As filed with the Securities and Exchange Commission on May 20, 2005
An Exhibit List can be found on page II-7.
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
CYBERLUX CORPORATION
(Name of small business issuer in its charter)
Nevada 3674 91-2048178
---------------------------- ---------------------------- ----------------
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
4625 Creekstone Drive, Suite 100
Research Triangle Park
Durham, North Carolina 27703
(919) 474-9000
(Address and telephone number of principal executive offices and
principal place of business)
Don F. Evans, Chief Executive Officer
CYBERLUX CORPORATION
4625 Creekstone Drive, Suite 100
Research Triangle Park
Durham, North Carolina 27703
(919) 474-9000
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
CALCULATION OF REGISTRATION FEE
------------------------------- -------------------- ---------------- ------------------ --------------------
Title of each class of Amount to be Proposed Proposed Amount of
securities to be registered registered (1) maximum maximum registration fee
offering aggregate
price per offering price
share (2)
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $.001 par 150,000,000 (3) $.02 $3,000,000 $353.10
value issuable upon
conversion of Secured
Convertible Notes
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $.001 par 25,000,000 (4) $.03 $750,000 $88.28
value issuable upon exercise
of Warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 175,000,000 $3,750,000.00 $441.38
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes and the exercise of warrants held
by the selling stockholders. In addition to the shares set forth in the table,
the amount to be registered includes an indeterminate number of shares issuable
upon conversion of the secured convertible notes and exercise of the warrants,
as such number may be adjusted as a result of stock splits, stock dividends and
similar transactions in accordance with Rule 416. The number of shares of common
stock registered hereunder represents a good faith estimate by us of the number
of shares of common stock issuable upon conversion of the secured convertible
notes and upon exercise of the warrants. For purposes of estimating the number
of shares of common stock to be included in this registration statement, we
calculated a good faith estimate of the number of shares of our common stock
that we believe will be issuable upon conversion of the secured convertible
notes and upon exercise of the warrants to account for market fluctuations, and
antidilution and price protection adjustments, respectively. Should the
conversion ratio result in our having insufficient shares, we will not rely upon
Rule 416, but will file a new registration statement to cover the resale of such
additional shares should that become necessary. In addition, should a decrease
in the exercise price as a result of an issuance or sale of shares below the
then current market price, result in our having insufficient shares, we will not
rely upon Rule 416, but will file a new registration statement to cover the
resale of such additional shares should that become necessary.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933,
using the average of the high and low price as reported on the Over-The-Counter
Bulletin Board on May 19, 2005, which was $.02 per share.
(3) Includes a good faith estimate of the shares underlying secured convertible
notes to account for market fluctuations.
(4) Includes a good faith estimate of the shares underlying warrants exercisable
at $.03 per share to account for antidilution protection adjustments.
----------
Pursuant to Rule 429 promulgated under the Securities Act of 1933, the
enclosed prospectus constitutes a combined prospectus also relating to an
aggregate of up to 64,567,319 shares of our common stock that were previously
registered for sale in a Registration Statement, as amended, on Form SB-2,
Registration No. 333-119716. As such, this prospectus also constitutes
post-effective amendment no. 1 to the Registration Statement on Form SB-2,
Registration No. 333-119716, which shall hereafter become effective concurrently
with the effectiveness of this Registration Statement on Form SB-2 in accordance
with Section 8(c) of the Securities Act of 1933.
----------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 20, 2005
CYBERLUX CORPORATION
175,000,000 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up
to 175,000,000 shares of our common stock, including up to 150,000,000 shares of
common stock underlying secured convertible notes in a principal amount of
$1,500,000 and up to 25,000,000 issuable upon the exercise of common stock
purchase warrants. The secured convertible notes are convertible into our common
stock at the lower of $0.03 or 50% of the average of the three lowest intraday
trading prices for the common stock on a principal market for the 20 trading
days before but not including the conversion date. The selling stockholders may
sell common stock from time to time in the principal market on which the stock
is traded at the prevailing market price or in negotiated transactions. The
selling stockholders may be deemed underwriters of the shares of common stock
which they are offering. We will pay the expenses of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "CYBL". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on May 19, 2005, was $.02.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _____, 2005.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Cyberlux Corporation with the Securities and Exchange Commission. The selling
stockholders may not sell these securities until the registration statement
becomes effective. This Prospectus is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the sale
is not permitted.
1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the secured convertible notes to
the financial statements.
CYBERLUX CORPORATION
We are in the development stage and our efforts have been principally
devoted to designing, developing manufacturing and marketing advanced lighting
systems that utilize white (and other) light emitting diodes as illumination
elements. We are developing and marketing new product applications of diodal
illumination(TM) that demonstrate added value over traditional lighting systems.
Using proprietary technology, we are creating a family of products for emergency
and security lighting offer extended light life and greater cost effectiveness
than other existing forms of illumination. We are expanding our marketing
activity into channels of retail, commercial and institutional sales.
For the year ended December 31, 2004, we generated $23,803 in revenue
and a net loss of $6,025,848. For the quarter ended March 31, 2005, we generated
$13,568 in revenue and a net loss of $423,660. As a result of recurring losses
from operations and a net deficit in both working capital and stockholders'
equity, our auditors, in their report dated March 17, 2005, have expressed
substantial doubt about our ability to continue as going concern.
Our principal offices are located at 4625 Creekstone Drive, Suite 100,
Research Triangle Park, Durham, North Carolina 27703, and our telephone number
is (919) 474-9000. We are a Nevada corporation.
The Offering
Common stock offered by selling stockholders ............................. Up to 175,000,000 shares, including the following:
- up to 150,000,000 shares of common stock
underlying secured convertible notes in the
principal amount of $1,500,000 (includes a good
faith estimate of the shares underlying secured
convertible notes to account for market
fluctuations and antidilution protection
adjustments, respectively), and
- up to 25,000,000 shares of common stock
issuable upon the exercise of common stock
purchase warrants at an exercise price of $.03
per share (includes a good faith estimate of
the shares underlying warrants to account for
antidilution protection adjustments).
This number represents 83.74% of our current
outstanding stock.
Common stock to be outstanding after the offering ........................ Up to 208,991,780 shares
2
Use of proceeds........................................................... We will not receive any proceeds from the sale of
the common stock. However, we will receive the sale
price of any common stock we sell to the selling
stockholders upon exercise of the warrants. We
expect to use the proceeds received from the
exercise of the warrants, if any, for general
working capital purposes. However, AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd., and New Millennium Partners II, LLC will be
entitled to exercise up to 18,333,334 warrants on a
cashless basis if the shares of common stock
underlying the warrants are not then registered
pursuant to an effective registration statement. In
the event that AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., or New Millennium
Partners II, LLC exercise the warrants on a cashless
basis, then we will not receive any proceeds from
the exercise of those warrants. In addition, we have
received gross proceeds $600,000 from the sale of
the secured convertible notes and the investors are
obligated to provide us with an additional $900,000;
$500,000 within five days of the filing of this
registration statement, and $400,000 within five
days of this prospectus being declared effective.
The proceeds received from the sale of the secured
convertible notes will be used for business
development purposes, working capital needs,
pre-payment of interest, payment of consulting and
legal fees and purchasing inventory.
Over-The-Counter Bulletin Board Symbol.................................... CYBL
Explanatory note: On April 22, 2005, we entered into a Securities Purchase
Agreement with four accredited investors. Any issuance of shares of common stock
pursuant to this agreement that would require us to issue shares of common stock
in excess of our authorized capital is contingent upon us obtaining shareholder
approval to increase our authorized shares of common stock from 300,000,000 to
700,000,000 and filing the certificate of amendment to our certificate of
incorporation. On May 9, 2005, we filed a preliminary information statement with
the Securities and Exchange Commission, which is currently being reviewed,
stating that a majority of the shareholders of our company have authorized the
increase in our authorized shares of common stock. We intend on filing the
certificate of amendment to our certificate of incorporation 20 days after the
mailing and filing of the definitive information statement. We are registering
175,000,000 shares of common stock pursuant to this prospectus that are
underlying the secured convertible notes and warrants issued in connection with
the Securities Purchase Agreement. Upon filing the certificate of amendment, we
will amend this prospectus to include additional shares of common stock that are
issuable pursuant to the Securities Purchase Agreement.
The above information regarding common stock to be outstanding after
the offering is based on 33,991,780 shares of common stock outstanding as of May
2, 2005 and assumes the subsequent conversion of our issued secured convertible
notes and series A convertible preferred stock and exercise of warrants by our
selling stockholders.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on April 22, 2005
for the sale of (i) $1,500,000 in secured convertible notes and (ii) warrants to
buy 25,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors are obligated to
provide us with an aggregate of $1,500,000 as follows:
3
o $600,000 was disbursed on April 22, 2005;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $400,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $600,000 pursuant to the
Securities Purchase Agreement.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
selling stockholders' option, at the lower of (i) $0.03 or (ii) 50% of the
average of the three lowest intraday trading prices for the common stock on a
principal market for the 20 trading days before but not including the conversion
date. Accordingly, there is in fact no limit on the number of shares into which
the notes may be converted. As of May 20, 2005, the average of the three lowest
intraday trading prices for our common stock during the preceding 20 trading
days as reported on the Over-The-Counter Bulletin Board was $.02 and, therefore,
the conversion price for the secured convertible notes was $.01. Based on this
conversion price, the $1,500,000 secured convertible notes, excluding interest,
were convertible into 150,000,000 shares of our common stock.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock.
See the "Selling Stockholders" and "Risk Factors" sections for a
complete description of the secured convertible notes.
4
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
We Have a History Of Losses Which May Continue, Which May Negatively Impact Our
Ability to Achieve Our Business Objectives.
We incurred net losses of $6,025,848 for the year ended December 31,
2004 and $1,494,556 for the year ended December 31, 2003. For the three months
ended March 31, 2005, we incurred a net loss of $423,660. 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
$900,000 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 17, 2005, our independent auditors stated
that our financial statements for the year ended December 31, 2003 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised as a result of losses for the years ended
December 31, 2004 and 2003 in the amounts of $6,025,848 and $1,494,556,
respectively. We continue to experience net operating losses. Our ability to
continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
Our continued net operating losses increase the difficulty in meeting such goals
and there can be no assurances that such methods will prove successful.
If We Are Unable to Retain the Services of Messrs. Evans, Schmidt or Ringo, or
If We Are Unable to Successfully Recruit Qualified Managerial and Sales
Personnel Having Experience in Business, We May Not Be Able to Continue Our
Operations.
Our success depends to a significant extent upon the continued service
of Mr. Donald F. Evans, our Chief Executive Officer, Mr. Mark D. Schmidt, our
President and Mr. John Ringo, our Secretary and Corporate Counsel. Loss of the
services of Messrs. Evans, Schmidt or Ringo could have a material adverse effect
on our growth, revenues, and prospective business. We do not maintain key-man
insurance on the life of Messrs. Evans or Ringo. In addition, in order to
successfully implement and manage our business plan, we will be dependent upon,
among other things, successfully recruiting qualified managerial and sales
personnel having experience in business. Competition for qualified individuals
is intense. There can be no assurance that we will be able to find, attract and
retain existing employees or that we will be able to find, attract and retain
qualified personnel on acceptable terms.
5
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.
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 May 2, 2005, we had 33,991,780 shares of common stock issued and
outstanding, secured convertible notes outstanding that may be converted into an
estimated 60,000,000 shares of common stock at current market prices and
outstanding warrants to purchase 10,000,000 shares of common stock.
Additionally, we have an obligation to sell secured convertible notes that may
be converted into an estimated 90,000,000 shares of common stock at current
market prices and issue warrants to purchase 15,000,000 shares of common stock
in the near future. Additionally, pursuant to a prior financing with the selling
stockholders, we still have outstanding secured convertible notes that may be
converted into an estimated 141,294,800 shares of common stock at current market
prices and outstanding warrants to purchase 2,250,000 shares of common stock. In
addition, the number of shares of common stock issuable upon conversion of the
outstanding secured convertible notes 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 May 19, 2005 of $0.02.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------ ----- ------ -------- -----
25% $.015 $.0075 200,000,000 85.47%
50% $.01 $.005 300,000,000 89.82%
75% $.005 $.0025 600,000,000 94.64%
6
As illustrated, the number of shares of common stock issuable upon
conversion of our secured convertible notes will increase if the market price of
our stock declines, which will cause dilution to our existing stockholders.
The Continuously Adjustable Conversion Price Feature of our Secured Convertible
Notes May Have a Depressive Effect on the Price of Our Common Stock.
The secured convertible notes 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 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 A 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
Prospectus 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 150,000,000 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 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. Although we currently have $600,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $900,000. In addition, any event of
default 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.
7
Risks Relating to Our Common Stock:
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be
reporting issuers under Section 12 of the Securities Exchange Act of 1934, as
amended, and must be current in their reports under Section 13, in order to
maintain price quotation privileges on the OTC Bulletin Board. If we fail to
remain current on our reporting requirements, we could be removed from the OTC
Bulletin Board. As a result, the market liquidity for our securities could be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in the
secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
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.
8
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will not
receive any proceeds from the sale of shares of common stock in this offering.
However, we will receive the sale price of any common stock we sell to the
selling stockholders upon exercise of the warrants. We expect to use the
proceeds received from the exercise of the warrants, if any, for general working
capital purposes. However, AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC will be entitled to exercise
up to 18,333,334 warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd., or New Millennium Partners II, LLC exercise
the warrants on a cashless basis, then we will not receive any proceeds from the
exercise of those warrants. In addition, we have received gross proceeds
$600,000 from the sale of the secured convertible notes and the investors are
obligated to provide us with an additional $900,000; $500,000 within five days
of the filing of this registration statement, and $400,000 within five days of
this prospectus being declared effective. The proceeds received from the sale of
the secured convertible notes will be used for business development purposes,
working capital needs, pre-payment of interest, payment of consulting and legal
fees and purchasing inventory.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"CYBL".
For the periods indicated, the following table sets forth the high and
low bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High($) Low ($)
------ -------
2003
Third Quarter (1) 1.05 0.10
Fourth Quarter 0.55 0.12
2004
First Quarter 0.53 0.19
Second Quarter 0.85 0.27
Third Quarter 0.55 0.23
Fourth Quarter 0.35 0.06
2004
First Quarter 0.07 0.02
Second Quarter (2) 0.04 0.02
(1) Our stock first traded on July 13, 2003.
(2) As of May 19, 2005
HOLDERS
As of May 2, 2005, we had approximately 224 holders of our common
stock. The number of record holders was determined from the records of our
transfer agent and does not include beneficial owners of common stock whose
shares are held in the names of various security brokers, dealers, and
registered clearing agencies. The transfer agent of our common stock is Pacific
Stock Transfer Company, 500 E. Warm Springs Road, Suite 240, Las Vegas, Nevada
89119.
9
We have never declared or paid any cash dividends on our common stock.
We do not anticipate paying any cash dividends to stockholders in the
foreseeable future. In addition, any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
our financial condition, results of operations, capital requirements, and such
other factors as the Board of Directors deem relevant.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. Our actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
Overview
We are in the development stage and our efforts have been principally
devoted to designing, developing manufacturing and marketing advanced lighting
systems that utilize white (and other) light emitting diodes as illumination
elements.
We are developing and marketing new product applications of diodal
illumination (TM) that demonstrate added value over traditional lighting
systems. Using proprietary technology, we are creating a family of products for
emergency and security lighting offer extended light life and greater cost
effectiveness than other existing forms of illumination. We are expanding our
marketing activity into channels of retail, commercial and institutional sales.
Our target markets include long-term interim 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; and certain sensitive applications
for the military.
During the second quarter of 2004, we met with officials from the State
of New York who expressed interest in our long-term interim lighting solutions.
We also met with security administrators of the Metropolitan Transit Authority
and the Port Authority in the City of New York. The Metropolitan Transit
Authority requested that we submit a proposal to provide long term interim
lighting pilot installations in New York City's subway system to include
passenger platforms, rail cars and tunnel accesses. In June 2004, we submitted a
proposal to the MTA for a pilot program. In March 2005, we submitted an
implementation proposal for subway cars and stairwells. This program is
currently being reviewed by the MTA. As a result of our meeting with the Port
Authority, we anticipate a similar proposal request related to Newark, LaGuardia
and JFK airports and the Holland Tunnel system, although we have not received a
proposal request as of the date of this filing and no assurance can be given
that we will receive a proposal request.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments:
o stock-based compensation; and
o revenue recognition.
11
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148 - Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS
No. 123 - Accounting for Stock-Based Compensation, providing alternative methods
of voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2002.
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by APB No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the provisions of APB No. 25, compensation expense is measured at the
grant date for the difference between the fair value of the stock and the
exercise price.
Revenue Recognition
For revenue from product sales, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
RESULTS OF OPERATIONS
Three months ended March 31, 2005 compared to the three months ended March 31,
2004
REVENUES
Revenues for the three months ended March 31, 2005 were $ 13,568 and
compares to $9,968 for the same period ended March 31, 2004. Included in sales
for the quarter is a $10,000 contract with Kings Park School District of Long
Island, New York for the installation of our ELS products in a local middle
school.
COST OF SALES
Cost of sales for the first quarter were $6,369 and produced a gross
margin on sales of 53%. This compares to $8,395 in cost of sales for the quarter
ended March 31, 2004 which produced a gross margin of 16%.
OPERATING EXPENSES
Operating expenses for the quarter ended March 31, 2005 were $388,153
and compares to $287,089 for the same period ended March, 31, 2004. Included in
the Quarter ended March 31, 2005 are $21,323 in expenses for market development
and literature. This compares to $0 for the first quarter of 2004.
12
As a result of limited capital resources and minimal revenues from
operations from our inception, we have relied on the issuance of equity
securities to non-employees in exchange for services. Our management enters into
equity compensation agreements with non-employees if it is in our best interest
under terms and conditions consistent with the requirements of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation. In order
to conserve our limited operating capital resources, we anticipate continuing to
compensate non-employees for services during the next twelve months. This policy
may have a material effect on our results of operations during the next twelve
months.
Results of Operations for the Years Ended December 31, 2004 and 2003 Compared.
Revenues for the year ended December 31, 2004 were $23,803 and include
the pilot installation of our new ELS product for the City of Cleveland, Ohio.
This compares to revenues of $74,238 for the year ended December 31, 2003.
Cost of goods sold were $160,260 for 2004 compared with $161,984 for
2003. Much of the design effort on the ELS product was costed into the product
installation for the City of Cleveland.
Operating expenses for the year ended December 31, 2004 were $4,098,444
compared with $1,268,802 for the year ended December 31, 2003. Included in
expenses for 2004 was $2,116,672 for consulting services compared with $95,935
for the previous year. Most of this expense was the result of issuing common
stock of the Company, recorded at the market price on the date of the awards, in
lieu of cash payments. The services provided included product design, market
development and capital fund-raising services.
Operating expenses for 2004 also include $296,008 representing costs
incurred in the design and pre-production of three products to be marketed
during the second quarter of 2005. Accounting practices have historically
attempted to match revenues and costs; however, in compliance with the
requirements of FASB number 2, we have taken these costs to expense during the
year 2004.
Interest expense for 2004 was $1,600,087 compared to $138,008 for 2003.
Included in interest expense for 2004 is $1,500,000 which was booked to
recognize the imbedded beneficial conversion feature of the $1,500,000
convertible notes payable entered into during the 3rd and 4th quarters of 2004.
The net loss realized for 2004 was $6,825,848, or $0.41 per share on an
average of 16,701,174 shares outstanding and compares to a net loss of
$2,230,806, or $0.29 per share on an average of 7,652,012 shares outstanding for
the year 2003.
Liquidity and Capital Resources
As of March 31, 2005, we had a working capital deficit of $875,666.
This compares to a working capital deficit of $ 442,303 as of December 31, 2004.
As a result of our operating losses for the first three months ended March 31,
2005, we generated a cash flow deficit of $326,442 from operating activities.
Cash flows used in investing activities was $963 during the quarter. Cash flows
used in financing activities were $77,510 on payment of short-term notes payable
for the first three months ended March 31, 2005.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of
capitalization, we believe we have sufficient capital resources to meet
projected cash flow deficits through the next twelve months. However, if
thereafter, we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
Our independent certified public accountant has stated in their report,
dated as of March 17, 2005, 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.
13
September 2004 Securities Purchase Agreement
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on September 23,
2004 for the sale of (i) $1,500,000 in secured convertible notes and (ii)
warrants to buy 2,250,000 shares of our common stock. The investors provided us
with an aggregate of $1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The 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. As
of May 18, 2005, $295,829 of the convertible debentures has been converted and
$1,204,171 remains outstanding.
The secured convertible notes bear interest at 10%, mature two years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.72 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for the 20 trading days before but not including the conversion date. The full
principal amount of the secured convertible notes is due upon default under the
terms of secured convertible notes. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.50 per share. In
addition, the conversion price of the secured convertible notes and the exercise
price of the warrants will be adjusted in the event that we issue common stock
at a price below the fixed conversion price, below market price, with the
exception of any securities issued in connection with the Securities Purchase
Agreement. The conversion price of the secured convertible notes and the
exercise price of the warrants may be adjusted in certain circumstances such as
if we pay a stock dividend, subdivide or combine outstanding shares of common
stock into a greater or lesser number of shares, or take such other actions as
would otherwise result in dilution of the selling stockholder's position. The
selling stockholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
Since the conversion price was less than the market price of the common
stock at the time the secured convertible notes are issued, we recognized a
charge relating to the beneficial conversion feature of the secured convertible
notes during the quarter in which they are issued, including the third quarter
of fiscal 2004 when $1,500,000 of secured convertible notes were issued.
April 2005 Securities Purchase Agreement
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on April 22, 2005
for the sale of (i) $1,500,000 in secured convertible notes and (ii) warrants to
buy 25,000,000 shares of our common stock. The investors are obligated to
provide us with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $400,000 will be disbursed within five days of the effectiveness of
this prospectus.
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.
14
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.03 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on a principal market
for the 20 trading days before but not including the conversion date. The full
principal amount of the secured convertible notes is due upon default under the
terms of secured convertible notes. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.03 per share. In
addition, the conversion price of the secured convertible notes and the exercise
price of the warrants will be adjusted in the event that we issue common stock
at a price below the fixed conversion price, below market price, with the
exception of any securities issued in connection with the Securities Purchase
Agreement. The conversion price of the secured convertible notes and the
exercise price of the warrants may be adjusted in certain circumstances such as
if we pay a stock dividend, subdivide or combine outstanding shares of common
stock into a greater or lesser number of shares, or take such other actions as
would otherwise result in dilution of the selling stockholder's position. The
selling stockholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. In addition, we have granted the investors a
security interest in substantially all of our assets and intellectual property
and registration rights.
Since the conversion price will be less than the market price of the
common stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
secured convertible notes during the quarter in which they are issued, including
the second quarter of fiscal 2005 when $600,000 of secured convertible notes
were issued.
We will still need additional investments in order to continue
operations to cash flow break even. Additional investments are being sought, but
we cannot guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS No. 141), and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The FASB also
issued Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" (SFAS No. 143),
and Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144) in August and
October 2001, respectively.
SFAS No. 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interest method. The adoption of SFAS No. 141 had no material impact
on the Company's consolidated financial statements.
Effective January 1, 2002, the Company adopted SFAS No. 142. Under the
new rules, the Company will no longer amortize goodwill and other intangible
assets with indefinite lives, but such assets will be subject to periodic
testing for impairment. On an annual basis, and when there is reason to suspect
that their values have been diminished or impaired, these assets must be tested
for impairment, and write-downs to be included in results from operations may be
necessary. SFAS No. 142 also requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption.
15
Any goodwill impairment loss recognized as a result of the transitional
goodwill impairment test will be recorded as a cumulative effect of a change in
accounting principle no later than the end of fiscal year 2002. The adoption of
SFAS No. 142 had no material impact on the Company's consolidated financial
statements
SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143 is
effective in fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company expects that the provisions of SFAS No. 143 will not have
a material impact on its consolidated results of operations and financial
position upon adoption. The Company plans to adopt SFAS No. 143 effective
January 1, 2003.
SFAS No. 144 establishes a single accounting model for the impairment
or disposal of long-lived assets, including discontinued operations. SFAS No.
144 superseded Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (SFAS No. 121), and APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The
Company adopted SFAS No. 144 effective January 1, 2002. The adoption of SFAS No.
144 had no material impact on Company's consolidated financial statements.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers". This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that a similar to sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9", which removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with Statements
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets. In addition, this Statement amends SFAS No. 144, Accounting for the
Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term customer
relationship intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
The requirements relating to acquisitions of financial institutions are
effective for acquisitions for which the date of acquisition is on or after
October 1, 2002. The provisions related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible assets are
effective on October 1, 2002. The adoption of this Statement did not have a
material impact to the Company's financial position or results of operations as
the Company has not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected to
change to the fair value based method of accounting for stock-based employee
compensation.
16
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." Interpretation 46 changes the criteria by which
one company includes another entity in its consolidated financial statements.
Previously, the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
Product Research and Development
We anticipate continuing to incur research and development expenditures
in connection with the development of our Wireless Lighting System during the
next twelve months.
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
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.
17
BUSINESS
OVERVIEW
We are a Nevada corporation that was incorporated on May 17, 2000. We
were founded to design, develop, manufacture, market and sell advanced lighting
systems that utilize Gallium Nitride light emitting diodes as illumination
elements. White diodes are a relatively new phenomenon that offers major
advances in illumination technology. Our Gallium Nitride diodes consume 92% less
energy than incandescent or fluorescent counterparts to produce comparable light
output. In electrochemical (battery powered) applications, this diminution of
energy consumption positions our lighting solutions as more durable and reliable
than other interim lighting alternatives. In standard alternating current
electrical applications, the calculated life of Gallium Nitride diodes as
lighting elements is over 20 years versus 750 hours for traditional incandescent
light bulbs. These exceptional performance characteristics, diminutive energy
consumption and extended life, have prompted Gallium Nitride diode
implementation in traffic lights and automotive brake lights, but have not yet
significantly occurred in our area of focus, diodal illumination (tm). Diodal
illumination is the production of light through the use of white light emitting
diodes. A light emitting diode is a chemical compound (gallium nitride, GaN)
that produces a visible light when an electrical current is applied. This
production of light through a diode is contrasted with light from a typical
light bulb, in which light is produced as a by-product of a burning filament
contained within a vacuum globe. The diode uses 92% less energy to produce
comparable light to that of a traditional light bulb.
PRINCIPAL PRODUCTS AND PRINCIPAL MARKETS
We have introduced our first product, the Cyberlux Home Safety Light.
Our production strategy has required the identification, qualification and
engagement of a variety of talents in industrial design, integrated circuit
board production, multi-cavity steel injection mold fabrication, component part
assembly, performance testing and packaging to fulfill the tasks associated with
finished goods delivery.. We are now planning to broaden our product line into
optoelectronic technology and expand our marketing activity into various
channels of retail and institutional sales. Our product line, consisting of the
Home Safety Light, the Cyclone PLP (Power Light Plant), the Power-Outage
Adapter, the Task & Accent Light and the KeyCap LockLight, employ single use
standard alkaline or lithium ion constant charge reusable batteries in different
applications. These fixtures express superior characteristics in brightness,
extended light life and durability through diodal(TM) illumination, an
optoelectronic descriptor trademarked by Cyberlux.
During the early stages of research for long-term interim light
solutions, all experimentation was confined to incandescent, fluorescent and, to
a more limited extent, fiber optics as illumination sources. The recurring
problem with these lighting elements was the inefficient use of electrical
energy. For example, in an incandescent bulb, 95% of the electrical energy
consumed is dissipated as radiant heat, not light. The discovery of the bright
white Gallium Nitride diode provides an alternative that can produce the
long-term interim light source that was to be the objective of our product
development activities. Unlike light bulbs that are brittle glass globes
surrounding a fragile wire filament in a vacuum, light emitting diodes are
extraordinarily efficient solid state semiconductors that are practically
indestructible. Diodes are manufactured from chemical compounds mixed with
phosphors, which transform electrical energy to visible light without heat. When
electrical current is applied to a diode, the energy creates electromagnetic
radiation, which occurs as light.
The power outage that struck the Midwest to the Northeastern United
States and parts of Canada in August of 2003 dramatized the absence of realistic
emergency lighting solutions in North America. This event was followed by the
hurricane season of 2004 during which millions of property owners in Florida
were without conventional power for days up to several weeks. The recurring
power losses are directly attributable to the grid system which delivers
electrical power to the North American Continent. Storm activity or power surges
may cause electrical power line damage which then causes grid collapse due to
the domino effect of failing systems. Typically, in the event of a power outage,
"emergency lighting" is utilized, which is short-term evacuation lights in
public and private buildings which perform for 60 to 90 minutes. Long-term
electrical power grid failure is a far different problem. We have developed an
alternative to typical "emergency lighting" for grid failure blackouts with
long-term emergency lighting using its Reliabrighttm family of battery powered
products that provide 60 hours (3,600 minutes) of bright light from one battery
charge.
18
Shortly after the blackout of August 2003, we were invited to propose
an emergency lighting redundancy system for the City of Cleveland, Ohio where
the power-outage darkened most of the city's buildings and homes. We reviewed
existing systems and then demonstrated our Reliabrighttm Emergency Lighting
System (ELS) over a three-month period beginning in December, 2003. In March of
2004, we were awarded a non-competitive bid contract by the City to begin
implementation of our Reliabrighttm ELS and ELU products in Cleveland's Public
Utilities Building. The nature and purpose of Reliabrighttm is its ability to
provide 60 hours of light during blackouts in bathrooms, stairwells, elevators,
corridors, equipment rooms and interior offices from its custom sealed
constant-charge battery pack and expandable diodaltm lighting element
configuration. The Reliabrighttm ELS retrofits into existing ceiling tiles in
bathrooms, elevators or offices and the ELU is wall mounted in corridors,
stairwells and equipment rooms.
Our initial product, the Home Safety Light (HSL), is an efficient
portable fixture that provides a full week of light from one set of AA batteries
compared to over 20 sets of replacement batteries required by other portable
lights to produce comparable light life. A proprietary intelligent circuit board
provides three levels of light intensity controlled by a simple push button. The
parabolic reflector broadcasts a blanket of light that can illuminate an entire
room, corridor, stairwell or other strategic location. The unit may be
hand-held, placed on a level platform or suspended from a wall-mounted hook. At
the moderate light level, it provides a full week of reliable bright light.
Because the patented HSL's performance characteristics are ideal for
recreational boating and camping as well as home safety, certain modifications
and package designs were implemented to create the CampLamptm which address the
needs of outdoor markets.
The Cyclone PLP (Power Light Plant) is a heavy-duty, rugged, portable
fixture that is actually a "perpetual source of light". The Cyclone is powered
by our proprietary sealed ConstaChargetm lead-acid battery that is maintained at
full charge by linkage to a standard electrical wall outlet or by linkage to a
vehicle's charge port or its cigarette lighter. The fixture operates its
articulated lens head for 60 hours of light from one charge session and can be
renewed to full charge in approximately 4 hours. The PLP has an integrated
charge port to enable recharge of a cell phone or other DC device and a reverse
current flow switch that can trickle charge a disabled automobile battery
through connection to the vehicle's internal charge port. The articulated lens
head arm has the ability to rotate through graduated ratchet points to provide
rigid focus of a powerful beam in task related applications. A 180 degree
rotation of the lens head when the fixture is upended to a vertical stance
positions the light source as a useful table lamp.
Our Power-Outage Adapter is a patented "intelligent electrical wall
outlet" that replaces an existing wall outlet, continues to perform as an
electrical outlet used by a variety of power cords, but now provides a new
dimension of service as an emergency lighting system. The Adapter contains a
constant charge battery, three sensors and three diodaltm lighting elements. One
sensor detects motion in a darkened space and illuminates one diode in the lower
lens to provide a guide light for movement; a second sensor detects loss of
power in the building's electrical system and illuminates two ultra-bright
diodes in the upper lens to wash the attendant wall with light; and a third
sensor detects ambient light in the space and deactivates the system. The Power
Outage Adapter will be marketed to hospitals, eldercare facilities and hotels in
the third quarter of 2005.
The "Heatless" new Task & Accent light is a fixture of several
different lengths which offer alternatives for its application in closets,
cabinets and under cabinet counter lighting. This product has the potential to
become the favorite of kitchen and interior designers owing to its remarkable
performance characteristics of several optional shades of white light, three
levels of light intensity and its "cool to the touch" safety feature. The choice
of electrical connections as plug-in, hard-wired or battery powered adds to the
fixture's flexibility and its light life of 75,000 hours contributes to its
leadership role in energy efficiency, durability and longevity.
Our patented KeyCaptm LockLight provides an inexpensive solution for a
key chain light source. This unique fixture is encased in an elastic fabric that
easily fits over the head of any variety of keys. The slender circuitry is
positioned to reside at the side of the key with the diode facing the lockset
entry down the shaft of the key which brightly, and precisely, illuminates the
keyhole. The KeyCaptm, which will be marketed three to a package surrounding
plastic facsimiles of keys, is a practical, lightweight, addition to every
consumer's key chain.
19
DISTRIBUTION METHODS OF OUR PRODUCTS
Consistent with our sales objectives, the reliable manufacture of
proprietary component parts and assembly of finished products required exacting
coordination of resources to provide detailed working drawings to tool
manufacturers for injection molded parts and optics; precise circuitry diagrams
to receive diodes, resistors and capacitors into the electronics platform;
source identification for volume supplies of batteries and diodes; packaging
considerations for presentation of product and corresponding dimensions of
containment's for shipping and display; and an experienced contract assembly
organization with an extensive infrastructure capable of collation and inventory
of all component parts.
During the Fall of 2000, we identified Shelby County Community
Services, Shelbyville, Illinois, as a contract manufacture and assembly
organization that was positioned to meet our requirements. Shelby County
Community Services has over a decade of successful performance on behalf of
Fortune 100 companies and represented the quality of management, performance and
fiscal stability that we sought to employ in the production process.
We have a Proprietary Product Manufacturing Agreement with Shelby
County Community Services that provides for Shelby County Community Services to
assemble, test, package, warehouse finished good inventory, palletize and ship
per purchase orders for shipment FOB Shelbyville. In the Summer of 2004, we
renewed our relationship with Shelby County Community Services. Shelby County
Community Services will continue to serve as the warehousing and distribution
center for our products, which are to be manufactured abroad. Shelby County
Community Services coordinates customs protocols and manages incoming
inventories.
Our internet site is serviced by Shelby County Community Services
through a fulfillment operations agreement whereby Shelby County Community
Services receives a daily batched summary of internet sales through an email
link established by us and United Parcel Service. The software validates the
address of the customer and advises shipping mode (next day, two day or ground),
computes shipping and handling charges then prints the appropriate waybill at
the shipping office of Shelby County Community Services. Packages are shipped
within 24 hours of receipt of the email summary of business for the preceding
day's orders. Shelby County Community Services coordinates materials inventory
with our approved vendors based upon purchase orders or blanket orders for
products.
Robrady Design, Inc., our industrial design firm, provides detailed
working drawings for injection molded parts to tool manufacturers in the US and
abroad. The initial production capacity at SCCS is 80,000 product units per
month, which can be increased by 50% with a four month lead time to undertake
expansion of facilities.
We have engaged Forma Designs, Inc. to produce, coordinate and manage
our corporate and product marketing activities. Forma Designs, Inc. has
broad-based experience in developing the corporate and product marketing
required to launch technology companies. The role of Forma Designs, Inc. is to
integrate marketing, sales, product and customer support activities and messages
to optimize customer acquisition and retention. Forma Designs, Inc. serves as
the liaison for the preparation and delivery of selling materials to the
individual selling firms and an information conduit to management for production
and finished goods inventory issues.
We have retained Capstrat, Inc. as our public relations firm
responsible for the strategic and tactical communications for Cyberlux. Capstrat
is a marketing communications firm that assists Cyberlux in communicating to our
target audiences of customers, prospects, the media, policymakers, employees,
opinion leaders and shareholders. Capstrat draws on a wide array of disciplines,
fueled by strategy and creativity, to aid Cyberlux in achieving our tactical and
strategic goals.
20
We have retained two technology product sales firms, Smart Products,
Inc., Westwood, NJ, and New Edison, LLC, Longmont, CO, to represent our product
line over the range of channels addressed for distribution. The individual firms
have been selected based upon established relationships with certain commercial
and retail channels and proven track records of sales to those channels.
INDUSTRY BACKGROUND
A research study attempted to identify a new approach to the
development of an electrochemical (battery powered), portable, interim lighting
system capable of providing safe illumination for extended periods of time to
property owners deprived of electrical service caused by power outages. Although
power outages have come to be a recurring phenomenon due to anomalies in
electrical service distribution networks, the focus of the initial study was on
disruptions caused by severe storm activity along the Atlantic and Gulf States'
coastlines and the corresponding affected inland electrical grids. The National
Weather Service labels annual storm activity as the Hurricane Season, which is
officially monitored from June 1st to November 30th each year. Other deficiency
outages not related to weather have been labeled by the press as rolling
blackouts. The loss of electrical power related to tropical and subtropical
storms can be wide spread and cover extensive regional segments surrounding the
matrix of the storm. It is the incidence of power outages that identified the
need for a reliable, durable, safe and economical interim lighting system for
property owners and the general population in areas affected by these seasonally
severe weather systems. The research conducted to identify an optimum interim
lighting system led to the discovery of a new illumination technology
(optoelectronics).
REGULATION
Our advertising and sales practices concerning the Home Safety Light
and the Wireless Interim Lighting Systems are regulated by the Federal Trade
Commission and state consumer protection laws. Such regulations include
restrictions on the manner that we promote the sale of our products. We believe
we are in material compliance with such regulations. We believe that we will be
able to comply in all material respects with laws and regulations governing the
conduct of business operations in general. We are not aware of any pending
government regulations that may adversely affect our business.
RESEARCH AND DEVELOPMENT ACTIVITIES
We anticipate continuing to incur research and development expenditures
in connection with the development of our Wireless Lighting System during the
next twelve months.
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
EMPLOYEES
We currently have eight (8) full time employees. Our employees are
primarily at the executive level based upon our role in coordination of
outsource contracts for manufacturing and other production considerations.
Currently, there exist no organized labor agreements or union agreements between
us and our employees. We have employment agreements with the following executive
officers: Donald F. Evans, Chairman and CEO, Mark D. Schmidt, President and COO,
Alan H. Ninneman, Senior Vice President and John W. Ringo, Secretary and
Corporate Counsel. We believe that our relations with our employees are good.
DESCRIPTION OF PROPERTIES
We maintain our principal office at 4625 Creekstone Drive, Suite 100,
Research Triangle Park, Durham, North Carolina 27703. Our telephone number at
that office is (919) 474-9700 and our facsimile number is (919) 474-9712. We
lease 2,405 square feet of office space. The lease expires on December 31, 2008.
The monthly rent is $3,457, subject to an annual cost of living increase. We
believe that our current office space and facilities are sufficient to meet our
present needs and do not anticipate any difficulty securing alternative or
additional space, as needed, on terms acceptable to us.
21
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.
On April 18, 2001, we filed a civil complaint against Light Technology,
Inc., Ervin J. Rachwal, Safe-Light Industries, LLC a/k/a JFER Innovations Group,
LLC, James Meyer and John Fleming alleging fraud, breach of contract, monies
lent, misappropriation of trade secrets, conspiracy and sought injunctive relief
against the defendants to prevent them from misappropriating trade secrets as
well as to recover monetary damages On May 11, 2001, the Court granted a
temporary injunction against the Defendants. On June 5, 2001, the Defendants
filed their Answer denying the allegations of the Complaint and filed a
counterclaim alleging fraud, violation of Trade Secret Act, breach of contract
and money lent.
On January 18, 2002, the Court granted the Defendants' Motion to
Dissolve the Injunction. On January 28, 2002, we filed a Motion for Rehearing or
Clarification of the Motion to Dissolve. A hearing on our Motion for Rehearing
or Clarification of the Motion to Dissolve was scheduled for March 18, 2002, but
was cancelled by the Court and has not been rescheduled. The injunction still
remains in effect until the Court rules on this Motion.
Background:
We came into contact with Light Technology, Inc. and Rachwal in early
2000. We were seeking someone with the knowledge and expertise to assist us in
the development of an emergency light using white LEDs. Light Technology, Inc.
and Rachwal represented that they had such knowledge and expertise and could
finalize the development of our emergency light by September 30, 2000 so that we
could begin manufacturing and selling the emergency light by November 2000.
Rachwal and Light Technology, Inc. also advised us that we could acquire all the
assets of Light Technology, Inc. and the rights to Light Technology, Inc.'s
flashlight which also used white LEDs provided Rachwal was made an officer and
director of our company as well as be in charge of design work.
In order to evaluate this offer, we requested accounting and financial
records to verify the representations of Light Technology, Inc. and Rachwal and
to attempt to ascertain the value of Light Technology, Inc.. Despite repeated
attempts, Light Technology, Inc. and Rachwal were unable to provide adequate,
verifiable financial records. Nonetheless, in order allow Light Technology, Inc.
and Rachwal to proceed with the development of the emergency light in order to
meet the November shipping deadline, we entered into a Letter of Intent with
Light Technology, Inc. on June 12, 2000. This Letter of Intent also contained a
confidentiality clause protecting our interests. Pursuant to the Letter of
Intent we paid Light Technology, Inc. $100,000 to develop a prototype of an
emergency storm light and possible acquisition of the assets of Light
Technology, Inc. based upon an independent evaluation of the of the worth of the
assets. We hired the Sarasota CPA firm, Kerkering, Barbario & Co. to
independently do an evaluation of the Light Technology, Inc. assets. Kerkering,
Barbario came to the conclusion that Light Technology, Inc. had no verifiable
assets of any value. Furthermore, Light Technology, Inc. never developed and
produced a working model of the emergency storm light. We incurred meeting and
travel expenses of $36,401 associated with Light Technology, Inc. during the
period June through December 2000. $43,699 was expended for marketing expense in
anticipation of the promised delivery of the light. We also made loans to
defendant Safe-Light in the amount of $13,188 to assist in development and
marketing of its products based upon representation that the assets of
Safe-Light would be acquired by us.
We instituted our complaint against the defendants when we learned,
through a local newspaper article that Light Technology, Inc. and Safe-Light had
merged and had developed an emergency light. We had confidentiality rights with
both companies. The defendants breached their contracts with us by
misappropriating trade secrets and we are seeking monetary damages as well
injunctive relief to prevent them from capitalizing on the misappropriation of
trade secrets. Despite the news article in which Rachwal announced that Light
Technology, Inc. had developed an emergency light, he did not object to the
injunction stating that he did not have such a light.
22
There is no similarity between our product, the Home Safety Light, and
Light Technology, Inc.'s product, known as the Pal Light. Our product has 10
diodes and provides a blanket of light to light up a room in the event of a
power outage. The Light Technology, Inc. product is a small flashlight that uses
one diode.
Light Technology, Inc. claims that we breached the contract terms of
the letter of intent and joint venture agreement by failing to maintain
confidential disclosed to us and intentionally disclosing confidential
information to third parties. Despite receiving $100,000 from us, defendants
claim we failed to fund the development of the light and claim that we owe them
in excess of $100,000 by breaching the letter of intent and joint venture
agreement. Further, defendants claim we failed to pay fees set forth in the
licensing agreement notwithstanding that the condition precedent to pay said
fees (the successful completion of a private placement by us, which was
subsequently withdrawn due to market conditions). Defendant Safe-Light alleges
that we requested that they assist us in raising funding for the products
discussed in the complaint. We actually loaned them funds for the development of
their barricade light.
We intend to fully prosecute our claims and actions against the
Defendants. We deny the Defendants allegations alleged against us in their
counterclaim. This litigation is still in the discovery stage and the ultimate
outcome cannot presently be determined.
COURT: Circuit Court of the Twelfth Judicial District In and For
Sarasota County, Florida.
CASE NAME: Cyberlux Corporation, Plaintiff v. Ervin J. Rachwal, Light
Technology, Inc., Safe-Light Industries, LLC a/k/a JFER Innovations Group, LLC,
James Meyer and John Fleming.
CASE NUMBER: 2001 CA 005309 NC Div. C.
23
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position
--------------------------------------------------------------------------------
Donald F. Evans 70 Chief Executive Officer and Chairman of the Board of
Directors
Mark D. Schmidt 40 President, Chief Operating Officer and Director
William P. Walker 42 Senior Vice President
John W. Ringo 60 Secretary, Corporate Counsel and Director
Alan H. Ninneman 61 Senior Vice President and Director
David D. Downing 55 Chief Financial Officer and Treasurer
Directors are elected to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Currently
there are three seats on our board of directors.
Currently, our Directors are not compensated for their services.
Officers are elected by the Board of Directors and serve until their successors
are appointed by the Board of Directors. Biographical resumes of each officer
and director are set forth below.
DONALD F. EVANS. Mr. Evans has been our Chief Executive Officer and
Chairman of the Board since May 2000. Between 1979 and May 2000, Mr. Evans was
the Managing Partner of Research Econometrics, a North Carolina based
corporation, where Mr. Evans began an investigative research study into the
feasibility of a long-term electrochemical interim lighting system. From June
1996 until March 1999, Mr. Evans represented the investment interest of Research
Econometrics in Waste Reduction Products Corporation, a privately held North
Carolina corporation Mr. Evans also served on the Board of Directors of Waste
Reduction Products Corporation. Mr. Evans graduated from the University of North
Carolina, Chapel Hill, NC with a BS Degree in Economics.
MARK D. SCHMIDT. Mr. Schmidt has been our President, Chief Operating
Officer and Director since May 2003. From December 1999 until December 2002, Mr.
Schmidt was a founder and executive of Home Director, Inc., the IBM Home
Networking Division spin-off company and a public company. Mr. Schmidt is a
former IBM executive with over 15 years of consumer marketing, business
management and venture startup experience. Mr. Schmidt graduated Summa Cum Laude
with a Bachelor of Science Degree in Engineering from North Carolina State
University and earned an MBA Degree from the Fuqua School of Business at Duke
University.
WILLIAM P. WALKER. Mr. Walker has been our Senior Vice President,
Business Development & Sales since January 2005. From March 2004 until December
2004, Mr. Walker was the founding principal in New Edison, LLC, a marketing
consulting firm focused on the emerging solid-state lighting industry. From
October 2002 until February 2004, Mr. Walker was the Vice President of Sales for
CorAccess Systems, a Golden, Colorado leading residential technology company.
From February 2001through October 2002, Mr. Walker was the Vice President at GE
Smart, a start-up joint venture between Microsoft and GE, where he developed and
implemented the sales and marketing strategies. From May 1996 until February
2001, Mr. Walker was the Founder and CEO of Wizer Home Technologies, a large
home technology integrations company. Mr. Walker graduated from the University
of Wyoming with a BS Degree in Business Administration.
JOHN W. RINGO. Mr. Ringo has been our Secretary, Corporate Counsel and
a Director since May 2000. Since 1990, Mr. Ringo has been in private practice in
Marietta, GA specializing in corporate and securities law. He is a former Staff
Attorney with the U. S. Securities and Exchange Commission, a member of the Bar
of the Supreme Court of the United States, the Kentucky Bar Association and the
Georgia Bar Association. Mr. Ringo graduated from the University of Kentucky in
Lexington, KY with a BA Degree in Journalism. Subsequently, he received a Juris
Doctor Degree from the University of Kentucky College of Law.
24
ALAN H. NINNEMAN. Mr. Ninneman has been our Senior Vice President and a
Director since May 2000. From 1992 until April 2000, Mr. Ninneman was a Chief
Executive Officer of City Software, Inc. based in Albuquerque, New Mexico. He
was a senior support analyst for Tandem Computer, San Jose, California from 1982
to 1985; senior business analyst at Apple Computer, Cupertino, California from
1985 to 1987; and Director of Operations at Scorpion Technologies, Inc., San
Jose, California. Mr. Ninneman attended Elgin Community College, Elgin, IL and
subsequently majored in business administration at Southern Illinois University,
Carbondale, IL.
DAVID D. DOWNING. Mr. Downing has been our Chief Financial Officer and
Treasurer since May 2000. Mr. Downing joined Marietta Industrial Enterprises,
Inc., Marietta, Ohio in November 1991 as its Chief Financial Officer. He was
elected to the Board of Directors of that Company in January 1994. He has been a
Director of American Business Parks, Inc., Belpre, Ohio since January 1998 and
served as a director of Agri-Cycle Products, Inc. from May 1998 until April
2001. Mr. Downing graduated from Grove City College, Grove City, PA with a BA
Degree in Accounting.
EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO
and each of our most highly-compensated executive officers whose total annual
salary and bonus for the fiscal year ending December 31, 2004, 2003 and 2002
exceeded $100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP
Name & Principal Salary Bonus Compen- Stock SARs Payouts All Other
Position Year ($) ($) sation ($) Awards($) (#) ($) Compensation
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Donald F. Evans 2004 180,000 0 0 - 550,000 - -
CEO & Chairman 2003 180,000 0 0 - 700,000 - -
2002 98,004 0 0 - - - -
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
John W. Ringo 2004 102,000 0 0 - 400,000 - -
Secretary and 2003 102,000 0 0 - 250,000 - -
Corporate Counsel 2002 69,000 0 0 - - - -
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Alan H. Ninneman 2004 102,000 0 0 - 400,000 - -
Senior Vice President 2003 102,000 0 0 - 250,000 - -
2002 78,000 0 0 - - - -
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Mark D. Schmidt 2004 180,000 0 0 - 650,000 - -
President & COO 2003 120,000 0 0 - 550,000 - -
2002 - - - - - - -
------------------------ ------- ------------ ------------ ------------ ------------- ----------- ------------ --------------
Annual compensation began accruing in the form of management fees as of July
2000. The compensation indicated in the table is the annualized amount of salary
to be paid the respective officers in accordance with their employment
agreements.
Option/SAR Grants in Last Fiscal Year
-------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
-------------------------------------------------------------------------------
Donald F. Evans 550,000 %27.5 $0.2125 /Sh 2010
-------------------------------------------------------------------------------
John W. Ringo 400,000 %20.0 $0.2125 /Sh 2010
-------------------------------------------------------------------------------
Alan H. Ninneman 400,000 %20.0 $0.2125 /Sh 2010
-------------------------------------------------------------------------------
Mark D. Schmidt 650,000 %32.5 $0.2125 /Sh 2010
-------------------------------------------------------------------------------
25
Stock Option Plans
We have created an Employee Stock Option Plan for incentive/retention
of current key employees and as an inducement to employment of new employees.
The 2003 plan, which sets aside 2,000,000 shares of common stock for purchase by
employees, was made effective by the Board of Directors.
On September 2, 2003, our Board approved a 2004 Incentive Stock Option
Plan, which will provide 2,000,000 shares to underwrite options.
On April 8, 2004 our Board approved the 2005 Incentive Stock Option
Plan that provides for 12,000,000 shares to underwrite options and on January
10, 2005, the Board approved the 2006 Plan that provides for 18,000,000 shares
to underwrite options.
The stock option plans are administered directly by our board of
directors.
Subject to the provisions of the stock option plans, the board will
determine who shall receive stock options, the number of shares of common stock
that may be purchased under the options, the time and manner of exercise of
options and exercise prices.
As of December 31, 2004, there were 2,000,000 stock options granted
under the 2003 plan that were outstanding.
Employment Agreements
Donald F. Evans
On July 1, 2000, we entered into an eight-year employment contract with
Donald F. Evans to serve as Chief Executive Officer, which was amended on
January 1, 2003. The base salary under the agreement is $180,000 per annum, plus
benefits.
Alan H. Ninneman
On July 1, 2000, we entered into an eight-year employment contract with
Alan H. Ninneman to serve as Senior Vice President, which was amended on January
1, 2003. The base salary under the agreement is $102,000 per annum, plus
benefits.
John W. Ringo
On July 1, 2000, we entered into an eight-year employment contract with
John W. Ringo to serve as Secretary and Corporate Counsel, which was amended on
January 1, 2003. The base salary under the agreement is $102,000 per annum, plus
benefits.
Mark D. Schmidt
On May 1, 2003, we entered into an employment contract with Mark D.
Schmidt to serve as Executive Vice President and Chief Operating Officer until
June 30, 2008. The base salary under the agreement is $180,000 per annum, plus
benefits.
26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We issued certain management fees, which were for accrued salaries for
Messrs. Evans, Ninneman, Ringo, Schmidt and Downing consistent with employment
agreements. These fees are in the form of non-interest bearing promissory notes.
$800,000 of these management fees were converted to Series B Convertible
Preferred stock with superior voting rights. Salary accruals in the form of
management fees for Messrs. Evans, Ninneman and Ringo are still owed in the
amounts of $125,401.95, $82,347.82 and $76,085.63, respectively.
Promissory notes were issued to certain officers for loans to the
Company for working capital. These Notes are listed as payable upon demand and
accrue interest at 12% per annum. Don F. Evans, David D. Downing, Alan H.
Ninneman loaned $13,100, $106,000 and $3,745, respectively. The terms of
transactions in this section are as fair to the Company as any transactions that
could have been made with unaffiliated parties.
We have no policy regarding entering into transactions with affiliated
parties.
27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 2, 2005:
o by each person who is known by us to beneficially own more than 5%
of our common stock;
o by each of our officers and directors; and
o by all of our officers and directors as a group.
PERCENTAGE OF PERCENTAGE OF
CLASS CLASS
NAME AND ADDRESS NUMBER OF PRIOR TO AFTER
OF OWNER TITLE OF CLASS SHARES OWNED(1) OFFERING(2) OFFERING(3)
-----------------------------------------------------------------------------------------------------
Donald F. Evans Common Stock 28,965,300 (4) 47.10% 12.25%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Mark D. Schmidt Common Stock 10,300,000 (5) 23.36% 4.70%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
Alan H. Ninneman Common Stock 18,715,200 (6) 35.95% 8.24%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
John W. Ringo Common Stock 17,141,500 (7) 33.82% 7.60%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
David Downing Common Stock 8,133,000 (8) 19.54% 3.75%
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
All Officers and Directors Common Stock 83,255,000 (9) 70.18% 28.81%
As a Group (5 persons)
===============================================
Donald F. Evans Preferred B 275,103 34.39% 34.39%
Mark D. Schmidt Preferred B 101,000 12.63% 12.63%
Alan H. Ninneman Preferred B 180,652 22.58% 22.58%
John W. Ringo Preferred B 166,915 20.86% 20.86%
David Downing Preferred B 76,330 9.54% 9.54%
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of May 2, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
28
(2) Based upon 33,991,780 shares issued and outstanding on May 2, 2005.
(3) Percentage based on 208,991,780 shares of common stock outstanding.
(4) Includes 275,103 shares of Series B convertible preferred stock convertible
into 27,510,300 shares of common stock.
(5) Includes 101,000 shares of Series B convertible preferred stock convertible
into 10,100,000 shares of common stock.
(6) Includes 180,652 shares of Series B convertible preferred stock convertible
into 18,065,200 shares of common stock.
(7) Includes 166,915 shares of Series B convertible preferred stock convertible
into 16,691,500 shares of common stock.
(8) Includes 76,330 shares of Series B convertible preferred stock convertible
into 7,633,000 shares of common stock.
(9) Includes 800,000 shares of Series B convertible preferred stock convertible
into 80,000,000 shares of common stock.
29
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue up to 300,000,000 shares of common stock,
par value $.001. As of May 2, 2005, there were 33,991,780 shares of common stock
outstanding. Holders of the common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
We have engaged Pacific Stock Transfer Company, located in Las Vegas,
Nevada, as independent transfer agent or registrar.
PREFERRED STOCK
We are authorized to issue up to 5,000,000 shares of Preferred Stock,
par value $.001. As of May 2, 2005, there were 800,113.3606 shares of preferred
stock issued and outstanding.
OPTIONS
There are currently options outstanding that have been issued to our
officers and directors to purchase 2,000,000 shares of our common stock at a
purchase price of $0.001, which expire in 2010.
WARRANTS
In connection with a Securities Purchase Agreement dated September 23,
2004, we issued 2,250,000 warrants to purchase shares of common stock. The
warrants are exercisable until five years from the date of issuance at a
purchase price of $0.50 per share.
In connection with a Securities Purchase Agreement dated April 22,
2005, we issued 10,000,000 warrants to purchase shares of common stock and are
obligated to issue 15,000,000 additional warrants. The warrants are exercisable
until five years from the date of issuance at a purchase price of $0.03 per
share.
In addition, in connection with a private placement offering, we have
issued 8,543,064 Series A and 8,543,064 Series B warrants. The Series A warrants
are exercisable at $0.25 per share and the Series B warrants are exercisable at
$1.05 per share. The Series A warrants expire in 2006 and the Series B warrants
expire in 2008. In addition, we issued Placement Agent warrants to the placement
agent in the private placement offering. We issued a total of 100,000 placement
agents warrants exercisable at $0.01 per share, 1,550,000 placement agent
warrants exercisable at $0.10 per share, 1,550,000 placement agent warrants
exercisable at $0.25 per share and 1,550,000 placement agent warrants
exercisable at $1.05 per share. All placement agent warrants expire in 2008.
In addition, we have 58,500 warrants outstanding exercisable at $0.10
per share, which expire in 2008. We have 605,000 warrants outstanding
exercisable at $0.20 per share, which expire in 2006. We have 1,441,500 warrants
outstanding exercisable at $0.25 per share, of which 1,350,000 expire in 2005
and 91,500 expire in 2008. We have 300,000 warrants outstanding exercisable at
$0.50 per share, which expire in 2006. We have 605,000 warrants outstanding
exercisable at $0.20 per share, which expire in 2006.
30
CONVERTIBLE SECURITIES
Not including approximately 27,453,064 shares of common stock issuable
upon exercise of outstanding options and warrants and 15,000,000 warrants that
we are obligated to issue in the near future, approximately 141,294,800 shares
of common stock are issuable upon conversion of outstanding secured convertible
notes issued pursuant to the Securities Purchase Agreement dated September 23,
2004, approximately 60,000,000 shares of common stock are issuable upon
conversion of outstanding secured convertible notes issued pursuant to the
Securities Purchase Agreement dated April 22, 2005. The 15,000,000 warrants to
shares of common stock that we are obligated to issue in the near future are to
be issued pursuant to the Securities Purchase Agreement dated April 22, 2005,
which requires that 8,333,333 warrants be issued together with $500,000 in
secured convertible notes within five days of the filing of this registration
statement and 6,666,667 warrants be issued together with $400,000 in secured
convertible notes within five days from the effective date of this prospectus.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with four accredited investors on April 22, 2005
for the sale of (i) $1,500,000 in secured convertible notes, and (ii) warrants
to purchase 25,000,000 shares of our common stock.
This prospectus relates to the resale of the common stock underlying
these secured convertible notes and warrants. The investors are obligated to
provide us with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $400,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $500,000 pursuant to the
Securities Purchase Agreement.
The notes bear interest at 10%, mature three years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
o $0.03; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on 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. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.03 per share. In addition, we have granted the investors a security interest
in substantially all of our assets and intellectual property and registration
rights.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest
extent permitted by Nevada law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Articles of Incorporation, as amended, is to eliminate our rights and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in our
Articles of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
31
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
32
The selling stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders may pledge their shares to their brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
33
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants unless the selling
stockholders exercise the warrants on a cashless basis. Assuming all the shares
registered below are sold by the selling stockholders, none of the selling
stockholders will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Notes Full Prospectus Before the Owned Before Offering Offering
and/or Warrants* Conversion (1) Offering** Offering** (4) (4)
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Offshore, Ltd. 91,000,000 72.80% Up to 1,751,416 (2) 4.9% -- --
(3) 91,000,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Qualified 63,000,000 64.95% Up to 1,751,416 (2) 4.9% -- --
Partners, LLC (3) 63,000,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
AJW Partners, LLC 17,500,000 33.99% Up to 1,751,416 (2) 4.9% -- --
(3) 17,500,000
shares of
common stock
------------------- ----------------- ------------- ------------- ------------ -------------- ------------ -------------
New Millennium 3,500,000 9.34% Up to 1,751,416 (2) 4.9% -- --
Capital Partners 3,500,000
II, LLC (3) shares of
common stock
* This column represents an estimated number based on a conversion price as of a
recent date of May 20, 2005 of $.01, divided into the principal amount.
** These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.9% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) Includes a good faith estimate of the shares issuable upon conversion of
the secured convertible notes and exercise of warrants, based on current market
prices. Because the number of shares of common stock issuable upon conversion of
the secured convertible notes is dependent in part upon the market price of the
common stock prior to a conversion, the actual number of shares of common stock
that will be issued upon conversion will fluctuate daily and cannot be
determined at this time. Under the terms of the secured convertible notes, if
the secured convertible notes had actually been converted on May 20, 2005, the
conversion price would have been $.01.
34
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholders have contractually
agreed to restrict their ability to convert their secured convertible notes or
exercise their warrants and receive shares of our common stock such that the
number of shares of common stock held by them in the aggregate and their
affiliates after such conversion or exercise does not exceed 4.9% of the then
issued and outstanding shares of common stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of common
stock set forth in the table for the selling stockholders exceeds the number of
shares of common stock that the selling stockholders could own beneficially at
any given time through their ownership of the secured convertible notes and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(3) The selling stockholders are affiliates of each other because they are under
common control. AJW Partners, LLC is a private investment fund that is owned by
its investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed below owned by AJW Partners, LLC. AJW Offshore, Ltd. is a private
investment fund that is owned by its investors and managed by First Street
Manager II, LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the shares owned by AJW
Offshore, Ltd. AJW Qualified Partners, LLC is a private investment fund that is
owned by its investors and managed by AJW Manager, LLC, of which Corey S.
Ribotsky and Lloyd A. Groveman are the fund managers, have voting and investment
control over the shares listed below owned by AJW Qualified Partners, LLC. New
Millennium Capital Partners II, LLC, is a private investment fund that is owned
by its investors and managed by First Street Manager II, LLC. First Street
Manager II, LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the shares owned by New Millennium Capital Partners II,
LLC. We have been notified by the selling stockholders that they are not
broker-dealers or affiliates of broker-dealers and that they believe they are
not required to be broker-dealers.
(4) Assumes that all securities registered will be sold.
TERMS OF SECURED CONVERTIBLE NOTES
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC on April 22, 2005
for the sale of (i) $1,500,000 in secured convertible notes and (ii) a warrants
to buy 25,000,000 shares of our common stock.
The investors are obligated to provide us with the funds as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $400,000 will be disbursed within five days of the effectiveness of
this prospectus.
Accordingly, we have received a total of $600,000 pursuant to the
Securities Purchase Agreement.
The notes bear interest at 10%, mature three years from the date of
issuance, and are convertible into our common stock, at the investors' option,
at the lower of:
o $0.03; or
o 50% of the average of the three lowest intraday trading prices for
the common stock on a principal market for the 20 trading days
before but not including the conversion date.
35
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. We are liable for breach of any
covenant, representation or warranty contained in the Securities Purchase
Agreement for a period of two years from the date that the investors distribute
the final $500,000. In the event that we breach any representation or warranty
regarding the condition of our company as set forth in the Securities Purchase
Agreement, we are liable to pay liquidated damages in shares or cash, at the
election of the investors, equal to three percent of the outstanding amount of
the secured convertible notes per month plus accrued and unpaid interest. In the
event that we breach any covenant as set forth in the Securities Purchase
Agreement, including the failure to comply with blue sky laws, timely file all
public reports, use the proceeds from the sale of the secured convertible notes
in the agreed upon manner, obtain written consent from the investors to
negotiate or contract with a party to for additional financing, reserve and have
authorized the required number of shares of common stock or the maintenance of
our shares of common stock on an exchange or automated quotation system, then we
are liable to pay liquidated damages in shares or cash, at the election of the
investors, equal to three percent of the outstanding amount of the secured
convertible notes per month plus accrued and unpaid interest.
The warrants are exercisable until five years from the date of issuance
at a purchase price of $0.03 per share. The selling stockholders will be
entitled to exercise the warrants on a cashless basis if the shares of common
stock underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the secured
convertible notes issued pursuant to the Securities Purchase Agreement, dated
April 22, 2005.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
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.
AJW Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., and
New Millennium Partners II, LLC have contractually agreed to restrict their
ability to convert their secured convertible notes or exercise their warrants
and receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such conversion
or exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock.
A complete copy of the Securities Purchase Agreement and related
documents are filed with the SEC as exhibits to our Form SB-2 relating to this
prospectus.
Sample Conversion Calculation
The number of shares of common stock issuable upon conversion of the
notes is determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, assuming
conversion of $1,500,000 of notes on May 20, 2005, a conversion price of $0.01
per share, the number of shares issuable upon conversion would be:
$1,500,000/$.01 = 150,000,000 shares
36
The following is an example of the amount of shares of our common stock
that are issuable, upon conversion of the principal amount of our secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of May 19, 2005 of $0.02.
Number % of
% Below Price Per With Discount of Shares Outstanding
Market Share at 50% Issuable Stock
------ ----- ------ -------- -----
25% $.015 $.0075 200,000,000 85.47%
50% $.01 $.005 300,000,000 89.82%
75% $.005 $.0025 600,000,000 94.64%
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Russell Bedford Stefanou Mirchandani LLP, independent registered public
accounting firm, have audited, as set forth in their report thereon appearing
elsewhere herein, our financial statements at December 31, 2004 and 2003 and for
the years then ended that appear in the prospectus. The financial statements
referred to above are included in this prospectus with reliance upon the
independent registered public accounting firm's opinion based on their expertise
in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of Cyberlux Corporation,
filed as part of the registration statement, and it does not contain all
information in the registration statement, as certain portions have been omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
37
INDEX TO FINANCIAL STATEMENTS
CYBERLUX CORPORATION
INDEX TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and December 31, 2003
Page
--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-1
--------------------------------------------------------------------------------
Balance Sheet at December 31, 2004 and 2003 F-2
--------------------------------------------------------------------------------
Statements of Operations for the Years ended December 31, 2004 F-3
and 2003 and for the Period May 17, 2000 (Date of Inception)
through December 31, 2004
--------------------------------------------------------------------------------
Statement of Deficiency in Stockholders' Equity for the F-4 - F-9
Period May 17, 2000 (Date of Inception) through December 31,
2004
--------------------------------------------------------------------------------
Statements of Cash Flows for the Years ended December 31, F-10 - F11
2004 and 2003 and for the Period May 17, 2000 (Date of
Inception) through December 31, 2004
--------------------------------------------------------------------------------
Notes to Financial Statements F-12 - F-21
--------------------------------------------------------------------------------
Condensed Consolidated Balance Sheets: F-22
March 31, 2005 (Unaudited) and December 31, 2004 (Audited)
--------------------------------------------------------------------------------
Condensed Consolidated Statements of Losses: F-23
Three Months Ended March 31, 2005 and 2004 (Unaudited)
--------------------------------------------------------------------------------
Condensed Consolidated Statements of Cash Flows: F-24 - F-25
Three Months Ended March 31, 2005 and 2004 (Unaudited)
--------------------------------------------------------------------------------
Notes to Unaudited Condensed Consolidated Financial Statements F-26 - F-27
--------------------------------------------------------------------------------
38
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Cyberlux Corporation
North Carolina 28370-2010
We have audited the accompanying consolidated balance sheets of
Cyberlux Corporation (the "Company"), as of December 31, 2004 and 2003 and the
related statements of losses, deficiency in stockholders' equity, and cash flows
for the two years then ended and for the period May 17, 2000 (Date of Inception)
through December 31, 2004. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based upon our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States of America). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003 and for the period May 17, 2000 (Date of Inception)
through December 31, 2004, and the results of its operations and its cash flows
for the two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note I to the
financial statements, the Company has suffered recurring losses from operations.
This raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note I. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
----------------------------------------
Russell Bedford Stefanou Mirchandani LLP
Certified Public Accountants
McLean, Virginia
March 17, 2005
F-1
CYBERLUX CORPORATION
(A Development Stage Company)
Balance Sheets
December 31, December 31,
2004 2003
Assets
Current assets:
Cash & cash equivalents $ 415,375 $ 16,247
Prepaid expenses 68,404 --
------------ ------------
Total current assets 483,779 16,247
Property, plant and equipment, net of accumulated
depreciation of $ 92,335 and $44,649, respectively 43,018 68,845
Other Assets:
Deposits - escrow -- 236,000
Patents, at cost 30,544 --
------------ ------------
Total other assets 30,544 236,000
Total Assets $ 557,341 $ 321,092
============ ============
Liabilities and Deficiency in Stockholders' Equity
Current liabilities:
Accounts payable $ 176,094 $ 296,388
Accrued liabilities 323,408 104,976
Management fees payable - related party (Note E) -- 996,508
Short-term notes payable - shareholders (Note E) 399,080 207,845
Short-term notes payable (Note B) 27,500 320,000
------------ ------------
Total current liabilities 926,082 1,925,717
Long-term liabilities:
Notes payable - (Note B) 1,355,069 --
Warrants payable convertible preferred -- 347,610
------------ ------------
Total long-term liabilities 1,355,069 347,610
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, Class A,
151.8606 and 0 shares issued and
outstanding as of December 31, 2004 and 2003 respective1y 1 1
Preferred stock, $0.001 par value, 8,000,000 shares authorized, Class B,
800,000 and 0 shares issued and
outstanding as of December 31, 2004 and 2003 respecti800y 800 --
Common stock, $0.001 par value, 300,000,000 shares authorized, 23,770,233
and 8,049,141 shares issued and outstanding as of December 31, 2004 and
December 31,
2003 respectively 23,770 8,049
Additional paid-in capital 9,099,302 2,337,736
Subscriptions receivable -- (276,186)
Accumulated deficit (10,847,683) (4,021,835)
------------ ------------
Deficiency in stockholders' equity (1,723,810) (1,952,235)
------------ ------------
Total liabilities and (deficiency) in stockholders' $ 557,341 $ 321,092
============ ============
The accompanying notes are an integral part of these financial statements
F-2
CYBERLUX CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Period
May 17, 2000
For the For the (Inception) to
Year Ended Year Ended December 31
Dec. 31, 2004 Dec. 31, 2003 2004
Revenue $ 23,803 $ 74,238 $ 98,041
Cost of goods sold (160,260) (161,984) (322,244)
------------ ------------ ------------
Gross (loss) (136,457) (87,746) (224,203)
Operating Expenses:
Marketing and advertising 109,651 20,820 257,519
Depreciation and amortization 47,686 246,598 386,086
Organization costs -- 25,473
Research and development 391,421 635,485
Management and consulting services - related party 445,997 504,000 1,717,319
General and administrative expenses 3,103,689 497,384 3,992,767
Total operating expenses 4,098,444 1,268,802 7,014,649
(Loss) from operations (4,234,901) (1,356,548) (7,238,852)
Other income/(expense)
Interest income 282 321
Interest expense (1,600,087) (138,008) (1,881,760)
Debt acquisition costs (191,142) (191,142)
Net loss before preferred dividend (6,025,848) (1,494,556) (9,311,433)
Preferred dividend - Beneficial conversion discount
on convertible preferred 800,000 736,250 1,536,250
Net loss available to common stockholders $ (6,825,848) $ (2,230,806) $(10,847,683)
Weighted average number of common shares
outstanding, basic and fully diluted 16,701,174 7,652,012
Net loss per share - Basic and fully diluted $ (0.41) $ (0.29)
Preferred dividend $ 96,000
The accompanying notes are an integral part of these financial statements
F-3
Cyberlux Corporation
(A Development Stage Company)
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
FROM INCEPTION THROUGH DECEMBER 31, 2004
Deficiency
Common Stock Preferrd Stock Accumulated
-------------------- ----------------- Additional Stock During Total In
Paid-in Subscription Development Stockholders'
Shares Amount Shares Amount Capital Receivable Stage Equtiy
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Common shares issued in
May 2000 to founders in
exchange for cash at $. 001
per share 1,640,000 $1,640 $560 $2,200
Common shares issued in May
2000 in exchange for
research and development
services valued at $.09
per share 750,000 750 68,003 68,753
Common shares issued in
May 2000 in exchange for
services valued @ $. 05 per
share 875,000 875 35,710 36,585
Common shares issued in
July 2000 in exchange for
convertible debt at $ .15
per share 288,000 288 39,712 40,000
Capital
contributed by principal
shareholders - - 16,000 16,000
Common shares issued in
November 2000 for cash in
connection with private
placement at $. 15 per
share 640,171 640 95,386 96,026
Common shares issued in
November 2000 in exchange
for services valued @ $. 15
per share hares issued for
consulting services 122,795 123 18,296 18,419
Net (loss)
- - - - - - (454,651) (454,651)
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Balance, December 31, 2000
4,315,966 $4,316 - - $273,667 - ($454,651) ($176,668)
Common shares issued in
January, 2001 in exchange
for convertible debt at $
.15 per share 698,782 $699 $104,118 $104,817
Stock options issued in May
2001, valued at $. 15 per
option, in exchange for
services 52,500 52,500
Warrant issued in May 2001,
valued at $. 15 per
warrant, in exchange for
placement of debt 75,000 75,000
Common shares issued in
September 2001 for cash in
connection with exercise of
warrant at $.15 per share 3,000 3 447 450
Common shares issued in
September 2001 for cash in
connection with exercise of
warrant at $.10 per share 133,000 133 13,167 13,300
Common shares issued in
November 2001 for cash in
connection with exercise of
warrant at $.0001 per share 500,000 500 - 500
Common shares issued in
November 2001 for cash in
connection with exercise of
options at $.0001 per share 350,000 350 - 350
Common shares issued in
December 2001 in exchange
for convertible debt at $
.50 per share 133,961 134 66,847 66,981
Common shares
issued in December 2001 in
exchange for debt at $ .50
per share 17,687 18 8,825 8,843
Net (loss)
- - - - - - (636,274) (636,274)
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Balance, December 31, 2001 6,152,396 $6,152 594,571 - (1,090,925) (490,202)
The accompanying notes are an integral part of these financial statements
F-4
Cyberlux Corporation
(A Development Stage Company)
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
FROM INCEPTION THROUGH DECEMBER 31, 2004 (Continued)
Deficiency
Common Stock Preferrd Stock Accumulated
-------------------- ----------------- Additional Stock During Total In
Paid-in Subscription Development Stockholders'
Shares Amount Shares Amount Capital Receivable Stage Equity
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Common shares issued in May
2002 in exchange for
services valued at $. 70
per share 70,000 $70 $49,930 - $ 50,000
Common shares issued in
Nov, 2002 in exchange for
services valued at $0.25
per share 150,000 150 37,350 37,500
Common shares issued in
Dec. 2002 as rights
offering at $0.25 per share 256,000 256 63,744 64,000
Subscription Receivable for
10,000 shares issued -2,500 -2,500
Net loss
- - - - - - -700,104 ($700,104)
--------- ------- ------ ------- ---------- ------------ ------------- -------------
Balance at December 31, 2002 6,628,396 $6,628 $745,593 ($2,500) ($1,791,029) ($1,041,308)
Common shares issued in
March, 2003 for cash in
connection with exercise of
options at $0.001 per share 250,000 $250 $250
Funds received for stock
subscription 2,500 2,500
Common Shares issued to
Cornell Capital Partners in
March, 2003 in connection
with Loan Commitment valued
at $0.75 per share 300,000 300 224,700 225,000
Common shares issues in
March, 2003 in exchange for
services valued at $0.75
per share 13,333 14 9,987 10,001
Robrady Design Note was
converted into 196,120
Shares @ .25 Per share. 196,120 196 48,833 49,029
Common Shares issued to
Mark Schmidt for services
in June, 2003. The 200,000
shares were issued at $0.25
per share. 200,000 200 49,800 50,000
Common Shares issued to
Capital Funding Solutions
September 2003. 450,000
shares were issued at $0.20
per share. Shares secure a
sales factoring agreement 450,000 450 89,550 90,000
Common shares issued on
11/12/03 for consulting
services valued at .50 per
share to Tom & Cheryl Rose 11,292 11 5,634 5,645
Preferred shares issued in
December 2003 valued at
$5,000 per share, Class A - 155 1 $774,999 (276,186) - 498,814
Warrants on convertible
preferred shares -347,610 -347,610
Beneficial conversion
discount on convertible
preferred shares 736,250 736,250
Net (Loss)
The accompanying notes are an integral part of these financial statements
F-5
Cyberlux Corporation
(A Development Stage Company)
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
FROM INCEPTION THROUGH DECEMBER 31, 2004 (Continued)
Additional
Paid in
Common Stock Preferred Stock Capital
-------------
Shares Amount Shares Amount
Balance, December 31, 2003 8,049,141 $ 8,049 155 $ 1 $ 2,337,736
Issuance of Convertible preferred shares 800,000 800 799,200
Class B in January, 2004 for accrued
management fees at $1 per share
Collected Balance of Stock Subscriptions
Receivable
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 260,000 260 95,940
Common Shares issued in January,
2004 in exchange for services valued
at $0..37 per share 225,000 225 83,025
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 2,100,000 2,100 774,900
Shares issued for note payable @ $.25
in January, 2004 110,764 111 27,580
Shares issued for consulting services
@ $0.21 per share 1,200,000 1,200 250,800
Beneficial conversion discount -
preferred stock dividend with respect
to convertible preferred shares Class B 800,000
Warrants issued in exchange for
services in April, 2004 243,000
Common shares cancelled for return of (450,000) (450) (89,550)
collateral deposit with factor
Common shares issued in May for
Private Placement at $0.10/Share 5,310,000 5,310 525,690
Class A preferred shares issued for
cash at $5,000 per share in May, 2004 15.861 79,307
Warrants on convertible preferred
Class A Shares (58,915)
Common shares issued in exchange for
note payable at $.10/share in June, 2004 50,000 50 4,950
Common Shares issued in June, 1,560,000 1,560 154,440
2004 in exchange for services valued
at $0..10 per share
Common Shares issued in June, 200,000 200 19,800
2004 in exchange for services valued
at $0.10 per share
Subscription received in advance for
shares to be issued
Common Shares issued in exchange for
services adjusted for issue prices (44,640)
Common Shares issued in July,
2004 in exchange for services valued
at $0.40 per share 100,000 100 39,900
Common shares issued in July, 2004 for
private placement at $0.10/Share 100,000 100 9,900
The accompanying notes are an integral part of these financial statements
F-6
Common shares issued in August, 2004 for
Conversion of Preferred "A" Shares 200,000 200 (4) (200)
Common shares issued in August, 2004 for
Exercise of warrants at $0.25/Share 701,000 701 174,549
Warrants issued to consultants for
services 106,172
Beneficial conversion feature of
convertible debentures (Note D)
Common shares issued in September for
Exercise of warrants at $0..25/Share 200,000 200 49,800
Options issued to employees as
Incentive Compensation 275,000
Common Shares issued in October,
2004 in exchange for services valued
at $0.25 per share 690,000 690 171,810
Shares issued in October, 2004
for note payable at $0.15 pershare 140,019 140 20,863
Shares issued in November, 2004
for note payable at $0.105 pershare 1,035,221 1,035 107,663
Shares issued in December, 2004
for note payable at $0.035 pershare 1,035,221 1,035 35,197
Shares issued in December, 2004
as a penalty for late registration to
Preferred "A" shareholders 203,867 204 89,498
Shares issued in December, 2004
for conversion of Preferred "A" shares 750,000 750 (15) -- (750)
Beneficial conversion feature of
convertible debentures (Note D) 1,000,000
Warrants issued for services 516,637
Net (Loss)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 23,770,233 23,770 800,152 801 9,099,302
The accompanying notes are an integral part of these financial statements
F-7
Deficiency
Accumulated
Stock During Total in
Subscription Development Stockholders'
Receivable Stage Equity
------------- ------------- -------------
Balance, December 31, 2003 $ (276,186) $ (4,021,835) $ (1,952,235)
Issuance of Convertible preferred shares 800,000
Class B in January, 2004 for accrued
management fees at $1 per share
Collected Balance of Stock Subscriptions
Receivable 276,186 276,186
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 96,200
Common Shares issued in January,
2004 in exchange for services valued
at $0..37 per share 83,250
Common Shares issued in January,
2004 in exchange for services valued
at $0.37 per share 777,000
Shares issued for note payable @ $.25
in January, 2004 27,691
Shares issued for consulting services
@ $0.21 per share 252,000
Beneficial conversion discount -
preferred stock dividend with respect
to convertible preferred shares Class B 800,000
Warrants issued in exchange for
services in April, 2004 243,000
Common shares cancelled for return of (90,000)
collateral deposit with factor
Common shares issued in May for
Private Placement at $0.10/Share 531,000
Class A preferred shares issued for
cash at $5,000 per share in May, 2004 79,307
Warrants on convertible preferred
Class A Shares (58,915)
Common shares issued in exchange for
note payable at $.10/share in June, 2004 5,000
Common Shares issued in June, 156,000
2004 in exchange for services valued
at $0..10 per share
Common Shares issued in June, 20,000
2004 in exchange for services valued
at $0.10 per share
The accompanying notes are an integral part of these financial statements
F-8
Subscription received in advance for
shares to be issued 22,500 22,500
Common Shares issued in exchange for
services adjusted for issue prices (44,640)
Common Shares issued in July,
2004 in exchange for services valued
at $0.40 per share 40,000
Common shares issued in July, 2004 for
private placement at $0.10/Share (10,000) --
Common shares issued in August, 2004 for
Conversion of Preferred "A" Shares --
Common shares issued in August, 2004 for
Exercise of warrants at $0.25/Share (12,500) 162,750
Warrants issued to consultants for
services 106,172
Beneficial conversion feature of
convertible debentures (Note D) 500,000 500,000
Common shares issued in September for
Exercise of warrants at $0..25/Share 50,000
Options issued to employees as
Incentive Compensation 275,000
Common Shares issued in October,
2004 in exchange for services valued
at $0.25 per share 172,500
Shares issued in October, 2004
for note payable at $0.15 pershare 21,003
Shares issued in November, 2004
for note payable at $0.105 pershare 108,698
Shares issued in December, 2004
for note payable at $0.035 pershare 36,232
Shares issued in December, 2004
as a penalty for late registration to
Preferred "A" shareholders 89,702
Shares issued in December, 2004
for conversion of Preferred "A" shares --
Beneficial conversion feature of
convertible debentures (Note D) 1,000,000
Warrants issued for services 516,637
Net (Loss) (6,825,848) (6,825,848)
------------- ------------- -------------
Balance, December 31, 2004 -- (10,847,683) (1,723,810)
The accompanying notes are an integral part of these financial statements
F-9
Cyberlux Corporation
(A Development Stage Company)
Statement of Cash Flows
For the Period
May 17, 2000
(Inception) to
For theYear Ended For theYear Ended December 31,
December 31, 2004 December 31, 2003 2004
Cash flows from operating activities
Net (loss) available to common stockholders $ (6,825,848) $ (2,230,806) $ (10,847,683)
Depreciation and amortization 47,686 246,598 386,086
Beneficial conversion discount - preferred stock dividend 800,000 736,250 1,536,250
Amortization of debt discount - beneficial conversion 1,500,000 1,500,000
feature of convertible note (Note D)
Stock options issued for consulting services 107,504
Stock options issued as compensation 275,000 275,000
Shares issued for previously incurred debt 288,326 49,029 337,355
Warrants issued to consultants for services 516,637 516,637
Shares issued/(cancelled) for factoring deposit (90,000) 90,000 -
Loan extension write off -
Preferred shares issued for conversion of accrued
management fees 723,670 723,670
Preferred shares issued for previously incurred debt 76,330 76,330
Accrued expenses relating to escrow deposits 23,814 23,814
Shares issued for consulting services 1,494,955 65,646 1,828,059
Shares issued for research and development 68,753
Decrease (increase) in deposits 236,000 (227,386) -
(Increase) decrease in prepaid expenses (68,404) (68,404)
(Increase)/decrease in other assets (30,544) 20,000 (30,544)
Increase (decrease) in accurued liabilities 218,432 60,549 323,408
(Decrease) increase in management fee payable-
related party (996,508) 450,000 -
(Decrease) increase in other accounts payable (120,294) 200,417 176,094
Net cash used in operating activities (1,954,562) (515,889) (3,067,671)
Cash flows from investing activities
Payments for property, plant and equipment (21,859) (11,000) (135,353)
Cash used in investing activities (21,859) (11,000) (135,353)
Cash flows from financing activities
(Payments for )/proceeds from short-term notes payable, net (292,500) (45,000) 27,500
Proceeds from short-term notes payable-shareholders (net) 191,235 84,300 399,080
Proceeds from issuance of preferred stock 79,308 475,000 554,308
Capital contributed by shareholders 276,186 292,186
Proceeds from convertible long-term notes 1,355,069 1,355,069
Proceeds from issuance of common stock 766,250 2,750 990,256
Net cash provided by financing activities 2,375,548 517,050 3,618,399
----------------- ----------------- -----------------
Net increase (decrease) in cash 399,128 (9,839) 415,375
The accompanying notes are an integral part of these financial statements
F-10
Cash - beginning 16,247 26,086 -
Cash - ending $ 415,375 $ 16,247 $ 415,375
Supplemental disclosures:
Interest Paid 75,103 18,425 143,003
Income Taxes Paid - - -
Non-Cash investing and financing activities:
Shares issued for research and development and consulting - 68,753
Shares issued for conversion of debt 288,326 49,029 337,355
Warrants issued in connection with financing 406,525 - 481,525
Warrants issued to consultants for services 349,173 349,173
Options issued in connection with services - - 107,504
Shares issued in connection with services 1,494,955 65,646 1,828,059
Shares issued in connection with loan - 225,000 225,000
Shares issued in connection with factoring (90,000) 90,000 -
Amortization of debt discount - beneficial conversion 1,500,000 1,500,000
feature of convertible note (Note D)
Warrants payable (detachable) with convertible preferred
shares (347,610) 347,610 --
Beneficial conversion discount on convertible preferred
stock 800,000 736,250 1,536,250
Convertible preferred shares issued for previously incurred debt 76,330 76,330
Convertible preferred shares issued for accrued management fees 723,670 723,670
The accompanying notes are an integral part of these financial statements
F-11
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE A-SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
Business and Basis of Presentation Cyberlux Corporation (the "Company") is
incorporated under the laws of the State of Nevada. The Company is in the
development stage as defined under Statement on Financial Accounting Standards
No.7, Development Stage Enterprises ("SF AS No.7") and is seeking to develop,
manufacture and market long-term portable lighting products for commercial and
industrial us. To date the Company has generated little revenue, has incurred
expenses, and sustained losses. Consequently, its operations are subject to all
risks inherent in the establishment of a new business enterprise. As of December
31, 2004, the Company has accumulated losses of $10,847,683.
The Company is in the development stage and its efforts have been principally
devoted to designing, developing manufacturing and marketing advanced lighting
systems that utilize white (and other) light emitting diodes as illumination
elements.
The Company's common stock has been listed on the NASDAQ OTC Electronic Bulletin
Board sponsored by the National Association of Securities Dealers, Inc. under
the symbol "CYBL" since July 11,2003.
Revenue Recognition
For revenue from product sales, the Company recognizes revenue in accordance
with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
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 consolidated financial position and results of operations was not
significant.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents
For purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.
Property, plant and equipment
Property and equipment are recorded at cost. Minor additions and renewals are
expensed in the year incurred. Major additions and renewals are capitalized and
depreciated over their estimated useful lives. Depreciation is calculated using
the straight-line method over the estimated useful lives
Advertising costs
The Company expenses all costs of advertising as incurred. Advertising costs
totaled $100,132 and $20,820 in 2004 and 2003 respectively.
Impairment of long lived assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144 ). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes ill circumstances indicate that the carrying amount
of an asset may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undercounted cash flows. Should an impairment in
value be indicated, the carrying value of intangible assets will be adjusted,
based on estimates of future discounted cash flows resulting from the use and
ultimate disposition of the asset. SF AS No. 144 also requires assets to be
disposed of be reported at the lower of the carrying amount or the fair value
less costs to sell.
F-12
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
Fair value of financial instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 2004 and
2003. The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments include
cash and accounts payable. Fair values were assumed to approximate carrying
values for cash and payables because they are short term in nature and their
carrying amounts approximate fair values or they are payable on demand.
Concentrations of Credit Risk
Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit.
Stock-Based Compensation:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SF AS No. 123 to require
prominent disclosures in both armua1 and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of the related
option. The Company has adopted the annual disclosure provisions of SFAS No.148
in its financial reports for the year ended December 31,2002 and subsequent
years.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note D):
For the year ended December 31,
2004 2003
----------- -----------
Net loss attributable to common stockholders -as reported $(6,825,848) $(2,230,806)
Add. Total stock based employee compensation expense as
reported under intrinsic value method (APB No. 25) 105,000 --
Deduct Total stock based employee compensation expense
as reported under fair value based method (SFAS No. 123) (658,800) (106,800)
Net loss -Pro Forma $(7,379,648) $(2,337,606)
Net loss attributable to common stockholders - Pro forma $(7,379,648) $(2,337,606)
Basic (and assuming dilution) loss per share -as reported $ (0.41) $ (0.29)
Basic (and assuming dilution) loss per share - Pro forma $ (0.44) $ (0.31)
Loss per share
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No.128 (SF AS #128) Earnings Per Share. Basic loss per
share is computed by dividing losses available to common stockholders by the
weighted average number of common shares outstanding during the period.
Segment reporting
The Company follows Statement of Financial Accounting Standards No.130,
Disclosures About Segments of an Enterprise and Related Information. The Company
operates as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
F-13
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
Income taxes
The Company follows Statement of Financial Accounting Standard No.109,
Accounting for Income Taxes (SFAS No.109) for recording the provision for income
taxes. Deferred tax assets and liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability during
each period. If available evidence suggests that it is more likely than not that
some portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is
more likely than not to be realized. Future changes in such valuation allowance
are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse
Recent pronouncements
In November, 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs - an amendment of ARB No. 43, Chapter 4. This statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing", to clarify
the accounting for normal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that"... under certain circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. "This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during the
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
In December, 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67" (SFAS
152). The amendments made by Statement 152. This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP 04-2), Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance of SOP 04-2. This Statement id effective for financial statements for
fiscal years beginning after June 15, 2005, with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations, or cash
flows.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised, 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year, 2005. Currently the Company accounts for its share-based
payment transactions under the provisions of APB25, which does not necessarily
require the recognition of compensation costs in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of ooperations in the tird quarter of
fiscal year 2005 and thereafter.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29, Accounting for Nonmonetary Transactions ("SFAS 153"). This Statement
amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. Under SFAS 153, if
a nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value if determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in the fiscal periods that begin after
June 15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
F-14
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at December 31, 2004 and 2003 are as follows:
2004 2003
10 % convertible note payable, unsecured and due September, 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 $ .50 per share. The company was 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 $ 1.00 per share. The Company is in violation of the loan
covenants. -0- 7,500
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 $ .50 per share. The Company is in violation of the loan
covenants. 25,000 25,000
10% 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 $ 1.00 per share. -0- 10,000
18% note payable, interest payable monthly and due June, 2003; note secured by
Company's assets and pledge of 3,265,000 shares of the Company's common stock
owned by Company's principal shareholders and officers; Note holder has the
option to convert unpaid note principal together with accrued and unpaid
interest to the Company's common stock at the lower of $ .15 per share or a
price per share equal to 85 % of the average daily bid price over the ten
preceding days prior to the date of conversion. The Company is in violation of
the loan covenants. This note was paid off and settled subsequently in January
2004. -0- 195,000
10% Convertible note payable, unsecured and due October 2003; accrued and unpaid
interest due at maturity. Note holder has the option to convert the unpaid note
principal together with accrued and unpaid interest to the Company's common
stock at $ .25 per share. The Note was redeemed in March, 2004 for a combination
of common stock and cash. -0- 75,000
10% convertible note payable, unsecured and due October 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 the rate of $ .10 per share. The Company is in violation of the loan
covenants. The note was converted to common stock in June, 2004 -0- 5,000
10% convertible note payable in the original amount of $1,500,000, and due
September, 2006. Interest is 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; b)
50% of the average of the three lowest intraday trading prices for the common
stock. The full principal amount of the secured convertible notes is due upon a
default under the terms of the secured convertible notes. The note is secured by
substantially all of the Company's assets, including the assets of wholly owned
subsidiaries and intellectual property. As of December 31, 2004 the Note holder
has converted $144,931 of the principal to common stock of the Company. 1,355,069
----------------------------------------
1,382,569 320,000
Less: current portion (27,500) (320,000)
----------------------------------------
$1,355,069 $ --
F-15
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued)
In accordance with the Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the convertible note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid in capital. During the year ended December 31, 2004, the
Company recognized and measured an aggregate of $1,500,000 of the proceeds,
which is equal to the intrinsic value of the imbedded beneficial conversion
feature, to additional paid in capital as a discount against the convertible
note. The debt discount attributed to the beneficial conversion feature is
expensed immediately as interest expense since the note can be converted to
common shares at any time.
In connection with the placement of the convertible note, the Company issued
non-detachable warrants granting the holders the right to acquire 2,250,000
shares of the Company's common stock at $0.50 per share. The Company valued the
warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and
the following assumptions: contractual terms of 5 years, an average risk free
interest rate of 2.0%, a dividend yield of 0%, and a volatility of 149%.
NOTE C -STOCKHOLDER'S EQUITY
Common Stock
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share.
During May, 2000, the Company issued 1,640,000 shares of its common stock to its
founders in exchange for cash of $2,200.
During May 2000, the Company issued 750,000 shares of its common stock in
exchange for research and development and organizational costs paid for by
Research Econometrics, LLP the totaling $68,753. The stock issued was valued at
approximately $.09 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
During May 2000, the Company issued 875,000 shares of its common stock to an
officer of the Company for consulting services valued at $36,585. The stock
issued was valued at approximately $.05 per share, which represents the fair
value of the stock issued, which did not differ materially from the value of the
services rendered.
In May, 2000 the Company issued $40,000 of notes payable convertible into the
Company's common stock at a price equal to $.15 per share. In July 2000, the
holders of the notes payable elected to convert $40,000 of the notes, plus
accrued interest, in exchange for 288,000 shares of the Company's common stock.
In November, 2000 the Company issued 640,171 shares of common stock in exchange
for $ 96,026 in connection With a private placement memorandum, net of costs.
During November 2000, the Company issued 122,795 shares of its common stock in
exchange for services totaling $18,419. The stock issued was valued at
approximately $0.15 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January 2001, holders of the Company's convertible notes payable elected to
convert $104,817 of debt in exchange for 698,782 shares of the Company's common
stock.
In May, 2001, the Company granted certain officers of the Company options to
purchase 350,000 shares the Company's common stock at its par value for services
rendered.. The options issued were valued at $ .15 per share, or $52,500 which
represents the fair value of the option issued, which did not differ materially
from the value of the services received. In November, 2001, the officers elected
to exercise their options to purchase the stock for $350.
In connection with the placement of the Company's Note Payable in October, 2001,
the Company issued warrants to purchase 500,000 shares of the Company's common
stock at par value to the holders of the Note. The warrant agreement expires
October 22, 2004, and is callable upon election by the Company. The 500,000
warrants are valued at $0.15 per warrant, or $75,000, which represents the fair
value of the warrants, issued and is being amortized over the life of the loan.
The warrant was exercised in November, 2001. Amortization expense of $ 50,000
and $12,500 was charged to operations in 2002 and 2001,respectively.
During the year ended December 31, 2001, certain warrant holders elected to
convert their warrants to 636,000 shares of the Company's $0.00 1 par value
common stock for cash of $ 14,250.
F-16
NOTE C -STOCKHOLDER'S EQUITY (Continued)
In December 2001, holders of the Company's convertible notes payable elected to
convert $ 75,824 of debt in exchange for 151,648 shares of the Company's common
stock.
During May 2002, the Company issued 70,000 shares of its common stock in
exchange for services totaling $49,998. The stock issued was valued at
approximately $.70 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
During November 2002, the Company issued 150,000 shares of its common stock in
exchange for services totaling $ 37,500. The stock issued was valued at
approximately $.25 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In December, 2002 the Company issued 256,000 shares of common stock in exchange
for $ 64,000 for cash in connection with a private placement memorandum, net of
costs.
In May, 2003, the holder of a $49,030 note payable exchanged the unpaid
principal together with accrued interest for 196,120 shares of the Company's
common stock.
In June, 2003, the Company issued 200,000 shares of its common stock in exchange
for services totaling $ 50,000. The stock issued was valued at approximately
$.25 per share, which represents the fair value of the stock issued, which did
not differ materially from the value of the services rendered.
In September, 2003, the Company issued 450,000 shares of its common stock in
exchange for services totaling $ 90,000. The stock issued was valued at
approximately $.20 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In November, 2003, the Company issued 11,292 shares of its common stock in
exchange for services totaling $ 5,645. The stock issued was valued at
approximately $.50 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January, 2004, the Company collected the balance of its subscriptions
receivable of $276,186.
In January, 2004, the holders of $27,691 in notes payable exchanged the unpaid
principal together with accrued interest for 110,764 shares of the Company's
common stock.
In January, 2004, the Company issued 2,585,000 shares of its common stock in
exchange for services totaling $ 956,450. The stock issued was valued at
approximately $.37 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January, 2004, the Company issued 1,200,000 shares of its common stock in
exchange for services totaling $ 252,000. The stock issued was valued at
approximately $.21 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In April, 2004, the Company received back and cancelled 450,000 shares of its
common stock for return of collateral deposit with factor at $90,000.
In April, 2004, the Company issued warrants to consultants for services of
$243,000 which represents the fair value of the warrants issued, which did not
differ materially from the value of the services rendered.
In April, 2004, the Company issued 2,000,000 options to purchase common stock at
$0.2125 per share to employees of the Company. The company recognized $275,000
as stock-based compensation and additional paid in capital, which is equal to
the intrinsic value of the stock on the date of the award.
In May, 2004, the Company issued 5,310,000 shares of common stock at $0.10 per
share for private placement for cash. In connection with the offering, the
investors received a warrant to purchase the Company's common stock for each
share of common stock purchased ("Class A Warrants"). The warrants have an
exercise price of $0.25 per share and expire on June 30, 2004.
F-17
NOTE C -STOCKHOLDER'S EQUITY (Continued)
In May, 2004, the Company issued 50,000 shares of common stock at $0.10 per
share on conversion of notes payable.
In June, 2004, the Company issued 1,760,000 shares of its common stock in
exchange for services totaling $ 176,000. The stock issued was valued at
approximately $.10 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In July, 2004 the Company issued 100,000 shares of common stock in exchange for
services rendered to the Company valued at $40,000. The shares were issued at
$0.40 per share which represents the fair value of the stock issued which did
not materially differ from the value of the services rendered.
In July, 2004 the Company issued 100,000 shares of common stock at $0.10 for
private placement for cash.
In August 2004, the Company issued 651,000 shares of common stock against
exercise of warrants at $0.25 per share for $150,250 in cash and balance $12,500
was adjusted out of cash received in June 2004.
In August 2004, the Company issued 200,000 shares of common stock for exercise
of warrants at $0.25 per share for cash.
In August, 2004, holders converted 4 shares of preferred stock - Class A into
200,000 of common stock at $.10 per share.
In September 2004, the Company recognized and measured an aggregate of $500,000
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and expensed as
interest.
In September, 2004, the Company issued warrants to consultants for services for
$106,173 which represents the fair value of the warrants issued, which did not
differ materially from the value of the services rendered.
In October, 2004, the Company issued 690,000 shares of its common stock in
exchange for services totaling $ 172,500. The stock issued was valued at
approximately $.25 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In October, 2004, the Company issued 140,019 shares of its common stock at $0.15
per share on conversion of notes payable.
In October, 2004, the Company recognized and measured an aggregate of $500,000
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and expensed as
interest.
In November, 2004, the Company recognized and measured an aggregate of $500,000
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and expensed as
interest.
In November, 2004, the Company issued 1,035,221 shares of its common stock at
$0.105 per share on conversion of notes payable.
In December, 2004, the Company issued 1,035,221 shares of its common stock at
$0.035 per share on conversion of notes payable.
In December, 2004, holders converted 15 shares of preferred stock - Class A into
750,000 shares of common stock at $.10 per share.
In December, 2004, the Company issued 203,867 shares of its common stock to
holders of preferred - Class A stock as a penalty for late registration of the
underlying common shares. The Company recorded an expense of $0.44 per share in
the amount of $89,702.
Preferred Stock
The Company has also authorized 5,000,000 shares of preferred Class A stock,
with a par value of $.001 per share.
In December, 2003, the Company issued 155 shares of its convertible preferred
stock -class A, valued at $5,000 per share. This 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. The Company recorded
beneficial conversion discount for the year ended December 31, 2003 of $736,250.
In May, 2004, the Company issued 15.861 shares of its convertible preferred
stock - class A, valued at $5,000 per share. This 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 Company has also authorized 8,000,000 shares of preferred Class B stock,
with a par value of $.001 per share.
F-18
NOTE C -STOCKHOLDER'S EQUITY (Continued)
In January, 2004, the Company issued 800,000 shares of its preferred stock -
class B 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 stock issued was valued at $1.00 per share, which represents the
fair value of the stock. The shares of preferred stock are convertible into
common shares at $0.20 per share which was amended in April, 2004 to $0.10 per
share. 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. The preferred stock - class B accumulates
interest, payable as dividends at the rate of 12% per annum. For the year ended
December 31, 2004 $96,000 in dividends were accumulated. These dividends are not
recorded until declared by the Company.
NOTE D -STOCK OPTIONS
Class A Warrants
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
shareholders at December 31,2004.
Warrants Outstanding Warrants Exercisable
--------------------- ---------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Prices
--------------- ----------- --------------------- -------------- ----------- ---------------
$ 0.10 91,500 5 $ 0.10 91,500 $ 0.10
0.20 1,445,000 4 0.20 1,445,000 0.20
0.25 10,101,564 3 0.25 10,101,164 0.25
0.50 2,600,000 5 0.50 2,600,000 0.50
$ 1.05 8,643,064 3 1.05 8,643,064 1.05
22,881,128 3.30 $ 0.58 22,881,128 $ 0.58
Transactions involving the Company's warrant issuance are summarized as follows:
Number of Shares Weighted Average
Price Per Share
Outstanding at December 31,2003 15,895,000 $ 0.54
Granted 11,756,128 0.39
Exercised ( 851,000) 0.25
Canceled or expired (3,919,000) 0.25
Outstanding at December 31, 2004 22,881,128 $0 .58
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
--------------------- ---------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (years) Exercise Price Exercisable Exercise Prices
--------------- ----------- --------------------- -------------- ----------- ---------------
$ 0.2125 2,000,000 5 $ 0.2125 2,000,000 $ 0.2125
0.2975 2,000,000 6 0.2125 2,000,000 0.2125
4.000.000 5.5 $ 0.2125 4.000.000 $ 0.2125
F-19
NOTE D -STOCK OPTIONS (Continued)
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
Outstanding at December 31, 2003 2,000,000 $0.2125
Granted 2,000,000 0.2125
Exercised - -
Canceled or expired - -
Outstanding at December 31, 2004 4.000.000 $0.2125
The weighted-average fair value of stock options granted to employees during the
period ended December 31, 2004 and 2003 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2004 2003
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2.0% 1.02%
Expected stock price volatility 149% 26%
Expected dividend payout - -
Expected option life-years (a) 6 5
(a)The expected option life is based on contractual expiration dates.
If the Company recognized compensation cost for the stock options and warrants
for the non-qualified employee stock option plan in accordance with SF AS
No.123, the Company's pro forma net loss and net loss per share would have been
$( 7,379,648 ) and $( 0.44 ) for the year ended December 31,2004 and
$(2,337,606) and $(0.31) for the year ended December 31, 2003, respectively.
NOTE E -RELATED PARTY TRANSACTIONS
The Company entered into a sub-lease agreement with Research Econometrics, LLP,
which provides the Company the ability to continue the research and development
efforts of the Electrochemical Portable Power Plant and Lighting System. The
agreement is on a month-to-month basis. Total rental expense for the years
ending December 31, 2004 and 2003 was $ 0 and $8,814, respectively.
The Company incurred management fees to its officers totaling $445,997 and
$504,000 during the years ended December 31, 2004 and December 31, 2003,
respectively. Unpaid management fees aggregate $ 0 and $996,508 as of December
31, 2004 and 2003, respectively. In May, 2004 the Board of Directors converted
$723,670 in unpaid management fees to Preferred Class B shares of the Company at
a rate of $1.00 per preferred share. The Company also issued notes payable to
officers in the amount of $283,835 for the balance of the unpaid management
fees.
From time to time, the Company's principal officers have advanced funds to the
Company for working capital purposes in the form of unsecured promissory notes,
accruing interest at 12% per annum. As of December 31, 2004 and 2003, the
balance due to the officers was $ 399,080 and $207,845, respectively.
NOTE F -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.
NOTE G- LOSSES PER SHARE
The following table presents the computation of basic and diluted losses per
share:
2004 2003
Net loss available to Common stockholders $(6,825,848) $(2,230,806)
Basic and diluted loss per share (0.41) (0.29)
Weighted average common shares outstanding 16,701,174 7,652,012
F-20
NOTE H- INCOME TAXES
The Company has adopted Financial Accounting Standards No.109, which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statement or
tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax purposes are
insignificant. At December 31,2004 and 2003, the Company has available for
federal income tax purposes a net operating loss carry forward of approximately
$ 8,500,000, expiring in the year 2023, that may be used to offset future
taxable income. The Company has provided a valuation reserve against the full
amount of the net operating loss benefit, since in the opinion of management
based upon the earnings history of the Company, it is more likely than not that
the benefits will not be realized.
Components of deferred tax assets as of December 31,2004 are as follows:
Non current:
Net operating loss carry forward $ 2,900,000
Valuation allowance $(2,900,000)
Net deferred tax asset -
The realization of these net operating loss carry forwards is dependent upon
generating taxable income prior to the related year of expiration. The amount of
carry forward that may be utilized in any future tax year may also be subject to
certain limitations, including limitations as a result of certain stockholder
ownership changes in which may be beyond the control of the Company.
NOTE I- 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
during the years ended December 31,2004 and 2003, the Company incurred losses
from operations of $(6,025,848) and $(1,494,556), respectively. These factors
among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The Company is actively pursuing additional equity financing through discussions
with investment bankers and private investors. There can be no assurance the
Company will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts,
management believes that the Company can continue to operate. However, no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems.
The Company's existence is dependent upon management's ability to develop
profitable operations and resolve it's 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 J-SUBSEQUENT EVENTS
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0248 per share on conversion of notes payable.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0135 per share on conversion of notes payable.
In February, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00883 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.01358 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00983 per share on conversion of notes payable.
F-21
CYBERLUX CORPORATION
(A Development Stage Company)
Balance Sheets
March 31, 2005 December 31, 2004
Unaudited Audited
------------ ------------
Assets
Current assets:
Cash & cash equivalents $ 10,460 $ 415,375
Accounts Receivable 13,429 --
Prepaid expenses 36,235 68,404
------------ ------------
Total current assets 60,124 483,779
Property, plant and equipment, net of accumulated
depreciation of $ 100,629 and $92,335, respectively 35,687 43,018
Other Assets:
Patents 61,739 30,544
------------ ------------
Total other assets 61,739 30,544
Total Assets $ 157,550 $ 557,341
============ ============
Liabilities and Deficiency in Stockholders' Equity
Current liabilities:
Accounts payable $ 166,376 $ 176,094
Accrued liabilities 347,320 323,408
Short-term notes payable - shareholders 394,595 399,080
Short-term notes payable 27,500 27,500
------------ ------------
Total current liabilities 935,791 926,082
Long-term liabilities:
Notes payable 1,282,045 1,355,069
------------ ------------
Total long-term liabilities 1,282,045 1,355,069
Deficiency Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, Class A,
113.3606 and 151.8606 shares issued and
outstanding as of March 31, 2005 and December 31, 2004 respectively 1 1
Preferred stock, $0.001 par value, 8,000,000 shares authorized, Class B,
800,000 and 0 shares issued and
outstanding as of March 31, 2005 and December 31, 2004 respectively 800 800
Common stock, $0.001 par value, 300,000,000 shares authorized, 30,871,338
and 23,770,233 shares issued and outstanding as of March 31, 2005 and
December 31,
2004 respectively 30,871 23,770
Additional paid-in capital 9,179,386 9,099,302
Accumulated deficit (11,271,344) (10,847,683)
------------ ------------
Deficiency in stockholders' equity (2,060,285) (1,723,810)
------------ ------------
Total liabilities and (deficiency) in stockholders' equity $ 157,550 $ 557,341
============ ============
The accompanying notes are an integral part of these financial statements
F-22
CYBERLUX CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31, 2005 March 31, 2004
Revenue $ 13,568 $ 9,968
Cost of goods sold (6,369) (8,395)
------------ ------------
Gross margin (loss) 7,199 1,573
Operating Expenses:
Marketing and advertising 21,323 --
Depreciation and amortization 8,294 18,291
Research and development 18,696
General and administrative expenses 339,840 268,798
------------ ------------
Total operating expenses 388,153 287,089
------------ ------------
(Loss) from operations (380,954) (285,516)
Other income/(expense)
Other Income 15,000 --
Interest income 300 --
Interest expense (43,006) (49,193)
------------ ------------
Net Loss before provision for income taxes
and preferred dividend (423,660) (319,709)
Income taxes (benefit) -- --
------------ ------------
Net loss (423,660) (319,709)
Preferred dividend - Beneficial conversion discount
on convertible preferred -- 400,000
------------ ------------
Net loss available to common stockholders $ (423,660) $ (719,709)
============ ============
Weighted average number of common shares
outstanding, basic and fully diluted 27,919,776 11,907,762
Net loss per share - Basic and fully diluted $ (0.02) $ (0.06)
Preferred dividend $ 24,000 $ 24,000
The accompanying notes are an integral part of these financial statements
F-23
CYBERLUX CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31, 2005 March 31, 2004
Cash flows provided by (from-used in) operating activities
Net (loss) available to common stockholders $ (423,660) $ (719,709)
Depreciation and amortization 8,294 18,291
Beneficial conversion discount - preferred stock dividend -- 400,000
Shares issued for previously incurred debt 73,024 27,692
Warrants issued to consultants for services 14,160 --
Preferred shares issued for conversion of accrued
management fees -- 723,670
Preferred shares issued for previously incurred debt 76,330
Shares issued for consulting services 47,225
Shares issued for research and development
Decrease (increase) in accounts receivable (13,429) (9,816)
Decrease (increase) in deposits 236,000
(Increase) decrease in prepaid expenses 32,169 --
(Increase)/decrease in other assets (31,195) --
Increase (decrease) in accrued liabilities 23,912 (142,442)
(Decrease) increase in management fee payable-
related party -- (684,670)
(Decrease) increase in other accounts payable (9,718) --
------------ ------------
Net cash (used in) operating activities (326,442) (27,429)
Cash flows provided by (used in) investing activities
Payments for property, plant and equipment (963) (5,174)
------------ ------------
Cash (used in) investing activities (963) (5,174)
Cash flows provide by (used in) financing activities
(Payments for )/proceeds from short-term notes payable, net -- --
(Payments for )/proceeds from short-term notes
payable-shareholders (net) (4,485) (85,000)
Proceeds from advance deposits -- 32,403
(Payments for)/Proceeds from convertible long-term notes (73,024) --
Proceeds from issuance of common stock -- 88,186
Net cash provided by (used in)financing activities (77,510) 35,589
------------ ------------
Net increase (decrease) in cash (404,915) 2,986
============ ============
Cash - beginning 415,375 16,247
Cash - ending $ 10,460 $ 19,233
Supplemental disclosures:
Interest Paid $ -- $ 66,314
Income Taxes Paid -- --
Non-Cash investing and financing activities:
Shares issued for research and development and consulting -- 47,225
Shares issued for conversion of debt 73,024 27,692
Warrants issued in connection with financing -- --
Warrants issued to consultants for services 14,160 --
Shares issued in connection with loan -- 225,000
Beneficial conversion discount on convertible preferred stock -- 400,000
Convertible preferred shares issued for note payable and accrued interest - -- 76,330
Convertible preferred shares issued for accrued management fees -- 723,670
The accompanying notes are an integral part of these financial statements
F-24
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES
General
The accompanying unaudited condensed consolidated 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, 2005, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2005. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated December 31, 2004
financial statements and footnotes thereto included in the Company's Form 10-KSB
for the year ended December 31, 2004.
Business and Basis of Presentation
Cyberlux Corporation (the "Company") is incorporated under the laws of the State
of Nevada. The Company, which has transitioned from a development state
enterprise, 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, 2005, the
Company has accumulated losses of $11,271,344.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassification
Certain reclassifications have been made to conform prior periods' data to the
current presentation. These reclassifications had no effect on reported losses.
Stock-Based Compensation:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SF AS No. 123 to require
prominent disclosures in both armua1 and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of the related
option. The Company has adopted the annual disclosure provisions of SFAS No.148
in its financial reports for the year ended December 31,2002 and subsequent
years.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note D):
F-25
CYBERLUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
For the three months ended March 31,
2004 2003
--------- ---------
Net loss attributable to common stockholders -as reported $(423,660) $(719,709)
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 $(423,660) $(719,709)
--------- ---------
Net loss attributable to common stockholders - Pro forma $(423,660) $(719,709)
========= =========
Basic (and assuming dilution) loss per share - as reported $ (0.02) $ (0.06)
Basic (and assuming dilution) loss per share - Pro forma $ (0.02) $ (0.06)
NOTE B -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, 2005 and December 31, 2004,
the balance due to the officers was $ 394,595 and $399,080, respectively.
NOTE C-SUBSEQUENT EVENTS
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0118 per share on conversion of notes payable.
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.011 per share on conversion of notes payable.
In May, 2005, the Company issued 1,035,221 shares of its common stock at $0.0108
per share on conversion of notes payable.
F-26
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as amended, provide to the fullest
extent permitted by Nevada law, our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such
director's or officer's fiduciary duty. The effect of this provision of our
Articles of Incorporation, as amended, is to eliminate our right and our
shareholders (through shareholders' derivative suits on behalf of our company)
to recover damages against a director or officer for breach of the fiduciary
duty of care as a director or officer (including breaches resulting from
negligent or grossly negligent behavior), except under certain situations
defined by statute. We believe that the indemnification provisions in its
Articles of Incorporation, as amended, are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
NATURE OF EXPENSE AMOUNT
SEC Registration fee $ 441.38
Accounting fees and expenses 10,000.00*
Legal fees and expenses 40,000.00*
Miscellaneous 4,558.62
----------
TOTAL $55,000.00*
==========
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 29, 2002, we issued 70,000 shares of our common stock to an
individual for services rendered valued at $49,000. The shares were issued in
accordance with Section 4(2) of the Securities Act. No broker or dealer was
involved in the transaction and no discounts or commissions were paid.
During November 2002, we issued 150,000 shares of our common stock in
exchange for services totaling $37,500. The stock issued was valued at $0.25 per
share, which represents the fair value of the stock issued, which did not differ
materially from the value of the services rendered.
In December 2002, we issued 256,000 shares of common stock for $64,000
in connection with a private placement memorandum, net of costs.
On October 1, 2003, we entered into an agreement with Consulting for
Strategic Growth 1, Ltd. ("CFSG"), in which CFSG would provide consulting
services in the form of investor relations and public relations. On January 27,
2004, in consideration for services rendered, Stanley Wunderlich, Chairman of
CFSG was issued 125,000 shares of our common stock at $0.001 per share and
Bonnie Stretch, pubic relations for CFSG, was issued 25,000 shares of our Common
stock at $0.001 per share. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On October 30, 2003, we entered into an agreement with Roccus Capital
Partners, LLC ("RCP") and Alliance Advisors (`AA") in which RCP and AA would
provide strategic advisement to us. On January 27, 2004, as an engagement fee,
Richard L. Berkley and Marc A. Heskell, principals of RCP and Alan Sheinwald,
principal of AA were each issued 75,000 shares of our common stock at $0.001 per
share. These issuances were private transactions pursuant to Section 4(2) of the
Securities Act.
On December 1, 2003, we entered into an agreement with CFSG, in which
CFSG would provide consulting services in the form of investor relations and
public relations. In consideration for services to be rendered, on January 27,
2004, Stanley Wunderlich was issued 60,000 shares of our common stock at $0.001
per share with 10,000 shares issued each month based upon performance criteria
satisfactory to both parties. This issuance was a private transaction pursuant
to Section 4(2) of the Securities Act.
On January 27, 2004, we issued 700,000 shares of our Common stock at
$0.01 per share to Titan Entertainment Group pursuant to a consulting services
agreement in which Titan Entertainment Group would create strategic business
relationships for us. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On January 27, 2004, we issued 600,000 shares of our Common stock at
$0.01 per share to Michael J. Stern pursuant to a consulting services agreement
in which Michael J. Stern would create strategic business relationships for us.
This issuance was a private transaction pursuant to Section 4(2) of the
Securities Act.
On January 27, 2004, we issued 600,000 shares of our Common stock at
$0.01 per share to KBK Ventures, Inc. pursuant to a consulting services
agreement in which KBK Ventures would create strategic business relationships
for us. This issuance was a private transaction pursuant to Section 4(2) of the
Securities Act.
On January 27, 2004, we issued 800,000 shares of our Common stock at
$0.01 per share to 3CD Consulting, LLC pursuant to a consulting services
agreement in which 3CD Consulting would create strategic business relationships
for us. This issuance was a private transaction pursuant to Section 4(2) of the
Securities Act.
On January 27,2004, we issued 600,000 shares of our Common stock at
$0.01 per share to Ronald E. Gee pursuant to a consulting services agreement in
which Ronald E. Gee would create strategic business relationships us. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On January 27, 2004, we issued 155 shares of Series A Preferred Stock
(with a stated value of $5,000 per share and a conversion price of $0.10 per
share) and warrants to purchase an aggregate of 15,500,000 of our common stock.
This private placement was exempt from registration pursuant to Section 4(2) of
the Securities Act.
II-2
On January 27, 2004, we issued 40,000 shares of our Common stock at
$0.001 per share to Donald F. Huffman in consideration of services on our
behalf. This issuance was a private transaction pursuant to Section 4(2) of the
Securities Act.
On January 27, 2004, we issued 10,000 shares of our common stock at
$0.001 per share to Robert Rubin in consideration of services on our behalf.
This issuance was a private transaction pursuant to Section 4(2) of the
Securities Act.
On January 27, 2004, Brian Scott converted a $20,000 promissory note
dated April 1, 2003 in the amount of $20,000 into 80,000 shares of the our
common stock at $0.25 per share. This issuance was a private transaction
pursuant to Section 4(2) of the Securities Act.
On April 5, 2004, we issued 450,000 shares of our common stock issued
to Capital Funding Solutions as collateral pursuant to a factoring agreement
were cancelled.
In May 2004, we issued 5,310,000 shares of our common stock at $0.10
per share and 5,310,000 warrants exercisable at $0.25 per share. This issuance
was a private transaction pursuant to Section 4(2) of the Securities Act
On May 25, 2004, we issued 15.861 shares of Series A Preferred Stock
(with a stated value of $5,000 per share and a conversion price of $0.10 per
share) and warrants to purchase an aggregate of 793,065 of our common stock.
This private placement was exempt from registration pursuant to Section 4(2) of
the Securities Act.
On June 4, 2004, we issued 30,500 stock purchase warrants exercisable
at $0.25 per share and 19,500 stock purchase warrants exercisable at $0.10 per
share each to Marc Haskell, Richard Berkley and Alan Sheinwald pursuant to a
consulting agreement. This issuance was a private transaction pursuant to
Section 4(2) of the Securities Act.
On June 4, 2004, Michael Kelly converted a promissory note in the
amount of $5.000 into 50,000 shares of our common stock at $0.10 per share. This
issuance was a private transaction pursuant to Section 4(2) of the Securities
Act.
On June 4, 2004, we issued 30,000 shares of our common stock valued at
$.10 per share to Forma Designs, Inc. for services rendered. This issuance was a
private transaction pursuant to Section 4(2) of the Securities Act.
On June 4, 2004, we issued 310,000 stock purchase warrants to Dennis
Oon, Gary Murphy, Brian Kramen and Ed English exercisable at $0.20 per share for
services rendered. This issuance was a private transaction pursuant to Section
4(2) of the Securities Act.
On June 8, 2004, we issued 975,000 shares of our common stock valued at
$.10 per share and 975,000 stock purchase warrants exercisable at $0.25 per
share pursuant to an agreement in which Current Capital would provide investor
relation services for us. This issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act.
On June 8, 2004, we issued 375,000 shares of our common stock valued at
$.10 per share and 375,000 stock purchase warrants exercisable at $0.25 per
share to Advisory Group Ltd. pursuant to an agreement in which Advisory Group
Ltd. would provide investor relation services for us. This issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act.
On June 8, 2004, we issued 200,000 shares of our common stock valued at
$.10 per share to Phil Snowden and C. Clark Burns pursuant to a consulting
agreement. This issuance was a private transaction pursuant to Section 4(2) of
the Securities Act.
On June 16, 2004, we issued 60,000 shares of our common stock valued at
$.10 per share and 100,000 stock purchase warrants exercisable at $0.50 each to
Frank Maresca Associate, Inc., William Schnell & Associates, Inc. and Bruce W.
Geiger & Associates, Inc. pursuant to a consulting agreement. This issuance was
a private transaction pursuant to Section 4(2) of the Securities Act.
II-3
On July 14, 2004, we issued 100,000 shares of our Common Stock to John
Hanemaayer at $0.10 per share. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
On July 15, 2004, we issued 100,000 stock purchase warrants exercisable
at $0.20 per share to Michael G. Konicek for services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On July 30, 2004, we issued 100,000 shares of our Common Stock to David
Bomberg pursuant to a consulting agreement. This issuance was a private
transaction pursuant to Section 4(2) of the Securities Act.
On August 24, 2004, we issued 701,000 shares of our Common Stock
against exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On August 24, 2004, holders of 4 shares of our Series A Convertible
Preferred Stock exercised their rights to convert into 200,000 shares of our
Common Stock. This issuance was exempt from registration pursuant to Section
4(2) of the Securities Act.
On September 17, 2004, we issued 200,000 shares of our Common Stock
against exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On September 17, 2004, we issued 150,000 stock purchase warrants to
Donald B. Hutton for services rendered at $0.25 per share. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC on September 23,
2004 for the sale of (i) $1,500,000 in secured convertible notes and (ii) a
warrants to buy 2,250,000 shares of our common stock.
The investors provided us with the funds as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20, 2004; and
o $500,000 was disbursed on November 18, 2004.
The secured convertible notes bear interest at 10%, mature two years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.72 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on 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 $0.50 per share. In addition the
warrants exercise price gets adjusted in the event we issue common stock at a
price below market, with the exception of any securities issued as of the date
of this warrant.
On October 11, 2004, we issued 50,000 stock purchase warrants
exercisable at $0.20 per share to Fleetwood Associates for services rendered.
This issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On October 18, 2004, we issued 500,000 shares of our Common Stock to
Greenfield Capital, LLC pursuant to a placement agent agreement. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
II-4
On October 18, 2004, Dolores and Ray L. Jennings converted a promissory
note in the amount of $21,002.85 into 140,019 shares of our Common Stock at
$0.15 per share. This issuance was a private transaction pursuant to Section
4(2) of the Securities Act.
On October 18, 2004, we issued 90,000 shares of our Common Stock to
Dolores and Ray L. Jennings for services rendered. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On October 18, 2004, we issued 100,000 shares of our Common Stock to
Sichenzia Ross Friedman Ference LLP for legal services rendered. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 250,000 stock purchase warrants exercisable at
$0.20 per share to RoBrady Capital, LLC for services rendered. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 8, 2004, we issued 50,000 stock purchase warrants
exercisable at $0.20 per share to Stephen W. Gropp for services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On November 8, 2004, we issued 50,000 stock purchase warrants
exercisable at $0.20 per share to Timothy C. Dudgeon for services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On November 8, 2004, we issued 200,000 stock purchase warrants
exercisable at $0.20 per share to William Walker for services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On December 10, 2004, we issued 203,867 shares of our Common Stock to
our Series A Preferred Shareholders at $0.44 per share as a penalty for late
registration of the underlying stock. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
On December 14, 2004, we issued 200,000 stock purchase warrants
exercisable at $0.20 per share to William Walker for services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
On December 14, 2004, we issued 200,000 stock purchase warrants
exercisable at $0.20 per share to Hunter H. Bostfor services rendered. This
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act.
In December 2004, holders converted 15 shares of our Series A Preferred
Stock into 750,000 shares of our Common Stock at $.10 per share. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
In January 2005, holders converted 33.5 shares of our Series A
Preferred Stock into 1,425,000 shares of our Common Stock at $.10 per share.
This issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act.
In February 2005, holders converted 5 shares of our Series A Preferred
Stock into 250,000 shares of our Common Stock at $.10 per share. This issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act.
To obtain funding for our ongoing operations, we entered into a
Securities Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC on April 22, 2005
for the sale of (i) $1,500,000 in secured convertible notes and (ii) a warrants
to buy 25,000,000 shares of our common stock.
II-5
The investors are obligated to provide us with an aggregate of
$1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 will be disbursed within five days of the filing of this
registration statement; and
o $400,000 will be disbursed within five days of the effectiveness of
this prospectus.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.03 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on 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 $0.03 per share. In addition the
warrants exercise price gets adjusted in the event we issue common stock at a
price below market, with the exception of any securities issued as of the date
of this warrant.
* 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.
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ITEM 27. EXHIBITS.
The following exhibits are included as part of this Form SB-2.
References to "the Company" in this Exhibit List mean Cyberlux Corporation, a
Nevada corporation.
Exhibit No. Description
3.1 Articles of Incorporation, dated as of May 17, 2000, filed as
an exhibit to the registration statement on Form 10-SB filed
with the Commission on December 17, 2001 and incorporated
herein by reference.
3.2 Certificate of Amendment to the Articles of Incorporation,
dated as of April 3, 2003, filed as an exhibit to the
registration statement on Form SB-2 filed with the Commission
on April 30, 2003 and incorporated herein by reference.
3.3 Bylaws of Cyberlux Corporation, filed as an exhibit to the
registration statement on Form 10-SB filed with the
Commission on December 17, 2001 and incorporated herein by
reference.
3.4 Certificate of Designation of Series A Preferred Stock, filed
as an exhibit to the current report on Form 8-K filed with
the Commission on January 8, 2004 and incorporated herein by
reference.
4.1 Securities Purchase Agreement, dated as of September 23,
2004, by and among Cyberlux Corporation, AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC, filed as Exhibit 4.1 to
the current report on Form 8-K filed with the Commission on
September 29, 2004 and incorporated herein by reference.
4.2 Secured Convertible Note issued to AJW Offshore, Ltd., dated
September 23, 2004, filed as Exhibit 4.2 to the current
report on Form 8-K filed with the Commission on September 29,
2004 and incorporated herein by reference.
4.3 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated September 23, 2004, filed as Exhibit 4.3 to the
current report on Form 8-K filed with the Commission on
September 29, 2004 and incorporated herein by reference.
4.4 Secured Convertible Note issued to AJW Partners, LLC, dated
September 23, 2004, filed as Exhibit 4.4 to the current
report on Form 8-K filed with the Commission on September 29,
2004 and incorporated herein by reference.
4.5 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated September 23, 2004, filed as Exhibit
4.5 to the current report on Form 8-K filed with the
Commission on September 29, 2004 and incorporated herein by
reference.
4.6 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated September 23, 2004, filed as Exhibit 4.6 to the current
report on Form 8-K filed with the Commission on September 29,
2004 and incorporated herein by reference.
4.7 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated September 23, 2004, filed as Exhibit 4.7 to the
current report on Form 8-K filed with the Commission on
September 29, 2004 and incorporated herein by reference.
4.8 Common Stock Purchase Warrant with AJW Partners, LLC, dated
September 23, 2004, filed as Exhibit 4.8 to the current
report on Form 8-K filed with the Commission on September 29,
2004 and incorporated herein by reference.
4.9 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated September 23, 2004, filed as Exhibit
4.9 to the current report on Form 8-K filed with the
Commission on September 29, 2004 and incorporated herein by
reference.
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4.10 Registration Rights Agreement, dated as of September 23,
2004, by and among Cyberlux Corporation, AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC, filed as Exhibit 4.10 to
the current report on Form 8-K filed with the Commission on
September 29, 2004 and incorporated herein by reference.
4.11 Security Agreement, dated as of September 23, 2004, by and
among Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as Exhibit 4.11 to the current report
on Form 8-K filed with the Commission on September 29, 2004
and incorporated herein by reference.
4.12 Intellectual Property Security Agreement, dated as of
September 23, 2004, by and among Cyberlux Corporation, AJW
Partners, LLC, AJW Qualified Partners, LLC, AJW Offshore,
Ltd. and New Millennium Capital Partners II, LLC, filed as
Exhibit 4.12 to the current report on Form 8-K filed with the
Commission on September 29, 2004 and incorporated herein by
reference.
4.13 Guaranty and Pledge Agreement, dated as of September 23,
2004, by and among Cyberlux Corporation, AJW Partners, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd., New
Millennium Capital Partners II, LLC and Donald F. Evans,
filed as Exhibit 4.13 to the current report on Form 8-K filed
with the Commission on September 29, 2004 and incorporated
herein by reference.
4.14 Secured Convertible Note issued to AJW Offshore, Ltd., dated
October 20, 2004.
4.15 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated October 20, 2004.
4.16 Secured Convertible Note issued to AJW Partners, LLC, dated
October 20, 2004.
4.17 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated October 20, 2004.
4.18 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated October 20, 2004.
4.19 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated October 20, 2004.
4.20 Common Stock Purchase Warrant with AJW Partners, LLC, dated
October 20, 2004.
4.21 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated October 20, 2004.
4.22 Secured Convertible Note issued to AJW Offshore, Ltd., dated
November 18, 2004.
4.23 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated November 18, 2004.
4.24 Secured Convertible Note issued to AJW Partners, LLC, dated
November 18, 2004.
4.25 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated November 18, 2004.
4.26 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated November 18, 2004.
4.27 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated November 18, 2004.
4.28 Common Stock Purchase Warrant with AJW Partners, LLC, dated
November 18, 2004.
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4.29 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated November 18, 2004.
4.30 Securities Purchase Agreement, dated as of April 22, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
April 28, 2005 and incorporated herein by reference.
4.31 Secured Convertible Note issued to AJW Offshore, Ltd., dated
April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.32 Secured Convertible Note issued to AJW Qualified Partners,
LLC, dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28,
2005 and incorporated herein by reference.
4.33 Secured Convertible Note issued to AJW Partners, LLC, dated
April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.34 Secured Convertible Note issued to New Millennium Capital
Partners II, LLC, dated April 22, 2005, filed as an exhibit
to the current report on Form 8-K filed with the Commission
on April 28, 2005 and incorporated herein by reference.
4.35 Common Stock Purchase Warrant issued to AJW Offshore, Ltd.,
dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28,
2005 and incorporated herein by reference.
4.36 Common Stock Purchase Warrant with AJW Qualified Partners,
LLC, dated April 22, 2005, filed as an exhibit to the current
report on Form 8-K filed with the Commission on April 28,
2005 and incorporated herein by reference.
4.37 Common Stock Purchase Warrant with AJW Partners, LLC, dated
April 22, 2005, filed as an exhibit to the current report on
Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.38 Common Stock Purchase Warrant with New Millennium Capital
Partners II, LLC, dated April 22, 2005, filed as an exhibit
to the current report on Form 8-K filed with the Commission
on April 28, 2005 and incorporated herein by reference.
4.39 Registration Rights Agreement, dated as of April 22, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
April 28, 2005 and incorporated herein by reference.
4.40 Security Agreement, dated as of April 22, 2005, by and among
Cyberlux Corporation, AJW Partners, LLC, AJW Qualified
Partners, LLC, AJW Offshore, Ltd. and New Millennium Capital
Partners II, LLC, filed as an exhibit to the current report
on Form 8-K filed with the Commission on April 28, 2005 and
incorporated herein by reference.
4.41 Intellectual Property Security Agreement, dated as of April
22, 2005, by and among Cyberlux Corporation, AJW Partners,
LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and New
Millennium Capital Partners II, LLC, filed as an exhibit to
the current report on Form 8-K filed with the Commission on
April 28, 2005 and incorporated herein by reference.
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4.42 Guaranty and Pledge Agreement, dated as of April 22, 2005, by
and among Cyberlux Corporation, AJW Partners, LLC, AJW
Qualified Partners, LLC, AJW Offshore, Ltd., New Millennium
Capital Partners II, LLC and Donald F. Evans, filed as an
exhibit to the current report on Form 8-K filed with the
Commission on April 28, 2005 and incorporated herein by
reference.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent
(filed herewith)
10.1 Donald F. Evans Employment Agreement, dated as of July 1,
2000, filed as an exhibit to the registration statement on
Form 10-SB filed with the Commission on December 17, 2001 and
incorporated herein by reference.
10.2 Alan H. Ninneman Employment Agreement, dated as of July 1,
2000, filed as an exhibit to the registration statement on
Form 10-SB filed with the Commission on December 17, 2001 and
incorporated herein by reference.
10.3 John W. Ringo Employment Agreement, dated as of July 1, 2000,
filed as an exhibit to the registration statement on Form
10-SB filed with the Commission on December 17, 2001 and
incorporated herein by reference.
10.4 Donald F. Evans Amended Employment Agreement, dated as of
January 1, 2003, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on April 30,
2003 and incorporated herein by reference.
10.5 Alan H. Ninneman Amended Employment Agreement, dated as of
January 1, 2003, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on April 30,
2003 and incorporated herein by reference.
10.6 John W. Ringo Amended Employment Agreement, dated as of
January 1, 2003, filed as an exhibit to the registration
statement on Form SB-2 filed with the Commission on April 30,
2003 and incorporated herein by reference.
10.7 Mark D. Schmidt Employment Agreement, dated as of May 1,
2003, filed as an exhibit to the quarterly report on Form
10-QSB filed with the Commission on August 19, 2003 and
incorporated herein by reference.
10.8 Proprietary Product Manufacturing Agreement, dated as April
24, 2001, by and between Cyberlux Corporation and Shelby
County Community Services, Inc., filed as an exhibit to the
registration statement on Form 10-SB filed with the
Commission on December 17, 2001 and incorporated herein by
reference.
10.9 Design Agreement, dated as of March 2, 2001, by and between
Cyberlux Corporation and ROBRADY Design, filed as an exhibit
to the registration statement on Form 10-SB/A filed with the
Commission on February 4, 2001 and incorporated herein by
reference.
10.10 Series A Convertible Preferred Stock Purchase Agreement,
dated as of December 31, 2003, by and among Cyberlux
Corporation and the purchasers set forth therein, filed as an
exhibit to the current report on Form 8-K filed with the
Commission on January 8, 2004 and incorporated herein by
reference.
10.11 Registration Rights Agreement, dated as of December 31, 2003,
by and among Cyberlux Corporation and the purchasers of
Series A Convertible Preferred Stock set forth therein, filed
as an exhibit to the current report on Form 8-K filed with
the Commission on January 8, 2004 and incorporated herein by
reference.
10.12 Form of Series A Warrant issued in connection with the sale
of Series A Convertible Preferred Stock, filed as an exhibit
to the current report on Form 8-K filed with the Commission
on January 8, 2004 and incorporated herein by reference.
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10.13 Form of Series B Warrant issued in connection with the sale
of Series A Convertible Preferred Stock, filed as an exhibit
to the current report on Form 8-K filed with the Commission
on January 8, 2004 and incorporated herein by reference.
10.14 Lock-up Agreement, dated as of December 31, 2003, by and
among Cyberlux Corporation and certain officers and directors
of Cyberlux Corporation, filed as an exhibit to the current
report on Form 8-K filed with the Commission on January 8,
2004 and incorporated herein by reference.
14.1 Code of Conduct, filed as an exhibit to the annual report on
Form 10-KSB filed with the Commission on April 15, 2005 and
incorporated herein by reference.
23.1 Consent of Russell Bedford Stefanou Mirchandani LLP (filed
herewith).
23.2 Consent of legal counsel (see Exhibit 5.1).
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Durham,
State of North Carolina, on May 20, 2005.
CYBERLUX CORPORATION
By: /s/ DONALD F. EVANS
---------------------------------------
Donald F. Evans, Chief Executive Officer, Principal
Executive Officer and Chairman of the Board of Directors
By: /s/ DAVID D. DOWNING
---------------------------------------
David D. Downing, Chief Financial Officer, Principal
Financial Officer and Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD F. EVANS Chief Executive Officer and May 20, 2005
-------------------------------- Chairman of the Board of Directors
Donald F. Evans
/s/ MARK D. SCHMIDT President, Chief Operating Officer May 20, 2005
-------------------------------- and Director
Mark D. Schmidt
/s/ JOHN W. RINGO Secretary, Corporate Counsel May 20, 2005
-------------------------------- and Director
John W. Ringo
/s/ ALAN H. NINNEMAN Senior Vice President and Director May 20, 2005
--------------------------------
Alan H. Ninneman
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