairment loss on patent -- 30,544
(Increase) decrease in:
Accounts receivable (41,018) (13,429)
Inventories 161,039 --
Prepaid expenses 9,402 32,169
Increase (decrease) in:
Accounts payable (306,071) 23,912
Accrued liabilities 279,829 (9,718)
----------- -----------
Net cash (used in) operating activities (873,377) (399,467)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (7,093) (963)
----------- -----------
Net cash used in investing activities: (7,093) (963)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible debenture 460,000 --
Net proceeds from borrowing on long term basis 152,400 --
Net proceeds (payments) to notes payable, related parties 500 (4,485)
----------- -----------
Net cash provided by (used in) financing activities: 612,900 (4,485)
----------- -----------
Net increase (decrease) in cash and cash equivalents (267,570) (404,915)
Cash and cash equivalents at beginning of period 475,656 415,375
----------- -----------
Cash and cash equivalents at end of period $ 208,086 $ 10,460
Supplemental disclosures:
Interest Paid $ 2,770 $ 75,103
Income Taxes Paid -- --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized (gain) loss in adjustment of derivative and warrant liability to
fair value of underlying securities $(2,323,186) $ 2,012,245
Common stock issued for services rendered 762,250 --
Common stock issued in settlement of debt 31,655 73,024
The accompanying notes are an integral part of these financial statements
5
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES
GENERAL
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three-month period ended March
31, 2006, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2006. The unaudited condensed financial statements
should be read in conjunction with the December 31, 2005 financial statements
and footnotes thereto included in the Company's Form 10-KSB for the year ended
December 31, 2005.
BUSINESS AND BASIS OF PRESENTATION
Cyberlux Corporation (the "Company") is incorporated on May 17, 2000 under the
laws of the State of Nevada. Until December 31, 2004, the Company was a
development state enterprise as defined under Statement on Financial Accounting
Standards No.7, Development Stage Enterprises ("SFAS No.7"). The Company
develops, manufactures and markets long-term portable lighting products for
commercial and industrial users. While the Company has generated revenues from
its sale of products, the Company has incurred expenses, and sustained losses.
Consequently, its operations are subject to all risks inherent in the
establishment of a new business enterprise. As of March 31, 2006, the Company
has accumulated losses of $18,513,679.
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 uperseded
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 March 31, 2006 and December 31, 2005, the Company did not have
any deferred revenue.
SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), MULTIPLE
DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for
arrangements that may involve the delivery or performance of multiple products,
services and/or rights to use assets. The effect of implementing EITF 00-21 on
the Company's financial position and results of operations was not significant.
RECLASSIFICATION
Certain reclassifications have been made to prior periods' data to conform to
the current presentation. These reclassifications had no effect on reported
losses.
6
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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 March 31, 2006 and
December 31, 2005, allowance for doubtful receivable was $0.
STOCK-BASED COMPENSATION:
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123(R). This statement does not
address the accounting for employee share ownership plans, which are subject to
AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company had to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. The Company
implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective
method. The fair value of each option grant issued after January 1, 2006 will be
determined as of grant date, utilizing the Black-Scholes option pricing model.
The amortization of each option grant will be over the remainder of the vesting
period of each option grant.
As more fully described in finacial statements in included in Form 10-KB for the
year ended December 31, 2005, the Company granted stock options over the years
to employees of the Company under a non-qualified employee stock option plan. As
of December 31, 2005, 33,580,000 stock options were outstanding and exercisable.
The Company did not grant any stock options to employees during the quarter
ended March 31, 2006. The Company did not recognize compensation expense related
to employees stock options in the quarter ended March 31, 2006. The impact on
earnings for the remainder of Fiscal 2006 for stock based compensation will
depend on future stock option issuances.
In prior years, the Company applied the intrinsic-value method prescribed in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," to account for the issuance of stock options to employees and
accordingly compensation expense related to employees' stock options were
recognized in the prior year financial statements to the extent options granted
under stock incentive plans had an exercise price less than the market value of
the underlying common stock on the date of grant.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
loss per share would have been as follows:
7
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------------- --------------------------------
For the three months ended March
31, 2005-As restated-Note K
------------------------------------------------------------- --------------------------------
Net loss attributable to common stockholders -as reported $(2,679,796)
------------------------------------------------------------- --------------------------------
Add. Total stock based employee compensation expense as
reported under intrinsic value method (APB No. 25) -
------------------------------------------------------------- --------------------------------
Deduct Total stock based employee compensation expense
as reported under fair value based method (SFAS No. 123) -
------------------------------------------------------------- --------------------------------
Net loss -Pro Forma $(2,679,796)
------------------------------------------------------------- --------------------------------
Net loss attributable to common stockholders - Pro forma $(2,679,796)
------------------------------------------------------------- --------------------------------
Basic (and assuming dilution) loss per share -as reported $(0.10)
------------------------------------------------------------- --------------------------------
Basic (and assuming dilution) loss per share - Pro forma $(0.10)
------------------------------------------------------------- --------------------------------
In determining the compensation cost of stock options granted to employees
during the three months ended March 31, 2005, as specified by SFAS No. 123, the
fair value of each option grant has been estimated on the date of grant using
the Black-Scholes option pricing model and the weighted average assumptions used
in these calculations are summarized as follows:
Three Months
Ended
March 31, 2005
----------------
Risk-free interest rate n/a
Expected life of options Granted n/a
Expected Volatility n/a %
Expected dividend yield 0 %
(a)The expected option life is based on contractual expiration dates.
PATENTS
During the year ended December 31, 2005, the Company management preformed an
evaluation of its intangble assets (Patents) for purposes of determining the
implied fair value of the assets at December 31, 2005. The test indicated that
the recorded remaining book value of its patens exceeded its fair value, as
determined by discounted cash flows. As a result, upon completion of the
assessment, management recorded a non-cash impairment charge of $30,544, net of
tax, or $0.00 per share during the three month period ended March 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.
8
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
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.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing
of Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The Company does not expect its
adoption of this new standard to have a material impact on its financial
position, results of operations or cash flows.
9
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at March 31, 2006 and December 31, 2005 are as follows:
------------------------------------------------------------------------------- --------------------- ---------------------
March 31, 2006 December 31, 2005
------------------------------------------------------------------------------- --------------------- ---------------------
10% convertible note payable, unsecured and due September, 2003; accrued and
unpaid interest due at maturity; Note holder has the option to convert note
principal together with accrued and unpaid interest to the Company's common
stock at a rate of $0.50 per share. The Company is in
violation of the loan covenants $ 2,500 $ 2,500
------------------------------------------------------------------------------- --------------------- ---------------------
------------------------------------------------------------------------------- --------------------- ---------------------
10% convertible notes payable, unsecured and due March, 2003; accrued and unpaid
interest due at maturity; Note holder has the option to convert unpaid note
principal together with accrued and unpaid interest to the Company's common
stock at a rate of $0.50 per share. The Company is in
violation of the loan covenants. 25,000 25,000
------------------------------------------------------------------------------- --------------------- ---------------------
------------------------------------------------------------------------------- --------------------- ---------------------
10% note payable, unsecured and due on demand, accrued and unpaid
interest due at maturity 15,000 -
------------------------------------------------------------------------------- --------------------- ---------------------
------------------------------------------------------------------------------- --------------------- ---------------------
10% note payable, unsecured and due March, 2009, accrued and unpaid
interest due at maturity. Shareholders secured debt with shares of
Company's common stock 152,400 -
------------------------------------------------------------------------------- --------------------- ---------------------
------------------------------------------------------------------------------- --------------------- ---------------------
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) 634,077 515,283
------------------------------------------------------------------------------- --------------------- ---------------------
10
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
------------------------------------------------------------------------------- --------------------- ---------------------
March 31, 2006 December 31, 2005
------------------------------------------------------------------------------- --------------------- ---------------------
10% convertible debenture, due three years from date of the note with interest
payable quarterly during the life of the note. The note is convertible into the
Company's common stock at the lower of a) $0.03 or b) 50% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for twenty days before, but not including, conversion date. The Company granted
the note holder a security interest in substantially all of the Company's assets
and intellectual property and registration rights. The Company is in
violation of the loan covenants (see below) 423,105 299,820
------------------------------------------------------------------------------- --------------------- ---------------------
------------------------------------------------------------------------------- --------------------- ---------------------
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) 115,434 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) 59,452 1,918
------------------------------------------------------------------------------- --------------------- ---------------------
------------------------------------------------------------------------------- --------------------- ---------------------
8% convertible debenture, due three years from the date of the note with
interest payable quarterly during the life of the note. The note is convertible
into the Company'common stock at the lower of a)$0.10 or b) 55% of the average
of the three lowest intraday trading prices for the common stock on a principal
market for twenty days before, but not including, conversion date. The Company
granted the note holder a security interest in substantially all of the
Company's assets and
intellectual property and registration rights. (See below) 1,826 --
--------- ---------
------------------------------------------------------------------------------- --------------------- ---------------------
1,428,794 894,201
------------------------------------------------------------------------------- --------------------- ---------------------
Less: current maturities (676,577) (542,783)
--------- ---------
------------------------------------------------------------------------------- --------------------- ---------------------
Notes payable and convertible debentures-long term portion $752,217 $351,418
======== ========
------------------------------------------------------------------------------- --------------------- ---------------------
11
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE B - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
The Company entered into a Securities Purchase Agreement with four accredited
investors on September 23, 2004 for the issuance of an aggregate of $1,500,000
of convertible notes ("Convertible Notes") and attached to the Convertible Notes
were warrants to purchase 2,250,000 shares of the Company's common stock. The
Convertible Notes accrue interest at 10% per annum, payable quarterly, and are
due two years from the date of the note. The note holder has the option to
convert any unpaid note principal to the Company's common stock at a rate of the
lower of a) $0.72 or b) 50% of the average of the three lowest intraday trading
prices for the common stock on a principal market for the 20 trading days
before, but not including, conversion date.
As of March 31, 2006, the Company issued to investors of the Convertible Notes a
total amount of $1,500,000 in exchange for net proceeds of $1,186,281. The
proceeds that the Company received were net of prepaid interest of $50,000 and
related fees and costs of $263,719.
This transaction, to the extent that it is to be satisfied with common stock of
the Company would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible host debt conversion feature, the Company is
required to record a liability relating to both the detachable warrants and
embedded convertible feature of the notes payable (included in the liabilities
as a "derivative liability)".
The Company entered into a Securities Purchase Agreement with four accredited
investors on April 23, 2005 for the issuance of an aggregate of $1,500,000 of
convertible notes ("Convertible Notes") and attached to the Convertible Notes
were warrants to purchase 25,000,000 shares of the Company's common stock. The
Convertible Notes accrue interest at 10% per annum, payable quarterly, and are
due three years from the date of the note. The note holder has the option to
convert any unpaid note principal to the Company's common stock at a rate of the
lower of a) $0.03 or b) 50% of the average of the three lowest intraday trading
prices for the common stock on a principal market for the 20 trading days
before, but not including, conversion date.
As of March 31, 2006, the Company issued to investors of the Convertible Notes a
total amount of $1,500,000 in exchange for total proceeds of $1,352,067. The
proceeds that the Company received were net of prepaid interest of $72,933
representing the first eight month's interest and related fees and costs of
$75,000.
This transaction, to the extent that it is to be satisfied with common stock of
the Company would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible host debt conversion feature, the Company is
required to record a liability relating to both the detachable warrants and
embedded convertible feature of the notes payable (included in the liabilities
as a "derivative liability".
The Company entered into a Securities Purchase Agreement with four accredited
investors on October 24, 2005 for the issuance of $800,000 of convertible notes
("Convertible Notes") and attached to the Convertible Notes were warrants to
purchase 800,000 shares of the Company's common stock. The Convertible Note
accrues interest at 10% per annum, payable quarterly, and are due three years
from the date of the note. The note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of a) $0.06
or b) 50% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before, but not
including, conversion date.
As of March 31, 2006, the Company issued to investors of the Convertible Notes a
total amount of $800,000 in exchange for total proceeds of $775,000. The
proceeds that the Company received were net of related fees and costs of
$25,000.
This transaction, to the extent that it is to be satisfied with common stock of
the Company would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible host debt conversion feature, the Company is
required to record a liability relating to both the detachable warrants and
embedded convertible feature of the notes payable (included in the liabilities
as a "derivative liability").
12
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
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 March 31, 2006, the Company issued to investors of the Convertible Notes a
total amount of $700,000 in exchange for total proceeds of $675,000. The
proceeds that the Company received were net of related fees and costs of
$25,000.
This transaction, to the extent that it is to be satisfied with common stock of
the Company would normally be included as equity obligations. However, in the
instant case, due to the indeterminate number of shares which might be issued
under the embedded convertible host debt conversion feature, the Company is
required to record a liability relating to both the detachable warrants and
embedded convertible feature of the notes payable (included in the liabilities
as a "derivative liability").
The Company entered into a Securities Purchase Agreement with four accredited
investors on March 31, 2006 for the issuance of $500,000 of convertible notes
("Convertible Notes") and attached to the Convertible Notes were warrants to
purchase 19,000,000 shares of the Company's common stock. The Convertible Note
accrues interest at 8% per annum, payable quarterly, and are due three years
from the date of the note. The note holder has the option to convert any unpaid
note principal to the Company's common stock at a rate of the lower of a) $0.10
or b) 55% of the average of the three lowest intraday trading prices for the
common stock on a principal market for the 20 trading days before, but not
including, conversion date.
As of March 31, 2006, the Company issued to investors of the Convertible Notes a
total amount of $500,000 in exchange for total proceeds of $460,000. The
proceeds that the Company received were net of related fees and costs of
$40,000.
The accompanying financial statements comply with current requirements relating
to warrants and embedded derivatives as described in FAS 133, EITF 98-5 and
00-27, and APB 14 as follows:
o The Company allocated the proceeds received between convertible debt and
detachable warrants based upon the relative fair market values on the
dates the proceeds were received.
o Subsequent to the initial recording, the increase in the fair value of the
detachable warrants, determined under the Black-Scholes option pricing
formula and the increase in the intrinsic value of the embedded derivative
in the conversion feature of the convertible debentures are accrued as
adjustments to the liabilities at 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 $1,233,894 and $866,701 as of March 31, 2006 and
December 31, 2005, respectively.
13
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (CONTINUED)
The following table summarizes the various components of the convertible
debentures as of March 31, 2006 and December 31, 2005:
----------------------------------------------------------------------- ------------------- ---------------------
March 31, 2006 December 31, 2005
----------------------------------------------------------------------- ------------------- ---------------------
Convertible debentures $1,261,394 $ 894,201
----------------------------------------------------------------------- ------------------- ---------------------
Warrant liability 2,919,377 2,013,188
----------------------------------------------------------------------- ------------------- ---------------------
Derivative liability 4,280,427 6,809,449
---------- ----------
----------------------------------------------------------------------- ------------------- ---------------------
8,461,198 9,716,838
----------------------------------------------------------------------- ------------------- ---------------------
Cumulative adjustment of derivative and warrant liability to fair (2,199,803) (4,322,637)
value
----------------------------------------------------------------------- ------------------- ---------------------
Cumulative unrealized loss relating to conversion of convertible
notes to common shares charged to interest expense (597,194) (565,539)
----------------------------------------------------------------------- ------------------- ---------------------
Cumulative accretion of principal related to convertible debentures (1,233,894) (866,701)
---------- ----------
----------------------------------------------------------------------- ------------------- ---------------------
$4,430,307 $3,961,961
========== ==========
----------------------------------------------------------------------- ------------------- ---------------------
NOTE C-WARRANT LIABILITY
Total warrant liability as of March 31, 2006 and December 31, 2005 are comprised
of the following:
----------------------------------------------------------------------- ------------------- ---------------------
March 31, 2006 December 31, 2005
----------------------------------------------------------------------- ------------------- ---------------------
Fair value of warrants relating to convertible debentures $2,919,377 $2,013,188
----------------------------------------------------------------------- ------------------- ---------------------
Fair value of warrants relating to preferred stock-class A 720,827 1,147,334
----------------------------------------------------------------------- ------------------- ---------------------
Fair value of other outstanding warrants 417,659 191,504
---------- ----------
----------------------------------------------------------------------- ------------------- ---------------------
Total $4,057,863 $3,352,026
========== ==========
----------------------------------------------------------------------- ------------------- ---------------------
NOTE D -STOCKHOLDER'S EQUITY
SERIES A - CONVERTIBLE PREFERRED STOCK
The Company has also authorized 5,000,000 shares of Preferred Stock, with a par
value of $.001 per share.
On December 30, 2003, the Company filed a Certificate of Designation creating a
Series A Convertible Preferred Stock classification for 200 shares.
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.
14
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY (CONTINUED)
SERIES A - CONVERTIBLE PREFERRED STOCK (CONTINUED)
As of December 31, 2005, 20 of the Series A Preferred shareholders exercised the
conversion right and exchanged 92 shares of Series A Preferred for 4,600,000
shares of the Company's common stock.
As of March 31, 2006, 3 of the Series A Preferred shareholders exercised the
conversion right and exchanged 8 shares of Series A Preferred for 419,032 shares
of the Company's common stock
The holders of the Series A Preferred shall have the right to vote, separately
as a single class, at a meeting of the holders of the Series A Preferred or by
such holders' written consent or at any annual or special meeting of the
stockholders of the Corporation on any of the following matters: (i) the
creation, authorization, or issuance of any class or series of shares ranking on
a parity with or senior to the Series A Preferred with respect to dividends or
upon the liquidation, dissolution, or winding up of the Corporation, and (ii)
any agreement or other corporate action which would adversely affect the powers,
rights, or preferences of the holders of the Series A Preferred.
The holders of record of the Series A Preferred shall be entitled to receive
cumulative dividends at the rate of twelve percent per annum (12%) on the face
value ($5,000.00 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 period ended March 31, 2006, $0 in
dividends were accumulated.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series A Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series A Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $5,000.00 per share, and the holders of
the Series A Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series A Preferred being sometimes referred to as
the "Liquidation Payments."
Because the Series A Shares include a redemption feature that is outside of the
control of the Company and the stated conversion price is subject to reset, the
Company has classified the Series A Shares outside of stockholders' equity in
accordance with Emerging Issues Task Force ("EITF") Topic D-98, "Classification
and Measurement of Redeemable Securities." In accordance with EITF Topic D-98,
the fair value at date of issuance was recorded outside of stockholders' equity
in the accompanying balance sheet. Dividends on the Series A Shares are
reflected as a reduction of net income (loss) attributable to common
stockholders.
15
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY (CONTINUED)
SERIES A - CONVERTIBLE PREFERRED STOCK (CONTINUED)
In connection with the issuance of the Series A Preferred and related warrants,
the holders were granted certain registration rights in which the Company agreed
to timely file a registration statement to register the common shares and the
shares underlying the warrants, obtain effectiveness of the registration
statement by the SEC within ninety-five (95) days of December 31, 2003, and
maintain the effectiveness of this registration statement for a preset time
thereafter. In the event the Company fails to timely perform under the
registration rights agreement, the Company agrees to pay the holders of the
Series A Preferred liquidated damages in an amount equal to 1.5% of the
aggregate amount invested by the holders for each 30-day period or pro rata for
any portion thereof following the date by which the registration statement
should have been effective. The initial registration statement was filed and
declared effective by the SEC within the allowed time , however the Company has
not maintained the effectiveness of the registration statement to date.
Accordingly, the Company issued 203,867 shares of common stock as liquidated
damages on December 10, 2004. The Company has not been required to pay any
further liquidated damages in connection with the filing or on-going
effectiveness of the registration statement.
The Company is required to record a liability relating to the detachable
warrants as described in FAS 133, EITF 98-5 and 00-27, and APB 14. As such:
o Subsequent to the initial recording, the increase in the fair value
of the detachable warrants, determined under the Black-Scholes option pricing
formula, are accrued as adjustments to the liabilities at March 31, 2006 and
December 31, 2005, respectively.
o The expense relating to the increase in the fair value of the
Company's stock reflected in the change in the fair value of the warrants noted
above) is included as an other comprehensive income item of an unrealized gain
or loss arising from convertible financing on the Company's balance sheet.
The fair value of the detachable warrants as of March 31, 2006 and December 31,
2005 were as follows:
----------------------------------------------------- ------------------- ---------------------
March 31, 2006 December 31, 2005
----------------------------------------------------- ------------------- ---------------------
Fair value of warrants relating to issuance of
convertible preferred stock: $720,827 $1,147,334
----------------------------------------------------- ------------------- ---------------------
The Company recorded an Unrealized Gain on the change in fair value of these
detachable warrants of $426,507 and $343,678 for the three months ended March
31, 2006 and 2005, respectively.
SERIES B - CONVERTIBLE PREFERRED STOCK
On February 19, 2004, the Company filed a Certificate of Designation creating a
Series B Convertible Preferred Stock classification for 800,000 shares.
In January, 2004, the Company issued 800,000 shares of its Series B Preferred in
lieu of certain accrued management service fees payable and notes payable
including interest payable thereon totaling $800,000 to officers of the company.
The shares of the Series B Preferred are non voting and convertible, at the
option of the holder, into common shares at $0.10 per share per share. The
shares issued were valued at $1.00 per share, which represented the fair value
of the common stock the shares are convertible into. In connection with the
transaction, the Company recorded a beneficial conversion discount of $800,000 -
preferred dividend relating to the issuance of the convertible preferred stock.
None of the Series B Preferred shareholders have exercised their conversion
right and there are 800,000 shares of Series B Preferred shares issued and
outstanding at March 31, 2006 and December 31, 2005.
16
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY (CONTINUED)
SERIES B - CONVERTIBLE PREFERRED STOCK (CONTINUED)
The holders of the Series B Preferred shall have the right to vote, separately
as a single class, at a meeting of the holders of the Series B Preferred or by
such holders' written consent or at any annual or special meeting of the
stockholders of the Corporation on any of the following matters: (i) the
creation, authorization, or issuance of any class or series of shares ranking on
a parity with or senior to the Series B Preferred with respect to dividends or
upon the liquidation, dissolution, or winding up of the Corporation, and (ii)
any agreement or other corporate action which would adversely affect the powers,
rights, or preferences of the holders of the Series B Preferred.
The holders of record of the Series B Preferred shall be entitled to receive
cumulative dividends at the rate of twelve percent per annum (12%) on the face
value ($1.00 per share) when, if and as declared by the Board of Directors, if
ever. All dividends, when paid, shall be payable in cash, or at the option of
the Company , in shares of the Company's common stock. Dividends on shares of
the Series B Preferred that have not been redeemed shall be payable quarterly in
arrears, when, if and as declared by the Board of Directors, if ever, on a
semi-annual basis. No dividend or distribution other than a dividend or
distribution paid in Common Stock or in any other junior stock shall be declared
or paid or set aside for payment on the Common Stock or on any other junior
stock unless full cumulative dividends on all outstanding shares of the Series B
Preferred shall have been declared and paid. These dividends are not recorded
until declared by the Company. For the period ended March 31, 2006 $ 216,000 in
dividends were accumulated.
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after payment of any senior liquidation
preferences of any series of Preferred Stock and before any distribution or
payment is made with respect to any Common Stock, holders of each share of the
Series B Preferred shall be entitled to be paid an amount equal in the greater
of (a) the face value denominated thereon subject to adjustment for stock
splits, stock dividends, reorganizations, reclassification or other similar
events (the "Adjusted Face Value") plus, in the case of each share, an amount
equal to all dividends accrued or declared but unpaid thereon, computed to the
date payment thereof is made available, or (b) such amount per share of the
Series B Preferred immediately prior to such liquidation, dissolution or winding
up, or (c) the liquidation preference of $1.00 per share, and the holders of the
Series B Preferred shall not be entitled to any further payment, such amount
payable with respect to the Series B Preferred being sometimes referred to as
the "Liquidation Payments."
COMMON STOCK
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share. As of March 31, 2006 and December 31, 2005, the Company has
85,428,795 and 75,608,334 shares issued and outstanding, respectively.
During the three months ended March 31, 2006, holders converted 8.3 shares of
preferred stock - Class A into 419,032 shares of common stock. Each share of
preferred stock is convertible into 50,000 shares of common stock.
In January, 2006, the Company issued 3,000,000 shares of its common stock at
$0.084 per share in exchange for services.
In January, 2006, the Company issued 100,000 shares of its common stock at
$0.113 per share in exchange for services.
In February, 2006, the Company issued 10,000 shares of its common stock at
$0.095 per share in exchange for services.
In February, 2006, the Company issued 1,500,000 shares of its common stock at
$0.092 per share in exchange for services.
In February, 2006, the Company issued 791,369 shares of its common stock at
$0.04 per share on conversion of notes payable.
17
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE D -STOCKHOLDER'S EQUITY (CONTINUED)
In March, 2006, the Company issued 4,000,000 shares in conjunction with the
exercise of employee stock options at $0.09 per share.
NOTE E-STOCK OPTIONS AND WARRANTS
Class A Warrants
----------------
The following table summarizes the changes in warrants outstanding and related
prices for the shares of the Company's common stock issued to shareholders at
March 31, 2006:
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
Warrants Outstanding Warrants Exercisable
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Price Outstanding Life (years) Exercise price Exercisable Exercise Price
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
$0.01 100,000 2.75 $0.01 100,000 $0.01
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
0.03 26,500,000 4.17 0.03 26,500,000 0.03
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
0.10 20,641,500 6.67 0.10 20,641,500 0.10
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
0.20 1,845,000 1.5 0.20 1,845,000 0.20
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
0.25 10,301,564 0.97 0.25 10,301,564 0.25
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
0.50 2,600,000 3.15 0.50 2,600,000 0.50
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
1.05 10,193,064 .97 1.05 10,193,064 1.05
------------------ ------------------ -------------------------- ----------------- ------------ -----------------------
TRANSACTIONS INVOLVING THE COMPANY'S WARRANT ISSUANCE ARE SUMMARIZED AS FOLLOWS:
------------------------------------------------------- ------------------------
Number of Shares Weighted Average
Price Per Share
------------------------------------------------------- ------------------------
Outstanding at December 31, 2004 21,931,128 $0.90
------------------------------------------------------- ------------------------
Granted 26,500,000 0.03
------------------------------------------------------- ------------------------
Exercised -- --
------------------------------------------------------- ------------------------
Canceled or expired -- --
------------------------------------------------------- ------------------------
Outstanding at December 31, 2005 48,431,128 0.42
------------------------------------------------------- ------------------------
Granted 23,750,000 0.17
------------------------------------------------------- ------------------------
Exercised -- --
------------------------------------------------------- ------------------------
Canceled or expired -- --
------------------------------------------------------- ------------------------
Outstanding at March 31, 2006 72,181,128 0.34
------------------------------------------------------- ------------------------
Warrants granted during the period ended December 31, 2005 totaling 26,499,500
were issued in connection with debt financing. The warrants are exercisable
until five years after the date of issuance at a purchase price of $0.03 per
share on 25,000,000 warrants, $0.10 per share on 800,000 warrants and $0.15 per
share on 699,500 warrants.
For the three months ended March 31, 2006, warrants totally 19,000,000 were
issued in connection with debt financing. The warrants are exercisable until
seven years after date of issuance at a purchase price of $0.10 per share. The
warrants have a reset provision should the Company issue shares below $0.10 per
share excluding conversion of related debt.
18
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE E-STOCK OPTIONS AND WARRANTS (CONTINUED)
EMPLOYEE STOCK OPTIONS (CONTINUED)
----------------------------------
For the three months ended March 31, 2006, following warrants were issued in
connection with services rendered:
------------------------- -------------------------- -----------------
Number of warrants purchase price per share: Term (years)
------------------------- -------------------------- -----------------
1,550,000 $0.10 2.75
------------------------- -------------------------- -----------------
1,550,000 $0.25 2.75
------------------------- -------------------------- -----------------
1,550,000 $1.05 2.75
------------------------- -------------------------- -----------------
100,000 $0.01 2.75
------------------------- -------------------------- -----------------
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan at March 31,
2006:
Options Outstanding Options Exercisable
------------------- ----------------- -------------------- -------------- ----------------- -----------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
------------------- ----------------- -------------------- -------------- ----------------- -----------------
$0.2125 2,000,000 2.71 $0.2125 2,000,000 $0.2125
------------------- ----------------- -------------------- -------------- ----------------- -----------------
0.2125 2,000,000 3.12 0.2125 2,000,000 0.2125
------------------- ----------------- -------------------- -------------- ----------------- -----------------
0.10 12,000,000 4.79 0.10 12,000,000 0.10
------------------- ----------------- -------------------- -------------- ----------------- -----------------
0.0295 10,948,237 6.07 0.0295 10,948,237 0.0295
------------------- ----------------- -------------------- -------------- ----------------- -----------------
Transactions involving stock options issued to employees are summarized as
follows:
--------------------------------------- -------------------- -------------------
Weighted Average
Number of Shares Price Per Share
--------------------------------------- -------------------- -------------------
Outstanding at December 31, 2004: 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
--------------------------------------- -------------------- -------------------
Granted - -
--------------------------------------- -------------------- -------------------
Exercised (6,631,763) 0.0295
--------------------------------------- -------------------- -------------------
Canceled or expired - -
--------------------------------------- -------------------- -------------------
Outstanding at March 31, 2006: 26,948,237 $0.088
--------------------------------------- -------------------- -------------------
The weighted-average fair value of stock options granted to employees during the
year ended December 31, 2005 and the weighted-average significant assumptions
used to determine those fair values, using a Black-Scholes option pricing model
are as follows:
19
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE E-STOCK OPTIONS AND WARRANTS (CONTINUED)
EMPLOYEE STOCK OPTIONS (CONTINUED)
----------------------------------
For the year ended December 31,2005:
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2%
Expected stock price volatility 255%
Expected dividend payout --
Expected option life-years (a) 7
(a)The expected option life is based on contractual expiration dates.
NOTE F -RELATED PARTY TRANSACTIONS
From time to time, the Company's principal officers have advanced funds to the
Company for working capital purposes in the form of unsecured promissory notes,
accruing interest at 12% per annum. As of March 31, 2006 and December 31, 2005 ,
the balance due to the officers was $352,095 and $366,595, respectively.
NOTE G -COMMITMENTS AND CONTINGENCIES
Consulting Agreements
---------------------
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. The Agreements are generally for a term of 12
months from inception and renewable automatically from year to year unless
either the Company or Consultant terminates such engagement by written notice.
Operating Lease Commitments
---------------------------
The Company leases office space in Durham, NC on a five year lease expiring
April, 2008 for an annualized rent payment of $43,127. Additionally the Company
leases warehouse space on a month to month basis for $550 per month. At December
31, 2005, schedule of the future minimum lease payments is as follows:
2006 $43,127
2007 43,127
2008 14,376
2009 -
2010 -
Litigation
----------
The Company is subject to other legal proceedings and claims, which arise in the
ordinary course of its business. Although occasional adverse decisions or
settlements may occur, the Company believes that the final disposition of such
matters should not have a material adverse effect on its financial position,
results of operations or liquidity. Listed below is a brief description of
pending litigation:
On May 17, 2005, Zykronix, Inc., a Colorado corporation, filed a complaint
against us and our President, Mark Schmidt, in the District Court, City and
County of Denver, State of Colorado (Case No. O5CV3704) claiming damages in the
amount of $211,323.75 and costs for breach of contract, unjust enrichment and
fraud by Mark Schmidt. We previously entered into a contract with Zykronix for
them to produce prototypes for several of our new products, which we believe
they never satisfactorily completed.
20
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE G -COMMITMENTS AND CONTINGENCIES (CONTINUED)
On June 22, 2005, we filed our Answer and Counterclaim against Zykronix,
claiming damages and costs in the amount of $2,850,000 for breach of contract,
unjust enrichment and negligent misrepresentation. At the same time, Mark
Schmidt filed a Motion to Dismiss since Zykronix failed to adequately plead a
claim for fraud. On August 24, 2005, the Motion to Dismiss was denied. The case
is currently in discovery. We believe that their claims are without merit and we
will vigorously defend these claims.
On July 27, 2005, Alliance Care Services, Inc. d/b/a Alliance Advisors, a New
York corporation, filed a complaint against us in the Supreme Court of the State
of New York, County of New York, claiming damages in the amount of not less than
$500,000 and costs for breach of contract, breach of duty of good faith and fair
dealing and unjust enrichment. We filed our answer on October 4, 2005 denying
all claims. This case is currently in discovery. We believe that their claims
are without merit and we intend to vigorously defend these claims.
On October 21, 2005, Greenfield Capital Partners LLC filed a statement of claim
against us in arbitration before the National Association of Securities Dealers,
Inc. Greenfield claims damages and costs in the amount of $107,000 for breach of
contract, fraud, fraudulent concealment and misrepresentation. We believe that
their claims are without merit and we intend to vigorously defend these claims.
NOTE H- (LOSS) INCOME PER SHARE
The following table presents the computation of basic and diluted (loss) income
per share:
---------------------------------------------------------------- ----------------------------------------------------
For the three months ended March 31,
2006 2005- As restated-Note K
---------------------------------------------------------------- ------------------- --------------------------------
Net income (loss) available to common stockholders $178,262 $(2,679,796)
---------------------------------------------------------------- ------------------- --------------------------------
Basic income/(loss) per share 0.0 (0.10)
---------------------------------------------------------------- ------------------- --------------------------------
Fully diluted income/(loss) per share 0.0 (0.10)
---------------------------------------------------------------- ------------------- --------------------------------
=Weighted average common shares outstanding (basic) 80,285,613 27,919,776
---------------------------------------------------------------- ------------------- --------------------------------
Weighted average commons shares outstanding (fully diluted) 334,282,061 204,473,391
---------------------------------------------------------------- ------------------- --------------------------------
As of March 31, 2005, 176,553,615 potential shares were excluded from the shares
used to calculate diluted loss per share as their inclusion would reduce net
loss per share.
NOTE I - BUSINESS CONCENTRATION
Sales to 3 major customers approximated $18,900 or 40% of total sales for the
three months ended March 31, 2006.
Purchases from the Company's 3 major suppliers approximated $48,142 or 90% of
total purchases for the three months ended March 31, 2006.
NOTE J- GOING CONCERN MATTERS
The accompanying statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the accompanying financial
statements, as of March 31, 2006, the Company incurred accumulated losses of
$18,513,679. The Company's current liabilities exceeded its current assets by
$1,933,949 as of March 31, 2006. These factors among others may indicate that
the Company will be unable to continue as a going concern for a reasonable
period of time.
21
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
NOTE J- GOING CONCERN MATTERS (CONTINUED)
The Company is actively pursuing additional equity financing through discussions
with investment bankers and private investors. There can be no assurance the
Company will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts,
management believes that the Company can continue to operate. However, no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems.
The Company's existence is dependent upon management's ability to develop
profitable operations and resolve its liquidity problems. Management anticipates
the Company will attain profitable status and improve its liquidity through the
continued developing, marketing and selling of its services and additional
equity investment in the Company. The accompanying financial statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern.
NOTE K-RESTATEMENT
During 2005, it was determined the correct application of accounting principles
had not been applied in the 2004 and 2003 accounting for convertible debentures
and detachable warrants (See note B above).
The original accounting for the debentures and detachable warrants, the Company
recognized an imbedded beneficial conversion feature present in the convertible
note and allocated a portion of the proceeds equal to the intrinsic value of
that feature to additional paid in capital. Accordingly, the proceeds attributed
to the common 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 Statement of
Operations and Statement of Cash Flows for the three months ended March 31, 2005
financial information. The impact to the previously issued March 31, 2005
financial statements is as follows:
------------------------------------------ ----------------------- --------------------- ---------------------
March 31, 2005 March 31, 2005 Amount increase
financial statement financial statement (decrease) in March
balance prior to post restatement 31, 2005 financial
restatement statements
------------------------------------------ ----------------------- --------------------- ---------------------
Net (loss) $(423,660) $(2,679,796) $2,256,136
------------------------------------------ ----------------------- --------------------- ---------------------
------------------------------------------ ----------------------- --------------------- ---------------------
Loss per share-basic and fully diluted $(0.02) $(0.10) $(0.08)
------------------------------------------ ----------------------- --------------------- ---------------------
The resulting effects on the prior period adjustments on the March 31, 2005 cash
flows by area are as follows:
---------------------------------- -------------------- -------------------------- --------------------------
March 31, 2005 March 31, 2005 cash flow Amount increase
cash flow statement post (decrease) in March 31,
statement balance restatement 2005 cash flow statement
prior to
restatement
---------------------------------- -------------------- -------------------------- --------------------------
Net cash from operating activities $(326,442) $(399,467) $(73,025)
---------------------------------- -------------------- -------------------------- --------------------------
Net cash from investing activities (963) (963) -
---------------------------------- -------------------- -------------------------- --------------------------
Net cash from financing activities (77,510) (4,485) 73,025
---------------------------------- -------------------- -------------------------- --------------------------
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that are
subject to significant risks and uncertainties about us, our current and planned
products, our current and proposed marketing and sales, and our projected
results of operations. There are several important factors that could cause
actual results to differ materially from historical results and percentages and
results anticipated by the forward-looking statements. The Company has sought to
identify the most significant risks to its business, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurance that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risks before making an
investment decision with respect to the Company's stock. The following
discussion and analysis should be read in conjunction with the financial
statements of the Company and notes thereto. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment from our Management.
OVERVIEW
We are 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. "Diodal(TM)" is our trademark. Using proprietary technology, we are
creating a family of products for task and accent lighting, emergency and
security lighting, and specialized lighting systems for military and Homeland
Security. Our solid-state lighting technology offers extended light life and
greater cost effectiveness than other existing forms of illumination. We are
expanding our marketing activity into channels of retail, commercial,
institutional and military sales.
With our Aeon task and accent lighting, the target markets include kitchen
and bath cabinet manufacturers, designer and installation contractors for the
residential market. In the commercial markets, our Aeon task and accent lighting
products and Reliabright emergency and security lighting products address the
lighting needs in hotels, hospitals, nursing homes, airports, shopping centers
and multiple family complexes; long-term evacuation solutions for theaters,
office and public buildings; reduced maintenance cost solutions for property
managers as applied to walkway, corridor or landscape lighting. For our retail
products, our target customers include the home improvement and consumer goods
retailers. For the military and Homeland Security Watchdog and BrightEye
products, our target markets include all branches of the military and all
government organizations providing homeland security services such as border
control and airport security.
On Janurary 10, 2006, we met with the Department of Homeland Security in
Washington, D.C. to discuss the potential use of our military-grade solid-state
lighting technology as the lighting solution for the Secure Border Initiative
(SBInet). As a result, we were invited to attend the SBInet Industry Day to meet
the primary contractor companies that we could supply with our lighting
solutions if we became a subcontractor. We also learned of the unsolicited
proposal process where companies submit solutions for consideration within the
Department of Homeland Security.
Between January 11, 2006 and January 14, 2006, we attended the
International Builder's Show in Orlando, Florida, to promote our Aeon lighting
solutions products. The Aeon products bring cool-to-the-touch and long-lasting
light into the residential and commercial market for use in closets, cabinet
interiors, under-cabinet lighting and kitchen counters. The solid state
semiconductors, trademarked by Cyberlux as diodal(TM) lighting elements, consume
92 percent less energy than conventional lighting elements. Approximately
100,000 housing professionals, including home and apartment builders,
architects, product manufacturers, and those involved in every aspect of
residential and light commercial construction attended the International
Builder's Show. The National Association of Home Builders featured more than
1,600 exhibitors showcasing the latest designs, technologies, products and
services available to the home building community. We scheduled meetings and
educational sessions to present our Aeon products to home builders, architects
and designers.
23
On January 17, 2006, we entered into an agreement with NewDominion Capital
Group ("NewDominion") of Arlington, Virginia, to serve as our exclusive
financial adviser. Under the terms of the agreement, NewDominion was engaged to
restructure our debt which includes a mandatory payoff of the NIR Group
investors and a subsequent capital raise through arrangements undertaken by
NewDominion with the assistance of our management.
On January 26, 2006, we attended the Secure Border Initiative (SBInet)
Industry Day hosted by the Department of Homeland Security. As a result, we were
able to determine which primary contractors we should pursue a subcontractor
relationship with as a leader in solid-state lighting solutions.
On January 27, 2006, we announced that we had been awarded a U.S. patent
for emergency lighting technology based on light emitting diodes (LEDs). The
patent, Number 6,986,589, is for `Apparatus and Methods for Providing and
Emergency Lighting Augmentation System.' The development of the ReliaBright
Emergency Lighting System (ELS) led to the patent filing. The ReliaBright ELS is
designed to retrofit as an augmentation to existing lighting systems in
commercial buildings, and it can be adapted for a variety of applications and
uses. These claims lead to new opportunities for the ReliaBright ELS technology
in the commercial, military and homeland security markets.
On February 7, 2006, we announced that we had agreements with two national
catalog and online retailers to offer our EverOn Emergency and Multi-Purpose LED
light to more than 10 million customers. The EverOn product will be offered by
Solutions Catalog, a national catalog retailer. Solutions is part of Norm
Thompson Outfitters, a leader in direct mail and retail sales. The EverOn
product will also be offered by Stacks and Stacks, a nationally recognized
retail, catalog and internet company based in San Francisco.
On February 13, 2006, we presented our LED solid-state lighting products
developed for defense and homeland security initiatives to representatives from
the military, Secret Service, FBI, Homeland Security and the federal
intelligence communities in a meeting hosted by the North Carolina Technology
Association. We demonstrated our Watchdog Portable Covert Illumination System,
an advanced lighting system selected by the U.S. Air Force's Air Mobility
Battlelab. The system was designed to protect military assets on the ground,
such as an airplane, be creating a `lightless' zone around the asset while
illuminating the surrounding protection boundary. We also demonstrated our
Bright Eye Portable Illumination System for border security initiatives,
extending visible or covert infrared lighting more than 600 feet.
On February 23, 2006, we met with the Army and Air National Guard Bureau,
the central command for the National Guard, to discuss the potential use of our
military-grade solid-state lighting technology as the lighting solution for the
various National Guard emergency response, border patrol and enforcement
responsibilities. As a result, we were invited to participate in the first
annual National Guard J3 Domestic Operations Conference. At the conference which
as held March 21-23, 2006, the National Guard personnel reviewed our Cyberlux
Watchdog and BrightEye Portable Covert and Visible Illumination Systems. We hope
to create demand for our portable, lightweight illumination systems,
particularly from units supporting states where border security or emergency
response capabilities are critical.
On March 21, 2006, we met with and began substantive discussions with a
leading global retailer regarding the EverOn product distribution and the
upcoming hurricane season.
On March 26, 2006, we announced that we were awarded a United States
government contract for energy saving lighting products through the General
Services Administration (GSA) Supply Schedule. Under the terms of the Federal
Supply Schedule contract, we can now sell our solid-state light emitting diode
(LED) Aeon task and accent lighting products as a primary contractor to any U.S.
Government purchasing organization. The contract period is March 2006 through
March 2011.
On March 29, 2006, we announced that we had completed the contract
requirements associated with the advanced solid-state LED security lighting
system developed for the United States Air Force. Based on the demonstration
results of the Portable Covert Illumination System, the Air Mobility Battlelab
completed the project briefing with A7 Air Mobility Command senior commanders
and successfully transitioned the Watchdog System to field trials for
procurement. As part of the Air Mobility Battlelab transition plan, the Air
Mobility Command will purchase Watchdog Systems for initial field deployment.
The unique properties of the Watchdog System have prompted purchase intentions
from other branches of the U.S. Military.
24
On March 30, 2006, we submitted a formal Unsolicited Proposal to the
Department of Homeland Security (DHS) for consideration of our military-grade
solid-state lighting technology as the lighting solution for the DHS' emergency
response, border patrol, threat prevention and law enforcement responsibilities
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2005
REVENUES
Revenues for the three months ended March 31, 2006 were $47,200 as
compared to $13,568 for the same period ended March 31, 2005.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2006 were
$1,393,820 as compared to $435,732 for the same period ended March 31, 2005.
Included in the three months ended March 31, 2006 are $47,828 in expenses for
market development and literature. This compares to $21,323 for the three months
ended March 31, 2005. Additionally, we incurred non cash expenses relating to
the exercise of options and payments for services rendered totaling $762,250 for
the three month period ended March 31, 2006 as compared with $0 for same period
in 2005.
As a result of limited capital resources and minimal revenues from
operations from its inception, we have relied on the issuance of equity
securities to non-employees in exchange for services. Our management enters into
equity compensation agreements with non-employees if it is in our best interest
under terms and conditions consistent with the requirements of Financial
Accounting Standards No. 123 and 123(R), Accounting for Stock Based
Compensation. In order conserve its limited operating capital resources, we
anticipate continuing to compensate non-employees for services during the next
twelve months. This policy may have a material effect on our results of
operations during the next twelve months.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2006, we had a working capital deficit of $1,933,949. As a
result of our operating losses for the three months ended March 31, 2006, we
generated a cash flow deficit of $873,377 from operating activities. Cash flows
used in investing activities was $7,093 during the three month period through
March 31, 2006. We met our cash requirements during this period through the
issuance of convertible debentures of $460,000 $152,400 from the issuance of
notes payable and advances of $500, net of repayments, to our officers and
shareholders and advances.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of
capitalization, we believe we have sufficient capital resources to meet
projected cash flow deficits through the next twelve months. However, if
thereafter, we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
Our independent certified public accountant has stated in their report
included in our December 31, 2005, Form 10-KSB, as amended, that we have
incurred operating losses in the last two years, and that we are dependent upon
management's ability to develop profitable operations. These factors among
others may raise substantial doubt about our ability to continue as a going
concern.
25
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) 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 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.
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.
We will still need additional investments in order to continue operations
to cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
We will still need additional investments in order to continue operations
to cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
26
Critical Accounting Policies
----------------------------
In March 2006, the FASB issued FASB Statement No. 156, Accounting for
Servicing of Financial Assets - an amendment to FASB Statement No. 140.
Statement 156 requires that an entity recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by
entering into a service contract under certain situations. The new standard is
effective for fiscal years beginning after September 15, 2006. The Company does
not expect its adoption of this new standard to have a material impact on its
financial position, results of operations or cash flows.
On February 16, 2006 the Financial Accounting Standards Board (FASB)
issued SFAS 155, "Accounting for Certain Hybrid Instruments," which amends SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating the need to
bifurcate the derivative from its host) if the holder elects to account for the
whole instrument on a fair value basis. SFAS 155 also clarifies and amends
certain other provisions of SFAS 133 and SFAS 140. This statement is effective
for all financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The Company does not expect its adoption of this new
standard to have a material impact on its financial position, results of
operations or cash flows.
In March 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.
Stock Based Compensation
------------------------
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123(R). This statement does not
address the accounting for employee share ownership plans, which are subject to
AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company had to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. The Company
implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective
method. The fair value of each option grant issued after January 1, 2006 will be
determined as of grant date, utilizing the Black-Scholes option pricing model.
The amortization of each option grant will be over the remainder of the vesting
period of each option grant.
As more fully described in finacial statements in included in Form 10-KB
for the year ended December 31, 2005, the Company granted stock options over the
years to employees of the Company under a non-qualified employee stock option
plan. As of December 31, 2005, 33,580,000 stock options were outstanding and
exercisable. The Company did not grant any stock options to employees during the
quarter ended March 31, 2006. The Company did not recognize compensation expense
related to employees stock options in the quarter ended March 31, 2006. The
impact on earnings for the remainder of Fiscal 2006 for stock based compensation
will depend on future stock option issuances.
In prior years, the Company applied the intrinsic-value method prescribed
in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," to account for the issuance of stock options to employees
and accordingly compensation expense related to employees' stock options were
recognized in the prior year financial statements to the extent options granted
under stock incentive plans had an exercise price less than the market value of
the underlying common stock on the date of grant.
Non-GAAP Financial Measures
---------------------------
The financial statements appearing in this quarterly report on Form 10-QSB
do not contain any financial measures which are not in accordance with generally
accepted accounting procedures.
27
Inflation
---------
In the opinion of management, inflation has not had a material effect on
our financial condition or results of its operations
Off-Balance Sheet Arrangements
------------------------------
We do not maintain off-balance sheet arrangements nor do we participate in
non-exchange traded contracts requiring fair value accounting treatment.
PRODUCT RESEARCH AND DEVELOPMENT
We anticipate incurring approximately $500,000 in research and development
expenditures in connection with the development of our portable boundary
lighting system, Aeon cabinet lighting and RelyOn Power Light Plant during the
next twelve months.
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
ACQUISITION OR DISPOSITION OF PLANT AND EQUIPMENT
We do not anticipate the sale of any significant property, plant or
equipment during the next twelve months. We do not anticipate the acquisition of
any significant property, plant or equipment during the next 12 months.
28
RISK FACTORS
Much of the information included in this quarterly report includes or is
based upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We incurred 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. For
the three months ended March 31, 2006, we incurred a net loss of $[ ]. As of
March 31, 2006, we had an accumulated deficit of $[ ]. We cannot assure you that
we can achieve or sustain profitability on a quarterly or annual basis in the
future. Our operations are subject to the risks and competition inherent in the
establishment of a business enterprise. There can be no assurance that future
operations will be profitable. Revenues and profits, if any, will depend upon
various factors, including whether we will be able to continue expansion of our
revenue. We may not achieve our business objectives and the failure to achieve
such goals would have an adverse impact on us.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED AND IF WE DO OBTAIN ADDITIONAL FINANCING OUR THEN EXISTING SHAREHOLDERS
MAY SUFFER SUBSTANTIAL DILUTION.
We will require additional funds to sustain and expand our sales and
marketing activities. We anticipate that we will require up to approximately $4
million to fund our continued operations for the next twelve months, depending
on revenue from operations. Additional capital will be required to effectively
support the operations and to otherwise implement our overall business strategy.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our marketing and development plans and
possibly cease our operations. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
In their report dated March 16, 2006, our independent auditors stated that
our financial statements for the year ended December 31, 2005 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised as a result of losses for the year ended
December 31, 2005 in the amount of $9,410,657. We continue to experience net
operating losses. Our ability to continue as a going concern is subject to our
ability to generate a profit and/or obtain necessary funding from outside
sources, including obtaining additional funding from the sale of our securities,
increasing sales or obtaining loans and grants from various financial
institutions where possible. Our continued net operating losses increase the
difficulty in meeting such goals and there can be no assurances that such
methods will prove successful.
29
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% of all
votes by our shareholders. As a result, these stockholders, acting together,
will have the ability to control substantially all matters submitted to our
stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
30
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%
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.
31
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.
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.
32
RISKS RELATING TO OUR COMMON STOCK:
-----------------------------------
WE HAVE ISSUED A LARGE AMOUNT OF STOCK IN LIEU OF CASH FOR PAYMENT OF EXPENSES
AND EXPECT TO CONTINUE THIS PRACTICE IN THE FUTURE. SUCH ISSUANCES OF STOCK WILL
CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Due to our limited economic resources, we try to issue stock in lieu of
cash for payment of expenses and services provided for us. In 2005, we issued
2,783,333 shares of common stock in exchange for expenses and services rendered.
We anticipate issuing shares of common stock whenever possible in lieu of cash
to conserve our financial position. The number of shares of common stock issued
is directly related to our stock price at the time of issuance. In the event
that our stock price drops, we will be required to issue larger amounts of
shares for expenses and services rendered, if the other party is willing to
accept stock at all. The issuance of shares of common stock will have the effect
of diluting the proportionate equity interest and voting power of holders of our
common stock, including investors in this offering.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
33
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.
34
ITEM 3. CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: As of March 31,
2006, our management carried out an evaluation, under the
supervision of our Chief Executive Officer and Chief Financial
Officer of the effectiveness of the design and operation of our
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 on that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls
and procedures are effective to provide reasonable assurance that
information we are required to disclose in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
b) CHANGES IN INTERNAL CONTROLS: There were no changes in internal
controls over financial reporting that occurred during the period
covered by this report that have materially affected, or are
reasonably likely to materially effect, our internal control over
financial reporting.
35
PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Except as
disclosed below, we are currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
INDEX NUMBER: 602727/05 - SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW
YORK
On July 27, 2005, Alliance Care Services, Inc. d/b/a Alliance Advisors, a
New York corporation, filed a complaint against us in the Supreme Court of the
State of New York, County of New York, claiming damages in the amount of not
less than $500,000 and costs for breach of contract, breach of duty of good
faith and fair dealing and unjust enrichment. We entered into an agreement with
Alliance Advisors in October 2003 for services to perform, including
introduction to investors for the raising of equity capital in exchange for
payment of certain fees. We filed our answer on October 4, 2005 denying all
claims. This case is currently in discovery. We believe that their claims are
without merit and we intend to vigorously defend these claims.
STATEMENT OF CLAIM - ARBITRATION BEFORE THE NATIONAL ASSOCIATION OF SECURITIES
DEALERS, INC.
On October 21, 2005, Greenfield Capital Partners LLC filed a statement of
claim against us in arbitration before the National Association of Securities
Dealers, Inc. Greenfield claims damages and costs in the amount of $107,000 for
breach of contract, fraud, fraudulent concealment and misrepresentation. We
entered into an agreement with Greenfield Capital Partners LLC in June 2004 to
act as financial advisor in connection with and equity offering. We believe that
their claims are without merit and we intend to vigorously defend these claims.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2006, we issued 419,032 shares of
common stock for the conversion of 8.4 shares of Series A preferred stock.
In March 2006, we issued 791,369 shares of common stock at $0.04 per share
on conversion of notes payable.
In January 2006, we issued 3,000,000 shares of common stock at $0.084 per
share, 100,000 shares of common stock at $0.113 per share and 10,000 shares at
$0.095, in exchange for services rendered.
In February 2006, we issued 1,500,000 shares of common stock at $0.092 per
share in exchange for services rendered.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC on March 27, 2006, for the
sale of (i) $500,000 in secured convertible notes and (ii) a warrants to
purchase 19,000,000 shares of our common stock.
The Notes bear interest at 8%, mature three years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of (i) $0.10 or (ii) 55% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date. The full principal
amount of the secured convertible notes are due upon default under the terms of
secured convertible notes. In addition, we have granted the investors a security
interest in substantially all of our assets and intellectual property and
registration rights. The warrants are exercisable until five years from the date
of issuance at a purchase price of $0.10 per share. In addition the warrants
exercise price gets adjusted in the event we issue common stock at a price below
market, with the exception of any securities issued as of the date of this
warrant.
36
* All of the above offerings and sales were deemed to be exempt under rule
506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended.
No advertising or general solicitation was employed in offering the securities.
The offerings and sales were made to a limited number of persons, all of whom
were accredited investors, business associates of Cyberlux or executive officers
of Cyberlux, and transfer was restricted by Cyberlux Corporation in accordance
with the requirements of the Securities Act of 1933. In addition to
representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment. Furthermore, all of the above-referenced persons were provided
with access to our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14 and Rule 15d-14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14 and Rule 15d 14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
37
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYBERLUX CORPORATION
Date: May 11, 2006 By: /s/ DONALD F. EVANS
-----------------------
Donald F. Evans
Chief Executive Officer (Principal Executive Officer) and
Chairman of the Board of Directors
Date: May 11, 2006 By: /s/ DAVID D. DOWNING
------------------------
David D. Downing
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
38