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ORYN > SEC Filings for ORYN > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for ORYON TECHNOLOGIES, INC.


2-Aug-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 and six month periods ended June 30, 2013 and 2012 and its financial condition as of June 30, 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 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.

OTLLC also previously owned OryonTechnologies 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. 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 Quarter ended June 30, 2013 to the Quarter ended June 30, 2012



Gross Profit and Other Revenues



                                           For the Quarter Ended June 30,
                                             2013                  2012              Change from 2012 to 2013
Revenues                                       $                     $                 $                  %
Product sales                                    36,229                 5,698           30,531              535.8 %
Cost of goods sold                               (4,849 )              (3,551 )         (1,298 )             36.6 %
Gross profit                                     31,380                 2,147           29,233             1361.6 %
Royalty and license fees                              -                     -                -
Other                                                 -                     -                -
Total revenues                                   31,380                 2,147           29,233             1361.6 %

Gross profit margin                                86.6 %                37.7 %

Product sales for the quarter ended June 30, 2013, increased $30.5 thousand, or 535.8%, to $36.2 thousand for the quarter ended June 30, 2013 from $5.7 thousand for the quarter ended June 30, 2012. Gross profit and total revenues increased $29.2 thousand to $31.4 thousand, or 1361.6%, from $2.1 thousand in the quarter ended June 30, 2012, due to both the increase in product sales and the increase in gross profit on product sales resulting from a decrease in the cost of goods sold.

Cost of goods sold represented 13.4% of product sales revenues in the second quarter of 2013 as compared to 72.3% in the second 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 June 30, 2013, decreased $233.4
thousand, or 39.8%, to $352.8 thousand, from $586.2 thousand in the quarter
ended June 30, 2012, as shown in the table below:



                                 For the quarter ended           For the quarter ended
                                     June 30, 2013                   June 30, 2012                    Change
                                     $               %               $               %             $             %
Total applications
development exp.                     68,894          19.5 %          84,153          14.4 %      (15,259 )      -18.1 %
Total sales and marketing
exp.                                 29,798           8.5 %          54,340           9.3 %      (24,542 )      -45.2 %
Total general and
administrative exp.                 246,390          69.8 %         437,382          74.6 %     (190,992 )      -43.7 %
Depreciation and
amortization                          7,695           2.2 %          10,308           1.8 %       (2,613 )      -25.4 %
 Total operating expenses           352,777         100.0 %         586,183         100.0 %     (233,406 )      -39.8 %

The primary reasons for the decrease in total operating expenses are the 43.7% decrease in general and administrative expense and the 45.2% decrease in sales and marketing expense, as discussed below.

Applications Development Expense



                                                  For the Quarter Ended June 30,
                                                    2013                  2012               Change from 2012 to 2013
Applications Development Expense                      $                     $                  $                   %
Wages                                                   31,846                48,547            (16,701 )            -34.4 %
Payroll taxes and benefits                               2,384                11,855             (9,471 )            -79.9 %
Materials, equipment, services                          30,177                20,714              9,463               45.7 %
Office and overhead                                      4,487                 3,037              1,450               47.7 %
Travel and entertainment                                     -                     -                  -
Total applications development exp.                     68,894                84,153            (15,259 )            -18.1 %

NM = Not Meaningful

Total applications development expense decreased by $15.3 thousand or 18.1% for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012, due to (a) the $16.7 thousand decrease in wages and the related $9.5 thousand decrease in payroll taxes and benefits, partially offset by (b) the $9.4 thousand increase in office and overhead. Due to the low level of customer activity in the second quarter of 2012, 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 June 30,
                                                 2013                  2012               Change from 2012 to 2013
Sales and Marketing Expense                        $                     $                  $                   %
Wages                                                18,000                18,000                  -               0.0 %
Payroll taxes and benefits                            1,389                 1,377                 12               0.9 %
Overhead                                              5,912                 6,732               (820 )           -12.2 %
Outside services                                      1,000                20,000            (19,000 )           -95.0 %
Travel and entertainment                              3,497                 8,231             (4,734 )           -57.5 %
Total sales and marketing exp.                       29,798                54,340            (24,542 )           -45.2 %

NM = Not Meaningful

Total sales and marketing expense decreased by $24.5 thousand, or 45.2%, to $29.8 thousand in the 2013 second quarter from $54.3 thousand in the 2012 second quarter, largely due to the elimination of outside public relations services that were incurred in during 2012.

General and Administrative Expense



                                                   For the Quarter Ended June 30,
                                                     2013                  2012               Change from 2012 to 2013
General and Administrative Expense                     $                     $                   $                   %
Wages                                                    69,999                83,532             (13,533 )           -16.2 %
Payroll taxes and benefits                               22,250                81,706             (59,456 )           -72.8 %
Overhead                                                 35,910                51,117             (15,207 )           -29.7 %
Outside services                                        118,176               220,312            (102,136 )           -46.4 %
Travel and entertainment                                     55                   715                (660 )           -92.3 %
Total general and administrative exp.                   246,390               437,382            (190,992 )           -43.7 %

NM = Not Meaningful

General and administrative expense decreased by $191.0 thousand, or 43.7%, to $246.4 thousand from $437.4 thousand largely due to (a) the $102.1 thousand decrease in outside services expenses, as discussed below, and (b) the decrease in payroll taxes/benefits expense, which decreased $59.5 thousand to $22.3 thousand in the 2013 second quarter from $81.7 thousand in the 2012 second quarter. Most of the decrease in payroll taxes and benefits is attributable to the $37.0 thousand decrease in stock-based compensation expense that was $36.1 thousand in the three months ended June 30, 2013, as compared to $73.1 thousand in the three months ended June 30, 2012. The stock-based compensation expense for the three months ended June 30, 2013, included $19.6 thousand for the fully-vested directors' options granted during the quarter, whereas no directors' options were granted in the previous year comparable quarter.

Outside services expenses decreased $102.1 thousand, or 46.4%, to $118.2 thousand in the quarter ended June 30, 2013 from $220.3 thousand in the quarter ended June 30, 2012, as shown in the table below.

                                         For the quarter ended          For the quarter ended
                                             June 30, 2013                  June 30, 2012                    Change
                                             $               %              $               %            $             %

Legal expenses                                38,993         33.0 %         133,044         60.4 %      (94,051 )      -70.7 %
Accounting and audit expenses                 11,694          9.9 %          16,194          7.4 %       (4,500 )      -27.8 %
Directors' fees and expenses                  37,826         32.0 %               -                      37,826           NM
Public relations expenses                          -                          5,000          2.3 %       (5,000 )     -100.0 %
Consulting                                    28,044         23.7 %          64,362         29.2 %      (36,318 )      -56.4 %
Payroll processing expenses                      564          0.5 %             542          0.3 %           22          4.1 %
Banking Fees                                     170          0.1 %           1,055          0.5 %         (885 )      -83.9 %
Stock transfer agent and filing fees             885          0.8 %             115          0.1 %          770        669.6 %
 Total G&A outside services                  118,176        100.0 %         220,312        100.0 %     (102,136 )      -46.4 %

NM = Not Meaningful

One large component of general and administrative outside services expense is the cost of being a public company, including legal, accounting and stock transfer agent fees. For example, the Company paid no directors' fees prior to the Merger but initiated the incurrence of directors' compensation in the last quarter of 2012. In consequence, general and administrative outside services expense for the second quarter of 2013 included $37.8 thousand in directors' fees and expenses as compared to no such costs in the comparable quarter of the prior year. Since the Closing of the Merger on May 4, 2012, the legal expenses, which include regulatory filing related expenses, have increased over the pre-Merger period due to the recent regulatory filings that the Company has made in connection with its current operational and financing activities. In the second quarter of 2012, the Company incurred unusually high legal costs relating to the Merger and also 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 second quarter of 2013 are more representative of the costs related to the regular quarterly review by independent public accountants.

An additional reason for the decrease in outside services in the quarter ended June 30, 2013, as compared to the second quarter of 2012 is the $36.3 thousand decrease in consulting costs. In connection with the Closing of the Merger, the Company paid an independent financial advisor $37.5 thousand for services in the second quarter of 2012. Excluding this cost, consulting costs were $26.9 thousand for the six months ended June 30, 2012 as compared to $28.0 thousand for the comparable period in 2013, an increase of $1.1 thousand.

Other Income (Expense)

Interest Expense: Interest expense decreased $88.3 thousand, or 90.4%, to $9.3 thousand for the three months ended June 30, 2013, from $97.6 thousand in the three months ended June 30, 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 second 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 second quarter of 2012.

                                           For the quarter ended          For the quarter ended
                                               June 30, 2013                  June 30, 2012                   Change
                                              $               %              $                %            $            %

Interest expense on convertible notes
payable                                            -                          32,234          33.0 %     (32,234 )        NM
Interest expense on promissory notes
and short-term debt                            9,348          100.0 %          7,334           7.5 %       2,014        27.5 %
Amortization of debt discount related
to warrants                                        -                           4,835           5.0 %      (4,835 )        NM
Amortization of debt
discount-beneficial conversion
feature on the Series C-1 convertible
notes payable                                      -                          53,204          54.5 %     (53,204 )        NM
 Total interest expense                        9,348          100.0 %         97,607         100.0 %     (88,259 )     -90.4 %

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 June 30, 2013, 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 Six Months ended June 30, 2013 to the Six Months ended June 30, 2012

Gross Profit and Other Revenues



                                                  For the Six Months Ended June 30,
                                                    2013                   2012               Change from 2012 to 2013
Revenues                                              $                      $                   $                  %
Product sales                                           52,983                  33,010            19,973              60.5 %
Cost of goods sold                                      (9,602 )               (23,128 )          13,526             -58.5 %
Gross profit                                            43,381                   9,882            33,499             339.0 %
Royalty and license fees                                     -                       -                 -
Other                                                        -                       -                 -
Total revenues                                          43,381                   9,882            33,499             339.0 %

Gross profit margin                                       81.9 %                  29.9 %

Product sales increased $20.0 thousand, or 60.5%, to $53.0 thousand for the six months ended June 30, 2013 from $33.0 thousand for the six months ended June 30, 2012. Gross profit and total revenues increased $33.5 thousand to $43.4 thousand, or 339.0%, from $9.9 thousand in the six months ended June 30, 2012, due to both the increase in product sales and the increase in gross profit on product sales resulting from a decrease in the cost of goods sold

Cost of goods sold represented 18.1% of product sales revenues in the first six months of 2013 as compared to 70.1% in the first six months 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 six months ended June 30, 2013, decreased
$118.3 thousand, or 13.2%, to $781.0 thousand, from $899.3 thousand in the six
months ended June 30, 2012, as shown in the table below:



                                  For the six months ended           For the six months ended
                                       June 30, 2013                      June 30, 2012                      Change
                                     $                  %               $                  %             $             %
Total applications
development exp.                      171,393            21.9 %          147,443            16.4 %       23,950         16.2 %
Total sales and marketing
exp.                                   55,787             7.1 %           75,625             8.4 %      (19,838 )      -26.2 %
Total general and
administrative exp.                   538,200            68.9 %          652,121            72.5 %     (113,921 )      -17.5 %
Depreciation and
amortization                           15,667             2.0 %           24,137             2.7 %       (8,470 )      -35.1 %
 Total operating expenses             781,047           100.0 %          899,326           100.0 %     (118,279 )      -13.2 %

The primary reason for the increase in total operating expenses is the 17.5% decrease in general and administrative expense, as discussed below.

Applications Development Expense



                                                          For the Six Months Ended June 30,
                                                             2013                   2012              Change from 2012 to 2013
Applications Development Expense                              $                      $                   $                  %
Wages                                                            68,712                 98,680            (29,968 )          -30.4 %
Payroll taxes and benefits                                       12,109                 18,959             (6,850 )          -36.1 %
Materials, equipment, services                                   78,937                 26,341             52,596            199.7 %
Office and overhead                                              11,635                  3,463              8,172            236.0 %
Travel and entertainment                                              -                      -                  -
Total applications development exp.                             171,393                147,443             23,950             16.2 %

Total applications development expense increased by $24.0 thousand or 16.2% for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012, due to (a) the $52.6 thousand increase in materials, equipment, services expenses partially offset by (b) the $30.0 thousand decrease in wages and the related $6.9 thousand decrease in payroll taxes and benefits. Due to the low level of customer activity in the first six months of 2012, 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 Six Months Ended June 30,
                                                             2013                      2012               Change from 2012 to 2013
Sales and Marketing Expense                                    $                         $                   $                  %
Wages                                                             36,000                    30,000              6,000             20.0 %
Payroll taxes and benefits                                         2,796                     2,295                501             21.8 %
Overhead                                                           7,921                    10,141             (2,220 )          -21.9 %
Outside services                                                   1,000                    20,000            (19,000 )          -95.0 %
Travel and entertainment                                           8,070                    13,189             (5,119 )          -38.8 %
Total sales and marketing exp.                                    55,787                    75,625            (19,838 )          -26.2 %

Total sales and marketing expense decreased to $55.8 thousand in the first six months of 2013 from $75.6 thousand in the first six months of 2012. The decrease of $19.8 thousand or 26.2% is largely due to the $19.0 thousand decrease in outside services expenses. The $6.0 increase in wages is the result of increased pay for sales personnel in the first six months of 2013.

General and Administrative Expense



                                                           For the Six Months Ended June 30,
                                                              2013                   2012              Change from 2012 to 2013
General and Administrative Expense                             $                      $                    $                  %
Wages                                                            139,998                199,394             (59,396 )         -29.8 %
Payroll taxes and benefits                                       106,852                 86,993              19,859            22.8 %
Overhead                                                          68,484                 86,392             (17,908 )         -20.7 %
Outside services                                                 221,179                277,040             (55,861 )         -20.2 %
. . .
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