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 June 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 (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
200 9th Avenue North, Suite 210
Safety Harbor, Florida 34695
(727) 797-6664
------------------------------------------------------------
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
John "JT" Thatch, President
(727) 797-6664 OnScreen
Technologies, Inc.
200 9th Avenue North, Suite 210
Safety Harbor, Florida 34695
(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 July 15, 2005, there were 70,649,719 shares of the Company's common stock
outstanding, 1,500,000 shares of common stock issuable, 1,935,718 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 11
Overview 11
Intellectual Property 12
Critical Accounting Policies 12
Liquidity and Capital Resources 13
Results of Operations 15
Item 3 Controls and Procedures 17
Part II
Item 1 Legal Proceedings. 17
Item 2 Changes in Securities 17
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits 18
Signatures 18
Exhibits 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONSCREEN TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
June 30, 2005 December 31,
(Unaudited) 2004
------------- -------------
Assets
Current Assets
Cash and cash equivalents $ 568,474 $ 1,561,650
Marketable securities available-for-sale -- 401,233
Accounts receivable, net of allowance of $1,605 at June 30, 2005 and -0- at
December 31, 2004 19,547 1,605
Inventory 331,844 --
Prepaid expenses and other current assets 207,098 38,354
------------ ------------
Total Current Assets 1,126,963 2,002,842
Property and Equipment, net of accumulated depreciation of $369,339 at June
30, 2005 and $317,845 at December 31, 2004 336,411 299,951
------------ ------------
Other Assets
Restricted marketable securities available-for-sale 27,827 30,000
Technology rights, net of accumulated amortization of $140,833 at June 30, 2005
and $130,833 at December 31, 2004 381,667 391,667
Patent Costs 357,414 48,657
Other assets 17,160 14,360
------------ ------------
Total Other Assets 784,068 484,684
------------ ------------
Total Assets $ 2,247,442 $ 2,787,477
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and other payables $ 420,149 $ 213,226
Note payable, related party 1,500,000 --
Accrued expenses 319,288 323,797
------------ ------------
Total Current Liabilities 2,239,437 537,023
Accrued expenses payable with common stock 363,133 245,669
------------ ------------
Total Liabilities 2,602,570 782,692
------------ ------------
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 June 30, 2005; 1,935,718 and 2,772,205 shares outstanding at
June 30, 2005 and December 31, 2004, respectively; liquidation preference
of $1,935,718 at June 30, 2005 1,936 2,772
Convertible Series B preferred stock, 30,000 shares authorized, no
shares issued and outstanding, liquidation preference of $240 per share -- --
Common stock, par value $0.001; 150,000,000 shares authorized,
70,649,719 and 63,680,020 shares issued and outstanding at
June 30, 2005 and December 31, 2004, respectively 70,650 63,680
Common stock issuable, at par value, (1,500,000 shares at June 30, 2005) 1,500 --
Additional paid-in capital 23,377,706 22,150,289
Accumulated deficit (23,060,673) (19,773,674)
------------ ------------
391,119 2,443,067
Treasury stock (225) --
Less Accumulated other comprehensive loss (2,820) --
Less deferred compensation expense (743,202) (438,282)
------------ ------------
Total Stockholders' Equity (355,128) 2,004,785
------------ ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,247,442 $ 2,787,477
============ ============
See accompanying notes to financial statements
3
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months For the six months
ended June 30, ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues $ 32,626 $ 47,034 $ 53,119 $ 81,193
Cost of Revenues 45,868 488 63,240 488
------------ ------------ ------------ ------------
Gross Profit (13,242) 46,546 (10,121) 80,705
Operating Expenses
Selling, general and administrative 1,609,287 3,416,356 2,484,432 5,076,095
Research and development 373,250 201,084 635,450 359,241
Bad debt expense 1,605 11,638 1,605 11,638
------------ ------------ ------------ ------------
Total Operating Expenses 1,984,142 3,629,078 3,121,487 5,446,974
------------ ------------ ------------ ------------
Loss from Operations (1,997,384) (3,582,532) (3,131,608) (5,366,269)
------------ ------------ ------------ ------------
Other Income (Expense)
Other income 323 11,254 7,365 18,810
Settlement gain (loss), net (300) 15,029 (300) 315,301
Interest expense (54,375) (8,558) (56,250) (64,070)
------------ ------------ ------------ ------------
Total Other Income (Expense), Net (54,352) 17,725 (49,185) 270,041
------------ ------------ ------------ ------------
Net Loss (2,051,736) (3,564,807) (3,180,793) (5,096,228)
Preferred Stock Dividends (47,115) (72,541) (106,206) (196,022)
------------ ------------ ------------ ------------
Net Loss Available to Common Stockholders $ (2,098,851) $ (3,637,348) $ (3,286,999) $ (5,292,250)
============ ============ ============ ============
Basic and Diluted Loss Per Common Share $ (0.03) $ (0.12) $ (0.05) $ (0.18)
============ ============ ============ ============
Basic and Diluted Loss Per Common Share
Available to Common Stockholders $ (0.03) $ (0.13) $ (0.05) $ (0.19)
============ ============ ============ ============
Weighted average common shares outstanding 70,049,143 28,814,299 67,803,478 28,235,562
============ ============ ============ ============
See accompanying notes to financial statements
4
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
For the six months ended June 30,
---------------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,180,793) $(5,096,228)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock, warrants and notes issued for compensation and services 38,500 1,827,335
Stock based settlement gain, net -- (300,272)
Non-cash interest expense for stock issued to noteholders that were in default -- 46,500
Non-cash interest expense -- 17,571
Bad debt expense 1,605 11,638
Amortization of technology rights 10,000 107,917
Amortization of deferred consulting and compensation 226,713 1,776,740
Compensation expense payable in common stock 678,132 135,624
Depreciation 53,165 82,608
Other 6,198 --
(Increase) decrease in assets:
Accounts receivable and other receivables (19,547) (25,975)
Due from affiliate -- (10,643)
Inventory (331,844) --
Prepaid expenses and other current assets (170,901) (108,306)
Deposits and other assets (3,447) (20,354)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 237,511 (421,297)
Deferred revenues 2,104 (8,035)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,452,604) (1,985,177)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in technology rights -- (522,500)
Investment in patents (308,757) --
Proceeds from sales of marketable securities 396,351 --
Purchase of property and equipment (90,941) (28,545)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,347) (551,045)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Series A convertible preferred stock dividends paid (121,250) (115,842)
Purchase of treasury stock (225) --
Proceeds from notes and loans payable 1,500,000 --
Payments on notes and loans payable -- (302,511)
Proceeds from sales of common stock and exercise of warrants
and options, net of offering costs 84,250 3,335,738
Proceeds from issuance of preferred stock - Series A -- 75,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,462,775 2,992,385
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ (993,176) $ 456,163
Cash and Cash Equivalents at Beginning of Year 1,561,650 1,323,923
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIODS $ 568,474 $ 1,780,086
=========== ===========
(Continued)
5
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
(continued)
For the six months
ended June 30,
-------------------
2005 2004
-------- --------
Accrued Compensation settled with Series A preferred stock $ -- $ 24,000
======== ========
Debt and accrued liability settled/paid with common stock $181,289 $391,961
======== ========
Common stock issued for deferred compensation $710,333 $ --
======== ========
Subscription receivable paid with reduction of notes payable $ -- $ 18,575
======== ========
Conversion of Series A convertible preferred stock to common stock $ 1,076 $ 30
======== ========
Series A preferred stock dividend resulting from intrinsic value of $ -- $ 52,000
convertible preferred stock
======== ========
Series B preferred stock dividend resulting from intrinsic value of
convertible preferred stock $ -- $ 24
======== ========
Cancellation of warrant $ 27,200 $ --
======== ========
Other comprehensive loss from unrealized loss $ 2,820 $ --
======== ========
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 $3,286,999 and cash used in
operations of $2,452,604 for the six months ended June 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 six-month periods ended June 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 six-month periods ended June 30, 2005 and 2004 based
on uncertainties concerning its ability to generate taxable income in future
periods. The tax benefits for the three- and six-month periods ended June 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 six months ended
June 30, 2005 and 2004:
8
Three months ending June 30, Six months ending June 30,
---------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net Loss Available to Common
Stockholders:
Net loss available to common
stockholders, as reported $(2,098,851) $(3,637,348) $(3,286,999) $(5,292,250)
Plus: Intrinsic value of
compensation costs included
in net loss 45,767 38,067 56,234 92,334
Deduct: Fair value of
stock-based employee
compensation costs (43,366) (49,960) (136,999) (121,040)
----------- ----------- ----------- -----------
Pro forma net loss $(2,096,450) $(3,649,241) $(3,367,764) $(5,320,956)
=========== =========== =========== ===========
Loss per common share
available to common
stockholders:
Basic and Diluted - as reported $ (0.03) $ (0.13) $ (0.05) $ (0.19)
=========== =========== =========== ===========
Basic and Diluted - pro forma $ (0.03) $ (0.13) $ (0.05) $ (0.19)
=========== =========== =========== ===========
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
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. One of the Company's board of directors has an interest in the
company that is the note holder.
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 directors has an 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 CEO/President's employment
agreement. The term of the agreement was extended three years expiring on
December 31, 2008. The 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 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.
9
On June 13, 2005, the Company entered into a three-year employment agreement
with a newly hired Chairman of the Board of Directors. 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 $455,625 was recorded as compensation expense as of June 30, 2005
and $50,625 was recorded as accrued compensation payable with common stock at
June 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
June 30, 2005.
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.
NOTE 10 PREFERRED STOCK
During the six months ended June 30, 2005, the Company converted 1,076,487
shares of the Company's Series A convertible preferred stock into 4,305,948
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 $120,000 deferred
and $120,000 expensed as of June 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 six months ended June
30, 2005, the Company repurchased 150,000 shares of common stock for $225 from
one of its employees who left the Company. These shares are recorded as treasury
stock shares. 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 the six months ended June 30, 2005.
10
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 at December 31, 2004.
During 2005, warrants and options were exercised to purchase 335,000 of the
Company's common stock. The Company received $84,250 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.
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
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 six months ended June 30, 2005, the Company continued to incur
significant losses from operations. The Company incurred a net loss of
$3,286,999 for the six months ended June 30, 2005. This net loss of $3,286,999
includes non-cash charges of approximately $943,000 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.
11
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 six months ended June 30, 2005 the Company received proceeds of $1.5
million for an unsecured six-month note 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, 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.
12
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
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 June 30, 2005 is $568,474.
The Company has a negative working capital balance at June 30, 2005 of
$1,112,474. 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 $2,452,604 for the six months ended June 30, 2005.
During the first six 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 six months of 2005, the Company recorded a total of approximately
$943,000 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.
13
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 six months of 2005, the Company invested approximately $91,000
in fixed assets which includes approximately $24,000 for fixed assets which was
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. 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 $308,757 in patent costs during the first six 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 six months of 2005.
Financing activities
During the second quarter of 2005, the Company received proceeds of $84,250 from
the exercise of warrants and options. During the first six month of 2005, the
Company received $1.5 million of proceeds from a six-month unsecured note. 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 six months of 2005, the Company paid $121,250 of 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.
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 is currently in the final stages of negotiating a private placement
of convertible notes of between $1,000,000 to $2,000,000. The Company
anticipates the interest rate on these notes will be 12% with an initial
maturity date of 90 days, which can be extended for an additional 90 days, at
the option of the Company. The Company anticipates the initial conversion price
will be approximately $.25, subject to further adjustment and negotiation. 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 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.
14
Results of Operations
Revenue
During the six months ended June 30 2005, revenue was $53,119 and $81,193 for
the same period during 2004. The revenue for the six months ended June 30, 2005
is comprised of $17,443 from living windowTM products and related add-ons and
$35,676 from the LED Truck rental. For the six months ended June 30, 2004, the
Company recorded $68,500 of revenue from the LED Truck and $12,693 of other
revenue.
During the three months ended June 30 2005, revenue was $32,626 and $47,034 for
the same period during 2004. The revenue for the three months ended June 30,
2005 is comprised of $17,443 from living windowTM products and related add-ons
and $15,183 from the LED Truck rental. For the three months ended June 30, 2004,
the Company recorded $39,500 of revenue from the LED Truck and $7,534 of other
revenue.
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 six months ended June 30, 2005 and 2004 was $63,240
and $488, respectively. For the three months ended June 30, 2005 and 2004, the
cost of revenue was $45,868 and $488, respectively. Given the low sales volumes
the Company expects it 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 $5,076,095 for the six months ended June 30, 2004
to $2,484,432 for the same period during 2005. This decrease of $2,591,663 is
primarily the result of decreased consulting expenses of approximately
$2,156,000 and decreased compensation expenses of approximately $409,000.
SG&A expenses decreased $1,807,069 for the three months ended June 30, 2005
compared to the same period in 2004. This decrease is primarily the result of
decreased consulting expenses of approximately $1,220,000 and decreased
compensation expenses of approximately $515,000.
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 $1,220,000 and
$2,156,000 in consulting expense during the three and six months ended June 30,
2005, respectively, compared to the same period in 2004. The total non-cash
compensation expense was $15,000 for the three and six months ended June 30,
2005.
15
The decrease in compensation expense in 2005 compared to 2004 was mainly due to
the non-cash compensation of approximately $1,433,000 recorded during 2004 for
stock issued to the CEO/President which was offset by the expenses associated
with an increase in the number of employees to assist with the commercialization
of the OnScreenTM product lines. The total non-cash compensation expense for the
first three and six months ended June 30, 2005 is approximately $757,000 and
$928,000, respectively.
The company anticipates its sales and marketing expenditures to increase during
the remainder of 2005 compared to the first six 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 $172,166 and
$276,209 in research and development during the three and six months ended June
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 six months
ended June 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 six months ended June 30, 2005.
The net settlement gain for the three and six months ended June 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.
Interest Expense
The interest expense of $54,375 and $56,250 for the three and six months ended
June 30, 2005, respectively is for the interest on the $1.5 million unsecured
note entered into during March 2005. The Company expects to have approximately
$56,000 of interest expense during the third quarter related to this note.
The interest expense of $64,070 for the six months ended June 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 June 30, 2004 was for
non-cash interest.
Preferred Stock Dividends
During the six months ended June 30, 2005 and 2004, the Company recorded Series
A Convertible Preferred Stock dividends of $106,206 and $196,022, respectively.
During the three months ended June 30, 2005 and 2004, the Company recorded
Series A Convertible Preferred Stock dividends of $47,115 and $72,541,
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.
16
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.
Responses to the summons and complaint have been filed and the case is currently
in the process of being scheduled for trial.
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 second quarter
of 2005, the Company issued 2,100,000 shares of its common stock to an employee
for services performed. These services were valued at $567,000.
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 second quarter
of 2005, the Company issued 200,000 shares of its common stock for a settlement
expense it had accrued for at December 31, 2004. These shares were valued at
$54,000.
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 second quarter
of 2005, certain Series A Preferred Stock holders converted 375,598 shares of
Series A Preferred Stock to 1,502,392 shares of the Company's common stock.
17
Series A Convertible Preferred 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 second quarter
of 2005, the Company issued 120,000 shares of its Series A Preferred Stock to an
employee in accordance with the employment contract. These services were valued
at $120,000.
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
10.1 Employment Agreement between the Company and Charles Baker, dated June 13,
2005.
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.
18
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 12th day of August 15th, 2005.
OnScreen Technologies, Inc.
(Registrant)
by: /s/ John "JT" Thatch
-----------------------------------------------
John "JT" Thatch
President/Chief Executive Officer/Director
by: /s/ Mark R. Chandler
-----------------------------------------------
Mark R. Chandler
Chief Operating Officer/Chief Financial Officer
19