NOTES TO FINANCIAL STATEMENTS
March 31, 2014
(Unaudited)
Note 1 – Uncertainties and Use of Estimates
Basis of Presentation
The accompanying financial statements of 3DIcon Corporation
(the “Company”) have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the Company's year-end audited financial statements and
related footnotes included in the previously filed 10-K. In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2014, and the statements
of its operations for the three months ended March 31, 2014 and March 31, 2013, and the period from inception (January 1, 2001)
to March 31, 2014, and cash flows for the three-month periods ended March 31, 2014 and 2013, and the period from inception (January
1, 2001) to March 31, 2014, have been included. The results of operations for interim periods may not be indicative of the results
which may be realized for the full year.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ
from the estimates and assumptions used.
Revenue Recognition
Revenues from software license fees are accounted for in
accordance with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue
Recognition”. The Company recognizes sales revenue when (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability
is reasonably assured.
Grant revenue is recognized when earned.
Recent Accounting Pronouncements
Based on management's assessment, no new accounting standards,
if adopted, would have a material impact on the accompanying financial statements.
Uncertainties
The accompanying financial statements have been prepared on
a going concern basis. The Company is in the development stage and has insufficient revenue and capital commitments to fund
the development of its planned product and to pay operating expenses.
The Company has realized a cumulative net loss of $20,427,375
for the period from inception (January 1, 2001) to March 31, 2014, and a net loss of $422,504 and $386,343 for the three-months
ended March 31, 2014 and 2013, respectively.
The ability of the Company to continue as a going concern depends on the successful completion of the Company's capital raising efforts to fund the development of its planned
products. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern.
Management plans to fund the future operations of
the Company with existing cash of $9,446, grants and investor funding. Under the terms of the Golden State
4.75% Convertible Debenture due on December 31, 2014, Golden State is obligated to submit conversion notices in an
amount such that Golden State receives 1% of the outstanding shares of the Company every calendar quarter for a period of one
year. In connection with each conversion, Golden State is expected to simultaneously exercise a percentage of warrants equal
to the percentage of the principal being converted. The warrants are exercisable at $381.50 per share. The number
of warrants exercisable is subject to certain beneficial ownership limitations contained in the 4.75% Convertible
Debenture (“the Beneficial Ownership Limitations”). The Beneficial Ownership Limitations prevent Golden
State from converting on the 4.75% Convertible Debenture or exercising warrants if such conversion or exercise would cause
Golden State’s holdings to exceed 9.99% of the Company’s issued and outstanding common stock. Subject to
the Beneficial Ownership Limitations and provided that Golden State is able to sell the shares under Rule 144, Golden State
is required to convert $85.71 of the 4.75% Convertible Debenture and exercise 857 warrants per month. Based upon
the current stock price, the issued and outstanding shares as of March 31, 2014 and ignoring the impact of the
Beneficial Ownership Limitations, the Company may receive up to $327,000 per month in funding from Golden State as a result
of warrant exercises. Due to the Beneficial Ownership Limitations, the Company received $13,175 in advances from Golden State
during the three-month period ended March 31, 2014. Such advances are recorded within warrant exercise advances on the
balance sheets when received.
On July 2, 2013, the Company was awarded a $300,000
grant in the 2013 Oklahoma Applied Research Support competition sponsored by the Oklahoma Center for the Advancement of
Science and Technology (“OCAST”). The grant will be used to support the development of the Company’s first
Product Platform, which will be the basis for a family of products based on the Company’s CSpace® volumetric 3D
display technology (see Note 3).
Joint Development Agreement with Schott Defense
As part of the Company’s federal funding strategy, the
Company intends to effectively compete by forming interdisciplinary teams with potential strategic partners (large and small),
academic and commercial laboratories, and systems integrators providing integrated data visualization solutions. The first of these
partnerships was reached in March 2014 when the Company signed a Joint Development Agreement with Schott Defense, a federally focused
subsidiary of Schott North America.
Additionally, the Company is continuing to pursue financing
through private offering of debt or common stock.
Note 2 – Sponsored Research Agreement ("SRA")
Common Stock Subject to Put Rights and Call Right
Since April 20, 2002, the Company has entered into a number
of SRA’s with the University of Oklahoma (“OU”) as follows:
Phase I: “Pilot Study to Investigate Digital Holography,”
April 20, 2004. The Company paid OU $14,116.
Phase II: “Investigation of 3-Dimensional Display Technologies,”
April 15, 2005, as amended. The Company paid OU $528,843.
Phase III: “3-Dimensional Display Development.”
The Company made partial payment to OU by issuing 121,849 post-split equivalent shares (4,264,707 pre-split shares) with a market
price of $290,000 on October 14, 2008 and final payment on December 1, 2010 in the amount of $525,481 of which $40,481 was in cash
and 1,685,714 post-split equivalent shares (59,000,000 pre-split) of Company stock (the “Shares”). The Shares
are subject to an OU ‘put’ right and a 3Dicon ‘call’ right.
OU “Put” Rights on the Shares
First “put” period: December 1, 2012 to November 30, 2013. If the shares (held plus previously sold) are valued at less than $100,000 then OU can “put” one-tenth of the shares for $50,000 plus accrued interest retro-active to December 1, 2012 less the value of sold shares. OU currently holds 1,807,563 post-split shares with a market value of less than $100,000. Under the terms of put rights, the put rights could be exercised by OU and the Company would be obligated to pay OU $50,000.
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Second “put” period: December 1, 2013 to November
30, 2014. If the shares (held & previously sold) are valued at less than $970,000 than OU can “put” the remaining
shares for $485,000 plus accrued interest retro-active to December 1, 2012 less the value of shares previously sold or redeemed
during the first “put.”
3DIcon “Call” rights on the shares
Commencing December 1, 2012, the Company shall have the right
to “call” the shares for an amount equal to $970,000 less the amount (if any) of prior shares by OU including
amounts “put” to 3DIcon.
The Company has presented the shares outside of deficit in the
mezzanine section of the balance sheets, as the Agreement includes put rights, which are not solely within the control of the Company.
The SRA also amended the previously existing agreements
between the Company and OU such that all intellectual property, including all inventions and or discoveries, patentable or
un-patentable, developed before July 28, 2008 by OU under the SRA is owned by OU. All intellectual property, including all
inventions and/or discoveries, patentable or un-patentable, developed jointly by the Company and OU at any time is jointly
owned by the Company and OU. Finally, all intellectual property developed by the Company after July 28, 2008, including all
inventions and or discoveries, patentable or un-patentable, is owned by the Company.
Note 3 – OCAST Grant
In July 2013, the Company was awarded a two year
grant from OCAST. This is the second
$300,000 grant received from OCAST. The first grant was completed in August 2012. This matching grant is for a total of
$300,000 commencing September 1, 2013. The funds will be used to support the development of the
Company’s first Product Platform, which will be the basis for a family of products based on the Company’s
CSpace® volumetric 3D display technology.
Note 4 – Debentures and Notes Payable
Debentures payable consist of the following:
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March 31,
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December 31,
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2014
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2013
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Senior Convertible Debentures:
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10% Convertible debentures to Directors due June 2014
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$
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30,000
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$
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30,000
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10% Convertible debenture due June 2014
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29,007
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29,007
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4.75% Convertible debenture due December 2014
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68,935
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69,805
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5.0% Convertible notes due July 2014 (net of $16,482 and $19,115 OID)
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115,532
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123,590
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15% Convertible bridge notes due 2014 (net of $11,250 and $23,500 OID)
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193,750
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181,500
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Settlement Agreement 3(a)(10)
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-
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118,842
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10% Convertible bridge note to Director due December 2014
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60,000
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60,000
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Total Debentures
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497,224
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612,744
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Less - Current Maturities
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(497,224
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(612,744
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)
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Long-term Debentures
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$
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-
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$
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-
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10% Convertible Director Debentures
On June 24, 2013, the Company issued to Victor Keen and Martin
Keating, Directors of the Company (“Directors”), 10% convertible debentures in a principal amount of $15,000 each,
due June 26, 2014. The Directors may elect to convert all or any portion of the outstanding principal amount of the debentures
at an exercise price of $0.01 per share. Provided that the debentures are paid in full on or before the maturity date, no
interest shall accrue on the unpaid balance of the principal amount. In the event that the debentures are not paid in full on or
before the maturity date, interest shall accrue on the unpaid outstanding balance of the principal amount of the debentures from
June 26, 2013, until paid, at the fixed rate of ten percent (10%) per annum.
10% Convertible Debenture Due Newton, O'Connor, Turner &
Ketchum
On December 20, 2012, the Company issued to Newton, O'Connor,
Turner & Ketchum (“NOTK”) a 10% convertible debenture in a principal amount of $29,007, initially due September
30, 2013 and extended to June 30, 2014. NOTK may elect to convert all or any portion of the outstanding principal amount
of the debenture at an exercise price of $0.02534 per share. The Company was indebted to NOTK for legal services performed for
the Company and reimbursement of expenses in rendition of those services for the period ended December 31, 2012. The debenture
was issued in settlement of the indebtedness.
4.75% Convertible Debenture due December 31, 2014
On November 3, 2006, the Company issued to Golden State a 4.75%
convertible debenture in a principal amount of $100,000, due in 2014, and warrants to buy 28,571 shares
of the common stock at an exercise price of $381.50 per share. In connection with each conversion, Golden State
is expected to simultaneously exercise a percentage of warrants equal to the percentage of the principal being converted.
During 2013, Golden State converted $3,860 of the $100,000 debenture into 37,651,544 shares of common stock, exercised
warrants to purchase 1,103 shares of common stock at $381.50 per share based on the formula in the convertible debenture.
Additionally Golden State advanced $671,810 against future exercises of warrants of which $420,740 was applied to the exercise
of warrants leaving $185,671 of unapplied advances at December 31, 2013. During 2014, Golden State converted $870 of the $100,000
debenture into 32,423,426 shares of common stock, exercised warrants to purchase 249 shares of common stock
at $381.50 per share based on the formula in the convertible debenture. Additionally Golden State advanced $13,175 against future
exercises of warrants of which $50,140 was applied to the exercise of warrants leaving $148,706 of unapplied advances at March
31, 2014.
The conversion price for the 4.75% $100,000 convertible debenture
is the lesser of (i) $140; or (ii) 80% of the average of the five lowest volume weighted average prices during the
twenty (20) trading days prior to the conversion. If Golden State elects to convert a portion of the debenture and, on the day
that the election is made, the volume weighted average price is below $0.70, the Company shall have the right to prepay
that portion of the debenture that Golden State elected to convert, plus any accrued and unpaid interest, at 135% of such amount.
5% Convertible Bridge Notes
On June 6, 2012 and August 1, 2012, the Company issued and sold
convertible promissory notes (the “5% Notes") in aggregate principal amount of $415,000 to JMJ Financial (“JMJ”).
The 5% Notes includes a $40,000 original issue discount (the “OID”) that will be prorated based on the advances actually
paid to the Company. During 2012, JMJ advanced $150,000 on the 5% Notes and earned $14,000 OID. During 2013, JMJ advanced an additional
$120,000 on the 5% Notes and earned $32,205 OID and accrued interest. During 2013, JMJ converted $203,700 of the 5% Notes
into 31,854,924 shares of common stock at an average of $0.00639 per share based on the formula in the 5% Notes. During 2014, JMJ
advanced an additional $25,000 on the 5% Notes and earned $5,975 OID and accrued interest. During 2014, JMJ converted $41,667
of the 5% Notes into 17,400,000 shares of common stock at an average of $0.00239 per share based on the formula in the 5%
Notes. In addition to the OID, the 5% Notes provides for a one-time interest charge of 5% to be applied to the principal sum advanced.
Pursuant to the terms of 5% Notes, JMJ may, at its election, convert all or a part of the $275,000 note and the $140,000
note into shares of the Company's common stock at a conversion rate equal to the lesser of (i) $0.15 and $0.35, respectively or
(ii) 70% of the lowest trade price during the twenty-five trading days prior to JMJ’s election to convert. If the Company
repays the 5% Notes on or before ninety days from the date it was issued, the interest rate will be zero percent. If the Company
does not repay the 5% Notes on or before ninety days from the date it was issued, a one-time interest charge of 5% shall be applied
to the principal. The Company did not repay the 5% Notes within the ninety day period and $20,750 of interest has been expensed.
The principal of the 5% Notes is due one year from the date of each of the principal amounts advanced.
The 5% Notes were subject to a Mandatory Registration Agreement
(the “Registration Agreement”) whereby no later than August 31, 2012, the Company agreed to file, at its own expense,
an amendment (the “Amendment”) to the S-1 Registration Statement (the “Registration Statement”) the Company
filed with the SEC on July 3, 2012, to include in such Amendment 4,750,000 shares of common stock issuable under the 5% Notes.
The Company agreed, thereafter, to use its best efforts to cause such Registration Statement to become effective as soon as possible
after such filing but in no event later than one hundred and twenty (120) days from the date of the Registration Agreement. Since
the Company failed to get the Registration Statement declared effective within the 120 days of the date of the Registration Agreement,
a penalty/liquidated damages of $25,000 was added to the balance of the 5% Notes.
10% Convertible Bridge Note to Director
On September 11, 2012, the Company issued and sold to
Victor Keen, a Director and an accredited investor a Convertible Bridge Note (the “Keen Bridge Note”) in
the principal amount of $60,000. The sale of the Keen Bridge Note in the principal of $60,000 included a $10,000
OID. Accordingly, the Company received $50,000 gross proceeds. The Keen Bridge Note matured 90 days from the date of issuance
and, other than the OID, the Keen Bridge Note do not carry interest. However, in the event the Keen Bridge Note is not paid
on maturity, all past due amounts will accrue interest at 15% per annum. Upon maturity of the Keen Bridge Note, the holders
of the Keen Bridge Note may elect to convert all or any portion of the outstanding principal amount of the Keen Bridge Note
into (i) securities sold pursuant to an effective registration statement at the applicable offering price; or (ii) shares
of common stock at a conversion price equal to the lesser of 100% of the Volume Weighted Average Price (VWAP), as reported
for the 5 trading days prior to (a) the date of issuance of the Keen Bridge Note, (b) the maturity date of the Keen Bridge
Note, or (c) the first closing date of the securities sold pursuant an effective registration statement.
On January 26, 2013, the Company entered into an amendment agreement
(the “Keen Amendment”) with Victor F. Keen, the holder of the Keen Bridge
Note in the principal amount of $60,000 issued by the Company on September 10, 2012.
The Keen Bridge Note matured on or about December 10, 2012,
on which date all past due amounts of the Keen Bridge Note began accruing interest at 15% per annum. Pursuant to the Keen Amendment,
Mr. Keen agreed to extend the maturity date of the Keen Bridge Note from December 10, 2012 to April 30, 2013 and to waive any and
all defaults, default interest and Liquidated Damages then due to Mr. Keen.
On July 30, 2013 (the “Amendment
Date”), the Company entered into a second amendment agreement (the “Second Keen Amendment”) with Victor Keen,
a Director on the Board of Directors of the Company, to amend the Keen Bridge note.
Pursuant to the Second Keen Amendment,
Mr. Keen agreed to extend the maturity of the Note from May 15, 2013 to August 31, 2013 (the “New Maturity Date”) and
to waive, if any, existing or prior defaults under the Keen Bridge Note or the Keen SPA and the Company agreed to (i) amend the
conversion provision to allow for conversions based on a conversion price calculated on the Amendment Date or the New Maturity
Date; and (ii) to include an interest rate equal to 10% per annum, payable on the New Maturity Date, as amended, which accrual
shall commence on December 10, 2012.
On September 30, 2013 (the “Amendment
Date”), the Company entered into a third amendment agreement (the “Third Keen Amendment”) with Victor Keen, a
Director on the Board of Directors of the Company, to amend the Keen Bridge note.
Pursuant to the Third Keen Amendment, Mr. Keen agreed to extend
the maturity of the Note from August 31, 2013 to December 31, 2013 (the “New Maturity Date”) and to waive, if any,
existing or prior defaults under the Keen Bridge Note or the Keen SPA.
On January 27, 2014 (the “Amendment
Date”), the Company entered into a fourth amendment agreement (the “Fourth Keen Amendment”) with Victor Keen,
a Director on the Board of Directors of the Company, to amend the Keen Bridge note.
Pursuant to the Fourth Keen Amendment, Mr. Keen agreed to extend
the maturity of the Note from December 31, 2013 to December 31, 2014 (the “New Maturity Date”) and to waive, if any,
existing or prior defaults under the Keen Bridge Note or the Keen SPA.
15% Convertible bridge notes due
2014
On
October 1, 2013 (the “Date of Issuance”), 3DIcon Corporation issued and sold to an accredited investor a Senior Convertible
Note (the “Senior Note”) in the principal amount of $205,000 and a warrant to purchase 300,000 shares of the Company’s
common stock at an exercise price equal to 110% of the closing bid price on September 30, 2013 (the “October 2013 Warrant”).
The Senior Note included a $30,750 OID. Accordingly, the Company received $174,250 gross proceeds from which
the Company paid legal and documentation fees of $22,500 and placement agent fees of $15,682.
The Senior Note matures on July 1, 2014 and does not carry interest.
However, in the event the Senior Note is not paid on maturity, all past due amounts will accrue interest at 15% per annum. At any
time subsequent to six months following the Date of Issuance, the Senior Note holder may elect to convert all or any portion of
the outstanding principal amount of the Senior Note into shares of Common Stock at a conversion price equal to the lesser of 100%
of the Volume Weighted Average Price (VWAP), as reported for the 5 trading days prior to the Date of Issuance or 80% of the average
VWAP during the 5 days prior to the date the holder delivers a conversion notice to the Company.
The estimated fair value of the warrants for common stock issued
of $2,130 was determined using the Black-Scholes option pricing model. The expected dividend yield of zero is based on the average
annual dividend yield as of the issue date. Expected volatility of 173.64% is based on the historical volatility of our stock.
The risk-free interest rate of 1.39% is based on the U.S. Treasury Constant Maturity rate for five years as of the issue date.
The expected life of five years of the warrant is based on historical exercise behavior and expected future experience.
The October 2013 Warrant is exercisable
at any time on or after March 31, 2014 and on or prior to the close of business on March 31, 2019. At the election of the October
2013 Warrant holder, the October 2013 Warrant may be exercised using a cashless exercise method.
Settlement Agreement
On July 26, 2013, the Circuit Court
in the 12
th
Judicial Circuit in and for Sarasota County, Florida (the “Court”), entered an Order Granting
Approval of Settlement Agreement (the “Order”) approving, among other things, the fairness of the terms and conditions
of an exchange pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended, in accordance with a settlement agreement
(the “Settlement Agreement”) between the Company and IBC Funds, LLC, a Nevada limited liability company (“IBC”),
in the matter entitled
IBC Funds, LLC v. 3DIcon Corporation
, Case No. 2013 CA 5705 NC (the “Action”). IBC
commenced the Action against the Company on July 19, 2013 to recover an aggregate of $197,631 of past-due accounts payable of the
Company, which IBC had purchased from certain vendors of the Company pursuant to the terms of separate claim purchase agreements
between IBC and each of such vendors (the “Assigned Accounts”), plus fees and costs (the “Claim”). The
Assigned Accounts relate to certain research, technical, development, accounting and legal services. The Order provides
for the full and final settlement of the Claim and the Action. The Settlement Agreement became effective and binding upon the Company
and IBC upon execution of the Order by the Court on July 26, 2013.
Pursuant to the terms of the Settlement
Agreement approved by the Order, on July 26, 2013, the Company issued 650,000 shares of Common Stock as a settlement fee and agreed
to issue, in one or more tranches as necessary, that number of shares equal to $197,631 upon conversion to Common Stock at a conversion
rate equal to 65% of the lowest closing bid price of the Common Stock during the ten trading days prior to the date the conversion
is requested by IBC minus $0.002. During 2013, IBC converted $78,789 of the note into 53,720,000 shares of common
stock at an average of $0.0015 per share based on the formula in the note.
On January 22, 2014 the Company entered
into a Mutual Release (the “Release”) with IBC Funds, LLC pursuant to which each party would release
the other party from any and all obligations pursuant to that certain court-approved Settlement Agreement dated as of July 26,
2013, as described in the Company’s Current Report on Form 8-K filed on July 31,
2013.
In consideration for the Release, IBC
will accept and the Company will remit to IBC: (i) a cash payment of $190,000, (ii) an issuance of 9,000,000 shares of the Company’s
common stock, pursuant to the terms of the Settlement Agreement under the December 18, 2013 Conversion Notice, and (iii) an issuance
of 6,810,811 shares of the Company’s common stock, pursuant to the terms of the Settlement Agreement under the January 17,
2014 Conversion Notice (together, the “Consideration”). Pursuant to the Release, IBC has agreed that the Consideration
shall be accepted as satisfaction in full of the payments due pursuant to the Settlement Agreement.
On January 23, 2014, the Company and
IBC filed a Stipulation of Dismissal with Prejudice with the Circuit Court in the 12th Judicial Circuit in and for Sarasota County,
Florida.
Note 5 – Common Stock and Paid-In Capital
Registration Statement on Form S-1
Pursuant to a Registration Statement on Form S-1 and the prospectus
therein, filed on July 3, 2012, and amendment thereto, the Registration Statement was declared effective on February 13, 2013.
Warrants issued
As of December 31, 2013, NOTK has warrants outstanding
to purchase 125,098 shares of common stock at a price of $3.15 per share that expire on May 22, 2014 and, warrants to
purchase 96,024 shares of common stock at a price of $3.15 per share that expire on June 1, 2015. Golden State has
warrants outstanding to purchase 19,942 shares of common stock at a price of $381.50 per share which expire December
31, 2014. Global Capital has warrants outstanding to purchase 300,000 shares of common stock at a price of $0.0032
per shares which expire on March 31, 2019. Additionally, in connection with the preferred stock issuance, there are
9,750,000 warrants outstanding to purchase common shares at $0.0055 per share, which expire December 31, 2017, and 9,500,000
warrants outstanding that were issued to Victor Keen, the CEO and Director of the Company, which expire on January 17,
2018.
Common stock and options issued for services and liabilities
During the three-month period ended March 31, 2014, shares of
common stock totaling 9,376,344 were issued for consulting services for which the Company recognized $45,000 of expense.
Additionally, during the period ending March 31, 2014, shares totaling 7,317,073 were issued to consultants for previous services
provided to the Company for which the accounts payable liability was reduced by $15,000.
Employment Agreement - On March 19, 2012 the Company announced
that Sidney Aroesty would resign as CEO and join the Board of Directors. Effective April 15, 2013, Mr. Aroesty resigned as a member
of the Board of Directors.
Employment Agreement - On November 1, 2013, Mark Willner
resigned as CEO of 3DIcon Corporation in order to allow Victor F. Keen to take over in his place as the Company’s
newly appointed Interim CEO.
Mr. Willner’s resignation was not a result of any dispute
with the Company. Furthermore, Mr. Willner will assume a strategic consulting role with the Company, focusing his efforts on the
commercialization of and business development of the Company’s patented 3D display technology, CSpace®.
Mr. Keen, formerly Co-Chairman of the Company’s Board
of Directors, will remain a member of the Board while John M. O’Connor, also a former Co-Chairman, was newly elected as the
sole Chairman of the Board. Mr. Keen has been a member of the Board since November 2007.
Employment Agreement - On March 16, 2012, the Company entered
into a one (1) year Agreement for At-Will Employment with Assignment of Inventions (“Employment Agreement”) with George
Melnik, pursuant to which Dr. Melnik began serving as the Company’s Senior Technical Advisor, effective immediately. Under
the terms of the Employment Agreement, Dr. Melnik is entitled to an annual base salary of $144,000, and, at the discretion of the
Company’s Board of Directors, performance-based bonuses and/or salary increases. Pursuant to the Employment Agreement, the
Company granted Dr. Melnik five-year stock options to purchase 28,571 shares at a price equal to the average price of the five
day period prior to March 16, 2012 which was $0.35 (the “Strike Price”). Furthermore, since Dr. Melnik remained employed
by the Company at the end of each quarter ending June 30, 2012, September 30, 2012 and December 31, 2012, he received additional
stock options to purchase 28,571 shares at the Strike Price. In addition, since the Company achieved certain quarterly business
objectives, Dr. Melnik received, at the end of each such quarterly period, a further grant of stock options to purchase 28,571
shares at the Strike Price. The estimated fair value of each of the 28,571 block of options, valued at $9,420, was determined using
the Black-Scholes option pricing model and was charged to operations in March 2012, June 2012, September 2012 and December 2012.
The expected dividend yield of $-0- is based on the average annual dividend yield as of the grant date. Expected volatility of
163% is based on the historical volatility of the stock since July 25, 2007, the day the Company began trading on the Over-The-Counter
Bulletin Board. The risk-free interest rate of 1.87% is based on the U.S. Treasury Constant Maturity rates as of the grant date.
The expected life of the option of five years is based on historical exercise behavior and expected future experience.
The Employment Agreement may be terminated with or without reason
by either the Company or Dr. Melnik and at any time, upon sixty (60) days written notice. The terms of the Employment Agreement
will remain effective for one (1) year and will automatically renew, subject to the same termination rights. Upon termination,
the Company will pay any base pay, bonus and benefits that have been earned and are due as of the date of the termination.
Employment Agreement - On January 28, 2013, the Board of Directors
of the Company appointed Ronald Robinson to serve as the Company’s Chief Financial Officer. Accordingly, the Company decided
not to renew its agreement with Christopher T. Dunstan pursuant to which Mr. Dunstan served as the Company’s Interim Chief
Financial Officer. The Company’s appointment of Mr. Robinson and decision not to renew its agreement with Mr. Dunstan was
not as a result of any disagreement between the Company and Mr. Dunstan.
On April 11, 2013, the Company completed the sale of two options,
each to purchase 10,000,000 shares of the Company’s common stock (the “Option Agreements”) to two accredited
investors. One of the accredited investors was Victor Keen, a director on the Board of Directors of the Company. Each of the Option
Agreements provide for the option to purchase up to 10,000,000 shares of restricted common stock at a purchase price of $0.01 per
share. The holders of the Option Agreements may exercise the option to purchase common stock on a cashless basis for a period of
five years. Furthermore, the holders of the Option Agreements were granted “piggyback” registration rights for the
inclusion, on a subsequent registration statement, the shares of common stock underlying the Option Agreements. The gross proceeds
to the Company for the sale of both Option Agreements were $100,000.
Private Placement
On December 9, 2013 and December 11, 2013 the Company closed
on $195,000 in a private placement (the “Private Placement”) contemplated by a Securities Purchase Agreement (the “Securities
Purchase Agreement”), dated December 9, 2013, pursuant to which the Company sold 195,000 Units (as defined below) to accredited
investors (each, an “Investor” and collectively, the “Investors”), one of whom was Victor Keen, the Company’s
Chief Executive Officer and a member of the board of directors of the Company. Accordingly, at the closings, the Company issued
(i) 195,000 shares of its newly designated Series A Convertible Preferred Stock (the “Series A Preferred”), and (ii)
warrants (“Warrants”) to purchase an aggregate of 9,750,000 shares of Common Stock for gross proceed of $195,000.
January 23,
2014, the Company sold to Victor Keen, the Company’s Chief Executive Officer and a member of the Company’s Board of
Directors, 190,000 Units for a purchase price of $190,000, as part of the Private Placement (as defined therein) disclosed in the
Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 13, 2013. Pursuant to
such Private Placement, the Company has now received aggregate proceeds equal to $385,000. Such Private Placement is now closed.
Under the terms of the Securities Purchase Agreement, the Company
sold units (“Units”) consisting of: (i) one share of Series A Convertible Preferred Stock and (ii) Warrants to purchase
fifty (50) shares of Common Stock. The purchase price of each Unit was $1.00. The total purchase price of the securities sold in
the Private Placement was $385,000.
The terms of the Series A Convertible Preferred Stock and Warrants
are as follows:
Series A Convertible Preferred Stock
A total of 500,000 shares of Series A Convertible Preferred
Stock (the “Series A Preferred Stock”) have been authorized for issuance under the Certificate of Designation of Preferences,
Rights and Limitation of Series A Convertible Preferred Stock of 3DIcon Corporation (the “Certificate of Designation”),
which Certificate of Designation was filed with the Secretary of State of the State of Oklahoma on December 11, 2013. The shares
of Series A Preferred Stock have a par value of $0.0002 per share (the “Stated Value”), and shall receive a dividend
of 6% of their Stated Value per annum. Under the Certificate of Designation, the holders of the Series A Preferred Stock have the
following rights, preferences and privileges:
The Series A Preferred Stock may, at the option of the Investor,
be converted at any time after the first anniversary of the issuance of the Series A Preferred Stock or from time to time thereafter
into 50,000,000 shares of Common Stock that Such Investor is entitled to in proportion to the 500,000 shares of Series A Preferred
so designated in the Certificate of Designation.
The Series A Preferred Stock will automatically be converted
into Common Stock anytime the 5 day average VWAP of the Company’s Common Stock prior to such conversion is equal to $0.05
or more. Such mandatory conversion would be converted by the same method described above for discretionary conversions.
Except as otherwise required by law, the holders of shares of
Series A Preferred Stock shall not have voting rights or powers.
In the event of any (i) liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, or ii) sale, merger, consolidation, reorganization or other transaction that
results in a change of control of the Company, each holder of a share of Series A Preferred shall be entitled to receive, subject
to prior preferences and other rights of any class or series of stock of the Company senior to the Series A Preferred, but prior
and in preference to any distribution of any of the assets or surplus funds of the Company to holders of Common Stock, or any other
class or series of stock of the Company junior to the Series A Preferred, an amount equal to the Stated Value plus accrued and
unpaid dividends (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the “Preference
Amount”). After such payment has been made to the holders of Series A Preferred of the full Preference Amount to which such
holders shall be entitled, the remaining net assets of the Company available for distribution, if any, shall be distributed pro
rata among the holders of Common Stock. In the event the funds or assets legally available for distribution to the holders of Series
A Preferred are insufficient to pay the Preference Amount, then all funds or assets available for distribution to the holders of
capital stock shall be paid to the holders of Series A Preferred pro rata based on the full Preference Amount to which they are
entitled.
The Company may not declare, pay or set aside any dividends
on shares of any class or series of capital stock of the Company (other than dividends on shares of Common Stock payable in shares
of Common Stock) unless the holders of the Series A Preferred Stock shall first receive, or simultaneously receive, a dividend
on each outstanding share of Series A Preferred in an amount equal to the dividend per share that such holders would have received
had they converted their shares of Series A Preferred into shares of Common Stock immediately prior to the record date for the
declaration of the Common Stock dividend in an amount equal to the average VWAP during the 5 trading days prior to the date such
dividend is due.
Warrants
Each Unit under the Securities Purchase Agreement consists of
Warrants entitling the Investor to purchase fifty (50) shares of Common Stock for each share of Series A Preferred purchased by
such Investor in the Private Placement, at an initial exercise price per share of $0.0055. The exercise price and number of shares
of Common Stock issuable under the Warrants are subject to adjustments for stock dividends, splits, combinations and similar events.
On or after the first anniversary of the issuance of the Warrants and prior to close of business on fourth anniversary of the issuance
of the Warrants and may be exercised at any time upon the election of the holder, provided however, that an Investor may at any
given time convert only up to that number of shares of Common Stock so that, upon conversion, the aggregate beneficial ownership
of the Company’s Common Stock (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of such
Investor and all persons affiliated with such Investor, is not more than 4.99% of the Company’s Common Stock then outstanding
(subject to adjustment up to 9.99% at the Investor’s discretion upon 61 days’ prior notice).
The $27,000 estimated fair value of warrants for common stock
issued in 2013 was determined using the Black-Scholes option pricing model. The expected dividend yield of $0 is based on the average
annual dividend yield at the date issued. Expected volatility of 178% is based on the historical volatility of the stock. The risk-free
interest rate of 1.38% is based on the U.S. Treasury Constant Maturity rates as of the issue date. The expected life of the warrants
of four years is based on historical exercise behavior and expected future experience.
The $34,926 estimated fair value of warrants for common stock
issued in 2014 was determined using the Black-Scholes option pricing model. The expected dividend yield of $0 is based on the average
annual dividend yield at the date issued. Expected volatility of 180% is based on the historical volatility of the stock. The risk-free
interest rate of 1.64% is based on the U.S. Treasury Constant Maturity rates as of the issue date. The expected life of the warrants
of four years is based on historical exercise behavior and expected future experience.
Transaction Documents Series A Convertible Preferred Stock
The Securities Purchase Agreement, the Warrants and Certificate
of Designation contain ordinary and customary provisions for agreements of this nature, such as representations, warranties, covenants,
and indemnification obligations, as applicable. The foregoing descriptions of the Securities Purchase Agreement and the Warrants
do not purport to describe all of the terms and provisions thereof and are qualified in their entirety by reference. The Securities
Purchase Agreement and the form of Warrant are filed as Exhibits 4.1 and 10.1, respectively, to the Current Report on Form 8-K
filed on December 13, 2013.
The following summary reflects warrant and option activity for
the three-month period ended March 31, 2014:
|
|
Attached
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|
|
Golden State
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
Warrants
|
|
|
|
Options
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|
Outstanding December 31, 2013
|
|
|
10,271,122
|
|
|
|
19,942
|
|
|
|
23,030,274
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|
Granted/purchased
|
|
|
9,500,000
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
(249
|
)
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|
|
-
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|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2014
|
|
|
19,771,122
|
|
|
|
19,693
|
|
|
|
23,030,274
|
|
Stock options are valued at the date of award, which does not
precede the approval date, and compensation cost is recognized in the period the options are granted. Stock options generally become
exercisable on the date of grant and expire based on the terms of each grant.
The estimated fair value of options for common stock granted was determined using the Black-Scholes option pricing model. The expected dividend yield is based on the average annual dividend yield as of the grant date. Expected volatility is based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury Constant Maturity rates as of the grant date. The expected life of the option is based on historical exercise behavior and expected future experience.
Note 6 – Incentive Stock Plan
In April 2012, the Company established the 3DIcon Corporation
2012 Equity Incentive Plan (the "2012 EIP"). The total number of shares of stock which may be purchased or granted directly
by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options granted under
the 2012 EIP shall not exceed five million (5,000,000) post-split shares. The shares are included in a registration
statement filed May 3, 2012. Post-split shares totaling 2,827,537 and 2,172,463 were issued from the 2012 EIP during 2013 and 2012
respectively, for services rendered and to satisfy accounts payable to the Company. There are currently -0- shares available for
issuance under the 2012 EIP.
In June 2013, the Company established the 3DIcon Corporation
2013 Equity Incentive Plan (the "2013 EIP"). The total number of shares of stock which may be purchased or granted directly
by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options granted under
the 2013 EIP shall not exceed twenty million (20,000,000) post-split shares. The shares are included in a registration
statement filed June 10, 2013. Post-split shares totaling 20,000,000 were issued from the 2013 EIP during 2013 for services
rendered. There are currently -0- shares available for issuance under the 2013 EIP.
In March 2014, the Company established the 3DIcon Corporation
2014 Equity Incentive Plan (the “2014 EIP”). The total number of shares of stock which may be purchased or granted
directly by options, stock awards or restricted stock purchase offers, or purchased indirectly through exercise of options granted
under the 2014 EIP shall not exceed fifty million (50,000,000) post-split shares. The shares are included in a registration statement
filed March, 2014. Post-split shares totaling 12,046,093 were issued from the 2014 EIP during 2014 for services rendered. There
are currently 37,563,907 shares available for issuance under the 2014 EIP.
Note 7 – Office Lease
The Company signed an Office Lease Agreement (the “Lease
Agreement”) on April 24, 2008. The Lease Agreement commenced on June 1, 2008 and expired June 1, 2011. On March 8, 2011 the
Lease Agreement was amended (amendment 1) to extend the expiration date to May 31, 2012. On July 24, 2012 the Lease
Agreement was amended (amendment 2) to extend the expiration date to July 31, 2015. The minimum future lease payments
to be paid annually under the three-year non-cancellable amended operating lease for office space are as follows:
2014
|
|
|
17,000
|
|
2015
|
|
|
13,000
|
|
Total
|
|
$
|
30,000
|
|
Note 8 – Related Party Transaction
3DIcon has engaged the law firm of Newton, O’Connor, Turner
& Ketchum as its outside corporate counsel since 2005. John O’Connor, a director of 3DIcon, is the Chairman of Newton,
O’Connor, Turner & Ketchum. During the three-month ending March 31, 2014 and March 31, 2013,
the Company incurred legal fees to Newton, O’Connor, Turner & Ketchum in the amount of $1,940 and $8,203, respectively.
Note 9 – Subsequent Events
Common stock issued for services and liabilities
Subsequent to March 31, 2014, Golden State converted $850 of
the 4.75% convertible debenture into 7,982,953 shares of common stock at $0.00011 per share and exercised 243 warrants at $381.50
per share for $92,650 and advanced $46,325 for future exercise of warrants under the terms of the securities purchase agreements.
Subsequent to March 31, 2014, JMJ converted $22,050 of the convertible
promissory note into 9,000,000 shares of common stock at $0.0025 under the terms of the securities purchase agreements.
Subsequent to March 31, 2014, shares of common stock
totaling 4,496,450 were issued for consulting services for which the Company recognized $9,267 of expense.