3DICON CORPORTION

(Name of small business issuer 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, OK 74136

(Address of principal executive offices) (Zip Code)

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

 

Securities registered under Section 12(b) of the Exchange Act: None.

 

Securities registered under Section 12(g) of the Exchange Act: None

 

Indicate by check mark is the issuer is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨   No x

Indicate by check if the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes ¨   No x

 

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 ¨

 

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 such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-K.  ¨

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 the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	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 ¨   No x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the average bid and asked price of such common equity as of June 30, 2009 was $3,022,559.

 

As of March 31, 2010, the issuer had 418,205,705 outstanding shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE: NONE

 

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TABLE OF CONTENTS

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Reserved	12
PART II
Item 5.	Market for Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	14
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 8.	Financial Statements and Supplementary Data	21
Item 9.	Changes In and Disagreements with Accountants on Accounting
	and Financial Disclosure	21
Item 9A.	Controls and Procedures	22
Item 9B.	Other Information	22
PART III
Item 10.	Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(A) of the Exchange Act.	22
Item 11.	Executive Compensation	25
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters	27
Item 13.	Certain Relationships and Related Transactions, and Director Independence	28
Item 14.	Principal Accountant Fees and Services	28
PART IV
Item 15.	Exhibits	29
SIGNATURES		30

 

 

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PART I  

Description of Provisional Patent Application as Filed		Description of Utility Patent Application Filing (Combined)		Date of Filing		Grant Date of U.S. Patent		European Pending Patent- Date of Filing		Japanese Pending Patent- Date of Filing
Swept Volume Display		Swept Volume Display		September 2006
Colorful Translation Light Surface 3D Display Colorful Translation 3D Volumetric Display 3D Light Surface Display		Light Surface Display for Rendering Three-Dimensional Image (Combined)		April 2007				April 2007		April 2007
Volumetric Liquid Crystal Display		Volumetric Liquid Crystal Display for Rendering Three-Dimensional Image (Combined)		April 2007		May 2009
Computer System Interaction with DMD		Computer System Interaction with DMD		January 2008
Virtual Moving Screen for Rendering Three Dimensional Image		Virtual moving screen for rendering a three-dimensional image		January 2008

 

 

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Marketing and Product Development

We produced our first product “Pixel Precision” in 2007. The product has been made commercially available through a sales and distribution arrangement with Digital Light Innovations that was signed March 6, 2008. This product is a result of our research efforts involving the use of the DMD. The product is targeted at the application development market involving the use of DMDs, specifically the DMD-Discovery™ line from Texas Instruments™.

We do not have any products, services or technologies in the area of Three Dimensional Displays as yet. We envision the sale of co-produced products with partners in various industry verticals, the licensing of University-owned technology, or a combination thereof.

We have identified the following potential markets and uses for the technology being developed by the University:

·

Digital Displays: Large Format, Retail Advertising;

·

Air Traffic Systems, Traffic Planning; Town Planning;

·

Pharmaceutical and Bio-Medical Research;

·

Homeland Defense and Security;

·

Architectural Plans and Virtual Structures;

·

Interactive Entertainment;

·

Geo-Spatial Applications;

·

Casino Gaming; and

·

Military Applications.

Competition

 

There are numerous technologies which are under development to enable the display of 3D images. The following is a summary of research being conducted and products under development in the 3D display system marketplace of which we are currently aware:

·

Lightspace DepthCube™ from LightSpace Technologies, Inc.

·

Felix 3D Displays

·

Perspecta Spatial 3D Display from Actuality Systems

·

3D Technology Laboratories

Employees

We had three full-time employees as of December 31, 2009, Martin Keating, Chief Executive Officer, Dr. Hakki Refai, Chief Technology Officer, and Ms. Judith Keating, Company Secretary and Director of Investor Relations.  None of our employees are covered by a collective bargaining agreement.  We consider relations with our employees to be good.

 

 

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ITEM 1A. RISK FACTORS.

Risks Relating to Our Business:

We have a limited operating history, as well as a history of operating losses.

 

We have a limited operating history. We cannot assure you that we can achieve revenue or sustain revenue growth or profitability in the future. We have a cumulative net loss of $12,576,914 for the period from inception (January 1, 2001) to December 31, 2009.   Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. Unanticipated problems, expenses, and delays are frequently encountered in establishing a new business and marketing and developing products. These include, but are not limited to, competition, the need to develop customers and market expertise, market conditions, sales, marketing and governmental regulation. Our failure to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail our operations. Revenues and profits, if any, will depend upon various factors. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on our business.

Currently, our only significant assets are our Sponsored Research Agreement with the University and the exclusive license agreement covering the technology on which the University and  Dr. Hakki Refai  are currently working. Our ability to accomplish our business plan relies entirely on the ability of the University and Dr. Refai to successfully develop marketable 3D communications technology.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.  

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

 

The following table sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each. There are no family relationships among any of our Directors and Executive Officers.

Name		Age		Position
Martin Keating		68		Chief Executive Officer and  Director
James N. Welsh		66		President, Chief Operating Officer and Treasurer
Lawrence Field		48		Director
John O’Connor		53		Director
Victor F. Keen		68		Director

 

 

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Martin Keating – Chief Executive Officer and Director

Martin Keating has been Chief Executive Officer and a director of the Company since 1998. Previously, Mr. Keating organized and managed private placement limited partnerships, ranging from real estate development to motion picture financing. Mr. Keating was also general counsel and director of investor relations for CIS Technologies, then a NASDAQ company. Mr. Keating is an attorney licensed to practice law in Oklahoma and Texas.

James N. Welsh – President, Chief Operating Officer and Treasurer

James N. Welsh was appointed as President, Chief Operating Officer and as Treasurer in March 2009.  He is the founder and principal of Welsh & Associates, a consulting firm which provides financial and management consulting services.  He also served as the interim president of TriCord Hurricane Holdings, Inc. until March 31, 2009.    In addition, Mr. Welsh served as Chief Financial Officer of Global Safety Labs, Inc. from January, 2007 through August, 2007.  He also served as the Chief Financial Officer of American Container Net, Inc. from October, 2003 through August, 2005.

Lawrence Field - Director

Mr. Lawrence Field was appointed to the Board of Directors of the Company in October 2007. Mr. Field is the cofounder and managing director of Regent Private Capital LLC, an investment management firm that invests globally through offices in New York City and Tulsa. Prior to co-founding Regent Private Capital LLC, Mr. Field was vice president of Capital Advisors, Inc., an investment management firm. Mr. Field holds a B.S. degree from the University of Texas at Austin.

John O’ Connor - Director

John O’Connor has been a director of the Company since October 2006. Since 1981, Mr. O’Connor has practiced law in Oklahoma, concentrating in the areas of corporate and commercial law. Mr. O’Connor served as President of the law firm of Newton, O’Connor, Turner & Ketchum from 2001 to 2005 and has served as its Chairman from 2001 to present.

Victor F. Keen,  Director

Mr. Victor F. Keen was appointed to the Board of Directors of the Company in November 2007. Until March 1, 2007, Mr. Keen served as the chair of the Tax Practice Group at Duane Morris. He is currently of counsel to the firm. Mr. Keen has served on the board of directors of Research Frontiers, Inc. (“Research Frontiers”) for over 10 years. He has been chair of the compensation committee of Research Frontiers for the last five years.

Audit Committee

On February 25, 2008, the Board of Directors created an Audit Committee comprising of Mr. Victor Keen.

Compensation Committee

On February 25, 2008, the Board of Directors created a Compensation Committee comprising Mr. Victor Keen (Chair) and Mr. Lawrence Field

Nomination and Corporate Governance Committee

On February 25, 2008, the Board of Directors created Nominations and Corporate Governance Committee comprising Mr. Victor Keen (Chair) and Mr. Lawrence Field.

 

 

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Director or Officer Involvement in Certain Legal Proceedings

Our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the past ten years.

Board Leadership Structure and Role in Risk Oversight

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of the Company and its shareholders to combine these roles.  Martin Keating has served as our Chairman and Chief Executive Officer since the inception of the Company. Due to the small size and early stage of the Company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions combined.

Our Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. Our Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensure that risks undertaken by us are consistent with the Board’s appetite for risk. While the Board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure and role in risk oversight is effective.

Code of Ethics

We have not adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that applies to all of our officers, directors and employees.

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;

 

 

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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.

Prior to Dr. Refai joining the Company on a full-time basis, he served as the co-principal investigator for the Static Volume / CSpace®™ technologies being developed under the Company's Sponsored Research Agreement with the University of Oklahoma. Dr. Refai is the lead inventor of the CSpace®™ technology and the creator of the Company’s first product, Pixel Precision™. He authored the patent applications for the Static Volume Displays, Virtual Moving Screen Displays and Interaction of Micro-Mirror Device with Computer System. Dr. Refai received his BS degree in electrical engineering in 1992 from Aleppo University in Syria and his MS and PhD degrees in electrical and computer engineering in 2002 and 2005, respectively, from the University of Oklahoma.

The estimated fair market value of the options was determined using the Black-Scholes option pricing model. The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of 95.50% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-the-counter Bulletin Board. The risk-free interest rate of 2.0% is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option of five years is based on historical exercise behavior and expected future experience.  Operations were charged $100,867 in 2008 for the vesting of the options cost of Mr. Refai under the terms of the Employment Agreement.

On March 25, 2009 the Company entered into a Resolution Agreement with Dr. Hakki Refai (the “Resolution  Agreement”) pursuant to which the Company agreed to remove the time constraints on the technical milestone achievements whereby the issuance of the options will be solely upon the achievement of the milestones.

ITEM 11. EXECUTIVE COMPENSATION.

 

The following table sets forth all compensation earned in respect of our Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year, collectively referred to as the named executive officers, for our last three completed fiscal years.

SUMMARY COMPENSATION TABLE

 

The following information is furnished for the years ended December 31, 2009 and December 31, 2008 for our principal executive officer and the two most highly compensated officers other than our principal executive officer who was serving as such at the end of our last completed fiscal year:

Name & Principal Position		Year			Salary ($)		Bonus ($)			Stock Awards ($)		Option Awards ($)			Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($)			All Other Compensation ($)		Total ($)
Martin Keating CEO			2009		144,000																	144,000
			2008		144,000			-		-			-		-			-		-		144,000
James N. Welsh, Pres. and COO			2009		95,000			-					0		-			-		0		95,000
Vivek Bhaman, Pres. and Coo			2008		250,000			-		-			50,782		-			-		33,333		334,115
			2009		71,955					-			98,148		-			-			-	170,103
Hakki Refai			2009		200,000					-			67,244		-			-			-	267,244
			2008							-			100,867		-			-			-	100,867

 

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

 

The following table sets forth with respect to grants of options to purchase our common stock to the executive officers as of December 31, 2009:

Name		Number of Securities Underlying Unexercised Options # Exercisable			Number of Securities Underlying    Unexercised    Options # Un-exercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options #		Option Exercise Price $			Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested #		Market Value of Shares or Units of Stock That have not vested  $			Equity Incentive Plan Awards: Number of Unearned Shares Units or Other Rights That Have Not Vested #		Equity Incentive Plan Awards Market or Payout Value of Unearned Shares Units or Other Rights That have not Vested  $
Martin Keating			500,000		-		-		$	0.40		April 26, 2009		-			-		-			-
Vivek Bhaman (1)			1,425,000		5,075,000		-			(1	)	April 30, 2010		-			-		-			-
Dr. Hakki Refai			1,500,000		-		-		$	0.85		July 28, 2018		2,000,000			-		-
					3,500,000				$	0.85

(1) Mr. Bhaman’s options are exercisable as follows: 100,000 at $0.80 per share, 200,000 at $1.00 per share and 1,125,000 at $0.055 per share

Director Compensation

Name		Fees Earned or Paid in Cash ($)				Stock Awards ($)				Option Awards ($)				Non-Equity Incentive Plan Compensation ($)				Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Victor Keen 2009			-			$	33,600				-				-				-				-			$	33,600
Victor Keen 2008										$	100,000															$	100,000
Lawrence Field 2008										$	100,000															$	100,000
John O’Connor 2009										$	125,391															$	125,391

 

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table provides information about shares of common stock beneficially owned as of

March 31, 2010 by:

·

each director;

·

each officer named in the summary compensation table;

·

each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and

·

all directors and executive officers as a group.

		Number of Shares Beneficially					Percentage
Name of Beneficial Owner (1)		Owned			Class of Stock		Outstanding (2)
Martin Keating (3)			42,217,474		Common			10.0	%
Victor F. Keen			24,599,729		Common			5.88	%
Lawrence Field (4)			7,953,134		Common			1.90	%
John O’Connor (5)			1,397,180		Common			*
Vivek Bhaman (6)			1,425,000		Common			*
James N. Welsh			14,963,571		Common			3.58
All directors and executive officers as a group (4 persons)			92,556,088		Common			21.36	%
Golden State Investors, Inc. (7)			32,679,588		Common			9.50

 

*	Less than 1%

(1)	Unless otherwise indicated, the address of each beneficial owner listed below is c/o 3DIcon Corporation, 6804 South Canton Avenue, Suite 150, Tulsa, Oklahoma 74136.

(2)

Applicable percentage ownership is based on 418,205,705 shares of common stock outstanding as of March 31, 2010. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Options to acquire shares of common stock that are currently exercisable or exercisable within 60 days of March 31 2010 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage.

(3)	Represents (i) 37,987,452 shares of common stock owned by Mr. Keating and (ii) 4,230,022 shares of common stock owned by Mr. Keating’s wife, Judy Keating.

(4)	Represents (i) 2,146,660 shares of common stock owned by Regent Private Capital of which Mr. Lawrence Field is a principal and managing director. Mr. Field disclaims any beneficial ownership of these shares and (ii) 1,625,000 stock options.

(5)	Represents (i) 110,000 shares of common stock owned by Mr. O’Connor and (ii) 100,000 shares of common stock owned by the John M. and Lucia D. O’Connor Revocable Living Trust over which Mr. O’Connor has voting and investment control and, (iii) 1,187,180 options owned by Mr. O’Connor.

(6)	Represents 1,425,000 stock options.

 

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(7)	Excludes 11,000,000 shares held as collateral under the Securities Purchase Agreement, such shares are included in Martin Keating total shares.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Other than as set forth below, during the last two fiscal years there have not been any relationships, transactions, or proposed transactions to which 3DIcon was or is to be a party, in which any of the directors, officers, or 5% or greater stockholders (or any immediate family thereof) had or is to have a direct or indirect material interest.

3DIcon has engaged the law firm of Newton, O’Connor, Turner & Ketchum as its outside corporate counsel  from 2005 through 2008. John O’Connor, a director of 3DIcon, is the Chairman of Newton, O’Connor, Turner & Ketchum.

Director Independence

Of the members of the Company’s board of directors, Victor F. Keen and Lawrence Field are considered to be independent under the listing standards of the Rules of NASDAQ set forth in the NASDAQ Manual.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

 

The aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2009 and 2008 were $67,415 and $57,000, respectively.

Audit-Related Fees

The aggregate fees billed by our principal accountant for assurance and advisory services that were related to the performance of the audit or review of our financial statements  for the fiscal years ended December 31, 2009 and 2008 were $0 and $0, respectively.

Tax Fees

 

The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2009 and 2008 were $0 and $0, respectively.

All Other Fees

The aggregate fees billed for products and services provided by our principal accountant for the fiscal years ended December 31, 2009 and 2008 were $0 and $0, respectively.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

 

The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.

 

 

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ITEM 15. EXHIBITS.

3.1		Certificate of Incorporation (1)
3.2		Bylaws (1)
3.3		Amended Certificate of Incorporation (1)
3.4		Amended Certificate of Incorporation (1)
3.5		Amended Certificate of Incorporation (1)
10.1		Securities Purchase Agreement (1)
10.2		Amendment No. 1 to Securities Purchase Agreement and Debenture (1)
10.3		Registration Rights Agreement dated November 3, 2006(1)
10.4		$100,000 convertible debenture (1)
10.5		$1.25 million convertible debenture dated November 3, 2006 (1)
10.6		Common Stock Purchase Warrant (1)
10.7		Sponsored Research Agreement by and between 3DIcon Corporation and the Board of Regents of the University of Oklahoma (1)
10.8		Sponsored Research Agreement Modification No. 1 by and between 3DIcon Corporation and the Board of Regents of the University of Oklahoma (1)
10.9		Sponsored Research Agreement Modification No. 2 by and between 3DIcon Corporation and the Board of Regents of the University of Oklahoma (1)
10.10		Amendment No. 2 to Securities Purchase Agreement, Debentures, and Registration Rights Agreement (2)
10.11		Securities Purchase Agreement dated June 11, 2007 (2)
10.12		$700,000 Convertible Debenture (2)
10.13		$1.25 million convertible debenture dated November 21, 2007
10.14		Registration Rights Agreement dated November 21, 2007
31.1		Certification by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2		Certification by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1		Certification by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code
32.2		Certification by Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

 

 

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(1)	Incorporated by reference to Form SB-2 as filed on December 15, 2006 (File No. 333-139420) and subsequently withdrawn on February 5, 2007

(2)	Incorporated by reference to Form SB-2 as filed on June 14, 2007 (File No. 333-143761)

 

 

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	3DICON CORPORATION
Date: March 31, 2010	/s/ Martin Keating
	Name:	Martin Keating
	Title:	Chief Executive Officer
		(Principal Executive and Accounting Officer)

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE			TITLE		DATE
By:	/s/ Martin Keating		Chief Executive Officer, Director (Principal Executive and Accounting Officer)		March 31, 2010
	Martin Keating
By:			Director		March 31, 2010
	Lawrence Field
By:	/s/ John O’Connor		Director		March 31, 2010
	John O’Connor
By:	/s/ Victor F. Keen		Director		March 31, 2010
	Victor F. Keen

 

 

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3DIcon CORPORATION

(A Development Stage Company)

December 31, 2009 and 2008

CONTENTS

Report of Independent Registered Public Accounting Firm		F-1
Balance Sheets as of December 31, 2009 and 2008		F-2
S  Statements of Operations for the years ended December 31, 2009 and 2008 and period from inception (January 1, 2001) to December 31, 2009		F-3
S  Statements of Changes in Stockholders’ Deficiency for period from inception (January 1, 2001) to December 31, 2009		F-4
Statements of Cash Flows for the years ended December 31, 2009 and 2008 and for period from inception (January 1, 2001) to December 31, 2009		F-6
Notes to Financial Statements, December 31, 2009 and 2008 and for period from inception (January 1, 2001) to December 31, 2009		F-7

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

3DIcon Corporation

We have audited the accompanying balance sheets of 3DIcon Corporation (a Development Stage Company) as of December 31, 2009 and 2008, and the related statements of operations, stockholders' deficiency, and cash flows for the years then ended and for the period from inception (January 1, 2001) to December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 3DIcon Corporation as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended and for the period from inception (January 1, 2001) to December 31, 2009, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is a development stage company having insufficient revenues and capital commitments to fund the development of its planned products. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We were not engaged to examine management's assessment of the effectiveness of 3DIcon Corporation’s internal control over financial reporting as of December 31, 2009, included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

 

/s/ HOGANTAYLOR LLP

Tulsa, Oklahoma

March 31, 2010

 

 

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3DIcon CORPORATION

(A Development Stage Company)

BALANCE SHEETS

December 31, 2009 and 2008

		2009				2008
Assets
Current assets:
Cash		$	1,118			$	48,400
Prepaid expenses			11,304				16,113
Total current assets			12,422				64,513
Net property and equipment			18,624				31,537
Debt issue costs, net			16,706				56,978
Deposits-other			17,315				17,315
Total Assets		$	65,067			$	170,343
Liabilities and Stockholders' Deficiency
Current liabilities:
Current maturities of convertible debentures payable		$	564,261			$	364,000
Warrant exercise advances			48,511				140,500
Accounts payable			844,530				1,135,887
Accrued salaries			279,603				59,615
Accrued interest on debentures			16,151				6,808
Advance due officer			11,000				-
Total current liabilities			1,764,056				1,706,810
Convertible debentures payable, less current maturities			93,168				675,279
Total Liabilities			1,857,224				2,382,089
Stockholders' deficiency:
Common stock $.0002 par, 750,000,000 shares authorized; 343,690,812 and 157,515,766 shares issued and outstanding at December 31, 2009 and 2008, respectively			68,738				31,503
Additional paid-in capital			10,716,019				8,766,830
Deficit accumulated during development stage			(12,576,914	)			(11,010,079	)
Total stockholders' deficiency			(1,792,157	)			(2,211,746	)
Total Liabilities and Stockholders' Deficiency		$	65,067			$	170,343

See notes to financial statements

 

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3DIcon CORPORATION

(A Development Stage Company)

STATEMENTS OF OPERATIONS

Years ended December 31, 2009 and 2008

and Period from Inception (January 1, 2001) to December 31, 2009

		2009				2008				Inception to December 31, 2009
Income:
License Fee		$	-			$	25,000			$	25,000
Grant income			35,139								35,139
Sales			10,200				17,900				28,100
Total income			45,339				42,900				88,239
Expenses:
Research and development			313,082				953,802				2,776,643
General and administrative			1,218,798				2,578,357				9,566,824
Interest			80,294				122,291				321,686
Total expenses			1,612,174				3,654,450				12,665,153
Net loss		$	(1,566,835	)		$	(3,611,550	)		$	(12,576,914	)
Loss per share:
Basic and diluted		$	(0.007	)		$	(0.025	)
Weighted average shares outstanding, Basic and diluted			238,635,629				142,669,496

See notes to financial statements

 

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3DIcon CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

Period from Inception (January 1, 2001) to December 31, 2009

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

 

 

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3DIcon CORPORATION

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

Period from Inception (January 1, 2001) to December 31, 2009

														Deficit
														Accumulated
		Common Stock								Additional Paid-In				During the Development
		Shares				Par Value				Capital				Stage				Total
Stock issued for services			4,700,000				940				205,597				-				206,537
Debentures converted			3,000,000				600				149,400				-				150,000
Stock issued for cash			200,000				40				16,160				-				16,200
Warrants issued to purchase common stock			-				-				33,800				-				33,800
Warrants converted to purchase common stock			16,489,000				3,297				565,203				-				568,500
Net loss for the year			-				-				-				(1,469,888	)			(1,469,888	)
Balance, December 31, 2006			98,327,656				19,666				2,568,119				(3,469,533	)			(881,748	)
Stock issued for services			817,727				164				155,262				-				155,426
Stock issued for interest			767,026				153				38,198				-				38,351
Stock based compensation			-				-				1,274,666				-				1,274,666
Debentures converted			17,215,200				3,442				1,673,741				-				1,677,183
Stock issued for cash			1,188,960				238				191,898				-				192,136
Options exercised			222,707				45				(45	)			-				-
Warrants issued to purchase common stock			-				-				87,864				-				87,864
Warrants converted to purchase common stock			8,585,956				1,717				462,203				-				463,920
Net loss for the year			-				-				-				(3,928,996	)			(3,928,996	)
Balance, December 31, 2007			127,125,232				25,425				6,451,906				(7,398,529	)			(921,198	)
Stock issued for cash			515,677				103				24,897				-				25,000
Warrants exercised			1,347,261				269				362,425				-				362,694
Stock based compensation			-				-				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	)			-				-
Stocks 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			20,607,841				4,122				197,878				-				202,000
Warrants exercised			35,100				7				382,583				-				382,590
Debentures converted			77,451,141				15,490				467,514				-				483,004
Stocks issued for service			68,506,130				13,701				524,653				-				538,354
Stock issued for accounts payable			11,264,706				2,253				321,409				-				323,662
Stock issued for interest			8,310,128				1,662				41,647				-				43,309
Warrants issued for accounts payable			-				-				13,505				-				13,505
Net loss for the year			-				-				-				(1,566,835	)			(1,566,835	)
Balance, December 31, 2009			343,690,812			$	68,738			$	10,716,019			$	(12,576,914	)		$	(1,792,157	)

See notes to financial statements

 

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3DIcon CORPORATION

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

Years ended December 31, 2009 and 2008

and Period from Inception (January 1, 2001) to December 31, 2009

		2009				2008				Inception to December 31, 2009
Cash Flows from Operating Activities
Net loss		$	(1,566,835	)		$	(3,611,550	)		$	(12,576,914	)
Adjustments to reconcile net loss to net cash used in operating activities:
Options issued for services			-				654,199				1,928,865
Stock issued for services			538,355				313,800				1,649,905
Stock issued for interest			43,309				-				81,660
Book value of assets retired			5,861								5,861
Amortization of debt issuance costs			54,227								153,708
Depreciation			7,052				5,658				14,796
Change in:
Impairment of assets							-				292,202
Prepaid expenses and other assets			4,809				(17,484	)			(262,019	)
Accounts payable and accrued liabilities			373,339				708,943				1,604,647
Net cash used in operating activities			(539,883	)			(1,906,163	)			(7,107,289	)
Cash Flows from Investing Activities
Purchase of office furniture and equipment			-				(25,363	)			(39,281	)
Net cash used in investing activities			-				(25,363	)			(39,281	)
Cash Flows from Financing Activities
Proceeds from stock and warrant sales, exercise of warrants and warrant exercise advances			492,601				528,194				3,238,965
Proceeds from issuance of debentures			-				746,213				3,908,713
Net cash provided by financing activities			492,601				1,274,407				7,147,678
Net increase (decrease) in cash			(47,282	)			(657,119	)			1,108
Cash, beginning of period			48,400				705,519				10
Cash, end of year		$	1,118			$	48,400			$	1,118
Supplemental Disclosures
Non-Cash Investing and Financing Activities
Conversion of debentures to common stock (net)		$	483,004			$	965,309			$	3,274,943
Cash paid for interest		$	-			$	124,336			$	232,326
Stock issued to satisfy payable			323,663				-				323,63
Debenture issued to satisfy payable			100,703								100,703

See notes to financial statements

 

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3DIcon CORPORATION

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2009 and 2008

and period from Inception (January 1, 2001) to December 31, 2009

Note 1 – Organization and Operations

Organization

3DIcon Corporation (the “Company”) was incorporated on August 11, 1995, under the laws of the State of Oklahoma as First Keating Corporation.  The articles of incorporation were amended August 1, 2003 to change the name to 3DIcon Corporation.  The initial focus of First Keating Corporation was to market and distribute books written by its founder, Martin Keating.  During 2001, First Keating Corporation began to focus on the development of 360-degree holographic technology.  The effective date of this transition is January 1, 2001, and the financial information presented is from that date through the current period.  The Company has accounted for this transition as reorganization and accordingly, restated its capital accounts as of January 1, 2001.  From January 1, 2001, the Company's primary activity has been the raising of capital in order to pursue its goal of becoming a significant participant in the formation and commercialization of interactive, optical holography for the communications and entertainment industries.

The mission of the Company is to pursue, develop and market full-color, 360-degree person-to-person holographic technology.  Its primary focus is to invest and participate in the commercialization of optical holographic technologies now planned and/or under development, particularly those employing derivative broadband, satellite-based systems.  At this time, the Company owns no intellectual property rights in holographic technologies and has no contracts or agreements pending to acquire such rights.

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 has therefore been in default of the Sponsored Research Agreement (“SRA”) (see Note 4) and the Newton, O’Connor, Turner, Ketchum 10% convertible debenture (see Note 6).  A revised payment schedule was agreed to with the University of Oklahoma (“University”) in October 2008, March 2009 and in and August 2009.  Failure of the Company to meet its revised payment obligations could result in the termination or the SRA and any outstanding license agreements under the SRA.  The University 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.  The termination of the license agreement with the University would forfeit the Company’s rights to any or all intellectual property licensed to it under the terminated license.

 

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The Company has realized a cumulative net loss of $12,576,914 for the period from inception (January 1, 2001) to December 31, 2009, and a net loss of $1,566,835 and $3,611,550 for the years ended December 31, 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 $1,118, grants and investor funding. Under the terms of the 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 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.  Based upon our current stock price, our issued and outstanding shares as of December 31, 2009 and ignoring the impact of the Beneficial Ownership Limitations, the Company may receive up to $3,924,000 in funding from Golden State as a result of warrant exercises during the year ended December 31, 2010.

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 approximately $300,000 to be provided during 2009 and 2010.  (See note 10)

Additionally, the Company is continuing to pursue financing through private offering of debt or common stock.

Note 2 – Summary of Significant Accounting Policies

Research and development

Research and development costs, including payments made to the University of Oklahoma pursuant to the SRA, are expensed as incurred. (Note 4)

Stock-based compensation

The Company accounts for stock-based compensation arrangements for employees in accordance with Accounting Standards Codification (“ASC”) No. 718, Compensation-Stock Compensation.  The Company recognizes expenses for employee services received in exchange for stock based compensation based on the grant-date fair value of the shares awarded.  The Company accounts for stock issued to non-employees in accordance with the provisions of ASC No. 718.

 

F-8

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Income taxes

The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) No. 740, Income Taxes.  This standard requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition, this standard requires the recognition of future tax benefits, such as net operating loss carry forwards, to the extent that realization of such benefits is more likely than not.  The amount of deferred tax liabilities or assets is calculated using tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

 

Net income (loss) per common share

 

The Company computes net income (loss) per share in accordance with ASC No. 260, Earnings Per Share.  Under the provisions of this standard, basic net income (loss) per common share is based on the weighted-average outstanding common shares.  Diluted net income (loss) per common share is based on the weighted-average outstanding shares adjusted for the dilutive effect of warrants to purchase common stock and convertible debentures.  Due to the Company’s losses, such potentially dilutive securities are anti-dilutive for all periods presented.  The weighted average number of potentially dilutive shares is 36,271,123 and 21,930,644 for the years ended December 31, 2009 and 2008, respectively.

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.

Note 3 – Recent Accounting Pronouncements

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

Subsequent Events – In May 2009, the FASB issued new standards which establish the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, the new standards set forth:

·	the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (through the date that the financial statements are issued or are available to be issued);

 

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·	the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

·	the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

The Company adopted the new standard as of June 30, 2009. See Note 13.

Fair Value Measurements – The FASB’s fair value measurement standards establish a single authoritative definition of fair value based upon the assumptions market participants would use when pricing an asset or liability and create a fair value hierarchy that prioritizes the information used to develop those assumptions. The standards require additional disclosures, including disclosures of fair value measurements by level within the fair value hierarchy. As of January 1, 2008, we adopted the new standards as they related to our financial assets and liabilities.   Adoption did not have a significant impact on our financial statements.  As of January 1, 2009, we adopted the new standards as they related to our nonfinancial assets and liabilities.  In April 2009, the FASB issued additional guidance clarifying the application of US GAAP for fair value measurements in the current economic environment, modifying the recognition of other-than-temporary impairments of debt securities, and requiring companies to disclose the fair value of financial instruments in interim periods. The revised guidance is effective for interim and annual periods ending after June 15, 2009. The guidance:

 

·	describes how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains the price that would be received to sell an asset or paid to transfer a liability at the measurement date.

·

modifies the requirements for recognizing other-than-temporarily impaired debt securities and significantly changes the existing impairment model for such securities. It also modifies the presentation of other-than-temporary impairment losses and increases the frequency of and expands already required disclosures about other-than-temporary impairment for debt and equity securities.

·

requires disclosures of the fair value of financial instruments in interim financial statements, the method or methods and significant assumptions used to estimate the fair value of financial instruments, and a discussion of changes, if any, in the method or methods and significant assumptions during the period.

We adopted this new guidance for the quarter ended June 30, 2009. Adoption had no impact on our financial position or results of operations. 

Accounting Standards Update – In August 2009, the FASB issued Accounting Standards Update (Update) 2009-5, “Measuring Liabilities at Fair Value” in order to provide further guidance on how to measure the fair value of a liability. The Update clarifies that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more prescribed techniques. We adopted the new guidance as of October 1, 2009. Adoption had no impact on our financial position or results of operations.

Accounting Standards Codification – In June 2009, the FASB established the FASB Accounting Standards Codification (Codification), which officially commenced July 1, 2009, to become the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants.  Generally, the Codification is not expected to change US GAAP.  All other accounting literature excluded from the Codification will be considered nonauthoritative.  The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We adopted the new standards for our quarter ending September 30, 2009.  All references to authoritative accounting literature are now referenced in accordance with the Codification.

 

 

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Note 4 – 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  (“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  3-Dimensional Display Technologies".  The agreement was modified in November 2006 to provide additional funding, and extended the term of the agreement through March 31, 2009.

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.

On October 31, 2008 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 31, 2008 of $861,131.  The $1,804,687 balance of the remaining scheduled payment obligation was cancelled.  Under the terms of the revised base payments schedule, the arrearages would be paid in nine monthly base installments from October 31, 2008 to June 30, 2009 of amounts ranging from $35,000 to $101,132 leaving a remaining balance after the base payments of $290,000.  In addition to the monthly base payments, the Company agreed to make additional payments on the $861,131 arrearages based on a formula of 50% of funding in excess of $120,000 plus the base monthly payment.  In the event funding does not provide for any additional payments, the remaining balance would be $290,000, which OU agreed to accept 4,264,707 shares of the Company’s common stock based on the October 14, 2008 market price as reported on the OTC Bulletin Board of $0.068 per share as payment on June 30, 2009.  The Company has the option to repurchase the shares at market value, but not less than $0.068 per share.

 

The Company was unable to meet the revised payment schedule and on May 18, 2009 the University agreed to revise the payment terms.  Under the terms of the revised base payments schedule, the arrearages scheduled to be paid in nine monthly base installments from October 31, 2008 to June 30, 2009 of amounts ranging from $35,000 to $101,132 were deferred to a monthly payment schedule of July 2009 through February 2010. (See Note 13, Subsequent Events)

 

Should the Company fail to report revenue or fail to timely pay any of the quarterly amounts owed above, the University 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.  The termination of the license agreement with the University would forfeit the Company’s rights to any or all intellectual property licensed to it under the terminated license.

During the years ended December 31, 2009 and 2008, the Company charged operations $64,084 and $953,802, respectively, pursuant to the SRA.  At December 31, 2009, the Company owed the University $5,638 in aggregate monthly payments and $525,481 on the arrearages under the revised payment terms.

 

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Note 5 – Consulting Agreements

Concordia Financial Group.

The Company entered into a one year Independent Consulting Agreement with Concordia effective November 1, 2007.  Under the terms of the agreement Concordia will serve as liaison to Golden State Investors, Inc. and provide business strategy services by assisting the Company by reviewing and evaluating the Company’s plans, personnel, board composition, technology, development of business models, building financial models for projections, developing materials to describe the Company, developing capital sources and assisting and advising the Company in its financial negotiations with capital sources. Concordia also advised with respect to effective registration of offerings of Company securities, the management team, the Company’s development of near and long-term budgets, marketing strategies and plans, and assisted in presentations related to the above services.  Concordia will be paid a monthly fee of $15,750.  Concordia, at its option, may take up to 100% of this monthly fee in registered stock at 50% discount to market; and the Company, at its option, may pay up to 50% of Concordia’s monthly invoice in registered stock, at 50% discount to market, provided that the payment of stock is made within ten (10) days of receipt of invoice and further provided that the stock trades above $.30 per share at any time during the last business day of the month.   Market is defined as the five day average of closing prices immediately proceeding the last business day of the calendar month in which the invoiced services were rendered.  The Company paid Concordia $189,000 and $204,750 for services during the periods ended December 31, 2009 and 2008, respectively under the terms of the agreement.  Under terms of the agreement, the services continue under a month-to-month basis.

In addition to the cash compensation, and conditioned upon terms of the agreement, the Company granted Concordia on May 1, 2008 and October 1, 2008, the option to purchase 250,000 shares of the Company stock, for a total of 500,000 options, at an exercise price of the average closing price of the stock for the five trading days prior to November 1, 2007 ($.37 per share).  The shares, upon exercise will be freely tradable.  The options expire on the third anniversary of the grant dates.  The estimated fair value of the options is $78,391 which was charged to operations in the year ended December 31, 2008.

Innovation Drive, Inc.

Pursuant to a consulting agreement effective November 1, 2007 signed with Innovation Drive, Inc (“IDI”) the Company engaged IDI; (1) to assist in opportunities with the federal government in R & D opportunities and eventually in sales funding; (2) become a subcontractor to prime contractors; (3) investigate, explore and capture multi-agency and/or multi-organizational teaming opportunities to generate a variety of program (and funding) opportunities; and (4) develop and distribute to targeted audiences in Washington materials to generate brand recognition.  The Company will pay a monthly fee of $15,000, payable $5,000 in cash and $10,000 in shares of Company stock, until the first contract is signed and thereafter 50% cash and 50% Company stock.  The shares issued under the agreement will be issued to Carla R. York, CEO of IDI and discounted 25% from a twenty day moving average prior to the invoice date.  Additionally a contract fee ranging from $20,000 to $30,000 will be paid on contracts greater than $200,000 and a fee ranging from $35,000 to $45,000 on contracts greater than $500,000.  The variance in fees is based on a contract being awarded within 120 days or within 150 days.  If a contract is not awarded within 150 days, the fee is 3% of the contract amount.  The agreement is for one year and is automatically extended on a month-to-month basis unless terminated by either party.   During 2008 IDI was paid $113,000 under the terms of the consulting agreement.  The agreement was terminated effective August 18, 2008.

LIB Holdings, Inc

Pursuant to a letter agreement signed October 1, 2007, LIB Holdings, Inc. (“LIB”) agreed to provide marketing and public relation services which includes (1) assistance with development of written and verbal company communications; (2) assistance with the development and maintenance of relevant and current information on the Company web site; (3) creation of media opportunities for visibility of the Company technologies; and (4) assisting with logistics and other arrangements for Company events.  The Company agreed to pay a monthly fee of $3,000 payable in registered shares of the company stock.  The number of shares to be issued is based on the 20 day average of the closing price immediately preceding the last day of the calendar month for which the fee is due.  The agreement trial commitment period terminated October 1, 2008 and is automatically extended on a month-to-month basis unless terminated by either party.   The Company paid LIB $3,000 and $36,000 for services during the periods ended December 31, 2009 and 2008, respectively under the terms of the agreement.  The contract was terminated February 1, 2009.

 

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Corporate Profile LLC

Pursuant to a letter agreement signed October 1, 2007 Corporate Profile LLC agreed to provide investor relation services.  The Company agreed to pay a monthly fee of $3,000.  Corporate Profile LLC was paid $6,000 and $36,000 for the years ending December 31, 2009 and December 31, 2008 respectively under the terms of the agreement.  The contract was terminated February 1, 2009.

Note 6 – Debentures Payable

Debentures payable consist of the following:

		December 31, 2009				December 31, 2008
Senior Convertible Debentures:
9.75% Debenture due July 31, 2009		$	-			$	364,000
6.25% Debenture due 2010			463,558				578,601
4.75% Debentures due 2011			93,168				96,678
10.0% Debenture due 2010			100,703				-
Total Debentures			657,429				1,039,279
Less - Current Maturities			(564,261	)			(364,000	)
Long-term Debentures		$	93,168			$	675,279

Securities Purchase Agreement

6.25% Convertible Debenture due 2009

The Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with Golden State Investors, Inc. (“Golden State”) on November 3, 2006 for the sale of a 6.25% convertible debenture in the principal amount of $1,250,000 (the “First Debenture”). The Company filed a registration statement with the SEC for the resale of the common stock underlying the debenture, which 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. Golden State provided the Company with an additional $312,500 of debenture funding 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 advanced during 2007 and 2008.  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 July 3, 2007 $478,529 of the debenture was converted into 2,097,406 shares of common stock at prices ranging from $0.20 to $0.26 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.

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 second 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 Company filed a registration statement covering the shares to be issued upon conversion of the debenture.  Included in the registration statement were 2.25 million shares issuable upon conversion of the balance of the First Debenture and 4.25 million shares issuable on the Second Debenture based on 2007 market prices and assuming full conversion of the convertible debentures The registration statement became effective on January 4, 2008.

 

F-13

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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.  At various dates during 2009, $115,043, of the debenture was converted into 12,124,828 shares of common stock at prices ranging from $0.007 to $0.01 based on the formula in the convertible debenture. Shares remaining in escrow and reported as outstanding at December 31, 2009 total 4,310,449.

The conversion price for the $1.25 million Second Debenture is the lesser of (i) $2.00 or (ii) 90% of the average of the five lowest volume weighted average prices during the twenty (20) trading days prior to the conversion.  If Golden State elects to convert a portion of the debenture and, on the day that the election is made, the volume weighted average price is below $0.75, the Company shall have the right to prepay that portion of the debenture that Golden State elected to convert, plus any accrued and unpaid interest, at 135% of such amount.

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 and subsequent to 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 those occasions only.  (See Note 13 -Subsequent Events)

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 $3,510 of the $100,000 debenture into 35,622,803 shares of common stock at $0.002 per share, exercised warrants to purchase 35,100 shares of common stock at $10.90 per share and the Company received $382,590 from the exercise of the warrants.  During 2009 Golden State advanced $240,000 against future exercises of warrants and applied $4,181 of accrued interest due on the debenture to the advance account of which $336,170 was applied to the exercise of warrants leaving $48,511 of unapplied advances.

 

F-14

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The conversion price for the 4.75% $100,000 convertible debenture is the lesser of (i) $4.00 or (ii) 80% of the average of the five lowest volume weighted average prices during the twenty (20) trading days prior to the conversion.  If Golden State elects to convert a portion of the debenture and, on the day that the election is made, the volume weighted average price is below $0.75, the Company shall have the right to prepay that portion of the debenture that Golden State elected to convert, plus any accrued and unpaid interest, at 135% of such amount.

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 on November 3, 2006.  The Company received gross proceeds of $700,000 from the sale of the aforementioned 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 the remaining balance $364,000 of the debenture was converted into 29,703,510 shares of common stock at prices ranging from $0.029 to $0.009 per common share based on the formula in the convertible debenture.

Newton, O’Connor, Turner & Ketchum 10% convertible debenture due September 30, 2009

 

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 was charged to operations in 2009.  (See note 13)

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 warrant of two years is based on historical exercise behavior and expected future experience. 

Note 7 – Common Stock and Paid-In Capital

Pursuant to a special meeting of the stockholders held on August 21, 2009, the stockholders approved the filing of an amendment to the Company’s Articles of Incorporation to increase the Company’s authorized shares of common stock from 250,000,000 shares, par value $0.0002, to 750,000,000 shares, par value $0.0002.

At various dates throughout 2008, the Company issued 1,320,000 shares of its common stock pursuant to the exercise of the warrants by non-employees.  The Company received $66,000 in cash. The remaining warrants totaling 80,000 were cancelled in 2008.

 

F-15

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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 $.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 terminated 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 30, 2009 through August 31, 2010 to one accredited individual. The Company received $25,000 in cash from the sale.  The warrants terminate August 31, 2010.

Pursuant to Subscription Agreements entered into during March and April 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; $.15 per share for the second subsequent twelve months or; $0.20 per share for the subsequent twelve months to three accredited individuals. The Company received $30,000 in cash from the sale. The 500,000 warrants are valued at $6,579 and the 999,999 shares are valued at $23,421.  The warrants terminate three years from date of issue in 2012.

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 178% 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 1.38% 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.

On June 18, 2009 the Company entered into Subscription Agreements with two of its directors pursuant to which the two directors purchased 17,941,176 shares of the Company’s common stock at a price per share equal to 50% of the average closing price during the five days prior to June 18, 2009 (0.0068 per share) for aggregate proceeds of $122,000.

Pursuant to Subscription Agreements entered into during October and November 2009, the Company sold 1,666,666 shares of the Company’s common stock at a per share price of $.03 per share and warrants to purchase 16,666,666 shares of its common stock at a price of $.10 per share from closing for a period of twelve months; $.25 per share for the second subsequent twelve months and; $0.50 per share for the third subsequent twelve months to two accredited individuals. The Company received $50,000 in cash from the sale.  The 16,666,666 warrants are valued at $35,225 and the 1,666,666 shares are valued at $14,775.  The warrants terminate three years from date of issue in 2012.

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 178% 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 1.38% 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.

As of December 31, 2009, there are warrants outstanding to purchase 257,839 shares of common stock at a price of $.25 per share from September 30, 2009 through August 31, 2010, warrants outstanding to purchase 500,000 shares of common stock at a price of $.10 per share through various dates in March and April 2010; $.15 per share through various dates in March and April 2011; or $.20 per share that expire on various dates in March and April 2012, warrants to purchase 16,666,666 shares of its common stock at a price of $.10 per share from closing for a period of twelve months; $.25 per share for the second subsequent twelve months and; $0.50 per share for the third subsequent twelve months 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 931,683 shares of common stock at a price of $10.90 per share which expire November 2, 2011.

 

F-16

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Common stock and options issued for services

During 2009 and 2008 shares of common stock totaling 68,506,130 and 4,598,973 respectively were issued for consulting services for which the Company recognized $538,354 and $313,800 of expense respectively.  Additionally, shares of common stock totaling 8,310,128 shares were issued to Golden State for accrued interest due December 1, 2009 for which the Company recognized $36,501 in expense and reduced accrued interest payable for $6,808.  Shares totaling 4,264,706 were issued during 2009 to the University of Oklahoma under the repayment terms of the SRA (see Note 4) which were valued at $290,000.  Shares totaling 7,000,000 were issued to consultant for previous services provided to the Company for which the accounts payable liability was reduced by $33,662.

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.

Director - - On October 12, 2008, the Company agreed to compensate its Director John O’Connor with 500,000 additional options to purchase stock of the corporation at $0.055 per share. The options expire at the end of ten years. The 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 $25,391 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 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.

Employment Agreement - On April 29, 2007 the Company entered into an Employment Agreement with Vivek Bhaman (the “Bhaman Agreement”) and an Amended Employment Agreement on October 12, 2008 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 until his resignation February 3, 2009.  The following represents the material terms of the Bhaman Agreement:

·

Annual salary of $250,000;

·

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

 

F-17

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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 was increased $50,000 to $300,000 annually.  The Company had the option to defer payment of any or all of the increase until April 30, 2009. Under the deferment, the Company elected to pay the $50,000 increase with shares of the Company’s common stock at a 25% discount to the market price of the Company’s common stock.  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. 125,000 of the 5,000,000 options had vested at the time of his resignation pursuant to the terms of the Amendment.

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.  Of the five million options, one hundred twenty-five thousand were vested upon resignation, valued at $6,348 and was charged to operations in 2009 under the terms of the Employment Agreement.

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 was unable to pay Mr. Bhaman timely for the remaining $41,667 compensation under his original Employment Contract and therefore agreed to compensate Mr. Bhaman an additional $58,333 in consideration under the terms of a Separation Agreement and Release signed April 29, 2009.  Additionally under the terms of the employment agreements, Mr. Bhaman had vested a total of 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.   Mr. Bhaman continued to serve as a Director of the Company through his elected term ending May 17, 2009.

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.  Under the terms of the consulting agreement, Mr. Welsh is to be compensated $2,000 per week in either cash or stock.  In the event stock is issued for the compensation, it will be issued at 50% of the average of the five previous closing prices.  During the year ended December 31, 2009, $83,000 was charged to operations and Mr. Welsh was issued 7,119,231 shares in consideration of $61,000 at an average price of $0.009 per share in consideration of his services and was due an additional $22,000 at December 31, 2009.

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:

 

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·

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.

On March 25, 2009 the Company entered into a Resolution Agreement with Dr. Hakki Refai (the “Resolution  Agreement”) pursuant to which the Company agreed to remove the time constraints on the technical milestone achievements whereby the issuance of the options will be solely upon the achievement of the milestones.

The following summary reflects warrant and option activity for the year ended December 31, 2009

		Attached Warrants				Golden State Warrants				Options
Outstanding December 31, 2008			852,321				966,783				20,111,540
Granted			21,545,061				-				-
Exercised							(35,100	)			-
Cancelled			(594,482	)			-				(6,575,000	)
Outstanding December 31, 2009			21,802,900				931,683				13,536,540

Stock options are valued at the date of award, which does not precede the approval date, and compensation cost is recognized in the period the options are granted.  Stock options generally become exercisable on the date of grant and expire based on the terms of each grant. 

 

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The estimated fair value of options for common stock granted was determined using the Black-Scholes option pricing model.  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.  

Common stock rights

Holders of shares of common stock are entitled to one vote per share on all matters submitted to a vote of the shareholders.  Shares of common stock do not have cumulative voting rights.  Holders of record of shares of common stock are entitled to receive dividends when and if declared by the board of directors.  To date, the Company has not paid cash dividends.  The Company intends to retain any earnings for the operation and expansion of its business and does not anticipate paying cash dividends in the foreseeable future.

Any future determination as to the payment of cash dividends will depend on future earnings, results of operations, capital requirements, financial condition and such other factors as the board of directors may consider.  Upon any liquidation, dissolution or termination of the Company, holders of shares of common stock are entitled to receive a pro rata distribution of the assets of the Company after liabilities are paid.

Holders of common stock do not have pre-emptive rights to subscribe for or to purchase any stock, obligations or other securities of 3DIcon.

Note 8 – Incentive Stock Plan

In August 2007 the Company established the 3DIcon Corporation 2007 Incentive Stock Plan (the "2007 Plan"). The 2007 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 2007 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 2007 Plan shall not exceed eight million (8,000,000) shares.  The shares are included in a registration statement filed August 7, 2007 which registered shares totaling fifteen million, (15,000,000) shares.

Incentive stock plan amended

The Company’s 2007 Plan was amended in February 2009 to increase the number of shares available to be issued upon exercise of outstanding options and warrants.  Originally 8,000,000 shares were included in the 2007 Plan.  The February amendment increased the available shares by 27,000,000 shares to 35,000,000 shares.  Shares totaling 30,191,027, 598,973 and, 210,000  were issued from the amended 2007 Plan during the years ended December 31, 2009, 2008, and 2007, respectively , for services rendered to the Company. There are currently no shares available for issuance under the amended 2007 Plan.

In September 2009 the Company established the 3DIcon Corporation 2009 Incentive Stock Plan (the "2009 Plan").   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 2009 Plan shall not exceed 50,737,115 shares.  The shares are included in a registration statement filed September 23, 2009.  Shares totaling 36,315,103 were issued from the Plan during the year ended December 31, 2009 for services rendered to the Company There are 14,422,022 shares available under the plan at December 31, 2009 (See Note 13).

 

 

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Note 9 – 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 December 31, 2009, minimum future lease payments to be paid annually under the three year non-cancellable operating lease for office space are as follows:

2010		$	27,570
2011		$	11,575
Total		$	39,145

Note 10 – OCAST Grant

The Oklahoma Center for the Advancement of Science and Technology 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.  The Company received $35,139 from the grant during 2009.  The Company received approval for our no cost extension request for the first year of the contract. With the new modification, the first year ends on April 30, 2010. Funding beyond April 30, 2010  is contingent upon satisfactory performance evaluation and the availability of funds.

 

Note 11 – Income Taxes

 

At December 31, 2009 and 2008, the Company had accumulated net operating losses of approximately $10,900,000 and $9,335,000, respectively, available to reduce future federal and state taxable income.  Unless utilized, the loss carryforward amounts will begin to expire in 2014.

 

Deferred tax assets resulting from the operating loss carryforward, are reduced by a valuation allowance.

 

The deferred tax asset consisted of the following:

 

		December 31,				December 31,
		2009				2008
Loss carry forward amount		$	10,900,000			$	9,335,000
Effective tax rate			38	%			38	%
Deferred tax asset			4,142,000				3,547,300
Less valuation allowance			(4,142,000	)			(3,547,000	)
Net deferred taxes		$	-			$	-

Note 12 – Related Party Transaction

3DIcon has engaged the law firm of Newton, O’Connor, Turner & Ketchum as its outside corporate counsel since 2005 through 2008. John O’Connor, a director of 3DIcon, is the Chairman of Newton, O’Connor, Turner & Ketchum. During the years ended December 31, 2009 and 2008, the Company incurred legal fees to Newton, O’Connor, Turner & Ketchum in the amount of $41,509 and $135,440 respectively.

The Company has fee income of $25,000 during 2008 with a company affiliated by common ownership.

 

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Note 13 – Subsequent Events

Debentures payable

In accordance with the terms of the Second Debenture an event of default occurs if the common stock of the Company trades at a price per share of $0.21 or lower. The trading price was at $0.21 or lower on several occasions during the period ended December 31, 2009 and subsequent to December 31, 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 December 31, 2009 Golden State converted $975 of the 4.75% convertible debenture into 29,310,581 shares of common stock at $0.0002 per share and exercised 9,750 warrants at $10.90 per share for $106,275 under the terms of the securities purchase agreements.

 

Newton, O'Connor, Turner & Ketchum 10% convertible debenture due September 30, 2009

 

On March 1, 2010, Newton, O'Connor, Turner & Ketchum agreed to extend the due date of their 10% debenture to March 31, 2010 in consideration for one million (1,000,000) shares of common stock.  The shares were valued at 50% of the average of the previous five day closing price, which was $0.003 per share totaling $3,000 and will be charged to operations in March 2010.

Common stock and paid in capital

Concordia was issued 22,550,810 shares of common stock in payment of $63,000 for December, January and February services under the consulting agreement.  James N. Welsh, President, was issued 10,250,895 shares of common stock in payment of $30,000 for September through December services under the consulting agreement.  Dr. Hakki Refai was issued 1,500,000 shares valued at $0.02 per share in payment of accrued salary of $30,000.  Additionally common shares totaling 5,000,000 were issued to vendors in payment of $9,650 for services.

Sponsored Research Agreement (SRA)

On February 19, 2010 OU agreed to modify the repayment plan to retire the outstanding debt of $525,481. Under the terms of the modified repayment plan the Company agreed to make payments to the University, not less than quarterly, in an amount equal to 22.5% of any funding received by the Company. Eligible funding shall include all revenues, investments in the Company, funding from current sources or other funding, provided, however, that grants or other similar funding with specific allocation to designated research and development projects shall be excluded from such calculation. The quarterly payments shall be made within thirty (30) days of the end of each calendar quarter. The first quarterly payment is due to the University on April 30, 2010. The Company shall provide its financial statements to the University upon completion and submission to the SEC at the end of each quarter. These repayment terms shall remain in effect until the outstanding debt is retired. The University has the right at its sole discretion to request an independent audit of the Company’s financial statement the cost of which shall be borne solely by the Company.

Incentive Stock Plans

Shares totaling 14,422,022 were issued from the amended 2009 Plan subsequent to December 31, 2009 for services rendered to the Company. There are currently no shares available for issuance under the 2009 Plan. In February the Company established the 3DIcon Corporation 2010 Incentive Stock Plan (the "2010 Plan"). 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 2010 Plan shall not exceed seventy-five million (75,000,000) shares. The shares are included in a registration statement filed February 26, 2010. Shares totaling 21,550,895 were issued from the 2010 Plan subsequent to December 31, 2009 for services rendered to the Company. There are currently 53,449,105 shares available for issuance under the 2010 Plan.

 

 

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