ONSCREEN TECHNOLOGIES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------
For quarter ended March 31, 2005
Commission File Number 0-29195
ONSCREEN TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
Colorado (7310) 84-1463284
--------------------------------------------------------------------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
200 9th Avenue North, Suite 210
Safety Harbor, Florida 34695
(727) 797-6664
--------------
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
John "JT" Thatch, President
(727) 797-6664
OnScreen Technologies, Inc.
200 9th Avenue North, Suite 210
Safety Harbor, Florida 34695
----------------------------
(Name, Address and Telephone Number of Agent for Service)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
As of March 31, 2005, there were 66,512,327 shares of the Company's common stock
outstanding, 2,100,000 shares of common stock issuable, 2,191,316 shares of
Series A Convertible Preferred Stock outstanding and no shares of Series B
Convertible Preferred Stock outstanding.
ONSCREEN TECHNOLOGIES, INC.
INDEX
Part I
Page
----
Item 1 Financial Statements 3
Condensed Balance Sheets (unaudited) 3
Condensed Statements of Operations (unaudited) 4
Condensed Statements of Cash Flows (unaudited) 5
Notes to the Condensed Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Overview 10
Intellectual Property 10
Critical Accounting Policies 11
Liquidity and Capital Resources 12
Results of Operations 13
Item 3 Controls and Procedures 14
Part II
Item 1 Legal Proceedings. 15
Item 2 Changes in Securities 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 16
Exhibits 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONSCREEN TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
MARCH 31, December 31,
2005 2004
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,740,163 $ 1,561,650
Marketable securities available-for-sale 297,564 401,233
Accounts receivable 4,605 1,605
Prepaid expenses and other current assets 224,810 38,354
------------ ------------
TOTAL CURRENT ASSETS 2,267,142 2,002,842
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF $344,025 AT MARCH 31, 2005
AND $317,845 AT DECEMBER 31, 2004 278,789 299,951
------------ ------------
OTHER ASSETS
Restricted marketable securities available-for-sale 27,209 30,000
Technology rights, net of accumulated amortization
of $135,833 at March 31, 2005 and $130,833
at December 31, 2004 386,667 391,667
Patent Costs 316,517 48,657
Other assets 15,110 14,360
------------ ------------
TOTAL OTHER ASSETS 745,503 484,684
------------ ------------
TOTAL ASSETS $ 3,291,434 $ 2,787,477
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other payables 238,014 213,226
Note payable, related party 1,500,000 --
Accrued expenses 325,342 323,797
------------ ------------
TOTAL CURRENT LIABILITIES 2,063,356 537,023
ACCRUED EXPENSES PAYABLE WITH COMMON STOCK 283,592 245,669
------------ ------------
TOTAL LIABILITIES 2,346,948 782,692
------------ ------------
COMMITMENTS (NOTE 7) -- --
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.001; 10,000,000 shares authorized
Convertible Series A, Preferred stock,
5,000,000 shares authorized, 2,990,580 shares
issued at March 31, 2005; 2,191,316 and 2,772,205 shares
outstanding at March 31, 2005 and
December 31, 2004, respectively;
liquidation preference of $2,191,316 at March 31, 2005 2,191 2,772
Convertible Series B preferred stock, 30,000 shares
authorized, no shares issued and outstanding,
liquidation preference of $240 per share -- --
Common stock, par value $0.001; 150,000,000 shares authorized,
66,512,327 and 63,680,020 shares issued and outstanding at
March 31, 2005 and December 31, 2004, respectively 66,512 63,680
Common stock issuable, at par value,
(2,100,000 shares at March 31, 2005) 2,100 --
Additional paid-in capital 22,857,938 22,150,289
Accumulated deficit (20,961,822) (19,773,674)
------------ ------------
1,966,919 2,443,067
Less Accumulated other comprehensive loss (5,489) --
Less deferred compensation expense (1,016,944) (438,282)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 944,486 2,004,785
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,291,434 $ 2,787,477
============ ============
See accompanying notes to financial statements
3
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
2005 2004
------------ ------------
REVENUES $ 20,493 $ 34,159
COST OF REVENUES 17,372 --
------------ ------------
GROSS PROFIT 3,121 34,159
OPERATING EXPENSES
Selling, general and administrative 875,145 1,659,739
Research and development 262,200 158,157
------------ ------------
TOTAL OPERATING EXPENSES 1,137,345 1,817,896
------------ ------------
LOSS FROM OPERATIONS (1,134,224) (1,783,737)
------------ ------------
OTHER INCOME (EXPENSE)
Other income 7,042 7,556
Settlement gain (loss), net -- 300,272
Interest expense (1,875) (55,512)
------------ ------------
TOTAL OTHER INCOME (EXPENSE), NET 5,167 252,316
------------ ------------
NET LOSS (1,129,057) (1,531,421)
Preferred Stock Dividends (59,091) (123,481)
------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (1,188,148) $ (1,654,902)
============ ============
Basic and Diluted Loss Per Common Share $ (0.02) $ (0.06)
============ ============
Basic and Diluted Loss Per Common Share
Available to Common Stockholders $ (0.02) $ (0.06)
============ ============
Weighted average common shares outstanding 65,677,901 27,577,183
============ ============
See accompanying notes to financial statements
4
ONSCREEN TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
FOR THE THREE MONTHS ENDED,
MARCH 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,129,057) $(1,531,421)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock, warrants and notes issued for compensation and services -- 235,817
Stock based settlement gain, net -- (300,272)
Non-cash interest expense for stock issued to noteholders that were in default -- 46,500
Non-cash interest expense -- 9,012
Amortization of technology rights 5,000 64,167
Amortization of deferred consulting and compensation 68,340 748,897
Amortization of investment premium 736 --
Compensation expense payable in common stock 102,921 --
Depreciation 26,179 40,913
(INCREASE) DECREASE IN ASSETS:
Accounts receivable and other receivables (3,000) (8,813)
Due from affiliate -- (4,790)
Prepaid expenses and other current assets (186,456) (156,239)
Deposits and other assets (750) 496
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable and accrued expenses 33,709 (210,596)
Deferred revenues -- (4,506)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,082,378) (1,070,835)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in technology rights -- (522,500)
Investment in patents (267,860) --
Proceeds from sales of marketable securities 100,235 --
Purchase of property and equipment (5,017) (10,090)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (172,642) (532,590)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Series A convertible preferred stock dividends paid (66,467) (110,587)
Proceeds from notes and loans payable 1,500,000 --
Payments on notes and loans payable -- (300,000)
Proceeds from sales of common stock and exercise of warrants and options, net of
offering costs -- 2,719,054
Proceeds from issuance of preferred stock - Series A -- 75,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,433,533 2,383,467
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 178,513 $ 780,042
Cash and Cash Equivalents at Beginning of Year 1,561,650 1,323,923
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIODS $ 1,740,163 $ 2,103,965
=========== ===========
(CONTINUED)
5
(CONTINUED)
FOR THE THREE MONTHS ENDED,
MARCH 31,
2005 2004
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt and accrued liability settled with common stock $ -- $ 115,500
=========== ===========
Subscription receivable paid with reduction of notes payable $ -- $ 18,575
=========== ===========
Conversion of Series A convertible preferred stock to common stock $ 701 $ 30
=========== ===========
Series A preferred stock dividend resulting from intrinsic value of
convertible preferred stock $ -- $ 52,000
=========== ===========
Series B preferred stock dividend resulting from intrinsic value of
convertible preferred stock $ -- $ 24
=========== ===========
Other comprehensive loss from unrealized loss $ 5,489 $ --
=========== ===========
See accompanying notes to financial statements
6
NOTE 1 BASIS OF PRESENTATION AND GOING CONCERN
OnScreen Technologies, Inc. (the Company) is commercializing its innovative
OnScreenTM light emitting diode (LED) technology to the world of visual
communications. The Company concentrates on LED display advertising products and
emergency/first responders' solutions. The Company seeks to develop innovative
approaches to these LED products and delivery systems. The Company is focused on
the design, development and sale of LED displays manufactured utilizing the
OnScreenTM architecture.
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 $1,129,057 and cash used in
operations of $1,082,378 for the three months ended March 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 continues to raise additional capital for the commercialization of
its OnScreen(TM) technology product lines. The Company believes it will have
sufficient cash to meet its funding requirements to bring the OnScreen(TM)
technology product lines into production during 2005. However, the Company
anticipates expanding and developing its technology and product lines which will
require additional funding. The Company has experienced negative cash flows from
operations and incurred net losses in the past and there can be no assurance as
to the availability or terms upon which additional financing and capital might
be available, if needed.
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and the rules and regulations of the United States Securities and Exchange
Commission for interim financial information which includes condensed financial
statements. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of financial position and results of
operations and should be read in conjunction with the Company's Annual Report,
Form 10-KSB for the year ended December 31, 2004.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring adjustments) have been made which are necessary for a fair
financial statement presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
NOTE 2 LOSS PER COMMON SHARE
Common stock equivalents in the three-month periods ended March 31, 2005 and
2004 were anti-dilutive due to the net losses sustained by the Company during
these periods, thus the diluted weighted average common shares outstanding in
these periods are the same as the basic weighted average common shares
outstanding.
7
NOTE 3 INCOME TAXES
The Company has not recognized an income tax benefit for its operating losses
generated in the three-month periods ended March 31, 2005 and 2004 based on
uncertainties concerning its ability to generate taxable income in future
periods. The tax benefits for the three-month periods ended March 31, 2005 and
2004 is offset by a valuation allowance established against deferred tax assets
arising from operating losses and other temporary differences, the realization
of which could not be considered more likely than not. In future periods, tax
benefits and related deferred tax assets will be recognized when management
considers realization of such amounts to be more likely than not.
NOTE 4 STOCK BASED EMPLOYEE COMPENSATION
For the stock options and warrants issued to employees, the Company has elected
to apply the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Under the intrinsic value based method,
compensation cost is measured on the date of grant as the excess of the quoted
market price or contemporaneous sales date of the underlying stock over the
exercise price. Such compensation amounts are amortized over the respective
vesting periods of the options.
The following table illustrates the effect on net loss and loss per share as if
the fair value based method of accounting had been applied to stock-based
employee compensation, as required by SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS 148 "Accounting for Stock-Based Compensation - transition
and disclosure", an amendment of SFAS No. 123 for the three months ended March
31, 2005 and 2004:
2005 2004
----------- -----------
Net Loss Available to Common
Stockholders:
Net loss available to common
stockholders, as reported $(1,188,148) $(1,654,902)
Plus: Intrinsic value of
compensation costs
included in net loss 10,467 54,267
Deduct: Fair value of
stock-based employee
compensation costs (93,633) (71,080)
----------- -----------
Pro forma net loss $(1,271,314) $(1,671,715)
=========== ===========
Loss per common share available to
common stockholders:
Basic and Diluted - as reported $ (0.02) $ (0.06)
=========== ===========
Basic and Diluted - pro forma $ (0.02) $ (0.06)
=========== ===========
The Company estimates the fair value of each stock option and warrant at the
grant date by using the Black-Scholes option-pricing model.
8
NOTE 5 NOTES PAYABLE
During March 2005, the Company executed a $1.5 million unsecured six-month
promissory note with a related party. The interest rate is 15% per annum.
Interest only payments are due monthly until maturity of the note when the
principal is due. One of the Company's board of directors has an interest in the
company that is the note holder.
NOTE 6 TECHNOLOGY RIGHT AND LICENSE AGREEMENT
On February 16, 2005 the inventor of the OnScreenTM technology, who licensed to
the Company the rights of the direct view LED video display technology conveyed
to a third party company, all of the inventor's right, title and interest of the
OnScreenTM technology. The Company purchased the right, title and interest of
the OnScreenTM technology for $200,000. The Company now owns all patent rights
to the OnScreenTM technology unencumbered subject to the rights of a seperate
party relating to the percentages of revenue from commercialization of the
direct view LED video display technology. One of the Company's directors has an
interest in the third-party company that conveyed these rights.
NOTE 7 COMMITMENTS
On March 28, 2005, an addendum was made to the CEO/President's employment
agreement. The term of the agreement was extended three years expiring on
December 31, 2008. The CEO/President is to receive an additional 2.1 million
shares of the Company's common stock and the vehicle allowance was increased to
$1,500. Also in this addendum, the CEO/President relinquished certain rights he
had to revenue which he had previously been entitled to per his contract. The
2.1 million shares were valued at $0.27 per share totaling $567,000 based on
contemporaneous cash sales and will be recorded as compensation expense over the
remaining term of his employment agreement.
NOTE 8 PREFERRED STOCK
During the first quarter of 2005, the Company converted 700,889 shares of the
Company's Series A convertible preferred stock into 2,803,556 shares of the
Company's common stock at the request of a few Series A convertible preferred
stock holders.
During January 2005, the Company issued 120,000 shares of its Series A
convertible preferred stock to its COO/CFO in accordance with his employment
agreement. The 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 $70,000 deferred and $50,000 expensed as of March 31, 2005.
NOTE 9 OTHER EQUITY TRANSACTIONS
During January 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate," or "continue" or use of
negative or other variations or comparable terminology.
We caution that these statements are further qualified by important factors that
could cause actual results to differ materially from those contained in the
forward-looking statements, that these forward-looking statements are
necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements.
OVERVIEW
OnScreen Technologies, Inc. (the Company) is commercializing its innovative
OnScreenTM light emitting diode (LED) technology to the world of visual
communications. The Company concentrates on LED display advertising products and
emergency/first responders' solutions. The Company seeks to develop innovative
approaches to these LED products and delivery systems. The Company is focused on
the design, development and sale of LED displays manufactured utilizing the
OnScreenTM architecture.
The Company expects delivery of the initial products during 2005. Until the
initial products are delivered, the Company does not expect to record any
significant growth in revenues. The Company expects to receive some revenue from
its mobile LED truck during 2005.
During the three months ended March 31, 2005, the Company continued to incur
significant losses from operations. The Company incurred a net loss of
$1,129,057 for the three months ended March 31, 2005. This net loss of
$1,129,057 includes non-cash charges of approximately $171,000 for equity given
to employees and consultants for services provided.
A priority of management during 2005 is to continue to raise the capital needed
to fund the development and marketing of the Company's OnScreen(TM) products.
During March 2005, the Company received proceeds of $1.5 million for an
unsecured six-month note. These funds will enable the Company to continue to
develop its OnScreen(TM) products and continue the Company's operations until
the Company brings the OnScreen(TM) products to market. However, the Company
anticipates expanding and developing its technology and product lines which will
require additional funding.
Intellectual Property
We rely on various intellectual property laws and contractual restrictions to
protect our proprietary rights in products, logos 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 servicemarks in the U.S. and internationally.
10
A provisional patent was filed August 26, 2002 on the OnScreen(TM) technology.
The patent was filed July 23, 2003 on the OnScreen(TM) technology that contains
over 50 separate claims. The Company retained Knobbe, Martens, Olson & Bear, LLP
to manage our current interests relative to the inventor's prosecution of the
full national and international patents. The Company continues to file and
protect its intellectual property rights, trademarks and products through
continued filings with the US Patent and Trademark Office.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that have a significant impact on the results we
report in the Company's financial statements. Some of the Company's accounting
policies require us to make difficult and subjective judgments, often as a
result of the need to make estimates of matters that are inherently uncertain.
Actual results may differ from these estimates under different assumptions or
conditions.
Asset Impairment
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset exceeds
its fair value and may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized as the
excess of the carrying amount over the fair value. Otherwise, an impairment loss
is not recognized. Management estimates the fair value and the estimated future
cash flows expected. Any changes in these estimates could impact whether there
was impairment and the amount of the impairment.
Valuation of Non-Cash Capital Stock Issuances
The Company values its stock transactions based upon the fair value of the
equity instruments. Various methods can be used to determine the fair value of
the equity instrument. The Company may use the fair value of the consideration
received, the quoted market price of the stock or a contemporaneous cash sale of
the common or preferred stock. Each of these methods may produce a different
result. Management uses the method it determines most appropriately reflects the
stock transaction. If a different method was used it could impact the expense,
deferred stock and equity stock accounts.
Service Period of Employee Equity Transactions
The Company recognizes the compensation costs related to equity transactions
over the period the services are performed. If the service period is not defined
and the equity transaction is a part of an employee agreement, the service
period is estimated to be the remaining portion of the contract even if the
equity shares are issued prior to the services being rendered. Any changes in
the estimate of when the service period is would impact the timing of when the
compensation expense was recorded. For example if it was estimated that the
shares had been issued for services already performed, the compensation expense
would be recorded at the time the shares were issued.
11
Patent Costs
The Company estimates the patents it has filed for have a future beneficial
value to the Company, thus it capitalizes the costs associated with filing for
its patents. At the time the patent is approved, the patent costs associated
with the patent will be amortized over the useful life of the patent. If the
patent is not approved, at that time the costs would be expensed. A change in
the estimate of the patent having a future beneficial value to the Company would
impact the other assets and expense accounts of the Company.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's cash and cash equivalents balance at March 31, 2005 is $1,740,163
and its marketable securities available-for-sale is $297,564. Its working
capital balance at March 31, 2005 is $203,786. The Company has funded its
operations and investments in equipment through cash from operations, equity
financings and borrowing from private parties as well as related parties. It has
also funded its operations through stock paid to vendors, consultants and
certain employees.
Cash used in operations
The Company's operating requirements generated a negative cash flow from
operations of $1,082,378 for the three months ended March 31, 2005.
During the first quarter of 2005 and 2004, the Company has used stock and
warrants as a form of payment to certain vendors, consultants and employees. For
the first quarter of 2005, the Company recorded a total of $171,000 of equity
compensation and consulting expense.
As the Company focuses on the OnScreen(TM) technology during 2004, it will
continue to fund research and development related to the OnScreen(TM) products
as well as sales and marketing efforts related to these products. The Company
does not expect to record much revenue and will continue to use cash in its
operating activities until its OnScreen(TM) product lines are commercialized
which is expected to be during 2005.
Capital Expenditures and Investments
During the first quarter of 2005, the Company invested approximately $5,000 in
equipment which was mainly computer equipment used for sales, marketing,
research and development and administration. During the remainder of 2005, the
Company anticipates that its capital expenditures should not significantly
change. The Company plans to outsource the manufacture of its products.
The Company invested $267,860 in patent costs during the first quarter of 2005.
The Company expects its investment in patent costs will continue throughout 2005
as it invests in patents to protect the rights to use its OnScreen product
developments.
Financing activities
During the first quarter of 2005, the Company received $1.5 million of proceeds
from a six-month unsecured note. The Company anticipates shipping one of its
products prior to the maturity of this note and then plans on raising the
capital needed to payoff this note payable and to fund the further development
and marketing of the Company's OnScreen(TM) products. During the first quarter
of 2005, the Company paid $66,467 of dividends on its Series A convertible
preferred stock.
12
Recap of liquidity and capital resources
The Company believes that the cash generated from the $1.5 million note payable
and the cash generated from operations, should be sufficient to meet its working
capital requirements for the next twelve months. However, the Company
anticipates expanding and developing its technology and product lines which will
require additional funding. The Company will attempt to raise these funds
through borrowing instruments or issuing additional equity.
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. Management expects the OnScreenTM LED technology to be commercialized
during 2005. 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.
RESULTS OF OPERATIONS
Revenue
During the first quarter of 2005, revenue was $20,493 and $34,159 for the same
period during 2004. The revenue for both periods is primarily due to revenue
from the LED truck. For the three months ending March 31, 2005 and 2004, the
Company recorded approximately $20,000 and $29,000, respectively of revenue for
the LED truck.
Management does not expect the Company's revenue to grow until the shipment of
the OnScreenTM LED technology product lines during 2005.
Cost of revenue
There was cost of revenue of $17,372 and $0 for the three months ending March
31, 2005 and 2004, respectively. The 2005 cost of sales related to the LED
truck. During 2005, the Company refined its process of capturing the costs
associated with the LED truck, thus the costs are higher than for the same
period in 2004.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses includes such items as
wages, consulting, general office expenses, business promotion expenses and
costs of being a public company including legal and accounting fees, insurance
and investor relations.
SG&A expenses decreased from $1,659,739 for the three months ended March 31,
2004 to $875,145 for the same period during 2005. This decrease of $784,594 is
primarily the result of decreased consulting expenses of approximately $936,000
which was offset by increased compensation expenses of approximately $106,000.
During 2004, the Company had issued equity for certain consulting services
provided to the Company. During 2005, the Company did not incur these consulting
services as it had hired employees to assist with the functions previously
provided by the consultants. This resulted in the decrease of $936,000 in
consulting expense during the first quarter of 2005 compared to the same period
in 2004.
13
The increase in compensation expense in 2005 compared to 2004 was mainly due to
an increase in the number of employees to assist with the commercialization of
the OnScreenTM product lines. The total non-cash compensation expense for the
first three months of 2005 is approximately $171,000.
The company anticipates its sales and marketing expenditures to increase during
the remainder of 2005 compared to the first quarter of 2005 as the Company is in
the process of the commercialization and marketing of its OnScreen(TM) product
lines which are expected to begin shipping during 2005. The other general and
administrative expenses will also increase during the remainder of 2005 as the
Company puts the infrastructure in place to support the shipping of the
OnscreenTM products.
Research and Development
The research and development costs are related to the OnScreen(TM) technology to
which the Company acquired the licensing rights. The $104,043 increase in
research and development during the first quarter of 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 increasing its
expenditures in research and development during the remainder of 2005 compared
to 2004.
Other Income
The Other Income remained relatively unchanged during the first quarter of 2005
compared to the first quarter of 2004. The Company does not expect this item to
be significant during 2005.
Settlement Gain (Loss), Net
The Company did not have any settlement gain (loss) during the first quarter of
2005.
The net settlement gain for the first quarter of 2004 was mainly due to the
settlement of a disputed convertible promissory note which resulted in the
Company recording a settlement gain of $267,458.
Interest Expense
The interest expense of $1,875 for the three months ending March 31, 2005 is for
the interest on the $1.5 million unsecured note entered into during March 2005.
The Company expects to have approximately $56,000 of interest expense during the
second and third quarters related to this note.
The interest expense for the three months ending March 31, 2004 of $55,512
includes $46,500 of non-cash interest related to the value of options issued
under default provisions of certain notes.
Preferred Stock Dividends
During the three months ending March 31, 2005 and 2004, the Company recorded
Series A Convertible Preferred Stock dividends of $59,091 and $123,481,
respectively.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, the Company carried out an
evaluation, under the supervision and with the participation of its management,
including the Chief Executive Officer and Chief Financial Officer, of the design
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and operation of its disclosure controls and procedures. Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective
for the gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Securities Exchange Act
of 1934, within the time periods specified in the SEC's rules and forms. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of this evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 1, 2004, the Company filed a lawsuit against Mobile Magic Superscreen,
Ltd. (breach of contract and civil conversion), Capitol City Trailers, Inc.
(civil conversion) and another party (civil fraud) in the Court of Common Pleas
of Franklin County, Ohio, Case Number 04 CVH 6884. This lawsuit relates to the
2001 contract with Mobile Magic Superscreen, Ltd. for the fabrication of a
mobile LED superscreen that Mobile Magic failed to complete and deliver.
Responses to the summons and complaint have been filed and the case is currently
in the discovery process.
ITEM 2. CHANGES IN SECURITIES.
COMMON STOCK ISSUED
The company relied on Section 4(2) of the Securities Act of 1933 as the basis
for an exemption from registration for this issuance. During the first quarter
of 2005, the Company issued 28,751 shares of its common stock to an employee for
services performed. These services were valued at $25,000.
The company relied on Section 4(2) of the Securities Act of 1933 as the basis
for an exemption from registration for this issuance. During the first quarter
of 2005, certain Series A Preferred Stock holders converted 700,889 shares of
Series A Preferred Stock to 2,803,556 shares of the Company's common stock.
SERIES A CONVERTIBLE PREFERRED STOCK ISSUED
The company relied on Section 4(2) of the Securities Act of 1933 as the basis
for an exemption from registration for this issuance. During the first quarter
of 2005, the Company issued 120,000 shares of its Series A Preferred Stock to an
employee in accordance with the employment contract. These services are valued
at $120,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
On March 1, 2005 Charles Baker was appointed to the Company's Board of
Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signed and submitted this 4th day of May 2005.
ONSCREEN TECHNOLOGIES, INC.
(Registrant)
By: /s/ John "JT" Thatch
-------------------------------------------
John "JT" Thatch as President/CEO/Director
By: /s/ Mark R. Chandler
-------------------------------------------
Mark R. Chandler as COO/CFO
By: /s/ Russell L. Wall
-------------------------------------------
Russell L. Wall Director/Audit Committee
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