UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
(Mark
One)
x QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended June 30, 2009
OR
o
TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________ to __________
COMMISSION FILE NUMBER
333-143761
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
Indicate
by check mark 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). 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
August 13, 2009, the issuer had 239,388,115 outstanding shares of Common
Stock.
TABLE OF
CONTENTS
|
Page
|
||
|
PART
I
|
||
|
Item
1.
|
Financial
Statements
|
4
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
21
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
28
|
|
Item
4
|
Controls
and Procedures
|
28
|
|
PART
II
|
||
|
Item
1.
|
Legal
Proceedings
|
29
|
|
Item
1A.
|
Risk
Factors
|
29
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
29
|
|
Item
4T.
|
Submission
of Matters to a Vote of Security Holders
|
29
|
|
Item
5.
|
Other
Information
|
30
|
|
Item
6.
|
Exhibits
|
30
|
|
SIGNATURES
|
31
|
|
2
PART
I
ITEM
1. FINANCIAL STATEMENTS.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Balance
Sheets as of June 30, 2009 (Unaudited) and December 31, 2008
(Audited)
|
4
|
|
Statements
of Operations for the three and six months ended June 30, 2009 and 2008
and period from inception (January 1, 2001) to June 30, 2009
(Unaudited)
|
5
|
|
Statements
of Changes in Stockholders' Deficiency for period from inception (January
1, 2001) to June 30, 2009 (Unaudited)
|
6
|
|
Statements
of Cash Flows for the six months ended June 30, 2009 and 2008
and period from inception (January 1, 2001) to June 30, 2009
(Unaudited)
|
9
|
|
Notes
to Financial Statements, June 30, 2009 (Unaudited)
|
10
|
3
3DIcon
CORPORATION
(A
Development Stage Company)
BALANCE
SHEETS
June
30, 2009 and December 31, 2008
|
June
30, 2009
|
December
31, 2008
|
|||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
|
$ | 98,550 | $ | 48,400 | ||||
|
Prepaid
expenses
|
32,913 | 16,113 | ||||||
|
Total
current assets
|
131,463 | 64,513 | ||||||
|
Net
property and equipment
|
27,566 | 31,537 | ||||||
|
Debt
issue costs, net
|
36,842 | 56,978 | ||||||
|
Deposits-other
|
17,315 | 17,315 | ||||||
|
Total
assets
|
$ | 213,186 | $ | 170,343 | ||||
|
Liabilities
and Stockholders' Deficiency
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of convertible debentures payable, net of unamortized discount
of $13,504
|
172,699 | 364,000 | ||||||
|
Warrant
exercise advances
|
36,030 | 140,500 | ||||||
|
Accounts
payable
|
988,003 | 1,135,887 | ||||||
|
Accrued
salaries
|
115,122 | 59,615 | ||||||
|
Accrued
interest on debentures
|
37,049 | 6,808 | ||||||
|
Total
current liabilities
|
1,348,903 | 1,706,810 | ||||||
|
Convertible
debentures payable, less current maturities
|
673,319 | 675,279 | ||||||
|
Total
liabilities
|
2,022,222 | 2,382,089 | ||||||
|
Stockholders'
equity:
|
||||||||
|
Common
stock $.0002 par 250,000,000 shares authorized;
|
||||||||
|
217,842,130
and 157,515,776 shares issued and outstanding as of June 30, 2009 and
December 31, 2008, respectively
|
43,568 | 31,503 | ||||||
|
Paid
for but not issued 14,705,882 shares
|
2,941 | |||||||
|
Additional
paid in capital
|
9,964,058 | 8,766,830 | ||||||
|
Deficit
accumulated during development stage
|
(11,819,603 | ) | (11,010,079 | ) | ||||
|
Total
stockholders’ deficiency
|
(1,809,036 | ) | (2,211,746 | ) | ||||
|
Total
liabilities and stockholders’ deficiency
|
$ | 213,186 | $ | 170,343 | ||||
See notes
to financial statements
4
3DIcon
CORPORATION
(A
Development Stage Company)
STATEMENTS
OF OPERATIONS
Three
and Six Months Ended June 30, 2009 and 2008 and period
From
Inception (January 1, 2001) to June 30, 2009
(Unaudited)
|
Three
Months
|
Three
Months
|
Six
Months
|
Six
Months
|
|||||||||||||||||
|
Ended
|
Ended
|
Ended
|
Ended
|
Inception
to
|
||||||||||||||||
|
June 30, 2009
|
June 30, 2008
|
June 30, 2009
|
June 30, 2008
|
June 30, 2009
|
||||||||||||||||
|
Income:
|
||||||||||||||||||||
|
License
fee
|
$ | - | $ | - | $ | - | $ | - | $ | 25,000 | ||||||||||
|
Sales
|
6,500 | 10,900 | 6,500 | 10,900 | 24,400 | |||||||||||||||
|
Grant
income
|
18,975 | - | 18,975 | - | 18,975 | |||||||||||||||
|
Total
income
|
25,475 | 10,900 | 25,475 | 10,900 | 68,375 | |||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Research
and development
|
13,978 | 276,679 | 60,473 | 576,679 | 2,524,234 | |||||||||||||||
|
General
and administrative
|
297,448 | 611,712 | 733,089 | 1,529,541 | 9,080,916 | |||||||||||||||
|
Interest
|
20,835 | 31,509 | 41,437 | 64,375 | 282,828 | |||||||||||||||
|
Total
expenses
|
332,261 | 919,900 | 834,999 | 2,170,595 | 11,887,978 | |||||||||||||||
|
Net
loss
|
$ | (306,786 | ) | $ | (909,000 | ) | $ | (809,524 | ) | $ | (2,159,695 | ) | $ | (11,819,603 | ) | |||||
|
Loss
per share:
|
||||||||||||||||||||
|
Basic
and diluted
|
$ | (0.002 | ) | $ | (0.007 | ) | $ | (0.005 | ) | $ | (0.016 | ) | ||||||||
|
Weighted
average shares outstanding , Basic and diluted
|
193,820,151 | 139,790,269 | 178,711,726 | 138,231,734 | ||||||||||||||||
See notes
to financial statements
5
3DIcon
CORPORATION
(A
Development Stage Company)
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
From
inception (January 1, 2001) to June 30, 2009
(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
|
|||||||||||||||
See notes
to financial statements
6
3DIcon
CORPORATION
(A
Development Stage Company)
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
From
inception (January 1, 2001) to June 30, 2009
(Unaudited)
|
Deficit
|
||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||
|
Additional
|
During
the
|
|||||||||||||||||||
|
Common
|
Stock
|
Paid-In
|
Development
|
|||||||||||||||||
|
Shares
|
Par Value
|
Capital
|
State
|
Total
|
||||||||||||||||
|
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
|
)
|
|||||||||||||
|
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
|
)
|
|||||||||||||
See notes
to financial statements
7
3DIcon
CORPORATION
(A
Development Stage Company)
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
From
inception (January 1, 2001) to June 30, 2009
(Unaudited)
|
Deficit
|
||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||
|
Additional
|
During
the
|
|||||||||||||||||||
|
Common
|
Stock
|
Paid-In
|
Development
|
|||||||||||||||||
|
Shares
|
Par Value
|
Capital
|
Stage
|
Total
|
||||||||||||||||
|
Stock
issued for cash
|
515,677 | $ | 103 | $ | 24,897 | $ | - | $ | 25,000 | |||||||||||
|
Warrants
exercised
|
1,347,261 | 269 | 362,425 | - | 362,694 | |||||||||||||||
|
Options
issued and accrued
|
- | - | 654,199 | - | 654,199 | |||||||||||||||
|
Debentures
converted
|
15,257,163 | 3,052 | 962,257 | - | 965,309 | |||||||||||||||
|
Options
exercised and escrowed shares
|
8,671,460 | 1,734 | (1,734 | ) | - | - | ||||||||||||||
|
Stock
issued for service
|
4,598,973 | 920 | 312,880 | - | 313,800 | |||||||||||||||
|
Net
loss for the year
|
- | - | - | (3,611,550 | ) | (3,611,550 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
157,515,766 | 31,503 | 8,766,830 | (11,010,079 | ) | (2,211,746 | ) | |||||||||||||
| - | ||||||||||||||||||||
|
Stock
issued for cash
|
999,999 | 200 | 29,800 | - | 30,000 | |||||||||||||||
|
Warrants
exercised
|
19,800 | 4 | 215,816 | - | 215,820 | |||||||||||||||
|
Debentures
converted
|
32,773,186 | 6,555 | 274,375 | - | 280,930 | |||||||||||||||
|
Stock
and warrants issued for accounts payable
|
4,264,706 | 853 | 302,652 | - | 303,505 | |||||||||||||||
|
Stock
issued for services
|
22,268,673 | 4,453 | 277,526 | 281,979 | ||||||||||||||||
|
Stock
paid for but not issued
|
14,705,882 | 2,941 | 97,059 | - | 100,000 | |||||||||||||||
|
Net
loss for the period
|
- | - | - | (809,524 | ) | (809,524 | ) | |||||||||||||
|
Balance
June 30, 2009
|
232,548,012 | $ | 46,509 | $ | 9,964,058 | $ | (11,819,603 | ) | $ | (1,809,036 | ) | |||||||||
See notes
to financial statements
8
3DIcon
CORPORATION
(A
Development Stage Company)
STATEMENTS
OF CASH FLOWS
Six
Months Ended June 30, 2009 and 2008 and period
From
Inception (January 1, 2001) to June 30, 2009
(Unaudited)
|
Six Months
|
Six Months
|
Inception to
|
||||||||||
|
Ended
|
Ended
|
June 30,
|
||||||||||
|
June 30, 2009
|
June 30, 2008
|
2009
|
||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
loss
|
$ | (809,524 | ) | $ | (2,159,695 | ) | $ | (11,819,603 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
|
Options
issued for services
|
- | 459,133 | 1,928,865 | |||||||||
|
Stock
issued for services
|
281,979 | 164,250 | 1,393,529 | |||||||||
|
Stock
issued for interest
|
- | - | 38,351 | |||||||||
|
Depreciation
|
3,971 | 2,486 | 11,715 | |||||||||
|
Amortization
of deferred debt issue costs
|
20,136 | 20,135 | 119,618 | |||||||||
|
Asset
impairments
|
- | - | 292,202 | |||||||||
|
Change
in:
|
||||||||||||
|
Accounts
receivable
|
- | (5,965 | ) | - | ||||||||
|
Prepaid
expenses and other assets
|
(16,800 | ) | (19,711 | ) | (283,628 | ) | ||||||
|
Accounts
payable and accrued liabilities
|
328,567 | 346,098 | 1,559,875 | |||||||||
|
Net
cash used in operating activities
|
(191,671 | ) | (1,193,269 | ) | (6,759,076 | ) | ||||||
|
Cash
Flows From Investing Activities:
|
||||||||||||
|
Purchase
of office furniture and equipment
|
- | (19,599 | ) | (39,281 | ) | |||||||
|
Class
Flows from Financing Activities:
|
||||||||||||
|
Proceeds
from stock and warrant sales and exercise of warrants
|
241,821 | 134,245 | 2,988,184 | |||||||||
|
Proceeds
from issuance of debentures
|
- | 746,214 | 3,9008,713 | |||||||||
|
Net
cash provided by financing activities
|
241,821 | 880,459 | 6,896,897 | |||||||||
|
Net
increase (decrease) in cash
|
50,150 | (332,409 | ) | 98,540 | ||||||||
|
Cash,
beginning of period
|
48,400 | 705,519 | 10 | |||||||||
|
Cash,
end of period
|
$ | 98,550 | $ | 373,110 | $ | 98,550 | ||||||
|
Supplemental disclosures
|
||||||||||||
|
Non-Cash
Investing and Financing Activities
|
||||||||||||
|
Conversion
of debentures to common stock
|
$ | 474,930 | $ | 458,054 | $ | 3,260,866 | ||||||
|
Cash
paid for interest
|
$ | 15,433 | $ | 64,375 | $ | 247,759 | ||||||
|
Stock
issued in satisfaction of payables
|
$ | 303,505 | $ | - | $ | - | ||||||
See notes
to financial statements
9
3DIcon
CORPORATION
(A
Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS
Six
Months Ended June 30, 2009 and 2008 and period
From
Inception (January 1, 2001) to June 30, 2009
(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 10-K. 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 June 30, 2009, and
the statements of its operations for the three and six months ended June 30,
2009, 2008 and the period from inception (January 1, 2001) to June 30, 2009, and
cash flows for the six-month periods ended June 30, 2009 and 2008, and the
period from inception (January 1, 2001) to June 30, 2009, 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.
Debt
issue costs
The
Company defers and amortizes the legal and filing fees associated with long-term
debt that is issued. These costs are primarily related to the
convertible debentures, the majority of which have a three year
term. The amortization is charged to operations over the three year
term and then adjusted quarterly for debenture conversions to common
stock.
Fair
value of financial instruments
The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument held by the Company:
Current assets and current
liabilities – The carrying value approximates fair value due to the short
maturity of these items.
Debentures payable – The fair
value of the Company's debentures payable has been estimated by the Company
based upon the liability’s characteristics, including interest
rate. The carrying value approximates fair value.
Revenue
Recognition
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.
10
Uncertainties
The
accompanying financial statements have been prepared on a going concern
basis. The Company is in the development stage and has insufficient
revenue and capital commitments to fund the development of its planned product
and to pay operating expenses. 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 revised payment schedule
was agreed to in October 2008 and March 20, 2009. Failure of the
Company to meet its revised payment obligations could result in the termination
of the SRA and any outstanding license agreements under the SRA. The
Company has realized a cumulative net loss of $ 11,819,603 for the period from
inception (January 1, 2001) to June 30, 2009, and a net loss of $809,524 and
$2,159,695 for the six months ended June 30, 2009 and 2008,
respectively.
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
$98,550, grants and investor funding. Under the terms of the Golden State Equity
Investors, Inc. (“Golden State”) debentures, Golden State 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 State is obligated to
submit conversion notices in an amount such that Golden State receives 1% of the
outstanding shares of the Company every calendar quarter for a period of one
year. In connection with each conversion, Golden State is expected to
exercise warrants equal to ten 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
State from converting on the 4.75% Debenture or exercising warrants if such
conversion or exercise would cause Golden State’s holdings to exceed 9.99% of
the Company’s issued and outstanding common stock. Subject to the
Beneficial Ownership Limitations, Golden State 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 June
30, 2009 and ignoring the impact of the Beneficial Ownership Limitations, we may
receive up to $693,650, in funding from Golden State as a result of warrant
exercises subsequent to June 30, 2009.
The
Company was approved for a matching grant from Oklahoma Center for the
Advancement of Science and Technology (“OCAST”) on November 19, 2008 in the
amount of $299,932. The award is for a maximum of $149,940 for calendar year
2009 with the remainder for calendar year 2010. Funding of the grant is
contingent upon the Company providing matching funds for the first year's
research and submission of all required documentation to OCAST.
Additionally,
the Company is continuing to pursue 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 April
2009, the Financial Accounting Standards Board (FASB) issued Staff Position
(FSP) FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (FSP FAS 107-1 and APB 28-1), which amends
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about the fair value of
financial instruments for interim reporting periods, as well as annual reporting
periods. FSP-FAS 107-1 and APB 28- are effective this quarter and shall be
applied prospectively. The adoption of FSP FAS 107-1 and APB 28-1 did not have a
significant impact on our financial statements.
In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS
165 is intended to establish general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for selecting that date, that is, whether that date represents the date
the financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15, 2009.
The adoption of SFAS No. 165 do not have any affect on our financial
statements.
11
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. The
implementation of this FSP did not have a material impact on our financial
position, results of operations and cash flows.
In
September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework and
gives guidance regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. In February 2008, the FASB released
FASB Staff Position, (FSP) SFAS 157-2—Effective Date of FASB Statement
No. 157, which delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually) to fiscal years beginning after November 15,
2008. We adopted SFAS 157 as it applies to financial assets and liabilities
as of January 1, 2008. The implementation of SFAS 157, as it relates
to financial assets and liabilities did not have a material impact on our
financial position, results of operations and cash flows.
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 was
effective for the Company’s year that began January 1, 2008. The adoption of
SFAS 159 did not have a material effect on the financial
statements.
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. The adoption of this
statement did not have a material effect on the Company’s financial
statements.
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 did not 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, and extended 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.
12
On
October 31, 2008 and on March 20, 2009, the University 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
2008 of $861,131. The $1,804,687 balance of the remaining SRA
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 July 31, 2009 to February 28, 2010 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 of $10,000 per
month. For the remaining balance of $290,000, the University 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.
During
the periods ended June 30, 2009 and 2008, the Company charged operations $60,473
and $576,679, respectively, pursuant to the SRA. At June 30, 2009,
the Company owed the University $18,448 for the May and June 2009 monthly
payments and $595,481on the arrearages under the revised payment
terms.
Note 4 – Debentures
Payable
Debentures
payable consist of the following:
|
|
June 30,
|
December 31,
|
||||||
|
2009
|
2008
|
|||||||
|
Senior
Convertible Debentures:
|
||||||||
|
9.75%
Debenture due July 31, 2009
|
$
|
85,500
|
$
|
364,000
|
||||
|
6.25%
Debenture due 2009
|
-
|
-
|
||||||
|
6.25%
Debenture due 2010
|
578,601
|
578,601
|
||||||
|
4.75%
Debentures due 2011
|
94,718
|
96,678
|
||||||
|
10.0%
Debenture due September 30, 2009
|
100,703
|
-
|
||||||
|
Less
unamortized discount
|
(13,504)
|
|||||||
|
Total
Debentures
|
846,018
|
1,039,279
|
||||||
|
Less
Current Maturities
|
(172,699)
|
(364,000
|
)
|
|||||
|
Long-term
Debentures
|
$
|
673,319
|
$
|
675,279
|
||||
Golden
State Investors, Inc. - Securities Purchase Agreement
6.25%
Convertible Debenture due 2009
The
Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with
Golden State 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 (the “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 State
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 State 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 to the
Company and the balance of $412,500 was released in 2008. At various
dates after the July 3, 2007 effective date of the registration statement,
$478,529 of the debenture was converted into 2,097,406 shares of common stock at
prices ranging from $0.20 to $0.26 during 2007 and, during the first quarter of
2008, the remaining $333,971 of the debenture was converted into 2,061,573
shares of common stock at prices ranging from $0.12 to $0.20 based on the
formula in the convertible debenture.
13
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 State with written notice that it desired to require Golden
State to purchase the second debenture.
On
November 21, 2007, the Company issued and sold a convertible note in the
principal amount of $1,250,000 to Golden State (the “Second
Debenture”). Pursuant to the terms of the Second Debenture, Golden
State may, at its election, convert all or a part of the Second Debenture into
shares of the Company’s common stock at a conversion rate equal to the lesser of
(i) $2.00 or (ii) 90% of the average of the five lowest volume weighted average
prices during the twenty trading days prior to Golden State’s election to
convert, subject to adjustment as provided in the Second
Debenture. In addition, pursuant to the terms of the Second
Debenture, the Company agreed to file a registration statement covering the
shares of common stock issuable upon conversion or redemption of the Second
Debenture. The registration statement became effective on January 4,
2008.
Golden
State advanced $125,000 on the second $1.25 million debenture on November 9,
2007. Additionally, Golden State advanced $312,500 directly to the
Company and $433,713 to an escrow account on the Second Debenture in January
2008 at which time the Company placed 7,961,783 shares of common stock in escrow
to be released as debentures are converted. As of December 31, 2008, Golden
State has funded an aggregate of $871,213 on the Second Debenture. Golden State
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. At
this time, the Company has not filed a registration statement. Under
the terms of the Securities Purchase Agreement, the escrowed funds were advanced
to the Company during 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. There was
no debenture conversions during the six-month period ended June 30,
2009. Shares remaining in escrow and reported as outstanding at June
30, 2009 total 4,310,449.
The
Second Debenture is secured by the pledge of 11 million shares of common stock
held by Martin Keating, the Chairman of the Company. In the event of
default and the Company has not repaid all outstanding principal and accrued
interest, along with liquidating damages of $250,000 within one day of default,
Golden State shall have the right to immediately sell the pledged shares in
satisfaction of any amounts of principal and interest owing under the Second
Debenture.
In
addition to standard default provisions concerning timeliness of payments,
delivery and notifications, the Second Debenture will be in default if the
common stock of the Company trades at a price per share of $0.21 or lower,
regardless of whether the trading price subsequently is higher than $0.21 per
share. The trading price was at $0.21 or lower on several occasions
during 2009 and 2008. On each of the occasions Golden State, by separate letter
agreements, agreed that the occasions did not constitute a default and thereby
waived the default provision for those occasions only.
4.75%
Convertible Debenture due 2011
On
November 3, 2006, the Company also issued to Golden State a 4.75% 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. Under the terms of the debenture, warrants are exercised in an
amount equal to ten times the dollar amount of the debenture
conversion. During 2007 Golden State 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 the
Company received $64,920 from the exercise of the
warrants. During 2008, Golden State converted $2,726 of the
$100,000 debenture into 5,115,695 shares of common stock at $0.002 per share,
exercised warrants to purchase 27,261 shares of common stock at $10.90 per share
and the Company received $297,145 from the exercise of the
warrants. During 2009, Golden State converted $1,980 of the $100,000
debenture into 12,658,049 shares of common stock at $0.002 per share, exercised
warrants to purchase 19,800 shares of common stock at $10.90 per share and the
Company received $215,820 from the exercise. During 2009 and 2008 Golden
State advanced $90,000 and $200,000 respectively against future exercises of
warrants of which $253,970 was applied leaving a balance of $36,030, of
unapplied advances at June 30, 2009.
14
9.75%
Convertible due July 31, 2009
To obtain
funding for ongoing operations, the Company entered into a Bridge Financing
Agreement with Golden State 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 filed 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 State November 3, 2006. The Company received
gross proceeds of $700,000 from the sale of the aforementioned debenture. At
various dates during 2009, $278,500 of the debenture was converted into
20,115,137 shares of common stock at prices ranging from $0.01 to $0.03 per
common share based on the formula in the convertible debenture. At various dates
during 2008, $336,000 of the debenture was converted into 8,079,895 shares of
common stock at prices ranging from $0.04 to $0.05 per common share based on the
formula in the convertible debenture. At various dates during 2009, $278,500 of
the debenture was converted into 20,115,137 shares of common stock at prices
ranging from $0.009 to $0.029 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 July 31, 2009 (see Subsequent
Events).
Newton,
O’Connor, Turner & Ketchum:
On May
22, 2009, the Company issued to Newton, O’Connor, Turner & Ketchum, a
professional corporation (“NOTK”) and the legal counsel to the Company, a 10%
convertible debenture in a principal amount of $100,703, due September 30, 2009,
and warrants to purchase 4,378,394 shares of the common stock at an exercise
price of $0.09 per share through September 30, 2010 and an exercise price of
$0.18 per share through September 30, 2014. The Company was indebted to
NOTK for legal services performed for the Company and reimbursement of expenses
in rendition of those services for the period ended December 31, 2008. The
debenture and the warrants were issued in settlement of the
indebtedness. The debentures and warrants were recorded at their pro
rata fair values in relation to the proceeds received. The warrants
were valued at $13,504. The difference between the pro rata fair value and face
value of the debenture is being amortized over the life of the
debenture.
The
estimated fair value of the warrants was determined using the Black-Scholes
option pricing model. The expected dividend yield of $-0- is based on the
average annual dividend yield as of the grant date. Expected volatility of
160.73% is based on the historical volatility of the stock since July 25, 2007,
the day the Company began trading on the Over-the-Counter Bulletin Board. The
risk-free interest rate of 2.23% is based on the U.S. Treasury Constant
Maturity rates as of the grant date. The expected life of the option of two
years is based on historical exercise behavior and expected future
experience.
Note
5 – Common Stock and Paid-In Capital
Pursuant
to a Subscription Agreement dated October 12, 2007, the Company sold 1,188,960
shares of the Company’s common stock at a per share price equal to 75% of the
average closing price during the five (5) days prior to the signing ($.31 per
share) and warrants to purchase 594,482 shares of its common stock at a price of
$.40 per share from October 12, 2007 through October 11, 2008, or $.50 per share
from October 12, 2008 through October 11, 2009 to two accredited individuals.
The Company received $280,000 in cash from the sale. The warrants
terminate on October 11, 2009.
Pursuant
to a Subscription Agreement dated October 1, 2008, the Company sold 515,677
shares of the Company’s common stock at a per share price equal to 80% of the
average closing price during the five (5) days prior to the signing ($.048 per
share) and warrants to purchase 257,839 shares of its common stock at a price of
$.20 per share from October 1, 2008 through August 31, 2009, or $.25 per share
from September 1, 2009 through August 31, 2010 to one accredited individual. The
Company received $25,000 in cash from the sale. The warrants
terminate on August 31, 2010.
Pursuant
to a Subscription Agreement dated March 20, 2009, the Company sold 999,999
shares of the Company’s common stock at a per share price of $.03 per share and
warrants to purchase 500,000 shares of its common stock at a price of $.10 per
share from closing for a period of twelve months or $.15 per share for the
second subsequent twelve months to three accredited individuals. The Company
received $30,000 in cash from the sale. The warrants terminate on
March 25, 2011.
On June
18, 2009, the Company entered into a subscription agreement with one of its
directors, Victor Keen, pursuant to which Mr. Keen advanced $100,000 to purchase
14,705,882 shares of the Company’s common stock at a per share price equal to
50% of the average of the closing price during the five (5) days prior to June
15, 2009 ($0.0068 per share). The shares are to be issued by
September 1, 2009.
15
As of
June 30, 2009, there are warrants outstanding to purchase 594,482 shares of
common stock at a price of $.50 per share which expire on October 11, 2009,
warrants to purchase 257,839 shares of common stock at a price of $.20 per share
from October 1, 2008 through August 31, 2009, or $.25 per share from September
30, 2009 through August 31, 2010, warrants outstanding to purchase 500,001
shares of common stock at a price of $.10 per share through March 25, 2010 or
$.15 per share that expire on March 25, 2011 and warrants to purchase 4,378,394
shares of common stock at a price of $0.09 per share through September 30, 2010
and $0.18 per share that expire on September 30, 2014. Additionally,
Golden State has warrants outstanding to purchase 946,983 shares of common stock
at a price of $10.90 per share which expire November 2, 2011.
Common
stock and options issued for services
During
the six months ended June 30, 2009 shares of common stock totaling 22,268,673
were issued for invoiced legal and invoiced consulting services for which the
Company recognized $281,979 of expense. During the six months ended June 30,
2008 shares of common stock totaling 1,162,281 were issued for invoiced legal
and invoiced consulting services for which the Company recognized $164,250 of
expense. Additionally under the SRA revised payment terms The
University of Oklahoma was issued 4,264,706 shares in payment of indebtedness
from services performed under the SRA agreement on June 30, 2009.
On June
6, 2009 Victor Keen, a director of the Company was issued 4,000,000 restricted
shares of common stock to recognize Mr. Keen’s participation providing certain
advisory and consultative services to the Company which are beyond
his required duties as a member of the Company’s Board of
Directors. The restricted shares value $33,600 was determined by
using 50% of the June 6, 2009 trading price of $0.016 which results in a
calculated value of $0.0084 per share.
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 year ended December 31, 2008.
The
estimated fair 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 April 29, 2007, the Company entered into an Employment Agreement
with Vivek Bhaman (the “Bhaman Agreement”) pursuant to which Mr.
Bhaman agreed to serve as the President and Chief Operating Officer
of the Company. Mr. Bhaman’s employment under the Bhaman Agreement commenced on
May 1, 2007 and continued for a term of one year from May 1, 2007, the date on
which he became a full-time employee of the Company. The term of the Bhaman
Agreement automatically extended for successive one year periods unless
otherwise terminated by the parties in accordance with the terms of the Bhaman
Agreement. The following represents the material terms of the Bhaman
Agreement:
|
|
·
|
Annual salary of
$250,000;
|
|
|
·
|
Cash bonus equal to twenty-five
percent (25%) of the annual salary in the event the Company records
revenue of $500,000 for the calendar year 2007; and Mr. Bhaman is an
employee of the Company;
|
16
|
|
·
|
Grant of 100,000 stock options
valued at $21,032 with a term of 10 years and an exercise price of $0.080
per share which vest on the commencement date of employment,
May 1, 2007;
|
|
|
·
|
Grant of 200,000 stock options
valued at $44,064 with a term of 10 years and an exercise price of $1.00
per share which vest on May 1, 2008;
and
|
|
|
·
|
Grant of 200,000 stock options
valued at $32,211 with a term of 10 years and an exercise price of $1.50
per share which vest on May 1,
2009.
|
The
estimated fair 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
137.60% 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 4.0% 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.
Amended
Employment Agreement- On October 12, 2008, the Company entered into an Amendment
to the Employment Agreement of Vivek Bhaman, (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 $0.055 per share with a term of 10 years comprised of (i)
1,000,000 options vesting immediately valued at $50,782, and (ii) 5,000,000
options valued at $253,909, vesting at a rate of 125,000 options 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.
There are
1,425,000 options vested at June 30, 2009 under the original and amended
employment agreements.
The
estimated fair 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
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 were charged $50,782 for the vesting of the one
million options on October 1, 2008.
President’s
resignation and interim President appointed
On
February 3, 2009, Vivek Bhaman resigned as President, Chief Operating Officer
and Treasurer of 3DIcon Corporation effective March 3, 2009. Mr.
Bhaman was due an aggregate of $41,667 compensation for January and February
2009 under the terms of the April 29, 2007 Employment
Agreement. Additionally, he is due $41,667 under the terms of the
October 12, 2008 Amended Employment Agreement which increased his annual
compensation to $300,000 from $250,000. Under the terms of the
contract, the Company elected to defer the $50,000 increase until April 30, 2009
and pay the increased compensation in registered common stock discounted at 25%
to the market price. Mr. Bhaman was issued 1,851,852 registered
common shares at $0.0225 per share for the $41,667 deferred
compensation. The Company has been unable to pay Mr. Bhaman for the
remaining $41,667 compensation under his original Employment
Contract. Additionally, under the terms of the employment agreements,
Mr. Bhaman has vested 1,425,000 options to purchase shares of common stock of
the Company at prices ranging from $0.055 to $1.00 per share that expire at
various dates through October 12, 2018. In connection with his
resignation, the Company agreed to waive certain provisions of Mr. Bhaman's
employment agreement which prevented him from continuing to serve as a Director
of the Company following the termination of his employment. Accordingly, Mr.
Bhaman continued to serve as a Director of the Company.
17
On April
29, 2009 the Company and Mr. Bhaman signed a Separation Agreement And Release
(the “Agreement”) whereby the Company agreed to settle the $41,667 compensation
due by paying Mr. Bhaman an aggregate of one hundred thousand dollars ($100,000)
(the “Settlement”), 75% of which shall be payable in the form of a “Stock
Payout” and 25% of which shall be payable in “Cash
Consideration”. Under the Stock Payout Mr. Bhaman shall receive the
aggregate sum of $4,000 per week payable in registered shares of the Company’s
common stock calculated at a 50% discount to the average closing price for the
five days prior to the weekly issuance. Under the Cash Consideration
Mr. Bhaman shall receive the greater of $500 or 25% of any amounts paid to the
remaining three full time employees and amount owed for 2008 legal service to
Newton, O’Connor, Turner & Ketchum, P.C. Any unpaid amounts will
bear interest at 8% or at the option of Mr. Bhaman, be payable in registered
shares of the Company’s common stock calculated at a 50% discount to
the average closing price for the five days prior, provided, however, that the
amount of shares issued in any one week, shall not exceed 450,000
shares. During the six months ended June 30, 2009 the Company issued
4,562,305 shares of common stock to Mr. Bhaman in payment of $61,667 under the
terms of the Agreement.
On
February 9, 2009, the Board of Directors of the Company appointed James N. Welsh
to serve as the Company’s Interim Chief Operating Officer and Treasurer. His
appointment was effective as of March 1, 2009. On May 5, 2009, Mr. Bhaman
resigned as a Director of the Company.
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, valued at $33,622, are vested and exercisable on October 1, 2008,
the date Dr. Refai commences full-time
employment;
|
|
|
2.
|
3,500,000 options, valued at
$235,357, 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 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. Operations were charged $100,867 in 2008 for the vesting
of the options cost of Mr. Refai under the terms of the Employment
Agreement.
18
The
following summary reflects warrant and option activity for the six months ended
June 30, 2009.
|
|
|
Attached
Warrants
|
|
|
Golden State
Warrants
|
|
|
Options
|
|
|||
|
Outstanding
December 31, 2008
|
852,321
|
966,783
|
20,111,540
|
|||||||||
|
Granted
|
4,878,395
|
-
|
-
|
|||||||||
|
Exercised
|
-
|
|
(19,800)
|
-
|
||||||||
|
Cancelled
|
-
|
|
-
|
(6,575,000
|
)
|
|||||||
|
Outstanding
June 30, 2009
|
5,730,716
|
946,983
|
13,536,540
|
|||||||||
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 June 30,
2009, minimum future lease payments to be paid annually under the three year
non-cancellable operating lease for office space are as follows:
|
2009
|
$
|
13,640
|
||
|
2010
|
27,570
|
|||
|
2011
|
11,573
|
|||
|
$
|
52,783
|
Note
7 – Related Party Transaction
3DIcon
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.
Martin
Keating, the Chairman and major shareholder, has advanced the company $25,642
and is owed an additional $14,184 in unreimbursed business expenses at June 30,
2009. Currently there are no specific terms for
repayment.
Note
8 – Incentive Stock Plan
In August
2007, the Company established 3DIcon Corporation 2007 Incentive Stock Plan (the
"Plan"). The Plan is designed to retain directors, executives and selected
employees and consultants and reward them for making major contributions to the
success of the Company. These objectives are accomplished by making long-term
incentive awards under the Plan thereby providing Participants with a
proprietary interest in the growth and performance of the Company. The total
number of shares of stock which may be purchased or granted directly by options,
stock awards or restricted stock purchase offers, or purchased indirectly
through exercise of options granted under the Plan shall not exceed eight
million (8,000,000) shares. The shares are included in a registration
statement filed August 7, 2007, which registered an aggregate of fifteen million
shares.
The
Company’s Incentive Stock Plan was amended in February 2009 to increase the
number of shares available to thirty-five million
(35,000,000). Shares totaling 14,956,713 and 1,162,281 were issued
from the Plan during the six months ended June 30, 2009 and 2008, for services
rendered to the Company. There are currently 8,127,329 shares available for
issuance under the plan.
Note
9 – OCAST Grant
The
Oklahoma Center for the Advancement of Science and Technology (OCAST) approved
the Company’s application for funding of a matching grant titled 800 Million
Voxels Volumetric Display, on November 19, 2008. The two-year
matching grant, totaling $299,932, has a start date of January 1,
2009. The award is for a maximum of $149,940 for 2009 and the
remainder for 2010. Funding beyond 2009 is contingent upon
the Company obtaining matching funds, satisfactory performance
evaluation and the availability of funds. The Company has received
$18,975 in matching funds from the grant for the six-month period ended June 30,
2009.
19
Note
10 – 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 subsequent to June
30, 2009. On each of the occasions Golden State, by separate letter
agreements, agreed that the occasions did not constitute a default and thereby
waived the default provision for the occasions.
Subsequent
to June 30, 2009 Golden State converted the remaining balance of $85,500 of the
9.75% convertible debenture into 9,588,373 shares of common stock at prices
ranging from $0.008 to $0.009 per share, converted $230 of the 4.75% convertible
debenture into 2,556,357 shares of common stock at $0.0002 per share and
exercised 2,300 warrants at $10.90 per share for $25,070 under the terms of the
Securities Purchase Agreements.
Common
stock and paid- in capital
Vivek
Bhaman, the former president of the Company, was issued 2,388,470 shares of
common stock valued at $16,000 as payment under the term of the separation
agreement. Additionally, common shares totaling 2,000,000 were
issued to vendors in payment of $13,400 for services.
20
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:
The
Company is 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 the Company 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 the Company is pursuing the
research and development of volumetric 3-D display technology through the
Sponsored Research Agreement (“SRA”) with the University of Oklahoma (“OU”). Our
efforts are focused on the technological approach for volumetric display which
has been developed into a proof-of-concept system.
21
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).
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.
We have
also released a software product called Pixel Precision™. The current version of
the software is 2.0. We plan to continue to pursue this market and provide
versions and variations of this software. The plans include enhancements to the
functionality as well as variants to address additional
opportunities.
We have
signed a sales and distribution agreement with Digital Light Innovations (DLi)
for the sales, marketing and first level support of the Pixel Precision™
software. Through DLi and its sub-distributors the software is being marketed in
the United States as well as in Europe and Asia.
The
Oklahoma Center for the Advancement of Science and Technology (“OCAST”) approved
our application for funding of a matching grant titled 800 Million Voxels
Volumetric Display, on November 19, 2008. The two-year matching grant
totals $299,932. The award is for a maximum of $149,940 for the
calendar year 2009 and the remainder for the calendar year
2010. Funding beyond 2009 is contingent upon satisfactory performance
evaluation and the availability of funds.
Progress
on Research and Development Activities
The
research team at OU filed two new patent applications in the first quarter of
2008 and converted one from a provisional to a utility filing.
Under the
aegis of the SRA, the University has filed the following Patent Applications.
The Utility Patents have been converted and consolidated from the previously
filed Provisional Applications.
|
Description of Provisional Patent Application as
Filed
|
Description of Utility Patent
Application Filing (Combined)
|
Date of Filing
|
||
|
Swept
Volume Display
|
Swept
Volume Display
|
September
2006
|
||
|
Colorful
Translation Light Surface 3D Display
|
Light
Surface Display for
|
April
2007
|
||
|
Colorful
Translation 3D Volumetric Display
|
Rendering
Three-Dimensional
|
|||
|
3D
Light Surface Display
|
Image
(Combined)
|
|||
|
Volumetric
Liquid Crystal Display
|
Volumetric
Liquid Crystal Display
|
April
2007
|
||
|
for
Rendering Three-Dimensional
|
||||
|
Image
(Combined)
|
||||
|
Computer
System Interaction with DMD
|
Computer
System Interaction with DMD
|
January
2008
|
||
|
Virtual
Moving Screen for Rendering Three Dimensional Image
|
Utility
Patent Application to be filed
|
January
2008
(Provisional)
|
||
|
Optically
Controlled Light Emitting…and System for Optically Written 2D and 3D
Displays
|
Utility
Patent Application to be filed
|
April
2008
(Provisional)
|
The
Company has also filed its own provisional patent for a new display screen which
it believes has significant advantages and market potential.
Further,
we are taking steps to explore areas that may be related to assist in the
protection of intellectual property assets. In addition, we have begun the
process of applying for trademarks related to our 3D technologies.
Our
research and development objectives for the 2009 calendar year are as follows.
The work will mainly be done by researchers, faculty and selected graduate or
doctoral level students at the University of Oklahoma with oversight by 3DIcon
personnel:
22
I. Static
Volumetric Display (CSpace™)
|
|
·
|
Continue
work on development of blue and red up-conversion
materials.
|
|
|
·
|
Synthesize
near-transparent projection media suitable for dispersion of display
materials.
|
|
|
·
|
Investigate
the use of additional technologies for development of image space that
enhance the commercialization of the technology. Dr. Hakki Refai has begun
collaboration with parties outside of OU to explore alternate material
development strategies.
|
|
|
·
|
Demonstrate
improvements in optical properties for transparent projection materials
for Static Volumetric Display and
Nano-materials
|
II.
By-Product Technologies
|
|
·
|
Continue
to generate revenue from Pixel Precision™ the DMD Control Software for DMD
Application development markets
|
|
|
·
|
Develop
next generation of Pixel Precision™ software for controlling multiple DMDs
as well as for controlling the next generation of the DMD-Discovery™
series
|
Support
Pixel Precision™ for the Discovery 4000 series (D4000).
III. New
3D Technologies
|
|
·
|
Continue
to pursue new 3D opportunities across a broad technological spectrum, with
the ultimate goal of the creation of a “free space” 3D display (i.e., one
without a visible containment
vessel).
|
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE
MONTHS ENDED JUNE 30, 2008
Revenue
We
launched our first software product PixelPrecision™. We appointed Digital Light
Innovations for the sales and distribution of this product in March
2008.
We had
$6,500 of earned income from the sales of PixelPrecision™ for the six months
ended June 30, 2009 compared to $10,900 for the six months ended June 30,
2008. Shared marketing support costs are charged to operations when
incurred.
We expect
sales of Pixel Precision™ to the installed and active user base of the earlier
D1100 and D3000 systems in the near term and as companion product sales to D4000
systems. We expect that the revenue from this product to contribute
to the operating expenses (General and Administrative, R&D, Interest
Payments) but do not expect the revenue generated in 2009 to cover the operating
expenses. Additionally we received the initial revenue from the OCAST
grant of $18,975 for the second quarter of 2009.
Research
and Development Expenses
The
research and development expenses were $13,978 for the three months ended June
30, 2009 as compared to $276,679 for the three months ended June 30,
2008. The decrease was a result of the SRA being converted to a cost
reimbursable basis effective September 1, 2008 under the terms of the revised
SRA agreement that was signed October 31, 2008. Additionally on October 1, 2008
we employed Dr. Hakki Refai as Chief Technology Officer who previously was the
lead investigator on the SRA with OU. Dr. Refai’s salary and benefits
are included in general and administrative expenses for 2009.
General
and Administrative Expenses
Our
general and administrative expenses were $297,448 for the three months ended
June 30, 2009 as compared to $611,712 for the three months ended June 30,
2008. The decrease was mainly due to the termination of consultant
contracts in February 2009 ($6,000), $300,000 of director’s and $58,397 of
consultant’s options issued in 2008, and a reduction in travel and lodging of
approximately $9,000 in 2009.
23
Interest
Expense
Interest
expense for the three months ended June 30, 2009 was $20,835 as compared to
$31,509 for the three months ended June 30, 2008. The decrease in interest
expense resulted from decreases in the amounts outstanding on our convertible
debentures during the periods.
RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS
ENDED JUNE 30, 2008
Revenue
We
launched our first software product PixelPrecision™. We appointed Digital Light
Innovations for the sales and distribution of this product in March
2008.
We had
$6,500 of earned income from the sales of PixelPrecision™ for the second quarter
of 2009 compared to $10,900 for the second quarter of 2008. Shared
marketing support costs are charged to operations when incurred.
We expect
sales of Pixel Precision™ to the installed and active user base of the earlier
D1100 and D3000 systems in the near term and as companion product sales to D4000
systems. We expect that the revenue from this product to contribute
to the operating expenses (General and Administrative, R&D, Interest
Payments) but do not expect the revenue generated in 2009 to cover the operating
expenses. Additionally we received the initial revenue from the OCAST
grant of $18,975 for the second quarter of 2009
Research
and Development Expenses
The
research and development expenses were $60,473 for the six months ended June 30,
2009 as compared to $576,679 for the six months ended June 30,
2008. The decrease was a result of the SRA being converted to a cost
reimbursable basis effective September 1, 2008 under the terms of the revised
SRA agreement that was signed October 31, 2008. Additionally on October 1, 2008
we employed Dr. Hakki Refai as Chief Technology Officer who previously was the
lead investigator on the SRA with OU. Dr. Refai’s salary and benefits
are included in general and administrative expenses for 2009.
General
and Administrative Expenses
Our
general and administrative expenses were $733,089 for the six months ended June
30, 2009 as compared to $1,529,541 for the six months ended June 30,
2008. The decrease was mainly due to the termination of consultant
contracts in February 2009 ($6,000), $300,000 of director’s and $58,397 of
consultant’s options issued in 2008, and a reduction in travel and lodging of
approximately $9,000 in 2009.
Interest
Expense
Interest
expense for the six months ended June 30, 2009 was $41,437 as compared to
$64,375 for the six months ended June 30, 2008. The decrease in interest expense
resulted from decreases in the amounts outstanding on our convertible debentures
during the periods.
Financial
Condition, Liquidity and Capital Resources
Management
remains focused on controlling cash expenses. We recognize our limited cash
resources and plan our expenses accordingly. We intend to leverage
stock-for-services wherever possible. The operating budget consists of the
following expenses:
24
|
|
·
|
Research
and development expenses pursuant to our Sponsored Research Agreement with
the University of Oklahoma. This includes development of an initial
demonstrable prototype and a second prototype for static volume
technology
|
|
|
·
|
Acceleration
of R&D increased research personnel as well as other research
agencies
|
|
|
·
|
General
and Administrative expenses: salaries, insurance, investor related
expenses, rent, travel, website,
etc.
|
|
|
·
|
Hiring
executive officers for technology, operations and
finance
|
|
|
·
|
Development,
support and operational costs related to Pixel Precision™
software
|
|
|
·
|
Professional
fees for accounting and audit; legal services for securities and
financing; patent research and
protection
|
Our
independent registered public accountants, in their audit report accompanying
our financial statements for the year ended December 31, 2008, expressed
substantial doubt about our ability to continue as a going concern due to our
status as a development stage organization with insufficient revenues to fund
development and operating expenses.
We had
net cash of $98,550 at June 30, 2009.
We had
negative working capital of $1,217,440 at June 30, 2009.
During
the six months ended June 30, 2009, we used $191,671 of cash for operating
activities, a decrease of $1,001,598 or 83.9% compared to the six months ended
June 30, 2008. The decrease in the use of cash for operating activities was a
result of a decrease in the net loss for the period.
Cash used
in investing activities during the six months ended June 30, 2009 was $ -0- , a
decrease of $19,599 compared to the six months ended June 30,
2008. The decrease was a result of purchasing office furniture and
equipment for the leased office space in 2008.
Cash
provided by financing activities during the six months ended June 30, 2009 was
$241,821, a decrease of $638,638 or 72.5% compared to the six months ended June
30, 2008. The decrease was the result of the decreased debenture
funding in 2009.
We expect
to fund the ongoing operations through the existing financing in place (see
below); through raising additional funds as permitted by the terms of Golden
State Equity Investors, Inc. (“Golden State”) financing as well as reducing our
monthly expenses.
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 six
months ended June 30, 2009. On each of the occasions Golden State, by
separate letter agreements, agreed that the occasions did not constitute a
default and thereby waived the default provision for the occasions.
During
the six months ended June 30, 2009 Golden State converted $278,500 of the 9.75%
convertible debenture into 20,115,137 shares of common stock at prices ranging
from $0.009 to $0.029 per share, converted $1,980 of the 4.75% convertible
debenture into 12,658,049 shares of common stock at $0.0002 per share and
exercised 19,800 warrants at $10.90 per share for $215,820 under the terms of
the securities purchase agreements.
Common
stock and paid in capital
Concordia
was issued 7,920,215, shares of common stock in payment of $94,500 for services
under the consulting agreement. Common shares totaling 10,348,458
were issued to vendors in payment of $153,880 for services.
Pursuant to a Subscription Agreement
dated March 20, 2009, the Company sold 999,999 shares of the Company’s common
stock at a per share price of $.03 per share and warrants to purchase 500,000
shares of its common stock at a price of $.10 per share from closing for a
period of twelve months or $.15 per share for the second subsequent twelve
months to three accredited individual. The Company received $30,000 in cash from
the sale. The warrants terminate on March 25, 2011.
On June
18, 2009, the Company entered into a subscription agreement with one of its
directors, Victor Keen, pursuant to which Mr. Keen advanced $100,000 to purchase
14,705,882 shares of the Company’s common stock at a per shares price equal to
50% of the average of the closing price during the five (5) days prior to June
15, 2009 ($0.0068 per share). The shares are to be issued by
September 1, 2009.
25
On June
6, 2009 Victor Keen, a director of the Company was issued 4,000,000 restricted
shares of common stock to recognize Mr. Keen’s participation providing certain
advisory and consultative services to the Company which are beyond his required
duties as a member of the Company’s Board of Directors. The
restricted shares value $33,600 was determine by using 50% of the June 6, 2009
trading price of $0.016 which results in a calculated value of $0.0084 per
share.
Newton,
O’Connor, Turner & Ketchum convertible debenture with warrants
attached:
On May 22, 2009, the Company issued to
Newton, O’Connor, Turner & Ketchum, a professional corporation (“NOTK”) and
the legal counsel to the Company, a 10% convertible debenture in a principal
amount of $100,703, due September 30, 2009, and warrants to purchase 4,378,394
shares of the common stock at an exercise price of $0.09 per share through
September 30, 2010 and an exercise price of $0.18 per share through September
30, 2014. The Company was indebted to NOTK for legal services performed
for the Company and reimbursement of expenses in rendition of those services for
the period ended December 31, 2008. The debenture and the warrants were issued
in settlement of the indebtedness. The debentures and warrants
were recorded at their pro rata fair values in relation to the proceeds
received. The warrants were valued at $13,504. The difference between
the pro rata fair value and face value of the debenture is being amortized over
the life of the debenture.
The
estimated fair value of the warrants 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
160.73% 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 2.23% is based on the U.S. Treasury Constant
Maturity rates as of the grant date. The expected life of the option of two
years is based on historical exercise behavior and expected future
experience
Our
ability to fund the operations of the Company is highly dependent on the
underlying stock price of the Company. As a result of our stock price being
around the 52 week low mark and trending downward, our ability to raise cash is
restricted.
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
$98,550, grants and investor funding. Under the terms of the Golden State
debentures, Golden State may advance an additional $378,787. However, the
additional funding would only 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 State is obligated to submit
conversion notices in an amount such that Golden State receives 1% of the
outstanding shares of the Company every calendar quarter for a period of one
year. In connection with each conversion, Golden State 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
State from converting on the 4.75% Debenture or exercising warrants if such
conversion or exercise would cause Golden State’s holdings to exceed 9.99% of
the Company’s issued and outstanding common stock. Subject to the
Beneficial Ownership Limitations, Golden State is required to convert $3,000 of
the 4.75% Convertible Debenture and exercise 30,000 warrants per month.
During the six months ended June 30, 2009, we received an aggregate of $90,000
from Golden State from such warrant exercises. Based upon our current
stock price, and ignoring the impact of the Beneficial Ownership Limitations, we
may receive up to $693,650 in funding from Golden State though the remaining 6
months of 2009 as a result of warrant exercises.
On
November 19, 2008, we received a research grant from OCAST titled the 800
Million Voxels Volumetric Display. The two-year matching grant totals
$299,932. The award is for a maximum of $149,940 for the calendar
year 2009 and the remainder for calendar year 2010. Funding of the
2009 amount is contingent upon the Company providing matching funds for the
first year’s research and submission of all required documentation to
OCAST. Funding beyond 2009 is contingent upon satisfactory
performance evaluation and the availability of funds. The OCAST matching grant
titled 800 Million Voxels Volumetric funded $18,975 during the six months ended
June 30, 2009 under the terms of the grant.
26
During
the fourth quarter of 2008 and the first quarter of 2009, the Company had been
unable to meets its monthly payment obligations under the Sponsored Research
Agreement (“SRA”) and received notification that they were in
default. A new payment schedule has been
negotiated. Failure of the Company to meet its payment
obligations under the new payments schedule could result in the termination of
the SRA, termination of the related projects and termination of any outstanding
license agreements under the SRA.
On October 31, 2008 and on March 20,
2009 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 2008 of $861,131. The $1,804,687 balance of the
remaining SRA 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 July 31, 2009 to February 28, 2010 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 of $10,000
per month. For the remaining balance of $290,000, 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.
In
payment of the $290,000 due June 30, 2009 under the revised SRA payment
schedule, The University of Oklahoma accepted 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.
Should
the Company fail to timely pay any of the amounts owed above, OU may immediately
and without notice or opportunity to cure, may terminate any or all existing
agreements between the parties, including but not limited to, the Exclusive
License Agreement, the Facilities/Resources Use Agreement, and the 2009 SRAs.
Termination of the license agreement with OU shall forfeit the Company’s rights
to any or all intellectual property licensed to it under the terminated
license.
During
the periods ended June 30, 2009 and 2008, the Company charged operations $60,473
and $576,679, respectively, pursuant to the SRA. At June 30, 2009,
the Company owed the University $18,448 for the May and June 2009 monthly
payments and $595,481 on the arrearages under the revised payment
terms.
In
addition, management has reduced operating expenses further through temporary
salary cuts, partial payments to consultants using stock and reduction in daily
expenses. We anticipate that this, along with other measures, will reduce our
current cash flow burn rate from $267,000 per month to an estimated amount of
$120,000 to $150,000 per month.
We also
intend to raise additional funds as permitted by the terms of Golden State
financing, to help with the short term capital needs.
Off
Balance Sheet Arrangements
3DIcon
does not engage in any off balance sheet arrangements that are reasonably likely
to have a current or future effect on our financial condition, revenues, results
of operations, liquidity or capital expenditures.
Significant
Accounting Policies
Research
and Development Costs
Statement
of Accounting Standards No. 2, “Accounting for Research and
Development Costs,” requires that all research and development costs be
expensed as incurred. Until we have developed a commercial product, all costs
incurred in connection with the Sponsored Research Agreement with the University
of Oklahoma, as well as all other research and development costs incurred, will
be expensed. After a commercial product has been developed, we will report costs
incurred in producing products for sale as assets, but we will continue to
expense costs incurred for further product research and development
activities.
27
Stock-Based
Compensation
Since its
inception 3DIcon has used its common stock or warrants to purchase its common
stock as a means of compensating our employees and consultants. Statement of
Financial Accounting Standards No. 123 “Accounting for Stock Based
Compensation” and No. 123(R), “Share Based Payments,”
requires us to estimate the value of securities used for compensation and to
charge such amounts to expense over the periods benefited.
The estimated fair value at date of
grant of options for our common stock is estimated using the Black-Scholes
option pricing model, as follows:
The
expected dividend yield is based on the average annual dividend yield as of the
grant date. Expected volatility is based on the historical volatility of our
stock. The risk-free interest rate is based on the U.S. Treasury
Constant Maturity rates as of the grant date. The expected life of the option is
based on historical exercise behavior and expected future
experience.
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 subsequent to June
30, 2009. On each of the occasions Golden State, by separate letter
agreements, agreed that the occasions did not constitute a default and thereby
waived the default provision for the occasions.
Subsequent
to June 30, 2009 Golden State converted the remaining balance of $85,500 of the
9.75% convertible debenture into 9,588,373 shares of common stock at prices
ranging from $0.008 to $0.009 per share, converted $230 of the 4.75% convertible
debenture into 2,556,357 shares of common stock at $0.0002 per share and
exercised 2,300 warrants at $10.90 per share for $25,070 under the terms of the
Securities Purchase Agreements.
Common
stock and paid- in capital
Vivek
Bhaman, the former president of the Company, was issued 2,388,470 shares of
common stock valued at $16,000 as payment under the term of the separation
agreement. Additionally, common shares totaling 2,000,000 were
issued to vendors in payment of $13,400 for services.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM
4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls
and Procedures. Under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act") as of the end of the period covered by this report. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures as of the end of the
period covered by this report were effective such that the information required
to be disclosed by us in reports filed under the Securities Exchange Act of 1934
is (i) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms and (ii) accumulated and communicated to
our management to allow timely decisions regarding disclosure. A controls system
cannot provide absolute assurance, however, that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
Changes in Internal Control Over
Financial Reporting. During the most recent quarter ended June
30, 2009, there has been no change in our internal control
over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
28
PART
II
ITEM
1. LEGAL PROCEEDINGS.
We are
not a party to any pending legal proceeding, nor is our property the subject of
a pending legal proceeding, that is not in the ordinary course of business or
otherwise material to the financial condition of our business. None of our
directors, officers or affiliates is involved in a proceeding adverse to our
business or has a material interest adverse to our business.
ITEM
1A. RISK FACTORS.
N/A
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS.
Pursuant to a Subscription Agreement
dated April 21, 2009, the Company sold 333,333 shares of the Company’s common
stock at a per share price of $.03 per share and warrants to purchase 166,667
shares of its common stock at a price of $.10 per share from closing for a
period of twelve months or $.15 per share for the second subsequent twelve
months to one accredited individual. The Company received $10,000 in cash from
the sale. The warrants terminate on March 25,
2011.
On June
6, 2009 Victor Keen, a director of the Company was issued 4,000,000 restricted
shares of common stock to recognize Mr. Keen’s participation providing certain
advisory and consultative services to the Company which are beyond his required
duties as a member of the Company’s Board of Directors. The
restricted shares value $33,600 was determine by using 50% of the June 6, 2009
trading price of $0.016 which results in a calculated value of $0.0084 per
share.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
29
ITEM
5. OTHER INFORMATION.
None
ITEM
6. EXHIBITS.
|
Exhibit
Number
|
Description
of Exhibit
|
|
31.1
|
Certifications
required by Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
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31.2
|
Certification
of Chief Executive Officer and Principal Accounting Officer pursuant to 18
U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
30
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
3DICON
CORPORATION
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|
|
/s/ Martin Keating
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|
|
August
14, 2009
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Martin
Keating
|
|
Chief
Executive Officer, Acting Chief Financial
Officer
and Director (Principal Executive Officer,
Principal
Accounting Officer and
Principal
Financial Officer)
|
31
EXHIBIT
31.1
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER
PURSUANT
TO SECTION 302 OF THE
SARBANES-OXLEY
ACT OF 2002
I, Martin
Keating, certify that:
1. I
have reviewed this quarterly report on Form 10-Q of 3DIcon
Corporation.
2. Based
on my knowledge, this quarterly report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this quarterly
report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4.
The registrant’s other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
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a)
|
designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
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b)
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designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
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c)
|
evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such
evaluation;
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d)
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disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting;
|
5.
I have disclosed, based on my most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the
equivalent function):
a) all
significant deficiencies and material weaknesses in the design or operation of
internal controls over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial data; and
b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal controls over financial
reporting.
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Dated:
August 14, 2009
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By:
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/s/ Martin Keating
|
|
Martin
Keating
Chief
Executive Officer and Acting Chief Financial
Officer
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Exhibit
32.1
CERTIFICATION
PURSUANT TO
18 U.S.C.
SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of 3DIcon Corporation (the “Company”) on
Form 10-Q for the quarter ended June 30, 2009 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Martin Keating, Chief
Executive Officer and Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
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|
(1)
|
The
Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934;
and
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|
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(2)
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The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
The foregoing certification is being
furnished solely to accompany the Report pursuant to 18 U.S.C. section 1350 and
is not being filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, and is not to be incorporated by reference into any filing of
the Company, whether made before or after the date hereof, regardless of any
general incorporation language in such filing.
|
Date: August
14, 2009
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By:
|
/s/ Martin Keating
|
|
|
Martin
Keating
Chief
Executive Officer and Acting Chief Financial
Officer
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