U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 2005
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to ______________
For the Period Ended June 30, 2005
Commission file number 000-33415
CYBERLUX CORPORATION
(Name of Small Business Issuer in Its Charter)
Nevada 91-2048178
(State of Incorporation) (IRS Employer Identification No.)
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
(Address of Principal Executive Offices)
(919) 474-9700
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of August 8, 2005, the Company had 73,300,001 shares of its par value $0.001
common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
CYBERLUX CORPORATION
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending June 30, 2005
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets:
June 30, 2005 and December 31, 2004 3
Condensed Statements of Losses:
Three and Six Months Ended June 30, 2005 and 2004 4
Condensed Statement of deficiency in Stockholder's Equity 5
January 1, 2005 through June 30, 20005
Condensed Statements of Cash Flows:
Six Months Ended June 30, 2005 and 2004 6
Notes to Unaudited Condensed Financial Information:
June 30, 2005 7-15
Item 2. Management Discussion and Analysis 16-24
Item 3. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27
Signatures 28
2
CYBERLUX CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
June 30, 2005 December 31, 2004
Unaudited
------------- -----------------
Assets
Current assets:
Cash & cash equivalents $ 141,652 $ 415,375
Accounts Receivable - allowance for doubtful accounts of $ 0 10,000 --
Prepaid expenses 156,792 68,404
------------- -----------------
Total current assets 308,444 483,779
Property, plant and equipment, net of accumulated
depreciation of $ 104,825 and $92,335, respectively 60,694 43,018
Other Assets:
Patents 78,270 30,544
------------- -----------------
Total Assets $ 447,408 $ 557,341
============= =================
Liabilities and Deficiency in Stockholders' Equity
Current liabilities:
Accounts payable $ 164,556 $ 176,094
Accrued liabilities 379,927 323,408
Short-term notes payable - shareholders 366,595 399,080
Short-term notes payable 27,500 27,500
------------- -----------------
Total current liabilities 938,578 926,082
Long-term liabilities:
Convertibel debentures, net of discounts (Note B) 1,107,497 1,355,069
Deficiency in Stockholders' equity:
Preferred stock, $0.001 par value, 200 shares
authorized, Class A, 86.8606 and 151.8606 shares issued and
outstanding as of June 30, 2005 and December 31, 2004 respectively 1 1
Preferred stock, $0.001 par value, 800,000 shares
authorized, Class B, 800,000 issued and outstanding
as of June 30, 2005 and December 31, 2004 800 800
Common stock, $0.001 par value, 300,000,000 shares
authorized, 62,952,001 and 23,770,233 shares issued
and outstanding as of June 30, 2005 and December 31,
2004, respectively 62,952 23,770
Additional paid-in capital 10,542,519 9,099,302
Accumulated deficit (12,204,939) (10,847,683)
------------- -----------------
Deficiency in stockholders' equity (1,598,667) (1,723,810)
------------- -----------------
Total liabilities and (deficiency) in stockholders' equity $ 447,408 $ 557,341
============= =================
The accompanying notes are an integral part of these unaudited condensed
financial statements
3
CYBERLUX CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------ ------------ ------------ ------------
Revenue $ 200 $ 11,238 $ 13,768 $ 21,206
Cost of goods sold (23,117) (7,992) (29,487) (16,387)
------------ ------------ ------------ ------------
Gross margin (loss) (22,917) 3,246 (15,718) 4,819
Operating Expenses:
Marketing and advertising 116,349 21,830 137,672 10,380
Depreciation and amortization 4,886 13,361 13,180 31,652
Research and development 100,883 34,086 119,580 34,086
General and administrative expenses 468,356 447,435 808,196 1,876,908
Total operating expenses 690,475 516,712 1,078,628 1,953,026
(Loss) from operations (713,392) (513,466) (1,094,346) (1,948,207)
Other income/(expense)
Other Income -- (10,441) -- 4,559
Interest income 0 62 300 62
Interest expense (125,873) (5,434) (168,879) (54,627)
Debt acquisition costs (94,331) (94,331)
Net Loss before provision for income taxes
and preferred dividend (933,596) (529,279) (1,357,255) (1,998,213)
Income taxes (benefit) -- -- --
Net loss (933,596) (529,279) (1,357,255) (1,998,213)
Preferred dividend - Beneficial conversion discount
on convertible preferred -- (800,000)
Net loss available to common stockholders $ (933,596) $ (529,279) $ (1,357,255) $ (2,798,213)
Weighted average number of common shares
outstanding, basic and fully diluted 41,216,067 15,169,191 34,604,651 13,004,736
Net loss per share - Basic and fully diluted $ (0.02) $ (0.03) $ (0.04) $ (0.22)
Preferred dividend $ 24,000 $ 24,000 $ 48,000 $ 24,000
The accompanying notes are an integral part of these unaudited condensed
financial statements
4
Cyberlux Corporation
CONDENSED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY FOR THE
PERIOD JANUARY 1, 2005 THROUGH JUNE 30, 2005
(Unaudited)
Common Stock Preferred Stock Additional Stock Deficiency in
------------------ --------------- Paid in Subscription Deficiency Stockholders'
Shares Amount Shares Amount Capital Receivable Accumulated Equity
---------- ------ ------- ------ ---------- ------------ ----------- -------------
Balance, December 31, 2004 23,770,233 $23,771 $800,152 $ 801 $9,099,302 $ -- $(10,847,684) $ (1,723,810)
Shares issued in January, 2005 for
Preferred A conversion 1,675,000 1,675 (34) -- (1,675) -- -- --
Shares issued in January, 2005 for
note payable at $0.0248 per share 1,035,221 1,035 -- -- 24,638 -- -- 25,673
Shares issued in January, 2005 for
note payable at $0.0135 per share 1,035,221 1,035 -- -- 12,940 -- -- 13,975
Shares issued in February, 2005
for Preferred A conversion 250,000 250 (5) -- (250) -- -- --
Shares issued in February, 2005
for note payable at $0.00883 per
share 1,035,221 1,035 -- -- 8,106 -- -- 9,141
Shares issued in March, 2005 for
note payable at $0.01358 per share 1,035,221 1,035 -- -- 13,024 -- -- 14,059
Shares issued in March, 2005 for
note payable at $0.00983 per share 1,035,221 1,036 -- -- 9,141 -- -- 10,177
Warrants issued in March in
exchange for services -- -- -- -- 14,160 -- -- 14,160
Shares issued in April, 2005 for
Preferred A conversion 250,000 250 (5) -- (250) --
Common Shares issued in April,
2005 in exchange for services
valued at $0.03 per share 800,000 800 23,200 24,000
Shares issued in April, 2005 for
note payable at $0.0118 per share 1,035,221 1,035 11,181 12,216
Shares issued in April, 2005 for
note payable at $0.011 per share 1,035,221 1,035 10,352 11,387
Shares issued in May, 2005 for
note payable at $0.0108 per share 1,035,221 1,035 10,145 11,180
Shares issued in May, 2005 for
note payable at $0.0105 per share 1,600,000 1,600 15,200 16,800
Shares issued in May, 2005 for
note payable at $0.0103 per share 1,100,000 1,100 10,230 11,330
Shares issued in May, 2005 for
note payable at $0.0088 per share 1,700,000 1,700 13,260 14,960
Shares issued in May, 2005 for
note payable at $0.0085 per share 1,700,000 1,700 12,750 14,450
Shares issued in May, 2005 for
note payable at $0.0083 per share 3,400,000 3,400 24,820 28,220
Shares issued in June, 2005 for
Preferred A conversion 1,075,000 1,075 (22) (1,075) --
Common Shares issued in June,
2005 in exchange for services
valued at $0.02 per share 250,000 250 4,750 5,000
Shares issued in June, 2005 for
note payable at $0.0083 per share 6,800,000 6,800 49,640 56,440
Shares issued in June, 2005 for
note payable at $0.0092 per share 2,400,000 2,400 19,680 22,080
Shares issued in June, 2005 for
note payable at $0.0085 per share 7,900,000 7,900 59,250 67,150
Beneficial conversion feature of
convertible debentures (Note D) 1,100,000 1,100,000
Net (Loss) -- -- -- -- -- -- (1,357,255) (1,357,255)
---------- ------ ------- ------ ---------- ------------ ----------- -------------
Balance, June 30, 2005 62,952,001 $62,952 $800,087 $ 801 $10,542,519 $ -- $(12,204,939) $ (1,598,667)
The accompanying notes are an integral part of these unaudited condensed
financial statements
5
Cyberlux Corporation
Condensed Statement of Cash Flows
(Unaudited)
For the Six Months Ended
June 30, 2005 June 30, 2004
----------- -----------
Cash flows provided by (from-used in) operating activities
Net (loss) available to common stockholders $(1,357,255) $(2,798,213)
Depreciation and amortization 13,180 31,652
Beneficial conversion discount - preferred stock dividend -- 800,000
Amortization of debt discount - beneficial conversion
feature of convertible note (Note D) 91,667 --
Shares issued for previously incurred debt -- 32,691
Warrants issued to consultants for services 14,160 243,000
Warrants issued in connection with financing --
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 29,000 1,327,810
Shares issued for factoring agreement (90,000)
Decrease (increase) in accounts receivable (10,000) (10,804)
(Increase) decrease in prepaid expenses (88,389) --
(Increase) decrease in other assets (47,726) 130,450
Increase (decrease) in accrued interest 50,976 (55,541)
Increase (decrease) in accrued liabilities 5,543 (223,798)
(Decrease) increase in management fee payable-
related party -- (723,670)
(Decrease) increase in other accounts payable (11,537) --
Net cash (used in) operating activities (1,310,382) (536,423)
Cash flows provided by (used in) investing activities
Payments for property, plant and equipment (30,856) (19,266)
Cash (used in) investing activities (30,856) (19,266)
Cash flows provide by (used in) financing activities
Payments for (proceeds from) short-term notes payable, net -- (255,000)
(Payments for ) proceeds from short-term notes
payable-shareholders (net) (32,485) (95,100)
Proceeds from advance deposits -- 22,500
(Payments for) Proceeds from convertible long-term notes 1,100,000 --
Proceeds from issuance of preferred stock 79,308
Proceeds from subscriptions receivable 276,186
Issuance of common stock 543,000
Net cash provided by (used in)financing activities 1,067,515 570,894
----------- -----------
Net increase (decrease) in cash (273,723) 15,205
Cash - beginning 415,375 16,247
Cash - ending $ 141,652 $ 31,452
Supplemental disclosures:
Interest Paid $ 9,537 110,167
Income Taxes Paid --
Non-Cash investing and financing activities:
Shares issued for research and development and consulting 29,000 1,327,810
Shares issued for conversion of debt -- 32,692
Warrants issued in connection with financing 273,967 --
Warrants issued to consultants for services 14,160 243,000
Warrants issued detachable with convertible preferred shares 58,915
Shares issued in connection with factoring -- (90,000)
Beneficial conversion discount on convertible preferred stock -- 800,000
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 unaudited condensed
financial statements
6
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 six-month period ended June 30,
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 June 30, 2005, the
Company has accumulated losses of $12,204,939.
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
Reclassification
Certain reclassifications have been made to conform prior periods' data to the
current presentation. These reclassifications had no effect on reported losses.
7
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
-------------------------------------------------
Impairment of long lived assets
The Company has adopted Statement of Financial Accounting Standards No. 144
(SFAS 144 ). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes ill circumstances indicate that the carrying amount
of an asset may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undercounted cash flows. Should impairment in value
be indicated, the carrying value of intangible assets will be adjusted, based on
estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset. SF AS No. 144 also requires assets to be disposed of
be reported at the lower of the carrying amount or the fair value less costs to
sell.
Fair value of financial instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of June 30, 2005 and 2004.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash and
accounts payable. Fair values were assumed to approximate carrying values for
cash and payables because they are short term in nature and their carrying
amounts approximate fair values or they are payable on demand.
Concentrations of Credit Risk
Financial instruments and related items which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with credit quality institutions. At times, such investments may be in excess of
the FDIC insurance limit.
Stock-Based Compensation:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both armua1 and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of the related
option. The Company has adopted the annual disclosure provisions of SFAS No.148
in its financial reports for the year ended December 31,2002 and subsequent
years.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note D):
8
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
For the three months ended For the six months ended
June 30, June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders -as reported $ (933,596) $ (529,279) $(1,357,255) $(2,798,213)
Add. Total stock based employee
compensation expense as reported
under intrinsic value method
(APB No. 25) -- -- -- 0
Deduct Total stock based employee
compensation expense as reported
under fair value based method
(SFAS No. 123) -- -- (478,800) 0
Net loss -Pro Forma $ (933,596) $ (529,279) $(1,836,055) $(2,798,213)
Net loss attributable to common
stockholders - Pro forma $ (933,596) $ (529,279) $(1,836,055) $(2,798,213)
Basic (and assuming dilution)
loss per share -as reported $ (0.02) $ (0.03) $ (0.04) $ (0.22)
Basic (and assuming dilution)
loss per share - Pro forma $ (0.02) $ (0.03) $ (0.05) $ (0.22)
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 operations in the third quarter of
fiscal year 2005 and thereafter.
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.
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
9
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE A-SUMMARY OF ACCOUNTING POLICIES (Continued)
Recent pronouncements (Continued)
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 operations in the third 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.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the first quarter of fiscal 2006. The Company
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
10
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 005
(Unaudited)
NOTE B-NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable at June 30, 2005 and December 31 2004 are as follows:
2005 2004
----------- -----------
10 % convertible note payable, unsecured and due September, 2003; accrued and
unpaid interest due at maturity ; Note holder has the option to convert 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 $ 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 $ .50 per share. The Company is in violation of the loan
covenants 25, 000 25,000
,
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 June 30, 2005 the Note holder has
converted $484,169 of the principal to common stock of the Company 1,015,831 1,355,069
10% convertible note payable in the original amount of $1,100,000, and due July
19, 2008. 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) $0.03; 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. The discount on the note is 1,008,333
related to beneficial interest of conversion features and warrants. 91,666 -0-
----------- -------
1,134,997 1,1382,568
Less: current portion (27,500) (27,500)
----------- -------
Total $ 1,107,497 $ 1,355,069
NOTE C -STOCKHOLDER'S EQUITY
----------------------------
Preferred Stock
The Company has authorized 200 shares of Preferred Class A stock, with a par
value of $.001 per share. As of June 30, 2005, the Company has 86.8606 shares of
Preferred Class A shares issued and outstanding
The Company has authorized 800,000 shares of Preferred Class B stock, with a
par value of $.001 per share. As of June 30, 2005, the Company has 800,000
shares of Preferred Class B shares issued and outstanding. The Preferred Class B
shares 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. For
the period ended June 30, 2005 an additional $48,000 in dividends were
accumulated. These dividends are not recorded until declared by the Company.
11
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE C -STOCKHOLDER'S EQUITY (Continued)
----------------------------------------
Common Stock
The Company has authorized 300,000,000 shares of common stock, with a par value
of $.001 per share. As of June 30, 2005, the Company has 62,952,001 shares
issued and outstanding.
During the three months ended March 31, 2005, holders converted 38.5 shares of
preferred stock - Class A into 1,925,000 shares of common stock at $.10 per
share.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0248 per share on conversion of notes payable.
In January, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0135 per share on conversion of notes payable.
In February, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00883 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.01358 per share on conversion of notes payable.
In March, 2005, the Company issued 1,035,221 shares of its common stock at
$0.00983 per share on conversion of notes payable.
During the three months ended June 30, 2005, holders converted 26.5 shares of
preferred stock - Class A into 1,325,000 shares of common stock at $.10 per
share.
In April, 2005, the Company issued 800,000 shares of its common stock at $0.03
per share in exchange for services.
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.0118 per share on conversion of notes payable.
In April, 2005, the Company issued 1,035,221 shares of its common stock at
$0.011 per share on conversion of notes payable.
In May, 2005, the Company issued 1,035,221 shares of its common stock at $0.0108
per share on conversion of notes payable.
In May, 2005, the Company issued 1,600,000 shares of its common stock at $0.0105
per share on conversion of notes payable.
In May, 2005, the Company issued 1,100,000 shares of its common stock at $0.0103
per share on conversion of notes payable.
In May, 2005, the Company issued 1,700,000 shares of its common stock at $0.0088
per share on conversion of notes payable.
In May, 2005, the Company issued 1,700,000 shares of its common stock at $0.0085
per share on conversion of notes payable.
In May, 2005, the Company issued 3,400,000 shares of its common stock at $0.0083
per share on conversion of notes payable.
In June, 2005, the Company issued 250,000 shares of its common stock at $0.02
per share in exchange for services.
In June, 2005, the Company issued 6,800,000 shares of its common stock at
$0.0083 per share on conversion of notes payable.
In June, 2005, the Company issued 2,400,000 shares of its common stock at
$0.0092 per share on conversion of notes payable.
In June, 2005, the Company issued 7,900,000 shares of its common stock at
$0.0085 per share on conversion of notes payable.
12
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
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 June 30,2005.
Warrants Outstanding Warrants Exercisable
--------------------- ----------------------
Weighted Weighted
Weighted Average Average Average
Number Remaining Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
--------------- ----------- --------------------- -------- ----------- --------
$0.03 18,333,333 5 $ 0.03 18,333,333 $ 0.03
0.10 91,500 4 $ 0.10 91,500 0.10
0.20 1,845,000 3 0.20 1,845,000 0.20
0.25 8,751,564 2 0.25 8,751,564 0.25
0.50 2,600,000 5 0.50 2,600,000 0.50
$1.05 8,643,064 2 1.05 8,643,064 1.05
---------- -------- -------- ----------- --------
40,264,461 3.61 $ 0.34 40,264,461 $ 0.34
=========== ===========
Transactions involving the Company's warrant issuance are summarized as follows:
Number of Weighted Average
Shares Price Per Share
----------- ----------------
Outstanding at December 31,2004 22,881,128 $ 0.58
Granted 18,733,333 0.03
Exercised -- --
Canceled or expired (1,350,000) (0.25)
---------- -----
Outstanding at June 30, 2005 40,264,461 $0.34
========== =====
Warrants granted during the period ended June 30, 2005 include 18,333,333 issued
in connection with debt financing. The warrants are exercisable until five years
after the date of issuance at a purchase price of $0.03 per share. In addition
the exercise price is adjusted in the event common stock is issued at a price
below the market, with the exception of any securities issued as of the date of
the warrant. In addition, 400,000 warrants were issued at $0.20 in exchange for
services.
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
------------------------------ ----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding life (Years) Price Exercisable Price
-------- ----------- ---------------- -------- ----------- --------
$ 0.2125 2,000,000 4 $ 0.2125 2,000,000 $ 0.2125
0.2125 2,000,000 5 0.2125 2,000,000 0.2125
0.10 12,000,000 6 0.10 12,000,000 0.10
---------- ---------- --------
16,000,000 5.6 $ 0.1281 16,000,000 $ 0.1281
========== ========== ========
Transactions involving stock options issued to employees are summarized as
follows:
Number of Weighted Average
Shares Price Per Share
---------- ----------------
Outstanding at December 31, 2004 4,000,000 $0.2125
Granted 12,000,000 $ 0.10
Exercised -- --
Canceled or expired -- --
---------- -------
Outstanding at June 30, 2005 16,000,000 $0.1281
========== =======
13
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE D -STOCK OPTIONS (CONTINUED)
The weighted-average fair value of stock options granted to employees during the
period ended June 30, 2005 and 2004 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
For the Six Months Ended
June 30
2005 2004
----- -----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 2% 1.5%
Expected stock price volatility 250% 149%
Expected dividend payout -- --
Expected option life-years (a) 6 6
(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
$(1,836,055) and $(0.05) for the six months ended June 30,2005 and $(1,858,483)
and $(0.14) for the three months ended June 30, 2004, respectively.
NOTE E -RELATED PARTY TRANSACTIONS
----------------------------------
From time to time, the Company's principal officers have advanced funds to the
Company for working capital purposes in the form of unsecured promissory notes,
accruing interest at 12% per annum. As of June 30, 2005 and December 31, 2004,
the balance due to the officers was $ 366,595 and $399,080, 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:
For the Six Months Ended June 30,
2005 2004
---- ----
Net loss available to Common stockholders $ (1,357,255) $ (2,798,213)
Basic and diluted loss per share (0.04) (0.22)
Weighted average common shares outstanding 34,604,651 13,004,736
14
CYBERLUX CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
NOTE H- 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
for the six months ended June 30, 2005 and for the period from inception through
December 31,2004, the Company incurred losses from operations of $(1,357,255)
and $(10,847,683), 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 I - SUBSEQUENT EVENTS
--------------------------
In July, 2005, the Company issued 12,700,000 shares of its common stock at
$0.0085 per share on conversion of notes payable.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that are
subject to significant risks and uncertainties about us, our current and planned
products, our current and proposed marketing and sales, and our projected
results of operations. There are several important factors that could cause
actual results to differ materially from historical results and percentages and
results anticipated by the forward-looking statements. The Company has sought to
identify the most significant risks to its business, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurance that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risks before making an
investment decision with respect to the Company's stock. The following
discussion and analysis should be read in conjunction with the financial
statements of the Company and notes thereto. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment from our Management.
Overview
We are in the development stage and our efforts have been principally
devoted to designing, developing and marketing advanced lighting systems that
utilize white (and other) light emitting diodes as illumination elements.
We are developing and marketing new product applications of solid-state
diodal illumination (TM) that demonstrate added value over traditional lighting
systems. Using proprietary technology, we are creating a family of products for
task and accent lighting, emergency and security lighting, and specialized
lighting systems for military and homeland security. Our solid-state lighting
technology offers extended light life and greater cost effectiveness than other
existing forms of illumination. We are expanding our marketing activity into
channels of retail, commercial, institutional and military sales.
With our task and accent lighting, the target markets include kitchen and
bath cabinet manufacturers and designer and installation contractors for the
residential market. In the commercial markets, our task and accent lighting
products and emergency and security lighting products address the lighting needs
in hotels, hospitals, nursing homes, airports, shopping centers and multiple
family complexes; long-term evacuation solutions for theaters, office and public
buildings; reduced maintenance cost solutions for property managers as applied
to walkway, corridor or landscape lighting. For our retail products, our target
customers include the home improvement and consumer goods retailers. For the
military and homeland security products, our target markets include all branches
of the military and all government organizations providing security services
such as border control and airport security.
In April of 2005, we began the development of a portable boundary security
lighting product for the military that will provide night-vision compatible
infrared lighting and intense, bright white lighting capability in a portable
configuration for fast, effective deployment. As of June 30, 2005, we completed
the first phase of development and expect final development to be complete in
the third quarter of 2005.
In April of 2005, we completed the fulfillment of a contract with Kings
Park School District of Long Island, New York for the installation of our
Emergency Lighting System in a local middle school. The objective of the pilot
project was to provide a local school with long-term interim lighting solution
so the Kings Park community will have a well-lit emergency shelter in the event
of a natural or manmade disaster. In May of 2005, the completed project was
presented to the Kings Park School District administration and we hope the pilot
could become a model for emergency lighting throughout other school districts.
In the second quarter of 2005, we developed a working relationship with
Cree, Inc., a leading manufacturer of light-emitting diode components. We plan
on developing products that utilize the Cree solid-state lighting technology. We
anticipate announcing our first product based on Cree technology in the third
quarter of 2005.
In May 2005, we introduced the Aeon (TM) "Task & Accent" lighting products
to address residential closet lighting, interior cabinet accent lighting and
under cabinet counter lighting with virtually heatless, long-term (75,000 hours
of life) lighting solutions for the homeowner. This unique lighting resource for
cabinetmakers, contractors and do-it-yourselfers offers three levels of light
from soft white diodal(TM) elements that are cool to the touch and easy to
install. The Aeon closet, cabinet and counter lighting was unveiled at the
Kitchen & Bath Industries Trade Show in Las Vegas, NV on May 10, 2005. Our
general lighting technology will provide a 40 to 60 percent reduction in
maintenance costs for property managers through the replacement of walkway,
corridor or landscape lighting elements and 68 percent reduction in energy costs
for those fixtures. In May, we began establishing the Aeon dealer network as our
channel of distribution for the Aeon products. As of June 30, 2005, we have 26
dealers representing 15 of the top 25 North American housing markets. We are
continuing to build the Aeon dealer network with qualify dealers and hope that
the Aeon dealer channel will cover many of top 50 North American housing markets
by year end.
In March of 2005, we submitted a proposal to the MTA that to providing
emergency lighting for only the subway cars and platforms. The proposal also
called for an initial subway car installation trial to prove the capability and
value of our technology. In April of 2005, we met with the Vice President of
Engineering for the MTA and discussed our proposal and the timing for a trial
within the subway system. Based on this meeting and the resulting discussions of
the time period required to accomplish our trial objectives, we understand the
MTA is still evaluating the trial proposal but this is not a priority at this
point and no determination can be made at this time as to when the MTA will make
a decision on our proposal. Therefore, we plan to address the Port Authority
with a similar proposal for an initial subway car installation trial to prove
the capability and value of our technology. This program will be formally
submitted in the third quarter of 2005.
In June of 2005, we completed the development of the Keon KeyCap (TM), a
new product designed to provide consumers with a long-lasting, slender sleeve of
electronics that turns a standard key into a lighting device. The patented Keon
KeyCap (TM) is the practical lighting solution for every consumer who carries
keys. Each Keon is a sturdy elastic surround that fits standard key heads and
features an electronics package that focuses a bright diodaltm beam of light
down the key shaft. When its miniaturized button is depressed, the Keon directs
light precisely into the intended keyhole or other targeted surfaces. We
anticipate supply and sales will begin on the Keon in the third quarter of 2005.
In June of 2005, we received confirmation that our Aeon Pro E "Task &
Accent" home lighting meets California's Title 24 new residential energy
requirements of 40 lumens per watt. Verified by Independent Testing
Laboratories, Inc., a third-party independent testing firm, the Aeon Pro E
product was confirmed to operate at 55 lumens per watt. The Title 24 California
energy requirements went into effect in 1978 to decrease California's energy
consumption. Since then, the legislation has saved the state more than $36
billion in electricity and natural gas costs. The Title 24 standards will be
revised in October of 2005 and the new standard of 40 lumens per watt will be
required. ITL was founded 50 years ago, is one of the most experienced
independent testing labs in the country and provides accurate, unbiased
information on virtually every type of lighting to lighting manufacturers,
designers, architects and the government. Exceeding the Title 24 standards opens
up the California market to our Aeon Pro E line and makes these products one of
the only alternatives to traditional task and accent lighting for the home. The
55 lumen per watt efficiency of the Aeon Pro E products is an industry-leading
efficacy and one that surpasses California's Title 24 requirements of 40 lumens
per watt. We anticipate that sales of the Aeon Pro E to grow in the fourth
quarter of 2005 when the new standards are in force.
16
Results of Operations
Six months ended June 30, 2005 compared to the six months ended June 30, 2004
REVENUES
Revenues for the six months ended June 30, 2005 were $ 13,768 as compared
to $21,206 for the same period ended June 30, 2004. Included in sales for the
six months 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. This
installation is being hailed as a pilot project that could become a model for
emergency lighting throughout the State of New York.
OPERATING EXPENSES
Operating expenses for the six months ended June 30, 2005 were $1,078,628
as compared to $2,184,526 for the same period ended June 30, 2004. Included in
the six months ended June 30, 2005 are $137,672 in expenses for market
development and literature. This compares to $10,380 for the six months ended
June 30, 2004.
Three months ended June 30, 2005 compared to the three months ended June 30,
2004
REVENUES
Revenues for the three months ended June 30, 2005 were $200 as compared to
$11,238 for the same period ended June 30, 2004.
OPERATING EXPENSES
Operating expenses for the three months ended June 30, 2005 were $690,475
as compared to $748,212 for the same period ended June 30, 2004. Included in the
three months ended June 30, 2005 are $116,349 in expenses for market development
and literature. This compares to $21,830 for the six months ended June 30, 2004.
As a result of limited capital resources and minimal revenues from
operations from its inception, the Company has relied on the issuance of equity
securities to non-employees in exchange for services. The Company's management
enters into equity compensation agreements with non-employees if it is in the
best interest of the Company under terms and conditions consistent with the
requirements of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation. In order conserve its limited operating capital resources,
the Company anticipates continuing to compensate non-employees for services
during the next twelve months. This policy may have a material effect on the
Company's results of operations during the next twelve months.
Liquidity and Capital Resources
As of June 30, 2005, we had a working capital deficit of $630,134. 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 six months ended June 30, 2005, we
generated a cash flow deficit of $1,310,382 from operating activities. Cash
flows used in investing activities was $30,856 during the quarter. Cash flows
from financing activities provided $1,067,515 from the issuance of convertible
notes payable for the first six months ended June 30, 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.
17
Our independent certified public accountant has stated in their report
included in our December 31, 2004, Form 10-KSB, as amended, that we have
incurred operating losses in the last two years, and that we are dependent upon
management's ability to develop profitable operations. These factors among
others may raise substantial doubt about our ability to continue as a going
concern.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on 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 provided us with an
aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
The 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.
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 $1,100,000 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.
18
Off-Balance Sheet Arrangement
We do not have any off-balance sheet arrangements.
Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and judgments that affect our reported assets, liabilities, revenues, and
expenses, and the disclosure of contingent assets and liabilities. We base our
estimates and judgments on historical experience and on various other
assumptions we believe to be reasonable under the circumstances. Future events,
however, may differ markedly from our current expectations and assumptions.
While there are a number of significant accounting policies affecting our
financial statements; we believe the following critical accounting policies
involve the most complex, difficult and subjective estimates and judgments:
o stock-based compensation; and
o revenue recognition.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148 - Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS
No. 123 - Accounting for Stock-Based Compensation, providing alternative methods
of voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2002.
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by APB No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the provisions of APB No. 25, compensation expense is measured at the
grant date for the difference between the fair value of the stock and the
exercise price.
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 operations in the third quarter of
fiscal year 2005 and thereafter.
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.
19
Product Research and Development
We anticipate incurring approximately $500,000 in research and development
expenditures in connection with the development of our Wireless Lighting System,
Aeon cabinet lighting and Cyclone Power Light Plant during the next twelve
months.
These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months.
Acquisition or Disposition of Plant and Equipment
We do not anticipate the sale of any significant property, plant or
equipment during the next twelve months. We do not anticipate the acquisition of
any significant property, plant or equipment during the next 12 months.
RISK FACTORS
Much of the information included in this quarterly report includes or is
based upon estimates, projections or other "forward-looking statements". Such
forward-looking statements include any projections or estimates made by us and
our management in connection with our business operations. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect our current judgment regarding the direction of
our business, actual results will almost always vary, sometimes materially, from
any estimates, predictions, projections, assumptions or other future performance
suggested herein.
Such estimates, projections or other "forward-looking statements" involve
various risks and uncertainties as outlined below. We caution the reader that
important factors in some cases have affected and, in the future, could
materially affect actual results and cause actual results to differ materially
from the results expressed in any such estimates, projections or other
"forward-looking statements".
Our common shares are considered speculative. Prospective investors should
consider carefully the risk factors set out below.
20
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 six months ended
June 30, 2005, we incurred a net loss of $2,730,422. As of June 30, 2005, we had
an accumulated deficit of $13,578,106. 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.
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.
21
Our Trademark and Other Intellectual Property Rights May Not be Adequately
Protected Outside the United States, Resulting in Loss of Revenue.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
Our Principal Stockholders, Officers And Directors Own a Controlling Interest in
Our Voting Stock And Investors Will Not Have Any Voice in Our Management.
We have issued 800,000 shares of Series B Convertible Preferred Stock to
our officers and directors which are convertible into 8 million shares of common
stock and, in the aggregate, have the right to cast 80 million votes in any vote
by our shareholders. Combined with the number of shares of common stock held by
our officers and directors, they have the right to cast approximately 70% of all
votes by our shareholders. As a result, these stockholders, acting together,
will have the ability to control substantially all matters submitted to our
stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
We Have Issued a Large Amount of Stock in Lieu of Cash for Payment of Expenses
and Expect to Continue this Practice in the Future. Such Issuances of Stock Will
Cause Dilution to Our Existing Stockholders.
Due to our limited economic resources, we try to issue stock in lieu of
cash for payment of expenses and services provided for us. In 2004, we issued
6,335,000 shares of common stock in exchange for expenses and services rendered,
and we issued 800,000 shares of series B convertible preferred stock to officers
and directors in exchange for the retirement of debt owed to them. We anticipate
issuing shares of common stock whenever possible in lieu of cash to conserve our
financial position. The number of shares of common stock issued is directly
related to our stock price at the time of issuance. In the event that our stock
price drops, we will be required to issue larger amounts of shares for expenses
and services rendered, if the other party is willing to accept stock at all. The
issuance of shares of common stock will have the effect of diluting the
proportionate equity interest and voting power of holders of our common stock,
including investors in this offering.
22
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.
23
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.
24
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures: As of June 30, 2005, our
management carried out an evaluation, under the supervision of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of the
design and operation of our system of disclosure controls and procedures
pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e)
under the Exchange Act). Based on that evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls
and procedures are effective to provide reasonable assurance that
information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission
rules and forms, and that such information is accumulated and communicated
to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
b) Changes in internal controls: There were no changes in internal controls
over financial reporting that occurred during the period covered by this
report that have materially affected, or are reasonably likely to
materially effect, our internal control over financial reporting.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 17, 2005, Zykronix, Inc., a Colorado corporation, filed a complaint
against us and our President, Mark Schmidt, in the District Court, City and
County of Denver, State of Colorado (Case No. O5CV3704) claiming damages in the
amount of $211,323.75 and costs for breach of contract, unjust enrichment and
fraud by Mark Schmidt.
On June 22, 2005, we filed our Answer and Counterclaim against Zykronix,
claiming damages and costs in the amount of $2,850,000 for breach of contract,
unjust enrichment and negligent misrepresentation. At the same time, Mark
Schmidt filed a Motion to Dismiss since Zykronix failed to adequately plead a
claim for fraud. These motions are currently pending. We believe that their
claims are without merit and we will vigorously defend these claims.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended June 30, 2005, we issued 1,325,000 shares of
common stock for the conversion of 26.5 shares of Class A preferred stock.
In April, 2005, we issued 800,000 shares of our common stock at $0.03 per
share in exchange for services rendered.
In June, 2005, we issued 250,000 shares of our common stock at $0.02 per
share in exchange for services rendered.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC on April 22, 2005 for the
sale of (i) $1,500,000 in secured convertible notes and (ii) a warrants to buy
25,000,000 shares of our common stock.
The investors provided us with an aggregate of $1,500,000 as follows:
o $600,000 was disbursed on April 22, 2005;
o $500,000 was disbursed on May 24, 2005; and
o $400,000 was disbursed on July 19, 2005.
The secured convertible notes bear interest at 10%, mature three years
from the date of issuance, and are convertible into our common stock, at the
investors' option, at the lower of (i) $0.03 or (ii) 50% of the average of the
three lowest intraday trading prices for the common stock on the
Over-The-Counter Bulletin Board for the 20 trading days before but not including
the conversion date. The full principal amount of the secured convertible notes
are due upon default under the terms of secured convertible notes. In addition,
we have granted the investors a security interest in substantially all of our
assets and intellectual property and registration rights. The warrants are
exercisable until five years from the date of issuance at a purchase price of
$0.03 per share. In addition the warrants exercise price gets adjusted in the
event we issue common stock at a price below market, with the exception of any
securities issued as of the date of the warrant.
Item 3. Defaults Upon Senior Securities.
None.
26
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule
15d-14(a), promulgated under the Securities and Exchange Act of 1934, as
amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule
15d 14(a), promulgated under the Securities and Exchange Act of 1934, as
amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)
27
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYBERLUX CORPORATION
Date: August 18, 2005 By: /s/ DONALD F. EVANS
---------------------------------------
Donald F. Evans
Chief Executive Officer
(Principal Executive Officer) and
Chairman of the Board of Directors
Date: August 18, 2005 By: /s/ DAVID D. DOWNING
---------------------------------------
David D. Downing
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
28