ITEM I. FINANCIAL STATEMENTS
Filing for Protection Under Chapter 11 of the U.S. Bankruptcy
Code
Oryon Technologies, Inc. (“Oryon” or the “Company”)
filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code on May 6, 2014. The following is information relating
to such filing.
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1.
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The name of the proceeding is In Re: Oryon Technologies, Inc., F/D/B/A Oryon Holdings, Inc., F/D/B/A Eaglecrest Resources, Debtor - EIN: 26-2623767 - 4251 Kellway Circle, Addison, Texas 75001.
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2.
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The identity of the court is The United States Bankruptcy Court for the Northern District of Texas, Dallas Division.
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3.
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The above Court assumed jurisdiction of the above proceeding on May 6, 2014.
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4.
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No receiver, fiscal agent or similar officer has been appointed in the proceeding. No order confirming a plan of reorganization, arrangement or liquidation has been entered.
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The filing was driven by a number of factors external to the
Company’s on-going business, including the following:
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a)
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EFL Tech B.V., a Holland corporation (“EFL Holland”), which purchased a majority of Oryon's outstanding common stock under a Subscription Agreement that had its initial closing on January 21, 2014 (the “EFL Holland Transaction”), breached that agreement by failing to make a payment of $250,000 to Oryon on March 31, 2014 as required by such agreement.
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b)
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The composition of the Board of EFL Holland legally authorized to make decisions on behalf of, and the identity of the person(s) or entities legally authorized to vote the outstanding shares of, EFL Holland were misrepresented to Oryon, with different factions, advancing different agendas, vying for control of that company.
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c)
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Certain persons interested in EFL Holland, including George Hatzimihail, a director of EFL Holland, and his son, Alex Hatzimihail, Chief Executive Office of EFL Tech Pty. Ltd. (an Australian corporation) but upon information and belief with no formal legal position with or connection to EFL Holland (collectively, the “Interested Parties”), conspired with Tony Chahine (upon information and belief a/k/a Antoine Chahine-Badr) the Chief Executive Officer of Myant Capital Partners, Inc., an Ontario, Canada garment manufacturer (“Myant”), subsequent to the closing of the EFL Holland Transaction, to provide Myant with a significant equity interest in, and to enable it to obtain substantial influence over or control of the operations and business of, Oryon. The Board of Directors of Oryon (after prolonged negotiations, and after careful and deliberate consideration of Myant’s offers, its history of putting companies which it acquired into bankruptcy, and Tony Chahine’s history of involvement in numerous court cases) had previously rejected bids by Myant to purchase a controlling equity interest in Oryon as insufficient and not in the best interests of the creditors and stockholders.
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d)
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M. Richard Marcus, the former Chief Executive Officer and a current affiliate and significant stockholder of Oryon, brought a lawsuit against Oryon and certain of its directors with respect to the EFL transaction seeking,
inter alia
, to unwind the EFL Holland transaction so that he, together with certain other Oryon stockholders, could sell a majority interest in Oryon to a third party for a price that reflects a control premium. Such lawsuit has consumed appreciable operating funds and management time, negatively impacting Oryon’s business activities.
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e)
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The Interested Parties and Tony Chahine have also conspired with M. Richard Marcus to gain his support for their efforts as described in paragraph (c) above.
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f)
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The Marcus lawsuit, as well as a lawsuit brought by Myant, created a business environment in which it was not possible for Oryon to attract additional investment funds outside of the protection of the Bankruptcy Court.
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Oryon believes that its extensive electroluminescent (EL) patent
portfolio, production-ready Elastolite® flexible lighting products and technology, wearable electronics market interest and
customer support can create a healthy business under the reorganization protection of the Bankruptcy Court.
Previously Filed Unauthorized Form 8-K
On May 7, 2014, a Form 8-K with a Date of Report of May 2, 2014
(the “May 2 Form 8-K”) was filed with the Securities and Exchange Commission (the “Commission”), purportedly
on behalf of Oryon. However, the current and legally designated management of Oryon (the “Management”) had no knowledge
of such Form 8-K, and was unaware of its existence until reviewing the same upon its filing with the Commission. Management disavows
the May 2 Form 8-K, including the substance and legal efficacy of all assertions made therein.
Upon information and belief, the May 2 Form 8-K was filed by,
on behalf or at the behest of, or with the involvement of, the group contesting control of Oryon’s Board, as follows:
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1.
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EFL Tech B.V. (by the actions of certain of its officers or directors), which breached its agreement to make a payment to Oryon of $250,000 under the Subscription Agreement between the parties dated as of January 21, 2014, and has otherwise failed to work in good faith with Oryon after purchasing a majority of Oryon’s stock on such date;
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2.
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M. Richard Marcus, the former Chief Executive Officer and current affiliate of Oryon, who has brought a lawsuit against Oryon and certain of its directors, seeking,
inter alia
, to unwind the EFL transaction and, acting together with certain other Oryon stockholders, to sell a controlling equity interest in Oryon to a third party; and
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3.
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Myant Capital Partners, Inc. (by the actions of its Chief Executive Officer, Tony Chahine, or certain other officers), which had offered in the Fall of 2013 to purchase a majority of Oryon’s stock; Oryon’s board of directors, after extensive negotiation and consideration, rejected Myant’s offer as insufficient.
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Management believes that the purported actions or events described
in the May 2 Form 8-K are not legally valid, and that the person or persons who filed, or who participated in or directed the filing
of, such Form 8-K were not legally entitled to do so under the federal securities laws.
Upon information and belief, one or more of the Interested Parties,
Tony Chahine and/or M. Richard Marcus contacted the vendor that Oryon uses to Edgarize and file periodic, current and other reports
under the Securities Exchange Act of 1934 pursuant to the Securities and Exchange Commission’s (the “Commission”)
EDGAR electronic filing system, purporting to be management of Oryon. Based on such misrepresentation, such persons prevailed upon
such vendor to utilize the unique identifying codes and passwords supplied to Oryon by the Commission to file, on May 7, 2014,
the May 2 Form 8-K.
Financial Statements – General
The accompanying consolidated balance sheets of Oryon Technologies,
Inc. (the “Company”, “Oryon” or the “Registrant”) at June 30, 2014 (with comparative figures
at December 31, 2013), the consolidated statements of operations for the quarters and six month periods ended June 30, 2014 and
2013, the consolidated statements of cash flows for the six month periods ended June 30, 2014 and 2013, and the consolidated statement
of changes in shareholders’ equity (deficit) for the six month periods ended June 30, 2014 and 2013, have been prepared by
the Company’s management in conformity with accounting principles generally accepted in the United States of America
(“GAAP”)
.
In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations, financial
position and cash flows have been included and all such adjustments are of a normal recurring nature. These unaudited financial
statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended, filed with the Securities
and Exchange Commission (the “SEC”) on March 7, 2014, and in the Company’s other filings with the SEC since that
date.
On October 24, 2011, the Company entered into a binding letter
of intent (“LOI”) with OryonTechnologies, LLC (“OTLLC”) in connection with a proposed reverse acquisition
transaction (the “Merger”) between the Company and OTLLC whereby OTLLC agreed to merge with Oryon Merger Sub, LLC,
a Texas limited liability company and wholly-owned subsidiary of the Company (“Merger Sub”) in exchange for the issuance
to the members of OTLLC of eight (8) shares of the Company’s common stock for each outstanding membership unit of OTLLC.
In accordance with the terms of the LOI, the terms and conditions of the Merger were to be set forth in a formal definitive agreement.
To that end, on March 9, 2012, the Company entered into an agreement and plan of merger by and between the Company, OTLLC and Merger
Sub (the “Merger Agreement”). Upon the closing of the Merger (the “Closing”) on May 4, 2012 (the “Closing
Date”), OTLLC became a wholly-owned subsidiary of the Company pursuant to the Merger Agreement, and the Company issued 16,502,121
shares of common stock to the members of OTLLC in exchange for the then outstanding 2,062,765.12 membership units of OTLLC. In
addition, OTLLC had outstanding equity equivalents, consisting of convertible notes payable, accrued interest on the notes payable,
warrants and unit options, that by their terms required the Company to be prepared to issue common stock in an amount equal to
the number of shares (at the 8 to 1 ratio) that would have been issuable at the Closing Date to holders of all of the equity equivalents
if they had been converted to membership units before the Closing.
The Merger was accounted for as a reverse-merger and recapitalization
in accordance with GAAP. In conjunction with the Merger, OTLLC assumed no liabilities from the Company and all members of the Company’s
executive management are from OTLLC. OTLLC is deemed to be the acquirer for financial reporting purposes and the Company is the
acquired company. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements
prior to the Merger are those of OTLLC and are recorded at the historical cost basis of OTLLC, and the consolidated financial statements
after completion of the Merger include the assets and liabilities of the Company and OTLLC, historical operations of OTLLC and
operations of the Company from the Closing Date. Membership units and the corresponding capital amounts of OTLLC pre-Merger have
been retroactively restated as shares of common stock reflecting the eight (8) to one exchange ratio in the Merger. All references
in this document to equity securities and all equity related historical financial measurements, including weighted average shares
outstanding, earnings per share, par value of common stock, additional paid in capital, option exercise prices and warrant exercise
prices, have been retroactively restated to reflect the Merger exchange ratio.
Operating results for the interim periods presented herein are
not necessarily indicative of the results that can be expected for the entire fiscal year.
ORYON TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2014 and December 31, 2013
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June 30,
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December 31,
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2014
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2013
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ASSETS
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CURRENT ASSETS
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Cash
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$
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11,347
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$
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44,741
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Accounts Receivable, net of allowance for doubtful accounts of $0 and $0, respectively
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23,971
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21,182
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Inventory (see note 2)
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142,970
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100,931
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Other current assets
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8,970
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8,716
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Total current assets
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187,258
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175,570
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PROPERTY AND EQUIPMENT, NET (see note 3)
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10,836
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13,736
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INTANGIBLE ASSETS, NET (see note 4)
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103,111
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114,652
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OTHER LONG-TERM ASSETS (see note 5)
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16,697
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16,697
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TOTAL ASSETS
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$
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317,902
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$
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320,655
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
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Accounts payable
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$
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595,866
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$
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378,184
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Deferred compensation (see note 6)
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76,245
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386,973
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Current portion of promissory notes and other short-term debt (see note 7)
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392,103
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1,149,521
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Other current liabilities (see note 8)
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95,401
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29,748
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Total current liabilities
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1,159,615
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1,944,426
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NOTES PAYABLE, NET (see note 9)
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-
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114,156
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Total liabilities
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1,159,615
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2,058,582
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SHAREHOLDERS' EQUITY
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Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding (see note 13)
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-
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-
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Common stock, $0.001 par value, 600,000,000 shares authorized, 252,333,438 and 62,660,778 shares issued and outstanding (see note 13)
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252,334
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62,661
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Paid in capital
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12,054,774
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10,277,865
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Accumulated deficit
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(13,148,821
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)
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(12,078,453
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)
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Total equity (deficit)
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(841,713
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)
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(1,737,927
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)
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
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$
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317,902
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$
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320,655
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The accompanying notes are an integral part
of these financial statements.
ORYON TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Quarters and Six Month Periods Ended
June 30, 2014 and 2013
(Unaudited)
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For the Quarter Ended June 30,
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For the Six Months Ended June 30,
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2014
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2013
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2014
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2013
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REVENUES
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Product sales
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$
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27,262
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$
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36,229
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$
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51,706
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$
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52,983
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Cost of goods sold
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(2,385
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)
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(4,849
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)
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(10,212
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)
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(9,602
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)
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Gross profit
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24,877
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|
31,380
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41,494
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|
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43,381
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Other
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-
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-
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-
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|
-
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Total revenues
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24,877
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|
31,380
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|
41,494
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43,381
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OPERATING EXPENSES
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Applications development
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Wages
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14,928
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31,846
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27,178
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|
|
|
68,712
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Payroll taxes and benefits
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|
|
2,757
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|
|
|
2,384
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|
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|
9,005
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|
|
|
12,109
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|
Materials, equipment, services
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|
45,702
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|
30,177
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|
|
|
141,424
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|
|
|
78,937
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|
Office and overhead
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|
2,239
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|
|
|
4,487
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|
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|
8,337
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|
|
|
11,635
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|
Total applications development expense
|
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|
65,626
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|
|
|
68,894
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|
|
|
185,944
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|
|
|
171,393
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|
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Wages
|
|
|
-
|
|
|
|
18,000
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|
|
|
-
|
|
|
|
36,000
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|
Payroll taxes and benefits
|
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|
-
|
|
|
|
1,389
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|
|
|
-
|
|
|
|
2,796
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|
Overhead
|
|
|
9,626
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|
|
|
5,912
|
|
|
|
14,829
|
|
|
|
7,921
|
|
Outside services
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
6,000
|
|
|
|
1,000
|
|
Travel and entertainment
|
|
|
3,359
|
|
|
|
3,497
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|
|
|
8,076
|
|
|
|
8,070
|
|
Total sales and marketing expense
|
|
|
14,985
|
|
|
|
29,798
|
|
|
|
28,905
|
|
|
|
55,787
|
|
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages
|
|
|
42,417
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|
|
|
69,999
|
|
|
|
81,435
|
|
|
|
139,998
|
|
Payroll taxes and benefits
|
|
|
13,953
|
|
|
|
22,250
|
|
|
|
26,359
|
|
|
|
106,852
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|
Overhead
|
|
|
32,361
|
|
|
|
35,910
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|
|
|
70,870
|
|
|
|
68,484
|
|
Outside services
|
|
|
263,532
|
|
|
|
118,176
|
|
|
|
668,678
|
|
|
|
221,179
|
|
Travel and entertainment
|
|
|
411
|
|
|
|
55
|
|
|
|
19,594
|
|
|
|
1,687
|
|
Total general and administrative expense
|
|
|
352,674
|
|
|
|
246,390
|
|
|
|
866,936
|
|
|
|
538,200
|
|
Depreciation and Amortization
|
|
|
6,746
|
|
|
|
7,695
|
|
|
|
14,441
|
|
|
|
15,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from operations
|
|
|
(415,154
|
)
|
|
|
(321,397
|
)
|
|
|
(1,054,732
|
)
|
|
|
(737,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
Interest expense
|
|
|
(7,159
|
)
|
|
|
(9,348
|
)
|
|
|
(15,653
|
)
|
|
|
(18,557
|
)
|
Total other income (expense)
|
|
|
(7,159
|
)
|
|
|
(9,348
|
)
|
|
|
(15,636
|
)
|
|
|
(18,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE TAX
|
|
|
(422,313
|
)
|
|
|
(330,745
|
)
|
|
|
(1,070,368
|
)
|
|
|
(756,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
(see
note 12)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS AFTER TAX
|
|
|
(422,313
|
)
|
|
|
(330,745
|
)
|
|
|
(1,070,368
|
)
|
|
|
(756,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS AFTER TAX
|
|
$
|
(422,313
|
)
|
|
$
|
(330,745
|
)
|
|
$
|
(1,070,368
|
)
|
|
$
|
(756,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: basic and diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Weighted average shares outstanding
|
|
|
252,333,438
|
|
|
|
62,660,778
|
|
|
|
212,453,808
|
|
|
|
62,660,778
|
|
The accompanying notes are an integral
part of these financial statements.
ORYON
TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders'
Equity
For the Quarters Ended June 30, 2014 and
2013
|
|
Shares
|
|
|
Common Stock,
$0.001 par value
|
|
|
Paid in Capital
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
Balances at December 31, 2012
|
|
|
62,660,778
|
|
|
$
|
62,661
|
|
|
$
|
10,126,184
|
|
|
$
|
-
|
|
|
$
|
(10,686,133
|
)
|
|
$
|
(497,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results for the quarter ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(425,478
|
)
|
|
|
(425,478
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
77,418
|
|
|
|
|
|
|
|
|
|
|
|
77,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2013
|
|
|
62,660,778
|
|
|
$
|
62,661
|
|
|
$
|
10,203,602
|
|
|
$
|
-
|
|
|
$
|
(11,111,611
|
)
|
|
$
|
(845,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results for the quarter ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330,745
|
)
|
|
|
(330,745
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
36,120
|
|
|
|
|
|
|
|
|
|
|
|
36,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2013
|
|
|
62,660,778
|
|
|
$
|
62,661
|
|
|
$
|
10,239,722
|
|
|
$
|
-
|
|
|
$
|
(11,442,356
|
)
|
|
$
|
(1,139,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2013
|
|
|
62,660,778
|
|
|
$
|
62,661
|
|
|
$
|
10,277,865
|
|
|
$
|
-
|
|
|
$
|
(12,078,453
|
)
|
|
$
|
(1,737,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results for the quarter ended March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(648,055
|
)
|
|
|
(648,055
|
)
|
Issuance of common stock, financing transactions
|
|
|
170,405,650
|
|
|
|
170,406
|
|
|
|
1,079,594
|
|
|
|
|
|
|
|
|
|
|
|
1,250,000
|
|
Issuance of common stock in settlement of liabilities
|
|
|
19,267,010
|
|
|
|
19,267
|
|
|
|
675,983
|
|
|
|
|
|
|
|
|
|
|
|
695,250
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
12,949
|
|
|
|
|
|
|
|
|
|
|
|
12,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2014
|
|
|
252,333,438
|
|
|
$
|
252,334
|
|
|
$
|
12,046,391
|
|
|
$
|
-
|
|
|
$
|
(12,726,508
|
)
|
|
$
|
(427,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Results for the quarter ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(422,313
|
)
|
|
|
(422,313
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,383
|
|
|
|
|
|
|
|
|
|
|
|
8,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2014
|
|
|
252,333,438
|
|
|
$
|
252,334
|
|
|
$
|
12,054,774
|
|
|
$
|
-
|
|
|
$
|
(13,148,821
|
)
|
|
$
|
(841,713
|
)
|
The accompanying notes are an integral
part of these financial statements.
ORYON TECHNOLOGIES, INC. AND SUBSIDIARIES
|
Consolidated Statements of Cash Flows
|
For the Six Month Periods Ended June 30, 2014 and 2013
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,070,368
|
)
|
|
$
|
(756,223
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Noncash interest expense on short-term notes
|
|
|
14,240
|
|
|
|
14,232
|
|
Stock-based compensation expense
|
|
|
21,332
|
|
|
|
113,538
|
|
Depreciation and amortization
|
|
|
14,442
|
|
|
|
15,667
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable -decrease (increase)
|
|
|
(2,789
|
)
|
|
|
6,205
|
|
Inventory - decrease (increase)
|
|
|
(42,039
|
)
|
|
|
(4,109
|
)
|
Other current assets - decrease (increase)
|
|
|
(254
|
)
|
|
|
(9,556
|
)
|
Other long-term assets - decrease (increase)
|
|
|
-
|
|
|
|
305
|
|
Accounts payable - increase (decrease)
|
|
|
217,681
|
|
|
|
96,887
|
|
Deferred revenues - increase (decrease)
|
|
|
-
|
|
|
|
(6,000
|
)
|
Deferred compensation - increase (decrease)
|
|
|
(310,728
|
)
|
|
|
101,788
|
|
Other current liabilities - increase (decrease)
|
|
|
65,653
|
|
|
|
(16,787
|
)
|
Due to affiliates - increase (decrease)
|
|
|
-
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(1,092,830
|
)
|
|
|
(444,053
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Short-term advances
|
|
|
-
|
|
|
|
350,000
|
|
Repayment of short-term debt and notes payable
|
|
|
(185,144
|
)
|
|
|
(17,563
|
)
|
Settlement of short-term debt by issuance of equity
|
|
|
(390,000
|
)
|
|
|
-
|
|
Conversion of investor short-term advances into equity
|
|
|
(310,670
|
)
|
|
|
-
|
|
Equity issued in conversion of investor short-term advances
|
|
|
310,670
|
|
|
|
-
|
|
Net cash proceeds from issuance of equity
|
|
|
939,330
|
|
|
|
-
|
|
Issuance of equity in settlement of short-term debt and other liabilities
|
|
|
695,250
|
|
|
|
-
|
|
Issuance of noncash warrants other than convertible notes related
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,059,436
|
|
|
|
332,437
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(33,394
|
)
|
|
|
(111,616
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
44,741
|
|
|
|
169,678
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
11,347
|
|
|
$
|
58,062
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,414
|
|
|
$
|
4,325
|
|
Debt and accrued interest converted to equity
|
|
$
|
1,005,920
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these financial statements.
|
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
Organization and Basis of Presentation
Oryon Technologies, Inc. (“Oryon” or the “Company”)
has only one direct subsidiary, OryonTechnologies, LLC, a Texas limited liability company (“OTLLC”). The Company is
a developer of a patented electroluminescent (“EL”) lighting technology, trademarked as Elastolite
®
that enables thin, flexible, crushable, water-resistant lighting systems to be incorporated into multiple applications such as
safety apparel, sporting goods, consumer goods and membrane switches, among others. OTLLC is the parent of two wholly-owned companies:
OryonTechnologies Licensing, LLC (“OTLIC”) and OryonTechnologiesDevelopment, LLC (“OTD”), both of which
are also Texas limited liability companies.
The accompanying unaudited financial statements of Oryon have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and the rules of the Securities and Exchange Commission (“SEC”). Because a precise determination of many assets and
liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use
of estimates, which have been made using careful judgment. Actual results may vary from these estimates.
These financial statements have been prepared in accordance
with GAAP applicable to a going concern, which assume that the Company will be able to meet its obligations and continue its operations
for its next fiscal year. Realization values may be substantially different from carrying values as shown and these financial statements
do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should
the Company be unable to continue as a going concern.
Oryon filed a petition for protection under Chapter 11 of the
U.S. Bankruptcy Code on May 6, 2014. At June 30, 2014, the Company had cash of $11,347 and had not yet achieved profitable operations.
The Company has accumulated losses of $13,148,821 since its inception and expects to incur further losses in the development of
its business, all of which raises substantial doubt about the Company’s ability to continue as a going concern. The Company’s
ability to reorganize under the protection of the Bankruptcy Court is dependent upon its ability to generate future profitable
operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business
operations when they come due.
The Company expects to continue to incur substantial losses
as it executes its business plan and does not expect to attain profitability in the near future. Since its inception, the Company
has funded operations through short-term borrowings and equity investments in order to meet its strategic objectives. The Company's
future operations are dependent upon external funding and its ability to execute its business plan, realize sales and control expenses.
Management cannot guarantee that sufficient funding will be available from additional borrowings and equity placements to meet
its business objectives, including anticipated cash needs for working capital, for a reasonable period of time. There can be no
assurance that the Company will be able to obtain sufficient funds to continue the development of its business operation, or if
obtained, upon terms acceptable to the Company.
These unaudited financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended,
filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2014, and in the Company’s other filings
with the SEC since that date. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full
year.
Corporate History and the Merger
The Company was incorporated under the laws of the State of
Nevada on August 22, 2007 with the name “Eaglecrest Resources, Inc.” and 100,000,000 authorized common shares with
a par value of $0.001. On August 6, 2010, the Company amended its Articles of Incorporation to increase its number of authorized
shares of common stock to 600,000,000 shares of common stock, par value of $0.006 per share. On November 4, 2011, the Company amended
its Articles of Incorporation to decrease the par value of its common stock from $0.006 to $0.001 per share. On November 25, 2011,
the Company amended its Articles of Incorporation to change its name from “Eaglecrest Resources, Inc.” to “Oryon
Holdings, Inc.” On May 5, 2012, the Company amended its Articles of Incorporation to change its name from “Oryon Holdings,
Inc.” to “Oryon Technologies, Inc.”
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
The Company was organized for the purpose of acquiring and developing
mineral properties. A mineral claim, with unknown reserves, was acquired in August 2007, became impaired in January 2008 and was
written off, and the Company had limited operations subsequently. The Company never established the existence of a commercially
minable ore deposit and therefore did not reach the exploration stage.
On October 24, 2011, the Company entered into a binding letter
of intent (“LOI”) with OTLLC in connection with a proposed reverse acquisition transaction (the “Merger”)
between the Company and OTLLC whereby OTLLC agreed to merge with Oryon Merger Sub, LLC, a Texas limited liability company and wholly-owned
subsidiary of the Company (“Merger Sub”), in exchange for the issuance to the members of OTLLC of eight (8) shares
of the Company’s common stock for each outstanding membership unit of OTLLC, which was equal to a total of 16,502,121 shares
(assuming that none of OTLLC’s existing Series C Notes were converted before the closing of the Merger).
In accordance with the terms of the LOI, the terms and conditions
of the Merger were thereafter set forth in a formal definitive agreement. To that end, on March 9, 2012, the Company entered into
an agreement and plan of merger by and between the Company, OTLLC and Merger Sub (the “Merger Agreement”). Upon the
closing of the Merger on May 4, 2012 (the “Closing Date”), OTLLC became a wholly-owned subsidiary of the Company, the
Company issued 16,502,121 shares of common stock to the members of OTLLC and the promissory notes receivable from OTLLC became
intercompany obligations within the corporate group (and have been cancelled).
In connection with the Merger, the Company received $2.0 million
in proceeds from the private equity offering, issuing 4.0 million shares of common stock, par value $0.001 (along with warrants
for the purchase an additional 4.0 million shares of common stock at the current exercise price of $0.50 per share and having a
term of five (5) years).
As a result of the Merger, the OTLLC members acquired the majority
of the Company’s issued and outstanding common stock, OTLLC became a wholly-owned subsidiary, and the Company acquired the
business and operations of OTLLC. In conjunction with the Merger, OTLLC assumed no liabilities from the Company and all members
of the Company’s executive management are from OTLLC.
The Company filed a Current Report
on Form 8-K, as amended, dated May 4, 2012, describing the Merger and providing information concerning OTLLC.
The Merger was accounted for as a reverse-merger and recapitalization
in accordance with GAAP. OTLLC is deemed to be the acquirer for financial reporting purposes and the Company is the acquired company.
Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements prior to
the Merger are those of OTLLC and are recorded at the historical cost basis of OTLLC, and the consolidated financial statements
after completion of the Merger include the assets and liabilities of the Company and OTLLC, historical operations of OTLLC and
operations of the Company from the Closing Date. Membership units and the corresponding capital amounts of OTLLC pre-Merger have
been retroactively restated as shares of common stock reflecting the eight (8) to one exchange ratio of the Merger. All references
in the financial statements and notes thereto to equity securities and all equity related historical financial measurements including
weighted average shares outstanding, earnings per share, par value of common stock, additional paid in capital, option exercise
prices and warrant exercise prices have been retroactively restated to reflect the Merger exchange ratio.
The EFL Transaction
On January 21, 2014, the Company entered
into a Subscription Agreement (the “Subscription Agreement”) with EFL Tech B.V., a Netherlands corporation (“EFL
Tech”). At the closing of the first tranche of issuances of shares of the Company’s common stock, par value $0.001
(the “Common Stock”) pursuant to the Subscription Agreement, on January 21, 2014 (the “First Closing”),
the Company issued to EFL Tech an aggregate of 85,271,779 shares of Common Stock, and EFL Tech delivered $1,000,000 (of the net
$1.5 million cash portion of the consideration for all share issuances under the Subscription Agreement) to the Company. Subsequent
to the First Closing, on January 21, 2014, EFL Tech held 51.0% of the Company’s issued and outstanding Common Stock (46.0%
on a fully diluted basis).
Other consideration provided to the Company
at the First Closing for the sale of shares of Common Stock to EFL Tech consists of the following agreements, each of which was
entered into and delivered by the Company and EFL Holdings Tech B.V., a Netherlands corporation (“EFL Holdings”), and
an affiliate of EFL Tech, on January 21, 2014: (a) License Agreement granting the Company an exclusive, worldwide, perpetual, sub-licensable,
royalty-free, paid-up license (the “License Agreement”) for all of EFL Holding’s EL-related patents, trademarks
and other intellectual property, both U.S. and international (the “EFL Holdings IP”); (b) Equipment Lease Agreement
for certain printing equipment used in the production of electroluminescent (“EL”) lamps, the Company’s principal
product, which EFL Holdings valued at $1.5 million, at no cost to Oryon (the “Equipment Lease”); and (c) Business Relationship
Agreement pursuant to which EFL Holdings covenants that it will not, directly or indirectly, provide services to or otherwise engage
in the business of manufacturing, designing, marketing, selling or distributing EL, or any products incorporating the EFL Holdings
IP, other than through the ownership, management and control of the Company by EFL Tech. The above-referenced agreements contemplate
that the Company will license, and will manufacture and market products incorporating, its EL-related intellectual property and
the EFL Holdings IP as a combined intellectual property portfolio. Collectively, the above referenced agreements and the Subscription
Agreement are referred to herein as the “EFL Transaction”.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
At the closing of the second tranche under the Subscription
Agreement, on or before February 28, 2014 (the “Second Closing”), EFL Tech delivered to the Company additional funds
in the amount of $250,000 and the Company issued to EFL Tech an additional 85,133,871 shares of Common Stock, at which time EFL
Tech’s cumulative ownership became 170,405,650 shares of Common Stock, constituting 63.0% of the Common Stock on a fully
diluted basis. . EFL Tech also obtained the right to nominate one additional director to the Company’s Board (but has not
yet done so), giving it the right to nominate two members of the seven-member Board.
EFL Tech failed to pay the third and final
tranche of $250,000 that was required by the Subscription Agreement to be paid to the Company on or before March 31, 2014 (the
“Third Closing”). At the Third Closing, EFL Tech was required to deliver to the Company additional funds in the amount
of $250,000 (bringing the total amount of the cash component that would have been paid by EFL Tech to the Company in consideration
for the issuance by the Company of shares of Common Stock to EFL Tech under the Subscription Agreement to $1,500,000). At the Third
Closing, the Company would have been required to issue to EFL Tech an additional 129,832,877 shares of Common Stock, at which time
EFL Tech’s cumulative ownership would have been 300,238,527 shares of Common Stock, constituting 75.0% of the Common Stock
on a fully diluted basis.
As required by the Subscription Agreement,
on January 21, 2014, the Company entered into certain exchange and release agreements (each an “Exchange Agreement”
and collectively, the “Exchange Agreements”) by and between the Company and each member of a group of unsecured creditors
of the Company (including current directors and executive officers). At the First Closing, pursuant to the Exchange Agreements
the Company issued an aggregate of 19,267,010 shares of Common Stock, constituting 10.39% of the Common Stock on a fully diluted
basis, in exchange for the settlement and release of $695,250 in unpaid and accrued debt to such creditors. Under the Exchange
Agreements, the per-share exchange price for such debt was determined by the average of the closing prices of the Common Stock
on the trading days commencing on December 1, 2013, and ending on January 20, 2014 (the day prior to the First Closing), which
resulted in an exchange price of $0.036085 per share of Common Stock. The Company also paid the sum of $122,125 in cash to such
creditors under the Exchange Agreement for the settlement and release of such amount of debt (for the settlement and release of
a total of $817,375 of debt pursuant to the Exchange Agreements).
The proceeds from the foregoing funding
of $1,250,000 ($1,000,000 at the First Closing, consisting of $689,330 in cash plus the forgiveness of the obligation to repay
the $310,670 in temporary unsecured advances that EFL Tech provided to the Company in periods prior to the First Closing, and the
additional $250,000 payment by EFL Tech at the Second Closing)
have been used for general corporate purposes and the
repayment of debt, including, but not limited to, the required cash payments of $122,125 made under the Exchange Agreements.
The Company’s common stock is quoted on the OTCQB tier
of the U.S. OTC Markets under the symbol ORYNQ.
1
.
Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The Company uses the accrual method of accounting and all amounts
are denominated in United States dollars.
All significant intercompany accounts and transactions have
been eliminated in the consolidation. “Due to affiliates” represents amounts due to entities that own equity or indebtedness
of the Company or a subsidiary but that are not part of the consolidated company presented herein.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
Revenue Recognition
The Company recognizes revenue from products when the goods
are shipped pursuant to a customer’s purchase order. Revenue from royalties is recorded in the period in which the sales
of the underlying products are made. Revenue from license fees is recognized in the period in which they are due and payable.
Cost of Goods Sold
The Company recognizes costs of goods sold as including only
direct production costs such as direct materials, direct labor and freight and does not include any allocation of production overhead.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates that affect the amounts reported in the consolidated financial statements
and the accompanying notes. Accounting estimates and assumptions are those that management considers to be the most critical to
an understanding of the consolidated financial statements because they inherently involve significant judgments and uncertainties.
All of these estimates reflect management’s judgment about current economic and market conditions and their effects based
on information available as of the date of these consolidated financial statements. If such conditions persist longer or deteriorate
further than expected, it is reasonably possible that the judgments and estimates could change, which may result in future impairments
of assets, among other effects.
Significant estimates include the carrying value of intangible
assets and the value of equity instruments, including convertible notes, stock options, warrants, and shares issued in lieu of
cash.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held in bank demand
deposits. The Company considers all highly liquid investments purchased with original maturities of three months or less to be
cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are accounted for at fair value, do not
bear interest, and are short-term in nature. The Company maintains an allowance for doubtful accounts for estimated losses resulting
from the inability to collect on accounts receivable. Based on management’s assessment, the Company provides for estimated
uncollectible amounts through a charge to earnings and a credit to the valuation allowance. Balances that remain outstanding after
the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to
accounts receivable. The Company does not require collateral.
Concentrations of Credit Risk
Certain balance sheet items that potentially subject the Company
to concentrations of credit risk are primarily accounts receivable. Concentrations of credit risk with accounts receivable are
generally mitigated by the size of the Company’s customers. The Company performs ongoing credit evaluations of its customers
and maintains an allowance for doubtful accounts based upon the expected collectability of all accounts receivable.
Inventory
Inventory is carried at the lower of cost or market. A physical
inventory count is taken at the end of each calendar quarter and the accounting records are adjusted to match the physical inventory.
Inventory cost does not include any allocation of production overhead.
Property and Equipment
Property, equipment, computer hardware and software, and leasehold
improvements are carried at historical cost. Expenditures are capitalized only if the cost of the individual asset exceeds $1,200
and the asset is expected to have a business use for greater than 12 months.
Depreciation is calculated on a straight line basis over the
estimated useful life of the property acquired. Equipment and furniture is depreciated over 60 months. Computer software and hardware
is depreciated over 36 months. Leasehold improvements are amortized over the life of the lease or the life of the improvement,
whichever is shorter.
Inter-company transfers of assets are recorded at depreciated
cost, with no change in estimated life or monthly depreciation.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
Research and Development
The Company expenses all costs associated with the development
of applications for the Company’s technology as the costs are incurred.
Intangible Assets
Amortization is computed based on the straight line method over
the life of the patent, which is 180 months beginning with the month when the patent is granted. The amortization is based on the
historical cost of each individual patent. Costs incurred to renew or extend the terms of patents are expensed as incurred.
The Company annually assesses whether the carrying value of
its intangible assets exceeds their fair value and records an impairment loss equal to any excess.
Income Taxes
Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized for the estimated 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 in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rate is recognized
in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts more likely than not to be realized.
The Company accounts for uncertain tax
positions in accordance with ASC 740-10. ASC 740-10 provides several clarifications related to uncertain tax positions. Most notably,
a “more likely-than-not” standard for initial recognition of tax positions, a presumption of audit detection and a
measurement of recognized tax benefits based on the largest amount that has a greater than 50 percent likelihood of realization.
ASC 740-10 applies a two-step process to determine the amount of tax benefit to be recognized in the financial statements. First,
the Company must determine whether any amount of the tax benefit may be recognized. Second, the Company determines how much of
the tax benefit should be recognized (this would only apply to tax positions that qualify for recognition.) No additional liabilities
have been recognized as a result of the implementation. Accordingly, the Company has not recognized any penalty, interest or tax
impact related to uncertain tax positions. Federal returns for tax years ended December 31, 2010 and after remain open to examination
as of December 31, 2013. The statute of limitations differ from state to state; however, generally tax years ended December 31,
2010 and after remain open to state examination as of December 31, 2013.
Stock-Based Compensation
The Company utilizes equity based awards as a form of compensation
for employees, officers and directors. The Company records compensation expense for all awards granted. After assessing alternative
valuation models and amortization methods, the Company uses the Black-Scholes valuation model and straight-line amortization of
compensation expense over the requisite service period for each grant. The Company will reconsider use of this model if additional
information becomes available in the future that indicates another model would be more appropriate or if grants issued in future
periods have characteristics that cannot be reasonably estimated using this model.
Leases
The Company leases office facilities under a non-cancelable
operating lease. The Company recognizes rent on a straight-line basis over the lease term.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
2
.
Inventory
Inventory consists of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Raw materials
|
|
$
|
88,122
|
|
|
$
|
88,486
|
|
Work in process
|
|
|
45,862
|
|
|
|
6,028
|
|
Finished goods
|
|
|
8,986
|
|
|
|
6,417
|
|
Total Inventory
|
|
$
|
142,970
|
|
|
$
|
100,931
|
|
3.
Property and Equipment
Property and equipment consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
7,279
|
|
|
$
|
7,279
|
|
Furniture and equipment
|
|
|
195,927
|
|
|
|
195,927
|
|
Property and equipment, gross
|
|
|
203,206
|
|
|
|
203,206
|
|
Accumulated depreciation
|
|
|
(192,370
|
)
|
|
|
(189,470
|
)
|
Net property and equipment
|
|
$
|
10,836
|
|
|
$
|
13,736
|
|
Depreciation expense was $976 and $2,201 for the three month
periods ended June 30, 2014 and 2013, respectively, and $2,900 and $4,125 for the six month periods ended June 30, 2014 and 2013,
respectively.
4
.
Intangible Assets
As of June 30, 2014 and December 31, 2013, the Company’s
only intangible assets consisted of patents with a gross carrying cost of $320,795 and accumulated amortization of $217,684 and
$206,143, respectively. The remaining weighted average amortization period was 6.6 years at December 31, 2013. The estimated aggregate
amortization expense in each of the years ending December 31, 2014 through December 31, 2017, is $23,084 per year.
The balances as of June 30, 2014, including intangible assets
and accumulated amortization, are detailed as follows:
As of June 30, 2014
|
Finite-Lived Intangible Assets
|
|
Amortization Period
(Years)
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
|
15
|
|
|
$
|
320,795
|
|
|
$
|
(217,684
|
)
|
|
$
|
103,111
|
|
The balances as of December 31, 2013, including intangible assets
and accumulated amortization, are detailed as follows:
As of December 31, 2013
|
Finite-Lived Intangible Assets
|
|
Amortization Period
(Years)
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
|
15
|
|
|
$
|
320,795
|
|
|
$
|
(206,143
|
)
|
|
$
|
114,652
|
|
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
Amortization expense was $5,771 for each of the three month
periods ended June 30, 2014 and 2013 and $11,541 for each of the six month periods ended June 30, 2014 and 2013.
5
.
Other Long Term Assets
Other long term assets consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Investment in subsidiaries
|
|
$
|
100
|
|
|
$
|
100
|
|
Security deposits
|
|
|
6,597
|
|
|
|
6,597
|
|
Licenses
|
|
|
10,000
|
|
|
|
10,000
|
|
Total other assets
|
|
$
|
16,697
|
|
|
$
|
16,697
|
|
6
.
Deferred Compensation
Deferred compensation consists of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Deferred wages
|
|
$
|
48,541
|
|
|
$
|
231,104
|
|
Deferred directors' fees
|
|
|
23,750
|
|
|
|
117,500
|
|
Accrued unpaid wages
|
|
|
-
|
|
|
|
20,227
|
|
Accrued taxes on deferred wages
|
|
|
3,954
|
|
|
|
18,142
|
|
Total deferred compensation
|
|
$
|
76,245
|
|
|
$
|
386,973
|
|
Effective September 1, 2011, employment
agreements with certain executives were revised to provide for the indefinite deferral of unpaid wages until sufficient external
funding was obtained. The aggregate deferred compensation as of December 31, 2013, was $231,104 and an additional $3,125 was deferred
during the first quarter of 2014 between January 1, 2014 and January 21, 2014. As required by the Subscription Agreement, on January
21, 2014, the Company entered into Exchange Agreements by and between the Company and all persons who were owed deferred compensation.
At the First Closing, pursuant to such Exchange Agreements, the Company issued an aggregate of 5,192,832 shares of Common Stock
in exchange for the settlement and release of $187,383 in deferred compensation. Under the Exchange Agreements, the per-share exchange
price for such debt was determined by the average of the closing prices of the Common Stock on the trading days commencing on December
1, 2013, and ending on January 20, 2014 (the day prior to the First Closing), which resulted in an exchange price of $0.036085
per share of Common Stock. The Company also paid the sum of $46,846 in cash to such creditors under the Exchange Agreement for
the settlement and release of such amount of deferred compensation (for the settlement and release of a total of $234,229 of deferred
compensation pursuant to such Exchange Agreements). The cash payment of $46,846 represented 20% of the total deferred compensation
of $234,229 and provided the recipients with some liquidity to pay Federal employment taxes on the compensation Subsequent to completion
of the Exchange Agreements, there were no deferred wages and the balance as of March 31, 2014, was $0.
An accrual equal to 7.85% of the deferred
wages had been established for the employer’s Social Security and Medicare tax obligations that would be required to be paid
at the time the deferred wages are paid. Such taxes were paid in full due to the settlement of the deferred wages as described
above.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
In November 2012, the Compensation Committee of the Board of
Directors and the Board of Directors both approved a program of compensation for independent directors to compensate non-management
directors for their services. Management directors receive no compensation for board service. Compensation for independent director
services was established as $5,000 per calendar quarter, due at the end of each calendar quarter for services rendered during such
period. In addition, the chairman of the Audit Committee receives extra compensation of $1,875 per calendar quarter and the chairman
of the Compensation Committee receives extra compensation of $1,250 per calendar quarter. However, payment of cash compensation
for director services has been deferred by the Board of Directors indefinitely. Directors are not paid for meetings attended.
The aggregate deferred directors’ fees as of December
31, 2013, were $117,500. As required by the Subscription Agreement, on January 21, 2014, the Company entered into Exchange Agreements
by and between the Company and certain members of the board of directors who were owed deferred compensation for past board service.
At the First Closing, pursuant to such Exchange Agreements, the Company issued an aggregate of 1,681,217 shares of Common Stock
in exchange for the settlement and release of $60,667 in deferred directors’ fees. Under the Exchange Agreements, the per-share
exchange price for such debt was determined by the average of the closing prices of the Common Stock on the trading days commencing
on December 1, 2013, and ending on January 20, 2014 (the day prior to the First Closing), which resulted in an exchange price of
$0.036085 per share of Common Stock. The Company also paid the sum of $15,167 in cash to such directors under the Exchange Agreement
for the settlement and release of such amount of deferred directors’ fees (for the settlement and release of a total of $75,833
of deferred directors’ fees pursuant to such Exchange Agreements). The cash payment of $15,167 represented 20% of the settled
deferred directors’ compensation of $75,833 and provided the recipients with some liquidity to pay Federal employment taxes
on the compensation. One former director agreed to waive payment of deferred directors’ compensation in the aggregate amount
of $41,667, which amount was applied to reduce directors’ expense in the first quarter of 2014.
As a result of the Company’s filing for bankruptcy protection
on May 6, 2014, the Company terminated all employees. However, certain individuals continued to work on behalf of the Company on
a volunteer basis with the understanding that they might possibly receive compensation in the event the Company was able to obtain
additional financing and exit the bankruptcy process. Such individuals are aware that their services may not be compensated if
those conditions are not achieved. The deferred wages of $48,542 represents the potential compensation incurred through June 30,
2014, that might be paid to those individuals in the event the conditions are met and the accrued taxes on deferred wages of $3,954
represent the potential employment taxes that would be payable by the Company in the event those individuals are so compensated.
The deferred directors’ compensation of $23,750 as of
June 30, 2014, represents the accrual for director services in the first six months of 2014.
7
.
Current Portion of Promissory Notes and Other Short-Term
Debt
Other short-term debt consists of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Current portion, promissory notes payable
|
|
$
|
-
|
|
|
$
|
53,738
|
|
Other short-term debt
|
|
|
307,145
|
|
|
|
318,395
|
|
Short-term advances
|
|
|
-
|
|
|
|
706,670
|
|
Accrued interest
|
|
|
84,958
|
|
|
|
70,718
|
|
Total
|
|
$
|
392,103
|
|
|
$
|
1,149,521
|
|
“Current portion, promissory notes payable”
In December 2012, the Company executed a promissory note (the
“Note”) payable to a former executive and current shareholder in order to consolidate its various obligations to such
individual into a single instrument. The Note had an original balance of $211,418 and would have matured on September 16, 2016.
Interest on the Note is incurred at WSJPrime plus one percent per annum, which has resulted in a constant interest rate of 4.25%
through March 31, 2014. The Note required monthly principal and interest payments of (a) $3,000 through March 31, 2014, (b) $4,500
from October 1, 2013 through September 30, 2014, (c) $6,000 from October 1, 2014 through September 30, 2015, (d) $7,500 from October
1, 2015 through September 30, 2016 and (e) all remaining principal on September 30, 2016. The remaining Note principal balance
at December 31, 2013 of $167,894 was repaid in full during the first quarter of 2014 from a portion of the proceeds from the EFL
Transaction.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
“Other short-term debt” and “Accrued interest”
During the year ended December 31, 2011, OTLLC was unable to
complete a financing deal with a private equity firm that had been expected to provide OTLLC with adequate capital. To fund continuing
operations at a reduced level of expenditures, OTLLC received temporary funding from several sources. The Company’s remaining
obligation as of December 31, 2013, was $31,250, included in the table above as other short-term debt. Such obligation was repaid
in full during the first quarter of 2014.
In addition, a vendor previously required that the outstanding
accounts payable balance of $287,145 be converted to a promissory note. Such note accrues interest at 10% annually ($84,957 and
$70,718 accrued through June 30, 2014, and December 31, 2013, respectively) and is payable upon demand. This note matured on December
15, 2011 and management has engaged in negotiations with the vendor to extend the note or replace it with a new promissory note.
“Short-term advances”
In connection with the Merger, the Company received $2.0 million
in proceeds from the private equity offering, issuing 4.0 million shares of common stock, par value $0.001 (along with warrants
for the purchase an additional 4.0 million shares of common stock at the current exercise price of $0.50 per share and having a
term of five (5) years). In the first nine months of 2013, investors holding certain of the warrants provided the Company with
$390,000 in financial support by providing short-term advances to the Company against the exercise of their warrants at a future
time of the investors’ choice. The balance of the short-term advances was $390,000 as of December 31, 2013. Since the Company’s
stock price in January 2014 was far below the exercise price of the warrants, EFL Tech required that the Company enter into an
Exchange Agreement with the investors who had provided the short-term advances in order to eliminate this obligation. At the First
Closing, pursuant to such Exchange Agreement the Company issued an aggregate of 10,807,815 shares of Common Stock, in exchange
for the settlement and release of $390,000 in short-term advances from such creditors. Under the Exchange Agreement, the per-share
exchange price for such debt was determined by the average of the closing prices of the Common Stock on the trading days commencing
on December 1, 2013, and ending on January 20, 2014 (the day prior to the First Closing), which resulted in an exchange price of
$0.036085 per share of Common Stock.
At December 31, 2013, short-term advances consisted of (a) the
$390,000 from investors as described above, (b) $310,670 in short term advances from EFL Tech to be credited against the equity
investment to be made at the First Closing, and (c) a loan to the Company of $6,000 from the Company’s Chief Executive Officer,
which was repaid in cash after the First Closing.
8
.
Other Current Liabilities
Other liabilities at June 30, 2014, and December 31, 2013, consist
of accrued corporate operating expenses as estimated by management, including accruals for legal, tax preparation and accounting
expenses.
9
.
Notes Payable, Net
At December 31, 2013, notes payable consisted entirely of the
non-current portion of the promissory note (the “Note”) discussed above in Note 7, “Current Portion of Promissory
Notes and Other Short-Term Debt”. The Note was repaid in full during the first quarter of 2014.
The Company, through its wholly-owned subsidiary OTLLC, had
three outstanding series of convertible notes (the Series C-1 notes, the Series C-2 notes, and the Series C-3 notes, collectively
the “Notes”). Each series of Notes was convertible under certain circumstances into the Company’s common stock
at different conversion rates. On August 31, 2012, as a result of the completion of a “Qualified Financing” as defined
in the Notes and as modified by the Group Modification Agreement approved by the holders of the Notes in March 2012, the Notes
and accumulated accrued interest through August 31, 2012, were converted into 27,158,657 shares of the Company’s common stock
(the “Conversion”).
Following the Conversion on August 31, 2012, none of the principal
and interest of the Notes remained outstanding, but the holders of the Notes retained the detachable warrants to purchase common
stock at $0.3125 per share that they had received in connection with their investment in the Notes. The following table shows the
number of shares of common stock that would have been issued if all the warrants related to the Notes were exercised as of June
30, 2014 and as of December 31, 2013:
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
As of June 30, 2014 and December 31, 2013
|
Convertible Debt
|
|
Conversion Price
|
|
Principal and Interest
Amounts
|
|
|
Potential Shares
Issued if Notes
Converted
|
|
|
Shares Issued if Series
C Warrants Exercised
@ $0.3125
|
|
Series C-1 Notes
|
|
N/A
|
|
$
|
-
|
|
|
|
-
|
|
|
|
2,841,440
|
|
Series C-2 Notes
|
|
N/A
|
|
|
-
|
|
|
|
-
|
|
|
|
3,200,000
|
|
Series C-3 Notes
|
|
N/A
|
|
|
-
|
|
|
|
-
|
|
|
|
1,972,000
|
|
|
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
8,013,440
|
|
The Company has not included these share equivalents in earnings
per share calculations as they are anti-dilutive due to the Company’s net losses incurred for the periods presented.
10
.
Leases
The Company’s only lease is for its office and production
facility, consisting of approximately 9,957 square feet in a building located at 4251 Kellway Circle in Addison Texas. The Company
is obligated to pay $6,597 per month through March 31, 2016. The Company began leasing its current facilities in April 2010 under
an operating lease that extends through March 2016.
Rent expense relating to the operating lease agreement was $19,791
for each of the three month periods ended June 30, 2014 and 2013 and $39,582 for each of the six month periods ended June 30, 2014
and 2013.
As of December 31, 2013, the future minimum
payments required under all operating leases with terms in excess of one year were as follows:
For the year ending December 31,
|
|
Amount
|
|
2014
|
|
|
79,164
|
|
2015
|
|
|
79,164
|
|
2016
|
|
|
19,791
|
|
2017
|
|
|
-
|
|
|
|
$
|
178,119
|
|
11
.
Commitments and Contingencies
Marcus v. Oryon, et. al.
On February 6, 2014, M. Richard Marcus (the “Plaintiff”)
filed a lawsuit against Oryon Technologies, Inc. (“Oryon”) and certain of its subsidiaries and directors, and EFL Tech
B.V. (“EFL”) and an affiliate (collectively, the “Defendants”), in the District Court for Dallas County,
Texas (the “Court”), alleging a breach of fiduciary duty, inducement of breach of fiduciary duty, minority shareholder
oppression, breach of promissory note, and tortious interference with contract, in connection with the transaction between Oryon
and EFL that is described in Oryon’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January
27, 2014 (the “EFL Transaction”).
The Plaintiff is the former Chief Executive Officer, President and
Chairman of the Board of OryonTechnologies, LLC, having relinquished those positions upon the closing of the Merger (as that
term is defined in Part II, Item 5, Initial Public Offering) on May 4, 2012.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
In the lawsuit, the Plaintiff seeks monetary damages, and a
temporary restraining order, temporary injunction and permanent injunction that would,
inter
alia
, restrain the Defendants
from: (i) closing the second and third tranches (as required by the Subscription Agreement between the parties) pursuant to which
EFL would contribute $500,000 to Oryon in exchange for shares of common stock that would increase EFL’s ownership stake in
Oryon to 75% of Oryon’s fully diluted common stock, and allow EFL to nominate three additional directors to Oryon’s
Board of Directors; (ii) acting under the Subscription Agreement, License Agreement, Equipment Lease Agreement, or the Business
Relationship Agreement that are part of the EFL Transaction; and (iii) dissipating the assets of Oryon.
The Plaintiff also alleges that Oryon breached a promissory
note held by Plaintiff which accelerates the full amount of principal and interest of due thereunder, in the amount of approximately
$68,000.
At a hearing held on February 6, 2014, the Court denied the
Plaintiff’s motion for a temporary restraining order.
After a hearing before the Court held on February 14 and 19,
2014, the Court entered an Order on February 20, 2014:
1. Denying Plaintiff’s request for
a Temporary Injunction; and
2. Ordering that Plaintiff shall not obstruct or interfere
with the Defendants’ continuing operations and transactions.
Oryon intends to vigorously defend against the foregoing action.
Myant v. Oryon, et. al.
On January 3, 2014, Myant Capital Partners filed a lawsuit against
Oryon Technologies, Inc. in the United States District Court for the Northern District of Texas, Dallas Division, alleging that
Oryon breached an exclusivity agreement and a non-disclosure/confidentiality agreement, and seeking $1.25 million in damages. On
January 28, 2014, Oryon filed its Answer to the Complaint denying the allegations and asserting affirmative defenses.
Oryon intends to vigorously defend against the foregoing action.
Other Commitments and Contingencies
As of June 30, 2014, only one of the Company’s employees
was covered by an employment agreement. In general, the employment agreement contains non-compete provisions ranging from three
months to one year following the termination of employment.
12
.
Income Taxes
The tax effects of significant items comprising
the Company’s net deferred tax assets and liabilities at June 30, 2014 are as follows:
|
|
June 30, 2014
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,216,431
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,645
|
)
|
|
|
|
|
|
Amortization
|
|
|
14,816
|
|
|
|
|
|
|
Accrued miscellaneous
|
|
|
(24,648
|
)
|
|
|
|
|
|
FMV warrants adjustment
|
|
|
182,025
|
|
|
|
|
|
|
Stock option compensation expense
|
|
|
122,293
|
|
|
|
|
|
|
Interest amortization
|
|
|
33,178
|
|
|
|
|
|
|
Total current deferred tax asset
|
|
|
1,541,450
|
|
|
|
|
|
|
Less: Valuation alllowance
|
|
|
(1,541,450
|
)
|
|
|
|
|
|
Net current deferred tax asset
|
|
$
|
-
|
|
The Company has net operating loss carry
forwards of approximately $3,577,740 at June 30, 2014, which begin expiring in 2030. In assessing the reliability of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods
in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. Management has recorded a valuation allowance
for all deferred tax assets at June 30, 2014.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
The Company is currently evaluating the
tax impacts, if any, of the ownership change. The federal and state net operating loss carryovers of the Company may be limited
in the amount that can be recognized in any one year. The full impact of this evaluation has not been determined as of the date
of these financial statements.
13
.
Capital
The Company was incorporated under the laws of the State of
Nevada on August 22, 2007 with 100,000,000 authorized common shares with a par value of $0.001. On August 6, 2010, the Company
effected a forward split of its shares of common stock on the basis of six new shares for one existing share, and amended its Articles
of Incorporation to increase its number of authorized shares of common stock to 600,000,000 shares of common stock, with a par
value of $0.006 per share. On October 31, 2011, certain shareholders, including two executive officers, surrendered, in aggregate,
30,000,000 shares of the Company’s common stock for cancellation. On November 17, 2011, an additional 1,000,000 shares were
surrendered for cancellation. On November 4, 2011, the Board of Directors reduced the par value of the common shares from $0.006
to $0.001 per share. As of June 30, 2014 and December 31, 2013, 29,000,000 post-split common shares were issued and outstanding.
The post-split common shares are shown as split from the date of inception.
14
.
Equity Options and Warrants
OTLLC adopted the 2004 Unit Option Plan under which officers,
employees, advisors and managers could be awarded membership unit option grants. Under the 2004 Unit Option Plan, OTLLC’s
board could fix the term and vesting schedule of each option. Vested options generally could remain exercisable for up to three
months after a participant's termination of service or up to 12 months after a participant's death or disability. Typically, the
exercise price of a nonqualified option must not be less than the fair market value of the units on the grant date. The exercise
price of each unit option granted under the 2004 Plan must be paid in cash when the option is exercised. Generally, options are
not transferable except by will or the laws of descent and distribution.
In connection with the Merger, the Company’s
Board of Directors adopted the 2012 Equity Incentive Plan, previously filed as Exhibit 99.1 to the Company’s Current Report
on Form 8-K filed on March 21, 2012. In connection with the Merger, each currently outstanding option to purchase an OTLLC unit
was converted into an option to purchase eight (8) shares of the Company’s common stock under the Company’s 2012 Equity
Incentive Plan. Immediately prior to Closing, there were 345,388 options to purchase OTLLC units outstanding, which, if exercised
could result in the issuance of 2,763,104 shares of the Company’s common stock at prices ranging from $0.13 per share to
$0.63 per share.
On January 16, 2013, options for 423,796
shares were granted to employees and consultants for past services rendered, exercisable at $0.3425 per share and 100% vested on
the grant date. The expense related to these option grants was $44,320 in 2013.
On May 2, 2013, non-executive directors
were issued options for 300,000 shares, exercisable at $0.21 per share, 100% vested on the grant date, as compensation for such
independent directors’ past service. The $19,590 grant date fair market value of these option grants was expensed in 2013.
On May 6, 2013, a consultant was issued
an option for 81,081 shares, exercisable at $0.185 per share, 100% vested on the grant date, as compensation for such consultant’s
past service. The $8,205 grant date fair market value of these option grants was expensed in 2013. Also, on June 28, 2013, the
consultant was issued an option for 53,922 shares, exercisable at $0.153 per share, 100% vested on the grant date, as compensation
for such consultant’s service in the second quarter. The $6,334 grant date fair market value of these option grants was expensed
in 2013. Also, on March 31, 2014, the consultant was issued an option for 181,500 shares, exercisable at $0.10 per share, 100%
vested on the grant date, as compensation for such consultant’s service in the first quarter of 2014. The $8,321 grant date
fair market value of these option grants was expensed in the first quarter of 2014.
In September 2013, an option for 500,000 shares, exercisable
at $0.1096 per share, with 100% vested on the first anniversary of the grant date, was granted to the Company’s chief executive
officer under the 2012 Equity Incentive Plan. The grant date fair market value of this option grant was $18,820 of which $6,016
was expensed in 2013.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
In November 2013, non-executive directors were issued options
for 300,000 shares, exercisable at $0.0418 per share, 100% vested on the grant date, as compensation for such independent directors’
prior service. The grant date fair market value of these option grants was $3,687, all of which was expensed in 2013.
At June 30, 2014, there were options exercisable
for 6,358,774 shares outstanding at an average exercise price of $0.18
3
per share, consisting of fully vested options for 5,858,774 shares at an average exercise price of $0.190 per share and an unvested
option for 500,000 shares at an exercise price of $0.1096 per share.
Stock Options
The Company uses the modified Black-Scholes model to estimate
the fair value of employee options on the date of grant utilizing the assumptions noted below. The risk-free rate is based on the
U.S. Treasury bill yield curve in effect at the time of grant for the expected term of the option. The expected term of options
granted represents the period of time that the options are expected to be outstanding. Expected volatilities are based on historical
volatilities of selected technology stock mutual funds. The dividend yield was zero since the Company will not be paying dividends
for the foreseeable future. For stock option grants in 2012, the following assumptions were used:
Range of risk-free interest rates
|
0.669% - 2.812%
|
|
|
Expected term of options in years
|
5.003 – 6.256
|
|
|
Range of expected volatility
|
34.70% – 38.42%
|
A summary of option activity for the years ended December 31,
2013 and 2012 follows:
|
|
For the year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year
|
|
|
3,529,771
|
|
|
$
|
0.275
|
|
|
|
2,363,104
|
|
|
$
|
0.188
|
|
Granted
|
|
|
2,607,503
|
|
|
$
|
0.125
|
|
|
|
1,166,667
|
|
|
$
|
0.452
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited and expired
|
|
|
(240,000
|
)
|
|
$
|
0.311
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at the end of the year
|
|
|
5,897,274
|
|
|
$
|
0.183
|
|
|
|
3,529,771
|
|
|
$
|
0.275
|
|
Exercisable at the end of the year
|
|
|
5,397,274
|
|
|
$
|
0.190
|
|
|
|
2,879,771
|
|
|
$
|
0.255
|
|
The Company recognized total compensation expense related to
the stock options of $12,949 and $77,418 during the three month periods ended June 30, 2014, and 2013, respectively. Compensation
expense related to stock options is included in selling, general and administrative expenses in the consolidated statement of operations.
Total unrecognized compensation expense related to unvested unit options was $8,176 and $12,804 at June 30, 2014, and December 31,
2013, respectively.
The weighted average grant date fair value of share options
granted during the three month period ended June 30, 2014 was $0.100 per share.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
Common stock options outstanding and exercisable at June 30,
2014 were as follows:
As of June 30, 2014
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise Prices
|
|
|
Number Outstanding
|
|
|
Weighted Average Years of
Remaining Contractual Life
|
|
|
Number Outstanding
|
|
$
|
0.020
|
|
|
|
540,000
|
|
|
|
9.94
|
|
|
|
540,000
|
|
$
|
0.030
|
|
|
|
765,000
|
|
|
|
9.51
|
|
|
|
765,000
|
|
$
|
0.042
|
|
|
|
300,000
|
|
|
|
9.35
|
|
|
|
300,000
|
|
$
|
0.080
|
|
|
|
227,500
|
|
|
|
9.26
|
|
|
|
227,500
|
|
$
|
0.100
|
|
|
|
181,500
|
|
|
|
9.76
|
|
|
|
181,500
|
|
$
|
0.110
|
|
|
|
500,000
|
|
|
|
9.19
|
|
|
|
-
|
|
$
|
0.125
|
|
|
|
1,943,104
|
|
|
|
6.39
|
|
|
|
1,943,104
|
|
$
|
0.153
|
|
|
|
53,922
|
|
|
|
9.00
|
|
|
|
53,922
|
|
$
|
0.185
|
|
|
|
81,081
|
|
|
|
8.85
|
|
|
|
81,081
|
|
$
|
0.210
|
|
|
|
300,000
|
|
|
|
8.84
|
|
|
|
300,000
|
|
$
|
0.250
|
|
|
|
240,000
|
|
|
|
4.51
|
|
|
|
240,000
|
|
$
|
0.343
|
|
|
|
340,000
|
|
|
|
8.55
|
|
|
|
340,000
|
|
$
|
0.375
|
|
|
|
120,000
|
|
|
|
6.11
|
|
|
|
120,000
|
|
$
|
0.395
|
|
|
|
266,667
|
|
|
|
8.36
|
|
|
|
266,667
|
|
$
|
0.745
|
|
|
|
500,000
|
|
|
|
8.19
|
|
|
|
500,000
|
|
Total
|
|
|
|
6,358,774
|
|
|
|
8.06
|
|
|
|
5,858,774
|
|
The stock options exercisable at December 31, 2013, had an aggregate
intrinsic value of $354,314. No options were exercised during 2014 or 2013.
The Company has not included these common stock equivalents
in earnings per share calculations as they are anti-dilutive due to the Company’s net losses incurred for the periods presented.
Warrants
On March 12, 2012, as discussed in Note 13
above, the Company fulfilled subscriptions for the issuance of 800,000 shares along with warrants having the right to purchase
800,000 shares of common stock at the current exercise price of $0.50 per share, expiring in 5 years from the date of issuance.
In June 2012, the Company fulfilled subscriptions for the issuance of 2,200,000 shares along with warrants having the right to
purchase 2,200,000 shares of common stock at the current exercise price of $0.50 per share, expiring in 5 years from the date of
issuance. In September 2012, the Company fulfilled subscriptions for the issuance of 1,000,000 shares along with warrants having
the right to purchase 1,000,000 shares of common stock at the current exercise price of $0.50 per share, expiring in 5 years from
the date of issuance. Also in September 2012, the Company issued to a consultant warrants having the right to purchase 133,335
shares of common stock at the current exercise price of $0.50 per share, expiring in 5 years from the date of issuance. Therefore,
shares that may potentially be issued upon the exercise of warrants as a result of subscriptions received by the Company and issued
to consultants as of June 30, 2014 are as follows:
|
|
Number of shares
potentially issuable
|
|
|
Weighted average
exercise price
|
|
|
|
|
|
|
|
|
Issued in fulfillment of subscriptions
|
|
|
4,000,000
|
|
|
|
0.50
|
|
Issued to consultant
|
|
|
133,335
|
|
|
|
0.50
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total shares potentially issuable as of June 30, 2014
|
|
|
4,133,335
|
|
|
|
0.50
|
|
When subscriptions are fulfilled by the Company, the warrants
related to each individual subscription are dated as of the date the subscription funds were received by the Company, regardless
of the date on which the obligation is ultimately fulfilled. Therefore, all warrants have a term of five years from date the subscription
funds were received.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
At June 30, 2014, the remaining number of years to expiration
and the weighted average term to expiration for the 4,133,335 outstanding warrants related to subscriptions that had been fulfilled
through that date were as follows:
Expiration Date
|
|
Number of shares
potentially issuable
|
|
|
Remaining years to
expiration and
weighted average
|
|
|
Fair Value of
Warrants (at $0.50
exercise price)
|
|
|
|
|
|
|
|
|
|
|
|
October 26, 2016
|
|
|
200,000
|
|
|
|
2.82
|
|
|
$
|
107,446
|
|
November 1, 2016
|
|
|
50,000
|
|
|
|
2.84
|
|
|
|
26,862
|
|
December 4, 2016
|
|
|
200,000
|
|
|
|
2.93
|
|
|
|
107,446
|
|
December 27, 2016
|
|
|
200,000
|
|
|
|
2.99
|
|
|
|
107,446
|
|
February 13, 2017
|
|
|
50,000
|
|
|
|
3.12
|
|
|
|
26,862
|
|
February 27, 2017
|
|
|
100,000
|
|
|
|
3.16
|
|
|
|
53,723
|
|
March 12, 2017
|
|
|
250,000
|
|
|
|
3.20
|
|
|
|
134,308
|
|
April 4, 2017
|
|
|
150,000
|
|
|
|
3.26
|
|
|
|
80,585
|
|
April 22, 2017
|
|
|
250,000
|
|
|
|
3.31
|
|
|
|
134,308
|
|
May 9, 2017
|
|
|
500,000
|
|
|
|
3.36
|
|
|
|
268,616
|
|
May 14, 2017
|
|
|
1,050,000
|
|
|
|
3.37
|
|
|
|
564,094
|
|
July 22, 2017
|
|
|
500,000
|
|
|
|
3.56
|
|
|
|
268,616
|
|
August 30, 2017
|
|
|
500,000
|
|
|
|
3.67
|
|
|
|
268,616
|
|
August 30, 2017
|
|
|
133,335
|
|
|
|
3.67
|
|
|
|
71,632
|
|
|
|
|
4,133,335
|
|
|
|
3.34
|
|
|
$
|
2,220,560
|
|
The following assumptions were used for
the Black-Scholes valuation of the warrants issued:
|
|
Assumption
|
|
|
|
|
|
Dividend rate
|
|
|
0
|
%
|
Annualized volatility
|
|
|
39.00
|
%
|
Risk free interest rate
|
|
|
0.59%- 1.20%
|
|
Expected life of warrants (years)
|
|
|
5.00
|
|
At both June 30, 2014 and December 31, 2013, the Company had
issued warrants for 8,013,440 shares of common stock to the holders of the Notes (see note 9) and additional warrants for 107,672
shares of common stock to other individuals for a total of 8,121,112 warrants outstanding. Of the warrants outstanding, 42,672
were issued in 2009, exercisable at $0.375 per share and had a weighted average grant date fair value of $0.009. In 2010, 7,768,440
warrants were issued, exercisable at $0.3125 per share, having a weighted average grant date fair value of $0.01. The remaining
310,000 warrants were issued in 2011, also exercisable at $0.3125 per share, having a weighted average grant date fair value of
$0.008. The Company uses the modified Black-Scholes model to estimate the fair value of warrants on the date of issuance.
The Company has not included these common stock equivalents
in earnings per share calculations as they are anti-dilutive due to the Company’s net losses incurred for the periods presented.
ORYON TECHNOLOGIES, INC.
Notes to the Consolidated Financial Statements
(Continued)
June 30, 2014
(Unaudited)
15
.
Benefit Plans
The Company established a 401(k) Plan (the “Plan”)
for eligible employees of the Company, but in December 2012, the Company announced the termination of the Plan, primarily due to
the high cost relative to the inadequate employee participation. Generally, all employees of the Company who are at least twenty-one
years of age and who have completed one-half year of service were eligible to participate in the Plan. The Plan was a defined contribution
plan that provides that participants may make voluntary salary deferral contributions, on a pretax basis, between 1% and 15% of
their compensation in the form of voluntary payroll deductions, up to a maximum amount as indexed for cost of living adjustments.
The Company was permitted to make discretionary contributions but no Company contributions had been made in 2014 or 2013.
16
.
Going Concern
The Company has accumulated losses from inception through June
30, 2014 of $13,148,821, has minimal assets, and has negative working capital. These factors raise substantial doubt
about the Company’s ability to continue as a going concern. These factors may have potential adverse effects on
the Company including the ceasing of operations.
The Company is currently seeking additional capital to fund
its operations through the foreseeable future. If capital raising efforts are unsuccessful, discontinuance of operations is likely.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
17
.
Subsequent Events
The Company has evaluated subsequent events that occurred after
June 30, 2014 through August 14, 2014, the date this report was available to be issued. Any material subsequent events that occurred
during that time period have been properly recognized or disclosed in the Company’s financial statements.
ITEM 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the results of operations
of Oryon Technologies, Inc. and its subsidiaries for the three and six month periods ended June 30, 2014 and 2013 and its financial
condition as of June 30, 2014 and December 31, 2013, should be read in conjunction with the consolidated financial statements and
the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. Our discussion includes
forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under the caption “Risk Factors” in the Company’s
Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission (the “SEC”) on March 7, 2013.
We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,”
“should,” “could,” and similar expressions to identify forward-looking statements.
Overview
Oryon Technologies, Inc. (“Oryon”,
the “Registrant” or the “Company” and “we,” “us”, “our” or similar
terms) was organized under the laws of the State of Nevada on August 22, 2007 to explore mineral properties. On May 4, 2012 (the
“Closing Date”), Oryon closed a merger transaction (the “Merger”) with Oryon Merger Sub, LLC, a Texas limited
liability company and wholly-owned subsidiary of the Company (“Merger Sub”), and OryonTechnologies, LLC (“OTLLC”),
a Texas limited liability company, pursuant to an Agreement and Plan of Merger dated March 9, 2012 (the “Merger Agreement”).
As a result of the Merger, the Company ceased to explore mineral properties and became a technology company with certain valuable
products and intellectual property rights related to a three-dimensional, elastomeric, membranous, flexible electroluminescent
lamp. The Company’s principal executive offices are located at 4251 Kellway Circle, Addison, Texas 75001, and its phone number
is (214) 267-1321.
Oryon Technologies, Inc. (“Oryon”
or the “Company”) has only one direct subsidiary, OryonTechnologies, LLC, a Texas limited liability company (“OTLLC”).
The Company is a developer of a patented electroluminescent (“EL”) lighting technology, trademarked as Elastolite
®
that enables thin, flexible, crushable, water-resistant lighting systems to be incorporated into multiple applications such as
safety apparel, sporting goods, consumer goods and membrane switches, among others. OTLLC is the parent of two wholly-owned companies:
OryonTechnologies Licensing, LLC (“OTLIC”) and OryonTechnologiesDevelopment, LLC (“OTD”), both of which
are also Texas limited liability companies.
The following discussion should be read
in conjunction with our most recent financial statements and notes appearing elsewhere in this quarterly report. In addition to
the historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties.
The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result
of certain factors.
Management’s discussion and analysis
of the Company’s financial condition and results of operations are only based on the current business and operations of OTLLC
and its subsidiaries, on a consolidated basis. Key factors affecting the Company’s results of operations include revenues,
cost of revenues, operating expenses and interest expense.
Operating results for the interim periods
presented herein are not necessarily indicative of the results that can be expected for the entire fiscal year.
Comparison of the Three months ended
June 30, 2014 to the Three months ended June 30, 2013
Gross Profit and Other Revenues
|
|
For the Quarter Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
Revenues
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Product sales
|
|
|
27,262
|
|
|
|
36,229
|
|
|
|
(8,967
|
)
|
|
|
-24.8
|
%
|
Cost of goods sold
|
|
|
(2,385
|
)
|
|
|
(4,849
|
)
|
|
|
2,464
|
|
|
|
-50.8
|
%
|
Gross profit
|
|
|
24,877
|
|
|
|
31,380
|
|
|
|
(6,503
|
)
|
|
|
-20.7
|
%
|
Royalty and license fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total revenues
|
|
|
24,877
|
|
|
|
31,380
|
|
|
|
(6,503
|
)
|
|
|
-20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin
|
|
|
91.3
|
%
|
|
|
86.6
|
%
|
|
|
|
|
|
|
|
|
Product sales decreased $9.0 thousand, or
24.8%, to $27.3 thousand for the three months ended June 30, 2014 from $36.2 thousand for the three months ended June 30, 2013.
Gross profit and total revenues decreased $6.5 thousand to $24.9 thousand, or 20.7%, from $31.4 thousand in the three months ended
June 30, 2013, due to the decrease in product sales but offset by the increase in gross profit on product sales resulting from
a decrease in the cost of goods sold as a percentage of product sales.
Cost of goods sold represented 32.0% of
product sales revenues in the first three months of 2014 as compared to 28.4% in the first three months of 2013. Each of the Company’s
sales is separately negotiated with the specific customer. The Company endeavors to obtain the highest sales price for its products
that can be negotiated with the customer and does not establish sales prices based on a “cost plus” analysis. Therefore,
the cost of goods sold as a percentage of product sales revenue can be expected to vary significantly from period to period depending
on the specific customers’ product orders. In addition, product sales included the cost of design and engineering services
that have little or no cost of goods sold.
Operating Expenses-Overview
Total operating expenses
for the three months ended June 30, 2014, increased $87.3 thousand, or 24.7%, to $440.0 thousand, from $352.8 thousand in the three
months ended June 30, 2013, as shown in the table below:
|
|
For the quarter ended
|
|
|
For the quarter ended
|
|
|
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Total applications development exp.
|
|
|
65,626
|
|
|
|
14.9
|
%
|
|
|
68,894
|
|
|
|
19.5
|
%
|
|
|
(3,268
|
)
|
|
|
-4.7
|
%
|
Total sales and marketing exp.
|
|
|
14,985
|
|
|
|
3.4
|
%
|
|
|
29,798
|
|
|
|
8.5
|
%
|
|
|
(14,813
|
)
|
|
|
-49.7
|
%
|
Total general and administrative exp.
|
|
|
352,674
|
|
|
|
80.2
|
%
|
|
|
246,390
|
|
|
|
69.8
|
%
|
|
|
106,284
|
|
|
|
43.1
|
%
|
Depreciation and amortization
|
|
|
6,746
|
|
|
|
1.5
|
%
|
|
|
7,695
|
|
|
|
2.2
|
%
|
|
|
(949
|
)
|
|
|
-12.3
|
%
|
Total operating expenses
|
|
|
440,031
|
|
|
|
100.0
|
%
|
|
|
352,777
|
|
|
|
100.0
|
%
|
|
|
87,254
|
|
|
|
24.7
|
%
|
The primary reason for the increase in total
operating expenses is the 43.1% increase in general and administrative expense, as discussed below.
Applications Development Expense
|
|
For the Quarter Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
Applications Development Expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Wages
|
|
|
14,928
|
|
|
|
31,846
|
|
|
|
(16,918
|
)
|
|
|
-53.1
|
%
|
Payroll taxes and benefits
|
|
|
2,757
|
|
|
|
2,384
|
|
|
|
373
|
|
|
|
15.6
|
%
|
Materials, equipment, services
|
|
|
45,702
|
|
|
|
30,177
|
|
|
|
15,525
|
|
|
|
51.4
|
%
|
Office and overhead
|
|
|
2,239
|
|
|
|
4,487
|
|
|
|
(2,248
|
)
|
|
|
-50.1
|
%
|
Travel and entertainment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total applications development exp.
|
|
|
65,626
|
|
|
|
68,894
|
|
|
|
(3,268
|
)
|
|
|
-4.7
|
%
|
NM = Not Meaningful
Total applications development expense decreased
by $3.3 thousand or 4.7% for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, due to the
$15.5 thousand, or 51.4%, increase in materials, offset by the $16.9 thousand decrease in wages resulting from the lower number
of development personnel in 2014.
Sales and Marketing Expense
|
|
For the Quarter Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
Sales and Marketing Expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Wages
|
|
|
-
|
|
|
|
18,000
|
|
|
|
(18,000
|
)
|
|
|
NM
|
|
Payroll taxes and benefits
|
|
|
-
|
|
|
|
1,389
|
|
|
|
(1,389
|
)
|
|
|
-100.0
|
%
|
Overhead
|
|
|
9,626
|
|
|
|
5,912
|
|
|
|
3,714
|
|
|
|
62.8
|
%
|
Outside services
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
100.0
|
%
|
Travel and entertainment
|
|
|
3,359
|
|
|
|
3,497
|
|
|
|
(138
|
)
|
|
|
-3.9
|
%
|
Total sales and marketing exp.
|
|
|
14,985
|
|
|
|
29,798
|
|
|
|
(14,813
|
)
|
|
|
-49.7
|
%
|
NM = Not Meaningful
Total sales and marketing expense decreased
to $15.0 thousand in the first three months of 2014 from $29.8 thousand in the first three months of 2013. The decrease of $14.8
thousand or 49.7% is largely due to the to the $18.0 thousand decrease in wages along with the related $1.4 thousand decrease in
payroll taxes and benefits resulting from the absence of sales personnel in 2014.
General and Administrative Expense
|
|
For the Quarter Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
General and Administrative Expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Wages
|
|
|
42,417
|
|
|
|
69,999
|
|
|
|
(27,582
|
)
|
|
|
-39.4
|
%
|
Payroll taxes and benefits
|
|
|
13,953
|
|
|
|
22,250
|
|
|
|
(8,297
|
)
|
|
|
-37.3
|
%
|
Overhead
|
|
|
32,361
|
|
|
|
35,910
|
|
|
|
(3,549
|
)
|
|
|
-9.9
|
%
|
Outside services
|
|
|
263,532
|
|
|
|
118,176
|
|
|
|
145,356
|
|
|
|
123.0
|
%
|
Travel and entertainment
|
|
|
411
|
|
|
|
55
|
|
|
|
356
|
|
|
|
647.3
|
%
|
Total general and administrative exp.
|
|
|
352,674
|
|
|
|
246,390
|
|
|
|
106,284
|
|
|
|
43.1
|
%
|
NM = Not Meaningful
General and administrative
expense for the second quarter of the year increased by $106.3 thousand, or 43.1%, to $352.7 thousand from $246.4 thousand in the
prior year comparable period largely due to (a) the $145.4 thousand increase in outside services expenses, as discussed below,
offset by (b) the $27.6 decrease in wages along with the related $8.3 decrease in payroll taxes and benefits. Payroll taxes and
benefits included stock option compensation expense for employees and consultants of $8.4 thousand in the quarter ended June 30,
2014, as compared to $16.5 thousand in the comparable quarter of 2013. Stock option compensation expense for directors is included
in outside services expense, discussed below.
Outside services expenses
increased $145.4 thousand, or 123.3%, to $263.5 thousand in the three months ended June 30, 2014 from $118.2 thousand in the three
months ended June 30, 2013, as shown in the table below.
|
|
For the quarter ended
|
|
|
For the quarter ended
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal expenses
|
|
|
189,208
|
|
|
|
71.8
|
%
|
|
|
38,993
|
|
|
|
33.0
|
%
|
|
|
150,215
|
|
|
|
385.2
|
%
|
Accounting and audit expenses
|
|
|
18,536
|
|
|
|
7.0
|
%
|
|
|
11,694
|
|
|
|
9.9
|
%
|
|
|
6,842
|
|
|
|
58.5
|
%
|
Directors' fees and expenses
|
|
|
11,875
|
|
|
|
4.5
|
%
|
|
|
37,826
|
|
|
|
32.0
|
%
|
|
|
(25,951
|
)
|
|
|
NM
|
|
Public relations expenses
|
|
|
3,794
|
|
|
|
1.4
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
3,794
|
|
|
|
NM
|
|
Consulting
|
|
|
31,419
|
|
|
|
11.9
|
%
|
|
|
28,044
|
|
|
|
23.7
|
%
|
|
|
3,375
|
|
|
|
12.0
|
%
|
Payroll processing expenses
|
|
|
272
|
|
|
|
0.1
|
%
|
|
|
564
|
|
|
|
0.5
|
%
|
|
|
(292
|
)
|
|
|
-51.8
|
%
|
Banking Fees
|
|
|
35
|
|
|
|
0.0
|
%
|
|
|
170
|
|
|
|
0.1
|
%
|
|
|
(135
|
)
|
|
|
-79.4
|
%
|
Stock transfer agent and filing fees
|
|
|
8,393
|
|
|
|
3.2
|
%
|
|
|
885
|
|
|
|
0.8
|
%
|
|
|
7,508
|
|
|
|
848.4
|
%
|
Total G&A outside services
|
|
|
263,532
|
|
|
|
100.0
|
%
|
|
|
118,176
|
|
|
|
100.0
|
%
|
|
|
145,356
|
|
|
|
123.0
|
%
|
NM = Not Meaningful
The primary reason for the increase in outside
services expense is the $150.2 thousand, or 385.2%, increase in legal expenses in the second quarter of 2014 as compared to the
second quarter of 2013. As discussed in Note 11, the Company has been conducting vigorous legal defenses against two lawsuits.
Although some of the legal defense costs will be covered by insurance, the Company’s directors’ and officers’
insurance policy carries substantial deductible requirements.
In connection with the EFL Transaction,
the Company was required to eliminate much of its corporate debt obligations, including the deferred directors’ fees that
had been accrued. Two directors agreed to settle their balances through the Exchange Agreements whereby they received a combination
of cash and common stock in settlement. A third director voluntarily agreed to waive his deferred director’s fees in the
amount of $41.7 thousand, which amount was applied in the first quarter of 2014, offsetting the quarterly accrual for directors’
fees expense and creating a negative balance for the quarter. The director also resigned from the Board of Directors effective
January 21, 2014, thereby eliminating the requirement for the quarterly accrual of fees for his service for the second quarter
of 2014. As a result of this director’s resignation, directors’ fees and expenses for the three months ended June 30,
2014, decreased by $26.0 thousand as compared to the three month period ended June 30, 2013. Also, directors’ fees and expenses
included stock option compensation expense of $-0- in the quarter ended June 30, 2014, as compared to $19.6 thousand in the comparable
period in 2013.
Public relations expense increased by $3.8
thousand to $3.8 thousand in the three months ended June 30, 2014 as compared to no expense in the three months ended June 30,
2013. The expense in 2014 is for press releases and the cost of public relations consultants in connection with the communications
to the public about the EFL Transaction.
Other Income
(Expense)
Interest Expense:
Interest
expense decreased $2.2 thousand, or 23.4%, to $7.2 thousand for the three months ended June 30, 2014, from $9.3 thousand in the
three months ended June 30, 2013, due to the lower principal amount of debt outstanding. Interest expense for the reported periods
consisted only of interest on promissory notes payable and other short-term debt.
Taxes
For the three months ended June 30, 2014,
the Company incurred substantial losses and subsequently has no tax obligation. Although the incurred losses can be carried forward
to offset future taxable income, within certain limitations, the Company cannot reliably forecast when profitable operations will
occur. Accordingly, the Company has not recorded any deferred tax assets related to the losses incurred.
Comparison of the Six months ended June 30, 2014 to the Six
months ended June 30, 2013
Gross Profit and Other Revenues
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
Revenues
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Product sales
|
|
|
51,706
|
|
|
|
52,983
|
|
|
|
(1,277
|
)
|
|
|
-2.4
|
%
|
Cost of goods sold
|
|
|
(10,212
|
)
|
|
|
(9,602
|
)
|
|
|
(610
|
)
|
|
|
6.4
|
%
|
Gross profit
|
|
|
41,494
|
|
|
|
43,381
|
|
|
|
(1,887
|
)
|
|
|
-4.3
|
%
|
Royalty and license fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total revenues
|
|
|
41,494
|
|
|
|
43,381
|
|
|
|
(1,887
|
)
|
|
|
-4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin
|
|
|
80.2
|
%
|
|
|
81.9
|
%
|
|
|
|
|
|
|
|
|
Product sales decreased $1.3 thousand, or
2.4%, to $51.7 thousand for the six months ended June 30, 2014 from $53.0 thousand for the six months ended June 30, 2013. Gross
profit and total revenues decreased $1.9 thousand to $41.5 thousand, or 4.3%, from $43.4 thousand in the six months ended June
30, 2013, due to both the decrease in product sales and the decrease in gross profit on product sales resulting from an increase
in the cost of goods sold as a percentage of product sales.
Cost of goods sold represented 19.8% of
product sales revenues in the first six months of 2014 as compared to 18.1% in the first six months of 2013. Each of the Company’s
sales is separately negotiated with the specific customer. The Company endeavors to obtain the highest sales price for its products
that can be negotiated with the customer and does not establish sales prices based on a “cost plus” analysis. Therefore,
the cost of goods sold as a percentage of product sales revenue can be expected to vary significantly from period to period depending
on the specific customers’ product orders. In addition, product sales included the cost of design and engineering services
that have little or no cost of goods sold.
Operating Expenses-Overview
Total operating expenses
for the six months ended June 30, 2014, increased $315.2 thousand, or 40.4%, to $1,096.2 thousand, from $781.0 thousand in the
six months ended June 30, 2013, as shown in the table below:
|
|
For the six months ended
|
|
|
For the six months ended
|
|
|
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Total applications development exp.
|
|
|
185,944
|
|
|
|
17.0
|
%
|
|
|
171,393
|
|
|
|
21.9
|
%
|
|
|
14,551
|
|
|
|
8.5
|
%
|
Total sales and marketing exp.
|
|
|
28,905
|
|
|
|
2.6
|
%
|
|
|
55,787
|
|
|
|
7.1
|
%
|
|
|
(26,882
|
)
|
|
|
-48.2
|
%
|
Total general and administrative exp.
|
|
|
866,936
|
|
|
|
79.1
|
%
|
|
|
538,200
|
|
|
|
68.9
|
%
|
|
|
328,736
|
|
|
|
61.1
|
%
|
Depreciation and amortization
|
|
|
14,441
|
|
|
|
1.3
|
%
|
|
|
15,667
|
|
|
|
2.0
|
%
|
|
|
(1,226
|
)
|
|
|
-7.8
|
%
|
Total operating expenses
|
|
|
1,096,226
|
|
|
|
100.0
|
%
|
|
|
781,047
|
|
|
|
100.0
|
%
|
|
|
315,179
|
|
|
|
40.4
|
%
|
The primary reason for the increase in total
operating expenses is the 61.1% increase in general and administrative expense, as discussed below.
Applications Development Expense
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
Applications Development Expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Wages
|
|
|
27,178
|
|
|
|
68,712
|
|
|
|
(41,534
|
)
|
|
|
-60.4
|
%
|
Payroll taxes and benefits
|
|
|
9,005
|
|
|
|
12,109
|
|
|
|
(3,104
|
)
|
|
|
-25.6
|
%
|
Materials, equipment, services
|
|
|
141,424
|
|
|
|
78,937
|
|
|
|
62,487
|
|
|
|
79.2
|
%
|
Office and overhead
|
|
|
8,337
|
|
|
|
11,635
|
|
|
|
(3,298
|
)
|
|
|
-28.3
|
%
|
Travel and entertainment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total applications development exp.
|
|
|
185,944
|
|
|
|
171,393
|
|
|
|
14,551
|
|
|
|
8.5
|
%
|
Total applications development expense increased
by $14.6 thousand or 8.5% for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013, due to the
$62.5 thousand, or 79.2%, increase in materials, offset by the $41.5 thousand decrease in wages along with the related $3.1 thousand
decrease in payroll taxes and benefits resulting from the lower number of development personnel in 2014. The increase in the cost
of materials is largely due to $45.6 thousand in costs associated with the production of products ordered by EFL Tech, for which
no net revenue has been reported. The price for the materials as invoiced to EFL Tech was $54.1 thousand, but management has fully
reserved that receivable due to the possibility that EFL Tech will not make payment as a consequence of the Company’s legal
matters.
Sales and Marketing Expense
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
Sales and Marketing Expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Wages
|
|
|
-
|
|
|
|
36,000
|
|
|
|
(36,000
|
)
|
|
|
NM
|
|
Payroll taxes and benefits
|
|
|
-
|
|
|
|
2,796
|
|
|
|
(2,796
|
)
|
|
|
NM
|
|
Overhead
|
|
|
14,829
|
|
|
|
7,921
|
|
|
|
6,908
|
|
|
|
87.2
|
%
|
Outside services
|
|
|
6,000
|
|
|
|
1,000
|
|
|
|
5,000
|
|
|
|
NM
|
|
Travel and entertainment
|
|
|
8,076
|
|
|
|
8,070
|
|
|
|
6
|
|
|
|
0.1
|
%
|
Total sales and marketing exp.
|
|
|
28,905
|
|
|
|
55,787
|
|
|
|
(26,882
|
)
|
|
|
-48.2
|
%
|
Total sales and marketing expense decreased
to $28.9 thousand in the first six months of 2014 from $55.8 thousand in the first six months of 2013. The decrease of $26.9 thousand
or 48.2% is largely due to the to the $36.0 thousand decrease in wages along with the related $2.8 thousand decrease in payroll
taxes and benefits resulting from the absence of sales personnel in 2014.
General and Administrative Expense
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change from 2013 to 2014
|
|
General and Administrative Expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
%
|
|
Wages
|
|
|
81,435
|
|
|
|
139,998
|
|
|
|
(58,563
|
)
|
|
|
-41.8
|
%
|
Payroll taxes and benefits
|
|
|
26,359
|
|
|
|
106,852
|
|
|
|
(80,493
|
)
|
|
|
-75.3
|
%
|
Overhead
|
|
|
70,870
|
|
|
|
68,484
|
|
|
|
2,386
|
|
|
|
3.5
|
%
|
Outside services
|
|
|
668,678
|
|
|
|
221,179
|
|
|
|
447,499
|
|
|
|
202.3
|
%
|
Travel and entertainment
|
|
|
19,594
|
|
|
|
1,687
|
|
|
|
17,907
|
|
|
|
NM
|
|
Total general and administrative exp.
|
|
|
866,936
|
|
|
|
538,200
|
|
|
|
328,736
|
|
|
|
61.1
|
%
|
General and administrative
expense for the first six months of the year increased by $328.7 thousand, or 61.1%, to $866.9 thousand from $538.2 thousand in
the prior year comparable period largely due to (a) the $447.5 thousand increase in outside services expenses, as discussed below,
offset by (b) the $58.6 decrease in wages along with the related $80.5 decrease in payroll taxes and benefits. The decrease in
payroll taxes and benefits is primarily due to the decrease in stock option compensation expense for employees and consultants
to $21.3 thousand in the six months ended June 30, 2014, from $93.9 thousand in the comparable period of 2013, a decrease of $72.6
thousand. Stock option compensation expense for directors is included in outside services expense, discussed below.
Outside services expenses
increased $447.5 thousand, or 202.3%, to $668.7 thousand in the six months ended June 30, 2014 from $221.2 thousand in the six
months ended June 30, 2013, as shown in the table below.
|
|
For the six months ended
|
|
|
For the six months ended
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal expenses
|
|
|
548,105
|
|
|
|
82.0
|
%
|
|
|
79,635
|
|
|
|
36.0
|
%
|
|
|
468,470
|
|
|
|
588.3
|
%
|
Accounting and audit expenses
|
|
|
35,792
|
|
|
|
5.4
|
%
|
|
|
24,384
|
|
|
|
11.0
|
%
|
|
|
11,408
|
|
|
|
46.8
|
%
|
Directors' fees and expenses
|
|
|
(17,917
|
)
|
|
|
-2.7
|
%
|
|
|
56,051
|
|
|
|
25.3
|
%
|
|
|
(73,968
|
)
|
|
|
-132.0
|
%
|
Public relations expenses
|
|
|
22,030
|
|
|
|
3.3
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
22,030
|
|
|
|
NM
|
|
Consulting
|
|
|
71,225
|
|
|
|
10.7
|
%
|
|
|
57,325
|
|
|
|
25.9
|
%
|
|
|
13,900
|
|
|
|
24.3
|
%
|
Payroll processing expenses
|
|
|
748
|
|
|
|
0.1
|
%
|
|
|
1,218
|
|
|
|
0.6
|
%
|
|
|
(470
|
)
|
|
|
-38.6
|
%
|
Banking Fees
|
|
|
470
|
|
|
|
0.1
|
%
|
|
|
514
|
|
|
|
0.2
|
%
|
|
|
(44
|
)
|
|
|
-8.6
|
%
|
Stock transfer agent and filing fees
|
|
|
8,225
|
|
|
|
1.2
|
%
|
|
|
2,052
|
|
|
|
0.9
|
%
|
|
|
6,173
|
|
|
|
300.8
|
%
|
Total G&A outside services
|
|
|
668,678
|
|
|
|
100.0
|
%
|
|
|
221,179
|
|
|
|
100.0
|
%
|
|
|
447,499
|
|
|
|
202.3
|
%
|
The primary reason for the increase in outside
services expense is the $468.5 thousand, or 588.3%, increase in legal expenses in the first six months of 2014 as compared to the
first six months of 2013. As discussed in Note 11, the Company has been conducting vigorous legal defenses against two lawsuits.
Although some of the legal defense costs will be covered by insurance, the Company’s directors’ and officers’
insurance policy carries substantial deductible requirements.
In connection with the EFL Transaction,
the Company was required to eliminate much of its corporate debt obligations, including the deferred directors’ fees that
had been accrued. Two directors agreed to settle their balances through the Exchange Agreements whereby they received a combination
of cash and common stock in settlement. A third director voluntarily agreed to waive his deferred director’s fees in the
amount of $41.7 thousand, which amount was applied in the first quarter of 2014, offsetting the quarterly accrual for directors’
fees expense and creating a negative balance for the first quarter. The director also resigned from the Board of Directors effective
January 21, 2014, thereby eliminating the requirement for the accrual of fees for service for the first half of 2014. As a result
of this director’s fee waiver and resignation, directors’ fees and expenses for the six months ended June 30, 2014,
decreased by $74.0 thousand as compared to the six month period ended June 30, 2013. Also, directors’ fees and expenses included
stock option compensation expense of $-0- in the six months ended June 30, 2014, as compared to $19.6 thousand in the comparable
period in 2013.
Public relations expense increased by $22.0
thousand to $22.0 thousand in the six months ended June 30, 2014 as compared to no expense in the six months ended June 30, 2013.
The expense in 2014 is for press releases and the cost of public relations consultants in connection with the communications to
the public about the EFL Transaction.
Other Income
(Expense)
Interest Expense:
Interest
expense decreased $2.9 thousand, or 15.6%, to $15.7 thousand for the six months ended June 30, 2014, from $18.6 thousand in the
six months ended June 30, 2013, due to the lower principal amount of debt outstanding. Interest expense for the reported periods
consisted only of interest on promissory notes payable and other short-term debt.
Taxes
For the six months ended June 30, 2014,
the Company incurred substantial losses and subsequently has no tax obligation. Although the incurred losses can be carried forward
to offset future taxable income, within certain limitations, the Company cannot reliably forecast when profitable operations will
occur. Accordingly, the Company has not recorded any deferred tax assets related to the losses incurred.
Liquidity and Capital Resources
Oryon filed a petition for protection under
Chapter 11 of the U.S. Bankruptcy Code on May 6, 2014. The Company does not have sufficient cash on hand to meet its current obligations
and anticipated cash requirements. See Notes 13, 16 and 17 of the Notes to the Consolidated Financial Statements. Not including
capital expenditures and costs directly related to revenue generating projects, operating expenditures are expected to range between
$100,000.00 and $150,000.00 per month. Management anticipates that an additional $1,500,000 to $3,000,000 will be necessary to
fund operations and provide adequate working capital for the next twelve to twenty-four month period subsequent to the date of
this report. The Company does not currently have any material commitments for capital expenditures as of the end of the current
period.
To meet management’s
future objectives, the Company will need to sell additional equity and/or debt securities, which could result in dilution to current
shareholders, or seek additional loans. The incurrence of indebtedness would result in increased debt service obligations and could
require the Company to agree to operating and financial covenants that would restrict its operations. The Company does not have
any lending arrangements in place with banking or financial institutions and management does not anticipate that it will be able
to secure these funding arrangements in the near future. Financing may not be available in amounts or on terms acceptable to the
Company, if at all. Any failure by the Company to raise additional funds on terms acceptable to it, or at all, could limit its
ability to continue operations and terminate its overall business prospects.
Our current cash requirements are significant
due to planned applications development and marketing of our current technology, and we anticipate generating additional operating
monthly losses at least through the end of 2014. In order to execute on our business strategy, we will require additional working
capital, commensurate with the operational needs of our planned marketing, development and production efforts. Our management cannot
guarantee that we will be able to raise sufficient amounts of working capital through debt or equity offerings, as may be required
to meet our short-term obligations. Moreover, changes in our operating plans, increased expenses, acquisitions, or other events,
may cause us to seek additional equity or debt financing in the future. We anticipate continued and additional marketing, development
and production expenses. Accordingly, we expect to continue to use debt and equity financing to fund operations for the next twelve
to twenty-four months, as we look to expand our asset base and fund marketing, development and production of our technology.
There are no assurances that we will be
able to raise the required working capital on terms favorable to us, or that such working capital will be available on any terms
when needed. Any failure to secure additional financing would limit our ability to continue as a going concern and force us to
modify our business strategy. In addition, we cannot be assured of profitability in the future.
We are not aware of any unusual or infrequent events or transactions
or any significant economic changes that materially affected or could materially affect the amount of our reported income from
operations.
Sources and uses of funds
As of June 30, 2014,
Oryon had cash and equivalents on hand of $11.3 thousand, and negative working capital of $972.4 thousand. Management of the Company
recognizes that its cash on hand and working capital will not be sufficient to meet its anticipated cash requirements in the near
term and is actively seeking additional capital funding. Any failure to secure additional financing would limit the Company’s
ability to continue as a going concern and force management to modify the business strategy.
Oryon’s sales cycle timing varies
depending on the type of customer being served. It can range from three months for certain specialty promotions to 12-18 months
for certain branded products from first contact with a prospective customer until product sales revenues can be reported. During
that period, Oryon works with the customer’s designers to cooperatively engineer an application of its patented technology
into the customer’s final product. This requires substantial co-development with the customer’s personnel to meet the
needs of the customer. Accordingly, Oryon must have sufficient capital to fund administrative overhead, sales and marketing efforts
and staffing expenses for an extended period of time before cash is received from customers.
Net cash provided by (used in) operating activities
Net cash used in operating activities for
the six months ended June 30, 2014 increased by $648.8 thousand to a use of $1,092.8 thousand, as compared to a use of $444.1 thousand
for the six months ended June 30, 2013. The primary reason, aside from the significantly increased operating loss (see below),
was the increased aggregate change in the operating assets and liabilities that occurred in the first six months of 2014, largely
as a result of the EFL Transaction. In the six months ended June 30, 2014, the aggregate changes in operating assets and liabilities
resulted in a total use of cash of $72.5 thousand, as compared to cash provided of $168.7 thousand in the comparable period in
2013, a net increased use of cash of $241.2 thousand. Under the terms of the Subscription Agreement, the Company was required to
eliminate many of its obligations through settlement and release agreements (the “Exchange Agreements”). A significant
portion of the change to operating liabilities is offset by the issuance of equity as described below under “Net Cash Provided
by Financing Activities”.
In addition, the deterioration in operating
results, with a net loss of $1,070.4 thousand in the first six months of 2014 as compared to a net loss of $756.2 thousand in the
first six months of 2013, resulted in an increased cash use of $314.1 thousand, or 41.5%. In addition, stock-based compensation
expense represented a smaller portion of the net loss in the first half of 2014 (an adjustment of $21.3 thousand) than it did in
the first half of 2013 (an adjustment of $113.5 thousand). In aggregate, the net cash used in operating activities before the changes
in operating assets and liabilities was $1,020.4 thousand in the six months ended June 30, 2014, as compared to $612.8 thousand
in the 2013 comparable period, an increased use of $407.6 thousand).
Net cash provided by (used in) investing activities
No net cash was provided by
(used in) investing activities in the six month periods ended June 30, 2014 and 2013.
Net cash provided by financing activities
Net cash provided by financing activities
in the first six months of 2014 was $1,059.4 thousand as compared to $332.4 thousand in the first six months of 2013. In connection
with the EFL Transaction, the Company issued an aggregate of 170,405,650 shares of common stock, par value $0.001, to EFL Tech
for the First Closing and the Second Closing. Prior to December 31, 2013, EFL Tech had advanced the Company a total of $310.7 thousand
in investor short-term advances to fund the Company’s operations up to the date of the First Closing. Such funds were recorded
as short-term advances when they were received by the Company. As provided by the Subscription Agreement, the $310.7 thousand of
short-term advances was settled by conversion into the Company’s common stock, par value $0.001, at the First Closing. In
addition, the Company received cash proceeds of $939.3 thousand ($689.3 at the First Closing and $250.0 at the Second Closing)
from EFL tech so that, in total, EFL Tech provided to the Company an aggregate of $1,250.0 thousand in cash, including $310.7 thousand
that had been advanced to the Company in 2013 and was settled by conversion to equity at the First Closing.
As required by the Subscription Agreement,
on January 21, 2014, the Company entered into certain exchange and release agreements (each an “Exchange Agreement”
and collectively, the “Exchange Agreements”) by and between the Company and each member of a group of unsecured creditors
of the Company (including current directors and executive officers). At the First Closing, pursuant to the Exchange Agreements
the Company issued an aggregate of 19,267,010 shares of Common Stock in exchange for the settlement and release of $695.3 thousand
in unpaid and accrued debt to such creditors. Of the $695.3 thousand, $390.0 thousand was for the settlement of short-term advances
and the remaining $305.3 thousand was for the settlement of operating liabilities including $187.4 thousand of deferred compensation,
$60.7 thousand of deferred directors’ fees and $57.2 thousand of accounts payable.
The Company also paid the sum of $167.9
thousand in full payment of the promissory note payable to a former executive and current shareholder. In addition, the Company
paid $31.3 to an unsecured holder of short-term debt and $6.0 thousand to the Company’s chief executive officer who had advanced
such amount during the third quarter of 2013 to fund operations at a time when the Company’s cash was inadequate. In the
second quarter of 2014, the Company received short-term debt of $20.0 thousand from a vendor to finance the Company’s operations
during the bankruptcy filing, such debt secured by first liens on certain of the Company’s fixed assets.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following table outlines payments due
under the Company’s significant contractual obligations over the periods shown, exclusive of interest, as of June 30, 2014:
|
|
Payments Due by Period
|
|
Contractual Obligations at June 30, 2014
|
|
Less than One
Year
|
|
|
One to Three
years
|
|
|
Three to Five
Years
|
|
|
More Than
Five Years
|
|
|
Total
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Operating lease obligations
|
|
|
79,164
|
|
|
|
59,373
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,537
|
|
Long-term debt obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Capital expenditure obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchase obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other long-term obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The above table outlines our obligations
as of the date noted above and does not reflect any changes in obligations that have occurred after that date.
Off-Balance Sheet Arrangements
The Company has not entered into any other
financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our
consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an
unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest
in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging
or research and development services with it.
Critical Accounting Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates
that affect the amounts reported in the consolidated financial statements and the accompanying notes. Accounting estimates and
assumptions are those that management considers to be the most critical to an understanding of the consolidated financial statements
because they inherently involve significant judgments and uncertainties. All of these estimates reflect management’s judgment
about current economic and market conditions and their effects based on information available as of the date of these consolidated
financial statements. If such conditions persist longer or deteriorate further than expected, it is reasonably possible that the
judgments and estimates could change, which may result in future impairments of assets, among other effects.
Significant estimates for Oryon include
the carrying value of intangible assets and the value of equity instruments, including convertible notes, stock options, warrants,
and shares of equity issued in lieu of cash.
Recently Issued Accounting Pronouncements
There
have been no new accounting rules or pronouncements introduced in 2014 or 2013 that have had an effect on our financial condition
or results of operations.