3DICON CORPORATION

(Exact Name of small business issuer as specified in its charter)

 

Oklahoma		73-1479206
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

6804 South Canton Avenue, Suite 150, Tulsa, Oklahoma 74136

(Address of principal executive offices) (Zip Code)

Issuer's Telephone Number: (918) 494-0505

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (do not check if smaller reporting company)

Smaller reporting company  x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

As of November 13, 2008, the issuer had 151,639,453 outstanding shares of Common Stock.

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TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4T	Controls and Procedures	23
	PART II
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
SIGNATURES		26

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PART I

ITEM 1. FINANCIAL STATEMENTS.

INDEX TO FINANCIAL STATEMENTS

	Page
Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007 (Audited)	4
Statements of Operations for the three and nine months ended September 30, 2008 and 2007 and for period from inception (January 1, 2001) to September 30, 2008 (Unaudited)	5
Statements of Changes in Stockholders' Deficiency for period from inception (January 1, 2001) to September 30, 2008 (Unaudited)	6
Statements of Cash Flows for the nine months ended September, 2008 and 2007 and the period from inception (January 1, 2001) to September 30, 2008 (Unaudited)	7
Notes to Financial Statements, September 30, 2008 (Unaudited)	8

3

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3DIcon CORPORATION

(A Development Stage Company)

BALANCE SHEETS

September 30, 2008 and December 31, 2007

		September 30, 2008 (Unaudited)			December 31, 2007 (Audited)
Assets
Current assets:
Cash		$	123,186		$	705,519
Accounts receivable			3,500			-
Prepaid insurance			24,727			15,944
Total current assets			151,413			721,463
Property and equipment, net			28,022			11,832
Debt issue costs, net			67,046			97,249
Deposit-other			2,315			-
Total assets		$	248,796		$	830,544
Liabilities and Stockholders' Deficiency
Current liabilities:
Current maturities of convertible debentures payable		$	590,000		$	700,000
Accounts payable			1,007,778			484,513
Accrued salaries			36,976			-
Accrued interest on debentures			8,845			8,854
Total current liabilities			1,643,599			1,193,367
Convertible debentures payable, less current maturities			676,979			558,375
Total liabilities			2,320,578			1,751,742
Stockholders' deficiency:
Common stock; $.0002 par, 250,000,000 shares authorized and 145,496,328 and 127,125,232 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively			29,099			25,425
Additional paid-in capital			8,143,073			6,451,906
Deficit accumulated during development stage			(10,243,954	)		(7,398,529	)
Total stockholders' deficiency			(2,071,782	)		(921,198	)
Total liabilities and stockholders' deficiency		$	248,796		$	830,544

See Notes to financial statements

4

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3DIcon CORPORATION

(A Development Stage Company)

STATEMENTS OF OPERATIONS

Three and Nine months ended September 30, 2008 and 2007 and period

from inception (January 1, 2001) to September 30, 2008

(Unaudited)

		Three Months Ended September 30, 2008			Three Months Ended September 30, 2007			Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007			Inception to September 30, 2008
Income:
Revenue		$	7,000		$	-		$	17,900		$	-		$	17,900
Cost of Goods Sold			3,500			-			8,435			-			8,435
Gross Profit			3,500			-			9,465			-			9,465
Expenses:
Research and development			184,453			300,000			761,132			720,888			2,270,891
General and administrative			475,923			441,874			2,000,530			1,713,483			7,770,199
Interest			28,853			33,290			93,228			69,796			212,329
Total expenses			689,229			775,164			2,854,890			2,504,167			10,253,419
Net loss		$	( 685,729	)	$	( 775,164	)	$	(2,845,425	)	$	(2,504,167	)	$	(10,243,954	)
Loss per share:
Basic and diluted		$	( .005	)	$	( .007	)	$	(.020	)	$	(.023	)
Weighted average shares outstanding, basic and diluted			141,994,607			116,688,048			139,495,180			108,011,614

See Notes to financial statements

5

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3DIcon Corporation

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

From inception (January 1, 2001) to September 30, 2008

(Unaudited)

											Deficit
											Accumulated
		Common Stock						Additional			During the
		Shares			Par Value			Paid-In  Capital			Development Stage			Total
Balance, January 1, 2001 – as reorganized			27,723,750		$	27,724		$	193,488		$	-		$	221,212
Adjustment to accrue compensation earned but not recorded			-			-			-			(60,000	)		(60,000	)
Stock issued for services			2,681,310			2,681			185,450			-			188,131
Stock issued for cash			728,500			729			72,121			-			72,850
Net loss for the year			-			-			-			(259,221	)		(259,221	)
Balance, December 31, 2001			31,133,560			31,134			451,059			(319,221	)		162,972
Adjustment to record compensation earned but not recorded			-			-			-			(60,000	)		(60,000	)
Stock issued for services			3,077,000			3,077			126,371			-			129,448
Stock issued for cash			1,479,000			1,479			146,421			-			147,900
Net loss for the year			-			-			-			(267,887	)		(267,887	)
Balance, December 31, 2002			35,689,560			35,690			723,851			(647,108	)		112,433
Adjustment to record compensation earned but not recorded			-			-			-			(90,000	)		(90,000	)
Stock issued for services			15,347,000			15,347			-			-			15,347
Stock issued for cash			1,380,000			1,380			33,620			-			35,000
Reverse split 1:10			(47,174,904	)		-			-			-			-
Par value $0.0001 to $0.0002			-			(51,369	)		51,369			-			-
Net loss for the year			-			-			-			(51,851	)		(51,851	)
Balance, December 31, 2003			5,241,656			1,048			808,840			(788,959	)		20,929
Additional Founders shares issued			25,000,000			5,000			(5,000	)		-			-
Stock issued for services			24,036,000			4,807			71,682			-			76,489
Stock issued for cash			360,000			72			28,736			-			28,808
Warrants issued to purchase common stock at $.025			-			-			18,900			-			18,900
Warrants issued to purchase common stock at $.05			-			-			42,292			-			42,292
Stock warrants exercised			2,100,000			420			60,580			-			61,000
Net loss for the year			-			-			-			(617,875	)		(617,875	)
Balance, December 31, 2004			56,737,656			11,347			1,026,030			(1,406,834	)		(369,457	)
Stock issued for services			5,850,000			1,170			25,201			-			26,371
Stock issued to settle liabilities			5,000,000			1,000			99,000			-			100,000
Stock issued for cash			1,100,000			220			72,080			-			72,300
Warrants issued to purchase common stock at $.025			-			-			62,300			-			62,300
Warrants issued to purchase common stock at $.05			-			-			140,400			-			140,400
Stock warrants exercised			5,260,000			1,052			172,948			-			174,000
Net loss for the year			-			-			-			(592,811	)		(592,811	)
Balance, December 31, 2005			73,947,656		$	14,789		$	1,597,959		$	(1,999,645	)	$	(386,897	)

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											Deficit
											Accumulated
		Common			Stock			Additional			During the
		Shares			Par Value			Paid-In Capital			Development Stage			Total
Stock issued for services			4,700,000			940			205,597			-			206,537
Debentures converted			3,000,000			600			149,400			-			150,000
Stock issued for cash			200,000			40			16,160			-			16,200
Warrants issued to purchase common stock			-			-			33,800			-			33,800
Warrants converted to purchase common stock			16,489,000			3,297			565,203			-			568,500
Net loss for the year			-			-			-			(1,469,888	)		(1,469,888	)
Balance, December 31, 2006			98,327,656			19,666			2,568,119			(3,469,533	)		(881,748	)
Stock issued for services			817,727			164			155,262			-			155,426
Stock issued for interest			767,026			153			38,198			-			38,351
Options issued for services			-			-			1,274,666			-			1,274,666
Debentures converted			17,215,200			3,442			1,673,741			-			1,677,183
Stock issued for cash			1,188,960			238			191,898			-			192,136
Options exercised			222,707			45			(45	)		-			-
Warrants issued to purchase common stock			-			-			87,864			-			87,864
Warrants converted to purchase common stock			8,585,956			1,717			462,203			-			463,920
Net loss for the year			-			-			-			(3,928,996	)		(3,928,996	)
Balance, December 31, 2007			127,125,232			25,425			6,451,906			(7,398,529	)		(921,198	)
Stock issued for services			2,743,072			549			242,252			-			242,801
Options issued for services			-			-			536,588			-			536,588
Debentures converted			5,626,303			1,125			736,483			-			737,608
Options exercised and shares issued to escrow			8,671,460			1,734			(1,734	)		-			-
Warrants converted to purchase common stock			1,330,261			266			177,578			-			177,844
Net loss for the period			-			-			-			(2,845,425	)		(2,845,425	)
Balance, September 30, 2008			145,496,328		$	29,099		$	8,143,073		$	(10,243,954	)	$	(2,071,782	)

See Notes to financial statements

6

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3DIcon Corporation

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2008 and 2007 and period

From inception (January 1, 2001) to September 30, 2008

(Unaudited)

		Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007			Inception to September 30, 2008
Cash Flows from Operating Activities
Net loss		$	(2,845,425	)	$	(2,504,167	)	$	(10,243,954	)
Adjustments to reconcile net loss to net cash used in operating activities:
Options issued for services			536,588			634,125			1,811,254
Stock issued for services			242,801			-			1,040,550
Stock issued for interest			-			38,352			38,352
Depreciation			4,036			1,074			6,122
Accounts receivable			(3,500	)		-			(3,500	)
Amortization of deferred debenture cost			30,203			39,267			91,881
Asset impairments			-			-			292,202
Change in:
Prepaid expenses and other assets			(11,098	)		(8,196	)		(62,340	)
Accounts payable and accrued liabilities			560,232			129,050			1,082,599
Net cash used in operating activities			(1,486,163	)		(1,670,495	)		(5,946,834	)
Cash Flows from Investing Activities
Purchase of office furniture and equipment			(20,226	)		(7,567	)		(34,142	)
Cash Flows from Financing Activities
Proceeds from stock and warrant sales and exercise of warrants			177,844			548,500			2,396,014
Increase in deferred debenture cost			-			(87,673	)		(200,572	)
Proceeds from issuance of debentures			746,212			1,646,250			3,908,710
Net cash provided by financing activities			924,056			2,107,077			6,104,152
Net increase (decrease) in cash			(582,333	)		429,015			123,176
Cash, beginning of period			705,519			202,431			10
Cash, end of period		$	123,186		$	631,446		$	123,186
Supplemental Disclosures
Cash paid for interest		$	93,237		$	69,796		$	201,227
Non-Cash Investing and Financing Activities
Conversion of debentures to common stock		$	737,608		$	1,138,743		$	2,564,791

See Notes to financial statements

7

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3DIcon Corporation

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Nine months ended September 30, 2008 and 2007 and period

From inception (January 1, 2001) to September 30, 2008

(Unaudited)

Note 1 - Uncertainties and Use of Estimates

 

Basis of Presentation

 

The accompanying financial statements of 3DIcon Corporation (the “Company”) have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's year end audited financial statements and related footnotes included in the previously filed 10KSB. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2008, and the statements of its operations for the three and nine months ended September 30, 2008 and 2007 and the period from inception (January 1, 2001) to September 30, 2008, and cash flows for the nine-month periods ended September 30, 2008 and 2007, and the period from inception (January 1, 2001) to September 30, 2008, have been included. The results of operations for interim periods may not be indicative of the results which may be realized for the full year.

Use of Estimates

The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from the estimates and assumptions used.

Revenue Recognition and Cost of Goods Sold

Revenues from software license fees are accounted for in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition.”  The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.

The cost of sales for software license fees includes commissions payable to the exclusive distributor. This is an outright obligation and not a license. We have no other significant cost of sales. Shared marketing support costs are charged to operations when incurred.

Uncertainties

The accompanying financial statements have been prepared on a going concern basis. The Company is in the development stage and has no significant source of revenue to fund the development of its planned product or to pay operating expenses. This has resulted in the Company realizing a cumulative net loss of $10,243,954 for the period from inception (January 1, 2001) to September 30, 2008.

8

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Note 1 - Uncertainties and Use of Estimates (continued)

Additionally, the Company has been unable to meet its monthly payment obligations and is therefore in default of the Sponsored Research Agreement (“SRA”) (see note 3). A new payment schedule has been agreed to (see note 8). Failure of the Company to meet its revised payment obligations could result in the termination of the SRA or any outstanding license agreements under the SRA.

The ability of the Company to continue as a going concern during the next year depends on the successful completion of the Company's capital raising efforts to fund the development of its planned products. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management plans to fund the future operations of the Company with existing cash of $123,186. Under the terms of the Golden Gate debentures, Golden Gate may advance an additional $378,787. The additional advance would be available if the Company filed a registration statement, however, the Company does not plan to file such registration statement.  In addition, pursuant to the 4.75% Convertible Debenture due in 2011, beginning in November 2007, Golden Gate is obligated to submit conversion notices in an amount such that Golden Gate receives 1% of the outstanding shares of the Company every calendar quarter for a period of one year.  In connection with each conversion, Golden Gate is expected to exercise warrants equal to 10 times the amount of principal converted.  The warrants are exercisable at $10.90 per share.  The number of warrants exercisable is subject to certain beneficial ownership limitations contained in the 4.75% Debenture and the warrants (the Beneficial Ownership Limitations”). The Beneficial Ownership Limitations prevent Golden Gate from converting on the 4.75% Debenture or exercising warrants if such conversion or exercise would cause Golden Gate’s holdings to exceed 9.99% of our issued and outstanding common stock. Subject to the Beneficial Ownership Limitations, Golden Gate is required to convert $3,000 of the 4.75% Convertible Debenture and exercise 30,000 warrants per month.  Based upon our current stock price, our issued and outstanding shares as of October 31, 2008 and ignoring the impact of the Beneficial Ownership Limitations, we may receive up to $981,000 in funding from Golden Gate as a result of warrant exercises from October 1, 2008 through December 31, 2008.  Additionally, the Company is continuing to pursue additional financing through private offering of debt or common stock.

Note 2 - Recent Accounting Pronouncements

The following are summaries of recent accounting pronouncements that are relevant to the Company:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years except for certain nonfinancial assets and nonfinancial liabilities for which the effective date has been deferred by one year in accordance with FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). Also in February 2008, the FASB issued FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”). FSP FAS 157-1 amends SFAS No. 157, to exclude SFAS No. 13, “Accounting for Leases”, and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS No. 13. FSP FAS 157-1 is effective with the initial adoption of SFAS 157. The adoption of SFAS 157 did not have a material effect on the financial statements.

  

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS 159”). This Statement permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option is elected will be recognized in net earnings at each subsequent reporting date. SFAS 159 is effective for the Company’s year that begins January 1, 2008. The adoption of SFAS 159 did not have a material effect on the financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will affect income tax expense. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.

In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB No. 51”. This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We do not have such subsidiaries therefore the adoption of the provisions of SFAS No. 160 will not affect our results of operations or financial position.

9

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Note 2 - Recent Accounting Pronouncements (continued)

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. (“SFAS 161”) SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedge items are accounted for under Statement 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is intended to enhance the current disclosure framework in SFAS 133 and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements. The provisions of SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Management is currently assessing the potential impact that the adoption of SFAS 161 could have on our financial statements. Additional disclosures required in this FSP are applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.

In April 2008, the FASB issued Staff Position (“FSP”) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The guidance contained in this FSP for determining the useful life of a recognized intangible asset is applied prospectively to intangible assets acquired after the effective date. Additional disclosures required in this FSP are applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.

In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Presented Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.

Note 3 - Sponsored Research Agreement (“SRA”)

On April 20, 2004, the Company entered into a SRA entitled "Investigation of Emerging Digital Holography Technologies" (Phase I) with the University of Oklahoma - Tulsa (“University”), which expired October 19, 2004. On July 15, 2005, the Company entered into a SRA with the University (Phase II), which expired January 14, 2007. Under this agreement the University conducted a research project entitled "Investigation of Emerging 3-Dimensional Display Technologies". The agreement was modified in November 2006 to provide additional funding, extend the term of the agreement through June 30, 2007.

On February 23, 2007 the Company entered into a SRA with the University (Phase III) which expires March 31, 2010. Under this agreement the University will conduct a research project entitled “3-Dimensional Display Development” that seeks to make significant progress in the development of 3-dimensional display technologies. The Company agreed to pay the University $3,468,595 payable in monthly installments ranging from $92,263 to $112,777 beginning April 30, 2007 and ending March 31, 2010, an aggregate commitment of $4,047,439. During the nine-month periods ended September 30, 2008 and 2007, the Company charged operations $761,132 and $720,888, respectively pursuant to the SRA. At September 30, 2008, the Company owed the University $861,131 in aggregate monthly payments under the agreement. (See Note 8 Subsequent events)

10

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Note 4 - Debentures Payable

Debentures payable consist of the following:

		September 30, 2008			December 31, 2007
Senior Convertible Debentures:
9.75% Debenture due January 31, 2009		$	590,000		$	700,000
6.25% Debenture due 2009			-			333,971
6.25% Debenture due 2010			578,601			125,000
4.75% Debentures due 2011			98,378			99,404
Total Debentures			1,266,979			1,258,375
Less - Current Maturities			(590,000	)		(700,000	)
Long-term Debentures		$	676,979		$	558,375

Securities Purchase Agreement

6.25% Convertible Debenture due 2009

The Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with Golden Gate Investors, Inc. (“Golden Gate”) on November 3, 2006, as amended on December 15, 2006 and February 6, 2007, for the sale of a 6.25% convertible debenture in the principal amount of $1,250,000 (“First Debenture.”) The Company agreed to file a registration statement with the SEC for the resale of the common stock underlying the debenture. The registration statement became effective on July 3, 2007. Under the terms of the Purchase Agreement, Golden Gate advanced $125,000 during 2006 and converted the $125,000 debenture into 357,142 shares of common stock on July 16, 2007 at $0.35 per share. Pursuant to the Securities Purchase Agreement, Golden Gate provided the Company with an additional $312,500 of debenture funding upon effectiveness of the registration statement and converted the $312,500 debenture into 892,857 shares of common stock on July 17, 2007 at $0.35 per share. The remaining $812,500 of the $1.25 million debenture was placed with an escrow agent during 2007. During the remainder of 2007 $400,000 was released. Additionally $412,500 was released in 2008. At various dates during 2007, $1,189,029 of the debenture was converted into 4,904,335 shares of common stock at prices ranging from $0.17 to $0.26. During the first quarter of 2008 the remaining $60,971 of the $1,250,000 debenture was converted into 504,643 shares of common stock at a price of $0.12 based on the formula in the convertible debenture.

6.25% Convertible Debenture due 2010

Pursuant to the terms of the Purchase Agreement, on October 24, 2007, at such time as the principal balance of the First Debenture was less than $400,000, the Company provided Golden Gate with written notice that it desired to require Golden Gate to purchase the second debenture. Golden Gate advanced $125,000 on the second $1.25 million debenture in November 2007. Additionally, Golden Gate advanced $312,500 directly to the Company and $433,713 to an escrow account on the Second Debenture in January 2008. As of September 30, 2008, Golden Gate has funded an aggregate of $871,213 on the Second Debenture. Golden Gate will be obligated to fund the Company for the remaining $378,787 in principal on the Second Debenture upon the effectiveness of a registration statement underlying the remaining unfunded principal balance on the Second Debenture. Under the terms of the Securities Purchase Agreement, the escrowed funds are available to be advanced to the Company at the rate of $200,000 per month beginning March 1, 2008.  At various dates during 2008, $292,611 of the debenture was converted into 3,651,337 shares of common stock at prices ranging from $0.05 to $0.14 based on the formula in the convertible debenture.

In accordance with the terms of the Second Debenture, an event of default occurs if the common stock of the Company trades at a price per share of $0.21 or lower. The trading price was at $0.21 or lower on several occasions during 2008. On each of the occasions Golden Gate, by separate letter agreements, agreed that the occasions did not constitute a default and thereby waived the default provision for those occasions only.

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Note 4 - Debentures Payable (continued)

9.75% Convertible due January 31, 2009

To obtain funding for ongoing operations, the Company entered into a Bridge Financing Agreement with Golden Gate Investors which closed on June 11, 2007 (the “Financing Agreement”), for the sale of a 9.75% convertible debenture in the principal amount of $700,000. Pursuant to the Financing Agreement, the Company agreed to file a registration statement with the SEC within three days of closing for the resale of the common stock underlying the $1.25 million convertible debenture, which was issued to Golden Gate Investors on November 3, 2006. The Company received gross proceeds of $700,000 from the sale of the aforementioned debenture. At various dates during 2008, $110,000 of the debenture was converted into 2,426,912 shares of common stock at prices ranging from $0.04 to $0.05 per common share based on the formula in the convertible debenture. The June 8, 2008 original due date of the 9.75% debentures has been extended to January 31, 2009.

4.75% Convertible Debenture due 2011

On November 3, 2006, the Company also issued to Golden Gate a 4¾% convertible debenture in a principal amount of $100,000, due 2011, and warrants to buy 1,000,000 shares of the common stock at an exercise price of $10.90 per share. During 2007, Golden Gate converted $596 of the $100,000 debenture into 244,045 shares of common stock at $0.002 per share, exercised warrants to purchase 5,956 shares of common stock at $10.90 per share and received $64,920 from the exercise of the warrants. During 2008, Golden Gate converted $1,026 of the $100,000 debenture into 1,137,818 shares of common stock at $0.002 per share, exercised warrants to purchase 10,261 shares of common stock at $10.90 per share and received $111,845 from the exercise of the warrants.

 

Note 5 - Common Stock and Paid-In Capital

Pursuant to a Subscription Agreement dated October 12, 2007, the Company sold 1,188,960 shares of the Company’s common stock at a per share price equal to 75% of the average closing price during the five (5) days prior to the signing ($.31 per share) and warrants to purchase 594,480 shares of its common stock at a price of $0.40 per share from October 12, 2007 through October 11, 2008, or $0.50 per share from October 12, 2008 through October 11, 2009 to two accredited individuals. The Company received $280,000 in cash from the sale. The warrants terminate October 11, 2009.

As of September 30, 2008, there are warrants outstanding to purchase 594,480 shares of common stock at a price of $0.40 per share from October 12, 2007 through October 11, 2008, or $0.50 per share from October 12, 2008 through October 11, 2009.

Common stock and options issued for services

During 2008 shares of common stock totaling 2,743,072 were issued for consulting services for which the Company recognized $242,801 of expense.

Options exercised

Under the terms of the Concordia consulting agreement, Concordia exercised 1,419,800 cashless options to purchase an aggregate of 709,677 shares of common stock.

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Note 5 - Common Stock and Paid-In Capital (continued)

Options granted

Board of Directors – On February 25, 2008, the Company agreed to compensate its non-employee Board members with options to purchase registered stock of the corporation equaling the value of $100,000 for each of the three non-employee Board members; using standard evaluation methods. The Board granted options to purchase an aggregate of 2,061,540 shares to its three non-employee Board members; the exercise price for each option is $0.24 per share. The options expire at the end of ten years. The $300,000 compensation is for services on the Board during all or part of the calendar year 2008 and is deemed fully vested on the date of the grant. Operations were charged with $300,000 for the nine months ending September 30, 2008. The estimated fair market value of the options was determined using the Black-Scholes option pricing model.

The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 71.33% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-the-counter Bulletin Board. The risk-free interest rate of 3.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience.

Employment Agreement - On July 28, 2008 the Company entered into an Employment Agreement with Dr. Hakki Refai (the “Employment Agreement”) pursuant to which Dr. Refai has agreed to serve as the Chief Technology Officer of the Company. Dr. Refai’s employment under the Employment Agreement commenced on October 1, 2008 and will continue for a term of one year from October 1, 2008, the date on which he became a full-time employee of the Company. The term of the Employment Agreement will automatically extend for successive one year periods unless otherwise terminated by the parties in accordance with the terms of the Employment Agreement. The following represents the material terms of the Employment Agreement:

·

Annual salary of $175,000 until the achievement of certain technical milestones as provided in the Employment Agreement (the “Technical Milestones”). Upon achievement of the Technical Milestones, the annual salary shall increase to $200,000;

·

Commission which shall not exceed 3% of sales of the Company’s Pixel Precision™ and CSpace™ technologies products, which commission shall not exceed $30,000 for the 12 month period commencing on October 1, 2008 and $50,000 for the 12 month period commencing on October 1, 2009; and

·

Grant of 5,000,000 incentive stock options with a term of 10 years and an exercise price of $0.085 per share which vest as follows:

1.

The first installment of 500,000 options are vested and exercisable on October 1, 2008, the date Dr. Refai commences full-time employment;

2.

3,500,000 options, vesting in accordance with certain technical achievements, deliverables and milestones as provided in the Employment Agreement; and

3.

1,000,000 options vesting in accordance with certain non-technical, general milestones as provided in the Employment Agreement or upon severance of the Employment Agreement under certain conditions as provided in the Employment Agreement.

The estimated fair market value of the options was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 95.50% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-the-counter Bulletin Board. The risk-free interest rate of 2.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience. September 30, 2008 operations were charged $33,622 for the vesting of the options cost of Mr. Refai under the terms of the Employment Agreement.

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Note 5 - Common Stock and Paid-In Capital (continued)

The following summary reflects warrant and option activity for the nine month period ended September 30, 2008:

		Attached Warrants			Golden Gate Warrants			Options
Outstanding December 31, 2007			1,914,480			994,044			7,250,000
Granted			-			-			13,261,540
Exercised			(1,320,000	)		(10,261	)		(1,419,800	)
Cancelled			-			-			-
Outstanding September 30, 2008			594,480			983,783			19,091,740

Note 6 - Office lease

The Company signed an Office Lease Agreement (the “Agreement”) on April 24, 2008. The Agreement commences on June 1, 2008 and expires June 1, 2011. At September 30, 2008, minimum future lease payments to be paid annually under the three year non-cancellable operating lease for office space are as follows:

2008		$	6,696
2009			27,071
2010			27,570
2011			11,575

Note 7 - Related party transaction

3DIcon has engaged the law firm of Newton, O’Connor, Turner & Ketchum as its outside corporate counsel since 2005. John O’Connor, a director of 3DIcon, is the Chairman of Newton, O’Connor, Turner & Ketchum. During the nine months ended September 30, 2008 and 2007, the Company incurred legal fees to Newton O’Connor, Turner & Ketchum in the amount of $119,986 and $181,291, respectively.

Note 8 - Subsequent events

Debentures payable

In accordance with the terms of the Second Debenture an event of default occurs if the common stock of the Company trades at a price per share of $0.21 or lower. The trading price was at $0.21 or lower on several occasions during the period ended September 30, 2008. Additionally the stock continues to trade at $0.21 or lower subsequent to September 30, 2008. On each of the occasions Golden Gate, by separate letter agreements, agreed that the occasions did not constitute a default and thereby waived the default provision for the occasions.

Subsequent to September 30, 2008, Golden Gate converted $136,000 of the 9.75% convertible debenture into 3,426,189 shares of common stock at prices ranging from $0.039 to $0.054 per share, converted $500 of the 4.75% convertible debenture into 1,243,762 shares of common stock at $0.0004 per share and exercised 5,000 warrants at $10.90 per share for $54,500 under the terms of the securities purchase agreements.

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Note 8 - Subsequent events (continued)

Employment agreement

On October 12, 2008 the Company entered into an Amendment to the Employment Agreement of Vivek Bhaman, the Company’s President and Chief Operating Officer (the “Amendment”). Pursuant to the Amendment, Mr. Bhaman’s base salary effective May 1, 2008 is $300,000, representing an annual increase of $50,000. The Company has the option to defer payment of any or all of the increase until April 30, 2009. If deferred, the Company may elect to pay the increase in shares of the Company’s common stock at a 25% discount to the market price of the Company’s common stock on April 30, 2009. The Bonus provision of Mr. Bhaman’s employment agreement has been deleted. In addition, pursuant to the amendment, Mr. Bhaman was granted an aggregate of 6,000,000 options to purchase shares of the Company’s common stock at an exercise price of $0.55 per share with a term of 10 years comprised of (i) 1,000,000 options vesting immediately and (ii) 5,000,000 options vesting at a rate of 125,000 per quarter. The vesting schedule of the 5,000,000 options may be accelerated if the market price of the Company’s common stock exceeds certain thresholds pursuant to the terms of the Amendment. In addition, pursuant to the amendment, in the event that Mr. Bhaman’s employment with the Company is terminated, he shall be entitled to severance pay equal to his regular monthly salary for a period not to exceed 6 months. For the nine months ended September 30, 2008 operations were charged $20,833 for the retroactive application of the employment agreement effective date of May 1, 2008.

The estimated fair market value of the one million and five million options was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 125.20% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-the-counter Bulletin Board. The risk-free interest rate of 2.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience.

Operations will be charged $50,782 for the vesting of the one million options on October 1, 2008. The $253,909 value of the five million options will be charged to operations at the rate of $25,391 annually over the ten year vesting period under the terms of the Employment Agreement.

Sponsored Research Agreement

On October 31, 2008 OU agreed to revise the payment terms under the SRA from a fixed monthly payment to a reimbursable cost payment basis effective September 1, 2008.  As of September 30, 2008 the Company had a remaining obligation under the previous SRA payment schedule of $2,665,818 which includes monthly payments due for December 2007 through August 31, 2008 of $861,131. The $1,804,687 balance of the remaining scheduled payment obligation was cancelled. Under the terms of the revised base payments schedule, the arrearages will be paid in nine monthly base installments from October 31, 2008 to June 30, 2009 of amounts ranging from $35,000 to $101,132 leaving a remaining balance after the base payments of $290,000. In addition to the monthly base payments, the Company agreed to make additional payments on the $861,131 arrearages based on a formula of 50% of funding in excess of $120,000 plus the base monthly payment. In the event funding does not provide for any additional payments, the remaining balance would be $290,000, which OU agreed to accept 4,264,707 shares of the Company’s common stock based on the October 14, 2008 market price as reported on the OTC Bulletin Board of $0.068 per share as payment on June 30, 2009. The Company has the option to repurchase the shares at $0.068 per share by September 30, 2009 or at market value, but not less than $0.068 per share, if the repurchase occurs after September 30, 2009.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Plan of Operation

Background:

 

We are engaged in the development of 360 ^o volumetric imaging and display technology, specifically in the areas identified by the initial in-depth investigation conducted by the University of Oklahoma (OU or University). The identified areas are two major complementary areas of technology that comprise the spectrum of the solution and application (1) a means of recording 3D objects as digital holographic data elements (capture); and (2) a means of reconstructing and displaying the 3D images (display).

Based on the investigation as well as review of existing patents and technologies, it was concluded that the area of 3-D image capture and recording had multiple solutions and technologies that adequately served the market. Therefore our primary area of focus is to develop products and intellectual property in the reconstruction and display of 3D images where we see the most opportunity. We aim to establish strategic partnerships with the assignees or license holders of existing 3D recording technologies as well as integrate our technologies with existing solutions.

The existing products reviewed can generally be broken down into two broad categories: stereoscopic - those that use flat-panels to implement 3D displays on 2D screens, and those that implement volumetric 3D displays. The flat-panel approaches, as previously noted, do not support 3DIcon’s planned embodiment of the technology. However, the application space of volumetric 3D displays supports our vision and appears to offer major opportunities for further technology development and creation of intellectual property through the University of Oklahoma, to which 3DIcon will have exclusive world-wide rights.

The research team at OU has been working to integrate open source image capture applications as well as to establish 3D image capture systems.

We continue to build intellectual property through the University of Oklahoma, to which 3DIcon has exclusive rights and engage in product research and development both directly related to the display as well as by-product technologies.

Current Activities and Operations

 

Currently we are pursuing the research and development of volumetric 3-D display technology through the Sponsored Research Agreement (“SRA”) with OU. Our efforts are focused on multiple technological approaches, two of which are being further developed into proof-of-concept demonstration systems:

Static Volume Display Technology: Also known as CSpace™, 3DIcon has produced the first non-mechanical, 360-degree, multi-view, high-resolution volumetric display. A prototype was demonstrated during September 2008, when a 3D image was created within a proprietary volumetric media (also called projection space or image matrix).

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This technology incorporates existing and rapidly evolving image projection technologies, such as DLP®/DMD technology from Texas Instruments, allowing 3DIcon to pursue full-color, full-motion 3D visualization, in harmony with 3DIcon’s vision for product development.

Swept Volume Display Technology: Additional work on this particular approach has been deferred indefinitely because of the success and initial superiority of the CSpace™ technology.