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, 2006
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, Oregon 97209
(503) 417-1700
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
Mark R. Chandler, COO/CFO
OnScreen Technologies, Inc.
600 NW 14th Avenue, Suite 100
Portland, Oregon 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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of October 31, 2006, there were 142,997,363 shares of the Company's common
stock outstanding, 108,000 shares of common stock issuable and 400,543 shares of
Series A 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 17
Overview 17
Intellectual Property 18
Critical Accounting Policies 18
Liquidity and Capital Resources 19
Results of Operations 21
Item 3 Controls and Procedures 23
Part II
Item 1 Legal Proceedings. 24
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 25
Item 4 Submission of Matters to a Vote of Security Holders 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibits 27
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONSCREEN TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
September 30,
2006 December 31,
(Unaudited) 2005
-------------- --------------
Assets
Current Assets
Cash and cash equivalents $ 185,800 $ 727,141
Accounts receivable, net of allowance of $ 6,333 at September 30, 2006 and $
11,780 December 31, 2005 27,366 18,226
Inventory 2,635,099 552,648
Prepaid expenses and other current assets 160,521 150,682
-------------- --------------
Total Current Assets 3,008,786 1,448,697
Property and Equipment, net of accumulated depreciation of $492,309 at September
30, 2006 and $399,530 at December 31, 2005 187,956 254,757
-------------- --------------
Other Assets
Restricted marketable securities available-for-sale -- 27,181
Note Receivable 122,500 --
Technology rights, net of accumulated amortization of $273,839 at September 30,
2006 and $150,833 at December 31, 2005 4,568,904 371,667
Patent Costs 505,471 429,096
Other assets 22,557 97,087
-------------- --------------
Total Other Assets 5,219,432 925,031
-------------- --------------
Total Assets $ 8,416,174 $ 2,628,485
============== ==============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and other payables $ 1,610,762 $ 268,710
Accrued expenses 336,007 616,082
Note payable, related parties, net of discounts of $7,535 at December 31, 2005 . 150,000 192,465
Note payable, net of discounts of $-0- at September 30, 2006 and $309,695 at
December 31, 2005 500,000 4,490,305
-------------- --------------
Total Current Liabilities 2,596,769 5,567,562
Accrued expenses payable with common stock -- 504,777
Long term convertible note payable at fair value, net of discounts of $553,755 .. 1,006,245 --
-------------- --------------
Total Liabilities 3,603,014 6,072,339
============== ==============
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, 3,235,580
shares issued at September 30, 2006; 404,543 and 1,885,718 shares
outstanding at September 30, 2006 and December 31, 2005, respectively;
liquidation preference of $400,543 at September 30, 2006 401 1,886
Convertible Series B preferred stock, 30,000 shares authorized, 29,068 shares
issued at September 30, 2006 and -0- shares outstanding at both September
30, 2006 and December 31, 2005 -- --
Common stock, par value $0.001; 200,000,000 shares authorized,
131,646,030 and 70,277,219 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively 131,646 70,277
Common stock issuable, at par value, (32,895 shares at September 30, 2006 and
150,000 shares at December 31, 2005) 33 150
Additional paid-in capital 44,060,286 25,088,614
Accumulated deficit (39,379,206) (28,457,694)
-------------- --------------
4,813,160 (3,296,767)
Less Accumulated other comprehensive loss -- (4,413)
Less Deferred compensation expense -- (142,674)
-------------- --------------
Total Stockholders' Equity (Deficit) 4,813,160 (3,443,854)
-------------- --------------
Total Liabilities and Stockholders' Equity (Deficit) $ 8,416,174 $ 2,628,485
============== ==============
See accompanying notes to financial statements
3
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30
2006 2005 2006 2005
------------- ------------- ------------- -------------
Revenues $ 84,145 $ 37,534 $ 148,950 $ 90,653
Cost of Revenues 327,131 57,945 772,836 121,185
------------- ------------- ------------- -------------
Gross Profit (242,986) (20,411) (623,886) (30,532)
Operating Expenses
Selling, general and administrative 759,054 1,361,644 5,578,666 3,847,681
Research and development 516,485 441,138 2,051,935 1,076,588
Restructuring costs -- -- 13,967 --
------------- ------------- ------------- -------------
Total Operating Expenses 1,275,539 1,802,782 7,644,568 4,924,269
------------- ------------- ------------- -------------
Loss from Operations (1,518,525) (1,823,193) (8,268,454) (4,954,801)
------------- ------------- ------------- -------------
Other Income (Expense)
Other income 2,965 3,973 30,139 11,338
Settlement gain (loss), net 175,000 4,167 (2,489,507) 4,167
Change in fair value of warrant liability 2,039,181 -- 3,718,543 --
Intrinsic value of convertible debt and amortization of
debt discount (158,489) (514,218) (2,358,217) (514,518)
Interest expense (819,385) (76,751) (1,504,089) (133,001)
------------- ------------- ------------- -------------
Total Other Income (Expense), Net 1,239,272 (582,829) (2,603,131) (632,014)
Net Loss (279,253) (2,406,022) (10,871,585) (5,586,815)
Preferred Stock Dividends 49,794 (48,144) (49,926) (154,350)
------------- ------------- ------------- -------------
Net Loss Available to Common Stockholders $ (229,459) $ (2,454,166) $ (10,921,511) $ (5,741,165)
============= ============= ============= =============
Basic and Diluted Loss Per Common Share $ (0.00) $ (0.03) $ (0.10) $ (0.08)
============= ============= ============= =============
Basic and Diluted Loss Per Common Share Available to $ (0.00) $ (0.03) $ (0.10) $ (0.08)
Common Stockholders
============= ============= ============= =============
Weighted average common shares outstanding 130,287,737 72,263,768 106,641,991 69,193,069
============= ============= ============= =============
See accompanying notes to financial statements
4
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
For the nine months ended
September 30,
------------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(10,871,585) $ (5,586,815)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock, warrants and notes issued for compensation and services 2,123,676 41,650
Change in value of Warrant Liability (3,718,543) --
Non-cash interest expense, including intrinsic value of convertible debt and
amortization of debt discount 2,358,216 514,518
Non-cash (gain) loss on settlement, net 2,629,984 --
Bad debt expense 2,333 1,605
Amortization of technology rights 123,006 15,000
Amortization of deferred consulting and compensation 258,223 300,177
Amortization of deferred financing fees 381,050 --
Compensation expense payable in common stock 328,541 1,074,801
Depreciation 94,500 86,112
Other 4,413 6,198
(Increase) decrease in assets:
Accounts receivable and other receivables (133,973) (31,175)
Inventory (2,085,000) (615,926)
Prepaid expenses and other current assets (9,839) (141,434)
Deposits and other assets 70,420 (3,934)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,673,256 616,077
Deferred revenues (810) 8,840
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (6,772,132) (3,714,306)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in technology rights (800,000) --
Investment in patents (76,375) (329,412)
Proceeds from sales of marketable securities 31,291 396,351
Purchase of property and equipment (25,150) (90,941)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (870,234) (24,002)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Series A convertible preferred stock dividends paid -- (121,250)
Purchase of treasury stock -- (225)
Proceeds from notes and loans payable 7,294,950 3,175,000
Payments on notes and loans payable (375,475) (75,000)
Proceeds from sales of common stock and exercise of warrants and options net of
offering costs 181,550 84,250
Deferred stock issuance costs -- (15,726)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,101,025 3,047,049
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (541,341) (691,259)
============ ============
Cash and Cash Equivalents at Beginning of Year 727,141 1,561,650
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIODS $ 185,800 $ 870,391
------------ ------------
(continued)
5
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
UNAUDITED
For the nine months ended
September 30,
------------------------------
2006 2005
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ -- $ --
============ ============
Interest paid $ 335,039 $ 107,785
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of Series A convertible preferred stock to common stock $ 1,610 $ 1,101
============ ============
Discount on debt of convertible notes payable $ 3,606,844 $
994,074
============ ============
Accounts payable converted to notes payable $ 375,475 $ --
============ ============
Conversion of debt to common stock $ 9,454,040 $ --
============ ============
Technology rights acquired through issuance of warrants $ 3,520,243 $ --
============ ============
Common Stock issued for debt financing $ -- $ 74,074
============ ============
Deferred consulting and compensation and accrued liabilities payable in common stock $ 833,315 $ 1,305,997
============ ============
Cancellation of warrant $ -- $ 178,700
============ ============
Other comprehensive loss from unrealized loss (gain) $ -- $ 3,205
============ ============
Reclassification of warrants from Liability to Equity $ 5,668,578
============ ============
See accompanying notes to financial statements
6
ONSCREEN TECHNOLOGIES, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 BASIS OF PRESENTATION AND GOING CONCERN
OnScreen Technologies, Inc. (the Company) has pioneered and is commercializing
innovative thermal management solutions capable of revolutionizing the LED
display, semiconductor and electronic packaging industries. Utilizing its
patent-pending thermal technologies and architecture, the Company has developed
highly advanced, proprietary LED display solutions and cooling applications that
provide increased performance and are less expensive to install and support than
competing products and technologies. The Company is focused on the
commercialization of its innovative thermal cooling technology, WayCool as well
as 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. Additionally, the Company is continuing efforts
toward development and commercialization of its Tensile technology.
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 $10,871,585 and cash used in
operations of $6,772,132 for the nine months ended September 30, 2006. 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 which the Company believes
will provide sufficient cash to meet its funding requirements to commercialize
OnScreen(TM) technology product lines during 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, 2005.
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. Certain reclassifications
have been made to the 2005 comparative information to conform to the 2006
presentation.
7
NOTE 2 LOSS PER COMMON SHARE
Common stock equivalents in the three-month and nine-month periods ended
September 30, 2006 and 2005 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.
At September 30, 2006, 50,950,510 potential common stock shares are issuable
upon the exercise of warrants and options and conversion of debt to common
stock. These are excluded from computing the diluted net loss per share as the
effect of such shares would be anti-dilutive.
NOTE 3 INVENTORY
Inventories are stated at the lower of cost or market value. The first in first
out (FIFO) method is utilized for reporting inventories. During the three and
nine months ended September 30, 2006 inventory valuation was reduced by $243,837
and $595,167, respectively to reflect the market value of certain impaired
inventory. The following information is presented for inventory at September 30,
2006 and December 31, 2005:
September 30, 2006 December 31, 2005
------------------ ------------------
Work In Process $ 2,004,189 $ 0
Finished Goods 630,910 552,648
------------------ ------------------
Total Inventory $ 2,635,099 $ 552,648
================== ==================
NOTE 4 INCOME TAXES
The Company has not recognized an income tax benefit for its operating losses
generated in the three-month and nine-month periods ended September 30, 2006 and
2005 based on uncertainties concerning its ability to generate taxable income in
future periods. The tax benefits for the three-month and nine-month periods
ended September 30, 2006 and 2005 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 5 STOCK-BASED EMPLOYEE COMPENSATION
On January 1, 2006, the Company implemented Statement of Financial Accounting
Standard 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment" which
replaced SFAS 123 "Accounting for Stock-Based Compensation" and superseded APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires
the fair value of all stock-based employee compensation awarded to employees to
be recorded as an expense over the related vesting period. The statement also
requires the recognition of compensation expense for the fair value of any
unvested stock option awards outstanding at the date of adoption. During 2006,
all employee stock compensation is recorded at fair value using the Black
Scholes Pricing Model. In adopting SFAS 123(R), the Company used the modified
prospective application ("MPA"). MPA requires the Company to account for all new
stock compensation to employees using fair value and for any portion of awards
prior to January 1, 2006 for which the requisite service has not been rendered
and the options remain outstanding as of January 1, 2006, the Company recognized
the compensation cost for that portion of the award the requisite service was
rendered on or after January 1, 2006. The fair value for these awards is
determined based on the grant-date. As of January 1, 2006, accrued compensation
payable in common stock of $469,112 previously classified as a liability was
reclassified as equity due to the implementation of SFAS 123(R).
8
On June 26, 2000, the Company's Board of Directors adopted the OnScreen
Technologies, Inc. 2000 Stock Option Plan (the "Plan"). The Plan provides for
the issuance of incentive stock options (ISO's) to any individual who has been
employed by the Company for a continuous period of at least six months. The Plan
also provides for the issuance of Non Statutory Options (NSO's) to any employee
who has been employed by the Company for a continuous period of at least six
months, any director, or consultant to the Company. The Company may also issue
reload options as defined in the plan. The total number of common shares of
common stock authorized and reserved for issuance under the Plan is 600,000
shares. The Board shall determine the exercise price per share in the case of an
ISO at the time an option is granted and such price shall be not less than the
fair market value or 110% of fair market value in the case of a ten percent or
greater stockholder. In the case of an NSO, the exercise price shall not be less
than the fair market value of one share of stock on the date the option is
granted. Unless otherwise determined by the Board, ISO's and NSO's granted under
the Plan have a maximum duration of 10 years.
On August 25, 2005, the Board of Directors approved the 2005 Equity Incentive
Plan ("2005 Plan") for 2,000,000 shares of the Company's common stock. The 2005
Plan provides for the issuance of stock options to attract, retain and motivate
employees, to encourage employees, directors and independent contractors to
acquire an equity interest in the Company, to make monetary payments to certain
employees based upon the value of the Company's stock and provide employees,
directors and independent contractors with an incentive to maximize the success
of the Company and to further the interest of the shareholders. The 2005 Plan
provides for the issuance of Incentive Stock Options and Non Statutory Options.
The Administrator of the plan shall determine the exercise price per share at
the time an option is granted but the exercise price shall not be less than the
fair market value on the date the options is granted. Stock options granted
under the 2005 Plan have a maximum duration of 10 years.
The following information is presented for the non-vested stock options for the
three months and nine months ended September 30, 2006:
Three Months Ended Nine Months Ended
------------------------------------------------------------------
Weighted Weighted Avg.
Avg. Grant-date
Number of Grant-date Number of Fair
Shares Fair Value Shares Value
------------- ------------------------------------------------
Non-vested stock options at beginning of period
7,166,485 $ 0.27 151,250 $ 0.23
Granted during the period -- -- 8,757,485 $ 0.36
Vested during the period (58,750) $ 0.45 (1,781,000) $ 0.57
Forfeited during the period (6,365,235) (6,385,235)
============= =============
Non-vested stock options at September 30, 2006 742,500 $ 0.45 742,500 $ 0.45
============= =============
9
The following information is presented for the stock option activity for the
three months and nine months ended September 30, 2006:
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------- -------------- -------------
Weighted Weighted Aggregate
Average Average Average Weighted
Exercise Exercise Remaining Intrinsic
# of shares Price # of shares Price Contract Life Value
--------------- ------------- ---------------- ------------ -------------- -------------
Outstanding at
beginning of period: 14,327,485 $0.10 6,112,500 $0.19
Forfeited (7,115,235) $0.05 (7,157,735) $0.05
Granted -- -- 8,757,485 $0.04
Exercised (880,000) $0.01 (1,380,000) $0.08
--------------- --------------
Outstanding at
September 30, 2006 6,332,250 $0.16 6,332,250 $0.16 3.2 years $2,053,920
=============== ==============
Outstanding exercisable
at September 30, 2006 5,589,750 $0.17 5,589,750 $0.17 2.9 years $1,793,295
=============== ==============
The fair value of each stock option is estimated on the date of grant using a
Black Scholes Pricing Model. The fair value of options granted during 2006 was
estimated using the following approximate assumptions: dividend yield of 0%,
expected volatilities of 130% -202% (based on historical volatility over a range
of the expected term), risk-free interest rates of 4.4% - 5.2%, and expected
lives of 1 - 5 years (based on the contractual term of the option).
In accordance with SFAS 123(R), during the nine months ended September 30, 2006,
the Company recognized compensation expense of $1,000,921 for the fair value of
stock options over the vesting period. Due to the Company's net loss position,
there was no tax effect recognized. There was no impact on the Company's net
loss per share for this additional expense.
At September 30, 2006, the Company has $2,155,981 of unrecognized compensation
costs related to non-vested awards and the Company expects to recognize this
expense over the vesting period of the stock options.
During 2005, the Company accounted for the stock options and warrants issued to
employees, by applying 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.
10
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(R), for the three and nine
months ended September 30, 2005:
Three months ended Nine months ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net Loss Available to Common Stockholders:
Net loss available to common stockholders, as reported $ (2,454,166) $ (5,741,165)
Plus: Intrinsic value of compensation costs included in net
loss 5,817 62,051
Deduct: Fair value of stock-based employee compensation costs (12,598) (149,597)
--------------- ---------------
Pro forma net loss $ (2,460,947) $ (5,828,711)
=============== ===============
Loss per common share available to common stockholders:
Basic and Diluted - as reported $ (0.03) $ (0.08)
=============== ===============
Basic and Diluted - pro forma $ (0.03) $ (0.08)
=============== ===============
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 6 NOTES PAYABLE
On January 30, 2006, the Company entered into a promissory note with a vendor
for $375,474.99. The payment terms were $50,000 every two weeks for a total of
seven payments and an eighth payment of $25,475 on May 12, 2006. At June 30,
2006, this note has been paid off.
During February 2006, the Company entered into three-month convertible
promissory notes and received proceeds of $200,000. The Company had the option
to extend these notes for an additional three-month period. Also during the
first quarter of 2006, the Company executed unsecured six-month convertible
promissory notes totaling $5.1 million. The interest rate was 12% per annum. For
$200,000 of notes, the note holders had the right to convert the note to common
stock at the lower of the exercise price of $0.25 per share or the price set for
the equity round. For the other $5.1 million of notes, the shares will convert
to common stock if the Company's bid price reaches or exceeds $0.35 of five
consecutive days, then the notes will convert at $0.25 per share or the note
holder could elect at any time to convert the note at $0.25 per share to common
stock shares. The intrinsic value related to the convertible feature of the debt
was valued at $814,237 and was amortized over the three- to six-month term of
the notes. For each note, the note holder received a warrant of one share of
common stock for each $1 of note principal. The proceeds of the note were
allocated to the note and warrants based upon the fair market value of each.
This resulted in a discount on notes of $897,061 which was amortized over the
three- to six-month term of the notes.
11
Interest only payments are due monthly until the maturity of this note at which
time the principal is due. If the note is paid prior to the maturity date or the
extended maturity date, the Company is required to pay the interest for the
entire three- or six-month periods. The holders of the convertible notes have a
security interest to the extent of their principal and interest in all assets
currently owned by the Company including the patent portfolio.
The Company amended the notes with principal amounts of $4,950,000 to extend the
notes for an additional six months. The terms of the amended notes included the
notes automatically convert to shares of common stock if the Company's bid price
reaches or exceeds $0.35 for five consecutive days, then the notes will convert
at $0.25 per share. Also a warrant for 1 share of common stock was given to the
note holders for every $1 of note principal balance. These warrants were
recorded as a discount to debt at their fair market value of $898,500 which was
amortized over the term of the notes.
During March 2006, the bid price of the Company's stock exceeded $0.35 per share
for five consecutive days and convertible debt totaling $10,050,000 was
converted into 40,200,000 shares of common stock. The Company recorded
$1,362,093 of interest expense related to the remaining intrinsic value of
convertible debt and amortization of debt discount of the notes at the time the
debt was converted into common stock for those convertible debt instruments that
had a beneficial conversion feature. For those convertible debt instrument that
did not have a beneficial conversion feature, the unamortized debt discount of
$1,012,102 was recorded as a credit to equity at the time of conversion.
On April 4, 2006, the Company converted $250,000 of convertible unsecured notes
into 1,000,000 shares of its common stock at $0.25 per share. The Company
recorded $127,500 of interest expense related to the remaining intrinsic value
of convertible debt and amortization of debt discount of the note at the time
the debt was converted into common stock.
As of June 30, 2006 the convertible debt totaling $10,300,000 was converted into
41,200,000 shares of common stock.
On May 19, 2006 the Company entered into a promissory note for $500,000.
Interest on this note accrues at the rate of 10% per annum and is payable at the
time the note is paid in full. The note is payable when a proposed offering of
the Company's securities, with the note holder as placement agent, closes, or,
in the event that the proposed offering does not close on or before the close of
business on October 31, 2006, the note is payable thirty days after demand for
payment from the holder.
On May 15, 2006 the Company entered into a promissory note with a shareholder
for $1,000,000. Interest accrues at 12% per annum, payable monthly, with the
first interest payment of $10,000 due June 5, 2006. The principal is payable in
one installment on November 15, 2007. The note holder has the right to convert
the note to the Company's common stock at the greater of a per share price equal
to 80% of the average closing bid price of the stock for 10 days preceding the
conversion date or $0.20. In accordance with FASB 155, the Company recorded this
note at fair value. The intrinsic value related to the convertible feature of
the note was valued at $339,553 which will be amortized over the term of the
note.
On August 28, 2006 the Company entered into a one-month promissory note with a
director of the Company for $150,000. Interest on this note accrues at the rate
of 12%. On September 28, 2006 the promissory note was extended an additional 30
days with both principal and accrued interest for two months due by October 28,
2006.
12
During August 2006, the Company entered into unsecured eighteen-month
convertible promissory notes totaling $486,000. Interest accrues at 12% per
annum, payable monthly, until the maturity of these notes at which time the
principal is due. The note holder has the right to convert the note to the
Company's common stock at the greater of a per share price equal to 80% of the
average closing bid price of the stock for 10 days preceding the conversion date
or $0.20. During September 2006, note holders converted $156,000 of the notes
into the Company's common stock.
During September 2006, the Company entered into unsecured eighteen-month
convertible promissory notes totaling $240,000. Interest accrues at 12% per
annum, payable monthly, until the maturity of these notes at which time the
principal is due. The note holder has the right to convert the note to the
Company's common stock at the greater of a per share price equal to 80% of the
average closing bid price of the stock for 10 days preceding the conversion date
or $0.20. During September 2006, note holders converted $10,000 of the notes
into the Company's common stock.
NOTE 7 DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
On January 1, 2006, the Company implemented SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments". This statement allows the Company to
elect fair value measurement of hybrid financial instruments on an instrument-by
instrument basis in cases in which a derivative would otherwise have to be
bifurcated.
The Company does not use derivative financial instruments to hedge exposures to
cash flow or market risks. However the promissory note entered into during the
second quarter with a shareholder had an embedded conversion option to purchase
the Company's stock, with the number of shares indexed to the Company's future
stock price. Accordingly, the embedded conversion option qualified during the
second quarter as a derivative. This promissory note was amended on September
28, 2006 to include a conversion to equity floor price per share of $0.20
resulting in the promissory note no longer qualifying as a derivative financial
instrument.
If any of the derivatives could potentially result in the Company's having
indeterminable shares (i.e. from a conversion price that is indexed to the
Company's stock price), then, per the Emerging Issues Task Force ("EITF") 00-19
Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in, a Company's own Stock the Company is required to classify all
outstanding non-employee warrants or options at fair value as a derivative
liability. The initial entry to record the derivative liability for these
outstanding warrants is a reclassification from additional paid-in-capital of
the fair value of the warrants as of the reclassification date (May 15, 2006).
At each subsequent reporting period, the Company continues to record these
instruments at fair value as a derivative liability with any difference recorded
as a change in the fair value of warrant liability under other income or expense
in the Statement of Operations until such time as the Company no longer has an
instrument with indeterminate shares. As of the nine months ended September 30,
2006, the Company no longer has any instruments with indeterminate shares. For
the three months and nine months ended September 30, 2006, a change in the fair
value of warrant liability under other income and expense of $2,039,181 and
$3,718,543, respectively was recorded for derivative liabilities. As of
September 28, 2006 the balance of the warrant liability of $5,668,578 was
reclassified to equity. The fair value was computed at June 30 2006 and at
September 28, 2006 using the Black-Scholes option pricing model with the
following assumptions:
13
June 30, 200 September 28, 2006
------------ ------------------
Expected Volatility (based on historical
volatility) 120.7% 122.7%
Expected Term (based on weighted average
contractual term of warrants) 2.5 years 2.5 years
Expected Dividends 0 0
Discount Rate 5.130% 4.600%
NOTE 8 TECHNOLOGY RIGHT AND LICENSE AGREEMENT
Effective March 24, 2006, the Company purchased from CH Capital, Inc. all right,
title and interest in and to the WayCool technology, patent application and
Letters Patent. CH Capital, Inc. is a related party controlled by a director and
an officer of the Company. To acquire this technology, the Company paid $800,000
to CH Capital, Inc. and agreed to issue CH Capital, Inc. a three year warrant to
acquire up to 7,040,485 shares of common stock at $0.20 per share. The warrant
is valued at $3,520,243 using the Black Scholes option pricing model with the
following assumptions:
Estimated Volatility (based on historic volatility) 131.4%
Expected Term (based on contractual term) 3 years
Expected Dividends 0
Discount Rate 4.69%
NOTE 9 COMMITMENTS
On February 1, 2006, the Company entered into an agreement with a consultant to
provide research and development services. For these services, the Company pays
a monthly fee of $50,000 over a one-year period.
On April 1, 2006, the Company entered into an agreement with a consultant to
provide research and development services. For these services, the Company pays
a monthly fee of $15,000 over a one year period.
On June 1, 2006, the Company entered into an agreement with a consultant to
provide sales and marketing services. For these services, the Company pays a
monthly fee of $15,000.
NOTE 10 PREFERRED STOCK
During the nine months ended September 30, 2006, the Company converted 24,000
shares of the Company's Series A convertible preferred stock into 96,000 shares
of the Company's common stock at the request of certain Series A convertible
preferred stock holders.
14
During the nine months ended September 30, 2006, the Company issued 250,000
shares of its Series A and 1,000 shares of Series B convertible preferred stock
to its Chief Financial Officer in accordance with his employment agreement. The
250,000 shares of Series A convertible preferred stock were valued at $1.00 per
share based on contemporaneous cash sales around the grant date. The 1,000
shares of Series B convertible preferred stock were valued at $270 per share
based on contemporaneous cash sales around the grant date. The total value of
these shares of $520,000 was expensed over the requisite service period. During
July 2006, the 250,000 shares of Series A convertible preferred were converted
into 1,250,000 shares of the Company's common stock at the conversion ratio of
four common plus one bonus share for each share of Series A Preferred. The 1,000
shares of Series B convertible preferred were converted into 1,250,000 shares of
the Company's common stock at the conversion ratio of 1,000 common plus 250
common bonus shares for each share of Series B Preferred.
During the three months ended September 30, 2006, the Company converted
1,461,175 shares of the Company's Series A convertible preferred stock into
7,305,875 shares of the Company's common stock at the request of certain Series
A convertible preferred stock holders. The conversion ratio was four common plus
one common bonus share for each share of Series A Preferred. The Company also
converted accrued dividends of approximately $134,905 into 674,523 shares of the
Company's common stock at a per share price of $0.20 for those shareholders who
elected to convert accrued dividends to common shares.
NOTE 11 OTHER EQUITY TRANSACTIONS
During the nine months ended September 30, 2006, the Company issued 113,883
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
of $0.2195 per share at December 31, 2005, in accordance with the employee's
employment agreement.
During the nine months ended September 30, 2006, the Company issued 150,000
shares of its common stock that it had accrued for at December 31, 2005.
During the nine months ended September 30, 2006, the Company issued 100,000
shares of its common stock for investor relation services. These shares were
valued at $20,000 based upon the $ 0.20 per share quoted market price of the
stock on the date of grant and were recorded as administrative expenses during
2006
During the nine months ended September 30, 2006, the Company converted
$10,300,000 of convertible unsecured notes into 41,200,000 shares of its common
stock at $0.25 per share.
During the nine months ended September 30, 2006, warrants for 7,175,000 shares
of its common stock at a price of $0.01 were exercised. The Company issued
7,175,000 of these shares.
During the nine months ended September 30, 2006, the Company issued 500,000
shares of its common stock at $0.20 per share under its Employee Equity
Ownership agreements.
During the nine months ended September 30, 2006, the Company issued 100,000
shares of its common stock for sales and marketing services. These shares were
valued at $20,000 based on the quoted market price of the stock on the date of
grant and were recorded as consulting expenses during 2006
15
During the nine months ended September 30, 2006, the Company recorded
compensation expense of $1,000,921 for stock options that the requisite service
was performed during the nine months ended September 30, 2006. The compensation
expense is recorded over the vesting period based upon fair market value of the
options using the Black Scholes option model in accordance with SFAS 123(R) as
discussed in Note 4 - Stock-Based Employee Compensation.
The Company also recorded $469,112 of compensation expense for stock that is to
be issued based upon employment agreements that the requisite service had been
performed by January 1, 2006 when the Company implemented SFAS 123(R). It had
previously been recorded as accrued expenses payable with common stock recorded
on the balance sheet. The Company also recorded an additional $187,423 of
compensation expense for stock that is to be issued based upon employment
agreements that the requisite service had been performed as of the nine months
ended September 30, 2006.
During the nine months ended September 30, 2006, the Company recorded consulting
expense of $320,840 for stock warrants for non-employees to acquire 698,001
shares of the Company's common stock. The $320,840 of consulting expense was
expensed during the first nine months of 2006 as the services had been provided.
The $320,840 value was based upon fair market value of the options using the
Black Scholes option model. These warrants were valued using the following
assumptions:
Estimated Volatility (based on historic volatility) 128.4% - 159.5%
Expected Term (based on contractual term) 1 - 3 years
Expected Dividends 0 Discount Rate 4.69% - 5.10%
On June 29, 2006, the Company obtained shareholder approval to increase the
number of authorized common stock shares from 150,000,000 to 200,000,000.
NOTE 12 SUBSEQUENT EVENTS
During October 2006, the Company entered into unsecured eighteen-month
convertible promissory notes which total $3,255,000. Interest accrues at 12% per
annum, payable monthly, until the maturity of these notes at which time the
principal is due. The note holder has the right to convert the note to the
Company's common stock at the greater of a per share price equal to 80% of the
average closing bid price of the stock for 10 days preceding the conversion date
or $0.20. During October 2006, note holders converted $2,655,000 of the notes
into the Company's common stock.
During October 2006, note holders converted $460,000 of the unsecured
eighteen-month convertible promissory notes generated during the third quarter
into the Company's common stock.
During October and November 2006, warrants for 692,287 shares of its common
stock at a price of $0.01 were exercised.
During November 2006, the Company converted 15,000 shares of the Company's
Series A convertible preferred stock into 75,000 shares of the Company's common
stock at the request of a Series A convertible preferred stock holder. The
conversion ratio was four common plus one common bonus share for each share of
Series A Preferred. The Company also converted accrued dividends of
approximately $1,500 into 7,500 shares of the Company's common stock at a per
share price of $0.20 for the shareholder who elected to convert accrued
dividends to common shares.
16
On November 2, 2006, the Company paid the remaining principal and interest due
of $153,200 on the promissory note that it had entered into on August 28, 2006
with director of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Result
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.
The Company cautions 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) has pioneered and is commercializing
innovative thermal management solutions capable of revolutionizing the LED
display, semiconductor and electronic packaging industries. Utilizing its
patent-pending thermal technologies and architecture, the Company has developed
highly advanced, proprietary LED display solutions and cooling applications that
provide increased performance and are less expensive to install and support than
competing products and technologies.
The Company is primarily focused on commercialization of its innovative thermal
cooling technology, WayCool, and the commercial adoption of its sign display
platform product under the name RediAlert(TM). Additionally, the Company is
continuing efforts towards development and commercialization of its Tensile
technology. The Company's product lines utilize the OnScreen(TM) direct view LED
(light emitting diode) sign display technology (sometimes referred to as the
"OnScreen(TM) LED architecture" or "OnScreen(TM) technology" or "OnScreen(TM)
LED technology"). The Company's plan is to focus all of its resources on the
commercialization of the OnScreen (TM) technology.
The Company's LED products are specially designed to provide display solutions
into vertical markets including commercial and government. The OnScreen(TM) LED
architecture provides a platform for the production of LED display products in
the current market that is lighter than competitive products and provides a
corresponding reduction in wind loading. These architectural benefits yield
products that could be easy to install, are portable and require less support
infrastructure, which opens new markets for LED message display products.
17
The Company's RediAlert(TM) Rapid Dispatch Emergency Signs product line provides
the world's first truly portable LED product for Emergency Response and
commercial advertising using the OnScreen(TM) LED sign technology. Powered by
battery and transported by any vehicle, these products give highly visible
emergency information or advertising messages in less than five minutes of set
up time. The Company began shipping the RediAlert(TM) product line during the
third quarter of 2006.
The Company does not expect to record any significant growth in revenues until
the WayCool technology is commercialized and its RediAlert(TM) product line is
fully deployed nationwide.
During the nine months ended September 30, 2006, the Company continued to incur
significant losses from operations. The Company incurred a net loss of
$10,871,585 for the nine months ended September 30, 2006. This net loss of
$10,871,585 includes non-cash charges of $2,710,440 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,
$2,358,217 of non-cash amortization of the intrinsic value of convertible debt
and the debt discount, and $2,780,000 of non-cash loss for the value of warrants
issued as a settlement.
Management has continued to raise the capital needed to fund the development and
marketing of the Company's OnScreen(TM) products during 2006. During the nine
months ended September 30, 2006 the Company received proceeds of $7.7 million
for unsecured notes less $0.4 million of expenses. 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, trademarks
and services. These include confidentiality, invention assignment and
nondisclosure agreements with the Company's employees, 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. 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 the
Company will report in the Company's financial statements. Some of the Company's
accounting policies require the Company 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.
18
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
and equity stock accounts.
Patent Costs
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, 2006 is
$185,800. The Company has a net working capital balance at September 30, 2006 of
$412,017. 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 $6,772,132 for the nine months ended September 30, 2006.
19
During the first nine months of 2006 and 2005, the Company has used stock and
warrants as a form of payment to certain vendors, consultants and employees. For
the first nine months of 2006, the Company recorded a total of $2,710,440 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.
During the first nine months of 2006, the Company recorded two additional
significant non-cash entries - interest expense of $2,358,216 for the intrinsic
value of convertible debt and the amortization of debt discount and $2,629,984
in net settlement loss.
As the Company focuses on the OnScreen(TM) technology during 2006, 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 RediAlertTM product line is
fully deployed nationwide. The RediAlertTM product line began shipping during
the third quarter of 2006.
Capital Expenditures and Investments
During the first nine months of 2006, the Company invested $25,150 in fixed
assets. During the remainder of 2006, the Company anticipates that its capital
expenditures should not significantly change. The Company outsources the
manufacture of its products.
The Company invested $76,375 in patent costs and $800,000 in technology rights
during the first nine months of 2006. The Company expects its investment in
patent costs will continue throughout 2006 as it invests in patents to protect
the rights to use its OnScreenTM product developments.
Financing activities
During the first nine months of 2006, the Company received $7,294,950 of
proceeds from unsecured convertible notes. The Company paid $375,475 on an
unsecured notes payable during the first nine months of 2006. During the first
nine months of 2006, the Company converted $10,466,000 of convertible unsecured
notes into 41,806,425 shares of its common stock. The Company plans on raising
the capital needed to fund the further development and marketing of the
Company's products.
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 $726,000 of proceeds from a private placement of
convertible notes and $150,000 of proceeds in other notes during the third
quarter of 2006 and the Company is continuing to raise funds. 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 commercialized during 2006 and 2007.
The Company cannot assure that it will generate material 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.
20
Results of Operations
Revenue
During the nine months ended September 30, 2006, revenue was $148,950 and
$90,653 for the same period during 2005. The revenue for the nine months ended
September 30, 2006 is comprised of $80,860 from Living WindowTM products and
related add-ons, $47,990 from RediAlert products, and $20,100 from other income.
For the nine months ended September 30, 2005, the Company recorded revenue of
$49,433 from Living WindowTM products and related add-ons, $37,176 from the LED
Truck rental, and $4,044 from other income.
During the three months ended September 30, 2006 and 2005, revenue was $84,145
and $37,534, respectively. The revenue for the three months ended September 30,
2006 is comprised of $47,990 from RediAlert sales, $27,755 from Living WindowTM
products and related add-ons and $8,400 from other income. For the three months
ended September 30, 2005, the Company recorded $33,135 from Living WindowTM
products and related add-ons, $1,500 from the LED Truck rental and $2,899 from
other income.
As the Company ships its RediAlertTM product line during the second half of
2006, the Company expects its revenues will increase during 2006 compared to the
prior year.
Cost of revenue
The cost of revenue for the nine months ended September 30, 2006 and 2005 was
$772,836 and $121,185, respectively. For the three months ended September 30,
2006 and 2005, the cost of revenue was $327,131 and $57,945, respectively. The
significant increase during 2006 compared to prior year is primarily the result
of an inventory write-down of impaired inventory to market value of $595,167.
While the Company's sales are low, it expects the cost of sales to fluctuate
between periods as a percentage of its revenues.
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 increased from $3,847,681 for the nine months ended September 30,
2005 to $5,578,666 for the same period during 2006. This increase of $1,730,985
is primarily the result of increased non-cash expenses of approximately $1.6
million as well as the Company is putting in place the infrastructure in to
support the distribution of the OnscreenTM product lines.
For the three months ended September 30, 2006 compared to the same period in
2005, SG&A expenses decreased $602,590 primarily the result of lower non-cash
expenses.
To conserve its cash, the Company continues to pay certain expenses through
equity compensation versus cash compensation and during the nine months ended
September 30, 2006, the Company recorded approximately $2.5 million related to
equity compensation that was granted to certain employees and consultants for
their services provided to the Company.
21
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 $75,347 and
$975,347 in research and development during the three and nine months ended
September 30, 2006, respectively compared to the same period in 2005 is a result
of activities to further research and develop the OnScreen(TM) technology and
products. During the nine months ended September 30, 2006, the Company recorded
approximately $200,000 of non-cash compensation for research and development
consulting services provided to the Company. The Company anticipates increasing
its expenditures in research and development during the remainder of 2006
compared to 2005.
Restructuring Costs
The Company incurred $13,967 of restructuring costs during the nine months ended
September 30, 2006 related to the move from Florida to Oregon.
Other Income
The investment income remained relatively unchanged during the three and nine
months ended September 30, 2006 compared to the same period in 2005. The Company
does not expect this item to be significant during the balance of 2006.
Settlement Gain (Loss), Net
The Company recorded a net settlement gain (loss) for the three and nine months
ended September 30, 2006 of $175,000 and $(2,489,507), respectively. The Company
did not have any significant settlement gain (loss) during the three and nine
months ended September 30, 2005.
The Company recorded a settlement gain for the three and nine months ended
September 30, 2006 of $175,000 and $290,493, respectively. During 2005, the
Company reached a settlement with Capitol City Trailers regarding the use of one
of its trucks. For the nine months ended September 30, 2006, the Company had
received $20,833, which it has recorded as a settlement gain. During the first
quarter of 2006, the Company reached a settlement with Mobile Magic where Mobile
Magic agreed to pay $175,000 as settlement of the Company's claim against it.
Due to the financial condition of Mobile Magic, the Company had not recorded as
of June 30, 2006 a receivable of $175,000 for the remaining amount. During
August 2006, Mobile Magic paid the first installment of $50,000 due per the
agreement. The settlement of $175,000 with Mobile Magic was recorded during the
third quarter as a settlement gain. The Company also had recorded approximately
$150,000 as a payable to Mobile Magic who was constructing a truck that the
Company never received. As part of the agreement the Company does not owe the
$150,000 and recorded a settlement gain for this amount during the first quarter
of 2006. This was offset by legal fees for approximately $65,000.
During April 2006 the Company negotiated the terms of a full and final
settlement with Fusion Three, LLC whereby Fusion Three, LLC relinquishes all
rights and claims to any revenues and fees in consideration for the Company
issuing to Fusion Three, LLC a three year warrant authorizing Fusion Three, LLC
to purchase up to 5,600,000 shares of common stock at a per share price of
$0.20. The Company also agreed to issue Fusion Three, LLC a warrant to purchase
up to 1,200,000 shares of common stock at per share price of $0.35 for 300,000
shares; $0.50 for 300,000 shares; $0.75 for 300,000 shares and $1.00 for 300,000
shares before November 15, 2007. During the second quarter of 2006, the Company
recorded a net settlement loss of $2,780,000 associated with this transaction.
22
Change in value of warrant liability
During the three and nine months ended September 30, 2006, a gain of $2,039,181
and $3,718,543, respectively was recorded for derivative liabilities. The
Company no longer has any financial instruments with indeterminate shares and as
such the value of warrant liability at September 30, 2006 has been reclassified
to equity.
Intrinsic value of convertible debt and amortization of debt discount
The Company recorded an expense of $158,489 and $2,358,217 for the three and
nine months ended September 30, 2006, respectively for the intrinsic value of
convertible debt and the amortization of debt discount. There were no remaining
unamortized debt discount amounts at September 30, 2006.
Interest Expense
The interest expense of $819,385 and $1,504,089 for the three and nine months
ended September 30, 2006, respectively is for the interest on the unsecured
convertible notes payable and deferred financing fees. Deferred financing fees
were $768,000 and $1,169,050 for the three and nine months ended September 30,
2006. The interest expense of $76,451 and $133,001 for the three and nine months
ended September 30, 2005, respectively, was for unsecured notes payable entered
into in late March 2005.
Preferred Stock Dividends
During the nine months ended September 30, 2006 and 2005, the Company recorded
Series A Convertible Preferred Stock dividends of $49,801 and $154,350,
respectively and Series B Convertible Preferred Stock dividends of $125 and
zero, respectively. During the three months ended September 30, 2006, the
Company recorded income of $49,794 as Series A Convertible Preferred
shareholders accepted the Company's offer to receive all outstanding dividends
through March 2006 in either cash or common shares at a per share price of
$0.20. The Company recorded during the three months ended September 30, 2005
Series A Convertible Preferred Stock dividends of $48,144.
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.
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(a) Our management, including the principal executive officer and
principal financial officer, do not expect that our disclosure controls and
procedures will prevent all error and fraud. A control system, no matter how
well conceived and operated, can only provide reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within our Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, collusion of two or
more people, or by management override of the control. The design of any system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
(b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal control
over financial reporting that could significantly affect these controls during
quarter ended September 30, 2006. We have not identified any significant
deficiency or material weaknesses in our internal controls, and therefore there
were no corrective actions taken.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
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 2006, the Company issued 606,425 shares of its common stock associated with
the conversion of $166,000 of convertible debt.
The Company relied on Section 4(2) of the Securities Act of 1933 as the basis
for an exemption from registration for these shares to be issued. During the
third quarter of 2006, the Company issued 1,250,000 shares of its common stock
to an employee in accordance with his employment agreement.
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 2006, the Company issued 880,000 shares of its common stock to former
employees for the exercise of warrants. The warrants were exercised for proceeds
of $8,800.
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 2006, the Company issued 100,000 shares of its common stock to a consultant
for the exercise of a warrant. The warrant was exercised for proceeds of $1,000.
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 2006, the Company issued a total of 1,591,667 shares of its common stock to
certain former note holders for the exercise of warrants. The warrants were
exercised for proceeds of $15,917.
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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 2006, certain Series A Preferred Stock holders converted 1,586,175 shares of
Series A Preferred Stock to 7,930,875 shares of the Company's common stock.
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 2006, certain Series B Preferred Stock holder converted 500 shares of Series
B Preferred Stock to 625,000 shares of the Company's common stock.
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 2006, certain Series A Preferred Stock holders converted $134,905 of Series A
Preferred Stock dividends to 674,523 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 and Reports on Form 8-K
(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.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on August 31, 2006 in connection
with the departure of Charles R. Baker as Chief Executive Officer, President and
Director of the Company and appointment of Steven S. Hallock to the Board of
Directors.
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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 14th day of November 2006.
OnScreen Technologies, Inc.
(Registrant)
by: /s/ Russell L. Wall
----------------------------------------------------
Russell L. Wall
Chief Executive Officer/Director
by: /s/ Mark R. Chandler
----------------------------------------------------
Mark R. Chandler
Chief Financial Officer/Principal Accounting Officer
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