ONSCREEN TECHNOLOGIES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For quarter ended September 30, 2005
Commission File Number 0-29195
ONSCREEN TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
Colorado (3990) 84-1463284
--------------------------------------------------------------------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
600 NW 14th Avenue, Suite 100
Portland, OR 97209
503-417-1700
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
200 9th Avenue North, Suite 210
Safety Harbor, Florida 34695
(727) 797-6664
(Former address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
Charles R. Baker
600 NW 14th Avenue, Suite 100
Portland, OR 97209
503-417-1700
(Name, Address and Telephone Number of Agent for Service)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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
--- ---
As of October 19, 2005, there were 71,107,219 shares of the Company's common
stock outstanding, 1,500,000 shares of common stock issuable, 1,890,718 shares
of Series A Convertible Preferred Stock outstanding and no shares of Series B
Convertible Preferred Stock outstanding.
1
ONSCREEN TECHNOLOGIES, INC.
INDEX
Part I
Page
----
Item 1 Financial Statements 3
Condensed Balance Sheets (unaudited) 3
Condensed Statements of Operations (unaudited) 4
Condensed Statements of Cash Flows (unaudited) 5
Notes to the Condensed Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Overview 13
Intellectual Property 13
Critical Accounting Policies 14
Liquidity and Capital Resources 15
Results of Operations 17
Item 3 Controls and Procedures 19
Part II
Item 1 Legal Proceedings. 19
Item 2 Changes in Securities 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits 20
Signatures 21
Exhibits 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONSCREEN TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
September 30, 2005 December 31,
(Unaudited) 2004
-------------- -------------
Assets
Current Assets
Cash and cash equivalents $ 870,391 $ 1,561,650
Marketable securities available-for-sale -- 401,233
Accounts receivable, net of allowance of $1,605 at September 30, 2005 and -0- at
December 31, 2004 31,175 1,605
Inventory 615,926 --
Prepaid expenses and other current assets 177,632 38,354
------------ ------------
Total Current Assets 1,695,124 2,002,842
Property and Equipment, net of accumulated depreciation of $402,287 at September
30, 2005 and $317,845 at December 31, 2004 303,464 299,951
------------ ------------
Other Assets
Restricted marketable securities available-for-sale 27,929 30,000
Technology rights, net of accumulated amortization of $145,833 at September 30,
2005 and $130,833 at December 31, 2004 376,667 391,667
Patent Costs 378,069 48,657
Other assets 32,886 14,360
------------ ------------
Total Other Assets 815,551 484,684
------------ ------------
Total Assets $ 2,814,139 $ 2,787,477
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and other payables $ 827,699 $ 213,226
Note payable, related parties, net of $30,000 discounts 1,570,000 --
Convertible notes payable, net of $523,630 discounts 976,370 --
Accrued expenses 345,185 323,797
------------ ------------
Total Current Liabilities 3,719,254 537,023
Accrued expenses payable with common stock 744,802 245,669
------------ ------------
Total Liabilities 4,464,056 782,692
------------ ------------
Commitments (Note 9) -- --
Stockholders' Equity (Deficit)
Preferred stock, par value $0.001; 10,000,000 shares authorized Convertible
Series A, Preferred stock, 5,000,000 shares authorized,
3,110,580 shares
issued at September 30, 2005; 1,910,718 and 2,772,205 shares outstanding
at September 30, 2005 and December 31, 2004, respectively; liquidation
preference
of $1,910,718 at September 30, 2005 1,911 2,772
Convertible Series B preferred stock, 30,000 shares authorized, no
shares issued and outstanding, 28,568 shares converted to common stock;
liquidation preference of $240 per share -- --
Common stock, par value $0.001; 150,000,000 shares authorized,
70,627,219 and 63,680,020 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively 70,627 63,680
Common stock issuable, at par value, (1,700,000 shares at September 30, 2005) 1,700 --
Additional paid-in capital 24,463,627 22,150,289
Accumulated deficit (25,514,839) (19,773,674)
------------ ------------
(976,974) 2,443,067
Less Accumulated other comprehensive loss (3,205) --
Less Deferred compensation expense (669,738) (438,282)
------------ ------------
Total Stockholders' Equity (Deficit) (1,649,917) 2,004,785
------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,814,139 $ 2,787,477
============ ============
See accompanying notes to financial statements
3
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months For the nine months ended
ended September 30, September 30,
2005 2004 2005 2004
------------ ------------- ------------- ------------
Revenues $ 37,534 $ 56,643 $ 90,653 $ 137,836
Cost of Revenues 57,945 -- 121,185 488
------------ ------------ ------------ ------------
Gross Profit (20,411) 56,643 (30,532) 137,348
Operating Expenses
Selling, general and administrative 1,361,644 853,286 3,846,076 5,929,381
Research and development 441,138 345,511 1,076,588 704,752
Bad debt expense -- 315 1,605 11,953
------------ ------------ ------------ ------------
Total Operating Expenses 1,802,782 1,199,112 4,924,269 6,646,086
------------ ------------ ------------ ------------
Loss from Operations (1,823,193) (1,142,469) (4,954,801) (6,508,738)
------------ ------------ ------------ ------------
Other Income (Expense)
Other income 3,973 6,527 11,338 25,337
Settlement gain (loss), net 4,167 (64,050) 3,867 251,251
Interest expense-intrinsic value of convertible debt and
amortization of debt discount (487,312) -- (514,518) --
Interest expense (103,657) -- (132,701) (64,070)
------------ ------------ ------------ ------------
Total Other Income (Expense), Net (582,829) (57,523) (632,014) 212,518
------------ ------------ ------------ ------------
Net Loss (2,406,022) (1,199,992) (5,586,815) (6,296,220)
Preferred Stock Dividends (48,144) (195,725) (154,350) (391,747)
------------ ------------ ------------ ------------
Net Loss Available to Common Stockholders $ (2,454,166) $ (1,395,717) $ (5,741,165) $ (6,687,967)
============ ============ ============ ============
Basic and Diluted Loss Per Common Share $ (0.03) $ (0.04) $ (0.08) $ (0.21)
============ ============ ============ ============
Basic and Diluted Loss Per Common Share Available to
Common Stockholders $ (0.03) $ (0.04) $ (0.08) $ (0.22)
============ ============ ============ ============
Weighted average common shares outstanding 72,263,768 33,891,245 69,193,069 29,876,458
============ ============ ============ ============
See accompanying notes to financial statements
4
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
For the nine months
ended September 30,
----------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(5,586,815) $(6,296,220)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock, warrants and notes issued for compensation and services 41,650 1,910,335
Stock based settlement gain, net -- (315,301)
Non-cash interest expense for stock issued to noteholders that were in default -- 46,500
Non-cash interest expense, including intrinsic value of convertible debt and
amortization of debt discount 514,518 17,571
Bad debt expense 1,605 11,638
Amortization of technology rights 15,000 125,833
Amortization of deferred consulting and compensation 300,177 1,985,359
Compensation expense payable in common stock 1,074,801 161,874
Depreciation 86,112 128,185
Other 6,198 --
(Increase) decrease in assets:
Accounts receivable and other receivables (31,175) (7,054)
Due from affiliate -- (3,612)
Inventory (615,926) --
Prepaid expenses and other current assets (141,434) (56,447)
Deposits and other assets (3,934) (19,773)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 616,077 (480,443)
Deferred revenues 8,840 (58,238)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (3,714,306) (2,849,793)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in technology rights -- (522,500)
Investment in patents (329,412) (35,212)
Proceeds from sales of marketable securities 396,351 (750,386)
Purchase of property and equipment (90,941) (107,245)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (24,002) (1,415,343)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Series A convertible preferred stock dividends paid (121,250) (199,956)
Purchase of treasury stock (225) --
Proceeds from notes and loans payable 3,175,000 --
Payments on notes and loans payable (75,000) (302,511)
Proceeds from sales of common stock and exercise of warrants and options, net of
offering costs 84,250 5,369,508
Deferred stock issuance costs (15,726) --
Proceeds from issuance of preferred stock - Series A -- 75,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,047,049 4,942,041
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (691,259) 676,905
Cash and Cash Equivalents at Beginning of Year 1,561,650 1,323,923
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIODS $ 870,391 $ 2,000,828
=========== ===========
5
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
For the nine months
ended
September 30,
---------------------
2005 2004
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid $ -- $ --
======== ========
Interest paid $107,785 $ 17,570
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Accrued Compensation settled with Series A preferred stock $ -- $ 24,000
======== ========
Debt and accrued liability settled/paid with common stock $595,664 $391,961
======== ========
Common stock issued for deferred compensation $710,333 $ --
======== ========
Common stock issued for debt financing $ 74,074 $ --
======== ========
Termination of warrant and common stock returned $178,700 $ --
======== ========
Subscription receivable paid with reduction of notes payable $ -- $ 18,575
======== ========
Conversion of Series A convertible preferred stock to common
stock $ 1,101 $ 340
======== ========
Series A preferred stock dividend resulting from intrinsic value
of convertible preferred stock $ -- $172,000
======== ========
Series B preferred stock dividend resulting from intrinsic value
of convertible preferred stock $ -- $ 28
======== ========
Discount on debt for intrinsic value of convertible notes payable $994,074 $ --
======== ========
Other comprehensive loss from unrealized loss $ 3,205 $ --
======== ========
See accompanying notes to financial statements
6
NOTE 1 BASIS OF PRESENTATION AND GOING CONCERN
OnScreen Technologies, Inc. (the Company) is commercializing its innovative
OnScreenTM light emitting diode (LED) technology to the world of visual
communications. The Company is focused on the design, development and sale of
LED displays utilizing the OnScreenTM architecture. The Company seeks to develop
innovative approaches to these products and delivery systems, which concentrates
in the commercial and government markets.
The accompanying financial statements have been prepared on the assumption that
the Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company has a net loss of $5,586,815 and cash used in
operations of $3,714,306 for the nine months ended September 30, 2005. The
ability of the Company to continue as a going concern is dependent on the
Company's ability to bring the OnScreen(TM) products to market, generate
increased sales, obtain positive cash flow from operations and raise additional
capital. The financial statements do not include any adjustments that may result
from the outcome of this uncertainty.
The Company is continuing to raise additional capital for the commercialization
of its OnScreen(TM) technology product lines; which the Company believes will
provide sufficient cash to meet its funding requirements to bring the
OnScreen(TM) technology product lines into production during 2005 and 2006. As
the Company continues to expand and develop its technology and product lines,
additional funding will be required. The Company has experienced negative cash
flows from operations and incurred net losses in the past and there can be no
assurance as to the availability or terms upon which additional financing and
capital might be available, if needed.
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and the rules and regulations of the United States Securities and Exchange
Commission for interim financial information which includes condensed financial
statements. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of financial position and results of
operations and should be read in conjunction with the Company's Annual Report,
Form 10-KSB for the year ended December 31, 2004.
It is management's opinion that all material adjustments (consisting of normal
recurring adjustments) have been made which are necessary for a fair financial
statement presentation. The results for the interim period are not necessarily
indicative of the results to be expected for the year.
NOTE 2 REVENUE
The Company recognizes revenue from its products when persuasive evidence of an
arrangement exists, the product(s) has been shipped, collectability is
reasonably assured and the price is fixed or determinable. In the event that the
contract provides for multiple elements (e.g., products, installation and
training), the total amount invoiced is allocated to these elements based on
"vendor-specific objective evidence" of fair value. If any portion of the
revenue is subject to forfeiture, refund or other contractual contingencies, the
Company will postpone revenue recognition until these contingencies have been
removed. The Company generally accounts for installation and training services
separate from product revenue for those multi-element arrangements where
services are a separate element and are not essential to the customer's
functionality requirements and there is "vendor-specific objective evidence" of
fair value for these services. Installation and education services revenue, is
recognized when the service has been performed.
7
Revenue from warranty and maintenance activities is recognized ratably over the
term of the warranty and maintenance period and the unrecognized portion is
recorded as deferred revenue.
The Company records any rental income pro-rata as earned over the rental period.
NOTE 3 INVENTORY
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. All of the inventory is finished goods.
NOTE 4 LOSS PER COMMON SHARE
Common stock equivalents in the three- and nine-month periods ended September
30, 2005 and 2004 were anti-dilutive due to the net losses sustained by the
Company during these periods, thus the diluted weighted average common shares
outstanding in these periods are the same as the basic weighted average common
shares outstanding.
NOTE 5 INCOME TAXES
The Company has not recognized an income tax benefit for its operating losses
generated in the three- and nine-month periods ended September 30, 2005 and 2004
based on uncertainties concerning its ability to generate taxable income in
future periods. The tax benefits for the three- and nine-month periods ended
September 30, 2005 and 2004 is offset by a valuation allowance established
against deferred tax assets arising from operating losses and other temporary
differences, the realization of which could not be considered more likely than
not. In future periods, tax benefits and related deferred tax assets will be
recognized when management considers realization of such amounts to be more
likely than not.
NOTE 6 STOCK-BASED EMPLOYEE COMPENSATION
For the stock options and warrants issued to employees, the Company has elected
to apply the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Under the intrinsic value based method,
compensation cost is measured on the date of grant as the excess of the fair
market value of the underlying stock over the exercise price. Such compensation
amounts are amortized over the respective vesting periods of the options.
The following table illustrates the effect on net loss and loss per share as if
the fair value based method of accounting had been applied to stock-based
employee compensation, as required by SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS 148 "Accounting for Stock-Based Compensation - transition
and disclosure", an amendment of SFAS No. 123 for the three and nine months
ended September 30, 2005 and 2004:
8
Three months ended September 30, Nine months ended September30,
-------------------------------- -----------------------------
2005 2004 2005 2004
---- ---- ---- ----
Net Loss Available to Common
Stockholders:
Net loss available to common
stockholders, as reported $(2,454,166) $(1,395,717) $(5,741,165) $(6,687,967)
Plus: Intrinsic value of
compensation costs included
in net loss 5,817 8,367 62,051 100,701
Deduct: Fair value of
stock-based employee
compensation costs (12,598) (21,460) (149,597) (142,500)
----------- ----------- ----------- -----------
Pro forma net loss $(2,460,947) $(1,408,810) $(5,828,711) $(6,729,766)
=========== =========== =========== ===========
Loss per common share available
to common stockholders:
Basic and Diluted - as reported $ (0.03) $ (0.04) $ (0.08) $ (0.22)
=========== =========== =========== ===========
Basic and Diluted - pro forma $ (0.03) $ (0.04) $ (0.08) $ (0.23)
=========== =========== =========== ===========
The Company estimates the fair value of each stock option and warrant at the
grant date by using the Black-Scholes option-pricing model.
NOTE 7 NOTES PAYABLE AND NOTES PAYABLE WITH RELATED PARTIES
During March 2005, the Company executed a $1.5 million unsecured six-month
promissory note with a related party. The interest rate is 15% per annum.
Interest only payments are due monthly until maturity of the note when the
principal is due, October 1, 2005. One of the Company's Board of Directors and
another officer of the Company both have a controlling interest in the company
that is the note holder. The Company defaulted on the note, but the note was
extended to November 1, 2005 (see Note 12).
During the third quarter of 2005, the Company executed unsecured three-month
convertible promissory notes totaling $1.6 million. One of the note holders is
the CFO who has a $100,000 note with the same terms as the other note holders.
The Company has the option to extend these notes for an additional three-month
period. The Company intends to extend these notes. The interest rate is 12% per
annum. Interest only payments are due monthly until the maturity of these notes
at which time the principal is due. If the notes are paid prior to the maturity
date or the extended maturity date, the Company is required to pay the interest
for the entire three-month periods. The note holders have the right to convert
their notes to common stock at the exercise price of $0.25 per share. The
beneficial conversion intrinsic value related to the convertible feature of the
debt was valued at $994,074 and will be amortized over the three-month term of
the notes. At September 30, 2005, $516,593 remained on the Company's Balance
Sheet as a discount to debt related to this convertible feature. There were two
note holders who were eligible to receive 100,000 shares of common stock each
(200,000 shares in total) based upon a $500,000 investment each. These shares
were valued at $74,074 based upon the allocation of the $1,000,000 proceeds
received to debt and equity based upon their fair market values. As of September
30, 2005, $37,037 of the $74,074 discount had been amortized. The notes payable
at September 30, 2005 was as follows:
9
Notes Payable $1,500,000
Discount - Shares issued (37,037)
Discount - Beneficial conversion value (486,593)
------------
Notes payable, net of discount $ 976,370
============
The notes payable, related parties at September 30, 2005 was as follows:
Notes Payable $1,600,000
Discount-Beneficial conversion value (30,000)
-----------
Notes payable, net of discount $1,570,000
===========
NOTE 8 TECHNOLOGY RIGHT AND LICENSE AGREEMENT
On February 16, 2005 the inventor of the OnScreenTM technology, who licensed to
the Company the rights of the direct view LED video display technology conveyed
to a third party company, all of the inventor's right, title and interest of the
OnScreenTM technology. This third party company conveyed to the Company all
right, title and interest of the OnScreenTM technology for $200,000. One of the
Company's Board of Directors and another officer of the Company both have a
controlling interest in the third-party company that conveyed these rights. The
Company now owns all patent rights to the OnScreenTM technology unencumbered
subject to the rights of a separate party relating to the percentages of revenue
from commercialization of the direct view LED video display technology.
NOTE 9 COMMITMENTS
On March 28, 2005, an addendum was made to the current business development
director and previous CEO/President's employment agreement. The term of the
agreement was extended three years expiring on December 31, 2008. The current
business development director and previous CEO/President received an additional
2.1 million shares of the Company's common stock and the vehicle allowance was
increased. Also in this addendum, the current business development director and
previous CEO/President relinquished certain rights he had to revenue which he
had previously been entitled to per his contract. The 2.1 million shares were
valued at $0.27 per share totaling $567,000 based on contemporaneous cash sales
and will be recorded as compensation expense over the remaining term of his
employment agreement.
On June 13, 2005, the Company entered into a three-year employment agreement
with a newly hired Chairman of the Board of Directors who was appointed CEO
during the third quarter of 2005. The annual salary is $225,000 and he will also
be entitled to a stock bonus award totaling five million shares of the Company's
common stock based upon continued employment at specified dates over a two-year
period. The stock bonus awards are accelerated if the Company's stock price
achieves certain price per share levels. The compensation expense related to the
bonus shares will be expensed over the vesting period of each award. The total
value of the awards as measured on the grant date was $1,350,000 based on a
$0.27 per share contemporaneous cash sales price of which $759,375 was recorded
as compensation expense as of September 30, 2005 and $354,375 was recorded as
accrued compensation payable with common stock at September 30, 2005. At June
30, 2005, the Chairman was entitled to 1.5 million shares upon execution of his
agreement which is recorded as common stock issuable at September 30, 2005.
10
During May 2005, the Director of Administrative Services' employment agreement
automatically renewed for a three-year period. The annual salary is $75,000 with
an annual stock bonus of the Company's registered common stock equal in value to
$25,000.
On September 14, 2005, the Company entered into an agreement for a contractor to
provide some research and development work on its products. The Company will
retain all the rights and technology related to this work. For this work, the
Company will pay this contractor $100,000 of which $50,000 had been paid at
September 30, 2005. The $50,000 paid was expensed to research and development
during 2005 as the work had been performed.
NOTE 10 PREFERRED STOCK
During the nine months ended September 30, 2005, the Company converted 1,101,487
shares of the Company's Series A convertible preferred stock into 4,405,948
shares of the Company's common stock at the request of certain Series A
convertible preferred stock holders.
During 2005, the Company issued 240,000 shares of its Series A convertible
preferred stock to its COO/CFO in accordance with his employment agreement. The
240,000 shares were valued at $1.00 per share based on contemporaneous cash
sales around the grant date. The total value of these shares of $240,000 is
being expensed over the three-year employment agreement with $100,000 deferred
and $140,000 expensed as of September 30, 2005.
NOTE 11 OTHER EQUITY TRANSACTIONS
During 2005, the Company issued 28,751 shares of its common stock to an employee
in accordance with his employment agreement. These shares were valued at $25,000
using a thirty-day average price at December 31, 2004, in accordance with the
employee's employment agreement.
During April 2005, the landlord who had held 200,000 shares of the Company's
common stock which were held contingent on payment of the rent returned the
shares to the Company and the shares were cancelled. These shares had properly
not been included as outstanding shares in the Company's financial statements
since they were contingently returnable as collateral shares, therefore there
was no financial accounting effect of this transaction.
In accordance with the employment agreement, during the nine months ended
September 30, 2005, the Company repurchased 150,000 shares of common stock for
$225 from one of its employees who left the Company. These shares were recorded
as treasury stock shares. During the third quarter of 2005, the Company
cancelled these 150,000 shares of its common stock. These shares were not vested
at the time the employee left the Company; therefore, additional paid-in-Capital
and deferred compensation was reduced by $151,500 during 2005.
During 2005, the Company repriced options to a former employee to purchase
1,050,000 shares of its common stock that previously had exercise prices ranging
from $0.25 to $0.35 per share to an exercise price of $0.20 per share. The
Company recorded $38,500 of compensation expense and additional paid-in-capital
related to this transaction.
During 2005, the Company issued 200,000 shares of its common stock that it had
accrued for at December 31, 2004.
11
During 2005, warrants and options were exercised to purchase 355,000 of the
Company's common stock. The Company received $99,250 of proceeds from these
exercises of warrants and options. Also, during 2005, the Company reduced the
deferred compensation account by $27,200 for the cancellation of an option that
was not fully vested when the employee left the Company.
During the third quarter of 2005, the Company issued 7,500 shares of its common
stock for the purchase of the website, www.onscreentechnologies.com. These
shares were valued at $3,000 using the quoted market price on the date of grant.
During the third quarter of 2005, the Company granted a stock option to an
employee to purchase 5,000 shares of its common stock after a one-year vesting
period. The exercise price was $0.25 and the quoted market value of the
Company's common stock was $0.28 on the date of grant. The Company recorded an
intrinsic value of $150 related to this stock option.
On August 25, 2005, the Board of Directors approved the 2005 Equity Incentive
Plan for 2,000,000 shares of the Company's common stock. The shareholders will
vote to approve this plan during the 2005 annual shareholder meeting on December
13, 2005.
During the third quarter of 2005, there were $15,726 of deferred stock issuance
costs incurred which is included in other assets on the balance sheet.
NOTE 12 SUBSEQUENT EVENT
On October 4, 2005, the Company paid $50,000 to extend a letter of intent for
the sale and purchase of certain intellectual property. One of the Company's
Board of Directors and another officer of the Company both have a controlling
interest in the company that is selling the intellectual property. The letter of
intent gives the Company the right to acquire the WayCool technology for
$800,000 and the issuance of warrants to acquire five percent of the Company's
fully diluted equity securities after giving effect to the Company's fund
raising efforts. The warrants will have the same pricing and terms issued in
connection with our private equity fund raising.
During October and November 2005, the Company entered into unsecured three-month
convertible promissory notes totaling $1.7 million. The Company has the option
to extend these notes for an additional three-month period. The interest rate is
12% per annum. Interest only payments are due monthly until the maturity of
these notes at which time the principal is due. If the notes are paid prior to
the maturity date or the extended maturity date, the Company is required to pay
the interest for the entire three-month periods. The note holders have the right
to convert their notes to common stock at the exercise price of $0.25 per share.
The beneficial conversion intrinsic value related to the convertible feature of
the debt was valued at $691,059 and will be amortized over the three-month term
of the notes. Certain note holders who had notes of $500,000 or greater will
receive a total of 300,000 shares of common stock. These shares were valued at
$85,425 based upon the allocation of the $1,500,000 proceeds received to debt
and equity based upon their fair market values. The Company will pay $64,000 of
costs related to these notes which will be recorded as deferred finance fees and
amortized over the term of the notes.
The maturity date of the $1.5 million note payable which was due on October 1,
2005 was extended to November 1, 2005 and the Company paid a $2,500 fee to
extend this note held by a related party. In late October, this $1.5 million
note was paid off by a convertible bridge loan with the same terms as the
Company's other convertible notes payable. The beneficial conversion intrinsic
value related to the convertible feature of the debt was valued at $17,303 and
will be amortized over the three-month term of the notes. The Company will issue
300,000 shares of common stock in conjunction with this convertible bridge loan.
These shares were valued at $55,776 based upon the allocation of the $1,500,000
proceeds received to debt and equity based upon their fair market values.
On November 11, 2005, the Company relocated its corporate offices to Portland,
Oregon. A field office will remain in Florida. The Company estimates the costs
associated with this move and restructuring is approximately $61,000.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate," or "continue" or use of
negative or other variations or comparable terminology.
We caution that these statements are further qualified by important factors that
could cause actual results to differ materially from those contained in the
forward-looking statements, that these forward-looking statements are
necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements.
Overview
OnScreen Technologies, Inc. (the Company) is commercializing its innovative
OnScreenTM light emitting diode (LED) technology to the world of visual
communications. The Company is focused on the design, development and sale of
LED displays utilizing the OnScreenTM architecture. The Company seeks to develop
innovative approaches to these products and delivery systems, which concentrates
in the commercial and government markets.
The Company began shipping its living windowTM product during June 2005. The
Company expects its other products will begin shipping during 2006. The Company
completed its commercial prototype for RediAlertTM during August 2005. The
Company does not expect to record any significant growth in revenues until its
living windowTM product is fully deployed nationwide. The Company expects to
continue to receive some revenue from its mobile LED truck.
During the nine months ended September 30, 2005, the Company continued to incur
significant losses from operations. The Company incurred a net loss of
$5,586,815 for the nine months ended September 30, 2005. This net loss of
$5,586,815 includes non-cash charges of approximately $1,417,000 for
compensation and services expense including amortization of deferred
compensation related to equity given or to be given to employees and consultants
for services provided and $514,518 of non-cash amortization of the intrinsic
value of convertible debt and the debt discount.
A priority of management during 2005 is to continue to raise the capital needed
to fund the development and marketing of the Company's OnScreen(TM) products.
During the nine months ended September 30, 2005 the Company received proceeds of
$3.175 million for unsecured notes and $84,250 from the exercise of warrants and
options. These funds will assist the Company to continue to develop its
OnScreen(TM) products and continue the Company's operations until the Company
brings the OnScreen(TM) products to market. However, the Company anticipates
expanding and developing its technology and product lines which will require
additional funding.
Intellectual Property
The Company relies on various intellectual property laws and contractual
restrictions to protect its proprietary rights in products, logos and services.
These include confidentiality, invention assignment and nondisclosure agreements
with the Company's employees,
13
contractors, suppliers and strategic partners. The confidentiality and
nondisclosure agreements with employees, contractors and suppliers are in
perpetuity or for a sufficient length of time so as to not threaten exposure of
proprietary information. In addition, the Company intends to pursue the
registration of its trademarks and service marks in the U.S. and
internationally.
The Company continues to file and protect its intellectual property rights,
trademarks and products through continued filings with the US Patent and
Trademark Office and, as applicable, internationally.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that have a significant impact on the results we
report in the Company's financial statements. Some of the Company's accounting
policies require us to make difficult and subjective judgments, often as a
result of the need to make estimates of matters that are inherently uncertain.
Actual results may differ from these estimates under different assumptions or
conditions.
Asset Impairment
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset exceeds
its fair value and may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized as the
excess of the carrying amount over the fair value. Otherwise, an impairment loss
is not recognized. Management estimates the fair value and the estimated future
cash flows expected. Any changes in these estimates could impact whether there
was impairment and the amount of the impairment.
Valuation of Non-Cash Capital Stock Issuances
The Company values its stock transactions based upon the fair value of the
equity instruments. Various methods can be used to determine the fair value of
the equity instrument. The Company may use the fair value of the consideration
received, the quoted market price of the stock or a contemporaneous cash sale of
the common or preferred stock. Each of these methods may produce a different
result. Management uses the method it determines most appropriately reflects the
stock transaction. If a different method was used it could impact the expense,
deferred stock and equity stock accounts.
Service Period of Employee Equity Transactions
The Company recognizes the compensation costs related to equity transactions
over the period the services are performed. If the service period is not defined
and the equity transaction is a part of an employee agreement, the service
period is estimated to be the remaining portion of the contract even if the
equity shares are issued prior to the services being rendered. Any changes in
the estimate of when the service period is would impact the timing of when the
compensation expense was recorded. For example if it was estimated that the
shares had been issued for services already performed, the compensation expense
would be recorded at the time the shares were issued.
Patent Costs
14
The Company estimates the patents it has filed have a future beneficial value to
the Company, thus it capitalizes the costs associated with filing for its
patents. At the time the patent is approved, the patent costs associated with
the patent will be amortized over the useful life of the patent. If the patent
is not approved, at that time the costs will be expensed. A change in the
estimate of the patent having a future beneficial value to the Company will
impact the other assets and expense accounts of the Company.
Revenue Recognition
The recognition of the Company's revenues requires judgment, including whether a
sale includes multiple elements, and if so, whether vendor-specific objective
evidence (VSOE) of fair value exists for those elements. Customers receive
certain elements of our products over a period of time. These elements include
installation and training services. The ability to identify VSOE for those
elements and the fair value of the respective elements could materially impact
the amount of earned and unearned revenue. Also, the Company offers an extended
warranty for which the revenues are initially recorded as deferred revenue and
recorded to revenue ratably over the applicable warranty period. The Company
does not have any history as to the costs expected to be incurred in performing
these services. Therefore, revenues may be recorded that are not in proportion
to the costs expected to be incurred in performing these services.
Liquidity and Capital Resources
General
The Company's cash and cash equivalents balance at September 30, 2005 is
$870,391. The Company has a negative working capital balance at September 30,
2005 of $2,024,130. The Company has funded its operations and investments in
equipment through cash from operations, equity financings and borrowing from
private parties as well as related parties. It has also funded its operations
through stock paid to vendors, consultants and certain employees.
Cash used in operations
The Company's operating requirements generated a negative cash flow from
operations of $3,714,306 for the nine months ended September 30, 2005.
During the first nine months of 2005 and 2004, the Company has used stock and
warrants as a form of payment to certain vendors, consultants and employees. For
the first nine months of 2005, the Company recorded a total of approximately
$1,398,000 for compensation and services expense including amortization of
deferred compensation related to equity given or to be given to employees and
consultants for services provided.
As the Company focuses on the OnScreen(TM) technology during 2005, it will
continue to fund research and development related to the OnScreen(TM) products
as well as sales and marketing efforts related to these products. The Company
does not expect to record much revenue until its living windowTM product is
fully deployed nationwide. The living windowTM product began shipping in June
2005 and the Company's other products are expected to begin shipping during
2006.
Capital Expenditures and Investments
During the first nine months of 2005, the Company invested approximately $91,000
in fixed assets which includes approximately $24,000 for mainly computer
equipment and software used for sales, marketing, research and development and
administration and approximately $67,000 for OnScreenTM products to be used for
sales demonstrations at customer sites.
15
During the remainder of 2005, the Company anticipates that its capital
expenditures should not significantly change. The Company outsources the
manufacture of its products.
The Company invested $329,412 in patent costs during the first nine months of
2005. The Company expects its investment in patent costs will continue
throughout 2005 as it invests in patents to protect the rights to use its
OnScreenTM product developments.
The Company received $396,351 of proceeds from the sales of marketable
securities during the first nine months of 2005.
Financing activities
During the first nine months of 2005, the Company received $84,250 of proceeds
from the exercise of warrants and options and $1.5 million of proceeds from
unsecured notes with a six- month term and $1.6 million of proceeds from
convertible three-month unsecured notes. The convertible notes have an exercise
price of $0.25 per share and a three-month term with a three-month extension.
The Company plans on raising the capital needed to payoff the notes payable and
to fund the further development and marketing of the Company's products. During
the first nine months of 2005, the Company paid $121,250 of cash dividends on
its Series A convertible preferred stock. During the second quarter of 2005, the
Company paid $225 to buy 150,000 shares of its common stock in accordance with
an agreement the Company had with an employee as part of the employee's
separation from the Company. In conjunction with the fund raising efforts of the
Company, the Company incurred $15,726 of deferred stock issuance costs.
During October and November 2005, the Company received $1.7 million of proceeds
from convertible three-month unsecured notes. The convertible notes have an
exercise price of $0.25 per share and a three-month term with a three-month
extension. The Company paid fees of $64,000. The Company also replaced its $1.5
million unsecured loan which was due with a $1.5 million convertible three-month
unsecured note with the same terms as the other convertible debt.
Recap of liquidity and capital resources
The Company is seeking to raise additional capital for the commercialization of
its OnScreen(TM) technology product lines which the Company believes will
provide sufficient cash to meet its short-term working capital requirements for
the next twelve months. As the Company continues to expand and develop its
technology and product lines, additional funding will be required. The Company
will attempt to raise these funds through borrowing instruments or issuing
additional equity.
The Company received $1,600,000 of proceeds from a private placement of
convertible notes during the third quarter of 2005 and this private placement of
convertible notes is continuing during the fourth quarter of 2005 with
$1,700,000 of proceeds received during October and November 2005. The $1.5
million unsecured loan that was due on November 1, 2005 was replaced with a
$1,500,000 convertible note. These convertible notes have three-month terms with
a three-month extension at the option of the Company. The proceeds from the sale
of such securities should be sufficient to satisfy the Company's short-term
working capital requirements.
Management of the Company believes that equity financing or debt will be
available to fund its operations until revenue streams are sufficient to fund
operations; however, the terms and timing of such equity or debt cannot be
predicted and there is no assurance that such financing will close. Management
expects the OnScreenTM LED technology to be
16
commercialized during 2005 and 2006. The Company cannot assure that it will
generate revenues by that date or that its revenues will be sufficient to cover
all operating and other expenses of the Company. If revenues are not sufficient
to cover all operating and other expenses, the Company will require additional
funding. There is no assurance the Company will be able to raise such additional
capital. The failure to raise additional capital or generate product sales in
the expected time frame will have a material adverse effect on the Company.
Results of Operations
Revenue
During the nine months ended September 30 2005, revenue was $90,653 and $137,836
for the same period during 2004. The revenue for the nine months ended September
30, 2005 is comprised of $53,477 from living windowTM products and related
add-ons and $37,176 from the LED Truck rental. For the nine months ended
September 30, 2004, the Company recorded $74,900 of revenue from the LED Truck
and $62,936 of other revenue.
During the three months ended September 30 2005, revenue was $37,534 and $56,643
for the same period during 2004. The revenue for the three months ended
September 30, 2005 is comprised of $36,034 from living windowTM products and
related add-ons and $1,500 from the LED Truck rental. For the three months ended
September 30, 2004, the Company recorded $6,440 of revenue from the LED Truck
and $50,203 from distributor's fees.
The Company began shipping its living windowTM product during late June 2005. As
the living windowTM product penetrates the marketplace, the Company's expects
its revenues will increase during 2005 compared to the prior quarters.
Cost of revenue
The cost of revenue for the nine months ended September 30, 2005 and 2004 was
$121,185 and $488, respectively. For the three months ended September 30, 2005
and 2004, the cost of revenue was $57,945 and $0, respectively. While the
Company's sales are low, it expects the cost of sales to fluctuate between
periods as a percentage of its revenues.
During 2005, the Company refined its process of capturing the costs associated
with the LED truck, thus the costs are higher for cost of sales related to the
LED truck than for the same period in 2004.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses includes such items as
wages, consulting, general office expenses, business promotion expenses and
costs of being a public company including legal and accounting fees, insurance
and investor relations.
SG&A expenses decreased from $5,929,381 for the nine months ended September 30,
2004 to $3,846,076 for the same period during 2005. This decrease of $2,083,305
is primarily the result of decreased consulting expenses of approximately
$2,328,000 which is offset by increased compensation expenses of approximately
$137,000.
SG&A expenses increased $371,836 for the three months ended September 30, 2005
compared to the same period in 2004. This increase is primarily the result of
increased compensation costs of approximately $616,000 which is offset by
decreased consulting expenses of approximately $157,000.
17
During 2004, the Company had issued equity for certain consulting services
provided to the Company. During 2005, the Company did not incur these consulting
services as it had hired employees to assist with the functions previously
provided by the consultants. This resulted in the decrease of $157,000 and
$2,328,000 in consulting expense during the three and nine months ended
September 30, 2005, respectively, compared to the same period in 2004.
For the nine months ended September 30, 2005 compared to 2004, the increase in
compensation was due mainly to the expenses associated with an increase in the
number of employees during 2005 to assist with the commercialization of the
OnScreenTM product lines. The Company recorded a non-cash compensation of
$1,398,000 and $1,433,000 for the nine months ended September 30, 2005 and 2004.
For the three months ended September 30, 2005 compared to 2004, the increase in
compensation expense was mainly due to the non-cash compensation of $470,000
recorded for the three months ended September 30, 2005, and the expenses
associated with an increase in the number of employees during 2005 to assist
with the commercialization of the OnScreenTM product lines.
The company anticipates its sales and marketing expenditures to increase during
the remainder of 2005 compared to the first nine months of 2005 as the Company
is in the process of the commercialization and marketing of its OnScreen(TM)
product lines. The other general and administrative expenses will also increase
during the remainder of 2005 as the Company puts the infrastructure in place to
support the shipping of the OnscreenTM products.
Research and Development
The research and development costs are related to the OnScreen(TM) technology to
which the Company acquired the licensing rights. The increase of $95,627 and
$371,836 in research and development during the three and nine months ended
September 30, 2005, respectively compared to the same period in 2004 is a result
of activities to further research and develop the OnScreen(TM) technology and
products. The Company anticipates increasing its expenditures in research and
development during the remainder of 2005 compared to 2004.
Other Income
The Other Income remained relatively unchanged during the three and nine months
ended September 30, 2005 compared to the same period in 2004. The Company does
not expect this item to be significant during the balance of 2005.
Settlement Gain (Loss), Net
The Company did not have any significant settlement gain (loss) during the three
and nine months ended September 30, 2005.
The net settlement gain for the three months ended September 30, 2005 was due
mainly to the Company making a payment of $68,121 to settle a consulting
agreement and nine months ended September 30, 2004 was mainly due to the
settlement of a disputed convertible promissory note which resulted in the
Company recording a settlement gain of $267,458.
Intrinsic value of convertible debt and amortization of debt discount
The Company recorded an expense of $487,312 and $514,518 for the three and nine
months ended September 30, 2005, respectively for the intrinsic value of
convertible debt and the amortization of debt discount. The total intrinsic
value of convertible debt recorded was $994,074 and a debt discount of $74,074.
These amounts will be amortized to expense over the three-month term of the
notes.
18
Interest Expense
The interest expense of $103,657 and $132,701 for the three and nine months
ended September 30, 2005, respectively is for the interest on the $1.5 million
unsecured note entered into during March 2005 and the $1.6 million of unsecured
convertible notes entered into during the third quarter of 2005. The Company
will continue to incur interest on these notes until they are paid off.
The interest expense of $64,070 for the nine months ended September 30, 2004,
was for $46,500 of non-cash interest related to the value of options issued
under default provisions of certain notes and $17,570 of other non-cash
interest. The $8,558 of interest expense for the three months ended September
30, 2004 was for non-cash interest.
Preferred Stock Dividends
During the nine months ended September 30, 2005 and 2004, the Company recorded
Series A Convertible Preferred Stock dividends of $154,350 and $391,747,
respectively. During the three months ended September 30, 2005 and 2004, the
Company recorded Series A Convertible Preferred Stock dividends of $48,144 and
$195,725, respectively. The Company expects the preferred stock dividends will
be lower for 2005 compared to 2004 as some of the preferred stock was converted
into common stock during 2005.
Item 3. Controls and Procedures
Within 90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of its management,
including the Chief Executive Officer and Chief Financial Officer, of the design
and operation of its disclosure controls and procedures. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective
for the gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, within the time periods specified in the SEC's rules and forms. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of this evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 1, 2004, the Company filed a lawsuit against Mobile Magic Superscreen,
Ltd. (breach of contract and civil conversion), Capitol City Trailers, Inc.
(civil conversion) and another party (civil fraud) in the Court of Common Pleas
of Franklin County, Ohio, Case Number 04 CVH 6884. This lawsuit relates to the
2001 contract with Mobile Magic Superscreen, Ltd. for the fabrication of a
mobile LED superscreen that Mobile Magic failed to complete and deliver. The
case against Capitol City Trailers, Inc. has been settled favorably for the
Company and the jury trial against Mobile Magic Superscreen, Ltd. was continued
to a trial date not yet set.
19
Item 2. Changes in Securities.
Common Stock Issued
The company relied on Section 4(2) of the Securities Act of 1933 as the basis
for an exemption from registration for this issuance. During the third quarter
of 2005, the Company issued 7,500 shares of its common stock to acquire a
website name. These shares were valued at $3,000.
The company relied on Section 4(2) of the Securities Act of 1933 as the basis
for an exemption from registration for this issuance. During the third quarter
of 2005, the Company issued 20,000 shares of its common stock for the exercise
of a warrant. The warrant was exercised for proceeds of $15,000.
The company relied on Section 4(2) of the Securities Act of 1933 as the basis
for an exemption from registration for this issuance. During the third quarter
of 2005, certain Series A Preferred Stock holders converted 25,000 shares of
Series A Preferred Stock to 100,000 shares of the Company's common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits
(a) Exhibits
Exhibit
Number Description
31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signed and submitted this 9th day of November 2005.
OnScreen Technologies, Inc.
(Registrant)
by: /s/ Charles R. Baker
-------------------------------------------
Charles R. Baker
Chief Executive Officer/Director
by: /s/ Mark R. Chandler
-------------------------------------------
Mark R. Chandler
Chief Operating Officer/Chief Financial Officer
21