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3DICON CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations. The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. Plan of Operation Background: The Company is engaged in the development of 360° volumetric imaging and display technology, specifically in the areas identified by the initial in-depth investigation conducted by the University. The identified areas are two major complementary areas of technology that comprise the spectrum of the solution and application (1) a means of recording 3D objects as digital data elements (capture); and (2) a means of reconstructing and displaying the 3D images (display). Based on the investigation as well as review of existing patents and technologies, it was concluded that the area of 3-D image capture and recording had multiple solutions and technologies that adequately served the market. Therefore our primary area of focus is to develop products and intellectual property in the reconstruction and display of 3D images where we see the most opportunity. We aim to establish strategic partnerships with the assignees or license holders of existing 3D recording technologies as well as integrate our technologies with existing solutions. The existing products reviewed can generally be broken down into two broad categories: stereoscopic - those that use flat-panels to implement 3D displays on 2D screens, and those that implement volumetric 3D displays. The flat-panel approaches, as previously noted, do not support 3DIcon's planned embodiment of the technology. However, the application space of volumetric 3D displays supports the Company vision and appears to offer major opportunities for further technology development and creation of intellectual property through our staff and the University, to which 3DIcon will have exclusive rights. The research team at OU has been working to integrate open source image capture applications as well as to establish 3D image capture systems. We continue to build intellectual property through our staff and the University, to which the Company has exclusive rights and engage in product research and development both directly related to the display as well as by-product technologies. The Oklahoma Center for the Advancement of Science and Technology approved the Company's application for funding of a matching grant titled 800 Million Voxels Volumetric Display, on November 19, 2008. The two-year matching grant, totaling $299,932, had a start date of January 1, 2009. The Company received approval for our no cost extension request for the first year of the contract. With the first modification, the first year ended on August 31, 2010. The award was for a maximum of $149,940 for 2009 and the remainder for 2010. The Company earned $54,889 and $28,765 from the grant during the periods ended June 30, 2011 and 2010, and $186,390 from inception to date. The Company received approval for our no cost extension request for the second year of the contract. With the new modification, the second year ends on August 31, 2011. Current Activities and Operations The Company is pursuing the research and development of volumetric 3-D display technology through the SRA with the University and with Dr. Hakki Refai, the former chief researcher at the University, who joined the Company as our Chief Technology Officer in October 2008. Our efforts are focused on multiple technological approaches, one of which is being further developed into proof-of-concept demonstration systems. 3 -------------------------------------------------------------------------------- Static Volume Display Technology: Also known as CSpace®™, the Company has produced the first non-mechanical, multi-view, high-resolution volumetric display. A prototype was demonstrated during September 2008, when a 3D image was created within a proprietary volumetric media (also called projection space or image matrix). This technology incorporates existing and rapidly evolving image projection technologies, such as DLP®/DMD technology from Texas Instruments, allowing 3DIcon to pursue full-color, full-motion 3D visualization, in harmony with 3DIcon's vision for product development. We have also released a software product called Pixel Precision™. The current version of the software is 2.0 that was released on February 12, 2009 to expand its capabilities and provide new compatibility with Texas Instrument's newly released DLP® Discovery 4000 kits. We plan to continue to pursue this market and provide versions and variations of this software. The plans include enhancements to the functionality as well as variants to address additional opportunities. We have signed a sales and distribution agreement with Digital Light Innovations ("DLi") for the sales, marketing and first level support of the Pixel Precision™ software. Through DLi and its sub-distributors the software will be marketed in the United States as well as in Europe and Asia. Progress on Research and Development Activities Under the aegis of the SRA, the University has filed the following patent applications. The utility patents have been converted and consolidated from the previously filed provisional applications. European Pending Japanese Description of Description of Utility Patent- Pending Provisional Patent Patent Application Granted Date of Patent-Date of Application as Filed Filing (Combined) Date of Filing U.S. Patent Filing Filing Swept Volume Display Swept Volume Display Filed by OU in September 2006 Colorful Translation Light Surface Display Filed by OU in December April 2007 April 2007 Light Surface 3D for Rendering April 2007 28, 2010 Display Colorful Three-Dimensional Translation 3D Image (Combined) Volumetric Display 3D Light Surface Display Volumetric Liquid Volumetric Liquid Filed by OU in May 2009 Crystal Display Crystal Display for April 2007 Rendering Three-Dimensional Image (Combined) Computer System Computer System Filed by OU in Interaction with DMD Interaction with DMD January 2008 Virtual Moving Screen Virtual moving screen Filed by OU in for Rendering Three for rendering a January 2008 Dimensional Image three-dimensional image Optically Controlled Utility Patent Filed by 3DIcon Light Emitting and Application to be in April 2008 System for Optically filed Written 2D and 3D Displays Further, we are taking steps to explore areas that may be related to assist in the protection of intellectual property assets. In addition, we have begun the process of applying for trademarks related to our 3D technologies. The primary objective for 2011 is to develop, and produce a prototype, CSpace single-color video display, in the form of a dome or alternately-shaped transparent enclosure not less than 8" in diameter, which can be viewed without operational safety controls (e.g., goggles), in moderately-bright room lighting, uniformly over 360° and from the top. The prototype display will satisfy the requirements of ISO 9241-303 for single-color direct-view displays. The associated research and development objectives for the 2011 calendar year are as follows. The work will be done by the Company and professional consultants: I. Static Volumetric Display ("CSpace®™") · Continue work on development of up-conversion materials. · Synthesize non-toxic, non-flammable liquid media suitable for dispersion of display materials. · Develop optical, thermal, and packaging designs for the prototype. · Continue software development to enhance CSpace®™ with the capability of displaying near real time 3D images. 4--------------------------------------------------------------------------------II. By-Product Technologies · Continue to generate revenue from Pixel Precision™ the DMD Control Software for DMD Application development markets. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2011 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2010 Revenue The Company earned $18,487 and $24,889 from the OCAST grant during the three months ended June 30, 2011 and 2010, respectivetly. We have earned income of $-0- and $4,300 before commissions and costs from the sales of Pixel Precision™ for the three-months ended June 30, 2011 and June 30, 2010, respectively. We expect sales of Pixel Precision™ to the installed and active user base of the earlier D1100 and D3000 systems in the near term and as companion product sales to D4000 systems. We expect that the revenue from this product to contribute to the operating expenses (general and administrative, research and development, interest) but do not expect the revenue generated in 2011 to cover the operating expenses. Research and Development Expenses The research and development expenses were $183,193 for the three months ended June 30, 2011, as compared to $246,090 for the three months ended June 30, 2010. The decrease was a result of options issued in 2010 to Hakki Refai valued at approximately $168,000 and a $6,000 decrease in cost incurred with the University under the SRA. We also had increases in 2011 of $76,000 for expenses incurred for the purchase of lab supplies and equipment consultants and $32,000 for the CSpace®™ prototype development consulting contract with Advanced Optical Technologies. General and Administrative Expenses Our general and administrative expenses were $426,112 for the three months ended June 30, 2011 as compared to $303,029 for the three months ended June 30, 2010. The increase is due primarily to consultants $86,500, auditing fees $12,500, travel $22,500, and the salary of and options issued to the new CEO of $ 70,600. Interest Expense Interest expense for the three months ended June 30, 2011 was $4,647 as compared to $16,607 for the three months ended June 30, 2010. The decrease was a result of the decrease in the amounts outstanding on our convertible debentures and the conversion of the Newton, O'Connor, Turner & Ketchum 13% Convertible Debentures to common stock. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2010 Revenue The Company received $54,889 from the OCAST grant during the six months ended June 30, 2011 as compared to $28,765 for the six months ended June, 2010. The increase was due to additional expenditures under the grant. There were sales of $3,000 of PixelPrecision™ during the six months ended June 30, 2011 as compared to $4,300 for the six months ended June 30, 2010. We expect sales of Pixel Precision™ to the installed and active user base of the earlier D1100 and D3000 systems in the near term and as companion product sales to D4000 systems. We expect that the revenue from this product to contribute to the operating expenses (general and administrative, research and development, interest) but do not expect the revenue generated to cover the operating expenses. Research and Development Expenses Research and development expenses were $283,627 for the six months ended June 30, 2011, as compared to $320,059 for the six months ended June 30, 2010. The net decrease was a result of the cost of vesting of options to the Director of Technology in 2010 amounting to $168,000 and an increase in expenses incurred for lab supplies and equipment $29,000 and consultants engaged amounting to $109,000 in 2011. 5 --------------------------------------------------------------------------------General and Administrative Expenses Our general and administrative expenses were $686,933 for the six months ended June 30, 2011 as compared to $536,485 for the six months ended June 30, 2010. The increase was the result of the increase in legal fees of $45,000 and the increase in cost related to the hiring of and options issued to the new CEO and consultants of approximately $100,000. Interest Expense Interest expense for the six months ended June 30, 2011 was $33,001 as compared to $37,298 for the six months ended June 30, 2010. The change in interest expense resulted from decreases in the amounts outstanding on our convertible debentures during the periods. Financial Condition, Liquidity and Capital Resources Management remains focused on controlling cash expenses. We recognize our limited cash resources and plan our expenses accordingly. We intend to leverage stock-for-services wherever possible. The operating budget consists of the following expenses: · Research and development expenses pursuant to our SRA with the University. This includes development of an initial demonstrable prototype and a second prototype for static volume technology. · Acceleration of research and development through increased research personnel as well as other research agencies. · General and administrative expenses: salaries, insurance, investor related expenses, rent, travel, website, etc. · Hiring executive officers for technology, operations and finance. · Development, support and operational costs related to Pixel Precision™ software. · Professional fees for accounting and audit; legal services for securities and financing; patent research and protection. Our independent registered public accountants, in their audit report accompanying our financial statements for the year ended December 31, 2010, expressed substantial doubt about our ability to continue as a going concern due to our status as a development stage organization with insufficient revenues to fund development and operating expenses. We had net cash of $572,186 at June 30, 2011. We had positive working capital of $43,577 at June 30, 2011. During the six months ended June 30, 2011, we used $564,915 of cash for operating activities, an increase of $363,114 or 180% compared to the six months ended June 30, 2010. The increase in the use of cash for operating activities was a result of the increase in the net loss of approximately $85,000, the decrease in stock issued for interest of approximately $57,000 and a decrease in the change in accounts payable of approximately $213,000. There was no cash used in investing activities during the six months ended June 30, 2011 or 2010. Cash provided by financing activities during the six months ended June 30, 2011 was $770,000, an increase of $567,760 or 266% compared to the six months ended June 30, 2010. The increase was the result of warrant exercise advances from Golden State and options exercised. We expect to fund the ongoing operations through the existing financing in place (see below); and; through raising additional funds as permitted by the terms of Golden State financing. Our ability to fund the operations of the Company is highly dependent on the underlying stock price of the Company. Pursuant to the 4.75% Convertible Debenture due in 2011, beginning in November 2007, Golden State is obligated to submit conversion notices in an amount such that Golden State receives 1% of the outstanding shares of the Company every calendar quarter for a period of one year. In connection with each conversion, Golden State is expected to exercise warrants equal to 10 times the amount of principal converted. The warrants are exercisable at $10.90 per share. Beginning in November 2008, Golden State is required to convert $3,000 of the 4.75% Convertible Debenture and exercise 30,000 warrants per month. During 2009, Golden State converted $3,510 of the $100,000 debenture into 35,622,803 shares of common stock, exercised warrants to purchase 35,100 shares of common stock at $10.90 per share and the Company received $382,590 from the exercise of the warrants. During 2009, Golden State advanced $240,000 against future exercises of warrants and applied $4,181 of accrued interest due on the debenture to the advance account of which $336,170 was applied to the exercise of warrants leaving $48,511 of unapplied advances at December 31, 2009. During 2010, Golden State converted $4,752 of the $100,000 debenture into 162,454,399 shares of common stock, exercised warrants to purchase 47,523 shares of common stock at $10.90 per share and advanced $251,489 against future exercises of warrants of which $300,000 was applied to the exercise of warrants leaving $-0- of unapplied advances at December 31, 2010. During 2011, Golden State converted $5,400 of the $100,000 debenture into 38,615,468 shares of common stock, exercised warrants to purchase 54,000 shares of common stock at $10.90 per share and applied $3,382 of accrued interest and advanced $750,000 against future exercises of warrants of which $588,589 was applied to the exercise of warrants leaving $164,782 of unapplied advances at June 30, 2011. 6 -------------------------------------------------------------------------------- The Oklahoma Center for the Advancement of Science and Technology approved our application for funding of a matching grant titled 800 Million Voxels Volumetric Display, on November 19, 2008. The two-year matching grant, totaling $299,932, had a start date of January 1, 2009. We received approval for our no cost extension request for the first year of the contract. With the first modification, the first year ended on August 31, 2010. The award is for a maximum of $149,940 for 2009 and the remainder for 2011. The Company earned $54,889 and $28,765 from the grant during the six month periods ended June 30, 2011 and 2010, and $186,390 from inception to date. We received approval for our no cost extension request for the second year of the contract. With the new modification, the second year ends on August 31, 2011. On October 31, 2008 OU agreed to revise the payment terms under the SRA from a fixed monthly payment to a reimbursable cost payment basis effective September 1, 2008. As of September 30, 2008 the Company had a remaining obligation under the previous SRA payment schedule of $2,665,818 which included monthly payments due for December 2007 through August 31, 2008 of $861,131. The $1,804,687 balance of the remaining scheduled payment obligation was cancelled. Under the terms of the revised base payments schedule, the arrearages would be paid in nine monthly base installments from October 31, 2008 to June 30, 2009 of amounts ranging from $35,000 to $101,132 leaving a remaining balance after the base payments of $290,000. In addition to the monthly base payments, the Company agreed to make additional payments on the $861,131 arrearages based on a formula of 50% of funding in excess of $120,000 plus the base monthly payment. In the event funding did not provide for any additional payments, the remaining balance would be $290,000, which OU agreed to accept 4,264,707 shares of the Company's common stock based on the October 14, 2008 market price as reported on the OTC Bulletin Board of $0.068 per share as payment on June 30, 2009. The Company had the option to repurchase the shares at $0.068 per share by September 30, 2009 or at market value, but not less than $0.068 per share, if the repurchase occurred after September 30, 2009. The Company was unable to meet the revised payment schedule and on May 18, 2009 the University agreed to revise the payment terms. Under the terms of the revised base payments schedule, the arrearages scheduled to be paid in nine monthly base installments from October 31, 2008 to June 30, 2009 of amounts ranging from $35,000 to $101,132 were deferred to a monthly payment schedule of July 2009 through February 2010. On February 19, 2010, the University agreed to modify the repayment plan to retire the outstanding debt of $525,481. Under the terms of the modified repayment plan the Company agreed to make payments to the University, not less than quarterly, in an amount equal to 22.5% of any funding received by the Company. The Company complied with the agreed upon payment schedule and on December 1, 2010 the Company entered into an agreement with OU pursuant to which OU agreed to convert all sums due to it from the Company in connection with its SRA with the Company, which as of December 1, 2010 amounted to approximately $485,000, into an aggregate of 59,000,000 shares of the Company's common stock. As a result of the debt conversion, OU became the holder of approximately 8% of the outstanding common stock of the Company. Pursuant to the agreement, the shares are subject to a put option allowing OU to require the Company to purchase certain of the shares upon the occurrence of certain events. In addition, the shares are subject to a call option allowing the Company to require OU to sell to the Company the shares then held by OU in accordance with the terms of the agreement. Off Balance Sheet Arrangements The Company does not engage in any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures. Significant Accounting Policies Research and Development Costs The Company expenses all research and development costs as incurred. Until we have developed a commercial product, all costs incurred in connection with the SRA with the University, as well as all other research and development costs incurred, will be expensed as incurred. After a commercial product has been developed, we will report costs incurred in producing products for sale as assets, but we will continue to expense costs incurred for further product research and development activities. Stock-Based Compensation Since its inception 3DIcon has used its common stock or warrants to purchase its common stock as a means of compensating our employees and consultants. Financial Accounting Standards Board ("FASB") guidance on accounting for share based payments requires us to estimate the value of securities used for compensation and to charge such amounts to expense over the periods benefited. The estimated fair value at date of grant of options for our common stock is estimated using the Black-Scholes option pricing model, as follows: 7 -------------------------------------------------------------------------------- The expected dividend yield is based on the average annual dividend yield as of the grant date. Expected volatility is based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option is based on historical exercise behavior and expected future experience. Subsequent Events Debentures payable In accordance with the terms of the Second Debenture an event of default occurs if the common stock of the Company trades at a price per share of $0.21 or lower. The trading price was at $0.21 or lower on several occasions during the period ended June 30, 2011 and subsequent to June 30, 2011. On each of the occasions Golden State, by letter agreements, agreed that the occasions did not constitute a default and thereby waived the default provision for the occasions. Common stock issued for services and liabilities Subsequent to June 30, 2011 shares of common stock totaling 5,262,115 were issued for consulting services for which the Company recognized $48,265 of expense. Shares totaling 5,262,115 were issued to consultant for previous services provided to the Company for which the accounts payable liability was reduced by $48,265. |