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ORYN > SEC Filings for ORYN > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for ORYON TECHNOLOGIES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ORYON TECHNOLOGIES, INC.


2-Nov-2012

Quarterly Report


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 nine month periods ended September 30, 2012 and 2011 and its financial condition as of September 30, 2012 and December 31, 2011 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 our Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission on October 11, 2012. 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, we 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. Our principal executive offices are located at 4251 Kellway Circle, Addison, Texas 75001. Our phone number is (214) 267-1321.

Subsequent to the Closing Date, Oryon has only one direct subsidiary, OTLLC, which is the parent of three wholly-owned companies: OryonTechnologies Licensing, LLC ("OTLIC"), OryonTechnologiesDevelopment, LLC ("OTD"), and OryonTechnologies International Pte. Ltd. ("OTI"). OTLIC and OTD are also Texas limited liability companies. OTI is a Singapore-based corporation. Operations at OTI were suspended in May 2009 and OTI is inactive. OTI originally owned 51% of Oryon-Asia Pacific Safety, Limited ("OAPS"), which was formed in December 2006 as a Hong Kong limited company. During 2011, the 51% ownership was transferred to OTLLC. The other 49% of OAPS is owned by two non-affiliated individuals. Operations of OAPS were suspended in February 2011 and OAPS is inactive. OTLLC is a research and development and applications engineering company that developed multiple patents relating to electroluminescent ("EL") lighting technology, trademarked as Elastolite®. Elastolite ® 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.

The following discussion should be read in conjunction with our most recent financial statements and notes appearing elsewhere in this quarterly report and the financial statements of OTLLC including OTLLC's audited consolidated financial statements for the years ended December 31, 2011 and 2010 filed as Exhibit 99.1 to the Company's Current Report on Form 8-K, as amended, dated May 4, 2012 and OTLLC's unaudited consolidated financial statements for the quarters ended March 31, 2012 and 2011 filed as Exhibit 99.3 to the Company's Current Report on Form 8-K/A (Amendment No. 1) filed on May 14, 2012. In addition to the historical financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors.

Our management's discussion and analysis of our 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 our results of operations include revenues, cost of revenues, operating expenses and interest expense.

Comparison of the Quarter ended September 30, 2012 to the Quarter ended September 30, 2011

Total Revenues

Total revenues for the quarter ended September 30, 2012 increased $7.8 thousand, or 336.9%, to $10.1 thousand for the quarter ended September 30, 2012 from $2.3 thousand for the quarter ended September 30, 2011. The increase was primarily due to the increase in gross profit, resulting from an increase in product sales, combined with a decrease in the cost of goods sold. In 2011, the company reported the cost of goods sold of $12.9 thousand on projects that did not produce the anticipated revenue. In the second quarter of 2011, the Company received $15.0 thousand in revenues for applications design and tooling services, reported as "other revenues".


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Our gross profit on product sales revenues increased $22.8 thousand to $10.1 thousand in the third quarter of 2012 from a loss of $12.7 thousand in the third quarter of 2011, primarily due to the cost of goods sold in the third quarter of 2011 related to projects that did not produce the anticipated revenue. Cost of goods sold represented 25.0% of product sales revenues in the third quarter of 2012 as compared to a negative gross profit in the third quarter of 2011. 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.

Operating Expenses

Total operating expenses for the quarter ended September 30, 2012, increased
$187.7 thousand, or 73.5%, to $443.1 thousand, from $255.4 thousand in the
quarter ended September 30, 2011, as shown in the table below:



                                          For the quarter ended           For the quarter ended
                                            September 30, 2012              September 30, 2011                  Change
                                              $               %               $               %             $             %
Total applications development exp.     $      61,156         13.8 %    $      45,165         17.7 %    $  15,991         35.4 %
Total sales and marketing exp.                 46,939         10.6 %               -           0.0 %       46,939           NM
Total general and administrative exp.         326,896         73.8 %          196,380         76.9 %      130,516         66.5 %
Depreciation and amortization                   8,072          1.8 %           13,829          5.4 %       (5,757 )      -41.6 %

Total operating expenses                $     443,063        100.0 %    $     255,374        100.0 %    $ 187,689         73.5 %

NM = Not Meaningful

The primary reason for the increase in total operating expenses is the 66.5% increase in general and administrative expenses, as discussed below.

Total applications development expenses increased by $16.0 thousand or 35.4%, due to (a) the $14.5 thousand increase in materials, equipment, services expenses and (b) the $8.1 thousand, or 203.1%, increase in payroll taxes and benefits, for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. Due to the low level of customer activity in the third quarter of 2011 (as a result of the Company's limited capital that resulted in the elimination of sales and marketing personnel in July 2011), the materials, equipment, services expenses were very low in that period. By comparison, in 2012, applications activities on behalf of prospective customers have increased significantly, resulting in greater expenditures on applications development projects. The Company provides group health insurance for employees who choose to take advantage of that benefit. In 2012, more employees requested coverage, resulting in a significant increase in benefits over the 2011 level, despite a decrease in the applications development wages expense that resulted from overall lower average wage levels in 2012.

Total sales and marketing expenses increased to $46.9 thousand in the 2012 third quarter from $0 in the 2011 third quarter. In the second half of 2011, sales and marketing expenses were minimal due to the elimination of all sales and marketing personnel that occurred in July 2011. With no personnel during the third quarter of 2011, there were no expenses in that period. The outside services expense in the third quarter of 2012 was the cost of services provided by TractorBeam, a brand development advisor.

General and Administrative Expenses

General and administrative expenses increased by $130.5 thousand, or 66.5%, to $326.9 thousand from $196.4 thousand largely due to the $97.8 thousand increase in outside services expenses, as discussed below, and the increase in payroll taxes/benefits expense, which increased $63.2 thousand, or 612.6%, to $73.5 thousand in the 2012 third quarter from $10.3 thousand in the 2011 third quarter. Most of such increase was attributable to the $60.9 thousand increase in stock-based compensation expense that was $65.3 thousand in the three months ended September 30, 2012, as compared to $4.4 thousand in the three months ended September 30, 2011. This increase in stock-based compensation expense included $64.3 thousand related to the stock option grant of 500,000 shares made in September 2012 to an executive in connection with an employment agreement.


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Outside services expenses increased $97.8 thousand, or 190.5%, to $149.2 thousand in the quarter ended September 30, 2012 from $51.4 thousand in the quarter ended September 30, 2011, as shown in the table below.

                                         For the quarter ended           For the quarter ended
                                           September 30, 2012              September 30, 2011                  Change
                                             $               %              $                %             $             %
Legal expenses                         $      32,481         21.8 %    $     47,928          93.3 %    $ (15,447 )      -32.2 %
Accounting and audit expenses                 26,892         18.0 %              -            0.0 %       26,892           NM
Public relations expenses                         -           0.0 %              -            0.0 %           -            NM
Consulting                                    76,846         51.5 %             870           1.7 %       75,976           NM
Payroll processing expenses                      564          0.4 %           2,357           4.6 %       (1,793 )      -76.1 %
Banking Fees                                     515          0.4 %             205           0.4 %          310        151.2 %
Stock transfer agent and filing fees          11,902          8.0 %              -            0.0 %       11,902           NM

Total G&A outside services             $     149,201        100.0 %    $     51,360         100.0 %    $  97,841        190.5 %

NM = Not Meaningful

The primary reason for the increase in general and administrative outside services expenses was the $76.0 thousand increase in consulting costs. In connection with the Merger, during the third quarter of 2012, the Company paid an independent financial advisor $12.5 thousand for services and issued the consultant 133,335 warrants to purchase common stock at the original exercise price of $0.75 per share (subsequently changed to the current exercise price of $0.50 per share) with a fair market value of $32.6 thousand, for a total cost in the quarter of $45.1 thousand. In addition, at the Closing Date, one former senior executive's status changed from being an employee to being an independent consultant to the Company, resulting in the $22.5 thousand in payments to the individual during the quarter ended September 30, 2012 being reported as outside services whereas compensation to the executive in the 2011 third quarter was reported as wages expense.

An additional reason for the increase in outside services in the third quarter of 2012 as compared to the third quarter of 2011 is the cost of being a public company, including legal, accounting and stock transfer agent fees. The operations of OTLLC acquired in the Merger require more substantial review by independent public accountants on a quarterly basis than was required by the previously inactive Company prior to the Merger. Stock transfer agent fees and regulatory filing fees were $11.9 thousand in 2012 as compared to no costs incurred in 2011 due to the Company's inactivity in that period. Since the closing of the Merger on May 4, 2012, the legal expenses have remained high due to the recent regulatory filings that the Company has made in connection with its current operational and financing activities.

Interest Expense

Interest expense decreased $4.9 thousand, or 6.6%, to $68.7 thousand for the three months ended September 30, 2012, from $73.6 thousand in the three months ended September 30, 2011. The principal reason for the decrease in interest expense was the conversion of the convertible notes payable on August 31, 2012, so that in the third quarter of 2012 the Company incurred interest expense for only two months as compared to three full months of interest incurred in the third quarter of 2011.

                                             For the quarter ended           For the quarter ended
                                               September 30, 2012              September 30, 2011                 Change
                                                $                %              $                %            $             %
Interest expense on convertible notes
payable                                    $     21,962          32.0 %    $     31,935          43.4 %    $ (9,973 )      -31.2 %
Interest expense on short-term debt               7,217          10.5 %           6,058           8.2 %       1,160           -
Amortization of debt discount related to
warrants                                          3,294           4.8 %           4,626           6.3 %      (1,332 )      -28.8 %
Amortization of debt discount-beneficial
conversion feature on the Series C-1
convertible notes payable                        36,249          52.8 %          30,996          42.1 %       5,253         17.0 %

Total interest expense                     $     68,722         100.0 %    $     73,614         100.0 %    $ (4,892 )       -6.6 %


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Taxes

Since the Company's operating subsidiary, OTLLC, is a limited liability company and, as such, does not accrue or pay income taxes, the Company has not reported income taxes for periods prior to the Closing Date. For the quarter ended September 30, 2012, 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 subsequent to the Merger.

Comparison of the Nine months ended September 30, 2012 to the Nine months ended September 30, 2011

Total Revenues

Total revenues for the nine months ended September 30, 2012 decreased $52.9 thousand, or 72.6%, to $20.0 thousand for the nine months ended September 30, 2012 from $73.0 thousand for the nine months ended September 30, 2011. The decrease was primarily due to the decline in other revenues, combined with a decrease in the gross profit margin on product sales. In the first nine months of 2011, the Company received $51.0 thousand in revenues for applications design and tooling services, reported as "other revenues".

Our gross profit on product sales revenues decreased $1.6 thousand, or 7.5%, to $20.0 thousand in the first nine months of 2012 from $21.6 thousand in the first nine months of 2011, primarily due to the 29.1% decrease in product sales. Cost of goods sold represented 57.0% of product sales revenues in the first nine months of 2012 as compared to 67.0% in the first nine months of 2011. 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.

Operating Expenses

Total operating expenses for the nine months ended September 30, 2012, increased
$285.3 thousand, or 27.0%, to $1,342.4 thousand in the first nine months of 2012
from $1,057.1 thousand in the first nine months of 2011, as shown in the table
below:



                                           For the nine months ended           For the nine months ended
                                               September 30, 2012                  September 30, 2011                    Change
                                                $                  %                $                  %             $             %
Total applications development exp.      $        208,599          15.5 %    $        284,642          26.9 %    $ (76,043 )      -26.7 %
Total sales and marketing exp.                    122,564           9.1 %              55,587           5.3 %       66,977        120.5 %
Total general and administrative exp.             979,017          72.9 %             671,876          63.6 %      307,141         45.7 %
Depreciation and amortization                      32,209           2.4 %              45,025           4.3 %      (12,816 )      -28.5 %

Total operating expenses                 $      1,342,389         100.0 %    $      1,057,130         100.0 %    $ 285,259         27.0 %

The primary reason for the increase in total operating expenses is the 45.7% increase in general and administrative expenses, as discussed below.

Total applications development expenses decreased by $76.0 thousand, or 26.7%, due to (a) the $36.1 thousand, or 21.7%, decrease in wages expense that resulted from overall lower average wage levels in 2012 and (b) the $32.5 thousand, or 44.3%, decrease in materials, equipment, services expenses, for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The applications materials, equipment, services expenses in the first nine months of 2011 were abnormally high because the Company expensed (a) $30.9 thousand to several consultants in connection with non-recurring projects that were concluded in the fourth quarter of 2011 and (b) $10.3 thousand for inventory that was deemed no longer usable. The Company provides group health insurance for employees who choose to take advantage of that benefit. In 2012, more employees elected coverage, resulting in an increase in payroll benefits expense over the 2011 level, despite a decrease in the overall level of the applications development wages expense.

Total sales and marketing expenses increased $67.0 thousand, or 120.5%, in the first nine months of 2012 as compared to the first nine months of 2011 primarily due to the $32.4 thousand cost of the services of TractorBeam, a brand development firm, recorded as outside services expense in the first nine months of 2012. Wages were greater in the first nine months of 2012 because sales


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personnel were employed during the entire nine months period, as compared to 2011 when all sales personnel were terminated at the beginning of the second half of 2011 as the Company experienced capital limitations. However, payroll taxes and benefits were $9.3 thousand higher in the first nine months of 2011 primarily due to the cost of group health insurance provided to the employees during that period as compared to 2012, when no sales personnel elected to be covered by the group health insurance plan. The Company paid $5.0 thousand as a sponsor fee for a trade show in the first nine months of 2012, increasing sales and marketing overhead expenses. Travel and entertainment expenses increased $23.3 thousand to $24.3 thousand for the nine months ended September 30, 2012, from $1.1 thousand in the comparable period in 2011 due to the increased activity of sales personnel, attending trade shows and visiting with prospective customers.

General and Administrative Expenses

General and administrative expenses increased by $307.1 thousand, or 45.7%, to $979.0 thousand from $671.9 thousand largely due to the increase in payroll taxes/benefits and outside services expenses. Payroll taxes/benefits increased $122.8, or 325.9%, to $160.5 thousand in the first nine months of 2012 from $37.7 thousand in the first nine months of 2011, due to the $129.2 thousand increase in stock-based compensation expense that was $144.5 thousand in the nine months ended September 30, 2012, as compared to only $15.2 thousand in the first nine months of 2011. Of this increase in stock-based compensation expense, $73.1 thousand is a direct result of the closing of the Merger on May 4, 2012, because the Merger accelerated the vesting of virtually all unvested options, thereby changing the fair value of all option grants affected by the change of control. An additional $64.3 thousand in stock-based compensation expense in the third quarter of 2012 is attributable to the grant of 500,000 incentive options to an executive in connection with an employment agreement.

Outside services expenses increased $180.4 thousand, or 73.4%, to $426.2 thousand in the first nine months of 2012 from $245.8 thousand in the first nine months of 2011, as shown in the table below.

                                           For the nine months ended             For the nine months ended
                                               September 30, 2012                    September 30, 2011                     Change
                                              $                   %                 $                   %               $             %
Legal expenses                          $      175,069              41.1 %    $      198,841              80.9 %    $ (23,772 )      -12.0 %
Accounting and audit expenses                   76,440              17.9 %            22,708               9.2 %       53,732        236.6 %
Public relations expenses                        5,000               1.2 %             2,022               0.8 %        2,978        147.3 %
Consulting                                     149,559              35.1 %            11,853               4.8 %      137,706           NM
Payroll processing expenses                      2,083               0.5 %             9,041               3.7 %       (6,958 )      -77.0 %
Banking Fees                                     1,920               0.5 %               998               0.4 %          922         92.4 %
Stock transfer agent and filing fees            16,170               3.8 %               378               0.2 %       15,792           NM

Total G&A outside services              $      426,241             100.0 %    $      245,841             100.0 %    $ 180,400         73.4 %

NM = Not Meaningful

The primary reason for the increase in general and administrative outside services expenses was the increase in consulting costs. In connection with the Merger, during the nine months ended September 30, 2012, the Company paid an independent financial advisor $50.0 thousand for services and issued the consultant 133,335 Series A Warrants to purchase common stock at the original exercise price of $0.75 per share (subsequently changed to the current exercise price of $0.50 per share when all the Series A Warrants were re-priced in September 2012 pursuant to an action of the board of directors) with a fair market value of $32.6 thousand for a total expense in the period of $82.6 thousand. In addition, at the Closing Date, one former senior executive's status changed from being an employee to being an independent consultant to the Company, resulting in the $37.5 thousand in payments to the individual during the nine months ended September 30, 2012 being reported as outside services whereas compensation to the executive in the 2011 comparable period was reported as general and administrative wages expense.

The secondary reason for the increase in outside services in the nine months ended September 30, 2012 as compared to the comparable period of 2011 was the significant increase in the "public company costs", including legal, accounting , stock transfer agent fees and regulatory filing fees. The operations of OTLLC acquired in the Merger require more substantial review by independent public accountants on a quarterly basis and have greater annual audit fees than had been required by the previously inactive Company prior to the Merger. Stock transfer agent fees and regulatory filing fees were $16.2 thousand in 2012 as compared to $0.4 thousand incurred in 2011 due to the Company's relative inactivity in that prior year period. Since the closing of the Merger on May 4, 2012, legal expenses have remained high due to the increased number of regulatory filings that the Company has made in connection with its current operational and financing activities, as well as the Merger documentation.


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Interest Expense

Interest expense increased $79.8 thousand, or 45.0%, to $257.1 thousand for the nine months ended September 30, 2012, from $177.3 thousand in the nine months ended September 30, 2011. The principal reason for the increase in interest expense was the increase in the amortization of the debt discount for the beneficial conversion feature. The amortization of the debt discount for the beneficial conversion feature related to Oryon's Series C-1 convertible notes payable was $136.1 thousand in the first nine months of 2012, an increase of $71.8 thousand, or 111.9%, over the $64.2 thousand in the first nine months of 2011, as shown in the table below. In the first nine months of 2012, Oryon incurred interest expense of $21.7 thousand on short-term debt that did not exist until the third quarter in the prior year comparable period. Accrued and unpaid interest on Oryon's convertible notes payable decreased $7.0 thousand, or 7.5%, to $86.4 thousand in the nine months ended September 30, 2012, from $93.4 thousand in the first nine months of 2011, due to the Conversion of the . . .

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