As filed with the Securities and Exchange Commission on January 29, 2004
Registration No. _________
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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 registrant as specified in its charter)
NEVADA 3674 91-2048978
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
50 Orange Road, PO Box 2010 R/A's of America
Pinehurst, North Carolina 28370 PO Box 2259
(910) 235-0066 Minden, Nevada 89423
(702) 888-2002
(Address and telephone number (Name, address, and telephone
of principal executive offices) number of agent for service)
Copies to:
John W. Ringo, Esq.
Attorney at Law
241 Lamplighter Lane
Marietta, GA 30067
Telephone: (770) 952-1904
Facsimile: (770) 952-0894
Approximate date of commencement of proposed sale of the securities to the
public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If any of the 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 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, please 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 of the effective registration
statement for the offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
SECURITIES TO BE REGISTERED
Proposed Proposed
Title of Maximum Maximum Amount
each Series Amount Offering aggregate Of
of securities To be Price per Offering Registration
to be registered Registered Share(1) Price Fee(2)
---------------- ---------- -------- --------- ------------
Common Stock,
$.001 par value to be sold
by selling stockholders 30,244,704 $0.345 $10,434,422.88 $1,322.04(3)
----------
(1) The proposed maximum aggregate offering price per Series of security will
be determined from time to time by the registrant in connection with the
issuance by the registrant of the securities registered hereunder.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we used the average of the closing bid and asked prices on
January 23, 2004.
(3) Calculated using $126.70 per million dollars.
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 Commission, acting pursuant to said Section 8(a),
may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state in which the offer
or sale is not permitted.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 29, 2004
CYBERLUX CORPORATION PROSPECTUS
30,244,704 Shares of Common Stock
This prospectus is part of a registration statement of Cyberlux Corporation
filed with the Securities and Exchange Commission in connection with a private
placement of our Series A Convertible Preferred Stock completed on December 31,
2003. As part of the private placement, we agreed to register shares of our
common stock issuable upon conversion of our Series A Preferred Stock and upon
exercise of our Series A warrants and Series B warrants. This prospectus relates
to the public offer for resale by certain of our security holders of up to (i)
7,750,000 shares of our common stock issuable upon conversion of our Series A
Preferred Stock, (ii) 7,750,000 shares of our common stock underlying the Series
A warrants, and (iii) 7,750,000 shares of our common stock underlying the Series
B warrants. We will not receive any of the proceeds from sales by the selling
security holders of common stock.
This prospectus also relates to the issuance of an aggregate of 4,750,000 shares
of common stock underlying warrants issued to our placement agent, H.C.
Wainwright & Co., Inc., and its designees. The placement agent warrants have
exercise prices ranging from $.01 to $1.05.
Additionally, this prospectus relates to the public offer for resale of
2,244,704 shares of our common stock by other stockholders.
Our common stock is quoted on the Over-the-Counter Bulletin Board maintained by
the NASD under the symbol "CYBL". On January 23, 2004, the last reported sale
price of our common stock was $0.342 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PLEASE
REFER TO "RISK FACTORS" BEGINNING ON PAGE 4.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAS APPROVED OR DISAPPROVED 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 January 29, 2004.
ii
TABLE OF CONTENTS
PAGE
----
FORM SB-2......................................................................i
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933.....................i
SECURITIES TO BE REGISTERED...................................................ii
CYBERLUX CORPORATION PROSPECTUS..............................................iii
TABLE OF CONTENTS.............................................................iv
PROSPECTUS SUMMARY.............................................................1
OUR COMPANY....................................................................1
THE OFFERING...................................................................2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.....................................3
STATEMENT OF OPERATION DATA.................................................3
BALANCE SHEET DATA:.........................................................3
RISK FACTORS...................................................................4
RISKS RELATED TO THIS OFFERING.................................................8
FORWARD-LOOKING STATEMENTS.....................................................9
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS...............................9
SELLING STOCKHOLDERS..........................................................10
DETERMINATION OF OFFERING PRICE...............................................14
DIVIDEND POLICY...............................................................14
PLAN OF DISTRIBUTION..........................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION...................16
DESCRIPTION OF BUSINESS.......................................................20
PRINCIPAL PRODUCTS AND PRINCIPAL MARKETS......................................20
DISTRIBUTION METHODS OF OUR PRODUCTS..........................................21
RESEARCH AND DEVELOPMENT ACTIVITIES...........................................22
EMERGENCY LIGHTING AUGMENTATION SYSTEM (Production Title)..................22
HOME SAFETY LIGHT (Market Title)...........................................22
LAZER SAFETY LIGHT (Production Title)......................................22
POWEROUTAGE ADAPTER (Production Title).....................................23
FAILSAFE SPOT & LAMP (Production Title)....................................23
CAMPLAMP LANTERN (Production Title)........................................23
INDUSTRY BACKGROUND...........................................................23
REGULATION....................................................................23
MANAGEMENT....................................................................24
EXECUTIVE COMPENSATION: EMPLOYMENT AGREEMENTS.................................26
STOCK OPTION GRANTS IN THE PAST FISCAL YEAR...................................27
DESCRIPTION OF PROPERTY.......................................................28
LEGAL PROCEEDINGS.............................................................29
PRINCIPAL SHAREHOLDERS........................................................31
SECURITY OWNERSHIP OF MANAGEMENT..............................................31
DESCRIPTION OF SECURITIES.....................................................33
COMMON STOCK...............................................................33
PREFERRED STOCK............................................................33
DESCRIPTION OF THE WARRANTS...................................................34
SERIES A WARRANTS..........................................................34
SERIES B WARRANTS..........................................................34
PLACEMENT AGENT WARRANTS...................................................34
TRANSFER AGENT.............................................................35
EXPERTS.......................................................................36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS............................39
AUDITED FINANCIALS AS OF DECEMBER 31, 2002.................................40
NOTES TO AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2002....................45
FINANCIALS AS OF SEPTEMBER 30, 2003...........................................52
NOTES TO SEPTEMBER 30,2003 FINANCIAL STATEMENTS............................58
SIGNATURES....................................................................67
iii
We intend to distribute to our shareholders annual reports containing audited
financial statements. Our audited financial statements for the fiscal year
December 31, 2002, were contained in our Annual Report on Form 10-KSB.
As used in this prospectus, the terms "we", "us", "our", "the Company" and
"Cyberlux" mean Cyberlux Corporation, a Nevada corporation. The term "selling
shareholder" means selling shareholders of Cyberlux (all of whom are identified
in this Registration Statement) all of which are offering to sell their shares
of Cyberlux common stock which are being registered through this prospectus and
the term "shares" means the shares of common stock registered by us through this
prospectus.
The information in this prospectus is qualified in its entirety by reference to
the entire prospectus. Consequently, this prospectus, which is contained as part
of this registration statement, must be read in its entirety. This is especially
important in light of material subsequent events disclosed. Information may not
be considered or quoted out of context or without referencing other information
contained in this report necessary to make the information considered, not
misleading.
You should rely only on the information contained in this document or that we
have referred you to. We have not authorized anyone to provide you with
information that is different. This prospectus does not constitute an offer to
sell or the solicitation of an offer to buy any securities covered by this
prospectus in any state or other jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such state or jurisdiction.
Neither the delivery of this prospectus nor any sales made hereunder shall,
under any circumstances, create an implication that there has been no change in
our affairs since the date hereof.
PROSPECTUS SUMMARY
The following is only a summary of the information, financial statements and the
notes included in this prospectus. You should read the entire prospectus
carefully, including "Risk Factors" and our Financial Statements and the notes
to the Financial Statements before making any investment decision.
OUR COMPANY
CYBERLUX CORPORATION (we, the "Company" or "Cyberlux") is a Nevada corporation
and was incorporated on May 17, 2000. Our articles were amended on April 3,
2003, to authorize us to issue up to 100,000,000 shares of common stock at a par
value of $0.001 per share and 5,000,000 shares of preferred stock at a par value
of $0.001 per share.
Our management founded the Company to design, develop, manufacture, market and
sell advanced lighting systems that utilize white (and other) light emitting
diodes as illumination elements. The business of the Company is conducted
through outsource relationships with specific professionals who are engaged
based upon tasks in which they are credentialed specialists. Management decided
from the outset that skills in industrial design, electrical engineering,
injection mold development, packaging, product assembly, testing and delivery
functions would, from an economic perspective, be best conducted through
contract relationships with professional firms rather than through a large,
diverse employee base. Although the diode illumination industry is in its
infancy, these lighting systems offer the potential to make continued
advancements in illumination technology. Light emitting diodes (LEDs) consume
90% less energy than their incandescent counterparts to produce a comparable
lumen output. Fluorescent tubes are similar to incandescent bulbs in life light
by virtue of the fact that both elements burn. Diodes do not burn. Instead,
diodes convert electrical current to electromagnetic energy that produces light
without heat. A lumen is a unit of measure used to determine light intensity. We
believe that in electrochemical (battery powered) applications, this decrease in
energy consumption positions our lighting solutions as a much more durable and
reliable lighting source than other alternatives. In standard electrical current
applications, the calculated life of diodes as lighting elements is over ten
years versus hours for traditiona1 incandescent or fluorescent bulbs. The
performance characteristics of diminutive energy consumption and extended life
have prompted LED implementation in traffic lights and brake lights, and to a
lesser degree in our area of focus, diode illumination.
Our principal place of business is located at 50 Orange Road, PO Box 2010,
Pinehurst, North Carolina 28370 and our telephone number at that address is
(910) 235-0066.
1
THE OFFERING
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TOTAL COMMON STOCK OFFERED 30,244,704
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COMMON STOCK UPON CONVERSION OF PREFERRED STOCK 7,750,000
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COMMON STOCK UNDERLYING SERIES A WARRANTS 7,750,000
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COMMON STOCK UNDERLYING SERIES B WARRANTS 7,750,000
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COMMON STOCK UNDERLYING PLACEMENT AGENT WARRANTS 4,750,000
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Offering price of the common stock issuable $0.25
upon exercise of the Series A warrants
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Offering price of the common stock issuable $1.05
upon exercise of the Series B warrants
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COMMON STOCK OUTSTANDING BEFORE THE OFFERING(1) 11,814,905
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COMMON STOCK OUTSTANDING AFTER THE OFFERING (2) 42,059,609
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OTC Bulletin Board Symbol CYBL
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1. Based on shares outstanding as of December 31, 2003.
2. Assumes the exercise in full of all outstanding Series A and Series B
warrants, including the warrants issued to our placement agent, H.C.
Wainwright & Co., Inc., and its designees.
USE OF PROCEEDS
We will use the net proceeds from the sale of our common stock issuable upon
exercise of the Series A warrants and Series B warrants for working capital and
general corporate purposes. We will not receive any of the proceeds from the
sale of shares of our common stock hereunder by the selling shareholders. See
"Use of Proceeds."
RISK FACTORS
The securities offered hereby involve a high degree of risk and immediate
substantial dilution and should not be purchased by investors who cannot afford
the loss of their entire investment. See "Risk Factors" and "Dilution."
DIVIDEND POLICY
We do not intend to pay dividends on our common stock. We plan to retain any
earnings for use in the operation of our business and to find future growth.
OVER-THE-COUNTER BULLETIN BOARD SYMBOL: CYBL
2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of our Financial Statements, which are included
elsewhere in this prospectus. You should read the following data together with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus as well as with our Financial Statements
and the notes therewith.
STATEMENT OF OPERATION DATA
THE YEAR ENDED
December 31, 2002
-----------------
Revenues $ --
Cost of Goods Sold --
Management & consulting fees - related parties 350,504
General & administrative expenses 179,162
Total operation expenses 603,184
(Loss) from operations (603,184)
Net (loss) (700,104)
Net loss per share - basic and diluted $ (.11)
BALANCE SHEET DATA:
DECEMBER 31, 2002
(Audited)
Cash $ 26,086
Prepaid design services 20,000
Accounts Receivable --
Total Current Assets 46,086
Fixed Assets (Net of accumulated depreciation of $23,050) 79,443
Other Assets: --
Deposit 8,614
-----------
Total Assets $ 134,143
===========
Current Liabilities 44,427
Accrued Interest 95,971
Other Accrued Liabilities
Management fees payable - related party 546,508
Short-term notes payable - shareholders 123,545
Short-term notes payable 365,000
-----------
Total current liabilities $ 1,175,451
Common stock 6,628
Additional paid-in capital 745,593
Subscription receivable (2,500)
(Deficit)accumulated during development stage (1,791,029)
-----------
Total Deficiency stockholders' equity $(1,041,308)
$ 134,143
===========
3
RISK FACTORS
THE SECURITIES OFFERED ARE HIGHLY SPECULATIVE. YOU SHOULD PURCHASE THEM ONLY IF
YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT IN US. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS ALL OTHER INFORMATION IN THIS
PROSPECTUS.
CERTAIN IMPORTANT FACTORS MAY AFFECT OUR ACTUAL RESULTS AND COULD CAUSE THOSE
RESULTS TO DIFFER SIGNIFICANTLY FROM ANY FORWARD-LOOKING STATEMENTS MADE IN THIS
PROSPECTUS OR OTHERWISE MADE BY US OR ON OUR BEHALF. FOR THIS PURPOSE, ANY
STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL
FACT SHOULD BE CONSIDERED TO BE FORWARD-LOOKING STATEMENTS. WORDS SUCH AS "MAY,"
"EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE," OR "CONTINUE"
OR THE NEGATIVES OF THOSE WORDS, IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS AND INCLUDE
STATEMENTS AS TO OUR INTENT, BELIEF OR EXPECTATIONS. THESE FORWARD- LOOKING
STATEMENTS ARE SUBJECT TO THE RISKS DETAILED BELOW OR ELSEWHERE IN THIS
PROSPECTUS, OR DETAILED FROM TIME TO TIME IN OUR FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION. SEE "RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS" ON
PAGE 9.
INVESTORS SHOULD ASSUME THAT, EVEN IF NOT SPECIFICALLY STATED WITHIN THIS
DOCUMENT, IF ANY OF THE FOLLOWING RISKS ACTUALLY MATERIALIZE, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF FUTURE OPERATIONS COULD BE MATERIALLY AND
ADVERSELY AFFECTED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
Risk related to our business
We have historically lost money and losses may continue in the future.
We have a history of losses. We have incurred an operating loss since inception
and had an accumulated deficit of $1,791,029 as of December 31, 2002. We
incurred a net loss of $(700,104) or $(.11) per share for the year ended
December 31, 2002. Future losses are likely to continue unless we successfully
implement our revised business plan. Our independent auditors have noted that
due to the substantial losses incurred during fiscal year 2002 and 2001, a
working capital deficit as well as a stockholders deficit of $(2,170,673) raise
substantial doubts about our ability to continue as a going concern. No
assurances can be given that we will be successful in reaching or maintaining
profitable operations. If we are not successful in reaching and maintaining
profitable operations we may not be able to attract sufficient capital to
continue our operations. Our inability to obtain adequate financing will result
in the need to curtail business operations and will likely result in a lower
stock price.
We may need to raise additional capital to finance operations.
We have relied on significant external financing to fund our operations. Such
financing has historically come from a combination of borrowing from third
parties and funds provided by certain officers and directors. We will need to
raise additional capital to fund our anticipated operating expenses and future
expansion. Among other things, external financing may be required to cover our
operating costs. We cannot assure you that financing whether from external
sources or related parties will be available if needed or on favorable terms.
The sale of our common stock to raise capital may cause dilution to our existing
shareholders. Our inability to obtain adequate financing will result in the need
to curtail business operations. Any of these events would be materially harmful
to our business and may result in a lower stock price.
4
We have been the subject of a going concern opinion from our independent
auditors, which means that we may not be able to continue operations unless we
obtain additional funding.
Our independent auditors have added in their audit reports for December 31, 2002
and 2001 a going concern statement. Our ability to continue as a going concern
depends on our ability to obtain additional funding. Our inability to obtain
adequate financing will result in the need to curtail business operations and
you could lose your entire investment. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Our common stock is deemed to be "Penny Stock" which may make it more difficult
for investors to sell their shares due to suitability requirements.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stock:
(1) With a price of less than $5.00 per share;
(2) That are not traded on a "recognized" national exchange;
(3) Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
(4) In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We could fail to attract or retain key personnel which could cause time away
from operations to recruit and train replacements.
Our success largely depends on the efforts and abilities of our key executives
and consultants, including Donald F. Evans, our CEO. The loss of the
services of Mr. Evans could materially harm our business because of the cost and
time necessary to recruit and train a replacement. Such a loss would also divert
management attention away from operational issues. We do not presently maintain
a key-man life insurance policy on Mr. Evans.
We may be unable to manage growth which could prevent our business from growing.
Successful implementation of our business strategy requires us to manage our
growth. Growth could place an increasing strain on our management and financial
resources. To manage growth effectively, we will need to:
(1) Implement changes in certain aspects of our business;
(2) Enhance our information systems and operations to respond to
increased demand;
(3) Attract and retain qualified personnel; and Develop, train and
manage an increasing number of management-level and other employees.
If we fail to manage our growth effectively, our business, financial condition
or operating results could be materially harmed, and our stock price may
decline.
5
Limited operating history; anticipated losses; uncertainty of future results.
We were incorporated in May, 2000 and therefore have a limited operating history
upon which an evaluation of our Company and our prospects can be based. Our
prospects must be evaluated with a view to the risks encountered by a company in
an early stage of development, particularly in light of the uncertainties
relating to the new and evolving products and methods which we intend to develop
and market, and the acceptance of our business model. We will be incurring costs
to: (i) design, develop, manufacture and market our products; (ii) to establish
distribution relationships; and (iii) to build an organization. To the extent
that such expenses are not subsequently followed by commensurate revenues, our
business, results of operations and financial condition will be materially
adversely affected. We, therefore, cannot insure that we will be able to
immediately generate sufficient revenues. We expect negative cash flow from
operations to continue for the next 12 months as we continue to develop and
market our business. If cash generated by operations is insufficient to satisfy
our liquidity, we may be required to sell additional equity or debt securities.
The sale of additional equity or convertible debt securities would result in
additional dilution to our stockholders. Our initial operations may not be
profitable, since time will be required to build our business to the point that
our revenues will be sufficient to cover our total operating costs and expenses.
Our reaching a sufficient level of sales revenues will depend upon a large
number of factors, including availability of sufficient working capital, the
number of customer we are able to attract, and the costs of manufacturing and
distributing our products.
Liquidity and working capital risks; Need for additional capital to finance
growth and capital requirements.
We have had limited working capital and we are relying upon notes (borrowed
funds) to operate. We may seek to raise capital from public or private equity or
debt sources to provide working capital to meet our general and administrative
costs until net revenues make the business self-sustaining. We cannot guarantee
that we will be able to raise any such capital on terms acceptable to us or at
all. Such financing may be upon terms that are dilutive or potentially dilutive
to our stockholders. If alternative sources of financing are required, but are
insufficient or unavailable, we will be required to modify our growth and
operating plans in accordance with the extent of available funding.
New business which could limit our ability to generate revenues and prevent our
business from growing.
We are a new business and you should consider factors which could adversely
affect our ability to generate revenues, which include, but are not limited to,
maintenance of positive cash flow, which depends on our ability both to raise
capital and to obtain additional financing as required, as well as the level of
sales revenues.
Lack of independent directors which could prevent potential for conflicts of
interest.
We cannot guarantee that our Board of Directors will have a majority of
independent directors in the future. In the absence of a majority of independent
directors, our executive officers, who are also principal stockholders and
directors, could establish policies and enter into transactions without
independent review and approval thereof. This could present the potential for a
conflict of interest between the Company and its stockholders generally and the
controlling officers, stockholders or directors.
Limitation of liability and indemnification of officers and directors.
Our officers and directors are required to exercise good faith and high
integrity in our Management affairs. Our Articles of Incorporation provide,
however, that our officers and directors shall have no liability to our
shareholders for losses sustained or liabilities incurred which arise from any
transaction in their respective managerial capacities unless they violated their
duty of loyalty, did not act in good faith, engaged in intentional misconduct or
knowingly violated the law, approved an improper dividend or stock repurchase,
or derived an improper benefit from the transaction. Our Articles and By-Laws
also provide for the indemnification by us of the officers and directors against
any losses or liabilities they may incur as a result of the manner in which they
operate our business or conduct the internal affairs, provided that in
connection with these activities they act in good faith and in a manner that
they reasonably believe to be in, or not opposed to, the best interests of the
Company, and their conduct does not constitute gross negligence, misconduct or
breach of fiduciary obligations. To further implement the permitted
indemnification, we have entered into Indemnity Agreements with our officers and
directors.
6
Continued control by current officers and directors and therefore you will have
no voice in management.
The present officers and directors own approximately 27.5% of the outstanding
shares of Common Stock, and therefore are in a position to elect all of our
Directors and otherwise control the Company, including, without limitation,
authorizing the sale of equity or debt securities of the Company, the
appointment of officers, and the determination of officers' salaries.
Shareholders have no cumulative voting rights. (See Security Ownership of
Certain Beneficial Owners and Management)
Delays in the introduction of our products have hampered our growth.
We have experienced numerous delays in the introduction of our initial product,
the Home Safety Light. These delays have been caused by certain requirements
from various retailers such as seasonal schedules to review certain products,
changes in personnel who review the products, problems with pricing and
packaging.
Dependence on independent parties to produce our products could affect our
production and sales capabilities.
We have out sourced the design, engineering, production, assembly, marketing and
sale of our product through contractual arrangements with independent
professional firms. Although the design, engineering, production and assembly
contractors are shareholders in the Company, the loss of one or all of these
firms could seriously affect our production and sales capabilities.
If the lawsuit we filed against Light Technology, Inc. is ruled against us, it
could have serious financial consequences.
On April 18, 2001, we filed a civil complaint against Light Technology, Inc. and
others. Light Technology has filed a counterclaim (See "Legal Proceedings", page
24). Although we are of the opinion that we have meritorious claims against the
defendants, a ruling against us could have serious financial consequences.
Our common stock may be affected by limited trading volume and may fluctuate
significantly.
Before this offering, our common stock has traded on the Over-the-Counter
Bulletin Board. Our common stock is thinly traded compared to larger more widely
known companies in our industry. Thinly traded common stock can be more volatile
than common stock trading in an active market.
Prior to this offering, there has been a limited public market for our common
stock and there can be no assurance that an active trading market for our common
stock will develop. As a result, this could adversely affect our shareholders'
ability to sell our common stock in short time periods, or possibly at all. Our
common stock has experienced, and is likely to experience in the future,
significant price and volume fluctuations which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially.
Potential inability of officers to devote sufficient time to the operations of
the business could affect the Company's growth.
Although we have five (5) employees who consider themselves full time employees,
none have been paid salaries from the inception of the Company. They continue to
pursue other sources of income and may not be able to devote sufficient time to
the operations of the business.
We do not anticipate paying cash dividends
We have not paid any cash dividends on our capital stock and we anticipate that
our future earnings, if any, will be retained for use in the business, or for
other corporate purposes. It is not anticipated that any cash dividends on the
common stock will be paid in the foreseeable future. See "Dividend Policy" and
"Description of Securities."
7
RISKS RELATED TO THIS OFFERING
Future sales by our stockholders may adversely affect our ability to raise funds
in new stock offerings.
Sales of our common stock in the public market following this offering could
lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all.
Of the 11,814,905 shares of common stock outstanding as of December 31, 2003,
1,140,966 are freely tradable without restriction. The remaining 10,673,939
shares of common stock held by existing stockholders are "restricted securities"
and may be resold in the public market only if registered or pursuant to an
exemption from registration. Some of these shares may be resold under Rule 144.
Immediately following the effective date of this prospectus, the common stock
and the preferred stock will be freely tradable without restriction, unless held
by our "affiliates."
Upon completion of this offering, and assuming all shares registered in this
offering are resold in the public market, and all Series A and Series B warrants
are exercised, there will be an additional 30,174,499 shares of common stock
outstanding. All of these shares of common stock may be immediately resold in
the public market upon effectiveness of the accompanying registration statement.
Our common stock has been relatively thinly traded and we cannot predict the
extent to which a trading market will develop.
Before this offering, our common stock has traded on the Over-the-Counter
Bulletin Board. Our common stock is thinly traded compared to larger more widely
known companies in our industry. Thinly traded common stock can be more volatile
than common stock trading in an active public market. We cannot predict the
extent to which an active public market for the common stock will develop or be
sustained after this offering.
8
FORWARD-LOOKING STATEMENTS
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements regarding
management's plans and objectives for future operations including plans and
objectives relating to our planned marketing efforts and future economic
performance. The forward-looking statements and associated risks set forth in
this prospectus include or relate to, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our ability to obtain and retain sufficient capital for future
operations, (e) our ability to achieve adequate intellectual property protection
for our future products and (f) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis or Plan of
Operations" and "Business," as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under "Risk Factors" and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this prospectus will in fact
occur.
The forward-looking statements herein are based on current expectations that
involve a number of risks and uncertainties. Such forward-looking statements are
based on assumptions that that demand for our products will significantly
increase, that our President will remain employed as such, that our forecasts
accurately anticipate market demand, and that there will be no material adverse
change in our operations or business or in governmental regulations affecting us
or our manufacturers and/or suppliers. The foregoing assumptions are based on
judgments with respect to, among other things, future economic, competitive and
market conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Accordingly, although we believe that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. In addition, as disclosed
elsewhere in the "Risk Factors" section of this prospectus, there are a number
of other risks inherent in our business and operations which could cause our
operating results to vary markedly and adversely from prior results or the
results contemplated by the forward-looking statements. Growth in absolute and
relative amounts of cost of goods sold and selling, general and administrative
expenses or the occurrence of extraordinary events could cause actual results to
vary materially from the results contemplated by the forward-looking statements.
Management decisions, including budgeting, are subjective in many respects and
periodic revisions must be made to reflect actual conditions and business
developments, the impact of which may cause us to alter marketing, capital
investment and other expenditures, which may also materially adversely affect
our results of operations. In light of significant uncertainties inherent in the
forward-looking information included in this prospectus, the inclusion of such
information should not be regarded as a representation by us or any other person
that our objectives or plans will be achieved.
Some of the information in this prospectus contains forward-looking statements
that involve substantial risks and uncertainties. Any statement in this
prospectus and in the documents incorporated by reference into this prospectus
that is not a statement of an historical fact constitutes a "forward-looking
statement". Further, when we use the words "may", "expect", "anticipate",
"plan", "believe", "seek", "estimate", "internal", and similar words, we intend
to identify statements and expressions that may be forward- looking statements.
We believe it is important to communicate certain of our expectations to our
investors. Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions that could cause our future
results to differ materially from those expressed in any forward-looking
statements. Many factors are beyond our ability to control or predict. You are
accordingly cautioned not to place undue reliance on such forward-looking
statements. We have no obligation or intent to update publicly any forward-
looking statements whether in response to new information, future events or
otherwise. Important factors that may cause our actual results to differ from
such forward-looking statements include, but are not limited to, the risk
factors discussed below. Before you invest in our common stock, you should be
aware that the occurrence of any of the events described under "Risk Factors"
below or elsewhere in this prospectus could have a material adverse effect on
our business, financial condition and results of operation. In such a case, the
trading price of our common stock could decline and you could lose all or part
of your investment.
9
SELLING STOCKHOLDERS
The following table sets forth the number of shares owned, and/or issuable
upon exercise of the warrants held, by each of the selling stockholders. Unless
otherwise indicated below, none of the selling stockholders has held any
position or office, or has otherwise had a material relationship, with us within
the past three years other than as a result of the ownership of shares or other
securities of Cyberlux.
No estimate can be given as to the amount of shares that will be held by
the selling stockholders after completion of this offering because the selling
stockholders may offer all or some of the shares and because there are currently
no agreements, arrangements or understandings with respect to the sale of any of
the shares. The shares offered by this prospectus may be offered from time to
time by the selling stockholders named below. The table sets forth, to our
knowledge, certain information about the selling stockholders as of January 28,
2004.
Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting or investment power with respect to shares. Shares of common
stock issuable under warrants that are exercisable within 60 days of December
31, 2003 and shares of common stock issuable upon conversion of the Series A
Preferred Stock are deemed outstanding for purposes of computing the percentage
ownership of the person holding the warrants or Series A Preferred Stock but are
not deemed outstanding for purposes of computing the percentage ownership of any
other person. Unless otherwise indicated below, to our knowledge, all persons
named in the table have sole voting and investment power with respect to their
shares of common stock, except to the extent authority is shared by spouses
under applicable law. The inclusion of any shares in this table does not
constitute an admission of beneficial ownership for the person named below.
The terms of the Series A Preferred Stock and warrants whose underlying
shares of common stock are included for resale under this prospectus prohibit
conversion of the Series A Preferred Stock and exercise of the warrants to the
extent that conversion of the Series A Preferred Stock and exercise of the
warrants would result in the holder, together with its affiliates, beneficially
owning in excess of 4.99% of our outstanding shares of common stock. A holder
may waive the 4.99% limitation upon 61 days' notice to us. Also this limitation
does not preclude the holder from converting or exercising the Series A
Preferred or warrants and selling shares underlying the preferred stock or
warrants in stages over time where each stage does not cause the holder and its
affiliates to beneficially own shares in excess of the limitation amount.
10
The following table presents information regarding the selling stockholders:
Number of Shares of Percent of
shares of Issuable upon Issuable upon Issuable upon common stock outstanding
common stock conversion of exercise of exercise of to be shares
beneficially Series A Series A Series B beneficially beneficially
owned as of Preferred Warrants @ Warrants @ owned after owned after
Name of Selling Stockholder 12/31/03 Stock (1) $0.25 (2) $1.05 (3) offering (4) offering (5)
------------------------------------------------------------------------------------------------------------------------------------
Arla Sheinwald 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Bruce W. Bryde 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Charles O'Brien 50,000 50,000 50,000 150,000 *
------------------------------------------------------------------------------------------------------------------------------------
Christina Crossman 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
David Bromberg 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
David S Nagelberg 2003 Rev Tr 237,500 237,500 237,500 712,500 1.69
------------------------------------------------------------------------------------------------------------------------------------
David W. Eckert 50,000 50,000 50,000 150,000 *
------------------------------------------------------------------------------------------------------------------------------------
Debbie Miller 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Dennis R. Steinke 125,000 125,000 125,000 375,000 *
------------------------------------------------------------------------------------------------------------------------------------
Dominic Thomas Coletta 50,000 50,000 50,000 150,000 *
------------------------------------------------------------------------------------------------------------------------------------
Emmet L. Goodman, Jr 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
F.B. Bywater 125,000 125,000 125,000 375,000 *
------------------------------------------------------------------------------------------------------------------------------------
Gary W. Callicott 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
George E. Flyth 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Jacob Engel 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Jericho Investments LLC 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
John G. Lechner 25,000 25,000 25,000 75,000 *
------------------------------------------------------------------------------------------------------------------------------------
John Huie 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Jonathan Wachs 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Katherine Kurzman 650,000 650,000 650,000 1,950,000 4.64
------------------------------------------------------------------------------------------------------------------------------------
Kenneth F. Oswald 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
Larry R. Stessel 125,000 125,000 125,000 375,000 *
------------------------------------------------------------------------------------------------------------------------------------
Lon E. Bell 500,000 500,000 500,000 1,500,000 3.57
------------------------------------------------------------------------------------------------------------------------------------
Lyder R. Johnson 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
M. Mark Castellano, II 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
Mark Wachs 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Neal M. Goldstein 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Patrick J. Armstrong 125,000 125,000 125,000 375,000 *
------------------------------------------------------------------------------------------------------------------------------------
Phoenix Group Consultants, Inc. 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
R. Keith Fetter 150,000 150,000 150,000 450,000 *
------------------------------------------------------------------------------------------------------------------------------------
Robert G. Dello Russo 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Robert G. & Cynthia D. Lewis 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
Robert Mittleman 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Ronald E. Gee 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Ronald I. Heller Rev TR 12/23/97 237,500 237,500 237,500 712,500 1.69
------------------------------------------------------------------------------------------------------------------------------------
Stephen B. Armstrong 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Stephen W. Gropp 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Thomas Terry 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Thomas V. Marianacci 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Vic T. Luong 250,000 250,000 250,000 750,000 1.78
------------------------------------------------------------------------------------------------------------------------------------
Ward I. Snyder 150,000 150,000 150,000 450,000 *
------------------------------------------------------------------------------------------------------------------------------------
William A. Cohen 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
William V. Castellano 100,000 100,000 100,000 300,000 *
------------------------------------------------------------------------------------------------------------------------------------
Wilson A. Knott 200,000 200,000 200,000 600,000 1.42
------------------------------------------------------------------------------------------------------------------------------------
Richard L. Berkley 75,000 75,000 *
------------------------------------------------------------------------------------------------------------------------------------
Marc A. Haskell 75,000 75,000 *
------------------------------------------------------------------------------------------------------------------------------------
Alan Sheinwald 75,000 75,000 *
------------------------------------------------------------------------------------------------------------------------------------
3CD Consulting, LLC 800,000 800,000 1.90
------------------------------------------------------------------------------------------------------------------------------------
Robert Ruben 10,000 10,000 *
------------------------------------------------------------------------------------------------------------------------------------
Stanley Wunderlich 185,000 125,000 *
------------------------------------------------------------------------------------------------------------------------------------
Bonnie Stretch 25,000 25,000 *
------------------------------------------------------------------------------------------------------------------------------------
11
Number of Shares of Percent of
shares of Issuable upon Issuable upon Issuable upon common stock outstanding
common stock conversion of exercise of exercise of to be shares
beneficially Series A Series A Series B beneficially beneficially
owned as of Preferred Warrants @ Warrants @ owned after owned after
Name of Selling Stockholder 12/31/03 Stock (1) $0.25 (2) $1.05 (3) offering (4) offering (5)
------------------------------------------------------------------------------------------------------------------------------------
Titan Entertainment Group, LLC 100,000 100,000 *
------------------------------------------------------------------------------------------------------------------------------------
Carothers H. Evans 140,000 140,000 *
------------------------------------------------------------------------------------------------------------------------------------
Heidi H. Evans 25,000 25,000 *
------------------------------------------------------------------------------------------------------------------------------------
John S. Evans 50,000 50,000 *
------------------------------------------------------------------------------------------------------------------------------------
Katherine D. Evans 50,000 50,000 *
------------------------------------------------------------------------------------------------------------------------------------
Mary Margaret Evans 100,000 100,000 *
------------------------------------------------------------------------------------------------------------------------------------
David S. Goodman 5,000 5,000 *
------------------------------------------------------------------------------------------------------------------------------------
Rufus Sherill 10,000 10,000 *
------------------------------------------------------------------------------------------------------------------------------------
John W. Walker 20,000 20,000 *
------------------------------------------------------------------------------------------------------------------------------------
Sidney T. Walker, III 5,000 5,000 *
------------------------------------------------------------------------------------------------------------------------------------
Jake Zapalac 5,000 5,000 *
------------------------------------------------------------------------------------------------------------------------------------
Advanced Alloys, Inc. 44,314 34,109 *
------------------------------------------------------------------------------------------------------------------------------------
Ray L. Jennings 73,284 73,284 *
------------------------------------------------------------------------------------------------------------------------------------
Katherine H. Vaughn 33,284 33,284 *
------------------------------------------------------------------------------------------------------------------------------------
E.W. and Thomas H. Parry 33,284 33,284 *
------------------------------------------------------------------------------------------------------------------------------------
Donna Mondik 2,132 2,132 *
------------------------------------------------------------------------------------------------------------------------------------
Merritt and Elizabeth Downing 3,837 3,837 *
------------------------------------------------------------------------------------------------------------------------------------
Donald A. Duquette 2,219 2,219 *
------------------------------------------------------------------------------------------------------------------------------------
Craig and Stacey Orr 4,203 4,203 *
------------------------------------------------------------------------------------------------------------------------------------
Ray L. and Dolores Jennings 4,236 4,236 *
------------------------------------------------------------------------------------------------------------------------------------
Adam D. Haas 4,530 4,530 *
------------------------------------------------------------------------------------------------------------------------------------
Amy Elizabeth Haas 4,530 4,530 *
------------------------------------------------------------------------------------------------------------------------------------
Robert A. and Joy L Kerr 4,000 4,000 *
------------------------------------------------------------------------------------------------------------------------------------
Erik A. and Marlene Kerr 4,000 4,000 *
------------------------------------------------------------------------------------------------------------------------------------
Brian and Heather Matthews 4,000 4,000 *
------------------------------------------------------------------------------------------------------------------------------------
Frank and Connie Yankovitch 10,000 10,000 *
------------------------------------------------------------------------------------------------------------------------------------
David and Rose Kowcheck 8,000 8,000 *
------------------------------------------------------------------------------------------------------------------------------------
David A. Kowcheck 40,000 40,000 *
------------------------------------------------------------------------------------------------------------------------------------
Harry R. and Nancy Johnston 4,000 4,000 *
------------------------------------------------------------------------------------------------------------------------------------
SueAnn Schatz 4,000 4,000 *
------------------------------------------------------------------------------------------------------------------------------------
Joan K. Haas 20,000 20,000 *
------------------------------------------------------------------------------------------------------------------------------------
Brian Scott 90,000 90,000 *
------------------------------------------------------------------------------------------------------------------------------------
Eric M. Oliver 10,000 10,000 *
------------------------------------------------------------------------------------------------------------------------------------
B.E. Coone 20,000 20,000 *
------------------------------------------------------------------------------------------------------------------------------------
Tammy L. Oliver 10,000 10,000 *
------------------------------------------------------------------------------------------------------------------------------------
Christine Frost 10,000 10,000 *
------------------------------------------------------------------------------------------------------------------------------------
Thomas W. Parry 10,000 10,000 *
------------------------------------------------------------------------------------------------------------------------------------
Thomas L. and Cheryl L. Rose 11,292 11,292 *
------------------------------------------------------------------------------------------------------------------------------------
Jonathan D. Mader 10,364 10,364 *
------------------------------------------------------------------------------------------------------------------------------------
Mary Rooks 10,195 10,195 *
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 2,244,704 7,750,000 7,750,000 7,750,000 25,494,704
------------------------------------------------------------------------------------------------------------------------------------
* Less than 1%.
(1) Includes shares issuable upon conversion of Series A Preferred Stock.
(2) Includes exercise of Series A warrants @ $0.25 per share.
12
(3) Includes exercise of Series B warrants @ $1.05 per share.
(4) We do not know when or in what amounts a selling stockholder may offer
shares for sale. The selling stockholders may not sell any or all of the
shares offered by this prospectus. Because the selling stockholders may
offer all or some of the shares pursuant to this offering, and because
there are currently no agreements, arrangements or understandings with
respect to the sale of any of the shares, we cannot estimate the number of
the shares that will be held by the selling stockholders after completion
of the offering. However, for purposes of this table, we have assumed
that, after the completion of the offering, none of the shares covered by
this prospectus will covered by this prospectus will be held by the
selling stockholders.
(5) For each selling stockholder, this number represents the percentage of
common stock to be owned by such selling stockholder after completion of
the offering, based on the number of shares of common stock outstanding as
of December 31, 2003 ( 42,059,609 ) and assuming conversion of all Series
A Preferred Stock and exercise of all of the Series A and Series B
warrants.
13
The following table sets forth the selling stockholders with respect to shares
of common stock underlying the placement agent warrants:
-------------------------------------------------------------------------------------------------
Number of Number of Number of Number of
shares shares shares shares
issuable issuable issuable issuable
upon upon upon upon
exercise of exercise of exercise of exercise of
placement placement placement placement
agent agent agent agent
warrants warrants warrants @ warrants
@ $0.01 @ $0.10 $0.25 @ $1.05 Total
-------------------------------------------------------------------------------------------------
H.C. Wainwright & Co., Inc. 35,000 775,000 775,000 775,000 2,360,000
-------------------------------------------------------------------------------------------------
John Clarke (1) 65,000 740,000 740,000 740,000 2,285,000
-------------------------------------------------------------------------------------------------
Robert Nathan (2) 35,000 35,000 35,000 105,000
-------------------------------------------------------------------------------------------------
Total 100,000 1,550,000 1,550,000 1,550,000 4,750,000
-------------------------------------------------------------------------------------------------
(1) John Clarke is a managing director of the placement agent.
(2) Robert Nathan is a senior vice president of the placement agent.
DETERMINATION OF OFFERING PRICE
The price at which the shares may actually be sold will be determined by the
market price of the common stock as of the date of sale.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of our common
stock hereunder by the selling stockholders.
Assuming the Series A warrants to purchase an aggregate of 7,750,000 shares of
our common stock issued to the investors in the December 2003 private placement
are exercised in full at a price per share of $0.25, we will receive proceeds of
$1,937,500 from such exercise. Further assuming that the Series B warrants to
purchase an aggregate of 7,750,000 shares of our common stock are subsequently
exercised in full at a price per share of $1.05, we could receive additional net
proceeds of up to $8,137,500 from such exercise.
Because the placement agent warrants issued to the placement agent in our
private placement contain a cashless exercise provision which we anticipate will
be used in connection with its exercise of warrants, we do not anticipate that
we will receive proceeds from such exercises.
Although we have not yet formulated a specific plan, we intend to use a
significant portion of the net proceeds from the exercise of the Series A and
Series B warrants, if any, for additional working capital, operations, personnel
and other general corporate purposes, including research and development
expenditures and general and administrative expenditures. We also plan to
satisfy certain payment obligations.
DIVIDEND POLICY
It is our present policy not to pay cash dividends and to retain future earnings
for use in the operations of the business and to fund future growth. Any payment
of cash dividends in the future will be dependent upon the amount of funds
legally available, our earnings, financial condition, capital requirements and
other factors that the Board of Directors may think are relevant. We do not
contemplate or anticipate paying any dividends on the common stock in the
foreseeable future.
PLAN OF DISTRIBUTION
The selling security holders and any of its donees, pledgees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of our common stock being offered under this prospectus on any
stock exchange, market or trading facility on which the shares are traded or in
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holder may use any one or
more of the following methods when selling shares:
14
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
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 resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o broker-dealers may agree with the selling security holder to sell a
specified number of shares at a stipulated price per share;
o through the settlement of short sales;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to time.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holder has
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if it deems the purchase price to be unsatisfactory at any
particular time.
The selling security holders may pledge their shares to their broker under
the margin provisions of customer agreements. If the selling security holders
default on a margin loan, the broker may, from time to time, offer and sell the
pledged shares. Broker-dealers engaged by the selling security holders may
arrange for other broker-dealers to participate in sales. Broker-dealers may
receive commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In that event, any
commissions received by these 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.
The selling security holders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. To our knowledge,
no selling security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If the selling security holder informs us that it has entered into
such an agreement or agreements, the relevant details will be set forth in a
supplement or revisions to this prospectus.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
security holders or any other such person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
15
Cyberlux Corporation is required to pay all fees and expenses incident to
the registration of the shares and has agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act of 1933.
H.C. Wainwright & Co., Inc. acted as placement agent in connection with
the transaction with the Selling Shareholders and received a cash fee of
$77,563.93.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF CYBERLUX AND THE NOTES THERETO APPEARING ELSEWHERE IN
THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL
OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
When used in this Form SB-2 and in our future filings with the Securities and
Exchange Commission, the words or phrases will likely result, management
expects, or we expect, will continue, is anticipated, estimated or similar
expressions are intended to identify forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. These statements are subject to
risks and uncertainties, some of which are described below. Actual results may
differ materially from historical earnings and those presently anticipated or
projected. We have no obligation to publicly release the result of any revisions
that may be made to any forward-looking statements to reflect anticipated events
or circumstances occurring after the date of such statements.
GENERAL OVERVIEW
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.
REVENUES
We have generated operating revenues $87,375 from operations from our inception.
We believe we will begin earning revenues from operations in our second year of
actual operation as the Company transitions from a development stage company to
that of an active growth and acquisition stage company.
COSTS AND EXPENSES
From our inception through September 30, 2003, we have not generated any
revenues. We have incurred losses of $3,009,224 during this period. These
expenses were associated principally with equity-based compensation to employees
and consultants, product development costs and professional services.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we had a working capital deficit of $1,929,243. As a
result of our operating losses from our inception through September 30, 2003 we
generated a cash flow deficit of $753,951 from operating activities. Cash flows
used in investing activities was $135,494 during the period May 17, 2000 (date
of Company's inception) through September 30, 2003. We met our cash requirements
during this period through the private placement of $177,076 of common stock,
$512,455 from the issuance of notes (net of repayments and costs), $195,542 from
the issuance of notes payable to Company officers and shareholders On October
16, 2003, due to the change in pricing structure of our common stock on the
over-the- counter bulletin board, we mutually cancelled the equity line of
credit agreement with Cornell Capital Partners, LP which we entered into on
March 15,2003.
16
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 its operations and development to the level of capitalization ,
management believes it has 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
AUDITORS' OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
GOING CONCERN:
The independent auditors report on the company's December 31, 2002 financial
statements included in this Form states that the Company's recurring losses
raise substantial doubts about the Company's ability to continue as a going
concern.
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.
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 Extinguishments 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.
18
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.
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
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.
NUMBER OF EMPLOYEES
From our inception through the period ended December 31, 2002, we have relied on
the services of outside consultants for services and currently have five (5)
full time employees. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. We do
not anticipate our employment base will significantly change during the next 12
months. As we continue to expand, we will incur additional cost for personnel.
This projected increase in personnel is dependent upon our generating revenues
and obtaining sources of financing. There is no guarantee that we will be
successful in raising the funds required or generating revenues sufficient to
fund the projected increase in the number of employees.
19
TRENDS, RISKS AND UNCERTAINTIES
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
DESCRIPTION OF BUSINESS
PRINCIPAL PRODUCTS AND PRINCIPAL MARKETS
Cyberlux is a Nevada corporation (hereinafter "Cyberlux" or "the Company") that
was incorporated on May 17, 2000 and is capitalized with 100 million common
shares and 5 million preferred shares. The Company was 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 offer major advances in illumination
technology. The Cyberlux Gallium Nitride diodes consume 92% less energy than
incandescent or fluorescent counterparts to produce comparable lumen output. In
electrochemical (battery powered) applications, this remarkable diminution of
energy consumption position the Company's optoelectronic lighting solutions as
much more durable and far more reliable than other interim lighting
alternatives. In standard AC electrical applications, the calculated life of GaN
diodes as lighting elements is over 20 years versus 750 hours for traditional
incandescent bulbs. These exceptional performance characteristics, diminutive
energy consumption and extended life, have prompted GaN diode implementation in
traffic lights and automotive brake lights, but have not yet significantly
occurred in the Company's area of focus, diodal illumination (tm).
Cyberlux has successfully introduced its first product entry, the "Cyberlux Home
Safety Light" (HSL), through its web site, www.cyberlux.com. The Company's
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. The initial production of 10,000 HSLs was completed in
early October 2002 and has successfully demonstrated the Company's ability to
sustain volume production standards for up to 80,000 units per month at its
assembly and distribution center in Shelbyville, Illinois. We are now positioned
to broaden our product line consistent with emerging breakthroughs in
optoelectronic technology and expand our marketing activity into various
channels of retail and institutional sales. These recently achieved advances
enable substantial cost savings in production as they enhance product
performance and readily discernible value to the consumer. The product line (see
"Product Development"), Lazer Safety Light; PowerOutage Adapter; Failsafe Spot &
Lamp; and CampLamp, are fixtures that employ single use standard alkaline or
lithium ion constant charge reusable batteries in different applications. The
design of products is consistent with findings of market research conducted by
Howard, Merrell & Partners (HM&P), a member firm of InterPublic Group (IPG,
NYSE) wherein certain categories of emergency lighting or interim lighting
products were either underserved or non-existent due to the inherent
inefficiency of incandescent and fluorescent lighting elements. These fixtures
express superior characteristics in brightness, vastly 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 grossly inefficient
use of electrical energy (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 (GaN) diode provided the solution to energy efficiency
necessary to produce the long-term interim light source that was to be the
objective of the Company's 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 Spartan
characteristics of GaN diodes with their frugal demand for energy (92% less
energy to produce equal or superior brightness to that of a bulb) create
opportunity to manage energy through Cyberlux patented circuitry to produce a
family of superior products.
The Home Safety Light (illustrations at www.cyberlux.com) is an efficient
portable fixture that provides a full week of light from one set of AA
batteries. Any other portable light will require over 20 sets of replacement
batteries to produce comparable light life which suggests that the Home Safety
Light (HSL) pays for itself at initial purchase. The Lazer Safety Light is a
modification of the HSL. The PowerOutage Adapter, the FailSafe portable
spot/lamp; and the CampLamp Lantern are the next product introductions followed
by hard-wired systems that will transcend the performance and efficiency of
existing emergency lighting products at a significant reduction in initial cost
and recurring expense for maintenance of incandescent products.
20
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 (SCCS),
Shelbyville, Illinois, as a contract manufacture and assembly organization that
was well positioned to meet the requirements proposed by the Company. SCCS 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. SCCS is a not-for-profit
organization that provides job training for handicapped workers and supplements
its workforce with underemployed farm labor. It is generously supported by State
and Federal programs to ensure competitiveness.
We have a Proprietary Product Manufacturing Agreement with SCCS that provides
for SCCS to purchase all of the component parts for our products; conformance of
parts acquired to Cyberlux specifications; exact assembly of parts in accordance
with schematics; verified accountable tests of each unit prior to packaging;
individual packaging; finished goods inventory warehousing; palletized shipping
containment's per purchase orders; and loading for shipment FOB Shelbyville.
SCCS is paid 112% of component cost to cover assembly, packaging and
warehousing.
The www.Cyberlux.com internet site is serviced by SCCS through a fulfillment
operations agreement whereby SCCS receives a daily batched summary of internet
sales through an email link established by Cyberlux and United Parcel Service.
The Cyberlux/UPS 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 SCCS.
Packages are shipped within 24 hours of receipt of the email summary of business
for the preceding day's orders. SCCS coordinates materials inventory with
Cyberlux approved vendors based upon purchase orders or blanket orders for
products. Robrady Design, Inc., the Company's industrial design firm, is
instrumental in providing detailed working drawings for injection molded parts
to tool manufacturers in the US and abroad. Similarly, the Company's proprietary
circuitry design is managed by the engineering firm of ICT, Inc. in Casey,
Illinois. ICT, Inc., an international engineering firm, is well positioned to
manufacture the electronic platforms to precise specifications. Although the
boards are rigidly tested prior to shipment to Shelbyville, SCCS tests each
board on receipt consistent with the quality assurance protocols established by
Cyberlux. The initial production capacity at SCCS is 80,000 product units per
month which can be increased by 50% consistent with a four month lead time to
undertake expansion of facilities.
SCCS will continue to serve as the warehousing and distribution center for
Cyberlux products, such as the PowerOutage Adapter, FailSafe Spot/Lamp and
CampLamp Lantern, which are to be manufactured abroad. The SCCS center will
coordinate customs protocols and manage incoming inventories.
The Company, through its agreements with Shelby County Community Services
(SCCS), has successfully implemented its internet order fulfillment operation,
the Cyberlux Distribution Center, which services all product sales generated
from its web site, www.cyberlux.com, at the SCCS complex in Shelbyville,
Illinois. The system was designed internally under the supervision of Cyberlux
Senior Vice President, Al Ninneman, who worked with the ecommerce professionals
at United Parcel Service (UPS) to perfect the customized billing and delivery
service. The Cyberlux software verifies ZIP code and credit card information;
records delivery selection (UPS overnight, second day air or ground); calculates
the delivery charge by destination; batches orders daily; and prints the
delivery way bills at the Distribution Center for shipment the day following
receipt of the order. SCCS and Cyberlux share the handling charge of $2 per
order equally.
Although the internet site and its fulfillment system is designed to receive and
process orders in volume, the linkage of the site to the Weather Channel (and
other referring sources) is not yet in place. The Weather Channel has proposed
an advertising position for the Home Safety Light wherein 10 million impressions
per month will be guaranteed, but the cost of the exposure is $10 thousand per
month. Cyberlux intends to pursue the relationship with the Weather Channel and
others relative to direction of traffic to its web site after the Company is in
a position to fund selective media buys through a contract relationship with
Howard, Merrell & Partners. Selection of media exposures is an important part of
the marketing campaign, but equally important is the development of compelling
messages and images that inspire consumer interest in Cyberlux products. The
Company has worked with Howard, Merrell & Partners (HM&P), a member firm of the
InterPublic Group (IPG, NYSE), that specializes in market research/analysis,
brand creation, creative imaging, messaging and media purchase management.
HM&P's market analysis indicates a dominant role for diodal(TM) illumination in
the safety lighting category. The objective is a marketing program that quickly
demonstrates the superiority of Cyberlux products to any incandescent bulb
product on the market today, whether battery powered or hard wired, and the
cost-effectiveness of Cyberlux diodal illumination tm based upon light life and
energy efficiency. HM&P sees broad opportunities to position Cyberlux as the
brand leader in diodal illumination tm through specific illustrations in which
the Company's technology provides superior value over the "burning" light bulb.
21
Equally important in product and/or brand launch is the management of a "go to
market" strategy. Cyberlux has engaged CMG Partners (CMGP) to coordinate product
launch into a variety of sales channels. CMGP has broad based experience in both
the US and UK in telecom (Nextel, BT Cellnet, MCI), Internet (Verisign) and
technology introductions. The role of CMGP is to integrate marketing, sales,
product and customer support activities and messages to optimize customer
acquisition and retention. CMGP will serve 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.
Cyberlux has retained three experienced technology product sales firms, Smart
Products, Inc., Westwood, NJ; A. Calvert & Company, LLC, Canton, OH; and Brand &
Associates, Dallas, TX to represent its product line over the range of channels
addressed for distribution. The individual firms have been selected based upon
established relationships with certain retail channels and proven track records
of sales to those retailers assigned. A. Calvert & Company, in addition to its
market segment of baby product retailers and On-Air sales (Calvert represents
Cyberlux to QVC), is a highly successful retail packaging design firm.
On September 22, 2003, we entered into a factoring agreement with Capital
Funding Solutions, Inc. with regard to a purchase order from QVC.
On October 1, 2003, we retained Consulting for Strategic Growth 1, Ltd., an
investor relations and corporate development firm to coordinate our corporate
and investor communications.
RESEARCH AND DEVELOPMENT ACTIVITIES
EMERGENCY LIGHTING AUGMENTATION SYSTEM (PRODUCTION TITLE)
The Emergency Lighting Augmentation System (ELAS) was designed to provide a
long-term emergency lighting solution for commercial buildings. ELAS employs an
array of ultra-bright white diodes that are powered by constant charge batteries
and are controlled by a patented power sensor that is positioned to detect an
electrical failure in the building. ELAS is easily installed within existing
light fixtures and provides several days of bright white light versus 90 minutes
provided by "evacuation" lights, as mandated by fire codes. The recent
"blackout" caused by a massive power outage from Michigan to New York inspired
many government officials to recognize the danger of the inadequacy of existing
"emergency lights" and prompted a focus on long-term interim lighting solutions.
Cyberlux is engaged in a demonstrate its ELAS products with the City of
Cleveland, the epicenter of the August 2003 blackout. The Cleveland project
offers opportunity to demonstrate the cost/benefit effectiveness of ELAS and
suggests significant implementation prospects for the product in other
municipalities.
HOME SAFETY LIGHT (MARKET TITLE)
The Home Safety Light was designed to provide up to a full week of light from
one set of 8 AA batteries. The portable elliptical fixture contains an array of
6 white Nichia diodes and 4 amber diodes which are controlled through a circuit
board that provides three alternative levels of light intensity. The parabolic
reflector manages light output from the inverted diode array to broadcast a
blanket of light capable of total illumination of a room, corridor, stairwell or
other strategic location. In October 2003, the Home Safety Light was
successfully launched in the retail market on the QVC, Inc., the world's leading
on-air sales channel.
LAZER SAFETY LIGHT (PRODUCTION TITLE)
The Lazer Safety Light is similar in form and function to the Home Safety Light,
but has an entirely new electrical system that employs a miniature square
circuit board controller which powers the fixture with only 2 C batteries. The
10 diodes mounted in the Home Safety Light are displaced by 1 Ultra Bright
Lumileds diode inversely centered to provide a blanket of light with more
intensity than its predecessor. The new circuitry, with pulse width modulation,
and the newly developed diodal lighting element reduce production cost of the
fixture by 47% of the cost of the original Home Safety Light.
22
POWEROUTAGE ADAPTER (PRODUCTION TITLE)
The PowerOutage Adapter transforms existing electrical wall outlets into an
emergency lighting system for homes, hospitals, hotels, nursing homes and
businesses. The fixture, designed as a replacement outlet, simply plugs into an
existing dual outlet after removal of its faceplate. The adapter, which
continues to function as an electrical outlet, however, contains a constant
charge lithium ion battery; a motion sensor that provides a low level of light
for darkened room or corridor transit; a loss of power sensor that activates a
high level of light when electrical service is disrupted to broadcast a wash of
light up its attendant wall which then reflects bright white light from the
overhead ceiling; and a photoelectric cell which detects daylight or powered
light in the space to prevent unnecessary performance. Market research suggests
that the "Adapter" can become a "Standard of Safety" in institutions
(particularly patient care facilities and hotels) which will endorse its
economical implementation by home owners, educational institutions and
businesses. The fixture will first be marketed through institutional sales
channels.
FAILSAFE SPOT & LAMP (PRODUCTION TITLE)
The FailSafe fixture is designed with a unique lens head that may be extended
and rotated 180 degrees to perform as a table lamp. The lens head has an opaque
surround that may be snapped out above the reflector to simulate the shade of a
lamp. This fixture contains a constant charge lithium ion battery and
retractable outlet inserts which fold into the base when it is removed from an
electrical wall outlet. The FailSafe contains a motion sensor which produces a
low level of light for darkened room or corridor transit from its constant
charge location in a strategically located wall outlet. The design form provides
a hand-held base that offers the alternatives of use as a powerful "flashlight"
or as a table lamp that will provide over a full week of light from its lithium
ion battery. The battery returns to "full charge" after the fixture is
reinstalled into a wall outlet.
CAMPLAMP LANTERN (PRODUCTION TITLE)
The CampLamp is designed to be a superior alternative to the venerable "Coleman
Lantern" that has served as a utility gas and mantle light for over fifty years.
Unlike the Coleman version, however, the CampLamp does not generate heat or
noxious emissions and eliminates the safety threats of combustible fuel and
burning elements. The fixture features a tri-parted mirrored reflector system
that, when all of the three elements are engaged, broadcasts a blanket of light
over 360 degrees. The circuitry design provides a rheostat control system and
pulse width modulation to extend battery life to over fifty hours. The reflector
design provides directional light alternatives in 90 degree increments which,
when combined with the rheostat, offers more utility options than a traditional
lantern. The fixture will be marketed through recreational sales channels, home
improvement stores and to government agencies.
INDUSTRY BACKGROUND
Our Company was born from an investigative research study designed 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
pervasive 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). We plan to
implement this technology through the development of diode illumination fixtures
for domestic, commercial and industrial applications. Management has identified
several opportunities, which are discussed in Section (10) Research and
Development Activities below, where our optoelectronic technology can be
introduced as a cost effective solution for antiquated, expensive and unreliable
lighting systems currently in use. The introduction of our Cyberlux Home Safety
Light is an example of our advanced illumination technology. We hope that this
will establish us as an innovative leader in the industry.
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.
23
EFFECT OF EXISTING OR PROBABLE GOVERNMENT 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.
EMPLOYEES
We currently have five (5) 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 Cyberlux and our
employees. However, 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 John W. Ringo, Secretary and Corporate
Counsel and David D. Downing, Treasurer and CFO. We believe that our relations
with our employees are good.
DEPENDENCE ON KEY PERSONNEL
The success of our Company depends upon the efforts, abilities and expertise of
our executive officers and other key employees, including our Chief Executive
Officer, Chief Operating Officer, Senior Vice President for Operations,
Treasurer/Chief Financial Officer and Secretary/Corporate Counsel. The loss of
the services of such individuals and/or other key individuals could have a
material adverse effect on our operations.
DEPENDENCE ON KEY CUSTOMERS
The Company is currently not dependent on any single customer for a significant
portion of its annual sales.
MAJOR SUPPLIERS
The Company is currently not dependent on any major suppliers. The Company does
rely on its investor and lender relationships as a source of capital for its
operations.
COMPLIANCE WITH COST OF ENVIRONMENTAL REGULATIONS
The Company currently has no costs associated with compliance with environmental
regulations. However, there can be no assurances that the Company will not incur
such costs in the future.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of our
executive officers or directors.
NAME AGE POSITION APPOINTED
---- --- -------- ---------
Donald F. Evans 68 CEO & Chairman of the Board May 19, 2000
Mark D. Schmidt 38 President, COO & Director May 01, 2003
John W. Ringo 58 Secretary, Corporate Counsel & Director May 19, 2000
Alan H. Ninneman 60 Senior Vice President & Director May 19, 2000
David D. Downing 52 Treasurer & CFO May 19, 2000
24
WORK EXPERIENCE
Donald F. Evans, CEO, Chairman of the Board - Mr. Evans graduated from the
University of North Carolina, Chapel Hill, NC with a BS Degree in Economics. Mr.
Evans represented the investment interest of Research Econometrics in Waste
Reduction Products Corporation, a privately held North Carolina corporation from
June of 1996 to until March of 1999. Mr. Evans served on the Board of that
Company and as its representative for product sales to the U.S. Department of
Defense. On March 19, 1999, Research Econometrics sold its interest in Waste
Reduction Products Corporation and on April 1, 1999, he began an investigative
research study on behalf of Research Econometrics into the feasibility of a
long-term electrochemical interim lighting system. The resulting study
identified the feasibility of white diodes as lighting elements which, when
managed by solid state circuitry, would provide a reliable source (over
forty-two hours from one battery pack) lighting solution to homeowners or
businesses during extended power outages. The study provided the performance
specifications and methods for the development of the light which led to the
formation of Cyberlux Corporation in May 2000 as the business management entity
for the project. Mr. Evans has served as the CEO of Cyberlux since its
inception.
Mark D. Schmidt, President, COO & Director. 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. Mr. Schmidt is a former IBM executive with over 15 years of consumer
marketing, business management and venture startup experience. He is a
recognized technology product marketing & sales expert who was responsible for
the global market launch of the IBM Valuepoint and IBM Aptiva personal computer
products as well as multiple accessories, services and home networking products.
He has held positions responsible for product development, manufacturing,
marketing, sales, strategic partnerships and worldwide channel development.
John W. Ringo, Secretary, Corporate Counsel & Director - 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. Since 1990, he has been engaged 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 is a founder of Cyberlux and has served as Secretary
and General Counsel since its inception.
Alan H. Ninneman, Senior Vice President & Director - Mr. Ninneman attended Elgin
Community College, Elgin, IL and subsequently majored in business administration
at Southern Illinois University, Carbondale, IL. Mr. Ninneman 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; Director of Operations at Scorpion Technologies, Inc., San Jose,
California; and CEO of City Software, Inc., Albuquerque, New Mexico from 1992
until becoming a founder of Cyberlux in May 2000. Mr. Ninneman is responsible
for the Company's operations systems.
David D. Downing, Treasurer & CFO - Mr. Downing graduated from Grove City
College, Grove City, PA with a BA Degree in Accounting. 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. He is a founder of Cyberlux and
served as its Treasurer since its inception.
25
EXECUTIVE COMPENSATION: EMPLOYMENT AGREEMENTS
Although the Company has employment agreements with Messrs. Evans, Schmidt,
Ringo, Ninneman and Downing which call for compensation as listed below, no
salaries have been paid during the development stage. These officers have agreed
to receive accrued management fees in the form of bonus payments after revenues
are available from product sales. No officer or director has received any
compensation as of yet until such time as we begin generating revenues. However,
the following table sets forth the annual compensation due our executives that
has accrued based on the inability of the Company to meet the obligation.
SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
------------------------------------- -----------------------------------
Other Annual Securities Awards LTIP Payouts
Name and Principal Compensation Restricted Underlying Payouts All other
Position Year Salary ($) Bonus ($) Stock Award(s) ($) Options/SARs (#)($) compensation ($)
------------------ ---- ---------- ------------ ---------- ------------ ------------------- ----------------
Donald F. Evans 2000 $28,500 $0 $0 $0 $0 $0
Chairman 2001 $98,004 $0 $0 $0 200,000 Common
CEO 2002 $98,004 $0 $0 $0 $0
2003 $180,000 700,000 Common
John W. Ringo 2000 $13,000 $0 $0 $0 $0 $0
Secretary 2001 $69,000 $0 $0 $0 150,000 Common
Director 2002 $69,000 $0 $0 $0 $0
2003 $102,000 $0 250,000 Common
Alan H. Ninneman 2000 $15,000 $0 $0 $0 $0 $0
Senior Vice Pres 2001 $78,000 $0 $0 $0 150,000 Common
Director 2002 $78,000 $0 $0 $0 $0
2003 $102,000 $0 250,000 Common
David D. Downing 2000 $0 $0 $0 $0 $0 $0
CFO 2001 $0 $0 $0 $0 100,000 Common
Treasurer 2002 $0 $0 $0 $0 $0
2003 $102,000 $0 $0 $0 250,000 Common
Mark D. Schmidt * 2003 $120,000 $0 $0 $0 550,000 Common $0
President, COO
Director
Footnotes to Executive Compensation:
No officer has been paid a salary since our inception as a capital conservation
measure designed to invest all available funds into the development of our
products. 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. Salary accruals for Mr. Evans began in July 2000 at $3,000 per month
through September 2000 and $6,500 per month from October to December 2000.
Salary accruals for Messrs. Ninneman and Ringo began in September 2000 at $3,000
each for September and October 2000, followed by $4,500 in November and December
for Mr. Ninneman and $3,500 in November and December for Mr. Ringo. From 2001
forward, salaries have accrued in accordance with the annualized salaries
outlined in the table. Pursuant to their employment agreements, Messrs. Evans,
Ninneman and Ringo are to receive monthly salaries of $8,167, $6,500, and $5,750
respectively. The salary accruals are non-interest bearing obligations of the
Company that are to be retired from revenues when product sales begin.
Salary accruals in the form of management fees for Messrs. Evans, Ninneman and
Ringo for the year 2000 were $28,500, $15,000 and $13,000 respectively. Salary
accruals for Messrs. Evans, Ninneman and Ringo for the year 2001 were $98,004,
78,000 and 69,000 respectively. In November 2001, Messrs. Evans, Ninneman and
Ringo were paid $5,000 each. Salary accruals for Messrs. Evans, Ninneman and
Ringo for the years 2001 and 2002 were $98,004, $78,000 and 69,000 respectively.
26
On January 1, 2003, the employment agreements of Messrs. Evans, Ninneman and
Ringo were amended to increase their annual salaries to $180,000, $102,000 and
$102,000, respectively. On that same date, David D. Downing entered in to an
employment agreement in which he will be paid an annual salary of $102,000.
*On May 1, 2003, Mark D. Schmidt entered into an employment agreement in which
he will be paid an annual salary of $180,000.
Compensation to officers has been deferred as a capital conservation measure
designed to invest available funds into development of saleable products.
Management's salaries will be based upon the performance of the Company.
Management's performance bonuses will be decided by a majority of the Board of
Directors of the Company and may be increased by the Board of Directors from
year to year consistent with goals established by the Board to the benefit of
shareholders.
Members of the Company's Board of Directors will serve until the next annual
meeting of the stockholders and until their successors are duly elected and
qualified, unless earlier removed as provided in the Bylaws of the Company.
Executive officers serve at the pleasure of the Board of Directors.
COMPENSATION OF DIRECTORS
There are no arrangements made to compensate any director for services as a
director. Such arrangements for compensation of directors for services will
commence once we begin earning revenues.
STOCK OPTION GRANTS IN THE PAST FISCAL YEAR
STOCK OPTION PLAN
The Company has created an Employee Stock Option Plan for incentive/retention of
current key employees and as an inducement to employment of new employees. The
2001 plan, which sets aside 600,000 shares of common stock for purchase by
employees, was made effective by the Board of Directors. Cyberlux will not issue
options or warrants to any employee or affiliate with an exercise price of less
than 85% of the fair market value of the Common Stock on the date of the grant.
Option/SAR Grants in Last Fiscal Year - Individual Grants
% of Total
Number of Securities Options/SARs Granted
Underlying to Employees in Exercise or Base Expiration
Name Options/SARs Granted(#) Fiscal Year Price ($/Sh) Date
---- ----------------------- -------------------- ---------------- ----------
Donald F. Evans 100,000 16.7% $0.001/Sh 2011
John W. Ringo 100,000 16.7% $0.001/Sh 2011
Alan H. Ninneman 100,000 16.7% $0.001/Sh 2011
David D. Downing 50,000 8.3% $0.001/Sh 2011
Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the Money Options/SARs
Acquired Value Options/SARs at FY-End at FY-End ($)
Name on Exercise(#) Realized ($) (#)Exercisable/Unexercisable Exercisable/Unexercisable
---- -------------- ------------ ---------------------------- -------------------------
Donald F. Evans 100,000 $14,900 100,000 $14,900
John W. Ringo 50,000 $ 7,450 50,000 $ 7,450
Alan H. Ninneman 50,000 $ 7,450 50,000 $ 7,450
David D. Downing 50,000 $ 7,450 50,000 $ 7,450
27
On January 3, 2003, our Board approved a 2003 Incentive Stock Option Plan which
will provide 2,000,000 shares of common stock to underwrite options and declared
the current eligible participants as follows:
-----------------------------------------------------------
Donald F. Evans 700,000 shares
-----------------------------------------------------------
David D. Downing 250,000 shares
-----------------------------------------------------------
John W. Ringo 250,000 shares
-----------------------------------------------------------
Alan H. Ninneman 250,000 shares
-----------------------------------------------------------
Mark D. Schmidt 550,000 shares
-----------------------------------------------------------
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
------------------------------------- ----------------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- --------------------- -------------- ----------- --------------
$0.2125 2,000,000 6.00 $0.2125 2,000,000 $0.2125
2,000,000 6.00 $0.2125 2,000,000 $0.2125
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
---------------- ---------------
Outstanding at July, 2003 -- --
Granted 2,000,000 0.2125
Exercised -- --
Canceled or expired -- --
Outstanding at September 30, 2003 2,000,000 0.2125
------
Employee Stock Options (Continued)
The weighted-average fair value of stock options granted to employees during the
period ended September 30, 2003 and 2002 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2003 2002
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.02% n/a
Expected stock price volatility 26% n/a
Expected dividend payout -- --
Expected option life-years (a) 6 n/a
----------
(a) The expected option life is based on contractual expiration dates.
If the Company recognized compensation cost for the non-qualified employee stock
option plan in accordance with SFAS No. 123, the Company's pro forma net loss
and net loss per share would have been $(1,324,995) and $(0.19) for the period
ended September 30, 2003 and $(446,766)and $(0.07) for the period ended
September 30, 2002, respectively.
On September 2, 2003, our Board approved a 2004 Incentive Stock Option Plan
which will provide 2,000,000 shares to underwrite options.
DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 50 Orange Road, Pinehurst, North
Carolina 28374. The office space is defined as the 12' by 14' office located at
the northeast corner of the property situated at 50 Orange Road, Pinehurst,
North Carolina 28374 and adjacent common spaces consisting of restroom
facilities, storage closets and conference room access. Equipment consists of
two telephone units; two calculators; one HP printer, copier, fax; one IBM
typewriter; one IBM computer with CTX color monitor and Logitech keyboards.
Furniture and fixtures consist of two leather executive swivel chairs; two
executive desks; two 2 drawer file cabinets; one lateral file cabinet; one
cherry wood storage cabinet; one steel typewriter table; two brass banker's
lamps, two extended halogen task lamps and various desk top appurtenances.
28
Research Econometrics, LLP, provides these facilities to Cyberlux at a cost of
$650 per month. The managing partner of Research Econometrics, LLP, Carothers H.
Evans, is the son of Donald F. Evans, president of Cyberlux. The leasing terms
represent a fully negotiated contract price between two related parties at an
arms length transaction. According to the Sublease Agreement, as of July 1, 2000
the space is rented on a month-to-month basis continuing until such use and
enjoyment is terminated by either party on thirty days notice in writing. Our
management believes that suitable expansion space is available to meet our
future needs at commercially reasonable terms, if required.
LEGAL PROCEEDINGS
On October 23, 2003, OneCap, Inc. filed a complaint against us and our officers,
Directors and certain shareholders in the District Court of Clark County, Nevada
(Case No. A475506). The complaint alleges a breach of contract and securities
fraud. The plaintiff is seeking specific performance, declaratory relief and
injunctive relief. We believe that we have meritorious defenses to the
plaintiff's claims and intend to vigorously defend ourselves against the
plaintiff's claims. On January 9, 2004 the litigation was settled with both
parties mutually releasing the other. The case was dismissed with prejudice.
On April 18, 2001, Cyberlux 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, Cyberlux filed a Motion for Rehearing or
Clarification of the Motion to Dissolve. A hearing on the Cyberlux 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:
Cyberlux came into contact with Light Technology, Inc. (LTI) 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. LTI and Rachwal
represented that they had such knowledge and expertise and could finalize the
development of the Cyberlux emergency light by September 30, 2000 so that we
could begin manufacturing and selling the emergency light by November 2000.
Rachwal and LTI also advised us that we could acquire all the assets of LTI and
the rights to LTI's flashlight which also used white LEDs provided Rachwal was
made an officer and director of Cyberlux as well as be in charge of design work
for the Company.
In order to evaluate this offer, we requested accounting and financial records
to verify the representations of LTI and Rachwal and to attempt to ascertain the
value of LTI. Despite repeated attempts, LTI and Rachwal were unable to provide
adequate, verifiable financial records. Nonetheless, in order allow LTI and
Rachwal to proceed with the development of the emergency light in order to meet
the November shipping deadline, Cyberlux and LTI entered into a Letter of Intent
on June 12, 2000. This Letter of Intent also contained a confidentiality clause
protecting our interests. Pursuant to the Letter of Intent we paid LTI $100,000
to develop a prototype of an emergency storm light and possible acquisition of
the assets of LTI 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 LTI assets. Kerkering, Barbario came to
the conclusion that LTI had no verifiable assets of any value. Furthermore, LTI
never developed and produced a working model of the emergency storm light. We
incurred meeting and travel expenses of $36,401 associated with LTI 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 LTI 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 LTI had developed an emergency light, he
did not object to the injunction stating that he did not have such a light.
29
There is no similarity between our product, the Home Safety Light, and LTI's
product, known as the Pal Light. Our product, which is described in detail in
the business section, has 10 diodes and provides a blanket of light to light up
a room in the event of a power outage. The LTI product is a small flashlight
that uses one diode. The two products are not in the same category.
Defendant LTI 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 allege 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.
In the event that LTI and Rachwal are successful in their claims, we would still
be able to sell our product since we have patent applications pending to protect
our product.
The Company intends to fully prosecute the Company's claims and actions against
the Defendants. The Company denies the Defendants allegations alleged against
the Company 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.
30
PRINCIPAL SHAREHOLDERS
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of April 29, 2003, certain information
regarding the beneficial ownership of our common stock by:
(1) Each person who is known us to be the beneficial owner of more than
5% of the common stock,
(2) Each of our director and executive officers and
(3) All of our directors and executive officers as a group.
Except as otherwise indicated, the persons or entities listed below have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them, except to the extent such power may be shared with a
spouse. No change in control is currently being contemplated.
Name and Address of Shares Beneficially Percentage of Shares
Beneficial Owner Owned Outstanding
------------------- ------------------- --------------------
Donald F. Evans
Fifty Orange Road
Pinehurst, NC 28374 1,455,000 12.3%
David D. Downing
100 Country Meadow Drive
Marietta, OH 45750 500,000 4.2%
Alan H. Ninneman
204 Chaparral Loop, SE
Rio Rancho, NM 87124 650,000 5.5%
John W. Ringo
241 Lamplighter Lane
Marietta, GA 30067 450,000 3.8%
Mark D. Schmidt
60 Kimberly Drive
Durham, NC 27707 200,000 1.7%
Total ownership by our officers 3,255,000 27.5%
Footnotes:
1. Mr. Evans was issued 875,000 shares individually in connection with his
founding of Cyberlux Corporation and assignment of his patent for the
Electrochemical Portable Power and Lighting System to the Company.
Research Econometrics was issued 750,000 shares in connection with an
assignment of all of its interests derived from its funding of the initial
development of the long-tern interim lighting system. The Research
Econometric shares were distributed to the partners in this venture and,
as one of the partners, Mr. Evans received 380,000 of the partnership's
750,000 shares.
2. 380,000 shares received by Mr. Evans pursuant to the distribution of
Research Econometrics shares are common stock of the Company owned by him
individually. The balance of the Research Econometric shares were
distributed to ten other individual partners no one of whom owns an amount
approaching 5% of the shares outstanding.
3. There is no voting trust among any of the shareholders , officers or
directors. Pursuant to the Incentive Stock Option Plan, officers of the
Company, Messrs. Evans, Ringo, Ninneman and Downing were vested with
350,000 options, which they exercised in November 2001 at par. In January
2002, Messrs. Evans, Ringo, Ninneman and Downing were each vested with
50,000 options for the fiscal year ended 2001. In January 2003, Mr. Evans
was vested with 50,000 options for the fiscal year 2001. These options are
reflected in the individual's share ownership in the table.
PERSONS SHARING OWNERSHIP OF CONTROL OF SHARES
No person other than Donald F. Evans, David D. Downing, Alan H. Ninneman, and
John Ringo owns or shares the power to vote 5% or more of our securities.
31
CERTAIN RELATIONSHIPS AND RELATED 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 for the
year ended December 31, 2001,was $15,806, and for the period ending December 31,
2000 was $10,606. Mr. Evans was the partner in Research Econometrics who
undertook the investigative research study designed to determine the feasibility
of an electrochemical (battery powered) interim lighting system that could
provide long-term solutions to property owners during extended power outages.
The study confirmed the feasibility of such a system consistent with an
application of new technologies that, when combined, provided extended life to
existing battery resources. He began the study with an investigation of the
incidence of power outage attributable to severe storm activity along the east
coast and west along the gulf coast states of the United States.
The agreement with Research Econometrics, therefore, is one whereby the light
design system perfected by Research Econometrics was assigned as the foundation
of the newly created Cyberlux Corporation. We issued certain management fees
which were for accrued salaries for Messrs. Evans, Ninneman and Ringo consistent
with employment agreements. These fees are in the form of non interest bearing
promissory notes. Salary accruals in the form of management fees for Messrs.
Evans, Ninneman and Ringo for the year 2000 were $28,500, $15,000 and $13,000
respectively. Salary accruals for Messrs. Evans, Ninneman and Ringo for the
years 2001 and 2002, were $98,004, 78,000 and 69,000 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 and
a former officer loaned $30,500, $58,000, $5,245 and $5,000, 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.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
Our 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. On January 23, 2004, the last trade price as
reported by the Over-the- Counter Bulletin Board was $0.342. As of December 31,
2003, we believe there were approximately 136 holders of record of our common
stock.
32
DESCRIPTION OF SECURITIES
COMMON STOCK
Our Articles of Incorporation authorize the issuance of 100,000,000 shares of
common stock, $0.001 par value per share. Of this amount, 8,037,849 are
currently issued and outstanding. The following description is a summary of the
capital stock of Cyberlux and contains the material terms of the capital stock.
Additional information can be found in Cyberlux 's Articles of Incorporation and
Bylaws.
Each holder of our common stock is entitled to one vote per share of common
stock standing in such holder's name on our records on each matter submitted to
a vote of our stockholders, except as otherwise required by law. Holders of our
common stock do not have cumulative voting rights so that the holders of more
than 50% of the combined shares of our common stock voting for the election of
directors may elect all of the directors if they choose to do so and, in that
event, the holders of the remaining shares of our common stock will not be able
to elect any members to our board of directors. Holders of our common stock are
entitled to equal dividends and distributions, per share, when, as and if
declared by our board of directors from funds legally available. Holders of our
common stock do not have preemptive rights to subscribe for any of our
securities nor are any shares of our common stock redeemable or convertible into
any of our other securities. If we liquidate, dissolve or wind up our business
or affairs, our assets will be divided up pro-rata on a share-for-share basis
among the holders of our common stock after creditors and preferred
shareholders, if any, are paid.
PREFERRED STOCK
Our Articles of Incorporation authorize the issuance of 5,000,000 Shares of
preferred stock, $0.001 par value per share, the designation and rights of which
are to be determined by our Board of Directors. Our Board of Directors has
authority, without action by the shareholders, to issue all or any portion of
the authorized but unissued preferred stock in one or more series and to
determine the voting rights, preferences as to dividends and liquidation,
conversion rights, and other rights of such series. We consider it desirable to
have preferred stock available to provide increased flexibility in structuring
possible future acquisitions and financing and in meeting corporate needs which
may arise. If opportunities arise that would make desirable the issuance of
preferred stock through either public offering or private placements, the
provisions for preferred stock in our Articles of Incorporation would avoid the
possible delay and expense of a shareholder's meeting, except as may be required
by law or regulatory authorities. Issuance of the preferred stock could result,
however, in a series of securities outstanding that will have certain
preferences with respect to dividends and liquidation over the common stock
which would result in dilution of the income per share and net book value of the
common stock. Issuance of additional common stock pursuant to any conversion
right which may be attached to the terms of any series of preferred stock may
also result in dilution of the net income per share and the net book value of
the common stock. The specific terms of any series of preferred stock will
depend primarily on market conditions, terms of a proposed acquisition or
financing, and other factors existing at the time of issuance. Therefore, it is
not possible at this time to determine in what respect a particular series of
preferred stock will be superior to our common stock or any other series of
preferred stock which we may issue. Our Board of Directors may issue additional
preferred stock in future financing, but has no current plans to do so at this
time.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. We intend to furnish holders of our common stock annual reports
containing audited financial statements and to make public quarterly reports
containing unaudited financial information.
On December 31 2003, we issued 155 shares of our Series A Convertible Preferred
Stock. Each share is convertible into 50,000 shares of common stock. The Series
A Convertible Preferred have the following designations and rights:
Maturity: Perpetual Preferred
Dividend: 12% per annum. The dividend shall be payable
semi-annually in cash or common stock at our option.
Fixed Conversion Price: The Series A Convertible Preferred shall be
convertible into common stock at $0.10 per share.
Stated Value: $5,000 per share
33
Mandatory Conversion: Beginning 180 days from the effective date of this
prospectus, if the closing bid price for our common
stock exceeds $1.50 for a period of 10 consecutive
trading days, we may elect to convert the Series A
Convertible Preferred into common stock at the
applicable conversion price.
Limitations on Conversion. Each holder of the Series A Convertible Preferred
shares shall not convert the Shares into common
stock such that the number of shares of common stock
issued after the conversion would exceed, when
aggregated with all other shares of common stock
owned by such holder at such time, in excess of
4.99% of the then issued and outstanding shares of
common stock of the Company.
No Voting Rights. The holders of the Series A convertible shares have
no voting rights until their shares are converted to
common shares.
The Board of Directors, pursuant to the Articles of Incorporation and By-Laws,
has authorized a series of Series B Convertible Preferred Stock which will be
issued to management of the Company in order to convert accrued management fees
and other liabilities not to exceed $800,000 into 4,000,000 shares of the Series
B Preferred Stock. The Series B Convertible Preferred Stock will have the
following designations and rights:
Term: Perpetual Preferred
Dividend: 12% per annum
Voting Rights: Except with respect to transactions upon which the
Series B Preferred stock shall be entitled to vote
separately, the Series B Preferred Stock shall have
superior voting rights equal to 10 votes for each
share of common stock voting rights of one vote per
share.
DESCRIPTION OF THE WARRANTS
SERIES A WARRANTS
We have issued Series A warrants exercisable into 7,750,000 shares of common
stock at $0.25 per share. The Series A warrants have a three (3) year term and
at no time may a holder exercise its warrant if it would cause such holder's
ownership to exceed 4.99% of our common stock outstanding at the time of
exercise.
Beginning twenty (20) days following the effective date of this prospectus, if
the closing bid price of our common stock exceeds $0.60 for a period of 20
consecutive trading days, the Series A warrants may be redeemed by us at $0.01
per warrant
SERIES B WARRANTS
We have issued Series B warrants exercisable into 7,750,000 shares of common
stock at $1.05 per share. Investors may only exercise the Series B warrants for
such number of shares they have been issued pursuant to their Series A warrants.
The Series B warrants have a five (5) year term and at no time may a holder
exercise its warrant if it would cause such holder's ownership to exceed 4.99%
of our common stock outstanding at the time of exercise.
Beginning twelve (12) months following the effective date of this prospectus, if
the closing bid price of our common stock exceeds $1.75 for a period of 20
consecutive trading days, the Series B warrants may be redeemed by us at $0.01
per warrant.
PLACEMENT AGENT WARRANTS
We have issued placement agent warrants exercisable into 4,750,000 shares of
common stock at prices ranging from $0.01 to $1.05 per share. The warrants are
be exercisable after the date of issuance and shall expire five (5) years after
the date of issuance, unless extended by us. The warrants include a cashless
exercise provision and are non-redeemable. The warrants are transferable at the
placement agent's discretion.
TRANSFER AGENT
The transfer agent for the common stock is Pacific Stock Transfer Company and
its telephone number is (702) 361-3033.
34
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as well as our by-laws provide for the
indemnification of directors, officers, employees and agents of the corporation
to the fullest extent provided by the Corporate Law of the State of Nevada, as
well as is described in the Articles of Incorporation and the By-Laws. These
sections generally provide that the Company may indemnify any person who was or
is a party to any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative except for an action by
or in right of the corporation by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation. Generally, no
indemnification may be made where the person has been determined to be negligent
or guilty of misconduct in the performance of his or her duties to the Company.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or controlling persons of Cyberlux, 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 Securities Act of 1933, and is,
therefore, unenforceable.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
AUTHORIZED AND UNISSUED STOCK.
The authorized but un-issued shares of our common and preferred stock are
available for future issuance without our shareholders' approval. These
additional shares may be utilized for a variety of corporate purposes including
but not limited to future public or direct offerings to raise additional
capital, corporate acquisitions and employee incentive plans.
EXPERTS
The financial statements of Cyberlux incorporated herein have been so
incorporated in reliance upon the report of Russell Bedford Stefanou
Mirchandani, LLP, independent certified public accountants, given upon their
authority as experts in auditing and accounting (which contains an explanatory
paragraph regarding Cyberlux 's ability to continue as a going concern).
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On July 17, 2002, G. Brad Beckstead ("Beckstead"), resigned as the Company's
certifying accountant. Beckstead's reports on the Company's financial statements
for the years ended December 31, 2001 and 2000 did not contain an adverse claim
or disclaimer of opinion; however, the audit report for the years ended December
31, 2001 and 2000 contained an explanatory paragraph regarding the substantial
doubt about the Company's ability to continue as a going concern. The decision
to change its certifying accountant was approved by the Company's Board of
Directors. During the year ended December 31, 2001 and the period May 17, 2000
(date of inception) through December 31, 2001, and the subsequent interim period
through July 17, 2002, the Company has not had any disagreements with Beckstead
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
The Company engaged Russell Bedford Stefanou Mirchandani LLP ("Russell Bedford
Stefanou Mirchandani") as its certifying accountant as of August 23, 2002 for
the Company's fiscal year ending December 31, 2002. The Company had not
consulted with Russell Bedford Stefanou Mirchandani prior to Russell Bedford
Stefanou Mirchandani's retention on either application of accounting principles
or the type of opinion Russell Bedford Stefanou Mirchandani might render on the
Company's financial statements.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by John W. Ringo, Attorney at Law, Marietta, Georgia. Mr. Ringo is
secretary, corporate counsel, a director and shareholder of the Company.
AVAILABLE INFORMATION
We have filed a registration statement under the Securities Act with respect to
the securities offered hereby with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. This prospectus, which is a part of the registration
statement, does not contain all of the information contained in the registration
statement and the exhibits and schedules thereto, certain items of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to Cyberlux Corporation and the securities
offered hereby, reference is made to the registration statement, including all
exhibits and schedules thereto, which may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N. W.,
Room 1024, Washington, D. C. 20549. You may obtain information on the operation
of the public reference facilities by calling the Commission at 1-800-SEC-0330.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in its entirety by
such reference. We will provide, without charge upon oral or written request of
any person, a copy of any information incorporated by reference herein. Such
request should be directed to us at Cyberlux Corporation, PO Box 2010, 50 Orange
Road, Pinehurst, North Carolina 28370, Attention: Donald F. Evans, President. We
will file reports and other information with the Commission. All of such reports
and other information may be inspected and copied at the Commission's public
reference facilities described above. The Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
such site is http://www.sec.gov. In addition, we make available to our
shareholders annual reports, including audited financial statements, unaudited
quarterly reports and such other reports as we may determine.
35
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 2002 AND 2001
FORMING A PART OF ANNUAL REPORT
PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
CYBERLUX CORPORATION
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cyberlux Corporation
50 ORANGE ROAD,
PO BOX 2010,
PINEHURST, NORTH CAROLINA 28370-2010
We have audited the accompanying balance sheet of Cyberlux Corporation (the
"Company"), a development stage company, as of December 31, 2002 and the related
statements of losses, deficiency in stockholders' equity, and cash flows for the
year ended December 31, 2002 . The company's financial statements as of December
31, 2001 were audited by another auditor whose reports, dated June 14, 2002 and
December 10, 2002, on those statements included an explanatory paragraph that
described the uncertainty regarding the company's ability to continue as a going
concern. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 audit 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
Cyberlux Corporation as of December 31, 2002 and the results of its operations
and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America. We express no
opinion on the cumulative period from inception through December 31, 2001.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has incurred net losses since its inception. This raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to this matter are 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
New York, New York
April 4, 2003
36
AUDITED FINANCIALS AS OF DECEMBER 31, 2002
(A Development Stage Company)
Balance Sheet
December 31, 2002
Audited
Cash $ 26,086
Prepaid design services 20,000
Accounts Receivable --
-----------
Total Current Assets 46,086
Fixed Assets (Net of accumulated depreciation of $23,050) 79,443
Other Assets:
Deposit 8,614
-----------
Total Assets $ 134,143
===========
Current Liabilities $ 44,427
Accrued Interest 95,971
Other Accrued Liabilities
Management fees payable - related party 546,508
Short-term notes payable - shareholders 123,545
Short-term notes payable 365,000
-----------
Total current liabilities $ 1,175,451
Common stock 6,628
Additional paid-in capital 745,593
Subscription receivable (2,500)
(Deficit)accumulated during development stage (1,791,029)
-----------
Total Deficiency stockholders' equity (1,041,308)
-----------
$ 134,143
===========
37
CYBERLUX CORPORATION
(A Development Stage Company)
Statement of Losses
May 17, 2000
Year ended Year ended (inception) to
December 31, December 31, December 31,
2002 2001 2002
----------- ----------- -----------
Revenues $ 2,326 $ -- $ 2,326
Cost of goods sold (3,082) -- (3,082)
----------- ----------- -----------
Gross Profit (Loss ) (756) -- (756)
Operating Expenses:
Marketing and advertising expense 8,500 74,535 127,048
Depreciation and Amortization expenses 63,768 14,856 79,300
Organizational expenses -- -- 25,473
Research and development costs 1,250 85,500 244,064
Management and consulting fees -
related party 350,504 263,088 767,322
General and administrative expenses 178,406 153,994 403,441
----------- ----------- -----------
Total Operating expenses 602,428. 591,973 1,646,648
(Loss) from operations (603,184) $ (591,973) $(1,647,404)
----------- ----------- -----------
Other income (expenses):
Interest (expenses) (96,920) (44,301) (143,665)
Interest income -- -- 40
Income (tax) benefit -- --
Net (Loss) $ (700,104) $ (636,274) $(1,791,029)
=========== =========== ===========
(Loss) per common share
(basic and assuming dilution) (.11) (.13) (.28)
=========== =========== ===========
Weighted average shares outstanding 6,241,585 5,061,350 6,241,585
=========== =========== ===========
38
CYBERLUX CORPORATION
(A Development Stage Company)
Statement of Deficiency in Stockholders Equity
For the period ended May 17,2000
(Date of Inception) to December 31,2002
Additional Stock
Preferred Stock Common Stock Paid in Subscription
Shares Amount Shares Amount Capital Receivable
---------------------------------------------------------------------
Common shares issued in May 2000 to Founders in
exchange for cash at $.001 per share -- -- 1,640,000 $1,640 $ 560 --
Common shares issued in May 2000 for research and
development services valued at $0.09 per share 750,000 750 68,003 --
Common shares issued in May 2000 in exchange for services
valued at $0.05 per share 875,000 875 35,710 --
Common shares issued in July 2000 in exchange for
convertible debt at $0.15 per share 288,000 288 39,712 --
Capital contributed by principal shareholders 16,000 --
Common shares issued in November, 2000 for cash in
connection with private placement at $0.15 per share 640,171 640 95,386 --
Common shares issued in November, 2000 in exchange for
services valued at $0.15 per share for consulting services 122,795 123 18,296 --
Net (loss) -- -- -- --
Balance, December 31, 2000 4,315,966 4,316 273,667 --
====== ======== ======
Common shares issued in January, 2001 in exchange
for convertible debt at $0.15 per share 698,782 699 104,118 --
Stock options issued in May, 2001 valued at $0.15
per option, in exchange for services 52,500
Common shares issued in September 2001 for cash in
connection with exercise of warrant of $0.15 per share 3,000 3 447 --
Common shares issued in September 2001 for cash in
connection with exercise of warrant at $0.10 per share 133,000 133 13,167 --
Common shares issued in October 2001 valued at
$0.15 per warrant, in exchange for placement of debt -- -- 75,000 --
Common shares issued in November 2001 for cash in
connection with exercise of warrant at $0.001 per share 500,000 500 -- --
Deficit
Accumulated
During
Development
Stage Total
--------------------------
Common shares issued in May 2000 to Founders in
exchange for cash at $.001 per share -- 2,200
Common shares issued in May 2000 for research and
development services valued at $0.09 per share -- 68,753
Common shares issued in May 2000 in exchange for services
valued at $0.05 per share -- 36,585
Common shares issued in July 2000 in exchange for
convertible debt at $0.15 per share -- 40,000
Capital contributed by principal shareholders -- 16,000
Common shares issued in November, 2000 for cash in
connection with private placement at $0.15 per share -- 96,026
Common shares issued in November, 2000 in exchange for
services valued at $0.15 per share for consulting services -- 18,419
Net (loss) (454,651) (454,651)
-------- --------
Balance, December 31, 2000 (454,651) (176,668)
======== ========
Common shares issued in January, 2001 in exchange
for convertible debt at $0.15 per share -- 104,817
Stock options issued in May, 2001 valued at $0.15
per option, in exchange for services 52,500
Common shares issued in September 2001 for cash in
connection with exercise of warrant of $0.15 per share -- 450
Common shares issued in September 2001 for cash in
connection with exercise of warrant at $0.10 per share -- 13,300
Common shares issued in October 2001 valued at
$0.15 per warrant, in exchange for placement of debt -- 75,000
Common shares issued in November 2001 for cash in
connection with exercise of warrant at $0.001 per share -- 500
39
CYBERLUX CORPORATION
(A Development Stage Company)
Statement of Deficiency in Stockholders Equity
For the period ended May 17,2000 (Date of Inception) to December 31,2002
--------------------------------------------------------------------------------
Additional Stock
Preferred Stock Paid in subscription
Shares Amount Common Shares Stock Amount Capital receivable
------------------------------------------------------------------------------
Common shares issued in November 2001 for cash in 350,000 350 -- --
connection with exercise of options at 0.001 per
share
Common shares issued in December 2001 in exchange
for convertible debt at $0.50 per share 133,961 134 66,847 --
Common shares issued in December 2001 in exchange
for debt at $0.50 per share 17,687 18 8,825 --
Net Loss
Balance, December 31, 2001 6,152,396 6,152 594,571 --
Common shares issued in May 2002, in exchange for
services valued at $0.70 per share 70,000 70 49,928 --
Common shares issued in Nov. 2002 in exchange for
services valued at $0.25 per share 150,000 150 37,350 --
Common shares issued in Dec 2002 as rights offering
at $0.25 per share 256,000 256 63,744 --
Subscription Receivable for 10,000 shares issued -- -- (2,500)
Net Loss -- -- --
-------------------------------------------------------
Balance, December 31, 2002 6,628,396 6,628 745,593 (2,500)
========= ===== =======
Deficit
Accumulated
During
Development Stage Total
-------------------------
Common shares issued in November 2001 for cash in -- 350
connection with exercise of options at 0.001 per
share
Common shares issued in December 2001 in exchange
for convertible debt at $0.50 per share -- 66,981
Common shares issued in December 2001 in exchange
for debt at $0.50 per share -- 8,843
Net Loss (636,274) (636,274)
Balance, December 31, 2001 (1,090,925) (490,171)
Common shares issued in May 2002, in exchange for
services valued at $0.70 per share -- 49,998
Common shares issued in Nov. 2002 in exchange for
services valued at $0.25 per share -- 37,500
Common shares issued in Dec 2002 as rights offering
at $0.25 per share -- 64,000
Subscription Receivable for 10,000 shares issued -- (2,500)
Net Loss (700,104) (700,104)
------------------------
Balance, December 31, 2002 (1,791,029) (1,041,308)
========== =========
40
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASHFLOWS
Year ended May 17, 2000
December 31, (inception) to
----------------------- December 31,
2002 2001 2002
--------- --------- -----------
Cash flows from operating activities
Net (loss) $(700,104) $(636,274) $(1,791,029)
Depreciation and Amortization 82,518 14,856 98,050
Write off Extension of loan exps 25,000 -- 25,000
Stock options issued for consulting services -- 52,500 107,504
Shares issued for consulting services 87,498 87,498
Shares issued for research and development -- -- 68,753
Adjustments to reconcile net (loss) to cash (used) by
operating activities:
(Increase) in deposit (1,795) (5,000) (8,614)
Increase in accrued interest 28,409 14,751 44,427
Decrease in other assets, net 6,812 21,373 28,185
Increase in other accrued liabilities 92,722 3,250 95,972
Increase in management fees payable 260,004 230,004 546,508
--------- --------- -----------
Net cash (used) by operating activities (118,936) (304,540) (697,746)
Cash flows from investing activities:
Purchase of fixed assets, net (52,880) (45,400) (102,494)
--------- --------- -----------
Net cash ( Used in )Investing Activities (52,880) (45,400) (102,494)
Cash flows from financing activities:
Proceeds from short-term notes payable, net 80,000 -- 80,000
Proceeds from notes payable, net -- 260,000 432,455
Proceeds from short-term notes payable - shareholders 25,800 84,245 123,545
Donated capital -- -- 16,000
Insurance of common stock 61,500 14,600 174,326
--------- --------- -----------
Net cash provided by financing Activities 167,300 358,845 825,326
--------- --------- -----------
Net ( Decrease )increase in cash (4,516) 8,905 26,086
Cash - beginning 30,602 21,697 --
--------- -----------
Cash - ending $ 26,086 $ 30,602 $ 26,086
========= ========= ===========
Supplemental disclosures:
Interest paid $ 49,475 $ -- $ 50,677
Income taxes paid -- -- --
Non cash investing and financing activities
Shares issued for R&D and consulting services 37,500 -- 106,253
Shares issued in exchange of debt -- 180,641 220,641
Warrents issued in connection with financing stock -- 75,000 75,000
Options issued in connection with services rendered -- 52,500 52,500
Shares issued in connection with services 49,998 -- 105,002
41
(A DEVELOPMENT STAGE COMPANY)
NOTES TO AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2002
FOR THE YEAR ENDED DECEMBER 31, 2002 AND 2001
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 ("SFAS 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 no revenues, has incurred expenses, and has sustained losses.
Consequently, its operations are subject to all risks inherent in the
establishment of a new business enterprise. For the period from inception
through December 31, 2002, the Company has accumulated losses of $1,791,029.
Revenue Recognition
The Company will follow policy of recognizing subscriber fee income as revenue
in the period the services are provided and the products shipped.
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
The Company maintains a cash balance in a non-interest-bearing account that
currently does not exceed federally insured limits. For the purpose of the
statements of cash flows, all highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents. There
are no cash equivalents as of December 31, 2002 and 2001 respectively.
Fixed assets
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 $8,500 and $74,535 in 2002 and 2001, 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 in 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. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to sell.
Fair value of financial instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 2002 and
2001. 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.
42
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 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 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 will
adopt the interim disclosure provisions for its financial reports for the
quarter ended March 31, 2003.
Loss per share
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS #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
In July 2001, the Financial Accounting Standards Board (FASB) issued 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.
43
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.
44
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.
Note B - Notes payable and convertible debentures
Notes payable at December 31, 2002 are as follows:
10% convertible note payable, unsecured and due September, 2003; accrued and
unpaid interest due at maturity; Noteholder 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. $ 2,500
10% convertible notes payable, unsecured and due March, 2003; accrued and
unpaid interest due at maturity; Noteholder 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. 7,500
10% convertible notes payable, unsecured and due March, 2003; accrued and unpaid
interest due at maturity; Noteholders 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. 25,000
10% notes payable, unsecured and due March, 2003; accrued and unpaid interest due
at maturity; Noteholders 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. 10,000
10% notes payable, unsecured and due March, 2003; accrued and unpaid interest
due at maturity; Noteholders 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. 40,000
NOTE A-SUMMARY OF ACCOUNTING POLICIES
Note B - Notes payable and convertible debentures
(Continued)
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; Noteholder 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. 195,000
10% Convertible note payable, unsecured and due October 2003; accrued and unpaid
interest due at maturity; Noteholder has the option to convert unpaid note
principal together with accrued and unpaid interest to the Company's common stock
at $.25 per share. 75,000
10% convertible note payable, unsecured and due October 2003 ; accrued and unpaid
interest due at maturity; Noteholder has the option to convert unpaid note
principal together with accrued and unpaid interest to the Company's common stock
at the lower of $.50 per share. 5,000
10% note payable, unsecured, accrued and unpaid interest and principal payable on
demand. 5,000
365,000
Less: current portion (365,000)
Total $
45
Total interest expense at December 31,2002 and 2001 of $96,920 and $44,301
includes a loan origination fee of $43,750 and $17,500 respectively.
Note C - Stockholder's equity
The Company has authorized 20,000,000 shares of common stock, with a par value
of $.001 per share. The Company has also authorized 5,000,000 shares if
preferred 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 $.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 .
Note C - Stockholder's equity (Continued)
In May, 2001, the Company granted certain officers of the Company options to
purchase 350,000 sharesc theCompany'scommon 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 $0.001 par value
common stock for cash of $ 14,250.
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.
46
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.
Note D - 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, 2002 and 2001 was $13,185 and $15,806, respectively.
The Company incurred management fees to its officers totaling $350,504 and
$263,088 during the years ended December 31, 2002 and December 31, 2001,
respectively. Unpaid management fees aggregate $546,508 as of December 31, 2002.
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, 2002, the balance due to
the officers is $123,545.
NOTE E-COMMITMENTS AND CONTINGENCIES
Consulting Agreements
The Company has consulting agreements with outside contractors, certain of whom
are also Company stockholders. directors and officers. 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 F-LOSSES PER SHARE
The following table presents the computation of basic and diluted losses per
share:
2002 2001
----------- -----------
Net loss available to Common stockholders $ (700,104) $ (636,274)
Basic and diluted earning (loss) per share (0.11) (0.13)
Weighted average common shares outstanding 6,241,585 5,061,350
=========== ===========
Note G - 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, 2002, the Company has available for federal
income tax purposes a net operating loss carry forward of approximately $
1,766,000, expiring in the year 2022, 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, 2002 are as follows:
Non current:
Net operating loss carry forward $ 930,000
Valuation allowance $ (930,000)
----------
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
47
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, 2002 and 2001, the Company incurred losses
from operations of $700,104 and $636,274, 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.
48
FINANCIALS AS OF SEPTEMBER 30, 2003
CYBERLUX CORPORATION
(A Development Stage Company)
Condensed Consolidated Balance Sheets
September 30, 2003 December 31, 2002
(unaudited) (audited)
------------------ -----------------
Current assets:
Cash and equivalents $ 11,628 $ 26,086
Due from factor, net 18,710 --
Inventories, at cost 8,208 --
Prepaid expenses -- 20,000
----------- -----------
Total current assets 38,546 46,086
Property and equipment, net 96,520 79,443
Other assets
Deposits -- 8,614
$ 135,066 $ 134,143
=========== ===========
Liabilities and Deficiency in Stockholders' Equity
Current liabilities:
Accrued interest $ 65,466 $ 44,427
Other accrued liabilities 410,852 95,971
Management fees payable - related party 970,926 546,508
Short-term notes payable - shareholders 193,045 123,545
Short-term notes payable 327,500 365,000
----------- -----------
Total current liabilities 1,967,789 1,175,451
Commitments and contingencies (Note D) -- --
Deficiency in Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 8,037,849 and 6,628,396 issued and outstanding 8,038 6,628
Subscription receivable -- (2,500)
Additional paid-in capital 1,168,463 745,593
Deficit accumulated during development stage (3,009,224) (1,791,029)
----------- -----------
Total deficiency in stockholders' equity (1,832,723) (1,041,308)
----------- -----------
$ 135,066 $ 134,143
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
49
CYBERLUX CORPORATION
(A Development Stage Company)
Condensed Consolidated Statement of Losses
(UNAUDITED)
For the Period
May 17, 2000
(Date of
Three Months Ended Nine Months Ended Inception)
September 30, September 30, through
--------------------------- --------------------------- September 30,
2003 2002 2003 2002 2003
----------- ----------- ----------- ----------- -----------
Revenue $ 87,375 $ -- $ 87,375 $ -- $ 87,375
Cost of Goods Sold 130,368 -- 130,368 -- 130,368
----------- ----------- ----------- ----------- -----------
Gross Profit (Loss) (42,993) -- (42,993) -- (42,993)
Expenses:
Marketing and advertising expense 250 9,196 114,750 9,196 241,798
Depreciation and amortization expense 5,675 24,197 240,924 52,071 320,224
Organization costs -- -- -- -- 25,473
Research and development costs 25,000 -- 60,000 1,250 304,064
Management and consulting fees 166,500 59,001 489,500 177,003 1,256,822
General and administrative expenses 127,539 49,993 215,905 166,742 620,102
----------- ----------- ----------- ----------- -----------
Total expenses 324,964 142,387 1,121,079 406,262 2,768,483
----------- ----------- ----------- ----------- -----------
Loss from operations (367,957) (142,387) (1,164,072) (406,262) (2,811,476)
Other (expense):
Interest income -- -- -- -- 40
Interest expense (15,189) (13,879) (54,123) (40,504) (197,788)
----------- ----------- ----------- -----------
Net (loss) $ (383,146) $ (156,266) $(1,218,195) $ (446,766) $(3,009,224)
=========== =========== =========== =========== ===========
(Loss) per share - basic and fully diluted $ (0.05) $ (0.03) $ (0.17) $ (0.07)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic and fully diluted 7,626,979 6,199,313 7,148,468 6,175,981
=========== =========== =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
50
CYBERLUX CORPORATION
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
For the period May 17,
For the Nine Months For the Nine Months 2000 (date of
Ended September 30, Ended September 30, inception) through
2003 2002 September 30, 2003
------------------- ------------------- ----------------------
Cash flows from operating activities
Net (loss) $(1,218,195) $(446,766) $(3,009,224)
Depreciation and Amortization 240,924 70,820 338,974
Stock issued in exchange for previously incurred debt 9,030 -- 9,030
Write off of previously incurred loan fees -- -- 25,000
Stock options issued for consulting services -- 49,000 107,504
Shares issued for consulting services 60,000 -- 147,498
Shares issued for factoring deposit 90,000 -- 90,000
Shares issued for research and development -- -- 68,753
(Increase) in Due From Factor, net (18,710) -- (18,710)
(Increase) in inventory (8,208) -- (8,208)
(Increase) in deposits 8,614 (1,795) --
(Increase) decrease in other assets, net 20,000 6,812 48,185
Increase (Decrease) in accrued interest 21,041 17,773 65,468
Increase in management fee payable-related party 424,418 176,003 970,926
Increase in other accrued liabilities 314,878 46,531 410,853
----------- --------- -----------
Net cash (used) by operating activities (56,208) (81,622) (753,951)
Cash flows from investing activities
Acquisition of property and equipment, net (33,000) (59,335) (135,494)
----------- --------- -----------
Net cash provided (used in) by investing activities (33,000) (59,335) (135,494)
Cash flows from financing activities
Proceeds from short-term notes payable net -- 80,000 80,000
Proceeds from notes payable net -- -- 432,455
Proceeds from short-term notes payable-shareholders, net 72,000 30,800 195,542
Capital contributed by shareholders -- -- 16,000
Receipts from subscription receivable 2,500 -- 2,500
Issuance of common stock 250 -- 174,576
----------- --------- -----------
Net cash provided by financing activities 74,750 110,800 901,073
Net increase in cash (14,458) (30,157) 11,628
Cash - at beginning of period 26,086 30,602 --
----------- --------- -----------
Cash - at end of period $ 11,628 $ 445 $ 11,628
=========== ========= ===========
Supplemental disclosures:
Interest paid $ 18,202 $ 20,856 $ 68,879
Income taxes paid -- -- --
Non-cash investing and financing activities:
Shares issued for research and development and consulting -- -- 106,253
Shares issued for conversion of debt 9,030 49,030 229,671
Warrants issued in connection with financing -- -- 75,000
Options issued in connection with services -- -- 52,500
Shares issued in connection with loan commitment 225,000 -- 225,000
Shares issued in connection with services 60,000 50,000 165,002
Shares issued for factoring deposit 90,000 -- 90,000
See accompanying notes to unaudited condensed consolidated financial statements
51
CYBERLUX CORPORATION
(A Development Stage Company)
Condensed Consolidated Statement of Deficiency in Stockholders' Equity
FOR THE PERIOD MAY 17, 2000 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2003
(UNAUDITED)
Deficiency
Accumulated Total
Common Stock Additional Stock During Deficiency in
Paid in Subscription Development Stockholder
Shares Amount Capital Receivable Stage Equity
------ ------ ---------- ------------ ----------- -------------
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 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)
Common shares issued in May, 2002 in exchange for
services valued at $.71 per share 70,000 70 49,930 -- -- 49,998
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)
-- -- -- -- (700,104) (700,104)
Net loss
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
Cash received in exchange for stock subscription -- -- -- 2,500 -- 2,500
Common shares issued in March, 2003 in exchange for
services valued at $.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
Common shares issued in May, 2003 exchange for debt at
$.25 per share 196,120 196 48,833 -- -- 49,029
Common shares issued in June, 2003 in exchange for
services valued at $.25 per share 200,000 200 49,800 -- -- 50,000
Common shares issued in September, 2003 in exchange
for services valued at $.20 per share 450,000 450 89,550 -- -- 90,000
Net Loss -- -- -- -- (1,218,195) (1,218,195)
---------- ------ ---------- --------- ----------- -----------
Balance, September 30, 2003 $8,037,849 $8,038 $1,168,463 $ -- $(3,009,224) $(1,832,723)
========== ====== ========== ========= =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
52
Cyberlux Corporation
(A Development Stage Company)
NOTES TO SEPTEMBER 30,2003 FINANCIAL STATEMENTS
Unaudited
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
The accompanying un audited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10QSB. 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 nine months period
ended September 30, 2003, are not necessarily indicative of the results that may
expected for the year ending December 31, 2003. The unaudited condensed
financial statements should be read in conjunction with the December 31, 2002
financial statements and footnotes thereto included in the Company's SEC Form 10
KSB.
Business and Basis of Presentation
Cyberlux Corporation ("Company") was formed on May 17, 2000 under the laws of
the state of Delaware. The Company is a development stage enterprise, as defined
by Statement of Financial Accounting Standards No. 7 ("SFAS No. 7") and its
efforts have been principally devoted to seeking profitable business
opportunities. . From its inception through the date of these financial
statements the Company has recognized limited revenues and has incurred
significant operating expenses. Consequently, its operations are subject to all
risks inherent in the establishment of a new business enterprise. For the period
from inception through September 30, 2003, the Company has accumulated losses of
$3,009,224.
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 change 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 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 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 all
subsequent periods. 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 C):
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- ----------- ---------
Net loss - as reported $(383,146) $(156,266) $(1,218,195) $(446,766)
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) (106,800) -- (106,800) --
--------- --------- ----------- ---------
Net loss - Pro Forma $(489,946) $(156,266) $(1,324,995) $(446,766)
Net loss attributable to common stockholders - Pro forma $(489,946) $(156,266) $(1,324,995) $(446,766)
Basic (and assuming dilution) loss per share - as reported $ (0.05) $ (0.03) $ (0.17) $ (0.07)
Basic (and assuming dilution) loss per share - Pro forma $ (0.06) $ (0.03) $ (0.19) $ (0.07)
53
New Accounting Pronouncements
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
definitive 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. Any goodwill
impairment loss recognized as a result of the transitional goodwill impairment
test is recorded as a cumulative effect of a change in accounting principle. The
adoption of SFAS 142 had no material impact on the Company's condensed 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 Extinguishments 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.
54
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.
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. In April 2003, the FASB issued Statement No.149, "
Amendment of Statement of 133 on Derivative Instruments and Hedging Activities",
which amends Statement 133, Accounting for Derivative Instruments and Hedging
Activities. The adoption of this statement did not have a material impact on the
Company's financial position.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". The
adoption of this statement did not have a material impact on the Company's
financial position.
NOTE B - COMMON STOCK
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.
NOTE C - STOCK OPTIONS
Employee Stock Options
The following table summarizes the changes in options outstanding and the
related prices for the shares of the Company's common stock issued to employees
of the Company under a non-qualified employee stock option plan.
Options Outstanding Options Exercisable
----------------------------------- ----------------------------
Weighted Average Weighted Weighted
Number Remaining Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- --------------------- -------------- ----------- --------------
$0.2125 2,000,000 6.00 $0.2125 2,000,000 $0.2125
2,000,000 6.00 $0.2125 2,000,000 $0.2125
55
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
---------------- ---------------
Outstanding at July, 2003 -- --
--------- -------
Granted 2,000,000 $0.2125
Exercised -- --
Canceled or expired -- --
--------- -------
Outstanding at September 30, 2003 2,000,000 $0.2125
========= =======
The weighted-average fair value of stock options granted to employees during the
period ended September 30, 2003 and 2002 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2003 2002
---- ----
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.02% n/a
Expected stock price volatility 26% n/a
Expected dividend payout -- --
Expected option life-years (a) 6 n/a
----------
(a) The expected option life is based on contractual expiration dates
If the Company recognized compensation cost for the non-qualified employee stock
option plan in accordance with SFAS No. 123, the Company's pro forma net loss
and net loss per share would have been $(1,324,995) and $(0.19) for the period
ended September 30, 2003 and $(446,766) and $(0.07) for the period ended
September 30, 2002, respectively.
NOTE D- COMMITMENTS AND CONTINGENCIES
In October, 2003, OneCap, Inc. filed a complaint against the Company and its
officers, Directors and certain shareholders in the District Court of Clark
County, Nevada. The complaint alleges a breach of contract and securities
fraud. The Company believes that it has meritorious defenses to the plaintiff's
claims and intends to vigorously defend itself against the Plaintiff's claims.
56
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On October 1, 2003, we entered into an agreement with Consulting for Strategic
Growth 1, Ltd. ("CFSG"), in which CFSG would provide consulting services in the
form of investor relations and public relations. In consideration for services
rendered, Stanley Wunderlich, Chairman of CFSG was issued 125,000 shares of the
Company's Common Stock at $0.001 per share and Bonnie Stretch, pubic relations
for CFSG, was issued 25,000 shares of the Company's 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. 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 the Company's 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, 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 December 19, 2003, we issued 700,000 shares of its 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 December 19, 2003, we issued 600,000 shares of its 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 December 19, 2003, we issued 600,000 shares of its 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 December 22, 2003, we issued 800,000 shares of its 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 December 22, 2003, we issued 600,000 shares of its 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 December 31, 2003, 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 or our common stock. This
private placement was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On January 27, 2004, we issued 40,000 shares of its 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 its 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.
57
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.
ITEM 27. INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
3.a [1] Articles of Incorporation of Cyberlux Corporation filed
May 17, 2000
3.1a [2] Certificate of Amendment of Articles of Incorporation
filed April 3, 2003
3.1b |1] Bylaws of Cyberlux Corporation
3.1c [2] Certificate of Designation of the Relative Rights and
Preferences of the Series A Convertible Preferred Stock of the
Registrant, dated as of December 30, 2003
5.1 Opinion re: Legality
10.a [1] SCCS Proprietary Product Manufacturing Agreement
10.b [1] Donald F. Evans Employment Agreement
10.c [1] Alan H. Ninneman Employment Agreement
10.d [1] John W. Ringo Employment Agreement
10.1 [2] Donald F. Evans Amended Employment Agreement
10.2 [2] Alan H. Ninneman Amended Employment Agreement
10.3 [2] John W. Ringo Amended Employment Agreement
10.4 [2] David D. Downing Employment Agreement
10.f [1] Robrady Agreement
10.h [1] ICT, Inc. Agreement
10.i [1] Research Econometrics Agreement
10.10 [3] Mark D. Schmidt Employment Agreement
10.1 [4] Series A Convertible Preferred Stock Purchase Agreement, dated as
of December 31, 2003, by the and among the Registrant and the
purchasers set forth therein.
10.2 [4] Registration Rights Agreement, dated as of December 31, 2003, by
and among the Registrant and the purchasers named therein
10.3 [4] Form of Series A Warrant to purchase shares of Common Stock of the
Registrant issued on December 31, 2003 in connection with the sale
of the Series A Convertible Preferred Stock.
58
10.4 [4] Form of Series B Warrant to purchase shares of Common Stock of the
Registrant issued on December 31, 2003 in connection with the sale
of the Series A Convertible Preferred Stock.
10.5 [4] Lock-Up Agreement dated as of December 31, 2003 by and among the
Registrant and certain stockholders named therein.
99.1 [4] Press Release dated January 8, 2004.
23.1 Consent of John W. Ringo (included in Exhibit 5.1)
23.2 Consent of Russell Bedford Stefanou Mirchandani, LLP
----------
[1] Incorporated by reference to our Registration Statement filed on Form
10-SB filed December 2001
[2] Incorporated by reference to our Registration Statement filed on Form SB-2
filed April 30, 2003
[3] Incorporated by reference to our Form 10-QSB for the period ended June 30,
2003
[4] Incorporated by reference to our Form 8-K filed on January 8, 2004
59
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the
Securities Act of 1933 (the "ACT");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
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) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement;
(iii) Include any additional or changed material information on the
plan of distribution;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the end of the offering. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has 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. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer 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 small business issuer 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 Act and
will be governed by the final adjudication of such issue.
60
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 for filing on this Form SB-2 and authorized this
registration statement to be signed on our behalf by the undersigned, in
Pinehurst, North Carolina on January 29, 2003.
CYBERLUX CORPORATION.
By: /s/ Donald F. Evans
-----------------------------------
Donald F. Evans
Chief Executive Officer, and
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates stated.
By: /s/ Donald F. Evans
-----------------------------------
Donald F. Evans,
Chief Executive Officer, and
Chairman of the Board
Date: January 29, 2003
By: /s/ Mark D. Schmidt
-----------------------------------
Mark D. Schmidt, President,
Chief Operating Officer and
Director
Date: January 29, 2003
By: /s/ John W. Ringo
-----------------------------------
John W. Ringo, Secretary,
Corporate Counsel and Director
Date: January 29, 2003
By: /s/ Alan H. Ninneman
-----------------------------------
Alan H. Ninneman,
Senior Vice President and Director
Date January 29, 2003
By: /s/ David D. Downing
-----------------------------------
David D. Downing, Treasurer and
Chief Financial Officer
61