10-K/A 1 dec0410ksb405amend42505.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-25474 LUNA TECHNOLOGIES INTERNATIONAL, INC. ----------------- --------------------------------------- (Name of Small Business Issuer in its charter) Delaware 91-1987288 ------------------------ ---------------------- (State of incorporation) (IRS Employer Identification No.) 61A Fawcett Road Coquitlam, British Columbia, Canada V3K 6V2 ------------------------------------- --------- (Address of Principal Executive Office) Zip Code Registrant's telephone number, including Area Code: (888) 955-8883 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (Title of Class) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. X YES NO Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The Company's revenues for the most recent fiscal year were $657,165. The aggregate market value of the voting stock held by non-affiliates of the Company as of April 15, 2005 was approximately $1,392,044. As of April 15, 2005 the Company had 10,009,648 issued and outstanding shares of common stock. ITEM 1. DESCRIPTION OF BUSINESS The Company was incorporated on March 25, 1999 in Delaware to develop, manufacture and sell photoluminescent products (High Performance Photoluminescent Lighting, "HPPL") used for emergency lighting, signs and markings, wayfinding systems and novelty products with applications in marine, commuter, rail, subway, building and toy markets. The Company conducts business in Canada through its wholly-owned Canadian subsidiary, Luna Technologies (Canada) Ltd. The Company's executive offices are located at 61B Fawcett Road, Coquitlam, British Columbia, Canada V3K 6V2. The Company's telephone number is (604) 526-5890, its facsimile number is (604) 526-8995, its email address is info@lunaplast.com, and its web site is www.lunaplast.com. From the date of its incorporation and through December 31, 2004 the Company had cumulative losses of $(2,406,065). There can be no assurance that the Company will ever earn any profits. Phosphorescent (also referred to as photoluminescent) materials emit light continuously when they are excited by ultraviolet or visible light. However, unlike fluorescent materials, when the excitation source is extinguished, phosphorescent materials continue to emit light. It is this light (called afterglow) that people refer to as "glow-in-the-dark". The afterglow decreases (or decays) over time after the excitation source has been extinguished. Although many people associate the word "photoluminescence" with "glow-in-the-dark" toys and novelties, in the lighting industry, photoluminescent products such as marker tapes and signs are commonly used to delineate emergency escape routes and danger areas, and to mark equipment, pipes, tools and working and accident prevention clothing. Photoluminescent signs and markers are used in a variety of situations, including office buildings, industrial sites, passenger ships, offshore drilling platforms, underground mines, and aircraft. The use of photoluminescent materials for life safety applications is recommended or mandated in numerous building codes, fire safety codes, and transportation standards. Most photoluminescent products are composed of inorganic pigments that can be incorporated into paint, plastic films, enamels, and flexible and rigid molded plastics. Typical products include adhesive vinyl tapes, rigid polyvinyl chloride (PVC) marker strips, and silk-screened plastic signage. Photoluminescent enamel-coated sheet metal and ceramic products are also available. The main pigment commonly used in photoluminescent glow-type products is a zinc sulphide compound emitting a yellowish-green light. This material performs well when subjected to high ambient lighting levels but the decay rate is rather rapid. The Company's current LUNAplast pigment material, Strontium Aluminate, has a performance level 20 x that of zinc-based products. In addition, the decay curve for strontium-based products is measured in hours as opposed to minutes for zinc-based items. 2 Strontium Aluminate is more expensive than zinc sulphide and takes slightly longer to charge, but can "store" more light, making it much more suitable for use in locations where ambient light levels are low. Strontium Aluminate also offers much brighter and longer-lasting photoluminescence. Although Strontium Aluminate PL material is superior to products made with zinc sulphide, the process required to manufacture Strontium Aluminate PL is very complex and manufacturers were unable to cost effectively produce Strontium Aluminate PL products in commercial quantities. Between January 1995 and October 1999, Douglas Sinclair, presently the chief executive officer of the Company's Canadian subsidiary, developed the proprietary technology, formulas and processes needed to commercially manufacture Strontium Aluminate PL products on a cost-effective basis. The resulting product, referred to by the Company as Lunaplast, is up to 20 x times brighter than commercial zinc sulphide products, and is clearly visible after many hours of total darkness. During this same period of time, Mr. Sinclair and Kimberly Landry, an officer and director of the Company, developed an advanced Strontium Aluminate HPPL material which is four times brighter than the Company's Lunaplast product. Mr. Sinclair and Ms. Landry filed a patent application pertaining to this invention with the U.S. Patent and Trademark Office in November 1997. For a nominal consideration Mr. Sinclair and Ms. Landry assigned the rights in November 1997 to the patent application and related technology to Luna Technologies Inc. ("LTI"), a corporation formed by Ms. Landry in December 1994. In April 1999 the Company acquired from LTI the rights to the patent application and related technology assigned to LTI by Mr. Sinclair and Ms. Landry. In consideration for this assignment, the Company agreed to pay LTI $90,000, without interest, on or before June 30, 2000. Subsequent to June 30, 2000, the Company paid this debt in full. As of March 30, 2004 the patent application had been placed in abeyance. In November 1999, the Company acquired from Mr. Sinclair the proprietary technology required to manufacture Lunaplast into PVC sheets, vinyl rolls and paints as well as the trademark rights to these products. In consideration for the assignment of this technology and the trademarks, the Company paid Mr. Sinclair $60,000. During 2000 the Company developed the processes required to manufacturer Strontium Aluminate PL products using vacuum forming, extrusion, and injection molding techniques. Lunaplast is available in flexible vinyl and rigid PVC sheets. In addition, a wide range of polymer compounds for extrusions and injection molding was added during the year. The substantial increase in performance opens up a completely new range of opportunities in life safety. Direct replacement of electrical exit signs (Underwriters Laboratories UL 924) is expected to be a market for photoluminescent materials in the near future. The Company began producing Lunaplast on a commercial basis during fiscal 2000. During the year ended December 31, 2004 one customer accounted for 43% of the Company's gross revenues. The Company is of the opinion that the loss of this customer would not have a material adverse effect on the Company. 3 Manufacturing Lunaplast is a three-part laminate, consisting of one base layer of highly reflective white material of PVC or vinyl, one mid-layer of photoluminescent PVC or vinyl impregnated with the Company's proprietary Strontium Aluminate polymer compound, and one top layer of clear PVC or vinyl with UV and fire-resistant properties. All aspects of the Company's manufacturing process are subcontracted to various third parties which formulate, mix and produce Lunaplast to the Company's specifications. Once the manufacturing process is complete, Lunaplast is sold to fabricators which use Lunaplast in a variety of end user products. All subcontractors involved in manufacturing Lunaplast have agreed to maintain the confidential nature of the Company's proprietary manufacturing technology. The Company does not have any long-term agreements with any of the third parties involved in manufacturing Lunaplast. The Company believes that alternative manufacturers are available which could produce Lunaplast on short notice and without disrupting product delivery schedules. Sales and Marketing World markets for photoluminescent lighting products are in the marine (shipping and cruise lines), transportation and commuter industry, and in the commercial, institutional and industrial retrofit and new building construction sector, in which the need for photoluminescent emergency lighting and wayfinding signage systems has risen sharply over the last two decades. A third primary marker is "glow-in-the-dark" toys and novelties. The Company believes that the world market for HPPL lighting is underdeveloped due largely to the low illumination delivered by zinc sulphide products. The Company plans to build interest and sales for Lunaplast products in established markets around the world. The Company's marketing plan includes advertising in trade magazines, exhibiting at industry tradeshows, direct mail campaigns, soliciting editorial coverage from naval architecture, building design, architecture and lighting industry publications and distributing product samples, videos and brochures to designers and developers. The Company's website will also be used as a means to distribute product information to interested parties quickly. The Company markets its products through its officers and through independent sales representatives. As of April 15, 2005 the Company had independent sales representatives marketing Lunaplast in North America, Latin America, Korea and Australia. Competition No single company dominates the world marketplace. Instead, a number of small and medium-sized firms are active within regional markets in Europe, the U.S. and elsewhere. Some producers include companies such as Permalight AG of Germany (Europe and North America), Safe T Glow (UK and U.S.), Datrex (U.S.), Jalite (UK), Everglow (Europe) and Existalight (Europe and U.S.). It is 4 difficult to determine annual sales volumes and revenues for these firms, as most are privately held. Although there are several manufacturers and distributors of photoluminescent products the Company believes it has a significant advantage over its competitors as a result of its proprietary manufacturing processes and cost effective approach to the production of Strontium Aluminate-based HPPL materials in commercial quantities. The Company also plans to be competitive in the HPPL industry by developing advanced Strontium Aluminate materials, enhancing formulation and focusing on higher volumes with a resultant lower cost of production. During the twelve-month period ending December 31, 2005 the Company plans to spend approximately $100,000 on research relating to the development of advanced strontium aluminate PL materials. Office Space The Company rents on a month to month basis approximately 4,800 square feet of executive office space at 61A and 16.B Fawcett Road, Coquitlam, British Columbia at a monthly rental of CDN$3,490. Employees As of April 15, 2005 the Company had ten full-time employees. See Item 9 of this report. As of April 15, 2005 the Company did not have any part time employees. Contingent upon the Company raising sufficient capital, the Company plans to hire additional employees as may be required by the level of the Company's operations. ITEM 2. DESCRIPTION OF PROPERTIES See Item 1 of this report. ITEM 3. LEGAL PROCEEDINGS. -------------------------- The Company is not engaged in any litigation, and the officers and directors presently know of no threatened or pending litigation in which it is contemplated that the Company will be made a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable ITEM 5. MARKET FOR COMMON EQUITY AND OTHER RELATED STOCK- HOLDER MATTERS. The Company's common stock is quoted on the Over the Counter Bulletin Board under the symbol "LTII". The following table presents the high and low closing prices for the common stock as reported by the NASD for each quarter beginning in April 2001 when the Company's stock was first quoted. The prices reflect inter-dealer quotations without adjustments for retail mark-up, markdown or commissions, and do not necessarily represent actual transactions. 5 Quarter Ending High Low 3/31/02 $0.71 $0.41 6/30/02 $1.10 $0.75 9/30/02 $0.87 $0.35 12/31/02 $0.48 $0.25 3/31/03 $0.51 $0.30 6/30/03 $0.55 $0.40 9/30/03 $0.76 $0.35 12/31/03 $0.76 $0.55 3/31/04 $1.15 $0.43 6/30/04 $1.00 $0.25 9/30/04 $0.40 $0.19 12/31/04 $0.40 $0.19 As of April 15, 2005 there were 94 record owners of the Company's common stock. Holders of common stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefore and, in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment of liabilities. The Board of Directors is not obligated to declare a dividend. The Company has not paid any dividends and the Company does not have any current plans to pay any dividends. The provisions in the Company's Articles of Incorporation relating to the Company's preferred stock would allow the Company's directors to issue preferred stock with rights to multiple votes per share and dividends rights which would have priority over any dividends paid with respect to the Company's common stock. The issuance of preferred stock with such rights may make more difficult the removal of management even if such removal would be considered beneficial to shareholders generally, and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if such transactions are not favored by incumbent management. During the year ended December 31, 2004 the Company: 1. Sold 100,000 units to one private investor at a price of $0.65 per unit. Each unit consisted of one common share and one warrant. Each warrant entitles the holder to purchase one additional common share of the Company at a price of $1.00 per share until February 26, 2006. 2. Sold 35,000 units to one private investor at a price of $1.00 per unit. Each unit consisted of one common share and one warrant. Each warrant entitles the holder to purchase one additional common share of the Company at a price of $1.00 per share until March 31, 2006. 6 3. Sold 1,250,000 units to one private investor at a price of $0.20 per unit. Each unit consisted of one common share and one warrant. Each warrant entitles the holder to purchase one additional common share of the Company at a price of $0.30 per share until September 3, 2006. 4. Issued 954,000 shares of its common stock upon the exercise of options granted in accordance with the Company's Non-Qualified Stock Option Plan. 5. Issued 597,812 shares of its common stock in accordance with the Company's Stock Bonus Plan. The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 with respect to the issuance of shares referred to in subparts 1 through 3. The shares referred to in subparts 4 and 5 were registered by means of a registration statement on Form S-8. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS/ PLAN OF OPERATIONS Sales during the year ended December 31, 2004 were $537,165, an increase of $155,444 or 41% from the previous year. Gross margin increased 11% to 50% over the same period in 2003 due to the Company's improvement in productivity and cost controls. Two customers amounted to 84% of total sales in 2003 and 60% of total sales during 2004. During the year ended December 31, 2004 the Company received payments totaling $120,000 from customers in connection with pricing agreements. General and administrative expenses for the year ended December 31, 2004 increased with the addition of management, staff and overhead needed to facilitate the Company's growth and ongoing product development. During the year ended December 31, 2004, stock-based compensation of $154,600 was expensed as consulting fees representing the fair value of stock options granted and $124,868 was expensed as consulting fees representing the fair value of 597,812 common shares issued pursuant to the Company's stock bonus plan. During the year ended December 31, 2004, the Company's operations used $314,683 in cash and the Company purchased $5,912 of equipment. During this period the Company satisfied its cash requirements through sales of common stock in private placements of $357,000 and advances from related parties of $49,509. The Company made $39,996 in convertible debenture repayments, $8,338 in notes payable repayments and decreased the bank overdraft by $11,068. Between December 2002 and January 2003 the Company borrowed $120,000 from a third party. Loan proceeds of $60,000 were received in December 2002 and the remaining $60,000 was received in January 2003. The loan is secured by all of the Company's assets and bears interest at a rate of 8% per year. The loan is to be repaid in 30 monthly principal payments of $3,333, commencing June 21, 2003, with a final principal payment of $20,010 due on December 21, 2005. Interest on 7 the outstanding principal balance is payable monthly commencing June 21, 2003. The unpaid balance of the loan and interest may be converted at any time into restricted shares of the Company's common stock at a price of $1.20 per share during 2005. The Company anticipates that its capital needs during the year ending December 31, 2005 will be as follows: $600,000 for corporate expenses, $100,000 for research relating to the development of advanced strontium aluminate PL materials, $360,000 for current liabilities and $56,797 for convertible debenture payments. The Company does not have any available credit, bank financing or other external sources of liquidity. Due to the operating losses of the Company during the Company's initial year of operations, the Company's operations have not been a source of liquidity. At December 31, 2004 the Company had a working capital deficiency of approximately $254,000. The ability of the Company to continue as a going concern is dependent on the Company raising additional capital and on future profitable operations. To that end the Company is seeking financing to expand its operations and for working capital purposes. There can be no assurance that the Company will be successful in obtaining additional funding. Critical Accounting Policies And Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, intangible assets, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. These accounting policies are described in the notes to the consolidated financial statements for the fiscal year ended December 31, 2004 which are included as part of this report. ITEM 7. FINANCIAL STATEMENTS See the financial statements attached to this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None. 8 ITEM 8A. CONTROLS AND PROCEDURES Kim Landry, the Company's Chief Executive and Principal Financial Officer has evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date") and in her opinion the Company's disclosure controls and procedures ensure that material information relating to the Company, including the Company's consolidated subsidiaries, is made known to her by others within those entities, particularly during the period in which this report is being prepared, so as to allow timely decisions regarding required disclosure. To the knowledge of Ms. Landry there have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the Evaluation Date. As a result, no corrective actions with regard to significant deficiencies or material weakness in the Company's internal controls were required. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The following sets forth certain information concerning the present management of the Company: Name Age Position with Company Scott Bullis 42 President Kimberly Landry 39 Chief Executive Officer, Principal Financial Officer, Chief Accounting Officer, Secretary and a Director Robert H. Humber 60 Director Kimberly Landry was the Company's President between September 1, 2001 and August 31, 2004. On August 31, 2004 Ms. Landry resigned as the Company President and was appointed the Company's Chief Executive Officer. Ms. Landry was appointed the Company's Principal Financial and Chief Accounting Officer on April 5, 2005. Ms. Landry has been the Secretary of the Company, as well as a director since April 1999. Since December 1994 Ms. Landry has also been an officer and director of LTI. Scott Bullis has the Company Presidents since August 31, 2004. Between September 2000 and October 2003 Mr. Bullis was the Chief Executive Officer of One5 Corporation, a business which provided technology to wireless telecommunications companies. Between June 1999 and June 2000 Mr. Bullis was Vice President of Marketing for iEngineer.com, Inc. Robert Humber was the President of the Company between September 1, 2001 and April 1999. Mr. Humber has been a director of the Company since April 1999. Between July 1996 and November 1999 Mr. Humber was the president of LTI. Prior to July 1996 Mr. Humber worked with Douglas Sinclair and Kimberly Landry in developing photoluminescent products. For the past twenty-three years Mr. Humber has also been an independent investigator and security consultant providing services to law enforcement agencies and private industry. 9 The Company does not have a compensation committee. The Company's Board of Directors serves as the Company's Audit Committee. None of the Company's directors qualifies as a financial expert. The Company has adopted a Code of Ethics which is applicable to the Company's principal executive, financial, and accounting officers and persons performing similar functions. The Code of Ethics is available on the Company's website located at www.lunaplast.com. Management Changes Effective August 31, 2004: o Douglas Sinclair resigned as an officer of the Company and as an officer of the Company's subsidiaries. o To satisfy amounts owed by the Company to Mr. Sinclair for management fees the Company agreed to pay Mr. Sinclair CDN$187,000 in a series of installments with the last installment due January 15, 2007. o Mr. Sinclair agreed to maintain the confidential nature of the Company's trade secrets and proprietary technology. o Mr. Sinclair agreed that he would not compete with the Company until July, 2006. o Kimberly Landry was appointed the Company's Chief Executive Officer. o Scott Bullis was appointed the Company's President. Brian Fiddler resigned as the Company's Principal Financial and Accounting Officer, and as a director of the Company on April 4, 2005. On that same date, Ms. Landry was appointed the Company's Principal Financial and Chief Accounting Officer. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth in summary form the compensation received by the Company's executive officers during the fiscal years ended December 31, 2002, 2003, and 2004. Annual Compensation Long Term Compensation ------------------------------- ---------------------- Other Re- Annual stricted Name and Compen- Stock Options Principal Fiscal Salary Bonus sation Awards Granted Position Year (1) (2) (3) (4) (5) --------- ------ ------- ------- ------ -------- -------- Kimberly Landry, 2004 $55,705 $46,750 500,000 President between 2003 $45,120 -- -- -- -- September 1, 2001 2002 $20,000 -- -- -- -- and August 31, 2004, and Chief Executive Officer since August 31, 2004 10 Scott Bullis, 2004 $22,016 -- -- -- 659,200 President since August 31, 2004 (1) The dollar value of base salary (cash and non-cash) received. (2) The dollar value of bonus (cash and non-cash) received. (3) Any other annual compensation not properly categorized as salary or bonus, including perquisites and other personal benefits, securities or property. (4) Amounts reflect the value of the shares of the Company's common stock issued as compensation for services. The table below shows the number of shares of the Company's common stock owned by the officers listed above, and the value of such shares as of December 31, 2004. Name Shares Value ---- ------ ------ Kimberly Landry 2,025,000 $790,000 Scott Bullis -- -- (5) The shares of common stock to be received upon the exercise of all stock options granted during the fiscal years shown in the table. The Company's Canadian subsidiary had an employment agreement with Kimberly Landry whereby the subsidiary has agreed to pay Ms. Landry a salary of CDN$7,500 per month. Mr. Bullis has an Employment Agreement with the Company which provides that the Company will pay Mr. Bullis CDN$7,500 per month. The monthly salary payable to Mr. Bullis will be renegotiated at the request of either Mr. Bullis or the Company during the term of the Employment Agreement. In the event that the Company and Mr. Bullis cannot agree on any increase in salary, the monthly salary payable to Mr. Bullis will be increased on an annual basis by the greater of (i) 15% or (ii) the percentage which is the average percentage increase of all compensation paid to the Company's officers during the previous twelve months. The Employment Agreement with Mr. Bullis may be terminated by either the Company or Mr. Bullis on thirty days notice. In addition to his compensation Mr. Bullis was granted options in accordance with the following terms: Shares Issuable Upon Option Exercise Expiration Exercise of Option Price (1) Date 52,800 US $0.35 August 26, 2007 6,400 US $0.75 August 26, 2007 400,000 (1) US $0.35 August 26, 2007 200,000 (1) US $0.50 August 26, 2007 11 (1) Options will vest in equal monthly portions over a period of twenty-four months beginning on July 26, 2004. Mr. Bullis is also entitled to participate in any medical or other benefit plans that are offered to the Company's employees generally. The Company's Board of Directors may increase the compensation paid to the Company's officers depending upon the results of the Company's future operations. Long Term Incentive Plans - Awards in Last Fiscal Year ------------------------------------------------------ None. Employee Pension, Profit Sharing or Other Retirement Plans ---------------------------------------------------------- Except as provided in the Company's employment agreements with its executive officers, the Company does not have a defined benefit, pension plan, profit sharing or other retirement plan, although the Company may adopt one or more of such plans in the future. Compensation of Directors ------------------------- Standard Arrangements. At present the Company does not pay its directors for attending meetings of the Board of Directors, although the Company may adopt a director compensation policy in the future. The Company has no standard arrangement pursuant to which directors of the Company are compensated for any services provided as a director or for committee participation or special assignments. Other Arrangements. During the year ended December 31, 2004, and except as disclosed elsewhere in this report, no director of the Company received any form of compensation from the Company. Stock Option and Bonus Plans ---------------------------- The Company has an Incentive Stock Option Plan, a Non-Qualified Stock Option Plan and a Stock Bonus Plan. A summary description of each Plan follows. In some cases these three Plans are collectively referred to as the "Plans". None of the plans have been approved by the Company's shareholders. Incentive Stock Option Plan. The Incentive Stock Option Plan authorizes the issuance of shares of the Company's common stock to persons that exercise options granted pursuant to the Plan. Only officers, directors and key employees of the Company may be granted options pursuant to the Incentive Stock Option Plan. In order to qualify for incentive stock option treatment under the Internal Revenue Code, the following requirements must be complied with: 1. Options granted pursuant to the Plan must be exercised no later than: 12 (a) The expiration of thirty (30) days after the date on which an option holder's employment by the Company is terminated. (b) The expiration of one year after the date on which an option holder's employment by the Company is terminated, if such termination is due to the Employee's disability or death. 2. In the event of an option holder's death while in the employ of the Company, his legatees or distributees may exercise (prior to the option's expiration) the option as to any of the shares not previously exercised. 3. The total fair market value of the shares of Common Stock (determined at the time of the grant of the option) for which any employee may be granted options which are first exercisable in any calendar year may not exceed $100,000. 4. Options may not be exercised until one year following the date of grant. Options granted to an employee then owning more than 10% of the Common Stock of the Company may not be exercisable by its terms after five years from the date of grant. 5. The purchase price per share of Common Stock purchasable under an option is determined by the Committee but cannot be less than the fair market value of the Common Stock on the date of the grant of the option (or 110% of the fair market value in the case of a person owning the Company's stock which represents more than 10% of the total combined voting power of all classes of stock). Non-Qualified Stock Option Plan. The Non-Qualified Stock Option Plan authorizes the issuance of shares of the Company's common stock to persons that exercise options granted pursuant to the Plan. The Company's employees, directors, officers, consultants and advisors are eligible to be granted options pursuant to the Plan, provided however that bona fide services must be rendered by such consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction. The option exercise price is determined by the Committee but cannot be less than the par value of the Company's Common Stock on the date the option is granted. Options granted pursuant to the Plan not previously exercised terminate upon the date specified when the option was granted. Stock Bonus Plan. The Company's Stock Bonus Plan allows for the issuance of shares of common stock to the Company's employees, directors, officers, consultants and advisors; provided, however, that bona fide services must be rendered by consultants or advisors and such services must not be provided in connection with promoting the Company's common stock or a capital-raising transaction. Other Information Regarding the Plans. The Plans are administered by the Company's Board of Directors. The Board of Directors has the authority to interpret the provisions of the Plans and supervise the administration of the Plans. In addition, the Board of Directors is empowered to select those persons to whom shares or options are to be granted, to determine the number of shares subject to each grant of a stock bonus or an option and to determine when, and 13 upon what conditions, shares or options granted under the Plans will vest or otherwise be subject to forfeiture and cancellation. In the discretion of the Board of Directors, any option granted pursuant to the Plans may include installment exercise terms such that the option becomes fully exercisable in a series of cumulating portions. The Board of Directors may also accelerate the date upon which any option (or any part of any options) is first exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock Option Plan will be forfeited if the "vesting" schedule established by the Board of Directors at the time of the grant is not met. For this purpose, vesting means the period during which the employee must remain an employee of the Company or the period of time a non-employee must provide services to the Company. At the time an employee ceases working for the Company (or at the time a non-employee ceases to perform services for the Company), any shares or options not fully vested will be forfeited and cancelled. In the discretion of the Board of Directors payment for the shares of Common Stock underlying options may be paid through the delivery of shares of the Company's Common Stock having an aggregate fair market value equal to the option price, provided such shares have been owned by the option holder for at least one year prior to such exercise. A combination of cash and shares of Common Stock may also be permitted at the discretion of the Board of Directors. Options are generally non-transferable except upon death of the option holder. Shares issued pursuant to the Stock Bonus Plan will generally not be transferable until the person receiving the shares satisfies the vesting requirements imposed by the Board of Directors when the shares were issued. The Board of Directors of the Company may at any time, and from time to time, amend, terminate, or suspend one or more of the Plans in any manner it deems appropriate, provided that such amendment, termination or suspension cannot adversely affect rights or obligations with respect to shares or options previously granted. The Board of Directors may not, without shareholder approval: make any amendment which would materially modify the eligibility requirements for the Plans; increase or decrease the total number of shares of Common Stock which may be issued pursuant to the Plans except in the case of a reclassification of the Company's capital stock or a consolidation or merger of the Company; reduce the minimum option price per share; extend the period for granting options; or materially increase in any other way the benefits accruing to employees who are eligible to participate in the Plans. The Plans are not qualified under Section 401(a) of the Internal Revenue Code, nor are they subject to any provisions of the Employee Retirement Income Security Act of 1974. Summary. The following tables present certain information as of April 15, 2005 concerning the stock options and stock bonuses granted by the Company. Each option represents the right to purchase one share of the Company's common stock. 14 Total Shares Remaining Shares Reserved for Shares Options/ Reserved Outstanding Issued As Shares Name of Plan Under Plan Options Stock Bonus Under Plan ------------ ---------- ------------ ----------- --------------- Incentive Stock Option Plan 750,000 -- N/A 445,000 Non-Qualified Stock Option Plan 4,000,000 (1) 770,200 N/A 2,193,130 Stock Bonus Plan 1,250,000 (1) N/A 777,812 472,188

(1) Reflects amendment to Plan in February 2005 which increased number of shares issuable upon exercise of options granted pursuant to the Plan. The persons listed below have received options or shares of the Company's common stock as a stock bonus: Incentive Stock Options Shares Expiration Options Expired/ Subject Exercise Date of Date of Exercised as of Option Holder To Option Price Grant Option April 15, 2005 ------------- --------- -------- ------- ---------- ---------------- Employee 5,000 $0.50 03/04/03 03/04/04 5,000 Consultant 300,000 $0.23 10/7/04 10/7/06 300,000 ------- 305,000 Non-Qualified Stock Options Shares Expiration Options Expired/ Subject Exercise Date of Date of Exercised as of Option Holder To Option Price Grant Option April 15, 2005 ------------- --------- -------- ------- ---------- ---------------- Brian Fiddler 40,000 $0.10 08/15/03 08/30/08 40,000 Brian Fiddler 40,000 $0.18 08/15/03 08/30/08 20,000 Brian Fiddler 20,000 $0.50 08/15/03 08/30/08 Brian Fiddler 20,000 $0.25 08/15/03 08/30/08 Brian Fiddler 20,000 $0.40 08/15/03 08/30/08 Brian Fiddler 20,000 $0.60 08/15/03 08/30/08 Scott Bullis 52,800 $0.35 07/26/04 08/26/07 Scott Bullis 6,400 $0.75 07/26/04 08/26/07 Scott Bullis 400,000 $0.35 07/26/04 08/26/07 Scott Bullis 200,000 $0.50 07/26/04 08/26/07 Kimberly Landry 359,000 $0.04 10/06/04 11/04/04 359,000 KimberlyLandry 130,000 $0.04 10/06/04 11/18/04 130,000 Kimberly Landry 11,000 $0.04 10/06/04 10/06/14 Other employees and consultants 572,670 $0.05/$0.50 * * 572,670 ---------- ---------- 1,891,870 1,121,670 ========= ========= * Various dates 15 Stock Bonuses Shares Issued Name as Stock Bonus Date Issued ---- -------------- ----------- Brian Fiddler 18,000 8/15/03 Kimberly Landry 205,000 10/04/04 Brian Fiddler 30,000 10/04/04 Robert Humber 100,000 10/04/04 Douglas Sinclair 175,000 10/04/04 Kimberly Landry 20,000 12/31/04 Brian Fiddler 20,000 12/31/04 Kimberly Landry 10,000 01/25/05 Brian Fiddler 10,000 01/25/05 Other employees and consultants 189,812 Various dates -------- 777,812 ======== Options Granted and Exercised During Year Ended December 31, 2004 and Year-End Option Values The tables below present information concerning the options granted and exercised during the year ended December 31, 2004 to the persons named below and the fiscal year-end value of all unexercised options (regardless of when granted) held by these persons. The options shown below were all Non-Qualified Stock Options. % of Total Options Granted to Exercise Options Employees in Price Per Expiration Name Granted (#) Fiscal Year Share Date ------ ----------- ------------ ------------ ------------ Kimberly Landry 489,000 42% $0.04 11/04 Kimberly Landry 11,000 1% $0.04 10/14 Scott Bullis 659,000 57% Various 8/07 Brian Fiddler (5) -- -- -- -- Robert H. Humber -- -- -- -- Value (in $) of Unexercised Number of In-the-Money Unexercised Options at Fiscal Shares Options (3) Year-End (4) Acquired On Value Exercisable/ Exercisable/ Name Exercise (1) Realized (2) Unexercisable Unexercisable ---- ------------ ------------ ------------- --------------- Kimberly Landry 489,000 $148,990 11,000/-- $ 4,290/-- Scott Bullis -- -- -- -- Brian Fiddler (5) -- -- -- -- Robert H. Humber -- -- -- -- 16 (1) The number of shares received upon exercise of options during the year ended December 31, 2004. (2) With respect to options exercised during the Company's year ended December 31, 2004, the dollar value of the difference between the option exercise price and the market value of the option shares purchased on the date of the exercise of the options. (3) The total number of unexercised options held as of December 31, 2004, separated between those options that were exercisable and those options that were not exercisable. (4) For all unexercised options held as of December 31, 2004, the market value of the stock underlying those options as of December 31, 2004. (5) Brian Fiddler resigned as an officer and director of the Company on April 4, 2005. The table below shows the weighted average exercise price of the outstanding options granted pursuant to the Company's Incentive and Non-Qualified Stock Option Plans as of December 31, 2004. The Company's Incentive and Non-Qualified Stock Option Plans were not approved by the Company's shareholders. Number of Securities Remaining Available Number For Future Issuance of Securities Under Equity to be Issued Weighted-Average Compensation Plans Upon Exercise Exercise Price of (Excluding Securities of Outstanding of Outstanding Reflected in Plan Category Options [a] Options Column (a)) ------------- -------------- ----------------- --------------------- Incentive Stock -- -- 445,000 Option Plan Non-Qualified Stock 770,200 $0.39 2,193,130 Option Plan ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the number of and percentage of outstanding shares of common stock owned by the Company's officers, directors and those shareholders owning more than 5% of the Company's common stock as of April 15, 2005. Shares of Name and Address Common Stock (1) Percent of Class ---------------- ----------------- -------------------- Kimberly Landry 2,025,000 21% 1653 Plateau Crescent Coquitlam, British Columbia Canada V3B 3E3 17 Shares of Name and Address Common Stock (1) Percent of Class ---------------- ----------------- -------------------- Scott Bullis -- -- 1204 - 939 Beatty St. Vancouver, British Columbia Canada, V6C 3Z1 Robert H. Humber 100,000 1% 13058 1/2 39th Ave., N.E Seattle, WA 98125-4614 Douglas Sinclair 1,584,000 16% 1653 Plateau Crescent Coquitlam, British Columbia Canada V3B 3E3 Robert Young 1,250,000 12.9% 6687 Nelson St. West Vancouver, British Columbia Canada V7W 2A5 All Officers and Directors as a Group (3 persons) 2,125,000 22% * Less than 1% (1) Excludes shares issuable upon the exercise of options or warrants held by the following persons: Shares Issuable Upon Exercise of Name Options or Warrants Exercisable Kimberly Landry 11,000 Scott Bullis 659,000 Robert H. Humber -- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In April 1999 the Company issued shares of its common stock to the persons, in the amounts, and for the consideration set forth below: Number Name of Shares Consideration Robert H. Humber 800,000 $ 800 Kimberly Landry 1,580,000 $1,580 Other third parties 2,120,000 $2,120 18 In April 1999 the Company acquired from LTI, a corporation formed by Kimberly Landry in December 1994, the rights to the Company's patent application and related technology. The patent application and related technology were assigned to LTI by Ms. Landry and Douglas Sinclair in November 1997. In consideration for the assignment of these rights, the Company paid LTI $90,000 during the year ended December 31, 2000. As of April 14, 2005 the patent application assigned to the Company was pending. Ms. Landry is an officer and director of the Company. Mr. Sinclair was an officer of the Company prior to August 31, 2004. See "Management Changes" in Item 9 of this report for information concerning the resignation of Mr. Sinclair. In November 1999, the Company acquired from Mr. Sinclair the proprietary technology required to manufacture Lunaplast into PVC sheets, vinyl rolls and paints as well as the trademark rights to these products. In consideration for the assignment of this technology and the trademarks, the Company paid Mr. Sinclair $60,000 during the year ended December 31, 2000. During the year ended December 31, 2000 the Company borrowed $60,000 from Ms. Landry. During the year ended December 31, 2003 the Company issued 225,000 shares of its common stock to Ms. Landry in payment of this debt. In January 2001 the Company acquired from LTI office and production equipment, as well as the rights to certain tradenames used by the Company. In consideration for these assets the Company agreed to pay LTI $41,142 prior to January 1, 2006. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Exhibit Number Exhibit Name Page Number ------- ------------ ----------- Exhibit 3 Articles of Incorporation and Bylaws * ----- Exhibit 4 Instruments Defining the Rights of Security Holders Exhibit 4.1 Incentive Stock Option Plan ** ------ Exhibit 4.2 Non-Qualified Stock Option Plan ** ------ Exhibit 4.3 Stock Bonus Plan ** ------ Exhibit 10 Material Contracts Exhibit 10.1 Agreement relating to purchase of patent rights * ----- Exhibit 10.2 Assignment of patent rights * ----- 19 Exhibit 10.3 Agreement relating to purchase of proprietary technology and trademarks * ----- Exhibit 10.4 Assignment of trademarks * ----- Exhibit 10.5 Non-Compete Agreement * ----- Exhibit 23 Accountants' Consent ----- Exhibit 31 Rule 13a-14(a)/15d-14(a) certifications ----- Exhibit 32 Section 1350 certifications ----- * Incorporated by reference to the same exhibit filed as part of the Company's Registration Statement on Form 10-SB. ** Incorporated by reference to the same exhibit filed as part of the Company's Registration Statement on Form S-8 (Commission File # 333-112647). 8-K Reports During the quarter ending December 31, 2004 the Company did not file any reports on Form 8-K. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Labonte & Co. served as the Company's independent public accountants during the fiscal year ended December 31, 2003. Effective January 1, 2004, LaBonte & Co. merged with Dale Matheson Carr-Hilton Chartered Accountants. Dale Matheson Carr-Hilton LaBonte served as the Company's independent public accountants during the fiscal year ended December 31, 2004. The following table sets forth the aggregate fees billed to the Company for the years ended December 31, 2003 and 2004 by LaBonte & Co. and by Dale Matheson Carr-Hilton LaBonte. 2003 2004 Audit Fees $17,600 $18,297 Audit-Related Fees -- -- Financial Information Systems -- -- Design and Implementation Fees -- -- Tax Fees -- -- All Other Fees -- -- Audit fees represent amounts billed for professional services rendered for the audit of the Company's annual financial statements and the reviews of the financial statements included in the Company's Forms 10-Q for the fiscal year. Before LaBonte & Co. or Dale Matheson Carr-Hilton LaBonte was engaged by the Company to render audit services, the engagement was approved by the Company's Board of Directors. 20 LUNA TECHNOLOGIES INTERNATIONAL, INC. FINANCIAL STATEMENTS DECEMBER 31, 2004 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- To the Stockholders and Board of Directors of Luna Technologies International, Inc. We have audited the consolidated balance sheets of Luna Technologies International, Inc. as at December 31, 2004 and 2003 and the consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. 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 that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial positions of the Company as at December 31, 2004 and 2003 and the results of its operations and its cash flows and the changes in stockholders' equity for the years then ended in accordance with generally accepted accounting principles in the United States. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a working capital deficiency and has incurred losses since inception raising substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. "Dale Matheson Carr-Hilton LaBonte" CHARTERED ACCOUNTANTS Vancouver, B.C. Canada March 31, 2005 LUNA TECHNOLOGIES INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS December December 31, 2004 31, 2003 -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Accounts receivable $ 81,357 $ 49,127 Prepaid expenses 6,027 3,960 Inventory 75,437 88,247 -------------------------------------------------------------------------------- 162,821 141,334 FURNITURE AND EQUIPMENT, net of depreciation of $81,424 (2003 - $70,340) 15,605 20,777 -------------------------------------------------------------------------------- $ 178,426 $ 162,111 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) CURRENT LIABILITIES Bank overdraft $ 184 $ 11,252 Accounts payable and accrued liabilities 265,505 229,738 Current portion of convertible debenture (Note 4) 56,797 39,996 Due to related parties (Note 3) 16,160 167,506 Current portion of notes payable (Note 3) 78,168 40,730 -------------------------------------------------------------------------------- 416,814 489,222 CONVERTIBLE DEBENTURE (Note 4) - 56,885 NOTE PAYABLE (Note 3) 101,497 - -------------------------------------------------------------------------------- 518,311 546,107 -------------------------------------------------------------------------------- GOING CONCERN CONTINGENCY (Note 1) STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Capital stock (Note 5) Common stock, $0.0001 par value, 30,000,000 shares authorized 9,664,648 (2003 - 6,727,836) shares issued and 966 673 outstanding Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized NIL issued and outstanding - - Additional paid-in capital 2,032,988 1,342,003 Warrants 124,000 74,000 Deficit (2,406,065) (1,735,410) Accumulated other comprehensive loss (91,774) (65,262) -------------------------------------------------------------------------------- (339,885) (383,996) -------------------------------------------------------------------------------- $ 178,426 $ 162,111 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements LUNA TECHNOLOGIES INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2004 2003 -------------------------------------------------------------------------------- SALES $ 537,165 $ 381,721 COST OF SALES 269,395 232,759 -------------------------------------------------------------------------------- GROSS PROFIT 267,770 148,962 OTHER INCOME 120,000 100,000 -------------------------------------------------------------------------------- 387,770 248,962 -------------------------------------------------------------------------------- GENERAL AND ADMINISTRATIVE EXPENSES Consulting 85,519 86,958 Consulting - stock based (Note 5) 279,468 193,500 Depreciation 11,084 19,686 Interest and bank charges 12,745 49,542 Interest on convertible debenture 6,197 8,990 Management fees 187,174 145,558 Office and general 166,584 127,336 Professional fees 101,987 54,718 Rent 33,716 27,303 Research and development, net of recoveries 55,097 46,925 Wages and benefits 172,219 99,958 Gain on write-off of accounts payable (Note 6) (53,365) - -------------------------------------------------------------------------------- 1,058,425 860,474 -------------------------------------------------------------------------------- NET LOSS FOR THE YEAR $ (670,655) $ (611,512) ================================================================================ BASIC NET LOSS PER SHARE $ (0.09) $ (0.10) ================================================================================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 7,615,138 6,067,002 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements LUNA TECHNOLOGIES INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 Accumulated Common Stock Additional Share Other Number of Paid Purchase Comprehensive Shares Amount Capital Warrants Deficit Income (loss) Total ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 5,415,166 $ 542 $ 605,150 $ - $(1,123,898) $ (2,970) $ (521,176) Issued for cash at - $0.50 per share 200,000 20 79,980 20,000 - 100,000 - $0.60 per share 250,000 25 119,975 30,000 - 150,000 - $0.80 per share 150,000 15 95,985 24,000 - 120,000 Issued for consulting services 6,000 1 2,999 - - - 3,000 Issued for debt settlement 225,000 23 86,877 - - - 86,900 Issued on exercise of options - 25,000 3 1,247 - - - 1,250 $0.05 per share - $0.10 per share 50,000 5 4,995 - - - 5,000 - $0.18 per share 20,000 2 3,598 - - - 3,600 - $0.38 per share 34,000 3 12,917 - - - 12,920 - $0.40 per share 205,000 20 81,980 - - - 82,000 - $0.50 per share 23,670 2 11,812 - - - 11,814 Issued pursuant to stock bonus plan 124,000 12 62,088 - - - 62,100 Beneficial conversion feature of - - 41,000 - - - 41,000 conversion option Stock-based compensation - - 131,400 - - - 131,400 Net loss for the year - - - - (611,512) (611,512) Currency translation adjustment - - - - - (62,292) (62,292) ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2003 6,727,836 $ 673 $1,342,003 $ 74,000 $(1,735,410) $(65,262) $ (383,996)

The accompanying notes are an integral part of these consolidated financial statements LUNA TECHNOLOGIES INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 Accumulated Common Stock Additional Share Other Number of Paid Purchase Comprehensive Shares Amount Capital Warrants Deficit Income (loss) Total ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2003 6,727,836 $ 673 $1,342,003 $ 74,000 $(1,735,410) $ (65,262) $ (383,996) Issued for cash at - $0.20 per share 1,250,000 125 199,875 50,000 - - 250,000 - $0.65 per share 100,000 10 51,990 13,000 - - 65,000 - $1.00 per share 35,000 4 27,996 7,000 - - 35,000 Issued on exercise of options - 489,000 49 19,511 - - - 19,560 $0.04 per share - $0.10 per share 160,000 16 15,984 - - - 16,000 - $0.23 per share 300,000 30 68,220 - - - 68,250 - $0.40 per share 5,000 - 2,000 - - - 2,000 Issued pursuant to stock bonus plan 597,812 59 130,809 - - - 130,868 Stock-based compensation - - 154,600 - - - 154,600 Share purchase warrants expired - - 20,000 (20,000) - - - Net loss for the year - - - - (670,655) (670,655) Currency translation adjustment - - - - (26,512) (26,512) ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2004 9,664,648 $ 966 $2,032,988 $ 124,000 $(2,406,065) $ (91,774) $ (339,885) =======================================================================================================================

The accompanying notes are an integral part of these consolidated financial statements LUNA TECHNOLOGIES INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, 2004 2003 -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the year $ (670,655) $ (611,512) Adjustments to reconcile net loss to net cash from operating activities: - depreciation 11,084 19,686 - stock-based compensation 279,468 193,500 - beneficial conversion feature - 41,000 - non-cash gain on write-off of accounts payable (53,365) - - accrued interest expense (88) 1,957 - accounts receivable (32,230) (6,434) - inventory 12,810 (67,189) - prepaid expenses (2,067) (1,763) - accounts payable and accrued liabilities 140,360 (4,033) -------------------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (314,683) (434,788) -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets (5,912) (6,473) -------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (5,912) (6,473) -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Bank overdraft (11,068) 8,913 Loan repayment - (4,500) Issuance of common shares 357,000 486,584 Convertible debenture proceeds (repayments) (39,996) 36,669 Loan from (repayments to) related parties 49,509 (24,113) Payment on notes payable (8,338) - -------------------------------------------------------------------------------- NET CASH FLOWS FROM FINANCING ACTIVITIES 347,107 503,553 -------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES (26,512) (62,292) -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH - - CASH, BEGINNING OF YEAR - - -------------------------------------------------------------------------------- CASH, END OF YEAR $ - $ - ================================================================================ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 6,285 $ 8,883 ================================================================ Taxes paid $ Nil $ Nil ================================================================ Non-cash activities: Refer to Notes 3, 5 and 6. The accompanying notes are an integral part of these consolidated financial statements LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION -------------------------------------------------------------------------------- The Company was incorporated on March 25, 1999 in the state of Delaware. The Company commenced operations April 30, 1999 and by agreement effective as of that date, acquired proprietary technology and patent rights from Luna Technology Inc. ("LTBC"), a private British Columbia company with certain directors and shareholders in common with the Company. In addition, by agreement effective November 15, 1999, the Company acquired proprietary technology and the trademark rights to "LUNA" and "LUNAPLAST" from Douglas Sinclair, an officer and employee of LTBC, which relate to the acquired Photoluminescent technology. This technology is used for the development and production of photoluminescent signage, wayfinding systems and other novelty products with applications in marine, commuter rail, subway, building and toy markets. The consolidated financial statements have been prepared on the basis of a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At December 31, 2004 the Company has a working capital deficiency of $253,993 (2003 - $347,888) and has incurred losses since inception raising substantial doubt as to the Company's ability to continue as a going concern. The ability of the Company and its subsidiary to continue as a going concern is dependent on raising additional capital and on generating future profitable operations. In addition, during 2004, 60% of the Company's total sales was derived from two customers, one customer of which also provided financing to the Company in connection with the Convertible Debenture as described in Note 4 accounted for 43%. The Company anticipates meeting its working capital requirement for the next year through the sale of shares of common stock or through loans and advances from related parties as may be required. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- Principles of Consolidation The financial statements include the accounts of the Company and its wholly-owned subsidiary Luna Technologies (Canada) Ltd. ("LTC"), a company incorporated June 9, 1999 in the province of British Columbia. LTC was incorporated to conduct all future business activities in Canada. All significant intercompany balances and transactions are eliminated on consolidation. Use of Estimates and Assumptions Preparation of the Company's financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. The areas requiring significant estimates and assumptions are determining the useful lives of furniture and equipment and the fair value of stock-based compensation. Inventory Inventory is carried at the lower of cost and net realizable value. Furniture and Equipment Furniture and equipment are recorded at cost. Depreciation is computed by the straight-line method on estimated useful lives of two to five years. Revenue Recognition The Company recognizes revenue when products have been shipped and collection is reasonably assured. The Company also generates other income from one-time fees charged in connection with territorial Supply Agreements. As the Company has no future obligations in connection with these agreements, these fees are recognized as other income upon execution of the agreements and when collection is reasonably assured. Research and Development Costs Ongoing new product and technology research and development costs are expensed as incurred net of contributions made by third parties toward research projects. LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd) -------------------------------------------------------------------------------- Foreign Currency Translation The financial statements are presented in United States dollars. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation", foreign denominated monetary assets and liabilities are translated to their United States dollar equivalents using foreign exchange rates which prevailed at the balance sheet date. Revenue and expenses are translated at average rates of exchange during the year. Related translation adjustments are reported as a separate component of stockholders' equity, whereas gains or losses resulting from foreign currency transactions are included in results of operations. Fair Value of Financial Instruments In accordance with the requirements of SFAS No. 107, management has determined the estimated fair value of financial instruments using available market information and appropriate valuation methodologies. The fair value of financial instruments classified as current assets or liabilities including bank overdraft and notes and accounts payable approximate carrying value due to the short-term maturity of the instruments. Management has also determined that the fair value of the convertible debenture approximates its carrying value as at December 31, 2004 and 2003. Risk Management Currency risk. The majority of the Company's sales and cost of sales are made in U.S. currency while a significant amount of its general and administrative expenses are made in Canadian currency. The Company does not currently hedge its foreign currency exposure and accordingly is at risk for foreign currency exchange fluctuations. Credit risk. Management does not believe the Company is exposed to significant credit risk and accordingly does not manage credit risk directly. Net Loss per Common Share Basic loss per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings per share reflects the potential dilution of securities that could share in the earnings of the Company. Share purchase warrants and stock options were not included in the calculation of weighted average number of shares outstanding because the effect would be anti-dilutive. Stock-Based Compensation In December 2002, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, (2) amend the disclosure provisions to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation, and (3) to require disclosure of those effects in interim financial information. The disclosure provisions of SFAS No. 148 were effective for the Company commencing for the year ended December 31, 2002 and the required disclosures have been made below. The Company has elected to continue to account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25") and comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148 as described above. In addition, in accordance with SFAS No. 123 the Company applies the fair value method using the Black-Scholes option-pricing model in accounting for options granted to consultants. Under APB No. 25, compensation expense is recognized based on the difference, if any, on the date of grant between the estimated fair value of the Company's stock and the amount an employee must pay to acquire the stock. Compensation expense is recognized immediately for past services and pro-rata for future services over the option-vesting period. LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd) -------------------------------------------------------------------------------- Stock-Based Compensation (cont'd) The following table illustrates the pro forma effect on net income (loss) and net income (loss) per share as if the Company had accounted for its stock-based employee compensation using the fair value provisions of SFAS No. 123 using the assumptions as described in Note 5: For the year ended December 31, 2004 2003 ------------------------------- Net loss for the year As reported $ (670,655) $ (611,512) SFAS 123 compensation expense Pro-forma (63,050) (18,700) ------------------------------- Net loss for the year Pro-forma $ (733,705) $ (630,212) =============================== Pro-forma basic net loss per share Pro-forma $ (0.10) $ (0.10) =============================== The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with SFAS No. 123 and the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF 96-18"). Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by EITF 96-18. The Company has also adopted the provisions of the Financial Accounting Standards Board Interpretation No.44, "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of APB Opinion No. 25" ("FIN 44"), which provides guidance as to certain applications of APB No. 25. Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax balances. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions ("SFAS 153") SFAS 153 requires that exchanges of non-monetary assets are to be measured based on fair value and eliminates the exception for exchanges of non-monetary, similar productive assets, and adds an exemption for non-monetary exchanges that do not have commercial substance. SFAS 153 will be effective for fiscal periods beginning after June 15, 2005. Management does not believe that the adoption of this standard will have a material impact on the Company's financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. A key provision of this statement is the requirement of a public entity to measure the cost of employee services received in exchange for an award of equity instruments (including stock options) based on the grant date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (i.e., the requisite service period or vesting period). This standard becomes effective for the Company for its first annual or interim period ended on or after December 15, 2005. The Company will adopt SFAS 123R no later than the beginning of the Company's fourth quarter ending December 31, 2005. Management is currently evaluating the potential impact that the adoption of SFAS 123R will have on the Company's financial position and results of operations. LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 3 - RELATED PARTY TRANSACTIONS -------------------------------------------------------------------------------- The Company pays the CEO, President, and Chief Financial Officer, CDN$7,500, CDN$5,000 and CDN$4,000 per month respectively. These obligations are on a month by month basis. During 2003 LTC and the Company executed a guarantee of certain unpaid management fees owing to the CEO of LTC (Doug Sinclair) totalling $123,750 (CAN$165,000). In connection with this guarantee, the CEO was granted the right to convert any or all of the unpaid amount into restricted shares of the Company's common stock at a price of $0.30 per share. During 2003 the Company recorded a $41,000 non-cash interest expense representing the beneficial conversion feature embedded in this conversion option. This beneficial conversion feature was valued using the intrinsic value method. Effective August 31, 2004, the CEO of LTC resigned and entered into an agreement with the Company for the payment of these guaranteed amounts an additional fees owing. Effective August 3, 2004, the Company has guaranteed, by a non-interest bearing promissory note, outstanding management fees due to the former CEO of LTC totalling CAN$187,000 payable as follows: CDN$20,000 upon acceptance, CDN$ 20,000 on January 15, 2005, CDN$25,000 on June 15, 2005, CDN$30,000 on January 15, 2006, CDN$40,000 on June 15, 2006 and CDN$52,000 on January 15, 2007. In addition, the Company has agreed to a severance payment of CDN$43,200 to be paid in twelve equal monthly installments of CDN$3,600. To December 31, 2004 CDN$41,600 has been paid in connection with the above agreements leaving CDN$188,600 (US$156,905) owing of which $138,935 has been reclassified to notes payable and $17,970 has been reclassified to accounts payable The Company did not pay the CDN $20,000 installment due January 15, 2005. During 2004 the Company had transactions with directors, officers, a relative of a director, and LTBC as follows: expenses paid on behalf of and advances made to the Company - $96,655 (2003 - $44,332); management fees incurred by the Company - $187,174 (2003 - $145,558); and payments and reimbursements made by the Company - $234,320 (2003 - $180,959). Also during 2004 $19,560 owing to a director of the Company was assigned to the Company as consideration for the issuance of 489,000 shares of the Company's common stock on the exercise of stock options at a price of $0.04 per share. In addition, amounts owing to the former CEO of LTC totalling $181,295 were reclassified during the year to Notes payable leaving $16,160 owing as at December 31, 2004 (2003 - $167,506). During 2003 related party debts totalling $86,900 were settled by way of offset against the proceeds receivable on the exercise of options by assignment of these debts to an unrelated third party. The Company and LTC have non-interest-bearing promissory notes totalling $40,730 to LTBC originally due on or before June 30, 2001. The due dates on these notes have been extended to January 1, 2006. Unless otherwise noted, all amounts due to related parties are unsecured, non-interest bearing and with no specific terms of repayment. Effective June 26, 2003 the Company entered into two agreements to acquire certain proprietary technology and patent application rights from Inject A Light Corporation Inc. ("Inject A Light"), a private Delaware corporation controlled by a director and officer of the Company and the former CEO of LTC. This proprietary technology and these patent application rights were originally acquired by Inject A Light from these two individuals. Under the terms of the agreements, the Company was required to pay consideration of a total of 1,250,000 restricted shares of the Company's common stock. Prior to the closing of the agreement the parties re-evaluated the terms and ultimate completion of this potential acquisition. Effective December 29, 2004, as a result of re-evaluating this acquisition, the parties entered into an Amending Agreement and Release whereby these parties agreed to transfer the Inject A Light proprietary technology at no cost to the Company. The parties determined that further significant development costs must be incurred to this technology and accordingly the parties were not able to determine an appropriate fair value. LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 4 - CONVERTIBLE DEBENTURE -------------------------------------------------------------------------------- Effective December 21, 2002 the Company issued a $120,000 Secured Convertible Debenture (the "Debenture"). The Debenture is secured by a first floating charge on all of the property, assets and undertakings of the Company and bears interest at a rate of 8% per annum. The Company is required to make fixed monthly principal payments of $3,333 for a period of 30 months commencing June 21, 2003 and a final principal payment of $20,010 due December 21, 2005. Interest is calculated on the outstanding principal balance and is payable monthly commencing June 21, 2003. During 2004 the Company made principal and interest payments totalling $46,281 and as at December 31, 2004 a further $124 of interest has been accrued. This Debenture was issued to the Company's major customer as described in Note 1. The total unpaid balance of principal and interest may be converted at any time into restricted shares of the Company's common stock at a price of $0.90 per share during 2004 and $1.20 per share during 2005. NOTE 5 - CAPITAL STOCK -------------------------------------------------------------------------------- During 2003 the Company issued 200,000 units at a price of $0.50 per unit for proceeds of $100,000. Each unit consists of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $0.75 per share until December 15, 2004. The estimated fair value of the warrants of $20,000 has been recorded as a separate component of stockholders' equity. During 2003 the Company issued 250,000 units at a price of $0.60 per unit for proceeds of $150,000. Each unit consists of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $0.75 per share until August 15, 2005. The estimated fair value of the warrants of $30,000 has been recorded as a separate component of stockholders' equity. During 2003 the Company issued 150,000 units at a price of $0.80 per unit for proceeds of $120,000. Each unit consists of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $1.00 per share until June 30, 2006. The estimated fair value of the warrants of $24,000 has been recorded as a separate component of stockholders' equity. During 2003 the Company issued 6,000 shares of common stock at $0.50 per share in settlement of $3,000 of accounts payable and 225,000 shares of common stock in settlement of a total of $86,900 of loans payable and other amounts previously owing to related parties which were assigned to a third party during 2003. During 2003 the Company issued 357,670 shares of common stock on exercise of stock options for total consideration of $116,584. During 2004 the Company issued 100,000 units at a price of $0.65 per unit for proceeds of $65,000. Each unit consists of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $1.00 per share until February 28, 2006. The estimated fair value of the warrants of $13,000 has been recorded as a separate component of stockholders' equity. During 2004 the Company issued 35,000 units at a price of $1.00 per unit for proceeds of $35,000. Each unit consists of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $1.00 per share until March 31, 2006. The estimated fair value of the warrants of $7,000 has been recorded as a separate component of stockholders' equity. During 2004 the Company issued 1,250,000 units at a price of $0.20 per unit for proceeds of $250,000. Each unit consists of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at a price of $0.30 per share until September 3, 2005. The estimated fair value of the warrants of $50,000 has been recorded as a separate component of stockholders' equity. During 2004 the Company issued 954,000 shares of common stock on exercise of various stock options for total consideration of $105,810 of which $7,000 was received in cash, $79,250 by offset of accounts payable and $19,560 by offset of amounts due to a director of the Company. LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 5 - CAPITAL STOCK (cont'd) -------------------------------------------------------------------------------- Stock option plans As approved by the directors effective January 26, 2004, the Company has adopted plans allowing for the granting of stock options and awarding of shares of common stock as follows: Incentive Stock Option Plan The Company adopted an Incentive Stock Option Plan authorizing the issuance of options to purchase up to 750,000 shares of common stock of the Company. Options granted under this plan will have a price and term to be determined at the time of grant, but shall not be granted at less than the then fair market value of the Company's common stock and can not be exercised until one year following the date of grant. This plan is available to officers, directors and key employees of the Company. Non-Qualified Stock Option Plan The Company adopted a Non-Qualified Stock Option Plan authorizing the issuance of options to purchase up to 1,350,000 shares of common of the Company. Options granted under this plan will have a price and term to be determined at the time of grant, but shall not be granted at less than the then par value of the Company's common stock and can be exercised at any time following the date of grant. This plan is available to officers, directors, employees, consultants and advisors of the Company. Stock Bonus Plan The Company adopted a Stock Bonus Plan authorizing the awarding of up to 1,000,000 shares of common stock of the Company solely at the discretion of the board of directors. This plan is available to officers, directors, employees, consultants and advisors of the Company. Effective February 10, 2004 the Company filed a Form S-8 Registration Statement for 3,000,000 shares authorized under the Incentive Stock Option Plan, the Non-Qualified Stock Option Plan and the Stock Bonus Plan. During 2003 the Company awarded 124,000 shares of common stock under the Stock Bonus Plan with a fair value of $62,100. During 2004 the Company issued 12,000 shares of common stock under the Company's Stock Bonus Plan at $0.50 per share in settlement of $6,000 of accounts payable and awarded a further 585,812 shares under the Stock Bonus Plan with a fair value of $124,868. As at December 31, 2004 202,188 shares remain available for awards under the Stock Bonus Plan. During 2003 the Company granted 382,670 stock options to consultants at prices ranging from $0.05 per share to $0.50 per share. The fair value of these options was recorded as consulting fees of $84,400. The fair value of these options was estimated using the Black-Scholes option pricing model assuming expected lives ranging from 0.7 years to 1.6 years, a risk-free interest rate of 3% and expected volatilities ranging from 67% to 82%. During 2003 the Company granted 160,000 stock options to a director at prices ranging from $0.10 per share to $0.60 per share. Of these options, 120,000 vested in 2003 and the remaining 40,000 options vested between March 1, 2004 and June 1, 2004. During 2003 the Company recorded a consulting expense of $47,000 representing the intrinsic value of the vested options. Also in connection with the vested options, pro-forma disclosures were provided in Note 2 to reflect the fair value of these options of $18,700 as calculated using the Black-Scholes option pricing model assuming expected lives of 5 years, a risk-free interest rate of 3% and an expected volatility of 112%. During 2004, upon vesting of the remaining options, the Company recorded an additional consulting expense of $4,400 representing the intrinsic value of the options and disclosed additional pro-forma fair value of the options totalling $15,700 as calculated using the Black-Scholes option pricing model assuming expected lives of 5 years, a risk-free interest rate of 3% and an expected volatility of 112%. During 2004 the Company granted 460,000 stock options to consultants at prices ranging from $0.10 per share to $0.23 per share. The fair value of these options was recorded as consulting fees of $71,600. The fair value of these stock options was estimated using the Black-Scholes option pricing model assuming expected lives ranging from one year to five years, risk-free interest rates ranging from 2% to 3% and expected volatilities ranging from 77% to 103%. LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 5 - CAPITAL STOCK (cont'd) -------------------------------------------------------------------------------- During 2004 the Company granted a total of 659,200 stock options to the Company's new president at exercise prices ranging from $0.35 per share to $0.75 per share, exercisable for a term of three years. The fair value of these stock options was estimated using the Black-Scholes option pricing model assuming an expected life of three years, a risk-free interest rate of 3% and an expected volatility of 102% resulting in a pro forma expense of $142,200 to be disclosed in Note 2 upon vesting of the options. Of these options, 59,200 vested immediately and the remaining 600,000 vest at a rate of 16,667 per month for a period of three years. During year ended December 31, 2004 $30,850 of the pro forma expense has been disclosed and the remaining $111,350 will be disclosed upon vesting of the options. During 2004 the Company granted a total of 505,000 stock options to an employee and a director of the Company at exercise prices ranging from $0.04 per share to $0.30 per share, exercisable for terms ranging from one year to ten years. As the exercise price of certain of these options was less than the market price of the Company's common stock as at the date of grant, the Company has recorded an intrinsic value stock based compensation expense of $78,600. In addition the Company has disclosed a pro-forma expense of $16,500 relating to the additional fair value of these options as estimated using the Black-Scholes option pricing model assuming an expected life of ten years, a risk-free interest rate of 3% and an expected volatility of 103%. As at December 31, 2004, 305,000 shares have been granted and no stock options were outstanding under the Incentive Stock Option Plan and 770,200 stock options were outstanding under the Non-Qualified Stock Option Plan. The Company's stock option activity is as follows: Number of Weighted Weighted options Average Average Exercise Remaining Life Price --------------------------------------- Balance, December 31, 2002 - $ - - Granted during the year 542,670 0.33 Expired during the year - - Exercised during the year (357,670) 0.33 --------------------------------------- Balance, December 31, 2003 185,000 0.32 2.98 years Granted during the year 1,624,200 0.23 Expired during the year (85,000) 0.25 Exercised during the year (954,000) 0.11 --------------------------------------- Balance, December 31, 2004 770,200 $ 0.39 2.81 years ======================================= Share Purchase Warrants The Company's share purchase warrant activity is as follows: Number of Weighted Weighted warrants Average Average Exercise Remaining Life Price ---------------------------------------- Balance, December 31, 2002 - $ - - Issued during the year 914,255 0.97 Expired during the year (75,000) 1.25 Exercised during the year - - ---------------------------------------- Balance, December 31, 2003 839,255 0.94 1.21 years Issued during the year 1,385,000 0.37 Expired during the year (439,255) 0.89 Exercised during the year - - ---------------------------------------- Balance, December 31, 2004 1,785,000 $ 0.51 0.77 years ======================================== LUNA TECHNOLOGIES INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 -------------------------------------------------------------------------------- NOTE 6 - OTHER GAIN -------------------------------------------------------------------------------- During 2002 a creditor of the Company seized inventory from the Company in an attempt to secure payment of certain amounts owing by the Company in excess of the carrying value of the inventory. As at December 31, 2003 the creditor was still in possession of the inventory and had not initiated any action in an attempt to receive payment. During 2004 management determined that any obligation relating to this dispute was unlikely and accordingly wrote-off previously accrued amounts resulting in a gain of $53,365. NOTE 7 - INCOME TAXES -------------------------------------------------------------------------------- There were no significant temporary differences between the Company's tax and financial bases, except for the Company's net operating loss carryforwards amounting to approximately $1,790,000 at December 31, 2004 (2003 - $1,400,000). These carryforwards will expire, if not utilized, beginning in 2006. The realization of the benefits from these deferred tax assets appears uncertain due to the Company's limited operating history. Accordingly, a valuation allowance has been recorded which offsets the deferred tax assets at the end of the year. NOTE 8 - SUBSEQUENT EVENTS -------------------------------------------------------------------------------- Subsequent to December 31, 2004, the Company issued 20,000 common shares under the Stock Bonus Plan and completed a private placement of 325,000 units at a price of $0.20 per unit for proceeds of $65,000. Each unit consist of one common share and one share purchase warrant entitling the holder to purchase one additional common share of the Company at prices ranging from $0.35 - $0.55 per share until March 11, 2007. SIGNATURES In accordance with Section 13 or 15(a) of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 15th day of April 2005. LUNA TECHNOLOGIES INTERNATIONAL INC. By /s/ Kimberly Landry ---------------------------------------- Kimberly Landry, President, Principal Financial Officer and Principal Accounting Officer In accordance with the Exchange Act, this Report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Kimberly Landry Director April 15, 2005 ------------------------- Kimberly Landry /s/ Robert H. Humber Director April 15, 2005 ------------------------- Robert H. Humber LUNA TECHNOLOGIES INTERNATIONAL INC. FORM 10-KSB EXHIBITS

LUNA TECHNOLOGIES INTERNATIONAL INC 10-K/A