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ORYN > SEC Filings for ORYN > Form 10-K on 7-Mar-2014All Recent SEC Filings

Show all filings for ORYON TECHNOLOGIES, INC.

Form 10-K for ORYON TECHNOLOGIES, INC.


7-Mar-2014

Annual Report


ITEM 7.-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition of Oryon Technologies, Inc. and its subsidiaries for the fiscal years ended December 31, 2013 and 2012 should be read in conjunction with the Summary Selected Consolidated Financial Data and the consolidated financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K. 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 Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this Annual Report. 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.

Recent Transactions

EFL Tech 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 Registrant 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). Based upon information from EFL Tech, the source of such funds was the working capital of EFL Tech.

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 the Company (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 License Agreement has a term that continues until the expiration of the last of the patents licensed thereunder, unless sooner terminated by EFL Holdings due to the Company's bankruptcy or other specified, similar financial difficulties. The Business Relationship Agreement has a term that continues until, and the Equipment Lease has a term of the earlier of 21 years or until, the License Agreement expires or is terminated. 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. The descriptions of the Subscription Agreement, the License Agreement, the Equipment Lease, and the Business Relationship Agreement herein are qualified in their entirety by reference to the full text of such agreements, which are attached hereto as Exhibits 10.1, 10.3, 10.4, and 10.5, respectively.

At the closing of the second tranche under the Subscription Agreement, on or before February 28, 2014 (the "Second Closing"), EFL Tech is required to deliver to the Company additional funds in the amount of $250,000 on or before February 28, 2014. At the Second Closing, the Company is required to issue to EFL Tech an additional 85,133,871 shares of Common Stock, at which time EFL Tech's cumulative ownership will be 170,405,650 shares of Common Stock, constituting 63.0% of the Common Stock on a fully diluted basis. Additionally, at the closing of the third and final tranche under the Subscription Agreement, on or before March 31, 2014 (the "Third Closing"), EFL Tech is required to deliver to the Company additional funds in the amount of $250,000 (bringing the total amount of the cash component 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 is required to issue to EFL Tech an additional 129,832,877 shares of Common Stock, at which time EFL Tech's cumulative ownership will be 300,238,527 shares of Common Stock, constituting 75.0% of the Common Stock on a fully diluted basis.

- 34 -

The proceeds from the foregoing funding of $1,500,000 ($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 payments by EFL Tech at each of the Second Closing and the Third Closing) will be used for general corporate purposes and the repayment of debt, including, but not limited to, the payments required to be made under the Exchange Agreements (as defined and described below). At the First Closing, the Company paid the sum of $122,125 in cash, and issued an aggregate of 19,267,010 shares of Common Stock, to certain creditors, including directors and executive officers, for the settlement and release of a total of $817,375 of the Company's debt, pursuant to the Exchange Agreements.

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 and Release Agreements).

Under the Subscription Agreement, the Company has the option of entering into additional Exchange Agreements with other holders of outstanding debt of the Company for the purpose of exchanging shares of Common Stock for the settlement and release of additional amounts of unpaid and accrued debt of the Company. The Company has not made a decision regarding whether to enter into any such additional Exchange Agreements. If the Company were to enter into one or more Exchange Agreements in the future, the Company would issue to EFL Tech that number of additional shares of Common Stock such that, after issuing shares of Common Stock in exchange for Company debt under such Exchange Agreements, EFL Tech would continue to hold 75% of the fully diluted shares of Common Stock (the "Additional Shares"). Under the Subscription Agreement, the cash and non-cash consideration described above for the issuance to EFL Tech of shares of Common Stock at the First Closing, the Second Closing and the Third Closing will apply to and suffice in all respects for the issuance by the Company of all Additional Shares, and EFL Tech will not provide the Company will any additional consideration in connection with the issuance by the Company of any such Additional Shares to EFL Tech.

Initial Public Offering

On May 4, 2012 (the "Closing Date"), the Company closed a merger transaction with Oryon Merger Sub, LLC, a Texas limited liability company and wholly-owned subsidiary of the Company ("Merger Sub"), and OryonTechnologies, LLC, a Texas limited liability company ("Oryon") pursuant to an Agreement and Plan of Merger dated March 9, 2012 (the "Merger Agreement"). In accordance with the terms of Merger Agreement, on the Closing Date, Oryon merged into Merger Sub in exchange for the issuance to the members of Oryon ("Oryon Members") of eight (8) shares of the Company's common stock for each outstanding membership unit of Oryon (the "Merger"). In addition, Oryon 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 Date.

From and after the Closing Date, our primary operations consist of the business and operations of Oryon. In conjunction with the Merger, Oryon assumed no liabilities from the Company and all members of the Company's executive management are from Oryon. Accordingly, the Merger was accounted for as a reverse-merger and recapitalization in accordance with GAAP, whereby the Registrant is the accounting acquiree and Oryon is the accounting acquirer. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements prior to the Merger are those of Oryon and are recorded at the historical cost basis of Oryon, and the consolidated financial statements after completion of the Merger include the assets and liabilities of the Company and Oryon, historical operations of Oryon and operations of the Company from the Closing Date. Membership units and the corresponding capital amounts of Oryon 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.

- 35 -

Oryon is a research and development and applications engineering company that developed multiple patents relating to electroluminescent ("EL") lighting (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.

For the year ended December 31, 2013, Oryon had a net loss of $1.392 million as compared to a net loss of $2.607 million for the year ended December 31, 2012, a decreased loss of 46.6%. There was no change in Oryon's business plan and operations were comparable in both years. However, in 2012, Oryon was more negatively impacted by the effects of capital transactions that had a negative but non-cash impact on the net loss. In July 2011, due to lack of capital, Oryon eliminated most of its work force, including all of its sales personnel, and began making only minimal payments on accounts payable in order to preserve capital.

In October 2011, Oryon signed the letter of intent (the "LOI") with the Company in connection with the Merger. In connection with the LOI, Oryon received funding of $325.0 thousand in exchange for promissory notes as of December 31, 2011 ($725.0 thousand as of the Closing) as advances against the proceeds to be received by Oryon from the sale of Company common stock at the Closing of the Merger. At Closing, Oryon became a wholly-owned subsidiary of the Company and, as a result, the amounts due under the promissory notes between the Company and Oryon became intercompany obligations within the corporate group that have been cancelled. These advances provided Oryon with working capital to continue its operations and to make some repayments on outstanding liabilities.

Overview

The accompanying consolidated balance sheets, statements of operations, statements of cash flows and statement of changes in stockholders' equity (deficit) 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.

Key factors affecting our results of operations include revenues, cost of revenues, operating expenses and income and taxation.

Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012

  Gross Profit and Other Revenues



                                 For the Years Ended December 31,
                                    2013                   2012               Change from 2012 to 2013
                                     $                      $                   $                   %
Revenues
Product sales                          124,573                 68,428             56,145               82.0 %
Cost of goods sold                     (56,684 )              (40,184 )          (16,500 )             41.1 %
Gross profit                            67,889                 28,244             39,645              140.4 %
Royalty and license fees                     -                      -                  -
Other                                        -                      -                  -
Total revenues                          67,889                 28,244             39,645              140.4 %

Gross profit margin                       54.5 %                 41.3 %

- 36 -

Gross profit and other revenues for the year ended December 31, 2013 increased $39.6 thousand, or 140.4%, to $67.9 thousand from $28.2 thousand for the year ended December 31, 2012, primarily due to a 82.0% increase in product sales, but increased by an improvement in the cost of goods sold as a percentage of product sales revenues. Cost of goods sold represented 45.5% of product sales revenues in 2013 as compared to 58.7% in 2012.

  Operating Expense-Overview



Total operating expense for the year ended December 31, 2013, decreased $397.2
thousand, or 21.8%, to $1,422.1 thousand in 2012 from $1,819.3 thousand in 2012,
as shown in the table below:



                                For the year ended          For the year ended
                                 December 31, 2013           December 31, 2012                Change
                                   $             %             $             %            $             %
Total applications
development exp.                  294,150        20.7 %       324,575        17.8 %      (30,425 )      -9.4 %
Total sales and marketing
exp.                               96,313         6.8 %       152,091         8.4 %      (55,778 )     -36.7 %
Total general and
administrative exp.             1,000,573        70.4 %     1,302,429        71.6 %     (301,856 )     -23.2 %
Depreciation and
amortization                       31,057         2.2 %        40,163         2.2 %       (9,106 )     -22.7 %
 Total operating expenses       1,422,093       100.0 %     1,819,258       100.0 %     (397,165 )     -21.8 %

The primary reason for the decrease in total operating expenses is the $301.9 thousand decrease in total general and administrative expense, as discussed below.

  Applications Development Expense



                                         For the Years Ended December 31,
                                            2013                   2012               Change from 2012 to 2013
                                             $                      $                   $                   %
Applications Development Expense
Wages                                           93,556                173,888            (80,332 )           -46.2 %
Payroll taxes and benefits                      20,508                 26,455             (5,947 )           -22.5 %
Materials, equipment, services                 164,986                117,008             47,978              41.0 %
Office and overhead                             15,100                  7,224              7,876             109.0 %
Travel and entertainment                             -                      -                  -
Total applications development exp.            294,150                324,575            (30,425 )            -9.4 %

Total applications development expense decreased by $30.4 thousand, or 9.4%, primarily due to the $80.3 thousand, or 46.2%, decrease in wages. A secondary but related reason for the decrease is the $5.9 thousand, or 22.5% decrease in payroll taxes and employee benefits in 2013 as compared to 2012. In 2013, due to capital constraints, the Company reduced its applications development workforce and, in addition, reduced the overall level of employee benefits.

  Sales and Marketing Expense



                                     For the Years Ended December 31,
                                       2013                   2012                Change from 2012 to 2013
                                         $                      $                   $                   %
Sales and Marketing Expense
Wages                                      40,500                  66,000            (25,500 )           -38.6 %
Payroll taxes and benefits                  3,125                   6,925             (3,800 )           -54.9 %
Overhead                                   16,391                  14,357              2,034              14.2 %
Outside services                           16,200                  32,400            (16,200 )           -50.0 %
Travel and entertainment                   20,097                  32,409            (12,312 )           -38.0 %
Total sales and marketing exp.             96,313                 152,091            (55,778 )           -36.7 %

- 37 -

Total sales and marketing expense decreased $55.8 thousand, or 36.7%, in 2013 as compared to 2012 due to the reduction of marketing staff in September 2013 (wages down $25.5 thousand, or 38.6%) and the related reduction in costs during 2013 such as travel expenses (down $12.3 thousand, or 38.0%).

General and Administrative Expense



                                            For the Years Ended December 31,
                                              2013                    2012                Change from 2012 to 2013
                                                $                       $                    $                  %
General and Administrative Expense
Wages                                             242,098                 339,378             (97,280 )          -28.7 %
Payroll taxes and benefits                        152,769                 163,292             (10,523 )           -6.4 %
Overhead                                          142,453                 160,099             (17,646 )          -11.0 %
Outside services                                  453,257                 633,244            (179,987 )          -28.4 %
Travel and entertainment                            9,996                   6,416               3,580             55.8 %
Total general and administrative exp.           1,000,573               1,302,429            (301,856 )          -23.2 %

General and administrative expense decreased $301.9 thousand, or 23.2%, to $1,000.6 thousand from $1,302.4 thousand, primarily due to (i) the decrease in outside services of $180.0 thousand, or 28.4%, to $453.3 thousand in 2013 from $633.2 thousand in 2012, as detailed in the table below and (ii) the decrease in employee wages of $97.3 thousand, or 28.7%, to $242.1 thousand in 2013 from $339.4 thousand in 2012.

The primary reason for the decrease in outside services expense was the absence of a major funding transaction in 2013. The closing of the Merger in May 2012, which made Oryon a public company for the first time, required the one-time services of legal counsel and auditors. In 2013, the cost of such outside services was more appropriate for a normal year without unusual transactions. For example, legal expenses declined $96.7 thousand, or 44.1%, and accounting and audit expenses declined $41.0, or 40.5%. In 2013, as a public company with outside directors for a full year, the Company incurred increased directors' fees and expenses (an increase to $96.0 thousand in 2013 from $78.8 thousand in 2012), including $23.3 thousand in directors' stock-based compensation expense in 2013 as compared to $33.8 thousand in 2012. Accounting and auditing fees decreased by $41.0 thousand, or 40.5%, because in 2012 the outside auditors were required to audit the Company for the first time for two previously unaudited years (2012 and 2011). In 2013, the outside auditors audited only the latest year, 2013.

Consulting expense decreased $65.6 thousand in 2013 as compared to 2012 because in 2012 the Company incurred $82.6 thousand in non-recurring consulting fees for a financial advisor in connection with the Merger. This was partially offset by the action of management in outsourcing certain secretarial and administrative services during part of 2012 and most of 2013 to reduce the fixed payroll overhead.

                                 For the year ended           For the year ended
                                 December 31, 2013            December 31, 2012                 Change
                                   $             %              $             %             $             %

Legal expenses                    122,768         27.1 %       219,514         34.7 %      (96,746 )      -44.1 %
Accounting and audit
expenses                           60,232         13.3 %       101,217         16.0 %      (40,985 )      -40.5 %
Directors' fees and
expenses                           95,987         21.2 %        78,800         12.4 %       17,187         21.8 %
Public relations expenses           3,115          0.7 %         5,000          0.8 %       (1,885 )      -37.7 %
Consulting                        113,963         25.1 %       179,554         28.4 %      (65,591 )      -36.5 %
Payroll processing expenses         2,088          0.5 %         2,565          0.4 %         (477 )      -18.6 %
Banking Fees                          998          0.2 %         2,491          0.4 %       (1,493 )      -59.9 %
Stock transfer agent and
filing fees                        54,106         11.9 %        44,103          7.0 %       10,003         22.7 %
   Total G&A outside
services                          453,257        100.0 %       633,244        100.0 %     (179,987 )      -28.4 %

- 38 -

The stock-based compensation expense included in general and administrative payroll taxes and benefits decreased to $128.4 thousand in 2013, as compared to $159.0 thousand in 2012, primarily due to the lower fair market value of grants in 2013. In addition, the acceleration of the vesting of the options outstanding as a result of the Merger on May 4, 2012, created additional expense in the second quarter of 2012 that otherwise would have been spread over the remaining vesting period of such options.

Other Income (Expense)

Other income (expense) consists of: interest income, interest expense (discussed below and net other income/expense (discussed below). The largest single component of Other Income (Expense) in the year ended December 31, 2012, was the non-recurring expense for the change in the fair market value of the Series A warrants. In September 2012, the board of directors authorized the re-pricing of the Series A warrants' exercise price from the original $0.75 per share to the current $0.50 per share. This resulted in an increase of $535,367 in allocation of the proceeds to paid-in capital and a matching expense on the income statement. Interest income is negligible.

Interest Expense: Interest expense decreased $233.3 thousand, or 85.8%, to $38.7 thousand from $272.0 thousand due to the elimination of (a) the interest on Oryon's Series C convertible notes payable, (b) the amortization of the debt discount for the beneficial conversion feature on the series C-1 convertible note payable and (c) the amortization of the debt discount on the related warrants, as shown in the table below, when the Series C convertible notes payable were all converted to common stock, effective August 31, 2012.

                                 For the year ended           For the year ended
                                 December 31, 2013            December 31, 2012                 Change
                                   $             %              $             %             $             %

Interest expense on
convertible notes payable               -                       91,284         33.6 %      (91,284 )         NM
Interest expense on
promissory notes and
short-term debt                    38,684        100.0 %        31,741         11.7 %        6,943         21.9 %
Amortization of debt
discount related to
warrants                                -                       12,893          4.7 %      (12,893 )         NM
Amortization of debt
discount-beneficial
conversion feature on the
Series C-1 convertible
notes payable                           -                      136,074         50.0 %     (136,074 )         NM
     Total interest expense        38,684        100.0 %       271,992        100.0 %     (233,308 )      -85.8 %

NM = Not Meaningful

Net other income (expense): For the year ended December 31, 2012, the other expense of $10.0 thousand consisted primarily of local personal property taxes.

Taxes

The Company has incurred operating losses through the date of the financial statements. As a result, no provision for tax liability has been deemed necessary.

Liquidity and Capital Resources

The Company does not have sufficient cash on hand and working capital to be able to meet its anticipated cash requirements through 2014. See Note 16 "Going Concern" and Note 17 "Subsequent Events" of the Notes to the Consolidated Financial Statements. Not including capital expenditures and costs directly related to revenues, monthly operating expenditures are expected to range between $125,000 and $150,000 per month. Management anticipates that an additional $1,000,000 to $3,000,000 will be necessary to fund operations over . . .

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