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ORYN > SEC Filings for ORYN > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for ORYON TECHNOLOGIES, INC.


8-May-2013

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 three month periods ended March 31, 2013 and 2012 and its financial condition as of March 31, 2013 and December 31, 2012, 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 Oryon Technologies, 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.

Oryon Technologies, Inc. ("Oryon" or the "Company") has only one direct subsidiary, Oryon Technologies, 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: Oryon Technologies Licensing, LLC ("OTLIC") and Oryon Technologies Development, LLC ("OTD"), both of which are also Texas limited liability companies.

OTLLC also previously owned Oryon Technologies International Pte. Ltd. ("OTI"), a Singapore-based corporation. Operations at OTI were suspended in May 2009 and OTI was liquidated in November 2012. The operations of OTI were not material to Oryon. 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 was owned by two non-affiliated individuals. Operations of OAPS were suspended in February 2011 and OAPS is in the final stage of liquidation. The operations of OAPS were not material to Oryon.

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. 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.

Operating results for the interim periods presented herein are not necessarily indicative of the results that can be expected for the entire fiscal year.


Table of Contents

Comparison of the Quarter ended March 31, 2013 to the Quarter ended March 31, 2012

Gross Profit and Other Revenues



                             For the Quarter Ended
                                   March 31,
                              2013            2012           Change from 2012 to 2013
     Revenues                  $                $                $                 %
     Product sales             16,754          27,312            (10,558 )         -38.7 %
     Cost of goods sold        (4,753 )       (19,577 )           14,824           -75.7 %

     Gross profit              12,001           7,735              4,266            55.2 %
     Other                        -               -                  -

     Total revenues            12,001           7,735              4,266            55.2 %


     Gross profit margin         71.6 %          28.3 %

Although product sales for the quarter ended March 31, 2013, decreased $10.6 thousand, or 38.7%, to $16.8 thousand for the quarter ended March 31, 2013 from $27.3 thousand for the quarter ended March 31, 2012, gross profit increased $4.3 thousand to $12.0 thousand, or 55.2%, from $7.7 thousand in the quarter ended March 31, 2012, due to the increase in gross profit on product sales resulting from a decrease in the cost of goods sold.

Cost of goods sold represented 28.4% of product sales revenues in the first quarter of 2013 as compared to 71.7% in the first quarter of 2012. 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-Overview

Total operating expenses for the quarter ended March 31, 2013, increased $115.1
thousand, or 36.8%, to $428.3 thousand, from $313.1 thousand in the quarter
ended March 31, 2012, as shown in the table below:



                                          For the quarter ended           For the quarter ended
                                              March 31, 2013                  March 31, 2012                    Change
                                              $               %               $               %             $             %
Total applications development exp.     $     102,499         23.9 %    $      63,290         20.2 %    $  39,209         62.0 %
Total sales and marketing exp.                 25,989          6.1 %           21,285          6.8 %        4,704         22.1 %
Total general and administrative exp.         291,810         68.1 %          214,739         68.6 %       77,071         35.9 %
Depreciation and amortization                   7,972          1.9 %           13,829          4.4 %       (5,857 )      -42.4 %

Total operating expenses                $     428,270        100.0 %    $     313,143        100.0 %    $ 115,127         36.8 %

The primary reasons for the increase in total operating expenses are the 35.9% increase in general and administrative expense and the 62.0% increase in applications development expense, as discussed below.

Applications Development Expense



                                                  For the Quarter Ended
                                                        March 31,
                                                    2013            2012         Change from 2012 to 2013
Applications Development Expense                     $               $               $                 %
Wages                                                 36,866        50,133           (13,267 )         -26.5 %
Payroll taxes and benefits                             9,725         7,104             2,621            36.9 %
Materials, equipment, services                        48,760         5,627            43,133           766.5 %
Office and overhead                                    7,148           426             6,722              NM

Total applications development exp.                  102,499        63,290            39,209            62.0 %

NM = Not Meaningful


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Total applications development expense increased by $39.2 thousand or 62.0% for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012, due to (a) the $43.1 thousand increase in materials, equipment, services expenses and (b) the $6.7 thousand increase in office and overhead. Due to the low level of customer activity in the first quarter of 2012 (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 2013, applications activities on behalf of prospective customers increased significantly, resulting in greater expenditures on applications development projects.

Sales and Marketing Expense



                                                For the Quarter Ended
                                                      March 31,
                                                 2013             2012          Change from 2012 to 2013
Sales and Marketing Expense                        $               $              $                   %
Wages                                              18,000         12,000            6,000               50.0 %
Payroll taxes and benefits                          1,407            918              489               53.3 %
Overhead                                            2,009          3,409           (1,400 )            -41.1 %
Travel and entertainment                            4,573          4,958             (385 )             -7.8 %

Total sales and marketing exp.                     25,989         21,285            4,704               22.1 %

Total sales and marketing expense increased to $26.0 thousand in the 2013 first quarter from $21.3 thousand in the 2012 first quarter. The increase of $6.0 thousand in wages is the result of increased pay for sales personnel in the first quarter of 2013.

General and Administrative Expense



                                                   For the Quarter Ended
                                                         March 31,
                                                     2013           2012          Change from 2012 to 2013
General and Administrative Expense                    $               $               $                 %
Wages                                                  69,999       115,862           (45,863 )         -39.6 %
Payroll taxes and benefits                             84,602         5,287            79,315              NM
Overhead                                               32,574        35,275            (2,701 )          -7.7 %
Outside services                                      103,003        56,728            46,275            81.6 %
Travel and entertainment                                1,632         1,587                45             2.8 %

Total general and administrative exp.                 291,810       214,739            77,071            35.9 %

NM = Not Meaningful

General and administrative expense increased by $77.1 thousand, or 35.9%, to $291.8 thousand from $214.7 thousand largely due to (a) the $46.3 thousand increase in outside services expenses, as discussed below, and (b) the increase in payroll taxes/benefits expense, which increased $79.3 thousand to $84.6 thousand in the 2013 first quarter from $5.3 thousand in the 2012 first quarter. Most of the increase in payroll taxes and benefits is attributable to the $71.3 thousand increase in stock-based compensation expense that was $77.4 thousand in the three months ended March 31, 2013, as compared to $6.1 thousand in the three months ended March 31, 2012. In the first quarter of 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 $58.4 thousand in the first quarter of 2013. In addition, the expense related to previously granted options that were not yet fully vested was $18.8 thousand in the first quarter of 2013 as compared to $6.1 thousand in the first quarter of 2012.


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Outside services expenses increased $46.3 thousand, or 81.6%, to $103.0 thousand in the quarter ended March 31, 2013 from $56.7 thousand in the quarter ended March 31, 2012, as shown in the table below.

                                         For the quarter ended           For the quarter ended
                                             March 31, 2013                  March 31, 2012                    Change
                                             $               %              $                %             $             %
Legal expenses                         $      40,642         39.5 %    $     13,696          24.1 %    $  26,946        196.7 %
Accounting and audit expenses                 12,690         12.3 %          33,355          58.8 %      (20,665 )      -62.0 %
Directors fees and expenses                   18,225         17.7 %              -            0.0 %       18,225           NM
Consulting                                    29,281         28.4 %           8,350          14.7 %       20,931        250.7 %
Payroll processing expenses                      654          0.6 %             977           1.7 %         (323 )      -33.1 %
Banking Fees                                     344          0.3 %             350           0.6 %           (6 )       -1.7 %
Stock transfer agent and filing fees           1,167          1.1 %              -            0.0 %        1,167           NM

Total G&A outside services             $     103,003        100.0 %    $     56,728         100.0 %    $  46,275         81.6 %

NM = Not Meaningful

The primary reason for the increase in general and administrative outside services expense was the cost of being a public company, including legal, accounting and stock transfer agent fees. Since the Closing of the Merger on May 4, 2012, the legal expenses, which include filing related expenses, have increased due to the recent regulatory filings that the Company has made in connection with its current operational and financing activities. In the first quarter of 2012, the Company incurred unusually high accounting costs related to the completion of the audit of fiscal years 2010 and 2011 that was necessary to consummate the Merger. The accounting and audit expenses incurred in the first quarter of 2013 are more representative of the costs related to the regular quarterly review by independent public accountants. Stock transfer agent fees and regulatory filing fees were $1.2 thousand in 2013 as compared to no costs incurred in 2012 due to the Company's inactivity in that period.

An additional reason for the increase in outside services in the first quarter of 2013 as compared to the first quarter of 2012 is the $20.9 thousand increase in consulting costs. In connection with the Merger, 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 $20.0 thousand in expense for the obligations to the individual during the quarter ended March 31, 2013 being reported as outside services consulting expense whereas compensation to the executive in the 2012 first quarter was reported as general and administrative wages expense.

Other Income (Expense)

Interest Expense: Interest expense decreased $81.5 thousand, or 89.9%, to $9.2 thousand for the three months ended March 31, 2013, from $90.8 thousand in the three months ended March 31, 2012. 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 first quarter of 2013 the Company incurred no interest expense or amortization of debt discount on the convertible notes as compared to three full months of such expenses incurred in the first quarter of 2012.

                                            March 31, 2013            March 31, 2012                 Change
                                             $           %            $            %             $             %
Interest expense on convertible notes
payable                                   $    -                   $ 32,234        35.5 %    $ (32,234 )         NM
Interest expense on short-term debt         9,209       100.0 %       7,139         7.9 %        2,070         29.0 %
Amortization of debt discount related
to warrants                                    -                      4,764         5.3 %       (4,764 )         NM
Amortization of debt
discount-beneficial conversion feature
on the Series C-1 convertible notes
payable                                        -                     46,621        51.4 %      (46,621 )         NM

Total interest expense                    $ 9,209       100.0 %    $ 90,758       100.0 %    $ (81,549 )      -89.9 %

NM = Not Meaningful

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 March 31, 2013, the Company incurred substantial losses and subsequently has no tax obligation. Although the incurred losses can be carried


Table of Contents

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.

Liquidity and Capital Resources

The Company does not have sufficient cash on hand to meet its current obligations and anticipated cash requirements. See Notes 13, 16 and 17 to Notes to the Consolidated Financial Statements. Not including capital expenditures and costs directly related to revenue generating projects, monthly operating expenditures are expected to range between $125,000.00 and $150,000.00 per month. Management anticipates that an additional $2,000,000 to $4,000,000 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 our future objectives, we 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 us to agree to operating and financial covenants that would restrict our operations. We do not have any lending arrangements in place with banking or financial institutions and we do not anticipate that we will be able to secure these funding arrangements in the near future. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to continue operations and terminate our 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 2013. 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 March 31, 2013, Oryon had cash and equivalents on hand of $3.9 thousand, and negative working capital of $864.5 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 our ability to continue as a going concern and force us to modify our 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.

In 2010, OTLLC completed an exchange of the then existing Series A and Series B convertible notes payable for the newly issued Series C-1 and Series C-2 convertible notes payable, respectively. Each holder of a Series A or Series B note also received detachable warrants in connection with the exchange. This exchange was necessary to obtain a modification of the terms of the notes payable to enable OTLLC to secure additional funding. In 2010, after the completion of the exchange, OTLLC began issuing Series C-3 convertible notes payable, with detachable warrants, obtaining additional funding of $418.0 thousand in 2010 and $75.0 thousand in 2011. In addition, during the second half of 2011, OTLLC issued $69.6 thousand in Series C-3 convertible notes payable, but without attached warrants, to the lessor of OTLLC's office space in lieu of cash rent payments for the period of July 1 through December 31. In January 2012, OTLLC issued an additional $6.6 thousand in Series C-3 convertible notes payable, without attached warrants, to the same lessor in lieu of cash rent for the month of January 2012.


Table of Contents

In early 2010, OTLLC began negotiations with a private equity firm regarding an investment of $4.5 million into OTLLC. In late summer 2010, OTLLC and the private equity firm executed a term sheet. In November 2010, OTLLC and the private equity firm executed an agreement titled "Draft Securities Purchase Agreement" based on the transaction proposed in the term sheet that would have provided OTLLC with sufficient capital to fund its business plan for the foreseeable future. The letter of intent and the "Draft Securities Purchase Agreement" included a "no-shop" clause that effectively prevented OTLLC from negotiating with any other potential source of funding until negotiations were terminated with the private equity firm. However, the private equity firm did not act in good faith, in management's opinion, changing certain terms of the proposed transaction, failing to respond to OTLLC's communications and ultimately terminating the transaction without finalizing the contemplated "Series A Convertible Preferred Stock Purchase Agreement". In attempting to complete the financing, OTLLC incurred substantial legal expenses and accounting costs to meet the requirements of the private equity firm and to document the proposed transaction. By September 2011, it was evident that OTLLC would not be able to obtain funding from the private equity firm and management took further steps to conserve cash and reduce overhead. In July 2011, OTLLC terminated the services of all but two employees, cancelled consulting agreements and began contacting interested parties concerning short-term loans to continue funding a reduced level of operations. Several existing investors provided a total of $114.0 thousand in exchange for unsecured promissory notes. In addition, OTLLC's then chief executive officer provided additional financing of approximately $90.0 thousand by personally paying certain OTLLC expenses and filing an expense reimbursement request that was recorded as an accounts payable obligation.

In October 2011, OTLLC began discussions with another investment firm concerning a merger with a publicly-traded company and a financing plan that would raise $2 million in new equity capital for OTLLC. A letter of intent was signed that same month and OTLLC began working on a definitive merger agreement and on meeting the related requirements, including the completion of audited financial statements. The investment firm arranged for the Company to advance $725.0 thousand (prior to the Closing Date) to OTLLC in exchange for promissory notes. The funding for the advances to OTLLC was generated by the equity financing. Without this advance, OTLLC would not have been able to complete the Merger. Between the Closing Date and August 31, 2012, the Company received an additional $1,275.0 thousand in exchange for the issuance of equity (consisting of 2,550,000 shares of common stock along with warrants having the right to purchase an additional 2,550,000 shares at the current exercise price of $0.50 . . .

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