UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2005.
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
------------------------------------------------
Commission File Number 0-29195
OnScreen Technologies, Inc.
(Name of Small Business Issuer in Its Charter)
Colorado (7310) 84-1463284
--------------------------------------------------------------------------------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
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)
Charles R. Baker, CEO/President
OnScreen Technologies, Inc.
600 NW 14th Avenue, Suite 100
Portland, Oregon 97209, (503) 417-1700
(Name, Address and Telephone Number of Agent for Service)
1
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.001.
The issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes | | No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
The issuer's revenues for its most recent fiscal year ended December 31, 2005
were $133,650.
The aggregate market value of the voting common equity held by non-affiliates as
of December 31, 2005 was $11,908,732 (calculated by excluding shares owned
beneficially by affiliates, directors and officers).
As of January 30, 2006, the registrant had 70,427, 219 shares of common stock
outstanding and 2,010,718 shares of Series A Convertible Preferred Stock
outstanding and 500 shares of Series B Convertible Preferred outstanding.
2
INDEX
Part I
Item 1. Description of Business 4
Industry Overview 4
OnScreen(TM) LED Technology 5
OnScreen(TM) Sign Products 6
Tensile Roll-Up 7
LED Sign Market Potential 8
Market Analysis 8
OnScreen Technologies, Inc. Business Strategy 8
Patent Rights to OnScreen(TM) 9
Intellectual Property 11
OnScreen(TM) WayCool Thermal Management Technology 12
WayCool Market Analysis 12
Intellectual Property Rights to WayCool 12
Employees 12
Risks Related to Our Busines 12
Risks Related to Our Common Stoc 16
Item 2. Description of Property 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
Item 5. Market for Common Equity and Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities 19
Item 6. Management's Discussion and Analysis 21
Critical Accounting Policies 22
Liquidity and Capital Resources 23
Results of Operations 25
Item 7. Financial Statements 28
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 28
Item 8A. Controls and Procedures 28
Item 8B Other Matters 29
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act 29
Business Experience of Executive Officers and Directors 29
Audit Committee 31
Item 10. Executive Compensation 32
Employment Agreements 33
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 35
Item 12. Certain Relationships and Related Transactions 38
Item 13. Exhibits 39
Item 14. Principal Accountants Fees and Services 43
Signatures 44
Certifications 45
3
This Annual Report on Form 10-KSB and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and assumptions made by
management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict; therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OnScreen Technologies, Inc. (sometimes hereafter referred to as "OnScreen(TM)"
or "the Company") is a Colorado corporation organized on April 21, 1998. The
Company's principal place of business is located at 600 NW 14th Avenue, Suite
100, Portland, Oregon 97209. The Company is primarily focused on the design,
development, marketing and sale of its sign display platform products under the
names RediAlert(TM), RediAd(TM), Living Window(TM) and RediDMS(TM).
Our 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 OnScreen(TM) LED architecture, incorporates a variety of patent pending
designs of a new generation of bright LED products that provide key design
improvements in wind load, heat dissipation, weight and brightness of LED sign
displays. The Company's plan is to focus all of its resources on the
commercialization of the OnScreen(TM) technology.
Our LED products are specially designed to provide display solutions into
vertical markets including commercial and government. The commercial market
targets include, but are not limited to, retail industry and point of purchase.
The government market targets are all levels of Departments of Transportation,
Homeland Security, Law Enforcement, Emergency Responders and FEMA.
The OnScreen(TM) LED architecture provides a platform for the production of LED
display products in the current market that are lighter than competitive
products and provide 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.
INDUSTRY OVERVIEW
Utilizing bright LEDs in large and small scale products has been expanding over
the past several years. LED's have become the technology of choice for products
because they offer significant advantages in brightness, energy efficiency and
longer product life over traditional illumination choices. Until the advent of
high-brightness LED display technology, few options existed for videotext and
motion displays to be viewed in direct sunlight.
4
Energy consumption has become a limiting factor in the advancement of outdoor
LED displays. Because significant energy is required to illuminate an LED motion
display in direct sunlight, significant heat is generated when powering LED's to
brightness adequate to be seen in direct sunlight. Current LED packages and heat
transfer mechanisms generally do not easily accommodate close pixel spacing on
this generation of products - a limiting visual factor when viewed from any
distance less than a couple hundred feet. It also means that, previously, a
commercial product with real market potential, i. e., outdoor television and
medium scale display advertising, up to now, has been technically difficult and
expensive to produce. The required pixel spacing for high resolution displays,
while limiting the corresponding heat transfer as with current display
architectures, has been difficult and expensive to achieve.
To date, the leading cause preventing a larger proliferation of large-scale LED
products has been cost. The Company believes that a more cost effective display
technology can result in a significantly deeper market penetration for these
displays.
ONSCREEN(TM) LED TECHNOLOGY
OnScreen Technologies, Inc. has created a range of products with significant
architectural benefits and brighter visibility than the current generation of
sign displays. Our sign displays are visible in direct sunlight, avoiding many
of the disadvantages associated with current displays, including sun-loading,
wind-loading and excessive weight. The OnScreen(TM) LED technology is focused on
delivering simple light weight, see-through arrays that eliminate the need for
complex modules. In our products, LEDs are equally spaced in a configuration
that creates a system such that light and air can easily pass through the system
that encourages rapid heat transfer, is lightweight and encourages convective
airflow cooling.
Materials and Manufacturing Cost
--------------------------------
OnScreen Technologies, Inc. has developed an open system that permits nearly
unobstructed flow of air through the LED screen that significantly reduces wind
loading. This advantage reduces weight of the sign system as well as the cost of
the structure that supports the sign system. These advantages are present to
some extent in all OnScreen(TM) LED sign product lines.
Structure Benefits
------------------
Wind loading is reduced because of the "grid design" that permits air to pass
through the LED grid and, at the same time, the ambient fluid air dissipates the
heat from the LEDs. Because of this lighter weight and the reduced wind loading
of the OnScreen(TM) LED architecture, the foundation and support structure can
be reduced in size and cost. In a typical large scale sign deployment, the cost
allocation is 30% sign and 70% installation and infrastructure.
Storage, Shipping, Handling and Setup Cost
------------------------------------------
Our products are lightweight, lighter than current systems, and offer
significant savings in storage, shipping, handling and installation costs
because of the "foldable" feature of several models that can be shipped laid
back-to-back with greatly decreased volume, weight and shipping expense.
Life Cycle Cost
---------------
Because of increasing LED junction temperature in traditional LED displays, LED
lifetime, brightness, and efficiency degrade. Our products are designed to
dramatically reduce the LED junction-to-environment thermal resistance resulting
in a lower junction temperature for any given brightness. This yields higher
brightness at lower power levels, thus reducing operating cost and increasing
reliability.
5
Weight
------
The unique OnScreen(TM) LED architecture reduces the weight-per-unit area
compared to current systems primarily due to efficient convective air cooling
that eliminates some of the heavy external cooling needed for traditional
displays and the difference in our base architecture versus complex rigid solid
circuit board modules in present LED displays.
Brightness
----------
Greatly increased brightness can be achieved through the use of innovative
optics that address spatial tuning, horizontal axis optics, angular aperture
control and optical efficiency. While brightness resulting from the OnScreen(TM)
LED architecture can be optimized through the use of our innovative pixel
packages, standard off the shelf pixels are used as well, depending on the
application.
ONSCREEN(TM) SIGN PRODUCTS
Living Window(TM)
-----------------
The Company has developed a product line that features a new generation of
bright LED products specifically designed for the retail industry and point of
purchase advertising markets. This product line features electrical conductors
imbedded in a rigid grid material that also serves as the structural member on
to which the LEDs are mounted at the intersection of the horizontal and vertical
elements of the grid, facing one direction. The material is approximately 70%
vacant space through which ambient air can freely flow to permit heat transfer.
This product line can provide highly effective advertising to several different
vertical retail markets with very different buying habits, such as auto
dealerships, grocery stores, movie theaters, malls, and restaurants. This
product is presently marketed under the name, Living Window(TM). The Living
Window(TM) enables retailers to communicate a bright three-to-six-line text
message directly to its customers through a 15 to 30 square feet, lightweight,
see-through sign that is lighter than most comparable products and which can be
easily installed to any window or suspended in any indoor environment. Living
Window(TM) enables any business owner to send a message to one or multiple
remote locations in a matter of seconds via a remote computer. One of the most
appealing factors of Living Window(TM) is its revolutionary product design that
does not interfere with the integrity of the building architecture. The
transparent design allows ambient light to enter, customers to see in and
employees to see out, all while a variety of text and graphics modes are being
displayed and controlled by advertisers or retailers over the Internet through a
wireless network.
RediAd(TM)
----------
The final design is being completed for the second of the commercial outdoor
product line, RediAd(TM). The basic structure of this product is similar to the
RediAlert(TM) in that it features the louver sign configuration. The RediAd(TM)
is a compact portable signage system with the capability of displaying three
lines of variable text for detailed advertising messaging. The RediAd(TM) sign
can be placed wherever it is convenient to quickly deploy a temporary outdoor
LED advertisement message. This highly mobile folding 3' x 5' illuminated screen
is independently powered and can interface with an optional remote control. The
RediAd(TM) products have been designed to collapse and fit into the trunk of
automobiles and are capable of being deployed by a single person.
6
RediAlert(TM)
-------------
The Company is committed to complete production in its government emergency
response product line during 2006. The first of this product line is the
RediAlert(TM). The RediAlert(TM) design is based on an arrangement of LEDs
placed periodically along the edge of narrow horizontal louver like slats
similar to Venetian blinds that provide structural integrity without sacrificing
any of its other advantages. The Company developed the initial RediAlert(TM)
product using a thin, light-weight rigid support material as the principal
structure that holds the LEDs, supplies the necessary circuitry, but yet permits
the characteristic OnScreen(TM) LED "see through" display and lightweight
design. The systematic elimination of support material results in a unique
screen effect that is capable of permitting free flow of air passage between the
slats and yet creating the appearance of an opaque background for easy reading
of the sign in bright sunlight conditions.
The RediAlert(TM) is capable of displaying three lines of variable text for
detailed messaging at emergency response incidents where it is important to
quickly convey a message to motorists and pedestrians. Independently powered by
12VDC battery power and with optional remote control, this easily deployable,
folding 3' x 5' illuminated screen will provide law enforcement and emergency
management personnel with the latest in technology and equipment to assist in
communicating with the public. The RediAlert(TM) products have been designed to
collapse and fit into the trunk of emergency vehicles. These products are
capable of being deployed by a single person within minutes and represent a
significant market for our company. Our target markets include the rapidly
expanding Homeland Security effort, federal and state homeland defense, law
enforcement, military, emergency response and traffic control.
RediDMS(TM)
-----------
This product line is in development stage. The RediDMS(TM), Dynamic Message
Signs (DMS) is a stationary sign capable of displaying variable text that can be
remotely controlled by means of a wireless modem. The components of this product
are similar to the RediAlert(TM) in that the louver configuration is the
fundamental element. The Company intends to outsource the manufacture of the
RediDMS(TM) and initially market the RediDMS(TM) through standard Department of
Transportation (DOT) programs. Contractual relationships with established
Department of Transportation contractors are presently being pursued by the
Company.
It is intended that the DOT usage of the RediDMS will include messages relating
to Amber Alert, Emergency Ahead, Homeland Security Warnings and other emergency
warnings. The primary benefits of our RediDMS(TM) are associated with the
reduced infrastructure because of the light weight of our product.
TENSILE ROLL-UP
The innovative Tensile technology is currently in the design and prototyping
stage. Tensile is a revolutionary LED sign design that features flexibility of
the LED screen in addition to lightweight, see-through features as used in the
other OnScreen(TM) sign products. The unique open design permits easy flow of
ambient air through the X-Y grid to better control heat dissipation. Full color
and video motion are standard features. This product is designed for indoor and
outdoor video displays, signage, indoor and outdoor lighting including complex
forms and decorative elements such as light-walls, light sculpture, and
chandeliers. Among the many advantages of Tensile is the ability to retrofit
existing signage infrastructure with little modification due to the lightweight
and advanced thermal management characteristics of Tensile. Furthermore, these
innovative characteristics also allow Tensile to be used in new applications and
locations where, heretofore, LED technology could not be used due to weight,
thermal management and structural constraints.
7
LED SIGN MARKET POTENTIAL
The Company believes that there are no new architectural developments in the
area of LED sign technology that addresses the key limitations of current LED
display systems. The Company is focusing its efforts towards further defining
the market environment, size, growth, trends, competitive analysis, product
roadmap, partnering strategy and commercial sales program. Specific applications
of the OnScreen(TM) LED technology include: billboards, store windows, large
screen indoor and outdoor products, outdoor commercial and residential
televisions, curved and complex shaped displays, artistic light displays, Amber
Alert project, Homeland Security, roadway "intelligent transportation systems"
(ITS) and see-through displays on buildings. An additional potential marketing
strategy is directed toward licensing the OnScreen(TM) LED technology
intellectual property to worldwide manufacturers of LED sign products and
components.
OnScreen Technologies, Inc. is currently pursuing markets related to LED
products that include:
o Indoor, see through window, commercial advertising products, Living
Window(TM). Our market focus is retail level such as automobile
dealerships, restaurants and other retail markets.
o Outdoor, rapidly deployed, mobile, commercial advertising products,
RediAd(TM). The primary commercial market objective is the short
term, nonrecurring daily or weekly specials, initial retail
openings, holiday/special events and sporting events.
o Rapidly deployed, highly mobile, emergency response products,
RediAlert(TM). This product is directed toward government emergency
response and public safety matters such as homeland security, Amber
alert, automobile accidents, traffic control and public information.
o Stationary or fixed highway signage designed to display both highway
traffic and emergency messages as well as commercial advertising
messages, RediDMS(TM). Although these products will be mounted along
government roadways for the purpose of traffic control and emergency
information, when the circumstances permit, these products can be
used for roadway advertising which will defray the signage expense.
o All of the products include an optional wireless modem capable of
transmitting and receiving data to be displayed on the sign at a
moments notice.
MARKET ANALYSIS
In August 2003, OnScreen Technologies, Inc. contracted with Principia Partners,
an independent third party new product research consulting firm, for a
comprehensive market analysis of standard LED display application programs to
analyze and assist the Company in determining the saleable features and breadth
of applications for the OnScreen(TM) LED technology and the viable options for
generating returns via intellectual property licensing of the OnScreen(TM) LED
technology. This market analysis was designed to accomplish the Company's
objectives of increased revenue and profitability through sale or licensing of
its OnScreen(TM) LED technology. Based upon the market segmentation analysis and
assuming that there are no "technological breakthroughs" in direct competition
with the OnScreen(TM) LED technology, the Company believes that there exists a
directly addressable North American market of over $5 billion for OnScreen(TM)
LED technology-based products for large format outdoor advertising and retail
applications. The market potential for the transportation applications of
OnscreenTM LED technology products in North America is estimated to be over $2
billion.
ONSCREEN TECHNOLOGIES, INC. BUSINESS STRATEGY
The implemented Company business strategy includes an expanding basis of
innovative ideas and products based on the OnScreen(TM) LED technology. The
Company continues to develop and purchase OnScreen(TM) LED architecture related
new product ideas and enhance its current technology. Examples of potential
areas to which the company will look to create market opportunity include: LED
pixel packages, custom mounting hardware, ventilation support systems and
electronic subsystems.
8
Licensing
---------
The Company intends to implement a broad intellectual property licensing program
for select products in order to commercialize various segments of the
OnScreen(TM) LED technology, including Tensile for retail and large outdoor
format applications, on a larger scale than is possible with the financial
resources currently available to the Company. Through this program, the
OnScreen(TM) LED technology will be exploited through the development of
worldwide license and royalty agreements. This strategy has been adopted for
several reasons:
o It is considerably less capital intensive than developing
manufacturing and marketing capabilities.
o It provides revenue streams immediately through advance licensing
fees.
o It provides an opportunity to fund further research and to
build/develop the intellectual property portfolio surrounding the
Company.
o It can provide continuous long-term revenue streams.
o It provides a more rapid adaptation and proliferation of the
OnScreen(TM) LED technology.
o It expedites finding potential corporate "copartners".
o It provides the opportunity for greater margins.
These benefits are intended to be used as the primary method for promoting rapid
adoption of WayCool through licensing agreements with various suppliers in the
microprocessor-based electronics markets. These include potential licensing
relationships with chip manufacturers (OEMs), original development manufacturers
(ODMs), as well as potential relationships with companies serving the
after-market retail market segment. It is intended that a worldwide licensing
strategy for WayCool will open significant business opportunities for this
technology in many vertical market applications.
Manufacturing In-House or Outsource Manufacturing
-------------------------------------------------
The Company continues to outsource production to a manufacturer. The Company
entered into a design and manufacturing agreement with SMTC Manufacturing
Corporation for the manufacture and assembly of several of the OnScreen(TM) LED
technology product lines. The Company has begun the commercialization of the
Living Window(TM), RediAlert(TM) and RediAd(TM) product lines. Living Window(TM)
is currently in production and the Company expects delivery of the RediAlert(TM)
and RediAd(TM) products during 2006.
PATENT RIGHTS TO ONSCREEN(TM)
The following scenario describes the evolution of the license and ownership of
the OnScreen(TM) LED technology patent:
o On or about July 23, 2001, the Company entered into a Contract and
License Agreement (hereafter the "License Agreement") with the
inventor of the OnScreen(TM) LED technology which agreement entitled
the Company to 75% of the revenue generated from the direct view
OnScreen(TM) LED sign technology with angular dimension greater than
30 inches and guaranteed the inventor a minimum royalty of $50,000
the first year, $100,000 the second year and $250,000 each year
thereafter as well as providing that if John "JT" Thatch were no
longer employed with the Company, he be involved to his satisfaction
with terms between the Company and himself to continue with the
OnScreen(TM) project (hereafter "Thatch OnScreen Rights").
9
o On or about August 28, 2002, the Company entered into an agreement
with Fusion Three, LLC (hereafter "F3") whereby F3 paid the annual
$50,000 Company license fee in consideration for the Company's
conveying to F3 5% of the Company's interest in the License
Agreement. In December 2002 the Company and F3 entered into an
addendum to the August 28, 2002 agreement whereby F3 paid the
$100,000 second year revenue guarantee in consideration for an
additional 10% of the Company's interest in the License Agreement.
o In July 2003 F3 entered into an Option Agreement with the inventor
for F3 to purchase all of the inventor's contract rights, including
all royalty rights, in the License Agreement in consideration for
$500,000 (hereafter the "Option Agreement"). This agreement was
contingent on the Company's consenting to the terms of the Option
Agreement.
o January 14, 2004, the inventor agreed to accept $175,000 in lieu of
the $250,000 third year annual revenue guarantee payment. The
Company paid this sum.
o January 15, 2004, the Company refused to consent to the July 2003
Option Agreement and entered into an agreement with the inventor
wherein it was agreed that in consideration for the sum of $400,000
to be paid to the inventor by March 31, 2004, the inventor will
convey to the Company all of the inventor's license and contract
rights, including all royalty rights, in the License Agreement. This
$400,000 sum was paid on March 23, 2004.
o February 3, 2004, John "JT" Thatch, CEO/President of the Company,
agreed to relinquish all Thatch OnScreen Rights in consideration for
1% of all revenue derived from any licensing fees received by the
Company in connection with the OnScreen(TM) LED technology.
Effective March 2005, the CEO/President relinquished his entitlement
to the said 1% of revenues.
o February 3, 2004, Fusion Three, LLC (hereafter "F3") and the Company
reached a Master Settlement and Release Agreement whereby, in
consideration for the exchange of mutual releases and F3
relinquishing any claim to any of the OnScreen(TM) technology
(including the 11.25% license payments), the Company paid to F3
during June 2004 $150,000 plus agreed to pay the following annually
declining percentages of revenue derived from the commercialization
of the direct view LED video display technology with angular
dimension greater than 30 inches: 5% in 2005 declining to 2% in year
2008 and thereafter. In the event of a change of control of the
Company, the percentage of revenue stated above shall terminate and
a single payment transaction fee shall be paid by the Company to F3
ranging from 10% of the OnScreen(TM) appraised value up to
$100,000,000, 7.5% for the appraised value between $100,000,001 and
$200,000,000, 5% of the appraised value between $200,000,001 and
$300,000,000, and 4% of the appraised value between $300,000,001 and
$400,000,000 and 3% for the appraised value between $400,000,001 and
$500,000,000 and 2% for any appraised amounts between $500,000,001
and $600,000,000.
o February 15, 2005, the inventor/owner of the OnScreen(TM) LED
technology patent conveyed ownership of the OnScreen(TM) patent to
CH Capital, Inc., a related party of the Company, for value
received. This conveyance is subject to the above stated license
rights of the Company.
o February 16, 2005, in consideration for the payment of two hundred
thousand dollars ($200,000), CH Capital, Inc. conveyed to the
Company the OnScreen(TM) patent rights. This conveyance now vests in
the Company the ownership of the OnScreen(TM) LED technology patent
subject to the revenue rights of F3 as described above.
10
INTELLECTUAL PROPERTY PROTECTION
We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in products and services. These include
confidentiality, invention assignment and nondisclosure agreements with our
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, we intend to pursue the registration of
our trademarks and service marks in the U.S. and internationally.
o A provisional patent was filed August 26, 2002 on the OnScreen(TM)
LED technology. The patent was filed July 23, 2003 on the
OnScreen(TM) LED technology that contains over 50 separate claims.
The Company retained Knobbe, Martens, Olson & Bear, LLP and Banner &
Witcoff, Ltd. to manage our current interests relative to the
prosecution of the national and international patents.
o A provisional patent application was prepared and filed by Banner &
Witcoff, Ltd., Intellectual Property Attorneys, Washington, D.C. on
behalf of the Company on March 15, 2004 in the U.S. Patent and
Trademark Office regarding our RediAlert(TM) Rapid Dispatch
Emergency Signs.
o A utility patent was prepared and filed May 18, 2004 on behalf of
the Company to protect our intellectual property rights regarding
our Living Window(TM) product.
o February 10, 2005 a provisional patent was filed on behalf of the
Company relating to the aerodynamic RediAlert(TM) LED sign system.
o March 15, 2005 a utility patent was filed on behalf of the Company
relating to the RediAlert(TM).
o March 17, 2005 an international patent application was filed
relating to the Living Window(TM).
On February 25, 2004, we were notified by the United States Patent and Trademark
Office that the examining attorney reviewed the "OnScreen(TM)" trademark
application and found no similar registered or pending mark registered under
Trademark Act Section 2(d), U.S.C. Section 1052(d) TMEP sect 1105.01. We were,
however, required to disclaim the unitary expression "onscreen technology"
because the individual component words of a complete descriptive phrase are not
registerable. This disclaimer does not impair the "OnScreen(TM)" trademark nor
the "OnScreen(TM) technology" words when used in conjunction with the trademark.
We have recently filed applications for trademark registration relating to
"RediAlert", "Ready Dispatch Emergency Sign", "RediAd", "Living Window" and
"RediDMS" relating to our OnScreen(TM) LED architecture signage. These
applications remain in process.
The Company continuously reviews and updates the existing patent and trademark
filings and files new documentation both nationally and internationally in a
continuing effort to maintain up to date patent and trademark protection.
There is no assurance we will be successful in registering these marks.
Furthermore, we are exposed to the risk that other parties may claim we infringe
their rights on these marks, which could result in our ceasing use of these
marks, licensing the marks or becoming involved in costly and protracted
litigation.
11
ONSCREEN(TM) WAYCOOL THERMAL MANAGEMENT TECHNOLOGY
Among the challenges and limitations in the development of high-end desktop
computers and workstations is the thermal dissipation associated with advanced
processors. It is anticipated that the next generation of high-end processors
using dual core design pushes the thermal envelope even further. This thermal
challenge has been approached by manufacturers of high-powered processors by
advancing heatsink and fan technology beyond the state of the art known only 3-4
years ago. The OnScreen(TM) WayCool Thermal Management Technology is designed as
an answer to this challenge. Today, over 80% of electronic failures are related
to overheating. WayCool provides a straightforward technology to effectively
manage operating temperatures of electronics with orders of magnitude of
improvement over conventional approaches, as verified by external testing and
evaluation.
WAYCOOL MARKET ANALYSIS
The Company received a report in May 2005 prepared by a reputable independent
third party new product research consulting firm that provided a comprehensive
market compilation and analysis of the semiconductor industry shipments in the
personal computer and server markets for major producers as well as an
evaluation of the market impact of the WayCool thermal management technology in
context with the total semiconductor industry demand. The principal focus of the
report was to determine a preliminary business valuation for WayCool in
providing a viable solution for computer processor chip thermal management.
The report of the independent third party research firm found that the
semiconductor industry is expected to move to the use of advanced cooling
solutions to solve an increasing need for higher processing speeds so as to
better manage greater power requirements. It is expected that exponential
increases in thermal output could prevent traditional thermal management
solutions over the next three years from being viable
The potential market opportunity for WayCool is very large. Third party analysis
indicates that a market potential of over $5 billion exists in the vertical
market of PC and server applications. The potential application of WayCool to
other types of electronics, such as video display chips and other types of
microprocessor-based electronics is estimated to equal or exceed the single
market potential of PCs and servers.
INTELLECTUAL PROPERTY RIGHTS TO WAYCOOL
The Company entered into a non-binding letter of intent with CH Capital, the
owner of the WayCool patent, for the purchase of the intellectual property
referred to as "WayCool". We have not yet entered into a definitive agreement
with CH Capital for the acquisition of the WayCool technology and there is no
assurance that we will reach a definitive agreement for the acquisition of
WayCool. CH Capital has agreed to extend the term of the Letter of Intent to
September 9, 2006. CH is a private company controlled by Mr. Brad Hallock,
currently a shareholder and a director and Mr. William Clough who currently is a
shareholder, corporate secretary and corporate counsel.
EMPLOYEES
As of December 31, 2005, the Company had seventeen fulltime employees. None of
our employees is represented by a labor union. We consider our relations with
our employees to be good. We plan to add additional staff as needed to handle
all phases of our business.
RISKS RELATED TO OUR BUSINESS
Our limited operating history makes evaluating our business and prospects
difficult.
12
We have been involved in the LED based business since July 2001, but have only
recently begun to direct all of our efforts to commercialization of the
OnScreen(TM) technology. Our limited operating history in this industry and the
unproven nature of the OnScreen(TM) technology makes an evaluation of our future
prospects very difficult. To date we have not achieved profitability and we
cannot be certain that we will sustain profitability on a quarterly or annual
basis in the future. You should carefully consider our prospects in light of the
risks and difficulties frequently encountered by early stage companies in new
and rapidly evolving technology.
We have all the risks of a new product developer in the LED technology business.
The Company, as the owner of the OnScreen(TM) LED sign technology patents,
assumed the responsibility for completing the development of the OnScreen(TM)
technology as well as determining which products to commercialize utilizing the
OnScreen(TM) technology. Because this is a new and unproven technology, there is
a risk that the technology, operation and development could be unsuccessful or
that the products, if any, developed with the OnScreen(TM) technology will not
be marketable. Such failures would negatively affect our business, financial
condition and results of operations.
There is no assurance we will achieve profitability. To date we have not
received significant revenue from the OnScreen(TM) technology. We have focused
our scope of operation to the singular product line of the OnScreen(TM) LED sign
technology. For the year ended December 31, 2005 we had a net loss of
$8,482,125. We will need to begin generating significant revenues from the
OnScreen(TM) LED architecture product line to offset current operational and
development losses if the Company is to cover its current overhead expenses and
cover further development and marketing expenses. There is no assurance that we
will achieve profitability.
During 2005 we funded our operations with net proceeds of approximately
$4,857,383 we received from financing activities. The Company is adequately
confident 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. The Living Window(TM) product
line has been commercialized during 2005 and management expects to begin
generating revenue from the RediAlert(TM) product line by the late first half of
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.
We will be dependent on third parties and certain relationships to fulfill our
obligations. Because manufacturing of the OnScreen(TM) LED technology products
is contracted to companies better equipped financially and technologically to
design and manufacture OnScreen(TM) LED technology end products, we are heavily
dependent on these third parties to adequately and promptly provide the end
product. The Company is dependent upon its ability to maintain the agreements
with these designers and manufacturers and other providers of raw materials and
components who provide these necessary elements to fulfill our product delivery
obligations at the negotiated prices.
We initially depend on commercial sales to the retail market. We currently
market our OnScreen(TM) LED architecture related products to retail commercial
markets and point of purchase sales such as new and used automobile dealerships,
convenience stores, restaurants, etc. Because our OnScreen(TM) LED architecture
is innovative, we have recently begun presentation to the retail advertising
market; therefore, its acceptance at this time is not known. Principally, our
Living Window(TM) and RediAd(TM) products are designed for this purpose.
13
Our second marketing focus is on government agencies.
Our second marketing focus is to sell our products to government agencies, such
as departments of transportation, police departments and other emergency
personnel. Our RediAlert(TM) is our first product directed toward this market.
Generally, the inspection, approval process and funding involved with government
agencies can take many months and are subject to cancellation by the
governmental agency without penalty. Our business could suffer if we are not
successful in marketing our products to a significant number of governmental
agencies or if contracts we enter into with such agencies are cancelled.
The market for LED signage is extremely competitive.
Because the LED signage industry is highly competitive, we cannot assure you
that we will be able to compete effectively. We are aware of several other
companies that offer LED products, although not identical to our OnScreen(TM)
LED technology. All of these competitors have been in business longer than we
have and have significantly greater assets and financial resources than
currently available to us. We expect competition to intensify as innovation in
the LED industry advances and as current competitors expand their market into
the portable, lightweight signage that is the initial market for the
OnScreen(TM) LED architecture. We cannot assure you that we will be able to
compete successfully against current or future competitors. Competitive
pressures could force us to reduce our prices and may make it more difficult for
us to attract new customers and retain current customers.
The use of portable emergency roadway signage is a recent development and the
extent of customer acceptance is not yet known. Portable LED emergency roadway
signage is a relatively new and evolving industry. For the Company to be
successful, government agencies must be willing to obtain government
administrative approval and public results satisfaction. There is no way to be
sure that a sufficient number of government agencies will utilize our product to
enable us to remain profitable.
We depend on key personnel and will need to recruit new personnel as we grow. As
a small company we are currently dependent on the efforts of a limited number of
management personnel. We believe that given the large amount of responsibility
being placed on each member of our management team, the loss of the services of
any member of this team at the present time would harm our business.
If we are successful in expanding our product and customer base, we will need to
add additional key personnel as we continue to grow. If we cannot attract and
retain enough qualified and skilled staff, the growth of our business may be
limited. Our ability to provide services to customers and expand our business
depends, in part, on our ability to attract and retain staff with professional
experiences that are relevant to technology development and other functions we
perform. Competition for personnel with these skills is intense. We may not be
able to recruit or retain the caliber of staff required to carry out essential
functions at the pace necessary to sustain or expand our business.
We believe our future success will depend in part on the following:
o the continued employment and performance of our senior management,
o our ability to retain and motivate our officers and key employees,
and
14
o our ability to identify, attract, hire, train, retain, and motivate
other highly skilled technical, managerial, marketing, sales and
customer service personnel.
If we fail to adequately protect our trademarks and proprietary rights, our
business could be harmed. The steps we take to protect our proprietary rights
may be inadequate. We regard our patents, trademarks, trade secrets and similar
intellectual property as critical to our success. We rely on trademark and
patent law, trade secret protection and confidentiality or license agreements
with our employees, customers, partners and others to protect our proprietary
rights. Despite these precautions, it may be possible for a third party to copy
or otherwise obtain and use our intellectual property without our authorization.
Although we have been granted registration rights for our OnScreen(TM)
trademark, there is no assurance our pending trademark applications for
RediAlert, RediAd, Living Window, RDES or RediDMS will be approved. Effective
trademark, patent and trade secret protection may not be available in every
country in which we may in the future offer our products. Therefore, we may be
unable to prevent third parties from infringement on or otherwise decreasing the
value of our trademarks, patents and other proprietary rights.
If we are to remain competitive, we must be able to keep pace with rapid
technological change. Our future success depends, in part, on our ability to
develop or license leading technologies useful in our business, enhance the ease
of use of existing products, develop new products and technologies that address
the varied needs of our customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
If we are unable, for technical, legal, financial or other reasons, to
incorporate new technology in new features or products, we may not be able to
adapt in a timely manner to changing market conditions or customer requirements.
We may infringe intellectual property rights of third parties. Litigation
regarding intellectual property rights is common in the software and technology
industries. We may in the future be the subject of claims for infringement,
invalidity or indemnification claims based on such claims of other parties'
proprietary rights. These claims, with or without merit, could be time consuming
and costly to defend or litigate, divert our attention and resources, or require
us to enter into royalty or licensing agreements. There is a risk that such
licenses would not be available on reasonable terms, or at all. Although we
believe we have the ability to use our intellectual property to operate and
market our existing products without incurring liability to third parties, there
is a risk that our products infringe the intellectual property rights of third
parties.
Third parties may infringe on our intellectual property rights There can be no
assurance that other parties will not claim infringement by us with respect to
our current or future technologies. We expect that participants in our markets
will be increasingly subject to infringement claims as the number of services
and competitors in our industry segment grows. Any such claim, with or without
merit, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements might not be available on terms acceptable to
us, or at all. As a result, any such claim of infringement against us could have
a material adverse effect upon our business, results of operations and financial
condition.
15
RISKS RELATED TO OUR COMMON STOCK
Our Common Stock price may be volatile, which could result in substantial losses
for individual stockholders. The market price for our Common Stock is volatile
and subject to wide fluctuations in response to factors including the following,
some of which are beyond our control, which means our market price could be
depressed and could impair our ability to raise capital:
o actual or anticipated variations in our quarterly operating results;
o announcements of technological innovations or new products or
services by us or our competitors;
o changes in financial estimates by securities analysts;
o conditions or trends relating to the LED industry;
o changes in the economic performance and/or market valuations of
other LED related companies;
o additions or departures of key personnel;
o fluctuations in the stock market as a whole.
Our Certificate of Incorporation limits director liability thereby making it
difficult to bring any action against them for breach of fiduciary duty. As
permitted by Colorado law, the Company's Articles of Incorporation limits the
liability of directors to the Company or its stockholders for monetary damages
for breach of a director's fiduciary duty except for liability in certain
instances. As a result of the Company's charter provisions and Colorado law,
stockholders may have limited rights to recover against directors for breach of
fiduciary duty.
We may be unable to meet our future capital requirements.
We are substantially dependent on receipt of additional capital to effectively
execute our business plan. If adequate funds are not available to us on
favorable terms we will not be able to develop new services or enhance existing
services in response to competitive pressures, which would affect our ability to
continue as a going concern. We do not anticipate issuing any additional shares
of our Series A or Series B Convertible Preferred Stock as a source of capital.
We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-related or debt securities, such securities may
have rights, preferences or privileges senior to those of the rights of our
common stock and our stockholders may experience additional dilution.
Penny stock regulations may impose certain restrictions on marketability of our
stock. The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. As a result,
our Common Stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities.
16
We have never paid dividends on our Common Stock and do not expect to pay any in
the foreseeable future. Preferred Shares impose restrictions on our ability to
pay Common Stock dividends.
A potential purchaser should not expect to receive a return on their investment
in the form of dividends on our Common Stock. We have never paid cash dividends
on our Common Stock and we do not expect to pay dividends in the foreseeable
future. Our ability to pay dividends on our Common Stock is restricted by the
terms of our agreements with the holders of our Series A and Series B
Convertible Preferred Stock. Holders of our Series A Preferred Stock are
entitled to annual dividends of 10%, currently aggregating $47,143 quarterly,
assuming no conversion. In the past, we have fulfilled our dividend obligations
on the Series A Convertible Preferred Stock through the issuance of additional
shares of our Series A Convertible Preferred Stock to the holders of our series
A Preferred Stock as well as cash payments.
On December 31, 2005 dividends payable for the Series A Convertible Preferred
Stock was $144,956. Holders of our Series B Convertible Preferred Stock are
entitled to annual dividends of $1.00 per share. On December 31, 2005 all Series
B Convertible Preferred Stock have been converted to common shares. We have
accrued approximately $17,901 regarding the Series B Convertible Preferred Stock
dividends.
Substantial sales of our Common Stock could cause our stock price to rapidly
decline. The market price of our Common Stock may fall rapidly and significantly
due to sales of our Common Stock from other sources such as:
o Common Stock underlying the conversion rights of our Series A
Convertible Preferred Stock and Series B Convertible Preferred
Stock.
o Common Stock underlying the exercise of outstanding options and
warrants.
o Common Stock, which are available for resale under Rule 144 or are
otherwise freely tradable and which are not subject to lock-up
restrictions.
Any sale of substantial amounts of our Common Stock in the public market, or the
perception that these sales might occur, whether as a result of the sale of
Common Stock received by shareholders upon conversion of our Series A or Series
B Convertible Preferred Stock, exercise of outstanding warrants or options or
otherwise, could lower the market price of our Common Stock. Furthermore,
substantial sales of our Common Stock by such parties in a relatively short
period of time could have the effect of depressing the market price of our
Common Stock and could impair our ability to raise capital through the sale of
additional equity securities.
The covenants with our Series A and Series B Convertible Preferred Stock
shareholders restrict our ability to incur debt outside the normal course,
acquire other businesses, pay dividends on our Common Stock, sell assets or
issue our securities without the consent of the Series A Convertible Preferred
and Series B Convertible Preferred Stock Shareholders. Such arrangements may
adversely affect our future operations or may require us to make additional
concessions to the holders of the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock in order to enter into transactions or take
actions management deems beneficial and in our best interests of the holders of
our Common Stock.
17
The forward-looking information in this Form 10-KSB may prove inaccurate. This
Form 10-KSB contains forward-looking statements and information that are based
on management's beliefs as well as assumptions made by, and information
currently available to, management. When used in this prospectus, words such as
"anticipate," "believe," "estimate," "expect," and, depending on the context,
"will" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the specific risk factors described above. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
estimated or expected. We do not intend to update these forward-looking
statements and information.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real estate. On March 29, 2001 the Company signed a lease
with Safety Harbor Centre commencing May 1, 2001 for five years with an option
for five additional years. The lease became effective August 27, 2001, the date
that the Company first occupied the facility, at an initial monthly rental of
$10,972.24 (Common Area Maintenance and tax not included). Per an October 3,
2001 Addendum to Lease the lease commencement date was extended to September 1,
2001 and the lease expiration was extended to August 31, 2006. Effective
February 1, 2004, the Company negotiated with the lessor a reduction of the
office rental space with a resulting monthly gross rent reduction of $2,465.97.
The Company is not expected to exercise its option for the additional 5 years.
On October 15, 2004 the Company leased an additional office suite contiguous to
the existing offices at a monthly rental of $2,814 (Common Area Maintenance and
tax not included).
Effective November 11, 2005, the Company relocated its corporate home office to
600 NW 14th Avenue, Suite 100, Portland, Oregon 97209. The Company shall retain
a field office in the central Florida area. In October 2005, the Company signed
a lease with Market Place I & II, LLC to lease 7,500 square feet of office space
at 600 NW 14th Avenue, Suite 100, Portland, Oregon 97209 beginning November 1,
2005 through December 31, 2010 which lease is renewable for an additional five
years. The initial monthly base rent is $9,062.50 for December 2005 through
October 2007, thereafter the rent increases slightly.
ITEM 3. LEGAL PROCEEDINGS
On July 1, 2004, the Company filed a lawsuit against Mobile Magic Superscreen,
Ltd. (breach of contract and civil conversion), Capitol City Trailers, Inc.
(civil conversion) and another party (civil fraud) in the Court of Common Pleas
of Franklin County, Ohio, Case Number 04 CVH 6884. This lawsuit relates to the
2001 contract with Mobile Magic Superscreen, Ltd. for the fabrication of a
mobile LED superscreen that Mobile Magic failed to complete and deliver. The
case against Capitol City Trailers, Inc. has been settled favorably for the
Company and the jury trial against Mobile Magic Superscreen, Ltd. was continued
to a trial date during the last week of February 2006.
Certain legal matters with respect security regulatory matters are passed upon
by Johnson, Pope, Bokor, Ruppel & Burns, LLP, Clearwater, Florida.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2005 Annual Meeting of Shareholders held on December 13, 2005, Russell L.
Wall and Charles R. Baker were duly elected to Seats 2 and 4, respectively, of
the OnScreen Technologies, Inc. Board of Directors to serve two year terms or
until his successor shall have been elected and qualified. Bradley J. Hallock
will retain his seat on the Board of Directors until the 2006 annual meeting of
shareholders or until his successor shall have been elected and qualified. The
following votes were tabulated:
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For Withhold
--- --------
Seat 2. Russell L. Wall Preferred 226,250 40,000
Common 31,430,232 212,228
Seat 4. Charles R. Baker Preferred 226,250 40,000
Common 31,431,232 211,228
At the same meeting the shareholders approved the OnScreen Technologies, Inc.
Equity Incentive Plan. The following votes were tabulated:
For Against Abstain Not Voted
--- ------- ------- ---------
Preferred 266,250
Common 16,239,912 448,413 401,522 14,552,613
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
Market Value
Our Common Stock is traded on the OTC Bulletin Board (OTCBB) under the trading
symbol "ONSC". The following table sets forth, the high and low bid prices of
our Common Stock for the four quarters of 2004 and 2005 as reported by the
National Quotation Bureau. The bid prices quoted on the OTCBB reflect
inter-dealer prices without retail mark-up, markdown or commission and may not
represent actual transactions.
Year Quarter High Bid Low Bid
---- ------- -------- -------
2004 First Quarter 1.090 .830
Second Quarter .950 .650
Third Quarter .920 .610
Fourth Quarter 1.070 .620
2005 First Quarter .890 .800
Second Quarter .720 .600
Third Quarter .220 .200
Fourth Quarter .240 .220
Description of Securities
During the December 18, 2003 shareholders' meeting, the shareholders voted to
amend the Company's Restated Articles of Incorporation to increase the number of
$0.001 par value common stock shares from 15,000,000 to 150,000,000 authorized
common shares ("Common Stock"). The Company authorized 10,000,000 shares of
$0.001 par value Preferred Stock ("Preferred Stock"), issuable in series. Of the
10,000,000 authorized preferred shares, 5,000,000 shares have been designated as
Series A Convertible Preferred and 30,000 shares have been designated as Series
B Convertible Preferred. The description of our capital stock does not purport
to be complete and is subject to and qualified in its entirety by our Articles
of Incorporation and Bylaws, amendments thereto, including the Certificates of
Designation for our Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock and by the provisions of applicable Colorado law.
Our transfer agent is Computershare Trust Company, Inc., 350 Indiana Street,
Suite 800, Golden, Colorado 80401.
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Common Stock
As of December 31, 2005, there were 70,277,219 shares of our Common Stock issued
and outstanding, plus 6,187,500 warrants and options that were issued
principally in consideration of employment and consulting services. The exercise
prices range from $0.01 to $1.00 per share. As of December 31, 2005, we had in
excess of 3,000 shareholders of record.
The holders of Common Stock and Series A Convertible Preferred are entitled to
one vote per share and holders of Series B Convertible Preferred shares are
entitled to one thousand votes per share for the election of directors and all
other purposes and do not have cumulative voting rights. There is a restriction
on the payment of any common stock dividends because any cumulative preferred
stock dividends are required to be paid prior to the payment of any common stock
dividends. Also, the retained earnings of the Company would be restricted upon
an involuntary liquidation by the cumulative unpaid preferred dividends to the
preferred stockholders and for the $1.00 per share Series A and $240 per share
Series B liquidation preferences. Holders of our Common Stock do not have any
pre-emptive or other rights to subscribe for or purchase additional shares of
capital stock, no conversion rights, redemption, or sinking-fund provisions.
We have not paid any dividends on our common stock since inception. We expect to
continue to retain all earnings generated by our operations for the development
and growth of our business and do not anticipate paying any cash dividends to
our common shareholders in the foreseeable future. The payment of future
dividends on the common stock and the rate of such dividends, if any, will be
determined by our Board of Directors in light of our earnings, financial
condition, capital requirements and other factors.
Unregistered Sales of Equity Securities
The following unregistered common stock shares are for the fourth quarter of
2005, all other unregistered sales would be reflected in the 10-QSB filing for
that quarter.
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 fourth quarter
of 2005, the Company issued 800,000 shares of its common stock to certain
convertible note holders in conjunction with their notes payable debt. These
shares were valued at $215,275.
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 fourth quarter
of 2005, the Company issued 250,000 shares of its common stock for the exercises
of two warrants. The warrants were exercised for proceeds of $37,500 and accrued
expenses of $25,000.
Convertible Preferred Stock Series A
The following unregistered Preferred Stock Series A shares are for the fourth
quarter of 2005, all other unregistered sales would be reflected in the 10-QSB
filing for that quarter.
The Company designated 5,000,000 shares of preferred stock as new Series A
Convertible Preferred Stock ("Series A"). The Series A is convertible to common
shares on a four-for-one ratio, is due dividends at $0.10 per share as
authorized by the Board, has a liquidation value of $1.00 per share and has
equivalent voting rights as common shares on a share for share basis. As of
December 31, 2005 there were 1,885,718 shares of our Series A Convertible
Preferred Stock issued and outstanding.
20
Convertible Preferred Stock Series B
On February 3, 2004, the Company's board of directors designated 30,000 shares
of preferred stock as Series B Convertible Preferred Stock ("Series B"). The
Series B is convertible to common shares on a one thousand-for-one ratio, is due
dividends at $1.00 per share, payable quarterly, as authorized by the Board and
the dividends are cumulative. Series B has a liquidation value of $240 per share
and has voting rights of one thousand votes per Series B share. There were no
shares of Series B Convertible Preferred Stock issued as of December 31, 2005.
Certain Provisions of the Articles of Incorporation and Colorado Business
Corporation Act Our Articles of Incorporation provides that, "To the fullest
extent permitted by Colorado Business Corporation Act as the same exists or may
hereafter be amended, a director of the corporation shall not be liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director."
The Company shall indemnify and advance expenses to a director or officer in
connection with a proceeding to the fullest extent permitted or required by or
in accordance with the indemnification sections of the Colorado Business
Corporation Act that provides that, "The corporation shall indemnify a person
who was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which the person was a party because the person is or was a
director, against reasonable expenses incurred by him or her in connection with
the proceeding."
Shares Eligible for Future Sale
As of December 31, 2005, we had outstanding 70,277,219 shares of Common Stock.
Of these shares, 28,782,909 shares are freely tradable without restriction or
limitation under the Securities Act.
The 41,494,310 shares of Common Stock held by existing shareholders as of
December 31, 2005 that are "restricted" within the meaning of Rule 144 adopted
under the Securities Act (the "Restricted Shares"), may not be sold unless they
are registered under the Securities Act or sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144 promulgated under the
Securities Act. The Restricted Shares were issued and sold by us in private
transactions in reliance upon exemptions from registration under the Securities
Act and may only be sold in accordance with the provisions of Rule 144 of the
Securities Act, unless otherwise registered under the Securities Act.
As of December 31, 2005, we had issued and outstanding 1,885,718 shares of
Series A Convertible Preferred Stock, of which 1,860,718 are "restricted" within
the meaning of Rule 144 as noted above.
The possibility of future sales by existing stockholders under Rule 144 or
otherwise will, in the future, have a depressive effect on the market price of
our Common Stock, and such sales, if substantial, might also adversely affect
our ability to raise additional capital.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
OnScreen Technologies, Inc. is a publicly traded company (OTC-BB: ONSC) focused
on commercializing its innovative technology to the world of visual
communications. The company concentrates on motion display solutions and seeks
to develop innovative approaches to visual communication and advertising
products and delivery systems. The Company is focused on the design,
development, licensing and sale of LED products manufactured with the
OnScreen(TM) LED technology architecture.
21
The Company has begun delivery of its Living Window(TM) product during 2006 and
expects the RediAlert(TM), and RediAd(TM) OnScreen(TM) products to begin
shipping during the 2006 year. The Company does not expect to record significant
revenue until the OnScreen(TM) product line is being shipped and distributed on
a national basis. The majority of management's focus is concentrated on the
Company product development and marketing. The Company has a third party
managing the leasing of its mobile LED truck and the Company expects to receive
some revenue from its mobile LED truck during 2006.
A priority of management during 2005 has been and continues to be to raise the
capital needed to continue to fund the development and marketing of the
Company's products. During the year ended December 31, 2005, the Company
received net proceeds from notes payable of $5,011,000. During 2006, management
is continuing to pursue funding from private equity sources. These funds will
enable the Company to develop its OnScreen(TM) LED technology products and
continue the Company's operations until the Company brings the remaining
Onscreen products to market.
During the year ended December 31, 2005, the Company continued to incur
significant losses from operations. The Company incurred a net loss of
$8,482,125 for the year ended December 31, 2005. This net loss of $8,482,125
includes non-cash charges of approximately $1.4 million for equity given to
employees and consultants for services provided and non-cash interest of
approximately $1.7 million for the intrinsic value of convertible debt and
amortization of debt discount.
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.
22
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 December 31, 2005 is
$727,141. Its negative working capital balance at December 31, 2005 is
$4,118,865. The Company has funded its operations and investments in patents and
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 $5,618,383 during 2005. The Company has used stock and warrants as
a form of payment to certain vendors, consultants and employees. During 2005,
the Company recorded a total of approximately $1.4 million 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.
The Company also recorded approximately $1.7 million of interest expense
relating to the beneficial conversion value of convertible debt.
As the Company focuses on the OnScreen(TM) technology during 2006, it will
continue to fund research and development related to the Company's products as
well as sales and marketing efforts related to these products. The Company does
not expect to record significant 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. The Company during 2006 will continue to outsource the production of its
products during 2006.
Capital Expenditures
During 2005, the Company invested $380,439 in patent expenses that are in the
approval process. These costs will be amortized over the life of the patents
once approved or expensed if not approved. In order to protect its intellectual
properties, the Company will continue to incur and capitalize costs associated
with patenting its technologies during 2006.
23
During 2005, the Company invested approximately $96,000 in fixed assets which
includes approximately $29,000 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 2006, the Company anticipates its
fixed asset expenditures to be similar to 2005.
The Company received $396,541 of proceeds from the sales of marketable
securities during 2005.
The Company outsources the manufacture of its products.
Financing activities
During 2005, the Company received $121,750 of proceeds from the exercise of
warrants and options and $1.5 million of proceeds from unsecured notes with a
six month term. The $1.5 million note was replaced with convertible promissory
notes. The Company also received additional proceeds of $3.5 million from
unsecured convertible promissory note holders. The Company incurred $64,000 of
fees to raise these funds. All of the convertible notes have the right to
convert into the Company's common stock at an exercise price of the lower of
$0.25 per share or at the price set for the equity round with a three-month term
and a three-month extension. The Company has extended those notes that have come
due and intends to extend the remaining notes as they come due. These notes have
an annual interest rate of 12% which is payable monthly.
The Company plans on raising the capital needed to fund further development and
marketing of the Company products. In conjunction with the fund raising efforts
of the Company, the Company incurred $63,892 of deferred stock issuance costs
during 2005.
During 2005, the Company received a $75,000 short-term loan which it paid off
during the year.
During 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. Also, during
November 2005, an employee entered into a new employment agreement which
included the return of 1,500,000 of the shares of common stock that were issued
to him. The Company paid him a nominal $15,000 for those shares
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.
24
The Company is adequately confident 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. The Company
began shipping its Living Window(TM) product during mid-June. Management expects
additional products using its OnScreenTM LED technology to be commercialized
during 2006. This includes RediAd(TM) and RediAlert(TM). 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.
Off-Balance Sheet Arrangements
As of December 31, 2005, we have no off-balance sheet arrangements.
RESULTS OF OPERATIONS
The accompanying financial statements reflect the operations of the Company for
the fiscal years ended December 31, 2005 and 2004.
Revenue
During the year ended 2005, revenue was $133,650 and $145,988 for the same
period during 2004. The revenue for year ended December 31, 2005 is comprised of
$87,573 from Living WindowTM products and related add-ons, $41,176 from the LED
Truck rental and $4,901 from other revenue. For the year ended December 31 2004,
the Company recorded $83,580 of revenue from the LED Truck and $62,408 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 2006 compared to 2005. During late 2005, the
Company entered into an agreement with a third party to manage the rental of its
mobile LED truck. The Company expects the mobile LED truck to remain a small
source of revenue during 2006.
During 2005, 43% of revenues were derived from three customers at 19%, 12% and
12%. During 2004, 36% of revenues were derived from two customers at 25% and
11%.
Cost of revenue
The cost of revenue for the year ended December 31, 2005 and 2004 was $170,533
and $0, respectively. The cost of revenue exceeded sales during 2005, mainly
because of the mobile LED truck which had revenues of $41,167 and cost of
revenue of $78,321 which was mainly depreciation on the mobile LED truck.
While the Company is introducing its new products and until it sells larger
volumes to get economies of scale, it expects the cost of sales to fluctuate
between periods as a percentage of its revenues.
During 2005, the Company refined its process of capturing the costs associated
with the LED truck, thus the costs are higher for cost of sales related to the
LED truck than for the same period in 2004.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses includes such items as
wages, consulting, general office expenses, business promotion expenses and
costs of being a public company including legal and accounting fees, insurance
and investor relations.
25
SG&A expenses decreased from $6,936,155 for the year ended December 31, 2004 to
$4,942,320 for the same period during 2005. This decrease of $1,993,835 is
primarily the result of decreased consulting expenses of approximately
$2,239,000 offset by increased marketing and sales costs during 2005 to market
the OnScreen(TM) product lines.
During 2004, the Company had issued equity for certain consulting services
provided to the Company for which the Company recorded approximately $2,192,000
of non-cash expense. 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 approximately
$2,239,000 in consulting expense during the year ended December 31, 2005,
compared to the same period in 2004. The Company did record approximately
$55,000 of non-cash consulting expenses during 2005.
For the year ended December 31, 2005 compared to 2004, the Company recorded
non-cash compensation of approximately $1,323,000 and $2,090,000, respectively.
The company anticipates its sales and marketing expenditures to increase during
2006 compared to 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 2006 compared to 2005 as the
Company is putting in place the infrastructure to support the distribution 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 $375,383 in
research and development during the year ended December 31, 2005, 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
continuing to increase its expenditures in research and development during the
remainder of 2006 compared to 2005 to bring its OnScreen(TM) technology products
to commercialization.
Restructuring costs
During the fourth quarter of 2005, the Company moved its headquarters to
Portland, Oregon from Safety Harbor, Florida. As part of the corporate office
relocation, the Company incurred $78,801 of restructuring costs for severance
for seven employees and relocation expenses for two employees. No additional
expenses are anticipated.
Impairment Loss
During 2004, the Company wrote off the remaining balance of its EyeCatcherPlus
displays which resulted in an impairment loss of $195,398. During 2005, there
was no impairment loss recorded.
Bad Debt
Bad debt expense has decreased by $6,682 during 2005 compared to 2004. The bad
debt expense is primarily related to the mobile LED truck business. The Company
does not anticipate this to be a large item during 2006.
26
Other Income
The Company recorded $14,510 of other income related primarily to bookkeeping
services and rental income from a sublease to a related party during 2004. This
arrangement was cancelled during 2004.
Other Expense
During 2005, the Company recorded a $16,787 loss related to the disposal of
certain fixed assets related to moving the headquarters to Portland Oregon from
its Florida location. During 2004, the Company recorded $22,768 related to a
loss on the disposal of certain fixed assets.
Investment Income
During 2004, in order for the Company to optimize its return on the equity funds
it has raised, it invested in certain liquid marketable securities. During 2005
and 2004, the Company recorded $20,680 and $20,969, respectively, of investment
income net of any losses related to these investments.
Settlement Gain
The Company recorded a settlement gain of $16,667 for the year ended December
31, 2005. During 2005, the Company reached a settlement with Capitol City
Trailers regarding the use of one of its trucks. The settlement resulted in
Capitol City Trailers paying $37,500 to the Company over time. At December 31,
2005, the Company had received $16,667, which it has recorded as a settlement
gain. Due to the financial condition of Capitol City Trailers, the Company has
not recorded a receivable of $12,917 for the remaining amount, but will record
it as a settlement gain when it is received.
The settlement gain was $335,465 for the year ended December 31, 2004. The main
component of the 2004 gain was from the settlement of a disputed convertible
promissory note in the principal amount of $234,869 plus 8% interest accruing
from the note date of August 1999. On February 5, 2004, the Company satisfied
this disputed obligation with 60,000 shares of the Company's common stock. These
shares were valued at $60,600 and the Company recorded a settlement gain of
$267,458 in February 2004.
Settlement Loss
The settlement loss was $139,621 for the year ended December 31, 2004. During
2004, the Company paid approximately $68,000 related to services provided by a
consultant that was in dispute and accrued $67,000 at December 31, 2004 related
to a proposed settlement with another consultant.
Interest Expense - Intrinsic Value of Convertible Debt and Amortization of Debt
Discount The Company recorded an expense of $1,676,481 for the year ended
December 31, 2005 for the intrinsic value of convertible debt and the
amortization of debt discount. The total intrinsic value of convertible debt
recorded was $1,778,436 and a debt discount of $215,275. The remaining $317,230
will be expensed during the first quarter of 2006.
Interest Expense
The Company incurred $336,051 and $64,071 of interest expense during 2005 and
2004, respectively. The interest expense for the year ended December 31, 2004
includes $46,500 of non-cash interest related to the value of options issued
under default provisions of certain notes and $17,571 of interest paid by the
issuance of equity.
27
The interest expense of $336,051 for year ended December 31, 2005 is for the
interest on the $1.5 million unsecured note entered into during March 2005 which
was replaced with unsecured convertible notes and the $3.5 million of unsecured
convertible notes entered into during the third and fourth quarter of 2005. The
Company will continue to incur interest on these notes until they are paid off.
Net Loss
The net loss increased $577,896 for the year ended December 31, 2005 compared to
the same period in 2004. The increase in net loss during 2005 compared to 2004
is mainly the result of recording the $1,676,481 of non-cash intrinsic value of
convertible debt and amortization of debt discount related to the convertible
notes payable and an increase of research and development costs of approximately
$375,000 and interest expense of approximately $272,000. This is offset by a
decrease of selling and administrative expenses of approximately $2 million.
Preferred Stock Dividends
During the year ended December 31, 2005, the Company recorded Series A
Convertible Preferred Stock dividends of $201,895.
During the year ended December 31, 2004, the Company recorded $172,000 and $28
for the intrinsic value associated with the embedded beneficial convertible
feature of the Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, respectively.
For financial statement purposes, the intrinsic value associated with the
embedded beneficial convertible feature of Series A and Series B Convertible
Preferred Stock was recorded as a preferred stock dividend.
Additionally, during 2004, the Company recorded Series A Convertible Preferred
Stock dividends of $270,583 and Series B Convertible Preferred Stock dividends
of $17,901.
The Company expects the preferred stock dividends will be lower for 2006
compared to 2005 as some of the preferred stock was converted into common stock
during 2005.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements and the report of Salberg & Company, P.A. dated
February 13, 2006 are attached hereto and incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of December 31, 2005. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective such that the
material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to OnScreen
Technologies, Inc. during the period when this report was being prepared.
28
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 fiscal
year ended December 31, 2005. We have not identified any significant deficiency
or materials weaknesses in our internal controls, and therefore there were no
corrective actions taken.
ITEM 8B. OTHER MATTERS
There are no matters to be reported under this Item.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following are officers and directors of the Company.
Name Age Position
---- --- --------
Charles R. Baker 51 Chief Executive Officer, President
and Chairman of the Board of Directors
William J. Clough, Esq. 54 Executive Vice President of
Corporate Development, Corporate
Secretary and General Counsel
Mark R. Chandler 51 Chief Financial Officer
Russell L. Wall 62 Director and Chairman of the
Audit Committee
Bradley J. Hallock 47 Director
Because we are a small company, we are currently dependent on the efforts of a
limited number of management personnel. We believe that because of the large
amount of responsibility being placed on each member of our management team, the
loss of the services of any member of this team at the present time would harm
our business. Each member of our management team supervises the operation and
growth of one or more integral parts of our business.
All directors hold office until the next annual meeting of shareholders of the
Company and until their successors are elected and qualified. Officers hold
office until the first meeting of directors following the annual meeting of
shareholders and until their successors are elected and qualified, subject to
earlier removal by the Board of Directors.
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS AND DIRECTORS
Charles R. Baker, Chief Executive Officer, President and Chairman of the Board
of Directors Charles R. Baker was appointed to the Company Board of Directors,
effective March 1, 2005, chosen as Chairman of the Board of Directors effective
June 13, 2005 and appointed Chief Executive Officer effective August 31, 2005.
Mr. Baker was elected to serve a two year term on the Board of Directors at the
2005 Annual Meeting of Shareholders. Mr. Baker is an experienced global business
executive with a 25 year track record of building and implementing successful
business strategies. Prior to assuming the fulltime position as Chairman of the
Board of Directors, Mr. Baker was the President of Vesta International, the
29
premium provider of stored value, payment and fraud solutions. Prior to Vesta,
Mr. Baker was CEO/Managing Director of Starbucks Coffee Company, Australia. He
also spent several years at NIKE where, as Divisional Vice President/General
Manager of NIKE Global Retail, he led the growth of a $1.2 billion retail
business in 16 countries. He was also a member of NIKE's Executive Leadership
team which was responsible for leading the strategy of NIKE's $12 billion
worldwide. In addition, he was CEO of a leading Internet company, Family Wonder,
which he successfully led through its acquisition by Sega, Inc. Earlier in his
career, Mr. Baker was General Manager of Britches of Georgetowne, a leading
apparel company.
William J. Clough, Esq., Executive Vice President of Corporate Development,
Corporate Secretary and General Counsel William J. Clough was a police officer
for 16 years, working at the local, state, and federal level. In 1987 while
working as a Federal Air Marshall flying in Southern Europe and the Middle East,
Mr. Clough decided to return to law school. He received his Juris Doctorate, cum
laude, from Hastings College of the Law in 1990. He operated his own law firm
with offices in Los Angeles, San Francisco, and Honolulu for 12 years. Mr.
Clough obtained the largest ever non-wrongful death jury verdict in Los Angeles
County Superior Court in 2000 and successfully represented parties in
multi-million dollar cases throughout the United States. He is certified to
practice law in state and federal courts in California, Illinois, Hawaii, and
before the United States Supreme Court. Mr. Clough has represented large scale
manufacturing and entertainment entities, including work with MGM Studios, 20th
Century Fox, News Corp., Lions Gate Films, Artisan Pictures, Sony, Mediacopy,
and others.
Mark R. Chandler, Chief Financial Officer
Mark Chandler joined OnScreen in January 2004 after working 23 years with Sara
Lee Corporation where he held several senior positions in finance, general
management and operations. He most recently was the CEO of Business Development
Europe and was a member of the Board of Directors of Sara Lee Apparel Europe.
Previously, he was the Group Chief Financial Officer for the $2 billion European
apparel group for Sara Lee and responsible for all financial and administrative
activities, IT, and strategic planning. Additionally, he led the organization
and launch of a new technological breakthrough product for the European apparel
market. Mr. Chandler has extensive and diversified international experience in
finance, IT, strategic planning and implementation, operations and general
management, treasury, business development and corporate development including
acquisitions and divestments. Mr. Chandler began his career with American
Express as an internal consultant and held several financial positions with
General Foods. He moved to Playtex, Inc. in 1980 and actively participated in
two leverage buyouts prior to the company being sold to Sara Lee in 1991. Mr.
Chandler holds a Bachelor of Arts degree in mathematics and economics from
Whitman College in 1976 and a MBA in finance and marketing from Columbia
University Graduate School of Business in 1978. Mr. Chandler is a member of the
European Executive Council.
Russell L. Wall, Director and Chairman of the Audit Committee Mr. Wall was
appointed to the Board of Directors in November 2003, elected to serve a one
year term at the 2004 Annual Meeting of Shareholders and re-elected to a two
year term at the 2005 Annual Meeting of Shareholders. He also serves as Chairman
of the Audit Committee. Mr. Wall holds a Bachelor of Science degree in
Engineering from Iowa State University, a MBA degree in finance/marketing from
University of Santa Clara and a Chartered Financial Analyst designation. Prior
to his retirement in 2000, Mr. Wall was Chief Financial Officer for 12 years
with a publicly traded company. His responsibilities included
financial/accounting management, internal and external financial reporting,
strategic planning and other operational duties. Mr. Wall brings 5 years
experience in the financial securities industry as a consultant and portfolio
manager with a Wall Street and a private investment management firm. He also
brings 10 years Fortune 100 company experience in the engineering and
construction industry with assignments as Analysis and Development Engineer,
Planning and Control Manager and Project Manager.
30
Bradley J. Hallock, Director
Brad Hallock, age 47, was appointed to the Board of Directors in April 2004 and
was elected at the June 2004 shareholders' meeting to serve an additional two
year term. Mr. Hallock brings to the board over 25 years of corporate
experience. Mr. Hallock was the founder and Chief Executive Officer of C and R,
Ltd., a provider of wholesale services to the automobile industry with annual
revenue in excess of $10,000,000. For three years, Mr. Hallock served as a
Senior Executive for First America Automotive, Inc. (FAA), an $800,000,000
annual revenue company that was later acquired by Sonic Automotive, Inc.
(NYSE:SAH). As a Senior Executive at FAA, he conceived and implemented the "Auto
Factory" concept to vertically integrate used car operations across disparate
retail franchises on a regional basis. He led the expansion of this concept into
a $100,000,000 annual revenue division of FAA resulting with industry leading
profitability. During his tenure at FAA, Mr. Hallock was a key member of the
merger and acquisition team, where he was instrumental in the successful
acquisition and integration of over 50 new car retail franchises
CODE OF ETHICS
The Company Board of Directors adopted a Code of Ethics for Principal Executives
and Financial Officers that describes the required conduct of honest and ethical
behavior in the conduct their duties. This code does not cover every issue that
may arise, but sets out basic principles relating to conflict of interest,
corporate opportunities, insider trading, confidentiality, protection and proper
use of company assets, compliance with laws, rules and regulations, reporting of
illegal or unethical behavior and accountability. We intend to post the Code of
Ethics and related amendments or waivers, if any, on our website at
www.onscreentech.com. Copies of our Code of Business Conduct and Ethics will be
provided free or charge upon written request to OnScreen Technologies, Inc., 600
N.W. 14th Avenue, Suite 100, Portland, Oregon 97209.
AUDIT COMMITTEE
The Audit Committee is established pursuant to the Sarbanes-Oxley Act of 2002
for the purposes of overseeing the company's accounts and financial reporting
processes and audits of its financial statements. The Audit Committee is
directly responsible for, among other things, the appointment, compensation,
retention and oversight of our independent Registered Public Accounting firm,
review of financial reporting, internal company processes of business/financial
risk and applicable legal, ethical and regulatory requirements. The Audit
Committee is currently composed of the Company Board of Directors and Russell L.
Wall was appointed committee Chairman. Mr. Wall is independent in accordance
with applicable rules promulgated by the Securities and Exchange Commission and
NASDAQ listing standards. Mr. Wall is able to read and understand fundamental
financial statements, including our balance sheet, income statement and cash
flow statement. The Board of Directors has determined that Mr. Wall is an "audit
committee financial expert" as defined in Section 401(h) of Regulation S-K
promulgated by the SEC under the Exchange Act. Our Audit Committee acts pursuant
to a written charter, a copy of which is available from the Company and is
posted on our website at www.onscreentech.com. The Audit Committee has
established a procedure to receive complaints regarding accounts, internal
controls and auditing issues.
31
ITEM 10. EXECUTIVE COMPENSATION
The following tables list the cash and option grant remuneration paid or accrued
and option exercises during 2003, 2004 and 2005 to our officers, executives and
directors who received compensation of $100,000 or more in 2003, 2004 and 2005.
--------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
--------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
--------------------- --------------------------------------------- --------------------------------- ---------- ---------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
--------------------- ------- ----------- ------ ------------------ ------------ ---- --------------- ---------- ---------------
Securities
Name and Other Annual Restricted Underlying All Other
Principle Salary Bonus Compensation Stock Options/ SARs Payouts Compensation
Position Year ($) ($) ($) Award(s) (#) ($) ($)
--------------------- ------- ----------- ------ ------------------ ------------ ---- --------------- ---------- ---------------
Charles Baker, 2005 125,480 - - - 2,000,000 - -
Chairman/CEO/ 2004 - - - - - - -
President (1) 2003 - - - - - - -
--------------------- ------- ----------- ------ ------------------ ------------ ---- --------------- ---------- ---------------
--------------------- ------- ----------- ------ ------------------ ------------ ---- --------------- ---------- ---------------
Mark Chandler 2005 180,000 - - 240,000 (2) - - -
CFO 2004 155,000 - - 120,000 (2) 600,000 - -
2003 - - - - - - -
--------------------- ------- ----------- ------ ------------------ ------------ ---- --------------- ---------- ---------------
William Clough, 2005 62,308 - 4,000 - - - -
EVP Corp. Dev., 2004 - - - - - - -
Corp Sec. (3) 2003 - - - - - - -
--------------------- ------- ----------- ------ ------------------ ------------ ---- --------------- ---------- ---------------
John Thatch, 2005 180,000 - 4,139 600,000 - - 15,000 (4)
Dir. Govt. Sales 2004 155,000 - 10,000 1,666,312 - - -
Prior CEO 2003 140,000 - 10,000 311,777 - - -
--------------------- ------- ----------- ------ ------------------ ------------ ---- --------------- ---------- ---------------
(1) Mr. Baker joined the Company on June 13, 2005.
(2) Mr. Chandler was issued 240,000 shares of the Company's Series A Convertible
Preferred Stock during 2005 and 120,000 shares of the company's Series A
Convertible Preferred Stock during 2004.
(3) Mr. Clough joined the Company on September 1, 2005.
(4) Mr. Thatch entered into a new employment agreement which included the return
of 1,500,000 shares of common stock issued to him previously. The Company
paid him a nominal $15,000 for those shares.
OPTION GRANTS DURING FISCAL 2005
Percent of
Number of Total Options
Securities Granted to Exercise Market
Underlying Employees in Price Per Price on
Options Fiscal Year Share Date of
Name Granted (2) ($/Sh) Grant Expiration Date
--------------------------- -------------- ---- --------------- ----------- ---------- ------------------------
Charles Baker 2,100,000 (1) 79% $0.01 $0.21 December 5, 2010
(1) The options granted to Mr. Baker were fully vested on the grant date. (2)
During the year ended December 31, 2005, OnScreen granted employees options
to purchase 2,547,500 shares of common stock.
32
AGGREGATED OPTION EXERCISES DURING FISCAL 2005
AND
FISCAL 2005 YEAR-END OPTION VALUES
The following table shows the number of shares underlying both exercisable and
unexercisable stock options held by the executive officers named in the Summary
Compensation Table as of the year ended December 31, 2005, and the values for
exercisable and unexercisable options:
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at December
Options at December 31, 2005 31, 2005 (1)
------------------------------- -- ----------------------------------
Name Shares Acquired Value
on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------- ----------------- -------------- --------------- ------------------ --------------- ------------------
Charles Baker - - 2,000,000 - $420,000 -
Mark Chandler - - 600,000 - - -
(1) Options are in the money if the market value per share of the shares
underlying the options is greater than the option exercise price. This
calculation is based on the fair market value at December 31, 2005 of $0.22
per share, less the exercise price.
Director Compensation
Other than as noted below, no Director is compensated for the performance of
duties in that capacity or for his/her attendance at Director meetings.
In recognition for serving on the Company Board of Directors initially without
the benefit of officers and directors liability insurance, which service is of
benefit to the Company in connection with the Company's management and
compliance with the Sarbanes-Oxley Act of 2002, the Board of Directors
authorized issuance to Russell L. Wall a warrant to purchase 100,000 restricted
common shares at a price of $0.25 per share within 3 years after the date of
issuance. In recognition for past services as a director of the Company, by
August 23, 2004 Board of Directors resolution, the board authorized issuance to
Russell L. Wall of a warrant to purchase 600,000 restricted common shares within
five years from date of issuance at a per share price of $0.25.
In recognition for services to be rendered by Charles Baker as a member of the
Board of Directors, the Board of Directors authorized an honorarium issuance to
Charles Baker of a Warrant to purchase 100,000 Corporation common shares at any
time within three years from date of issuance at the per share price of $0.75.
EMPLOYMENT AGREEMENTS
President/CEO
The Company executed an employment contract with Charles R. Baker, the
registrant's Chief Executive Officer, President and Chairman of the Board of
Directors, effective December 13, 2005 for a term of three years. The contract
contains provisions: to terminate the employee for "Just Cause" which will
terminate employee compensation; penalty for termination of employee without
just cause; medical and dental insurance coverage; employee confidentiality and
non-compete obligations. The contract further provides for a monthly salary of
$22,920 plus an automobile allowance of $1,500. Baker shall receive a one time
33
sign on bonus of $100,000, due and payable upon completion of the Equity Round
of financing. In addition, Baker shall receive an annual bonus as follows:
During the first year of employment Baker's bonus is guaranteed to be at least
one hundred thousand dollars ($100,000) with the potential of receiving up to
one hundred percent (100%) of his annual base salary based upon performance.
During the balance of the contract term, Baker shall receive a minimum annual
bonus of at least fifteen percent (15%) of his base annual salary with the
potential of receiving up to one hundred percent (100%) of his annual base
salary based upon performance. Baker shall receive stock options allowing him to
purchase two million (2,000,000) shares of the Company's common stock at a price
of one cent ($0.01) per share. Said options shall be valid for five (5) years
following the date on which they are issued. On the first and second anniversary
of his Employment Agreement, respectively, Baker shall be issued stock options
under the same terms and conditions as stated above, in equal installments such
that at the end of two (2) years he has options to purchase a total number of
common shares equaling five percent (5%) of the fully diluted common shares upon
the closing of the Equity Financing Round.
Baker is responsible to direct, implement, control and otherwise manage all
business; operational; administrative; commercialization; and associated
functions within the Registrant. Baker reports directly to the Board of
Directors.
Executive Vice President of Corporate Development, Corporate Secretary and
General Counsel The Company executed an employment contract with William J.
Clough, Esq. the registrant's Executive Vice President of Corporate Development,
Corporate Secretary and General Counsel, effective December 13, 2005 for a term
of three years. The contract contains provisions: to terminate the employee for
"Just Cause" which will terminate employee compensation; penalty for termination
of employee without just cause; medical and dental insurance coverage; employee
confidentiality and non-compete obligations. William J. Clough's contract
provides for a monthly salary of $15,000 plus an automobile allowance of $1,000.
Clough shall receive a one time sign on bonus of $50,000.00, due and payable
upon completion of the Equity Round of financing. In addition, Clough shall
receive an annual bonus as follows: During the first year of employment Clough's
annual bonus is guaranteed to be at least twenty-five percent (25%) of his
annual base salary with the potential of receiving up to fifty percent (50%) of
his annual base salary based upon performance. During the balance of the
contract term, Clough shall receive a minimum annual bonus of at least fifteen
percent (15%) of his base annual salary with the potential of receiving up to
twenty-five percent (25%) of his annual base salary based upon performance.
Clough is a practicing attorney at law, licensed in state and federal courts of
California, Illinois and Hawaii. In the capacity as General Counsel, Clough is
responsible to direct, implement, control and otherwise manage all legal affairs
and corporate governance. In the capacity as Executive Vice President of
Corporate Development, Clough is responsible for advising and otherwise working
with corporate top management relating to corporate funding, acquisitions,
mergers, product approval and general corporate guidance and oversight of
operations. Clough reports directly to the Company CEO/President.
Chief Financial Officer
On December 16, 2003, the Company executed a three-year employment agreement
that is effective January 1, 2004 with its Chief Financial Officer. The terms of
this agreement are as follows: i) Base salary of $120,000 during 2004, $150,000
during 2005 and $180,000 during 2006, ii) a sign-on bonus for $10,000 payable
before March 31, 2004 and eligible for the bonus plan as set up by the Company,
iii) receive 120,000 shares of Series A convertible preferred stock for each
period of June 2004, January 2005 and June 2005 and iv) receive a warrant to
purchase 100,000 shares of common stock at an exercise price of $0.25 which
expires on November 30, 2006. In the event of a change of control, the Series A
Convertible Preferred stock shall immediately accelerate and be issued within 30
days of written notice from the employee.
34
By August 23, 2004 Board of Directors resolution, the annual salary of Mark R.
Chandler was increased to $150,000 retroactive from January 1, 2004 and
Chandler's annual salary beginning November 1, 2004 was increased to $180,000.
In recognition for past services rendered by Mark R. Chandler, by August 23,
2004 Board of Directors resolution, the board authorized issuance to Mark R.
Chandler a warrant to purchase 500,000 restricted common shares within five
years from date of issuance a per share price of $0.25.
In recognition of continuing and additional services to be rendered by Mark R.
Chandler, by August 23, 2004 Board of Directors resolution, the board authorized
issuance to Mark R. Chandler three hundred seventy five thousand (375,000)
Series A Convertible Preferred shares and one thousand five hundred (1,500)
Series B Convertible Preferred shares in the following increments: 125,000
Series A shares and 500 Series B shares on or about January 1, 2006; 125,000
Series A shares and 500 Series B shares on or about July 1, 2006; and 125,000
Series A shares and 500 Series B shares on or about December 31, 2006. The said
shares will be issued so long as Chandler has not terminated employment
voluntarily before the above issue date.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of the date of this filing by: (i) each
shareholder known by us to be the beneficial owner of 5% or more of the
outstanding common stock, (ii) each of our directors and executives and (iii)
all directors and executive officers as a group. Except as otherwise indicated,
we believe that the beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
Shares of common stock issuable upon exercise of options and warrants that are
currently exercisable or that will become exercisable within 60 days of filing
this document have been included in the table.
35
BENEFICIAL INTEREST TABLE
---------------------------- -------------------------- ------------------------- ----------------------- ---------------
Common Stock Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
---------------------------- -------------- ----------- ------------- ----------- ----------- ----------- ---------------
Name and Address of Percent Percent Percent Percent of
of Class of Class of Class all Voting
Beneficial Owner (1) Number (2) Number (3) Number (4) Securities (5)
-------------------------------------------------------------------------------------------------------------------------------
Brad Hallock (6) 6,684,540 9.49% -- -- -- -- 9.16%
John Thatch (7) 2,531,814 3.59% 211,221 10.50% -- -- 3.76%
William Clough 2,272,104 3.23% -- -- -- -- 3.12%
Russell Wall (8) 1,691,493 2.38% -- -- -- -- 2.30%
Mark Chandler (9) 866,667 1.22% 903,726 44.95% 500 100.00% 3.09%
Charles Baker (10) 2,100,000 2.90% -- -- -- -- 2.80%
Maryatha Miller -- -- 210,000 10.44% -- -- *
Richard S. Kearney -- -- 150,000 7.46% -- -- *
Officers, Directors,
executives as group 16,146,618 21.87% 1,114,947 55.45% 500 100.00% 23.27%
* Less than 1 percent
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
OnScreen Technologies, Inc., 600 NW 14th Avenue, Suite 100, Portland,
Oregon 97209.
(2) Calculated on the basis of 70,427,219 shares of common stock issued and
outstanding at January 30, 2006 except that shares of common stock
underlying options and warrants exercisable within 60 days of the date
hereof are deemed to be outstanding for purposes of calculating the
beneficial ownership of securities of the holder of such options or
warrants. This calculation excludes shares of common stock issuable upon
the conversion of Series A Preferred Stock.
(3) Calculated on the basis of 2,010,718 shares of Series A Preferred Stock
issued and outstanding at January 30, 2006.
(4) Calculated on the basis of 500 shares of Series B Preferred Stock issued
and outstanding at January 30, 2006.
(5) Calculated on the basis of an aggregate of 70,427,219 shares of common
stock with one vote per share, 2,010,718 shares of Series A Preferred
Stock with one vote per share, and 500 shares of Series B Preferred Stock
with 1,000 votes issued and outstanding at January 30, 2006, except that
shares of common stock underlying options and warrants exercisable within
60 days of the date hereof are deemed to be outstanding for purposes of
calculating beneficial ownership of securities of the holder of such
options or warrants.
(6) Mr. Brad Hallock's common stock shares includes 6,611,040 shares owned by
Hallock Trust dtd 6/25/99.
(7) All shares are owned by Thatch Family Trust.
(8) Mr. Wall's common stock shares include 700,000 shares he has the right to
purchase pursuant to a warrant. Mr. Wall's common stock shares include
781,493 shares owned by his IRA account.
(9) Mr. Chandler's common stock shares include 600,000 shares he has the right
to acquire pursuant to a warrant. Mr. Chandler's Series A Preferred shares
include 250,000 shares owned by his IRA account.
(10) Mr. Baker's common stock shares include 2,100,000 shares he has the right
to purchase pursuant to a warrant.
36
At December 31, 2005, the Company had outstanding the following equity
compensation plan information:
---------------------------------- ------------------------- ---------------------- --------------------------
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
Plan category warrants and rights warrants and rights equity compensation plans
---------------------------------- ------------------------- ---------------------- --------------------------
Equity compensation plans 265,000 $0.25 1,735,000
approved by security holders
---------------------------------- ------------------------- ---------------------- --------------------------
Equity compensation plans not 5,922,500 $0.19 -
approved by security holders
---------------------------------- ------------------------- ---------------------- --------------------------
Total 6,187,500 $0.19 1,735,000
---------------------------------- ------------------------- ---------------------- --------------------------
Equity Compensation Plan Information
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 (ISOs) 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 (NSOs) 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 NSOs granted under
the Plan have a maximum duration of 10 years.
On August 25, 2005 the Company's Board of Directors adopted the OnScreen
Technologies, Inc. 2005 Equity Incentive Plan (the "Equity Incentive Plan") and
authorized 2,000,000 shares of Common Stock to fund the Plan. At the 2005 Annual
Meeting of Shareholders held on December 13, 2005, the Equity Incentive Plan was
approved by the Company shareholders.
The Equity Incentive Plan is intended to: (a) provide incentive to employees of
the Company and its affiliates to stimulate their efforts toward the continued
success of the Company and to operate and manage the business in a manner that
will provide for the long-term growth and profitability of the Company; (b)
encourage stock ownership by employees, directors and independent contractors by
providing them with a means to acquire a proprietary interest in the Company by
acquiring shares of Stock or to receive compensation which is based upon
appreciation in the value of Stock; and (c) provide a means of obtaining and
rewarding employees, directors, independent contractors and advisors.
37
The Equity Incentive Plan provides for the issuance of incentive stock options
(ISOs) and Non Statutory Options (NSOs) to employees, directors and independent
contractors of the Company. 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 NSOs granted under the Equity Incentive Plan have a maximum
duration of 10 years.
Equity compensation plans not approved by security holders The Company has
outstanding at December 31, 2005, the following options issued under equity
compensation plans not approved by security holders:
During 2001, the Company issued an option to an employee for the right to
acquire 5,000 shares of its common stock at an exercise price of $0.50. The
option is fully vested and expires during 2006.
During 2003, the Company issued warrants to the Scientific Advisory Board
members for the right to acquire 75,000 shares of its common stock at an
exercise price of $0.25. The warrants are fully vested and expire during 2008.
During 2003, the Company issued options to various employees for the right to
acquire 1,850,000 shares of its common stock at exercise prices ranging from
$0.20 to $0.40. The options are fully vested and expire during 2006.
During 2004, the Company issued options to various employees and a director for
the right to acquire 1,810,000 shares of its common stock at exercise prices
ranging from $0.25 to $1.00. The options are fully vested and expire during 2006
to 2009.
During 2005, the Company issued options to various employees and a director for
the right to acquire 2,282,500 shares of its common stock at exercise prices
ranging from $0.01 to $1.00. The options are fully vested except for 5,000
shares and expire during 2006 to 2010.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth herein, none of our directors or officers, nor any proposed
nominee for election as one of our directors or officers, nor any person who
beneficially owns, directly or indirectly, shares carrying more than 10% of the
voting rights attached to our outstanding shares, nor any relative or spouse of
any of the foregoing persons has any material interest, direct or indirect, in
any transaction in any presently proposed transaction which has or will
materially affect the Company.
We have entered into employment agreements with all of our senior management.
These employment contracts include provisions for the issuance of Common and
Convertible Preferred shares as well as incremental salary increases. For
description of these employment agreements and related rights to our stock
options, see above Item 10, Executive Compensation, Employment Agreements.
38
February 16, 2005 the inventor of the OnScreen technology, who licensed to the
Company the rights of the direct view LED video display technology with angular
dimension greater than 30 inches, conveyed through a third party corporation,
all of the inventor's right, title and interest of the OnScreen technology to
the Company for $200,000. The Company now owns all patent rights to the OnScreen
technology unencumbered subject to the rights of F3 relating to the percentages
of revenue from commercialization of the direct view LED video display
technology with angular dimension greater than 30 inches. One of the Board of
Directors of the Company has an interest in the third party corporation that
conveyed these rights to the Company.
On October 4, 2005, the Company paid $50,000 to extend a letter of intent for
the sale and purchase of certain intellectual property. One of the Board of
Directors of the Company and another officer of the Company both have a
controlling interest in the company that is selling the intellectual property.
The letter of intent gives the Company the right to acquire the WayCool
technology for $800,000 and the issuance of warrants to acquire five percent of
the Company's fully diluted equity securities after giving effect to the
Company's fund raising efforts. The warrants will have the same pricing and
terms issued in connection with our private equity fund raising.
During March 2005, the Company executed a $1.5 million unsecured six-month
promissory note with a related party. The interest rate was 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 and another officer of
the Company both have a controlling interest in the company that is the note
holder. The Company paid a $2,500 fee to extend this note to November 1, 2005.
On October 31, 2005, substitute convertible promissory notes totaling $1.5
million were executed with terms similar to the convertible promissory notes the
Company had outstanding and a promissory note for $100,000 of the $1.5 million
is held by a trust controlled by a member of our Board of Directors and one of
the note holders is the CFO who has a $100,000 note with the same terms as the
other note holders.
ITEM 13. EXHIBITS AND REPORTS
Indemnification of Directors and Officers
The Colorado General Corporation Act provides that each existing or former
director and officer of a corporation may be indemnified in certain instances
against certain liabilities which he or she may incur, inclusive of fees, costs
and other expenses incurred in connection with such defense, by virtue of his or
her relationship with the corporation or with another entity to the extent that
such latter relationship shall have been undertaken at the request of the
corporation; and may have advanced such expenses incurred in defending against
such liabilities upon undertaking to repay the same in the event an ultimate
determination is made denying entitlement to indemnification. The Company's
bylaws incorporate the statutory form of indemnification by specific reference.
Reports to Shareholders
We intend to voluntarily send annual reports to our shareholders, which will
include audited financial statements. We are a reporting company, and file
reports with the Securities and Exchange Commission (SEC), including this Form
10-KSB as well as quarterly reports under Form 10-QSB. The public may read and
copy any materials filed with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The
company files its reports electronically and the SEC maintains an Internet site
that contains reports, proxy and information statements and other information
filed by the company with the SEC electronically. The address of that site is
http://www.sec.gov.
39
The company also maintains an Internet site, which contains information about
the company, news releases and summary financial data. The address of that site
is http://www.onscreentech.com.
40
(a) Exhibits
Exhibit No. Description
3.1(1) Amended Articles of Incorporation of the Company.
3.2(1) Bylaws of the Company.
3.3(2) Articles of Amendment to Certificate of Incorporation -
Certificate of Designations, Preferences, Limitations and
Relative Rights of the Series A Preferred Stock, filed July 25,
2002.
3.4(2) Articles of Amendment to Articles of Incorporation-Terms of
Series A Convertible Preferred Stock, filed November 13, 2003.
3.5(2) Amendment to Restated Articles of Incorporation, filed December
23, 2003.
3.6(2) Articles of Amendment to Certificate of Incorporation -
Certificate of Designations of the Series B Convertible
Preferred Stock, filed April 1, 2004.
3.7(4) Restated Articles of Incorporation, Officers' Certificate and
Colorado Secretary of State Certificate filed June 30, 2004
showing corporate name change to OnScreen Technologies, Inc.
4.1(1) Investment Agreement dated May 19, 2000 by and between the
Registrant and Swartz Private Equity, LLC.
4.2(1) Form of "Commitment Warrant" to Swartz Private Equity, LLC for
the purchase of 1,000,000 shares common stock in connection with
the offering of securities.
4.3(1) Form of "Purchase Warrant" to purchase common stock issued to
Swartz Private Equity, LLC from time to time in connection with
the offering of securities.
4.4(1) Warrant Side-Agreement by and between the Registrant and Swartz
Private Equity, LLC.
4.5(1) Registration Rights Agreement between the Registrant and Swartz
Private Equity, LLC related to the registration of the common
stock to be sold pursuant to the Swartz Investment Agreement.
10.1(2) Employment Agreement between the Registrant and John Thatch,
dated November 2, 1999.
10.2(2) Contract and License Agreement between the Registrant and John
Popovich, dated July 23, 2001.
10.3(2) Agreement by and among the Registrant, John Popovich and Fusion
Three, LLC, dated January 14, 2004.
10.4(2) Letter Agreement between the Registrant and John Popovich, dated
January 15, 2004.
41
10.5(2) Master Settlement and Release Agreement by and among the
Registrant, Fusion Three, LLC, Ryan Family Partners, LLC, and
Capital Management Group, Inc., dated February 3, 2004.
10.6(2) First Amendment to Contract and License Agreement, dated
February 3, 2004.
10.7(2) Employment Agreement between the Registrant and Mark R.
Chandler, COO/CFO, dated December 16, 2003.
10.8(2) Employment Agreement between the Registrant and Stephen K.
Velte, CTO dated November 7, 2003.
10.9(2) Reserved.
10.10(3) Consulting Services Agreement by and among the Registrant, David
Coloris, Excipio Group, S.A., dated December 22, 2003.
10.11(2) Commission Agreement between the Registrant and Gestibroker
dated September 12, 2003.
10.12(2) Addendum to Lease Agreement dated February 1, 2004.
10.13(4) Lease Agreement dated October 15, 2004.
10.14(4) Second Addendum to the Employment Agreement of John "JT" Thatch
dated February 3, 2004.
10.15(2) Lockup Agreement between the Registrant and Excipio Group, S.A.,
dated December 12, 2003.
10.16(2) Agreement between the Registrant and Visual Response Media
Group, Inc., dated February 3, 2004.
10.17(4) Assignment, dated February 16, 2005, of OnScreen(TM) technology
patents ownership from inventor to CH Capital, Inc.
10.18(4) Assignment, dated February 16, 2005, of OnScreen(TM) technology
patents ownership from CH Capital, Inc. to Company.
10.19(4) Contract between SMTC Manufacturing Corporation and Company
dated November 9, 2004
10.20(4) Technology Reseller Agreement between eLutions, Inc. and Company
dated January 31, 2005
10.21(4) Third Addendum to the Employment Agreement of John "JT" Thatch
dated March 28, 2005.
10.22(4) Promissory Note dated March 25, 2005 evidencing $1,500,000
unsecured short term loan.
42
10.23(5) OnScreen Technologies, Inc. 2005 Equity Incentive Plan
10.24(7) Employment Agreement between the Registrant and Charles R. Baker
dated November 21, 2005.
10.25(7) Employment Agreement between the Registrant and William J.
Clough, Esq. dated November 21, 2005.
14.1(6) OnScreen Technologies, Inc. Code of Ethics for Principal
Executive and Financial Officers and OnScreen Technologies, Inc.
Code of Ethics and Business Conduct Statement of General Policy
22.1(6) Proxy Statement and Notice of 2005 Shareholder Meeting.
Footnotes to Exhibits:
1 Incorporated by reference to our Registration Statement on Form
SB-2/A filed with the Commission on October 26, 2001.
2 Incorporated by reference to our Form 10-KSB filed with the
Commission on April 14, 2004.
3 Incorporated by reference to our Report on Form S-8 filed with the
Commission on January 15, 2004.
4 Incorporated by reference to our Report on Form 10-KSB filed with
the Commission on May 4, 2005.
5 Incorporated by reference to our Proxy Statement pursuant to Section
14(a) filed October 7, 2005.
6 Incorporated by reference, filed November 7, 2005.
7 Filed herewith.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
Compensation of Auditors
Audit Fees. The financial statements of the Company, which are furnished herein
as of December 31, 2005, have been audited by Salberg & Company, P.A., Boca
Raton, Florida, Independent Registered Public Accounting Firm. Salberg &
Company, P.A. billed the Company an aggregate of $54,000 in fees and expenses
for professional services rendered in connection with the audit of the Company's
financial statements for the fiscal year ended December 31, 2005 and the reviews
of the financial statements included in each of the Company's Quarterly Reports
on Form 10-QSB during the fiscal year ended December 31, 2005. Salberg &
Company, P.A. billed the Company an aggregate of $50,000 in fees and expenses
for professional services rendered in connection with the audit of the Company's
financial statements for the fiscal year ended December 31, 2004 and the reviews
of the financial statements included in each of the Company's Quarterly Reports
on Form 10-QSB during the fiscal year ended December 31, 2004. Audit related
fees for 2005 were $0 and for 2004 were $0. The Company paid these sums.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
OnScreen Technologies, Inc.
Name Title Date
/s/ CEO/President/Director February 23, 2006
------------------------
Charles R. Baker
/s/ CFO February 23, 2006
------------------------
Mark R. Chandler
/s/ Director/Audit Committee February 23, 2006
------------------------
Russell L. Wall
44
ONSCREEN TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
OnScreen Technologies, Inc.
Contents
Page
---------------
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet F-3
Statements of Operations F-4
Statement of Changes in Stockholders' Equity (Deficit) F-5
Statements of Cash Flows F-7
Notes to Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of:
Onscreen Technologies, Inc.:
We have audited the accompanying balance sheet of Onscreen Technologies, Inc. as
of December 31, 2005, and the related statements of operations, changes in
stockholders' equity (deficit), and cash flows for the years ended December 31,
2005 and 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position Onscreen Technologies, Inc. as of
December 31, 2005 and the results of its operations and its cash flows for the
years ended December 31, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has a net loss of $8,482,125 and cash used in operations
of $5,618,383 in 2005 and an accumulated deficit of $28,457,694, stockholders'
deficit of $3,443,854 and working capital deficit of $4,118,865 at December 31,
2005. These matters raise substantial doubt about its ability to continue as a
going concern. Management's plans as to these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
February 13, 2006
F-2
ONSCREEN TECHNOLOGIES, INC.
BALANCE SHEET
DECEMBER 31, 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 727,141
Accounts receivable, net 18,226
Inventory 552,648
Prepaid expenses and other 150,682
----------------
TOTAL CURRENT ASSETS 1,448,697
----------------
PROPERTY AND EQUIPMENT, NET 254,757
----------------
OTHER ASSETS
Restricted Marketable securities available-for-sale 27,181
Technology rights, net 371,667
Patent Costs 429,096
Deposits and other 97,087
----------------
TOTAL OTHER ASSETS 925,031
----------------
TOTAL ASSETS $ 2,628,485
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 268,710
Preferred stock dividends payable 162,857
Accrued expenses 337,915
Accrued compensation 115,310
Convertible notes payable, related parties, net of discounts of $7,535 192,465
Convertible notes payable, net of discounts of $309,695 4,490,305
----------------
TOTAL CURRENT LIABILITIES 5,567,562
Accrued expenses payable with common stock 504,777
----------------
TOTAL LIABILITIES 6,072,339
----------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' 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 and 1,885,718 shares outstanding at December 31, 2005;
liquidation preference of $1,885,718 at December 31, 2005 1,886
Convertible Series B preferred stock, 30,000 shares authorized, 28,568 shares
issued and no shares outstanding -
liquidation preference of $240 per share
Common stock, par value $0.001; 150,000,000 shares authorized,
70,277,219 shares issued and outstanding at December 31, 2005 70,277
Common stock issuable, at par value, (150,000 shares) 150
Additional paid-in capital 25,088,614
Accumulated deficit (28,457,694)
----------------
(3,296,767)
Less Accumulated other comprehensive loss (4,413)
Less Deferred compensation expense (142,674)
----------------
TOTAL STOCKHOLDERS' DEFICIT (3,443,854)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,628,485
================
See accompanying notes to financial statements
F-3
ONSCREEN TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
----------------- -----------------
REVENUES $ 133,650 $ 145,988
COST OF REVENUES 170,533 -
----------------- -----------------
GROSS PROFIT (36,883) 145,988
OPERATING EXPENSES
Selling, general and administrative 4,942,320 6,936,155
Research and development 1,420,069 1,044,686
Restructuring costs 78,801 -
Impairment loss - 195,398
Bad debt 11,780 18,462
----------------- -----------------
TOTAL OPERATING EXPENSES 6,452,970 8,194,701
----------------- -----------------
LOSS FROM OPERATIONS (6,489,853) (8,048,713)
----------------- -----------------
OTHER INCOME (EXPENSE)
Other income - 14,510
Other expense (16,787) (22,768)
Investment income 20,680 20,969
Settlement gain 16,667 335,465
Settlement loss (300) (139,621)
Interest expense - Intrinsic value of convertible debt and amortization of
debt discount (1,676,481) -
Interest expense (336,051) (64,071)
----------------- -----------------
TOTAL OTHER INCOME (EXPENSE), NET (1,992,272) 144,484
----------------- -----------------
NET LOSS (8,482,125) (7,904,229)
Preferred stock dividends (201,895) (460,512)
----------------- -----------------
NET LOSS ALLOCABLE TO COMMON STOCKHOLDERS $ (8,684,020) $ (8,364,741)
================= =================
Basic and diluted net loss per common share $ (0.12) $ (0.22)
================= =================
Basic and diluted net loss per common share allocable to common stockholders $ (0.12) $ (0.23)
================= =================
Weighted average common shares outstanding 70,116,586 36,144,257
================= =================
See accompanying notes to financial statements
F-4
ONSCREEN TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2005 AND 2004
SERIES A
SERIES B PREFERRED STOCK COMMON STOCK
PREFERRED AND PREFERRED AND COMMON
STOCK STOCK ISSUABLE STOCK ISSUABLE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
Balance, December 31, 2003 -- $ -- 2,689,080 $2,689 21,789,683 $ 21,790
Warrants granted for services, compensation and
under default provisions of promissory notes
Subscription receivables not paid (1,433) (1) (1,800,000) (1,800)
Common stock issued for warrants exercised from
the private placement 12,636 13 7,055,333 7,055
Common stock issued for options and other
warrants exercised 1,175,736 1,176
Common stock issued for services, compensation,
debt payment and settlements 3,502,254 3,502
Common stock issued for cash from private
offering 5,365 5 2,995,274 2,995
Offering costs
Series A & Series B preferred stock dividend
resulting from intrinsic value of convertible
preferred stock
Series A and B Preferred Stock converted to
common stock (28,568) (29) (98,375) (99) 28,961,740 28,962
Series B Preferred Stock issuable to private
placement holders 12,000 12
Series B Preferred Stock dividends, $1 per
share
Series A Preferred Stock issued for cash 25,000 25
Series A Preferred Stock issued for services of
employees, non-employees and accrued expenses 156,500 157
Series A Preferred Stock dividends, $0.10 per
share
Amortization of deferred compensation and
consulting
Net loss for the year ended December 31, 2004
------- -------- ---------- ----------- ----------- ----------
Balance, December 31, 2004 -- -- 2,772,205 2,772 63,680,020 63,680
Net loss for the year ended December 31, 2005
Unrealized losses on marketable securities
COMPREHENSIVE LOSS
Warrants and options granted for service and
compensation
Cancellation of option granted for service
Repricing of options
Common stock issued for options and warrants
exercised in exchange for cash and accrued
compensation 605,000 605
Common stock issued for services, compensation,
and accrued settlement 986,251 986
Common stock issued in conjunction with debt
financing 800,000 800
Common stock acquired from prior employee per
agreement (150,000) (150)
Intrinsic value of common stock conversion
feature of convertible debt
Offering costs
Series A Preferred Stock dividends, $0.10 per
share
Series A Preferred Stock converted to common
stock (1,126,487) (1,126) 4,505,948 4,506
Series A Preferred Stock issued for services of
employee 240,000 240
Amortization of deferred compensation
------- -------- ---------- ----------- ----------- ----------
Balance, December 31, 2005 -- $ -- 1,885,718 $1,886 70,427,219 $70,427
======= ======== ========== =========== =========== ==========
(Continued)
F-5
(Continued)
ADDITIONAL ACCUM- DEFERRED
PAID-IN ULATED COMPENSATION SUBSCRIPTIO
CAPITAL DEFICIT & CONSULTING RECEIVABLE
---------- ------------ ------------- -------------
Balance, December 31, 2003 $ 13,125,44 $ (11,408,933) $ (1,418,307) $ (417,325
Warrants granted for services,
compensation and under default
provisions of promissory notes 976,852 (591,360)
Subscription receivables not paid (448,199) 350,000
Common stock issued for warrants
exercised from the private
placement 3,609,432
Common stock issued for options and
other warrants exercised 352,258 (1,250
Common stock issued for services,
compensation, debt payment and
settlements 2,449,487 (391,375) 18,575
Common stock issued for cash from
private offering 2,243,456
Offering costs (482,946)
Series A & Series B preferred stock
dividend resulting from intrinsic
value of convertible preferred
stock 172,028 (172,028)
Series A and B Preferred Stock
converted to common stock (28,834)
Series B Preferred Stock issuable
to private placement holders (12)
Series B Preferred Stock dividends,
$1 per share (17,901)
Series A Preferred Stock issued for
cash 24,975 50,000
Series A Preferred Stock issued for
services of employees,
non-employees and accrued expenses 156,343 (100,000)
Series A Preferred Stock dividends,
$0.10 per share (270,583)
Amortization of deferred
compensation and consulting 2,062,760
Net loss for the year ended
December 31, 2004 (7,904,229)
---------- ------------ ------------- -------------
Balance, December 31, 2004 22,150,289 (19,773,674) (438,282) -
Net loss for the year ended December
31, 2005 (8,482,125)
Unrealized losses on marketable
securities
COMPREHENSIVE LOSS
Warrants and options granted for
service and compensation 415,150
Cancellation of option granted for
service (27,200) 27,200
Repricing of options 38,500
Common stock issued for options and
warrants exercised in exchange for
cash and accrued compensation 161,145
Common stock issued for services,
compensation, and accrued
settlement 273,014 (177,000)
Common stock issued in conjunction
with debt financing 214,475
Common stock acquired from prior
employee per agreement (151,575) 151,500
Intrinsic value of common stock
conversion feature of convertible
debt 1,778,436
Offering costs
Series A Preferred Stock dividends,
$0.10 per share (201,895)
Series A Preferred Stock converted
to common stock (3,380)
Series A Preferred Stock issued for
services of employee 239,760 (143,333)
Amortization of deferred compensation 437,241
---------- ------------ ------------- -------------
Balance, December 31, 2005 $ 25,088,614 $ (28,457,694) $ (142,674) $ -
========== ============ ============= =============
See accompanying notes to financial statements
F-6
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE EQUITY
LOSS (DEFICIT) I
-------------- -------------
Balance, December 31, 2003 $ - (94,637)
Warrants granted for services,
compensation and under default
provisions of promissory notes 385,492
Subscription receivables not paid (100,000)
Common stock issued for warrants
exercised from the private
placement 3,616,500
Common stock issued for options and
other warrants exercised 352,184
Common stock issued for services,
compensation, debt payment and
settlements 2,080,189
Common stock issued for cash from
private offering 2,246,456
Offering costs (482,946)
Series A & Series B preferred stock
dividend resulting from intrinsic
value of convertible preferred
stock -
Series A and B Preferred Stock
converted to common stock -
Series B Preferred Stock issuable
to private placement holders -
Series B Preferred Stock dividends,
$1 per share (17,901)
Series A Preferred Stock issued for
cash 75,000
Series A Preferred Stock issued for
services of employees,
non-employees and accrued expenses 56,500
Series A Preferred Stock dividends,
$0.10 per share (270,583)
Amortization of deferred
compensation and consulting 2,062,760
Net loss for the year ended
December 31, 2004 (7,904,229)
-------------- -------------
Balance, December 31, 2004 - 2,004,785
Net loss for the year ended December
31, 2005 (8,482,125)
Unrealized losses on marketable
securities (4,413) (4,413)
-------------
COMPREHENSIVE LOSS
(8,486,538)
Warrants and options granted for
service and compensation 415,150
Cancellation of option granted for
service -
Repricing of options 38,500
Common stock issued for options and
warrants exercised in exchange for
cash and accrued compensation 161,750
Common stock issued for services,
compensation, and accrued
settlement 97,000
Common stock issued in conjunction
with debt financing 215,275
Common stock acquired from prior
employee per agreement (225)
Intrinsic value of common stock
conversion feature of convertible
debt 1,778,436
Offering costs -
Series A Preferred Stock dividends,
$0.10 per share (201,895)
Series A Preferred Stock converted
to common stock -
Series A Preferred Stock issued for
services of employee 96,667
Amortization of deferred compensation 437,241
-------------- -------------
Balance, December 31, 2005 $ (4,413) $ (3,443,854)
============== =============
See accompanying notes to financial statements
F-7
ONSCREEN TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (8,482,125) $ (7,904,229)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock, warrants and notes issued for compensation and services 486,650 2,027,645
Gain from settlement of certain accruals and accounts payable - (335,466)
Stock based settlement loss - 71,500
Non-cash interest expense for stock issued to note holders that were in default - 46,500
Non-cash interest expense, including intrinsic value of convertible debt and
amortization of debt discount 1,676,481 17,571
Non-cash interest related party - -
Bad debt 11,780 18,462
Amortization of technology rights 20,000 130,833
Amortization of deferred consulting and compensation 437,241 2,062,760
Amortization of deferred financing fees 64,000 -
Loss on disposal of assets and asset shrinkage 16,787 22,768
Impairment of long-lived assets - 195,398
Compensation and services expense payable in common stock 454,775 191,669
Depreciation 118,018 169,205
Other 4,692 -
(INCREASE) DECREASE IN ASSETS:
Accounts receivable and other receivables (28,401) (8,974)
Inventory (552,648)
Due from affiliate - (2,863)
Prepaid expenses and other current assets (114,484) (38,354)
Deposits and other assets (20,429) (23,084)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable 139,852 (198,026)
Royalties payable - (52,501)
Accrued expenses 64,778 174,505
Accrued compensation 75,310 (176,689)
Deferred revenues 9,340 (58,238)
Deferred gain on sale of future revenues - (150,000)
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (5,618,383) (3,819,608)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in technology rights - (522,500)
Investment in marketable securities - (401,233)
Investment in patents (380,439) (48,657)
Proceeds from sales of marketable securities 396,541 -
Proceeds from sale of property and equipment 6,472 850
Purchase of property and equipment (96,083) (118,461)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (73,509) (1,090,001)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Series A convertible preferred stock dividends paid (121,250) (257,347)
Purchase of treasury stock (15,225) -
Proceeds from notes and loans payable, net of expenses 5,011,000 -
Payments on notes and loans payable (75,000) (302,511)
Proceeds from sales of common stock and exercise of warrants and options, net
of offering costs 121,750 5,632,194
Deferred stock issuance costs (63,892) -
Proceeds from issuance of preferred stock - Series A - 75,000
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,857,383 5,147,336
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ (834,509) $ 237,727
Cash and Cash Equivalents at Beginning of Year 1,561,650 1,323,923
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 727,141 $ 1,561,650
============== ==============
(continued)
F-8
(continued)
2005 2004
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Approximate interest paid in cash $ 261,785 $ -
Income taxes paid $ - $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt and accrued liabilities settled/paid with common stock, net of subscriptions
receivable $ 181,664 $ 227,361
=========== ==========
Subscription receivable paid with reduction of debt $ - $ 18,575
=========== ==========
Debt and accrued interest - related party settled with capital stock $ - $ -
=========== ==========
Series A and Series B preferred stock dividends from intrinsic value $ - $ 172,028
=========== ==========
Accounts payable and accrued expenses settled with Series A preferred stock $ - $ 24,000
=========== ==========
Discount on debt for intrinsic value of convertible notes payable $ 1,778,436 $ -
=========== ==========
Other comprehensive loss from unrealized loss $ 4,413 $ -
=========== ==========
Termination of warrant and common stock returned $ 178,700 $ -
=========== ==========
Common stock issued for conversion of Series A preferred stock $ 1,126 $ 99
=========== ==========
Common stock issued for conversion of Series B preferred stock $ - $ 29
=========== ==========
Common stock issued for accrued expense settlements $ 54,000 $ 160,600
=========== ==========
Common stock issued for deferred consulting and compensation $ 710,333 $ 1,082,735
=========== ==========
Common stock issued for debt financing $ 215,275 $ -
=========== ==========
See accompanying notes to financial statements
F-9
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION
------
OnScreen Technologies, Inc. (the Company) is commercializing its
innovative OnScreen(TM) 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 $8,482,125 and cash used in operations of $5,618,383 for
the year ended December 31, 2005 and an accumulated deficit of
$28,457,694, stockholders' deficit of $3,443,854, and working capital
deficit of $4,118,965 at December 31, 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 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.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------
(A) USE OF ESTIMATES
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 affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
in 2005 and 2004 include estimates used to review the Company's
long-lived assets for impairment, inventory valuation, valuations of
non-cash capital stock issuances and the valuation allowance on
deferred tax assets.
(B) CASH AND CASH EQUIVALENTS
For purposes of the cash flow statement, the Company considers all
highly liquid investments with maturities of three months or less at
the time of purchase to be cash equivalents.
F-10
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
(C) MARKETABLE SECURITIES AVAILABLE-FOR-SALE
In order for the Company to optimize its return on the equity funds it
has raised, it invested in certain liquid marketable securities. The
Company classifies these marketable securities as available-for-sale.
These securities are recorded at fair market value, with unrealized
gains or losses excluded from earnings and included in other
comprehensive income within stockholders' equity. Realized gains and
losses on the sale of these securities are determined using the
specific-identification method.
The restricted available-for-sale securities are comprised of the
following at December 31, 2005. The gross unrealized losses are
included in accumulated other comprehensive income:
Gross Estimated
Amortized Unrealized Fair
cost Losses Value
------------ ------------- -------------
Equity securities $ 14,000 $ (2,079) $ 11,921
Corporate debt securities 6,000 (259) 5,741
Mutual funds 10,000 (2,075) 7,925
Money market 1,594 - 1,594
----------- ------------ -----------
$ 31,594 $ (4,413) $ 27,181
=========== ============ ===========
The corporate debt securities have a maturity of less than one year.
The Company received proceeds of $396,541 from the sale of investments
and recognized losses on sale of investments of $3,956 during the year
ended December 31, 2005. The loss is included in investment income on
the Statement of Operations.
(D) ACCOUNTS RECEIVABLE
Accounts receivable consist of the receivables associated with the
revenue derived from the Company's LED truck and its Living Windows(TM)
products. We record an allowance for doubtful accounts to allow for any
amounts that may not be recoverable, which is based on an analysis of
our prior collection experience, customer credit worthiness, and
current economic trends. Based on management's review of accounts
receivable, an allowance for doubtful accounts of $11,780 at December
31, 2005 is considered adequate. We determine receivables to be past
due based on the payment terms of original invoices.
(E) INVENTORY
Inventories are stated at the lower of cost (first-in, first-out basis)
or market. All of the inventory is finished goods at December 31, 2005.
During 2005, the Company impaired $25,000 of defective inventory which
is included in Cost of Goods Sold on the Statement of Operations.
F-11
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
(F) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit and financial
institution deposit accounts, which, at times, exceed federally insured
limits. The Company has not experienced any losses in such accounts
through December 31, 2005.
(G) PROPERTY AND EQUIPMENT
Property and equipment are recorded at the lower of fair value or cost,
less accumulated depreciation and amortization. Major additions are
capitalized. Minor additions and maintenance and repairs, which do not
extend the useful life of an asset, are charged to operations when
incurred. When property and equipment are sold or otherwise disposed
of, the asset account and related accumulated depreciation account are
relieved, and any gain or loss is included in operations. Depreciation
is provided primarily using the straight-line method over the assets'
estimated useful lives of three to seven years. Estimated useful lives
are periodically reviewed and, where appropriate, changes are made
prospectively.
(H) LONG-LIVED ASSETS
The Company periodically reviews its long-lived assets and certain
identifiable assets related to those assets for impairment whenever
circumstances and situations change such that there is an indication
that the carrying amounts may not be recoverable. If the non-discounted
future cash flows of the enterprise are less than their carrying
amount, their carrying amounts are reduced to fair value and an
impairment loss is recognized. See Note 3 for the impairment amounts
that were recorded during 2004. There was no impairment amount recorded
during 2005.
(I) IDENTIFIABLE INTANGIBLE ASSETS
As of December 31, 2005, the Company had capitalized $522,500 of costs
related to technology rights it had acquired. The Company is amortizing
the remaining unamortized technology rights over a twenty year life.
As of December 31, 2005, the Company had capitalized $429,096 of costs
related to filing patent applications. When the patents are approved,
the Company will then amortize these costs over the life of the patent.
Any patents that are not approved will be expensed at that time. At
December 31, 2005, all of the patents are pending approval.
(J) STOCK-BASED COMPENSATION
For the stock options, warrants and stock 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 current
market price of the underlying stock over the exercise price. For
options, the compensation amounts are amortized over the respective
vesting periods of the option grant. For stock compensation, the
amounts are amortized over the shorter of the vesting period or the
period of service the award pertains to. The Company provides pro forma
disclosures of net loss and pro forma loss per share as if the fair
value based method of accounting had been applied, 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.
F-12
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
The following table illustrates the effect on net loss available to
common stockholders and loss per common share had the Company applied
the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation during 2005 and 2004:
2005 2004
------------------- -----------------
Net Loss Available to Common Stockholders:
Net loss available to common stockholders as reported $ (8,684,020) $ (8,364,741)
Plus total stock-based employee compensation cost
included in the net loss, net of related tax
effects 469,318 142,468
Less total stock-based employee compensation
expenses determined under fair value based method
for all awards, net of related tax effects (597,754) (665,710)
------------------- -----------------
Pro forma net loss $ (8,812,456) $ (8,887,983)
=================== =================
Loss per share:
As reported $ (0.12) $ (0.23)
=================== =================
Pro forma $ (0.13) $ (0.25)
=================== =================
See Note 7 section I, for additional disclosure and discussion of the
Company's employee stock plan and activity.
The Company accounts for services provided by non-employees who are
issued equity instruments based on the fair value of the consideration
received or the fair value of the equity instruments, whichever is more
reliably measurable on the measurement date. The amount related to the
value of the stock awards is amortized on a straight-line basis over
the required service periods.
(K) REVENUE RECOGNITION
The Company operates as one segment. All internal analysis and
financial reporting by management is performed as one segment. 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
F-13
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
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.
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.
(L) WARRANTY RESERVES
The Company records a warranty reserve liability based on its estimates
of future costs on sales recognized. There was no warranty reserve
recorded at December 31, 2005.
(M) ADVERTISING
In accordance with Accounting Standards Executive Committee Statement
of Position 93-7, costs incurred for producing and communicating
advertising of the Company are charged to operations as incurred.
Advertising expense for the years ended December 31, 2005 and 2004 was
$39,823 and $19,422, respectively.
(N) INCOME TAXES
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized as income in the period that includes the enactment date.
Valuation allowances have been established against the Company's
deferred tax assets due to uncertainties in the Company's ability to
generate sufficient taxable income in future periods to make
realization of such assets more likely than not. The Company has not
recognized an income tax benefit for its operating losses generated
during 2005 and 2004 based on uncertainties concerning the Company's
ability to generate taxable income in future periods. There was no
income tax receivable at December 31, 2005 and 2004. 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.
F-14
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
(O) NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share", basic net loss per share is computed by dividing
the net loss available to common stockholders for the period by the
weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing net loss available
to common stockholders by the weighted average number of common and
common equivalent shares outstanding during the period. Common
equivalent shares outstanding as of December 31, 2005 and 2004, which
consist of options, warrants, convertible notes and convertible
preferred stock, have been excluded from the diluted net loss per
common share calculations because they are anti-dilutive. Accordingly,
diluted net loss per share is the same as basic net loss per share for
2005 and 2004. The following table summarizes the potential common
stock shares at December 31, 2005 which may dilute future earning per
share.
Convertible preferred stock 7,542,872
Warrants and options 6,187,500
Convertible debt 20,000,000
---------------
33,730,372
===============
(P) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of
information about the fair value of certain financial instruments for
which it is practicable to estimate that value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation.
The Company believes the carrying amounts of the short-term financial
instruments, including accounts receivable, notes payable and current
liabilities reflected in the accompanying balance sheet approximate
fair value at December 31, 2005 due to the relatively short-term nature
of these instruments.
(Q) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123 (revised
2004) ("SFAS 123(R)"), "Share-Based Payment." This statement replaces
SFAS No. 123 "Accounting for Stock-Based Compensation," and supersedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
123(R) will require the fair value of all stock option awards issued 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. The adoption of SFAS 123(R) will impact the Company
by requiring it to use the fair-value based method of accounting for
future and unvested employee stock transactions rather than the
intrinsic method the Company currently uses. The Company adopted this
SFAS as of January 1, 2006. The adoption of this SFAS does not have an
impact on the Company's financial statement through December 31, 2005,
but will increase the cost of equity compensation by $32,756 during
2006 related to 182,500 of its options that are not vested at December
31, 2005 as the options will be valued at fair value instead of the
intrinsic value.
F-15
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS 154"). This statement replaces APB Opinion
No. 20 "Accounting Changes" and FASB Statement No. 3 "Reporting
Accounting Changes in Interim Financial Statements". SFAS 154 applies
to all voluntary changes in accounting principle and to changes
required by an accounting pronouncement in the unusual instance that
the pronouncement does not include specific transition provisions. SFAS
154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. When it is impracticable to determine
the period-specific effects of an accounting change on one or more
individual prior periods presented, this SFAS requires that the new
accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of equity or net assets for
that period rather than being reported in an income statement. When it
is impracticable to determine the cumulative effect of applying a
change in accounting principle to all prior periods, this SFAS requires
that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. The Company adopted
this SFAS as of January 1, 2006. There is no current impact on the
Company's financial statements with the adoption of this FASB.
(R) RECLASSIFICATIONS
Certain amounts in the 2004 financial statements have been reclassified
to conform to the 2005 presentation.
NOTE 3 PROPERTY AND EQUIPMENT, NET
----------------------------------
Property and equipment is summarized as follows at December 31, 2005:
LED truck $ 450,000
Equipment 87,084
Computers and software 68,042
Vehicles 38,173
Leasehold improvements 10,988
---------------
654,287
Less accumulated depreciation (399,530)
---------------
$ 254,757
===============
Depreciation expense for the years ended December 31, 2005 and 2004 amounted to
$118,018 and $169,205, respectively.
During 2004, management evaluated the recovery of the recorded value of the
boards and determined since, the Company did not receive any revenue from these
boards during 2004 and the fair value of the boards was less than the net book
value of the boards there was an impairment loss of $195,398 which was included
in impairment loss on the Statements of Operations.
F-16
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
NOTE 4 TECHNOLOGY RIGHTS AND LICENSE AND ROYALTY AGREEMENTS
-----------------------------------------------------------
TECHNOLOGY RIGHTS UNDER LICENSE 1
---------------------------------
The Company, under a license agreement, obtained an exclusive license in a
patent for the manufacture, sale, and marketing of direct view video displays
with an angular dimension of greater than 30 inches. Prior to 2005, the Company
recorded a technology right intangible asset for the $522,500 it paid for these
rights. The remaining unamortized technology rights are amortized over the
twenty-year estimated life of the technology. The Technology Rights at December
31, 2005 were as follows:
Technology Rights $ 522,500
Accumulated Amortization (150,833)
--------
$ 371,667
=========
The amortization of the technology rights during 2005 and 2004 was $20,000 and
$130,833, respectively. The estimated annual amortization expense is $20,000 for
each for the next five years. The management of the Company has evaluated the
technology rights for impairment and based upon its projected cash flow analysis
from this technology believes there is no impairment of these technology rights
at December 31, 2005.
LICENSE 2
---------
On February 3, 2004, a third party and the Company reached a Master Settlement
and Release Agreement whereby, in consideration for the exchange of mutual
releases and the third party relinquishing any claim to any of the OnScreen
technology (including the 11.25% license payments), the Company paid to this
third party during June 2004, $150,000 plus agreed to pay the following annually
declining percentage of revenue derived from the commercialization of the direct
view LED video display technology with angular dimension greater than 30 inches:
5% in 2005 declining to 2% in year 2008 and thereafter. The $150,000 reduced the
deferred gain on sale of future revenues which had been recorded on the
Company's balance sheet during 2004. In the event of a change of control of the
Company, the percentage of revenue stated above shall terminate and a single
payment transaction fee shall be paid by the Company to this third party ranging
from 10% of the OnScreen appraised value up to $100,000,000, 7.5% for the
appraised value between $100,000,001 and $200,000,000, 5% of the appraised value
between $200,000,001 and $300,000,000, and 4% of the appraised value between
$300,000,001 and $400,000,000 and 3% for the appraised value between
$400,000,001 and $500,000,000 and 2% for any appraised amounts between
$500,000,001 and $600,000,000.
F-17
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
NOTE 5 CONVERTIBLE NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE, RELATED PARTIES
-------------------------------------------------------------------------------
During March 2005, the Company executed a $1.5 million unsecured six-month
promissory note with a related party. The interest rate was 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 and another officer of
the Company both have a controlling interest in the company that is the note
holder. The Company paid a $2,500 fee to extend this note to November 1, 2005.
On October 31, 2005, substitute convertible promissory notes totaling $1.5
million were executed with terms similar to the convertible promissory notes the
Company had outstanding (see below) with $1 million assigned to the adult
brother of a related party (who management does not consider to be a related
party), $100,000 assigned to a trust controlled by a member of our Board of
Directors and $400,000 assigned to unrelated parties.
During the third and fourth quarters of 2005, the Company executed three-month
convertible promissory notes totaling $3.5 million. One of the note holders is
the CFO who has a $100,000 note with the same terms as the other note holders.
The Company has the option to extend these notes for an additional three-month
period. The Company has verbally extended those notes that came due and intends
to extend the remaining notes. The interest rate is 12% per annum. Interest only
payments are due monthly until the maturity of these notes at which time the
principal is due. If the notes are paid prior to the maturity date or the
extended maturity date, the Company is required to pay the interest for the
entire three-month periods. The note holders have the right to convert their
notes to common stock at the lower of the exercise price of $0.25 per share or
the price set for a future equity offering. At December 31, 2005, the price for
an equity offering was not set, therefore the conversion price was $0.25.
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.
In total, the Company issued convertible notes totaling $5 million. All
convertible notes were reviewed by management to determine if the embedded
conversion rights qualified as derivatives under FASB Statement 133 "Accounting
for Derivative Instruments and Hedging Activates" and related interpretations.
Management determined the embedded conversion features were not derivatives and
accordingly each convertible instrument is reflected as one combined instrument
in the accompanying financial statements. Management then reviewed whether a
beneficial conversion feature and value existed. The intrinsic value related to
the convertible feature of the debt was valued at $1,778,436 and is being
amortized over the three-month term of the notes. At December 31, 2005, $270,163
remained on the Company's Balance Sheet as a discount to debt related to this
convertible feature. The Company issued 800,000 shares of its common stock to
several note holders who were eligible to receive 100,000 shares of common stock
based upon a $500,000 investment. These shares were valued at $215,275 based
upon the allocation of the $4,000,000 proceeds to debt and equity based upon
their fair market values. At December 31, 2005, $47,067 remained on the
Company's Balance Sheet as a discount to debt related to the allocation of the
proceeds to the 800,000 shares of common stock.
NOTE 6 COMMITMENTS AND CONTINGENCIES
------------------------------------
(A) LEGAL MATTERS
The Company may be involved in certain legal actions arising from the
ordinary course of business. While it is not feasible to predict or
determine the outcome of these matters, the Company does not anticipate
that any of these matters or these matters in the aggregate will have a
material adverse effect on the Company's business or its financial
position or results of operations.
F-18
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
(B) ROYALTY AND LICENSE FEE AGREEMENTS
See Note 4-License and Royalty Agreements for a discussion of
commitments owed under royalty and license fee agreements.
(C) EMPLOYMENT AGREEMENTS
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN OF THE BOARD OF
DIRECTORS On December 12, 2005, the Company executed an agreement with
the Chief Executive Officer/President and Chairman of the Board of
Directors ("CEO") that expires November 21, 2008. The CEO's annual
salary is $275,040. The CEO is eligible to receive a one-time sign-on
bonus of $100,000 upon completion of an equity round of financing. The
CEO is also eligible for annual bonuses with a minimum 15% bonus of his
salary and the potential to receive up to 100% bonus of his salary. In
the first year, the CEO will receive a minimum bonus of $100,000. The
Company granted five-year options to purchase two million shares of its
common stock at an exercise price of $0.01 per share. Additionally, on
the first and second anniversary of the agreement, the CEO shall
receive five-year stock options with an exercise price of $0.01 in
equal installments such that at the end of the two years the CEO has
options to purchase a total number of common stock shares equaling five
percent of the fully diluted common shares upon the closing of the
equity financing to be completed on or about January 1, 2006. At
December 31, 2005, the Company had accrued compensation expense of
$12,431 pertaining to the options to be granted per his agreement for
an estimated 2,268,574 shares of its common stock.
CORPORATE SECRETARY, GENERAL COUNSEL AND EXECUTIVE VICE PRESIDENT OF
CORPORATE DEVELOPMENT On December 12, 2005, the Company executed an
agreement with the Corporate Secretary, General Counsel and Executive
Vice President of Corporate Development ("Corporate Secretary") that
expires November 21, 2008. The Corporate Secretary's annual salary is
$180,000. The Corporate Secretary is eligible to receive a one-time
sign-on bonus of $50,000 upon completion of an equity round of
financing. The Corporate Secretary is also eligible for annual bonuses
with a minimum 25% bonus of his salary and the potential to receive up
to 50% bonus of his salary. In the first year, the Corporate Secretary
will receive a minimum bonus of $45,000.
CHIEF FINANCIAL OFFICER
On December 16, 2003, the Company executed a three-year employment
agreement that is effective January 1, 2004 with its Chief Financial
Officer (CFO). On October 6, 2004, the Compensation Committee of the
Board of Directors authorized an increase in the CFO's salary to
$180,000 effective November 1, 2004.
F-19
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
On October 6, 2004, the Compensation Committee of the Board of
Directors also granted the CFO 375,000 shares of Series A Convertible
Preferred stock and 1,500 shares of Series B Convertible Preferred
stock in the following increments: 125,000 Series A shares and 500
Series B shares on or about January 1, 2006; 125,000 Series A shares
and 500 Series B shares on or about July 1, 2006, and 125,000 Series A
shares and 500 Series B shares on or about December 31, 2006. These
shares will be issued with the provision that the CFO has not
terminated his employment voluntarily prior to the issuance of the
shares. The 375,000 shares of Series A Convertible Preferred Stock are
valued at $1.00 per share based on contemporaneous cash sales during
2004. The total value of these Series A shares is $375,000 and is being
expensed over the term of the CFO's employment agreement. The 1,500
shares of Series B Convertible Preferred Stock are valued at $270 per
share based on contemporaneous cash sales during 2004 of common stock
multiplied times the conversion ratio of 1,000. The total value of
these Series B shares is $405,000 and is being expensed over the term
of the CFO's employment agreement. At December 31, 2005, the Company
had accrued $433,350 related to the Series A and Series B Convertible
Preferred Stock that is to be issued per his agreement. During January
2006, the Company issued 500 shares of its Series B Convertible
Preferred stock and 125,000 shares of its Series A Convertible
Preferred stock to the CFO in accordance with this agreement.
DIRECTOR OF GOVERNMENT SALES
On November 4, 2005, the Company executed a one-year employment
agreement with the Director of Government Sales. He will be paid
$15,000 per month for January and February 2006 and then will be paid
an annual salary of $150,000 until the Company has the RediAlert(TM) or
RediDMS(TM) products produced at which time his annual salary shall be
reduced to $125,000. He is also eligible to receive sales commissions.
In addition, the employee is eligible for a bonus of 500,000 shares of
the Company's common stock if the employee exceeds his sales target and
is employed at the end of the one-year agreement term. At December 31,
2005, the Company had accrued $26,667 of compensation expense for this
bonus.
DIRECTOR OF ADMINISTRATION
In accordance with the Director of Administration's employment
agreement, he is paid an annual salary of $75,000 and a stock bonus of
the Company's registered common stock equal in value to $25,000 within
two and one-half months after the end of each year of employment during
which he was employed by the Company. The employment agreement expires
May 21, 2008. At December 31, 2005, the Company had accrued $25,000
related to the common stock bonus that is to be issued per his
agreement for his 2005 service period.
(D) LEASES
During October 2005, the Company executed a non-cancelable 5-year
office lease in Portland, Oregon commencing November 1, 2005. With one
hundred eighty days prior written notice, the Company has the right to
renew this lease for an additional five years.
The Company executed a non-cancelable 5-year office lease commencing
May 1, 2001 in Safety Harbor, Florida. With sixty days prior written
notice, the Company has the right to renew this lease for an additional
five years. During 2004, the Company needed additional space and
executed an additional non-cancelable 5-year office lease commencing on
December 1, 2004. The annual rent escalation for both leases is the
greater of the CPI or 3%.
F-20
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
Future minimum lease payments under these leases are as follows:
Year Ending December 31,
2006 $ 212,000
2007 151,000
2008 171,000
2009 174,000
2010 143,000
---------------
$ 851,000
===============
Rental expense was $184,600 and $142,766 in 2005 and 2004,
respectively, included in selling, general and administrative on the
statement of operations.
(E) CONSULTING AGREEMENTS
During 2005, the Company entered into an investor relations agreement
for which the Company has granted 100,000 shares of its common stock to
this firm to be issued after January 20, 2006. At December 31, 2005,
the Company had accrued $7,333 of expense related to this stock
commitment based upon the quoted market price of the stock at December
31, 2005.
(F) VENDOR COMMITMENTS
At December 31, 2005, the Company had an outstanding commitment to a
vendor for materials and finished goods that had not been delivered to
the Company of $413,184.
NOTE 7 STOCKHOLDERS' EQUITY
---------------------------
(A) CONVERTIBLE PREFERRED STOCK SERIES A
The Company designated 5,000,000 shares of preferred stock as new
Series A Convertible Preferred Stock ("Series A"). The Series A is
convertible to common shares on a four-for-one basis, is due dividends
at $0.10 per share as authorized by the Board, has a liquidation value
of $1.00 per share and has equivalent voting rights as common shares on
a share for share basis. Once the Series A shares have been issued,
they cannot be reissued. On the Balance Sheet, the shares issued are
higher than the shares outstanding due to the conversion of the Series
A to common stock.
During 2004, the Company sold and issued 25,000 shares of Series A
convertible preferred stock for cash at $1.00 per share for total
proceeds of $25,000. Also the Company received payment of $50,000 for
the Series A Convertible Preferred Stock subscription recorded during
2003 and issued the 50,000 shares of Series A convertible preferred
stock that was issuable at December 31, 2003.
During 2004, the Company issued 12,500 shares of its Series A
convertible preferred stock for consulting services totaling $12,500.
These shares were valued at $1.00 per share based on contemporaneous
cash sales. The measurement date was the date at which the performance
of the services had been completed.
During 2004, the Company issued 24,000 shares of Series A convertible
preferred stock for services totaling $24,000 that was accrued as a
liability at December 31, 2003. These shares were valued at $1.00 per
share based on contemporaneous cash sales. The measurement date was the
date at which the performance of the services had been completed.
F-21
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
During 2004, the Company issued 120,000 shares of its Series A
Preferred Stock to its CFO in accordance with his employment agreement.
These 120,000 shares were valued at $1.00 per share based on
contemporaneous cash sales around the grant date. The total value of
these shares of $120,000 is being expensed over the three-year
employment agreement with $40,000 deferred and $80,000 expensed as of
December 31, 2005.
During 2004, the Company converted 98,375 shares of Series A
convertible preferred stock into 393,500 shares of the Company's common
stock at the request of certain Series A convertible preferred stock
holders.
During 2004, the Company recorded $172,000 for the intrinsic value
associated with the embedded beneficial convertible feature of the
Series A convertible preferred stock. This amount was computed as the
difference between the conversion price and the fair value of the
preferred stock, which was computed as the fair value of the common
stock based on the quoted trading price at the preferred stock issuance
dates, multiplied by the conversion ratio of four-for-one for Series A.
This intrinsic value is limited to the amount of the proceeds allocated
to the preferred stock. For financial statement purposes, this $172,000
was recorded as a preferred stock dividend. Additionally during 2004,
the Company recorded Series A convertible preferred stock dividends of
$270,583.
During the year ended December 31, 2005, the Company converted
1,126,487 shares of the Company's Series A convertible preferred stock
into 4,505,948 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 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 $80,000 deferred and $160,000 expensed as of
December 31, 2005.
During 2005, the Company recorded Series A convertible preferred stock
dividends of $201,895.
(B) CONVERTIBLE PREFERRED STOCK SERIES B
On February 3, 2004, the Company's board of directors designated 30,000
shares of preferred stock as Series B Convertible Preferred Stock
("Series B"). The Series B is convertible to common shares on a one
thousand-for-one ratio, is due dividends at $1 per share, payable
quarterly, as authorized by the Board and the dividends are cumulative.
Series B has a liquidation value of $240 per share and has voting
rights of one thousand votes per Series B share. Once the Series B
shares have been issued, they cannot be reissued. On the Balance Sheet,
the shares issued are higher than the shares outstanding due to the
conversion of the Series B to common stock.
F-22
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
During 2004, the Company recorded 28,568 shares of Series B Convertible
Preferred Stock as issuable. This is comprised of 23,203 Series B
shares issuable to the private placement unit holders during 2003 and
the exercise of certain warrants during 2004 and 5,365 Series B shares
issuable to private placement shareholders during 2004. The 28,568
shares of Series B were converted to 28,568,240 shares of common stock
during 2004
During 2004, the Company recorded $28 for the intrinsic value
associated with the embedded beneficial convertible feature of the
Series B convertible preferred stock. This amount was computed as the
difference between the conversion price and the fair value of the
preferred stock, which was computed as the fair value of the common
stock based on the quoted trading price at the preferred stock issuance
dates, multiplied by the conversion ratio of one thousand-for-one for
Series B. This intrinsic value is limited to the amount of the proceeds
allocated to the preferred stock. For financial statement purposes,
this $28 was recorded as a preferred stock dividend. Additionally
during 2004, the Company recorded Series B convertible preferred stock
dividends of $17,901.
(C) COMMON STOCK DIVIDEND RESTRICTIONS
There is a restriction on the common stock dividends as any cumulative
preferred stock dividends are required to be paid prior to any common
stock dividends being paid. Also, the retained earnings of the Company
would be restricted upon an involuntary liquidation by the cumulative
unpaid preferred dividends to the preferred stockholders and for the $1
per share Series A and $240 per share Series B liquidation preferences.
(D) 2003 PRIVATE PLACEMENT
During the fourth quarter of 2003, the Company had a private placement
offering of common stock. From this offering, the Company received
$1,575,000 of cash proceeds and recorded a $100,000 subscriptions
receivable at December 31, 2003. The investors received 6,700,000
common stock shares, 6,700,000 common stock warrants with an exercise
price of $0.50 and an expiration date of February 28, 2004 and
3,350,000 common stock warrants with an exercise price of $0.75 and an
expiration date of May 30, 2004 (See Note 7H for details of warrants).
The Company issued 5,900,000 shares of common stock during the first
quarter of 2004 related to this private placement.
The remaining 800,000 shares from this private placement will not be
issued because during July 2004, the Company and this party mutually
terminated the subscription agreement and the Company paid back the
$100,000 originally paid, reduced the subscription receivable of
$100,000 to zero and did not issue the 800,000 shares that were
recorded as issuable to this investor. The Company also reduced its
Series B convertible preferred stock issuable for the 1,433 shares of
Series B related to this transaction. In addition, the Company paid
$68,121 as settlement of other amounts owed to this individual. The
$68,121 was recorded as a settlement loss during 2004.
F-23
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
On February 5, 2004, as part of the private placement the Company's
Board of Directors authorized a) 12,000 shares of Series B Convertible
Preferred Stock to the private placement unit holders, b) 12,000 shares
of Series B Convertible Preferred Stock upon the exercise of the $0.50
warrant holders of the private placement and c) 6,000 shares of Series
B Convertible Preferred Stock upon the exercise of the $0.75 warrant
holders of the private placement.
During 2004, warrants were exercised to purchase 6,700,000 shares of
common stock from the private placement at $0.50 per share and warrants
were exercised to purchase 355,333 shares of common stock from the
private placement at $0.75 per share. The Company received $3,616,500
of cash from the exercise of these warrants.
In conjunction with raising these funds, the Company paid in cash,
offering costs of $229,750 during 2003 and $482,946 during 2004. The
Company also issued 630,000 warrants during 2003 with an exercise price
of $0.001 per share that expire sixty days from their issuance valued
at $541,170, which cost is included in warrants granted for services in
the additional paid-in capital (total offering costs of $770,920 during
2003) (See Note 7H).
(E) 2004 PRIVATE PLACEMENT
During the third and fourth quarters of 2004, the Company sold some of
its securities through a private placement. Each unit in the 2004
private placement was comprised of 666.67 shares of common stock and
1.194 shares of Series B Preferred Stock for each $500 received. During
the third and fourth quarters of 2004, the Company received $2,246,456
of proceeds related to this 2004 private placement. The Company issued
2,995,274 shares of common stock and the 5,364.54 shares of series B
convertible preferred stock were converted into common stock totaling
5,364,540 shares.
(F) COMMON STOCK ISSUANCES
The Company entered into a stock purchase agreement on October 31, 2003
whereby the buyer agreed to purchase 1,000,000 shares of the Company's
common stock for $250,000 and also received warrants to purchase up to
1,000,000 shares of the Company's common stock at an exercise price of
$0.50 with an expiration date of February 28, 2004. The Company
recorded $1,000 in its common stock issuable equity account for the
1,000,000 shares which are to be issued upon receipt of payment. The
Company recorded the purchase price of $250,000 for the 1,000,000
shares of the Company's common stock in subscriptions receivable as the
funds had not been received by the Company at December 31, 2003.
Subsequent to year end, this subscription was not fulfilled and the
warrants expired. Therefore, the Company reduced its subscription
receivable for the $250,000 and reduced the common stock issuable for
the 1,000,000 shares during 2004.
During 2004, the Company issued 50,000 shares of its common stock
pursuant to the exercise of the rights of certain note holders granted
under the default provisions of certain promissory notes. The issuance
resulted in additional subscriptions receivable of $1,250 for a total
issuance price of $1,250 or $0.025 per share.
F-24
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
During 2004, warrants to purchase 1,420,736 shares of the Company's
common stock were exercised. The Company received $350,184 of cash and
a note for the remaining $150,000. The $150,000 owed to the Company was
not paid for the 300,000 shares that were recorded as issuable during
2004 and on October 11, 2004, the Company and investor agreed that they
would not issue the 300,000 shares and would not collect the $150,000
owed for those shares. The Company issued 1,120,736 shares of its
common stock for the warrants that were exercised and paid.
As part of the October 11, 2004 agreement with a certain investor, the
Company also agreed to issue 100,000 shares of stock to this party for
the services they provided to the Company during the Company's
negotiations with a third party which included the forgiveness by the
third party of dividends that accrued on 114,343 shares of Series A
Convertible Preferred Stock. These shares were valued at $0.27 per
share based on contemporaneous cash sales around the date of grant.
During 2004, the Company recorded the $27,000 as general consulting
expense and also recorded a settlement gain of $12,093 related to the
Series A dividends that were forgiven.
During 2004, the Company granted and issued 100,000 shares of its
common stock to a research and development provider. These shares were
valued at $0.27 per share based on contemporaneous cash sales around
the date of grant. The $27,000 was expensed to research and development
costs
During 2004, a former employee exercised an option to purchase 5,000
shares of the Company's common stock at an exercise price of $0.40 per
share. The Company received $2,000 for the exercise of this option.
During 2004, the Company issued 100,000 shares of its common stock to
an individual for services. These shares were valued based upon the
quoted marked price of $1.06 on the date of grant and the expense of
$106,000 was recorded during 2004.
During 2004, the Company issued 1,666,312 shares of its common stock to
its then President/CEO in accordance with his employment agreement.
These shares were valued based upon the quoted market price of $0.86 on
the grant date and the expense of $1,433,028 was recorded during 2004.
During 2004, the Company issued 450,000 shares of its common stock to
its then President of its OnScreen Products Division. The Company had a
right to repurchase 150,000 of these shares from the employee for $225
as they were not fully vested when he left the Company. The 450,000
shares were valued at $454,500 based upon the quoted market price of
$1.01 on the grant date and $303,000 was recorded as an expense over
the employee's employment agreement. During the year ended December 31,
2005, the Company repurchased 150,000 shares of common stock for $225.
The Company cancelled these 150,000 shares of its common stock. These
shares were not vested at the time the employee left the Company;
therefore, deferred compensation was reduced by $151,500 during 2005.
F-25
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
Certain notes were paid in full on March 12, 2004 by paying the note
holders $250,000 and issuing 12,500 shares of the Company's common
stock. These shares were valued at $11,500 based on the quoted market
price of $0.92 on the settlement date and after consideration of
additional interest due for 2004 and a receivable of $18,575 due from
the note holders from option exercises, the Company recognized a gain
of $7,103 in 2004.
During 2004, a note holder exercised the right to convert a $215,861
note into 863,442 shares of the Company's common stock.
A plaintiff held a convertible promissory note for $234,869 at 8%
interest accruing from the note date of August 1999. The Company
disputed the note; however, as a contingency, the Company recorded a
total of $328,058 in accrued expenses at December 31, 2003 related to
this matter. On February 5, 2004, the Company satisfied this disputed
note with 60,000 shares of the Company's common stock. These shares
were valued at $60,600 based upon the quoted market price of $1.01 on
the settlement date. The Company recorded a settlement gain of $267,458
during 2004.
During 2004, the Company recorded a settlement loss of $13,500 for
50,000 shares of its common stock that were issued to a third party.
These shares were valued at $0.27 per share based on contemporaneous
cash sales.
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.
During 2005, warrants and options were exercised to purchase 605,000 of
the Company's common stock. The Company received $161,750 of proceeds
from these exercises of warrants and options.
During 2005, the Company issued 200,000 shares of its common stock that
it had recorded an accrued liability of $54,000 for at December 31,
2004.
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 2005, the current Director of Government Sales and previous
CEO/President received an additional 2.1 million shares of the
Company's common stock and the vehicle allowance was increased. Also,
the current Director of Government Sales and previous CEO/President
relinquished certain rights he had to revenue which he had previously
been entitled to per his contract. The 2.1 million shares were valued
at $0.27 per share totaling $567,000 based on contemporaneous cash
sales and will be recorded as compensation expense over the remaining
term of his employment agreement. During November 2005, this employee
returned 1,500,000 of the shares of stock as a new employment agreement
was entered into. The Company paid him a nominal $15,000 for those
shares. $390,000 of the previous compensation recorded was reversed and
$177,000 total compensation expense was recorded for the shares issued
to this employee during 2005.
F-26
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
The current CEO was to receive 1.5 million shares of Company stock in
accordance with his initial employment agreement entered into in early
2005, plus additional stock awards throughout his employment agreement.
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 $961,875 was recorded as compensation expense during 2005. The
shares were never issued and during December 2005, the Company entered
into a new agreement which replaced the prior agreement and eliminated
any stock awards. In accordance with APB 25 and related
interpretations, the $961,875 of compensation expense for the stock was
reversed.
During the third quarter of 2005, the Company issued 7,500 shares of
its common stock for the purchase of the website,
www.onscreentechnologies.com. These shares were valued at $3,000 using
the quoted market price on the date of grant and were recorded as
administrative expenses during 2005.
During the year ended 2005, the Company granted 150,000 shares of its
common stock for investor relation services. These shares were valued
at $30,000 based upon the quoted market price of the stock on the date
of grant and were recorded as administrative expenses during 2005.
The Company issued 800,000 shares of its common stock to several note
holders who were eligible to receive 100,000 shares of common stock
based upon the issuance of convertible notes payable which equal or
exceed $500,000. These shares were valued at $215,275 based upon the
allocation of the $4,000,000 proceeds to debt and equity based upon
their fair market values.
The intrinsic value related to the convertible feature of the
convertible debt that was issued during 2005 was valued at $1,778,436
and is being amortized over the three-month term of the notes.
(G) INVESTMENT AGREEMENT
On February 3, 2004, the Company and Swartz entered into a settlement
and termination of investment agreement. The Company agreed to i) pay
$10, ii) promptly issue the 379,907 shares of common stock from the
cashless exercise of the Swartz warrants of which Swartz agreed to
limit its sales of these shares of Company stock to ten percent of the
Company's trading volume for any calendar month, iii) Swartz shall
retain the 100,000 shares of stock that had been issued during 2002 per
the initial agreement and then were not valid as put shares as the put
transaction was never executed, but the shares had been issued to
Swartz and iv) the investment agreement between the Company and Swartz
shall terminate subject to the completion of items i - iv above. During
February 2004, the Company issued the 379,907 shares of common stock
(without any restrictive legends).
F-27
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
The 100,000 share were valued at $104,000 using the quoted marked price
of $1.04 on the date of settlement. This $104,000 settled the $100,000
commitment payable that was owed to Swartz at December 31, 2003 and the
remaining $4,000 was recognized as a settlement loss.
(H) NON-EMPLOYEE STOCK WARRANTS
During 2004 the Company granted warrants to purchase 1,395,736 shares
of the Company's common stock to certain service providers at exercise
prices ranging from $0.25 to $0.50. These warrants were valued at an
aggregate of $707,352 and are recognized as consulting expense over the
period of each consultant's agreement. These warrants were valued using
the Black-Scholes Options Pricing Model using the following
assumptions: expected life of 90 days - 3 years, volatility of 79% -
309%, zero expected dividends and a discount rate of 0.85% to 2.03%. At
December 31, 2005, 75,000 of these warrants are outstanding.
During 2004, the Company granted warrants to purchase 50,000 shares of
the Company's common stock under the default provisions of certain
notes payable at an exercise price of $0.025. These warrants were
valued at $46,500 using the Black-Scholes option pricing model with a
30 day expected life, volatility of 74% - 100%, zero expected dividends
and a discount rate of 0.85% - 0.92% and the $46,500 was charged to
interest expense. All of these warrants were exercised during 2004.
During 2005, the Company granted a warrant to purchase 20,000 shares of
its common stock for legal services at an exercise price of $0.75. This
warrant was valued at $15,000 using the Black-Scholes option pricing
model with a six-month expected life, volatility of 73%, zero expected
dividends and a discount rate of 2.61% and the $15,000 was charged to
administrative expense. This warrant was exercised during 2005.
A summary of the warrants issued to non-employees for services as of
December 31, 2005 and 2004 and changes during the years is presented
below:
2005 2004
---------------------------------- -----------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Warrants Price Warrants Price
---------------- ------------- ---------------- --------------
Balance at beginning of period 2,150,000 $ 0.55 3,055,000 $ 0.47
Granted 20,000 $ 0.75 1,395,736 $ 0.28
Exercised (595,000) $ 0.27 (1,470,736) $ 0.34
Forfeited (1,500,000) $ 0.69 (830,000) $ 0.15
---------------- ----------------
Balance at end of period 75,000 $ 0.25 2,150,000 $ 0.55
================ ================
Warrants exercisable at end of period 75,000 $ 0.25 2,150,000 $ 0.55
================ ================
Weighted average fair value of warrants $ 0.002 $ 0.30
granted during the period
F-28
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
During 2005, warrants to purchase 1.5 million shares of the Company's
common stock expired during the year and are recorded as forfeited in
the table above.
The following table summarizes information about non-employee stock
warrants outstanding that were issued for services at December 31,
2005:
Warrants Outstanding and Exercisable
Weighted
Average Weighted
Number Remaining Average
Range of Outstanding at Contractual Exercise
Exercise Price December 31, 2005 Life Price
---------------- ------------------ --------------- --------------
$ 0.25 75,000 2.1 Years $ 0.25
(I) EMPLOYEE STOCK OPTIONS AND WARRANTS
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.
F-29
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
The Company accounts for its stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees";
accordingly, the excess of the fair values of the common stock
underlying the options over the exercise prices on the dates of the
grants are recorded as a compensation expense.
During the first quarter of 2004, the Company issued warrants to the
CFO and a director each to purchase 100,000 shares of the Company's
common stock (200,000 in total). These warrants were valued at $149,000
based on quoted market prices and will be recorded as compensation
expense over the service period.
During 2004, a member of the Board of Directors was granted a five-year
warrant to purchase 600,000 shares of common stock with an exercise
price of $0.25 for services provided. This warrant was valued at
$12,000 based on contemporaneous cash sales during 2004 of common stock
and was recorded to compensation expense during 2004.
During 2004, the CFO was granted a five-year warrant to purchase
500,000 shares of common stock with an exercise price of $0.25 for
services provided. This warrant was valued at $10,000 based on
contemporaneous cash sales during 2004 of common stock and was recorded
to compensation expense during 2004.
For additional services to be provided, the then President, OnScreen
Products Division was granted a five-year warrant to purchase 2,000,000
shares of common stock with an exercise price of $0.25 for services
provided. This warrant was valued at $40,000 based on the fair value of
common stock of $0.27 based on contemporaneous cash sales during 2004
of common stock and will be recorded to compensation expense through
the vesting date of November 1, 2006. During 2005, this employee left
the Company and the Company reduced the deferred compensation account
by $27,200 for the cancellation of an option that was not fully vested
when the employee left the Company.
During 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 2004, the Director of Administration was granted a five-year
warrant to purchase 600,000 shares of common stock with an exercise
price of $0.25 for services provided. This warrant was valued at
$12,000 based on contemporaneous cash sales during 2004 of common stock
and was recorded to compensation expense during 2004.
During 2004, a total of 40,000 of stock options were granted to two
employees. The exercise price exceeded the fair value of common stock
based on contemporaneous common stock cash sales during 2004; therefore
no compensation expense was recorded as there was no intrinsic value.
F-30
During 2005, the Company granted stock options to various employees to
purchase 182,500 shares of its common stock after vesting periods that
range from immediately to 1 year. The exercise prices range from $0.25
to $1.00 and the fair value of the Company's stock ranged from $0.27 to
$0.32 based on contemporaneous cash sales if there were any or the
quoted market value of the Company's common stock on the dates of
grant. The Company recorded an intrinsic value of $150 related to these
stock options.
During 2005, the Company granted stock options from the 2005 Plan to
various employees to purchase 265,000 shares of its common stock
vesting periods that range from immediately to two years. The exercise
prices are $0.25 and the quoted market value of the Company's common
stock ranged from $0.21 to $0.25 on the dates of grant. The intrinsic
value of these grants was -0-, therefore no expense was recognized
related to these stock options.
During 2005, a member of the Board of Directors was granted a
three-year warrant to purchase 100,000 shares of the Company's common
stock with an exercise price of $0.75 for services provided. The
exercise price exceeded the fair value of common stock based on
contemporaneous common stock cash sales during 2004; therefore no
compensation expense was recorded as there was no intrinsic value.
During 2005, the Chief Executive Officer was granted a five-year
warrant to purchase 2,000,000 shares of the Company's common stock with
an exercise price of $0.01 for services provided. The Company recorded
an intrinsic value of $400,000 related to these stock options as the
quoted market value of the Company's common stock of $0.21 on the date
of grant exceeded the exercise price of $0.01.
A summary of the warrants and options issued to employees as of
December 31, 2005 and 2004 and changes during the year are presented
below:
2005 2004
----------------------------------- ----------------------------------
Weighted Weighted
Number of Average Number of Average
Warrants and Exercise Warrants and Exercise
Options Price Options Price
---------------- ------------- ---------------- -------------
Balance at beginning of period 5,810,000 $ 0.28 1,885,000 $ 0.33
Granted 2,547,500 0.12 3,940,000 0.25
Exercised (10,000) 0.30 (5,000) 0.35
Expired (100,000) 0.25 - -
Forfeited (2,135,000) 0.28 (10,000) 0.35
---------------- ----------------
Balance at end of period 6,112,500 $ 0.19 5,810,000 $ 0.28
================ ================
Warrants and options exercisable at
end of period 5,961,250 $ 0.19 3,805,000 $ 0.29
================ =========== ================ ===========
At December 31, 2005, there were 1,735,000 shares available under the
2005 Stock Plan.
F-31
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
The weighted average fair value of warrants and options granted during
the periods are as follows:
2005 2004
---- ----
Exercise price lower than the market price $0.21 $0.30
Exercise price equaled the market price $0.19 n/a
Exercise price exceeded the market price $0.19 $0.36
The fair value of warrants granted during 2005 was estimated on the
dates of the grants using the following approximate assumptions:
dividend yield of 0%, expected volatilities of 145% - 205%, risk-free
interest rates of 3.72% - 4.46%, and expected lives of 3 months to - 5
years.
The fair value of warrants granted during 2004 was estimated on the
dates of the grants using the following approximate assumptions:
dividend yield of 0%, expected volatilities of 166% - 312%, risk-free
interest rates of .85% - 3.46%, and expected lives of 2 - 5 years.
The following table summarizes information about employee stock
warrants and options outstanding at December 31, 2005:
Warrants and Options Outstanding Warrants and Options Exercisable
------------------------------------------------------------------------------ ---------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise at December Exercise
Price 2005 Life Price 31, 2005 Price
------------- ---------------- ---------------- ------------- --------------- -------------
$ 0.01 2,000,000 4.9 Years $ 0.01 2,000,000 $ 0.01
0.20 - 0.25 3,220,000 2.5 Years 0.23 3,068,750 0.23
0.35 - 0.50 720,000 0.8 Years 0.39 720,000 0.39
0.75 162,500 2.5 Years 0.75 162,500 0.75
$ 1.00 10,000 0.1 Years 1.00 10,000 1.00
---------------- ---------------
6,112,500 3.1 Years $ 0.19 5,961,250 $ 0.19
================ ===============
(J) DEFERRED CONSULTING AND COMPENSATION EXPENSE FROM STOCK AND WARRANT
ISSUANCES
During 2004 and 2005, the Company entered into several consulting
agreements with various consultants to provide services for the
Company. The measurement date was typically the grant date for these
agreements since the shares were contractually fully vested and
nonforfeitable at the grant date. The Company amortizes the cost of
each agreement over the contract term. At December 31, 2005, the
Company had amortized all of the deferred consulting expense.
During 2004 and 2005, the Company issued common stock, preferred stock
and warrants to certain employees. The Company amortizes the cost of
this equity compensation over the service period of the employee. At
December 31, 2005, the Company had $142,674 of deferred equity
compensation.
F-32
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
During the years ended December 31, 2005 and 2004, the Company
recognized $437,241 and $2,062,760, respectively, of deferred
consulting and compensation amortization expense.
NOTE 8 RELATED PARTY TRANSACTIONS
---------------------------------
At January 1, 2003, the company had a short-term loan payable from its current
President of the OnScreen Products Division totaling $50,000. This loan was paid
off in full during March 2004. The Company did not record any interest expense
related to this loan.
On April 15, 2004, Orion One, LLC ("Orion") and the Company entered into a
ninety day consulting agreement whereby as compensation for the services Orion
was granted a warrant to purchase 600,000 shares of the Company's common stock
at an exercise price of $0.25 to be exercised within ninety days (warrant was
exercised and 600,000 share issued for $150,000). The warrant was recorded as a
consulting expense of $402,360 during 2004. On October 11, 2004, Orion and the
Company entered into an agreement whereby Orion would provide services to the
Company and for these services, the Company would issue 100,000 shares of its
common stock which was valued at $27,000. The former President of our OnScreen
Products Division is an investor in Orion.
On February 3, 2004, a third party and the Company reached a master settlement
and release agreement whereby, in consideration for the exchange of mutual
releases and the third party relinquishing any claim to any of the benefits of
the OnScreen (including the 11.25% license payments), the Company agreed to pay
to this third party $150,000 within five days of receiving the $7.2 million
funding in 2004 plus an annually declining percentage of revenue of 5% in 2005
declining to 2% in year 2008 and thereafter from the OnScreen revenues. In the
event of a change of control of the Company, the percentage of revenue shall
terminate and a single payment transaction fee shall be paid by the Company to
this third party ranging from 10% of the OnScreen appraised value up to
$100,000,000, 7 1/2% for the appraised value between $100,000,001 and
$200,000,000, 5% of the appraised value between $200,000,001 and $300,000,000,
and 4% of the appraised value between $300,000,001 and $400,000,000 and 3% for
the appraised value between $400,000,001 and $500,000,000 and 2% for any
appraised amounts between $500,000,001 and $600,000,000. (See Note 4 - License
1). At the time of this agreement, the former President of the OnScreen Products
Division was the manager in this third party company.
February 16, 2005 the inventor of the OnScreen technology, who licensed to the
Company the rights of the direct view LED video display technology with angular
dimension greater than 30 inches, conveyed through a third party corporation,
all of the inventor's right, title and interest of the OnScreen technology to
the Company for $200,000 which is included in patent costs on the accompanying
Balance Sheet. The Company now owns all patent rights to the OnScreen technology
unencumbered subject to the rights of F3 relating to the percentages of revenue
from commercialization of the direct view LED video display technology with
angular dimension greater than 30 inches. One of the Board of Directors of the
Company has an interest in the third party corporation that conveyed these
rights to the Company.
On October 4, 2005, the Company paid $50,000 to extend a letter of intent for
the sale and purchase of certain intellectual property. This amount is included
in patent costs on the accompanying Balance Sheet. One of the Board of Directors
of the Company and another officer of the Company both have a controlling
interest in the company that is selling the intellectual property. The letter of
intent gives the Company the right to acquire the WayCool technology for
$800,000 and the issuance of warrants to acquire five percent of the Company's
fully diluted equity securities after giving effect to the Company's fund
raising efforts. The warrants will have the same pricing and terms issued in
connection with our private equity fund raising.
F-33
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
During late March 2005, the Company signed a $1.5 million unsecured six-month
promissory note. The interest rate is 15%, payable monthly. One of the Board of
Directors of the Company has an interest in the company that is the note holder.
On October 31, 2005, substitute convertible promissory notes totaling $1.5
million were executed with terms similar to the convertible promissory notes the
Company had outstanding with $1 million assigned to the adult brother of a
related party (who management does not consider to be a related party), $100,000
assigned to a trust controlled by a member of our Board of Directors and
$400,000 assigned to unrelated parties.
One of the note holders of the convertible promissory notes is the CFO who has a
$100,000 note with the same terms as the other note holders.
During 2005, a sale of $21,000 was made to a customer who the owner is the
brother of a director. The brother is not considered a related party for
purposes of these financial statements.
NOTE 9 INCOME TAXES
-------------------
The Company recognized losses for both financial and tax reporting purposes
during each of the periods in the accompanying statements of operations.
Accordingly, no provision for income taxes and/or deferred income taxes payable
has been provided for in the accompanying financial statements.
At December 31, 2005, the Company has available net operating loss carry
forwards of approximately $16 million. These net operating loss carry forwards
expire in various years through the year ending December 31, 2025; however,
because the Company has incurred significant operating losses, utilization of
the income tax loss carry forwards are not assured. As a result, the non-current
deferred income tax asset arising from these net operating loss carry forwards
and from other temporary differences are not recorded in the accompanying
balance sheets because we established a valuation allowance to fully reserve
such assets due to the uncertainty of the Company's realization of this benefit.
After consideration of all the evidence management has determined that a full
valuation allowance is necessary to reduce the deferred tax assets to the amount
that will more likely than not be realized.
F-34
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
The Company's tax expense differs from the "expected" tax expense for the
periods ended December 31, 2005 and 2004, computed by applying the Federal
Corporate tax rate of 34% to loss before taxes, as follows:
2005 2004
---------------- ------------------
Computed "expected" tax benefit $ (2,884,000) (2,687,000)
State tax benefit, net of federal effect (308,000) (287,000)
Change in valuation allowance 2,399,000 1,523,000
Intrinsic value of convertible debt 631,000 -
Equity instruments for services 162,000 1,451,000
---------------- ------------------
$ - $ -
================ ==================
At December 31, 2005, the tax effects of temporary differences that gave rise to
significant portions of deferred tax assets and liabilities are as follows:
2005
-----------------
Deferred tax assets:
Net operating loss carry forwards $ 6,205,000
Warrants issued to employees 224,000
Accrued expenses payable with common stock 266,000
Impairment of assets 318,000
Other 25,000
Valuation allowance for deferred tax asset (7,038,000)
-
Deferred tax liabilities:
Property and equipment depreciation (69,000)
Valuation allowance for deferred tax asset 69,000
-----------------
-
-----------------
$ -
=================
NOTE 10 OTHER SETTLEMENTS
-------------------------
During 2004, the Company settled several payables owed and recorded a settlement
gain of $48,811 during 2004 related to these settlements.
During 2005, the Company reached a settlement with Capitol City Trailers
regarding the use of one of its trucks. The settlement resulted in Capitol City
Trailers paying $37,500 to the Company over time. At December 31, 2005, the
Company had received $16,667, which it has recorded as a settlement gain. Due to
the financial condition of Capitol City Trailers, the Company has not recorded a
receivable of $12,917 for the remaining amount, but will record it as a
settlement gain when it is received.
F-35
ONSCREEN TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
--------------------------
NOTE 11 CONCENTRATIONS
----------------------
During 2005, 43% of revenues were derived from three customers at 19%, 12% and
12%. During 2004, 36% of revenues were derived from two customers at 25% and
11%.
The Company's major products are reliant upon the OnScreen(TM) technology which
it has purchased the rights to and it has applied for several patents related to
this technology.
At December 31, 2005, the gross accounts receivable totaled $30,006, 89% was due
from three customers at 32%, 29% and 28%.
Currently the Company is using one main supplier for its products. To switch to
another supplier would take lead time for the new supplier to produce our
products.
NOTE 12 SUBSEQUENT EVENTS
-------------------------
On January 30, 2006, the Company entered into a promissory note with a vendor
for $375,474.99. The payment terms are $50,000 every two weeks for a total of
seven payments and an eighth payment of $25,474.99 on May 12, 2006. There is no
interest on this note unless there is a payment default which the default amount
would accrue interest at prime rate on the last date of the prior fiscal quarter
plus two percent. If equity financing is received, the note is due within five
days of receipt of such funding. At December 31, 2005, $62,295 was included in
accounts payable for this vendor.
During February 2006, the Company entered into a three-month convertible
promissory note and received proceeds of $200,000. The Company has the option to
extend these notes for an additional three-month period. The interest rate is
12% per annum. Interest only payments are due monthly until the maturity of 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-month periods. The note holder has 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. At the date of the note, the price
for the equity round was not set; therefore the conversion price was $0.25. 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.
F-36