This Annual Report
on Form 10-K includes the accounts of 3DIcon Corporation, an Oklahoma corporation, together with its wholly-owned subsidiary, Coretec
Industries LLC, a North Dakota limited liability corporation based in Fargo, North Dakota (individually referred to as “Coretec”).
References in this Report to “3DIcon”, “we”, “our”, “us” or the “Company”
refer to 3DIcon Corporation and its consolidated subsidiary unless context dictates otherwise.
Certain statements
in this report, including information incorporated by reference, are “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the
Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements reflect current views about future events
and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections,
guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “will,”
“may,” “should,” “could,” “would,” “expects,” “plans,”
“believes,” “anticipates,” “intends,” “estimates,” “approximates,”
“predicts,” “forecasts,” “potential,” “continue,” or “projects,” or
the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement.
Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses,
our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing
general optimism about future operating results and the development of our products, are forward-looking statements.
Although forward-looking
statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based
on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties
and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those
specifically addressed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Annual
Report on Form 10-K. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of
the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission (“SEC”). You
can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.
You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including us.
We undertake no obligation
to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date
of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout
the entirety of this Annual Report on Form 10-K, which attempt to advise interested parties of the risks and factors that may affect
our businesses, financial condition, results of operations and prospects.
ITEM 1. BUSINESS
Organizational History
3DIcon Corporation
was incorporated on August 11, 1995, under the laws of the State of Oklahoma as First Keating Corporation. Our articles of incorporation
were amended August 1, 2003 to change our name to 3DIcon Corporation in order to reflect our change in focus from marketing and
distributing books to the development of 360-degree holographic technology. From April 2004 through March 2010, we engaged the
University of Oklahoma (the “University” or “OU”) under a Sponsored Research Agreement (“SRA”)
to conduct studies related to our volumetric three dimensional display systems. The development to date has resulted in multiple
new technologies, two working laboratory prototypes (Lab Proto 1 and Lab Proto 2), and eight provisional patents; five of the eight
provisional patents have been combined and converted to five utility patents. Under the SRA, the Company has obtained the exclusive
worldwide marketing rights to these 3D display technologies, our CSpace® technology (“CSpace”).
On September 30, 2016,
we closed a transaction contemplated by a Share Exchange Agreement dated May 31, 2016 (the “Share Exchange Agreement”)
with Coretec, and four Coretec members (the “Members”), which Members held all outstanding membership interests in
Coretec. Pursuant to the Share Exchange Agreement, Coretec became a wholly-owned subsidiary of the Company, and the Company issued
an aggregate 4,760,872 shares of the Company’s Series B Convertible Preferred Stock to the Members, resulting in their collective
beneficial ownership of approximately 65% of the Company’s common stock on a fully-diluted basis, which shares are subject
to a one-year lock up agreement. The Series B Convertible Preferred Stock is convertible into 1,914 shares, or an aggregate of
9,112,309,008 shares of common stock. Since the parties agreed and acknowledged that such conversion shares are not available for
issuance, the Company agreed to take action to proceed in good faith to cause a corporate action that would allow the Company to
issue such conversion shares (the “Capitalization Adjustment”). In the event that Capitalization Adjustment is not
completed by May 30, 2017, the Members have an option, but not the obligation, to rescind the Share Exchange Agreement by surrendering
for cancellation all consideration paid by the Company and the Company returning all membership interests in Coretec.
Background of the Share Exchange Agreement.
In the fourth quarter
of 2015, it was determined that federal funding, while still a viable source, was a longer term prospect than originally planned.
In addition, the low price of our stock, made it extremely difficult to raise capital without significant dilution. Victor Keen,
who was then CEO and Chairman, funded the Company with $250,000, simultaneously with holders of debt totaling over $1 million agreeing
to convert into equity. The Company also began to look for an acquisition, merger or partnership to improve the Company’s
position. After exploring several alternatives, it was determined that a combination with Coretec represented the best potential
outcome for the Company. The combination of the two companies provides a significant number of opportunities to increase shareholder
value by:
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Providing technological support to advance the refinement of CSpace® image material;
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Adding recognized expertise to the team;
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Creating the opportunity for near-term revenue; and
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Adding a significant portfolio of Intellectual Property (IP).
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Overview of the Consolidated Company.
Coretec’s
Technology.
Coretec’s underlying technology is based on the production of a high value liquid silicon precursor, cyclohexasilane
(“CHS”). A key advantage of CHS is that it remains in liquid form at room temperature and does not convert to a gas
until heated above 400°F. This compares to materials commonly used for manufacturing silicon-based semiconductors and solar
cells (monosilane or trichlorosilane) that have much lower boiling points which leads to higher cost handling and shipping. Another
key advantage of CHS is that the production rate of the silicon-forming step can be increased by a factor of six relative to the
currently used materials, leading to significant cost savings. We anticipate that CHS will first be used as an alternative to monosilane
or trichlorosilane when adding silicon to lithium ion batteries or when used in manufacturing silicon-based semiconductors.
We also see longer
term potential in several emerging markets where there are opportunities in the conversion of CHS into nanoparticles and nanowires
for use in such emerging, high-growth markets as:
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Authentication of critical documentation
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Building-integrated solar energy
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Coretec’s IP
portfolio of silicon-based materials in-licensed rights pursuant to an exclusive, global licensing agreement (the “License”)
entered into between Coretec and the NDSU Research Foundation (NDSU/RF) in June 2016. The License provides access to 11 existing
and three pending patents representing the global intellectual property around this silicon-based technology for all the markets
we have identified. In addition, Coretec has an option to acquire the exclusive licensing rights to an additional 16 patents within
the next 12 months.
Enhancement of CSpace.
A key challenge in the development of CSpace® has been the development of the material to be used for the image chamber. 3DIcon
had been exploring a variety of glass alternatives under a Joint Development Agreement with Schott Defense, a global leader in
specialty glass materials. While progress continued to be made, it was concluded that limitations remained, primarily in weight
and cost.
A key virtue of having
access to the Coretec IP portfolio of silicon-based materials is that we can now use all of the manufacturing infrastructure and
knowledge that is available for optical plastics for the CSpace® image chamber. The benefit to CSpace® is that silicon-based
optical plastics can be molded into a broad range of shapes and allow the image chamber to be much lighter and much lower in cost
than the glass material we worked with before.
Near-Term Revenue
Opportunities.
Opportunities for near-term revenue continue to be explored in battery and microelectronic markets. Interest
in the use of silicon in Li-ion batteries continues to increase driven by the growing demand for electrical vehicles and home energy
storage systems for backup power. Discussions are ongoing with suppliers of Li-ion battery anode materials that are seeking next
generation materials to further increase performance while improving lifetime, safety and reliability. We believe these suppliers
will be well positioned to take advantage of the benefits provided by CHS when combined as a liquid with other powder based materials. While
we believe the use of CHS in Li-ion batteries will provide near term revenue, we also continue to explore revenue opportunities
in microelectronics and especially those early adopter markets where advanced microelectronics are being developed in lower volumes
and with less price sensitivity.
Recent Developments.
On December 13, 2016, we entered into a Supply Agreement (the “Supply Agreement”) with Gelest Inc., a Pennsylvania
corporation (“Gelest”). This Supply Agreement is for the purchase and sale of Cyclohexasilane (CHS) as set forth in
the Supply Agreement (the “Products”), pursuant to which the Company agrees to use Gelest as a primary source to manufacture
the Products for a period of three years. NDSU provided raw materials required to produce CHS to Gelest in January,
2017. Efforts by Gelest to scale the manufacturing process for CHS are ongoing with the goal of producing up to 400 grams
of material that will be available for sale to potential customers. An initial estimate of pricing for the Products is set forth
in the Supply Agreement, which varies from $28/gram to $35/gram based on the quantity and quality of material that is being purchased.
We believe this price is competitive with competing higher order silanes such as trisilane and neopentasilane while offering
a number of advantages.
Overview of Business
Coretec Business
Coretec Industries
LLC, a North Dakota limited liability corporation based in Fargo, was established in 2015 to create technology based solutions
(products and services) that address energy-related market needs globally. Coretec was founded by three corporate entities: EOS
Management LLC, Carlton James North Dakota, Ltd., and ChymaTek Energy Solutions, LLC. Principals supporting the business include
Dennis Anderson, Simon Calton, and Ronald Dombrowski. The principals have combined expertise in forming and managing technology
based startups, fundraising, sales, and marketing. They are advised by Dr. Philip Boudjouk, an expert in silicon chemistry and
Doug Freitag, an expert in the application of Si materials and Federal business development.
Coretec’s business
model is to identify and license technology created by major universities, institutes, national laboratories and other research
centers. Where technology does not already exist, research is to be sponsored. The initial candidates for licensing will include
silicon technologies developed by the group of Dr. Philip Boudjouk at North Dakota State University (“NDSU”). These
technologies include methods to produce and process cyclohexasilane (C6H12), “stacked” polysilane ((R2Si)n) and their
alloys with various dopants into liquid silane, Si and SiC thin films, Si nanowires and Si QDs. Future technologies will include
high refractive index siloxane polymers (HRISP).
Technology licensed
by Coretec is used to form partnerships with established manufacturers and distributors in global markets of interest. Early adoption
of these technologies is anticipated in markets for battery energy storage (Li-ion), solid-state lighting (LEDs), solar energy
(BIPV) and printable electronics (Asset Monitoring). These respective supply chains include material suppliers, process tool suppliers,
subcomponent suppliers and OEMs. We will first form strategic partnerships with specialty material suppliers with expertise in
Si. Once the supply of our materials has been established, we will form partnerships with OEMs and their suppliers in the respective
markets looking for a competitive advantage we believe we can provide.
Coretec Overview
Coretec is developing,
testing, and providing new and/or improved technologies and resulting product solutions for energy-related industries including,
but not limited to oil/gas, renewable energy, energy conservation, and distributed energy industries. Many of these technologies
and resulting product solutions also have application to the broader markets of anti-counterfeit packaging, medical devices, electronics,
photonics, and displays. The initial technologies and product solutions are based on new innovations in cyclohexasilane (C6H12),
Si QDs, “stacked” polysilane ((R2Si)n), their alloys with various dopants, and in the future, high refractive index
siloxane polymers (HRISP). Early adoption of these technologies and resulting product solutions is anticipated in markets for energy
storage (Li-ion batteries), solid-state lighting (LEDs), solar energy (BIPV) and printable electronics (Asset Monitoring).
Coretec was founded
by three corporate entities:
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Expertise and experience
in equipment and services for oil/gas industry.
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Carlton James North Dakota Ltd
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Expertise and experience in procuring and managing investments and financial services.
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ChymaTek Energy Solutions LLC
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Expertise and experience in R&D and commercialization of material and chemical technologies.
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Business Model
Coretec’s business
model includes monitoring the ever-growing catalogue of new technologies and valuable IP for licensing opportunities that could
lead to incremental improvements and/or additional features in resulting products or lead to next generation products for use by
energy-related industries and is created and held within universities and other parties that may lack financial resources and/or
interest to further develop and commercialize them.
Additionally, where
needs exist, but new technologies and resulting products are not currently available, conduct research and development (“R&D”)
activities through sponsored projects performed at major universities, institutes, national laboratories and other research centers.
Coretec will leverage existing, world-class expertise, experience, and laboratory facilities that reside in these non-profit, R&D
entities for R&D, testing, and “proof of concept” studies up to and including at the device level that may be required
to create commercialization opportunities.
Following these “proof
of concept studies”, commercialization opportunities (e.g., manufacturing, marketing, sales) created for its technologies
and IP will include, but are not limited to:
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joint ventures or other business collaborations with Coretec’s joint development partners who can manufacture, market and sell new or improved products (based upon Coretec’s technologies and IP) into existing or new supply chains (that the partner company/companies already have an established, significant presence or can capture and grow market share); or
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manufacturing, marketing and selling its own products; or
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creating “exit strategies” such as:
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sale of one or more technologies and IP to the private sector;
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license and/or sublicense one or more technologies and IP to the private sector; or
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other business transactions, e.g., merger, acquisition, spinoffs.
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Research & Development
Coretec’s priorities
for R&D and commercialization are customer/market-driven and guided by the needs and specifications of the energy-related industries
served. Identified customer/market-driven opportunities include:
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New and novel silicon-based materials
that facilitate “greener” more eco-friendly energy production, including:
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lower cost, longer life, higher capacity battery energy storage systems, e.g., Li-ion batteries (LiBs), for use in transportation and distributed power generation systems;
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more aesthetically appealing, lower cost building integrated photovoltaics (BIPV); and
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flexible and/or printable
electronics for use in monitoring the condition of distributed or remote assets, e.g., wind power and embedded, wireless sensors
to detect corrosion and other changes in pipelines;
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New and novel silicon-based materials that facilitate “greener” more energy efficient products, including encapsulation of high brightness LEDs to improve light extraction and solar cells to improve full spectrum light collection;
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New and novel silicon-based materials that facilitate more efficient and eco-friendly exploration and monitoring of distributed energy industries, including imaging materials for visualizing oil and gas exploration and distribution data using volumetric 3D displays;
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New and novel silicon-based materials that prevent illegal imitation or reproduction of a product or service used within energy-related industries, including trusted supply (anti-counterfeit packaging) products for supply chain assurance, currency, identity documents, lottery tickets, etc.
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Future Revenue
In the future, we foresee
additional and greater revenue coming from one or more business transactions such as:
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sale of Coretec’s novel silicon-based materials that improve or otherwise enhance performance of various products, e.g., Li-ion batteries, electronics, PV/solar cells, and displays and/or other optical-based devices;
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a share of the revenue coming from the sale of jointly developed product(s) and/or from one or more joint ventures with strategic partners; and/or
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sale of technology/technologies and associated IP to joint development partners or other companies.
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Gelest Supply Agreement
Pursuant to our Supply
Agreement with Gelest Inc. we agreed to use Gelest as a primary source to manufacture our CHS Products for a period of three years.
The Supply Agreement provides us the opportunity to scale the manufacturing process for CHS and with the initial goal of producing
up to 400 grams of material that will be available for sale to potential customers. An initial estimate of pricing for the Products
is set forth in the Supply Agreement, which varies from $28/gram to $35/gram based on the quantity and quality of material that
is being purchased. We believe this price is competitive with competing higher order silanes such as trisilane and neopentasilane
while offering a number of competitive advantages.
Competition
Based on our market
research and competitive analysis, we have concluded that that our Cyclohexasilane technology is unique and provides an advantage
in that it will allow 1) production at high yields at low cost using readily available raw materials, 2) storage, transport and
use as a liquid at room temperature 3) processing of the liquid into fibers, particles, and films that when heated forms silicon,
and 4) the simple addition of dopants to the liquid at an atomic level that when heated forms doped silicon. Competing silanes
provided by numerous manufacturers exist as a gas at room temperature and are explosive resulting in greater cost during storage,
handling, transportation and use. Our closest competitor is cyclopentasilane which exists as a gas at room temperature and has
proven costly and difficult to manufacture. Other competitors exist in specific applications. For example, graphene and carbon
nanotubes are potential competitors in printable electronics but are only now emerging and require purification that is proving
costly.
Licenses
Coretec’s first
priority is providing new or improved silicon-based materials that meet the needs and specifications of: a) battery energy storage
(Li-ion batteries), b) solid-state lighting (LEDs), c) solar energy (BIPV) and d) printable electronics (Asset Monitoring) markets.
To achieve this priority, Coretec will license certain silicon-based material technologies and IP that are derived from or are
based upon new innovations in cyclohexasilane (Si6H12), Si QDs, “stacked” polysilane ((R2Si)n) and unique processes
developed for their application. The material technologies and IP were invented by NDSU and are owned by NDSU’s authorized
assignee, the NDSU/RF. Coretec has licensed from NDSU/RF a portfolio of silicon-related technologies and IP beginning with four
inventions or intellectual property cases (NDSU/RF labels its intellectual property cases as “RFTs”). An option to
license ten additional inventions, one of which is a provisional patent, within 18 months has been requested.
Patent Rights for Licensed Technologies:
Tech
Id
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Country
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Title
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Lead PI +
other
inventors
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File Date
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Application
No.
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App Type
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Status
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RFT-0039
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Germany
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Compounds Containing Tetra-deca-chloro-cyclo-hexasilane Dianion
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Philip Boudjouk + Bhanu Chauha, Beon Kyu Kim, Michael Remington
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69808403.9
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Utility (UTIL)
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Issued
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Italy
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N98306581.4
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Nationalized PCT
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Issued
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Japan
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1998-08-27
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241193/98
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Nationalized PCT
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Issued
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USA
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1998-03-30
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09/050,141
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Utility (UTIL)
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Issued
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UK
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98306581.4
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Nationalized PCT
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Pending
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France
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98306581.4
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Nationalized PCT
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Pending
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Europe
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1998-08-18
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98306581.4
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Nationalized PCT
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Issued
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RFT-0265
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USA
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Method of Forming Functionalized Silanes
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Douglas Schulz + Xuliang Dai, Kendric Nelson, Philip Boudjouk
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2010-11-17
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12/993,239
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Nationalized PCT
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Issued
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Japan
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2010-11-22
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2011-511749
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Nationalized PCT
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Issued
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RFT-0324
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USA
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Method of Producing Polyalkylated Oligoalkylenepolyamines
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Arumugasamy Elangovan
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2012-07-18
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US 13/522,803
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Nationalized PCT
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Issued
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Japan
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2012-08-03
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2012-552112
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Nationalized PCT
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Pending
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RFT-0325
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Japan
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Method of Producing Cyclohexasilane Compounds
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Arumugasamy Elangovan + Kenneth Anderson, Douglas Schulz, Philip Boudjouk
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2012-07-23
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2012-551225
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Nationalized PCT
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Issued
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USA
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2012-07-13
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13/522,289
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Nationalized PCT
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Issued
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South Korea
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2012-08-21
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2012-7021848
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Nationalized PCT
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Pending
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Europe
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2012-08-21
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11737505.5
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Nationalized PCT
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Pending
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Patent Rights for Optioned Technologies
Tech
Id
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Country
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Title
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Lead
PI + other
inventors
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File
Date
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Application
No.
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App
Type
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Status
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RFT-0311
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USA
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Liquid Silane-Based Compositions and Methods for Producing Silicon-Based Materials
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Douglas Schulz + Justin Hoey, Xiangfa Wu, Iskander Akhatov, Arumugasamy Elangovan,
Philip Boudjouk, Larry Pederson, Jeremiah Smith, Xuliang Dai, Sijin Han
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2012-10-05
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13/645,551
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Utility
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Issued
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Japan
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2012-10-01
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2013-503933
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Issued
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South Korea
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2012-10-03
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10-2012-7028666
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Nationalized PCT
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Pending
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RFT-0311A
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USA
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Liquid Silane-Based Compositions and Methods of Fabrication
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Robert Salier
+ Justin Hoey
Philip Boudjouk + Xuliang
Dai, Arumugasamy Elangovan, Kenneth Anderson, Sijin Han
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2014-03-22
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14/222,604
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Nationalized PCT
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Pending
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Japan
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2014-03-28
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2014-533518
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Nationalized PCT
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Pending
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South Korea
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2014-7009881
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PCT
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Pending
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RFT-315
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USA
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Method and Apparatus for Aerosol Direct Write Printing
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Justin Hoey +Iskander Akhatov,Douglas Schulz, Orven Swenson
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2014-03-10
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14/202,801
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Continuation
in Part (CIP)
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Pending
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RFT-447
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USA
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Synthesis of Silicon Containing Materials Using Liquid Hydrosilane Compositions
through Direct Injection
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Guruvenket Srinivasan + Robert Sailer, Justin Hoey
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2014-03-14
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PCT/US2014/029451
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PCT
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Pending
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Japan
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2013-503100
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Pending
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RFT-0449
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USA
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Silicon Materials from the Processing of Liquid Silanes and Heteroatom Additives
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Philip Boudjouk + Guruvenket Srinivasan, Xuliang Dai, Justin Hoey, Kenneth Anderson,
Matthew Frohlich
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2014-03-14
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PCT/US2014/029789
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PCT
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Pending
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Japan
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2013-503222
|
|
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Pending
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RFT-0454
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USA
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Synthesis of SI-Based Nano-Materials using Liquid Silanes
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Guruvenket Srinivasan + Kenneth Anderson, Justin Hoey, Robert Sailer
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2014-09-11
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PCT/US2014/055271
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PCT
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Pending
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S. Korea
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Pending
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Japan
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Pending
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Europe
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14844950.7
|
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Pending
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RFT-0498
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USA
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Production of 1-Dimensional
Supramolecular Assemblies Comprised of Cyclopentasilane and Cyclohexasilane Rings Linked by Atoms, Molecules, and Ions
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Philip Boudjouk + Kenneth Anderson, Ryan Schwiderski
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2015-06-19
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62/182,149
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Provisional
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Pending
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RFT-501
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USA
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Surface Modified Silicon Quantum
Dots
|
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Philip Boudjouk
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2015-08-20
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PCT/US2016
/047904
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PCT
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Pending
|
Licensing rights include:
worldwide, royalty-bearing, exclusive, perpetual rights, with the right to sublicense without restrictions for the duration of
the applicable issued patents or those patent claims licensable by NDSU Research Foundation and to exercise all due rights thereto
including, but not limited to, make, have made, use, offer to sell, sell, import, and otherwise transfer specified technologies
and associated intellectual property and any and all derivative works thereof for the fields of use in:
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·
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energy generation and related applications (e.g., PV/solar, etc.)
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energy storage and related applications (e.g., batteries, etc.)
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printable/flexible electronics of any and all kinds
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displays, lighting, lasers, medical imaging and related applications (etc. OLED, LEDs, x-ray imaging,
radiation detection, etc.)
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·
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other devices, sensors, etc. utilizing silicon in any composition, form or type whatsoever.
|
Coretec’s business
and commercialization model is based in part upon establishing joint development partnerships with companies that are commercially
successful and financially sound as well as deeply embedded in the supply chains for the aforementioned energy-related products.
For example, Coretec is developing a strategic partnership with a domestic supplier of silicon-based materials that will facilitate
further development and scale-up of Si6H12 plus chemical derivatives and other materials based on Si6H12. This strategic partnership
will enable Coretec to supply large quantities of these novel silicon materials to those companies interested in producing prototype
batteries, electronics, and PV/solar cells for testing and commercial evaluation. Coretec will continue to seek other such strategic
partnerships within the private sector.
Products
Coretec, under licenses
from NDSU/RF, has commercial rights to certain key inventions created by NDSU that are based, in part or whole, on novel silicon-based
materials. These silicon-based materials can be used to make new or improved products and other commercial applications. Coretec
will be working with strategic partners to incorporate such novel materials into such new or improved products to the marketplace.
Coretec’s business model features revenue coming initially from licenses granted to strategic partners to be followed by
future sales of products developed and made by Coretec and/or through joint ventures with other companies.
Specifically, Coretec’s
license agreement with NDSU/RF currently provides rights to four patents for silicon-based, composition technologies (RFT-0039,
0265, 0324, 0325). Coretec has also acquired the right to license an additional portfolio of eight (8) patents for conversion of
these silicon-based composition technologies in silicon films, particles of various shapes and silicon particles (QDs) and sizes
(RFT-0311, 0311A, 0315, 0336, 0449, 0454, 0447, 0501) and one (1) additional provisional patent (RFT-0498) that will further extend
the coverage of silicon-based composition technologies.
These licensed patents
and patent applications (and other, related intellectual property including know-how, show-how, and trade secrets) concern various
chemical compositions such as silanes (compounds containing a Si-H bond) and other silicon based materials including, but not limited
to, cyclohexasilane (“Si6H12” or “CHS”) and related dianion salt, various “doped” derivatives
of Si6H12, and “stacked” polysilanes. These novel materials and processes will be used to produce new or improved energy
storage (Li-ion batteries), solid-state lighting (LEDs), solar energy (BIPV), printable electronics (Asset Monitoring) and other
commercially important products and applications.
Patents covered by
the option to license concern deposition technologies that can be used to apply silanes like Si6H12 and other silicon-based materials
such as collimated aerosol beam-direct write deposition (“CAB-DW”), micro-cold spray (“MCS”), and plasma-enhanced
chemical vapor deposition (“PECVD”). These patents also include processes to convert the licensed materials into Si6H12-based
nanoparticles or quantum dots. A decision to convert the option into a license will occur within 18 months from the effective date
of the license agreement with NDSU/RF and be based on issuance of the provisional patents and customer feedback on market needs
for these processes versus alternative processes that may be considered and already in use.
3DIcon Business
3DIcon is developing
a patented volumetric 3D display technology that was developed by and with the University under an SRA. The development to date
has resulted in multiple new technologies, two working laboratory prototypes (Lab Proto 1 and Lab Proto 2), and eight provisional
patents; five of the eight provisional patents have been combined and converted to five utility patents. Under the SRA, the Company
has obtained the exclusive worldwide marketing rights to these 3D display technologies.
On May 26, 2009, the
United States Patent and Trademark Office ("USPTO") approved the patent called "Volumetric Liquid Crystal Display"
for rendering a three-dimensional image and converted it to US patent No. 7,537,345. On December 28, 2010, USPTO approved the patent
called “Light Surface Display for Rendering a Three-Dimensional Image,” and issued the United States Patent No. 7,858,913.
On August 21, 2012, the USPTO approved a continuation patent called “3D Volumetric Display” and issued the US Patent
No. 8,247,755. These patents describe the foundation of what is called CSpace® technology (“CSpace”).
3DIcon Overview
3DIcon intends to commercialize
the CSpace volumetric 3D technology through a combination of government funded research and development contracts, joint development
agreements with industry partners and technology licensing agreements for high value applications in military planning, cyber data
analysis, battlespace visualization, oil and gas exploration and medical imaging.
Commercialization Strategy and
Target Applications
The Company plans to
commercialize the CSpace volumetric 3D technology through customer funded research and development contracts and technology licensing
agreements for high value applications like air traffic control, design visualization, and medical imaging. The Company plans to
develop products for contract engineering and with joint development customers. At this time the Company does not have any commercialized
products and does not plan to develop its own products based on the CSpace technology due to the high value / low volume nature
of the best-fit initial applications for this technology. These applications include but are not limited to the following:
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Healthcare (diagnostics, surgical planning, training, telemedicine, biosurveillance);
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Cyber Security Data Visualization;
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Military (operational planning, training, modeling and simulation, battlespace awareness, damage
assessment, autonomous piloting);
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Physical Security (passenger, luggage & cargo screening);
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Mining, Oil & Gas Exploration; or
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Meteorological and Oceanographic data visualization.
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Competition
Based on our market
research and competitive analysis to date, we have concluded that the CSpace volumetric technology is unique and advantaged versus
other 3D technologies in that it can deliver both 1) a true 360 degree viewing experience for multiple simultaneous users, and
2) high image quality, high reliability and large image size. Rear projection 3D displays such as those from Zecotek, Setred, and
EuroLCDs (formerly LC Tech LightSpace) do not provide a 360 degree viewing experience and are typically limited to one or two users.
Early proof of concept work done on infrared active phosphor displays by 3D Display Laboratories proved to not be scalable due
to limited phosphor persistence and vector scanning limitations. While holographic and light field displays show promise, they
do not deliver a true 360 degree viewing experience and cost effective multiple user systems do not appear feasible due to current
and expected pixel density, data bandwidth and compute power limitations.
History of 3D Technology Research and
Development at the University of Oklahoma
Beginning in 2007 the
University, under an SRA with 3DIcon, undertook the development of high potential 3D display technologies.
It is anticipated that
Coretec’s technology will play a key role in the continued development of an image space material for CSpace.
Intellectual Property History, Status
& Rights
The United States Patent
and Trademark Office (“USPTO”) approved the pending patent called "Volumetric Liquid Crystal Display" for
rendering a three-dimensional image and converted it to US patent No. 7,537,345. On July 16, 2013, USPTO approved the pending patent
called “Computer System with Digital Micromirror Device,” and issued US patent No. 8,487,865.
CSpace Patents are
as follow: On December 28, 2010, USPTO approved the pending patent called “Light Surface Display for Rendering a Three-Dimensional
Image,” and issued the US Patent No. 7,858,913. On August 21, 2012, the USPTO approved a continuation patent called “3D
Volumetric Display” and issued the US Patent No. 8,247,755. On December 13, 2011, USPTO approved a continuation patent called
“3D Light Surface Display,” and issued the US Patent No. 8,075,139.
Through a SRA with
the University, we have obtained the exclusive worldwide marketing rights to certain 3D display technologies under development
by the University. The development to date has resulted in the University filing eight provisional patents; five of the eight provisional
patents have been combined and converted to five utility US patents, one pending European patent and one pending Japanese patent.
In addition, 3Dicon
owns exclusively two U.S. patents as noted below.
Key Patents Exclusively Licensed to
3DIcon from OU:
United States Patents Granted
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“3D Volumetric Display” - 8,247,755, August 21, 2012
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“3DLight Surface Display” - 8,075,139, December 13, 2011
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“Light Surface Display for Rendering a Three-Dimensional Image” - 7,858,913, December 28, 2010
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“Volumetric Liquid Crystal Display”- 7,537,345, May 26, 2009
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“Computer System with Digital Micromirror Device” – 8,487,865, July 16, 2014
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International Patents Granted-Japan
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“Light Surface Display for Rendering a Three-Dimensional Image” - Japanese Patent Number 5,594,718, August 15, 2014
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International Patents Pending-Europe
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“Light Surface Display for Rendering a Three-Dimensional Image” - European Application Number EP07755984, filed April 25, 2007
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Key Patents Exclusively Owned by 3DIcon:
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“Ultra High-Resolution Volumetirc Three-Dimensional Display”-9,423,682, August 23, 2016
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“Hloform 3D Projection Display”-2014/02680162A1, September 18, 2014
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Employees
We had three employees
as of April 7, 2017: Mr. Michael Kraft, Chief Executive Officer, Mr. Ronald Robinson, Chief Financial Officer and Ms. Judith Keating,
Company Secretary and Director of Investor Relations. None of our employees are covered by a collective bargaining agreement. We
consider relations with our employees to be good.
ITEM 1A. RISK FACTORS
Risks Relating to Our Businesses
We have a limited operating history, as well as a history
of operating losses.
We have a limited operating
history. We cannot assure you that we can achieve revenue or sustain revenue growth or profitability in the future. We have a cumulative
net loss of $880,104 for the period from inception (June 2, 2015) to December 31, 2016. Our operations are subject to the risks
and competition inherent in the establishment of a business enterprise. Unanticipated problems, expenses, and delays are frequently
encountered in establishing a new business and marketing and developing products. These include, but are not limited to, competition,
the need to develop customers and market expertise, market conditions, sales, marketing and governmental regulation. Our failure
to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail our operations.
Revenues and profits, if any, will depend upon various factors. We may not achieve our business objectives and the failure to achieve
such goals would have an adverse impact on our business.
We may be unable to successfully
integrate and develop the vertical synergies anticipated by or complete all obligations under the Share Exchange Agreement.
Integration
of 3DIcon and Coretec may be a complex, time-consuming and costly process requiring the employment of additional personnel, including
key management and accounting personnel. Additionally, the integration of the 3DIcon and Coretec businesses may require significant
financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Unanticipated
problems, delays, costs or liabilities may also be encountered in the development of these businesses. Failure to successfully
and fully integrate and develop these businesses and operations may have a material adverse effect on our business, financial condition,
results of operations and cash flows. The difficulties of combining the acquired operations include, among other things:
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operating a significantly larger combined organization;
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coordinating geographically disparate organizations, systems and facilities;
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consolidating corporate technological and administrative functions;
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integrating internal controls and other corporate governance matters;
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the diversion of management’s attention from other business concerns;
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hiring additional management and other critical personnel; and
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potential environmental or regulatory liabilities and title problems.
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addition, we may not realize all of the anticipated benefits from the Share Exchange Agreement, such as increased earnings, cost
savings and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher than
expected acquisition and operating costs, unknown liabilities, inaccurate reserve estimates and fluctuations in markets. If these
benefits do not meet the expectations of financial or industry analysts, the market price of our shares may decline.
Our research and development
efforts with respect to new technologies may not result in customer or market acceptance. Some or all of those technologies may
not successfully make the transition from the research and development stage to cost-effective production as a result of technology
problems, competitive cost issues, yield problems, and other factors. Even if we successfully complete a research and development
effort with respect to a particular technology, our customers may decide not to introduce or may terminate products utilizing the
technology for a variety of reasons, including difficulties with other suppliers of components for the products, superior technologies
developed by our competitors and unfavorable comparisons of our solutions with these technologies, price considerations and lack
of anticipated or actual market demand for the products.
Our business could
be harmed if we are unable to develop and utilize new technologies that address the needs of our customers, or our competitors
or customers develop and utilize new technologies more effectively or more quickly than we can. Any investments made to enhance
or develop new technologies that are not successful could have an adverse effect on our net revenue and operating results.
Fluctuations in direct or indirect
raw material costs could have an adverse impact on our business.
The availability and
prices of raw material inputs may be influenced by supply and demand, changes in world politics, unstable governments in exporting
nations and inflation. The prices of our direct and indirect raw materials have been, and we expect them to continue to be, volatile.
If the cost of direct or indirect raw materials increases significantly and we are unable to offset the increased costs with higher
selling prices, our profitability will decline. Additionally, we may not be able to obtain lower prices from our suppliers should
our sale prices decrease. Increases in prices for our products could also hurt our ability to remain both competitive and profitable
in the markets in which we compete.
Future raw material
prices may be impacted by new laws or regulations, suppliers’ allocations to other purchasers, changes in our supplier manufacturing
processes as some of our products are byproducts of these processes, interruptions in production by suppliers, natural disasters,
volatility in the price of crude oil and related petrochemical products and changes in exchange rates.
We operate in industries that are
subject to significant fluctuation in supply and demand and ultimately pricing that affects our revenue and profitability.
For example, the LED
lighting industry is in the relatively early stages of adoption and is characterized by constant and rapid technological change,
rapid product obsolescence and price erosion, evolving standards, short product life-cycles and fluctuations in product supply
and demand. The LED industry has experienced significant fluctuations, often in connection with, or in anticipation of, product
cycles and changes in general economic conditions. As the markets for our products mature, additional fluctuations may result from
variability and consolidations within the industry’s customer base. These fluctuations have been characterized by lower product
demand, production overcapacity, higher inventory levels and increased pricing pressure. These fluctuations have also been characterized
by higher demand for key components and equipment used in, or in the manufacture of, our products resulting in longer lead times,
supply delays and production disruptions.
We operate in a highly competitive
industry.
The silane chemical
markets are global, capital intensive and highly competitive. Our competitors may have greater financial resources, as well as
other strategic advantages, to maintain, improve and possibly expand their facilities, and as a result, they may be better positioned
to adapt to changes in the industry or the global economy. The advantages that our competitors have over us could have a material
adverse effect on our business. In addition, new entrants may increase competition in our industry, which could have a material
adverse effect on our business. An increase in the use of substitutes for certain of our products also could have a material adverse
effect on our financial condition and operations.
Environmental, Health and Safety
Regulation—Compliance with extensive environmental, health and safety laws could require material expenditures or changes
in our operations.
Our operations
are subject to extensive environmental, health and safety laws and regulations at national, international and local levels in numerous
jurisdictions. In addition, our production facilities and a number of our distribution centers require operating permits that are
subject to renewal and, in some circumstances, revocation. The nature of the chemicals industry exposes us to risks of liability
under these laws and regulations due to the production, storage, transportation, disposal and sale of chemicals and materials that
can cause contamination or personal injury if released into the environment.
A reduction or disruption in our
production capacity or our supplies, or an incorrect forecast, could negatively impact our business.
Our production capacity
could be affected by manufacturing problems. Difficulties in the production process could reduce yields or interrupt production,
and, as a result of such problems, we may not be able to deliver products on time or in a cost-effective, competitive manner. As
the complexity of both our products and our fabrication processes has become more advanced, manufacturing tolerances have been
reduced and requirements for precision have become more demanding. In the past, we have experienced delays in delivery and product
quality. Our failure to adequately manage our capacity or maintain product quality could have a negative impact on net sales and
harm our customer relationships.
Furthermore, we may
suffer disruptions in our manufacturing operations, either due to production difficulties such as those described above or as a
result of external factors beyond our control. We manufacture combustible materials in our manufacturing process and are therefore
subject to the risk of explosions and fires, which can cause major disruptions to our operations. If operations at a manufacturing
facility are interrupted, we may not be able to shift production to other facilities on a timely basis or at all. In addition,
certain of our products are only capable of being produced at a single manufacturing facility due to unique manufacturing requirements
and to the extent that any of these facilities fail to produce these products, this risk will be increased. Even if a transfer
is possible, transitioning production of a particular type of material from one of our facilities to another can take between three
to six months to accomplish, and in the interim period we would likely suffer extensive or total supply disruption and incur substantial
costs. Such an event could have a material negative impact on our business, financial condition and results of operations.
Our ability to meet
customer demands also depends on our ability to obtain timely and adequate delivery of materials, parts and components from our
suppliers. From time to time, suppliers may extend lead times, limit the amounts supplied to us or increase prices due to capacity
constraints or other factors. Supply disruptions may also occur due to shortages in critical resources, such as Lithium aluminum
hydride, other specialized chemicals or energy or other general supplier disruptions. A reduction or interruption in supplies or
a large increase in the price of one or more supplies could have a material negative impact on our business, financial condition
and results of operations.
If we do not keep pace with technological
innovations, our products may not remain competitive and our revenue and operating results may suffer.
We operate in rapidly
changing highly competitive markets. Technological advances, the introduction of new products and new design techniques could adversely
affect our business unless we are able to adapt to changing conditions. Technological advances could render our solutions less
competitive or obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. Therefore,
we will be required to expend substantial funds for and commit significant resources to enhancing and developing new technology
which may include purchasing advanced design tools and test equipment, hiring additional highly qualified engineering and other
technical personnel, and continuing and expanding research and development activities on existing and potential human interface
solutions.
We may not be able to achieve the
target specifications for the second and third generation CSpace laboratory prototypes.
The process of developing
new highly technical products and solutions is inherently complex and uncertain. It requires accurate anticipation of customer's
changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing
whether these investments will eventually result in products that achieve customer acceptance and generate the revenues required
to provide desired returns. If we fail to achieve and meet our target specifications in the development of the second and third
generation CSpace laboratory prototypes, we could lose market position and customers to our competitors and that could have a material
adverse effect on our results of operations and financial condition.
We may not be able to secure the
customer funding necessary to develop the CSpace Trade Show Prototype.
An important part of
our business strategy moving forward is the development of our Lab Proto 3. While we believe this prototype will enable
us to secure customer funded development contracts whereby our customer would provide part or all of the funding necessary to develop
products for or with the customer and to secure technology licensing agreements, there can be no assurances that this will occur. If
we are unable to secure customer funded development contracts we will likely not be able to develop our CSpace Trade Show Prototype. Without
the CSpace Trade Show Prototype we will not be able to successfully implement our business strategy for our volumetric 3D Display
products, which could cause harm to our competitive position and financial condition.
We may not be able to successfully
license the CSpace technology to customers.
A significant portion
of our expected future revenues will be generated through licensing our CSpace technology to third parties such as Boeing, Lockheed
Martin, Siemens, and General Electric. However, there is no guarantee we will be able to successfully license our CSpace
technology to such companies or to other third parties. If we fail to successfully license our CSpace technology it
could negatively impact our revenue stream and financial condition.
We may not be able to compete successfully
in the markets applicable to our volumetric 3D display technology.
Although the volumetric
3D display technology that we are attempting to develop is new, and although at present we are aware of only a limited number of
companies that have publicly disclosed their attempts to develop similar technology, we anticipate a number of companies are or
will attempt to develop technologies/products that compete or will compete with our technologies. Further, even if we are the first
to market with a technology of this type, and even if the technology is protected by patents or otherwise, because of the vast
market and communications potential of such a product, we anticipate the market will be flooded by a variety of competitors (including
traditional display companies), many of which will offer a range of products in areas other than those in which we compete, which
may make such competitors more attractive to prospective customers. In addition, many if not all of our competitors and potential
competitors will initially be larger and have greater financial resources than we do. Some of the companies with which we may now
be in competition, or with which we may compete in the future, have or may have more extensive research, marketing and manufacturing
capabilities and significantly greater technical and personnel resources than we do, and may be better positioned to continue to
improve their technology in order to compete in an evolving industry. Further, technology in this industry may evolve rapidly once
an initially successful product is introduced, making timely product innovations and use of new technologies essential to our success
in the marketplace. The introduction by our competitors of products with improved technologies or features may render any product
we initially market obsolete and unmarketable. If we or our partners are not able to deliver to market products that respond to
industry changes in a timely manner, or if our products do not perform well, our business and financial condition will be adversely
affected.
The technologies being developed
may not gain market acceptance.
The products that we
are currently developing utilize new technologies. As with any new technologies, in order for us to be successful, these technologies
must gain market acceptance. Since the technologies that we anticipate introducing to the marketplace will exploit or encroach
upon markets that presently utilize or are serviced by products from competing technologies, meaningful commercial markets may
not develop for our technologies.
In addition, the development
efforts of 3DIcon and the University on the 3D technology are subject to unanticipated delays, expenses or technical or other problems,
as well as the possible insufficiency of funding to complete development. Our success will depend upon the ultimate products and
technologies meeting acceptable cost and performance criteria, and upon their timely introduction into the marketplace. The proposed
products and technologies may never be successfully developed, and even if developed, they may not satisfactorily perform the functions
for which they are designed. Additionally, these may not meet applicable price or performance objectives. Unanticipated technical
or other problems may occur which would result in increased costs or material delays in their development or commercialization.
If we are unable to successfully
retain existing management and recruit qualified personnel having experience in our business, we may not be able to continue our
operations.
Our success depends
to a significant extent upon the continued services of our Board of Directors, management officers and other technical advisors. Our
success also depends on our ability to attract and retain other key executive officers.
There is substantial doubt about
our ability to continue as a going concern. If we do not continue as a going concern, investors will lose their entire investment.
We have a limited operating
history. Since our inception, we have incurred net losses. As of December 31, 2016, we had a working capital deficiency of $496,100.
We believe these conditions indicate that there is substantial doubt about our ability to continue as a going concern within the
next twelve months from the date of this filing. Our auditors have expressed substantial doubt about our ability to continue as
a going concern. These concerns arise from the fact that we have insufficient revenues to fund development and operating expenses.
If we are unable to continue as a going concern, you could lose your entire investment in us.
We will need significant additional
capital, which we may be unable to obtain.
Our capital requirements
in connection with our development activities and transition to commercial operations have been and will continue to be significant.
As of April 7, 2017, we require approximately $1.4 million of additional funds through December 2017 to continue research,
development and testing of our technologies, to obtain intellectual property protection relating to our technologies when appropriate,
and to improve and market our technologies. There can be no assurance that financing will be available in amounts or on terms acceptable
to us, if at all.
Risks Related to Our Intellectual
Property
If we fail to establish, maintain
and enforce intellectual property rights with respect to our technology and/or licensed technology, our financial condition, results
of operations and business could be negatively impacted.
Our ability to establish,
maintain and enforce intellectual property rights with respect to our technology and the University’s ability to establish,
maintain and enforce intellectual property rights with respect to our exclusively licensed technologies will be a significant factor
in determining our future financial and operating performance. We seek to protect our intellectual property rights by relying on
a combination of patent, trade secret and copyright laws. We also use confidentiality and other provisions in our agreements that
restrict access to and disclosure of its confidential know-how and trade secrets.
Outside the patents
and pending patent applications directly granted to us or are in-licensed to us, we seek to protect our technology as trade secrets
and technical know-how. However, trade secrets and technical know-how are difficult to maintain and do not provide the same legal
protections provided by patents. In particular, only patents will allow us to prohibit others from using independently developed
technologies that are similar. If competitors develop knowledge substantially equivalent or superior to our trade secrets and technical
know-how, or gain access to our knowledge through other means such as observation of our technology that embodies trade secrets
at customer sites that we do not control, the value of our trade secrets and technical know-how would be diminished.
While we strive to
maintain systems and procedures to protect the confidentiality and security of our trade secrets and technical know-how, these
systems and procedures may fail to provide an adequate degree of protection. For example, although we generally enter into agreements
with our employees, consultants, advisors, and strategic partners restricting the disclosure and use of trade secrets, technical
know-how and confidential information, we cannot provide any assurance that these agreements will be sufficient to prevent unauthorized
use or disclosure. In addition, some of the technology deployed at customer sites in the future, which we do not control, may be
readily observable by third parties who are not under contractual obligations of non-disclosure, which may limit or compromise
our ability to continue to protect such technology as a trade secret.
While we are not currently
aware of any infringement or other violation of our intellectual property rights, monitoring and policing unauthorized use and
disclosure of intellectual property is difficult. If we learned that a third party was in fact infringing or otherwise violating our
intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual
property may not prove successful and might result in substantial costs and diversion of resources and management attention.
If our technology is
licensed to customers at some point in the future, the strength of the intellectual property under which we would grant licenses
can be a critical determinant of the value of such potential licenses. If we are unable to secure, protect and enforce our intellectual
property now and in the future, it may become more difficult for us to attract such customers. Any such development
could have a material adverse effect on our business, prospects, financial condition and results of operations.
We may face claims that we are violating
the intellectual property rights of others.
Although we are not
aware of any potential violations of others’ intellectual property rights, we may face claims, including from direct competitors,
other companies, scientists or research universities, asserting that our technology or the commercial use of such technology infringes
or otherwise violates the intellectual property rights of others. We cannot be certain that our technologies and processes do not
violate the intellectual property rights of others. If we are successful in developing technologies that allow us to earn revenues
and our market profile grows we could become increasingly subject to such claims.
We may also face infringement
claims from the employees, consultants, agents and outside organizations we have engaged to develop our technology. While
we have sought to protect ourselves against such claims through contractual means, we cannot provide any assurance that such contractual
provisions are adequate, and any of these parties might claim full or partial ownership of the intellectual property in the technology
that they were engaged to develop.
If we were found to
be infringing or otherwise violating the intellectual property rights of others, we could face significant costs to implement work-around
methods, and we cannot provide any assurance that any such work-around would be available or technically equivalent to our potential
technology. In such cases, we might need to license a third party’s intellectual property, although any required license
might not be available on acceptable terms, or at all. If we are unable to work around such infringement or obtain a license on
acceptable terms, we might face substantial monetary judgments against us or an injunction against continuing to use or license such
technology, which might cause us to cease operations.
In addition, even if
we are not infringing or otherwise violating the intellectual property rights of others, we could nonetheless incur substantial
costs in defending ourselves in suits brought against us for alleged infringement. Also, if we are to enter into a license agreement
in the future and it provides that we will defend and indemnify our customer licensees for claims against them relating to
any alleged infringement of the intellectual property rights of third parties in connection with such customer licensees’
use of such technologies, we may incur substantial costs defending and indemnifying any customer licensees to the extent they are
subject to these types of claims. Such suits, even if without merit, would likely require our management team to dedicate substantial
time to addressing the issues presented. Any party bringing claims might have greater resources than we do, which could potentially
lead to us settling claims against which we might otherwise prevail on the merits.
Any claims brought
against us or any customer licensees alleging that we have violated the intellectual property of others could have negative consequences
for our financial condition, results of operations and business, each of which could be materially adversely affected as a result.
At this time, we do not own all of
the intellectual property in Volumetric Liquid Crystal Display or Light Surface Display for Rendering Three-Dimensional Images,
and, apart from the SRA with the University and the exclusive worldwide marketing rights thereto, we have no contracts or agreements
pending to acquire the intellectual property.
Although we have obtained
exclusive worldwide marketing rights to “Volumetric Liquid Crystal Display” and “Light Surface Display for Rendering
Three-Dimensional Images”, two technologies vital to our business and growth strategy, we do not own all of the intellectual
property in these technologies. Although our exclusive worldwide marketing rights to these technologies stand alone
and are independent of the SRA, outside of our SRA with the University, we have no pending agreements to obtain or purchase ownership
over all intellectual property in these technologies. Should the University lose their rights in such technologies or
we are otherwise unable to utilize the rights obtained in such agreements it would be difficult to successfully implement our business
strategy going forward and our stock value would likely decrease.
Our subsidiary,
Coretec, does not own any patents and relies on the patents we license from NDSU Research Foundation.
We
do not currently own any patents related to our silicon-based businesses and only have an exclusive worldwide license to certain
intellectual property owned by NDSU Research Foundation pursuant to a license agreement between Coretec and NDSU Research Foundation.
Under the license agreement with NDSU, NDSU retains ownership of the licensed patents. If we were to default under the license
agreement, then our rights to NDSU’s intellectual property would be extinguished and we would lose all rights to operate
the license. In such an event, we would effectively cease to operate in the silicon-based businesses unless we re-obtained licensing
with NDSU.
Risks Relating to Our Current Financing
Arrangement
s
:
We have
a limited number of unreserved shares available for future issuance, which may impair our ability to conduct future financing and
other transactions.
Our amended and restated
certificate of incorporation currently authorizes us to issue up to 1,500,000,000 shares of common stock and 7,100,000 shares of
preferred stock. As of April 7, 2017, we had a total of 18,245,467 shares of common stock that were authorized but unissued, and
we have currently reserved 18,103,223 of these shares for future issuance pursuant to outstanding equity awards, our equity plans,
warrants and convertible notes. In addition, we have Series A Preferred Stock and Series B Preferred that are convertible into
more shares of common stock than we have available for issuance. As a result, our ability to issue shares of common stock other
than pursuant to existing arrangements or outstanding derivative securities will be limited until such time, if ever, that we are
able to amend our amended and restated certificate of incorporation to allow for an increased number of authorized but unissued
shares or shares currently reserved for issuance otherwise become available (for example, due to the termination of the underlying
agreement to issue the shares).
If we are unable to
enter into new arrangements to issue shares of our common stock or securities convertible or exercisable into shares of our common
stock, our ability to complete equity-based financings or other transactions that involve the potential issuance of our common
stock or securities convertible or exercisable into our common stock, will be limited. In lieu of issuing common stock or securities
convertible into our common stock in any future equity financing transactions, we may need to issue some or all of our authorized
but unissued shares of preferred stock, which would likely have superior rights, preferences and privileges to those of our common
stock, or we may need to issue debt that is not convertible into shares of our common stock, which may require us to grant security
interests in our assets and property and/or impose covenants upon us that restrict our business. If we are unable to issue additional
shares of common stock or securities convertible or exercisable into our common stock, our ability to enter into strategic transactions
such as acquisitions of companies or technologies, may also be limited. If we propose to amend our amended and restated certificate
of incorporation to increase our authorized shares of common stock, such a proposal would require the approval by the holders of
a majority of our outstanding shares of common stock, and we cannot assure you that such a proposal would be adopted. If we are
unable to complete financing, strategic or other transactions due to our inability to issue additional shares of common stock or
securities convertible or exercisable into our common stock, our financial condition and business prospects may be materially harmed.
There are a large number of shares
underlying our convertible debentures, and warrants
that may be available for future sale and the sale of these
shares may depress the market price of our common stock.
As of April 7, 2017,
we had 1,481,754,533 shares of common stock issued and outstanding and convertible debentures outstanding that may be converted
into estimated 9,796,180,281 shares of common stock at current market prices, although the Company currently would not have enough
authorized shares to issue such estimated conversion shares. The number of shares of common stock issuable upon conversion of the
outstanding convertible debentures may increase if the market price of our stock declines. We also have outstanding warrants issued
to Golden State Equity Investors, Inc. f/k/a Golden Gate Investors ("Golden State") to purchase 18,318 shares of common
stock at an exercise price of $381.50. Additionally, there are warrants to purchase 19,250,000 common shares at an exercise price
of $0.0055, which warrants were issued to investors that also purchased 385,000 shares of Series A Convertible Preferred Stock,
which remaining shares are convertible into an aggregate of 34,500,000 shares of common stock. We have 6,558,345 shares of Series
B Convertible Preferred Stock that are convertible to common shares (see Note 7 of the Notes to the Consolidated Financial Statements).
The sale of the shares underlying the convertible debentures, the Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and warrants may adversely affect the market price of our common stock.
Our obligation to issue
shares upon conversion of our convertible debentures is essentially limitless. Additionally, as of April 7, 2017, we have only
18,245,467 unissued authorized shares available.
The conversion price of our convertible
debentures
is continuously adjustable, which could require us to issue a substantially greater number
of shares, which will cause dilution to our existing stockholders.
The following is an
example of the amount of shares of our common stock that are issuable, upon conversion of our 4.75% $100,000 convertible debenture
(excluding accrued interest) issued to Golden State on November 3, 2006, based on the remaining principal balance of $64,125 and
market prices 25%, 50% and 75% below the market price as of April 7, 2017 of $0.0009.
|
|
|
|
|
|
Effective
|
|
|
Number
|
|
|
% of
|
|
% Below
|
|
|
Price Per
|
|
|
Conversion
|
|
|
of Shares
|
|
|
Outstanding
|
|
Market
|
|
|
Share
|
|
|
Price
|
|
|
Issuable(1)
|
|
|
Stock
|
|
|
25
|
%
|
|
$
|
0.0007
|
|
|
$
|
0.0005
|
|
|
|
13,061,787,457
|
|
|
|
882
|
%
|
|
50
|
%
|
|
$
|
0.0005
|
|
|
$
|
0.0004
|
|
|
|
19,593,001,809
|
|
|
|
1,322
|
%
|
|
75
|
%
|
|
$
|
0.0002
|
|
|
$
|
0.0002
|
|
|
|
39,186,644,865
|
|
|
|
2,645
|
%
|
(1) Shares issuable exclude 18,318 shares underlying the remaining
warrants exercisable at $381.50 per share.
As illustrated, the
number of shares of common stock issuable upon conversion of our convertible debentures will increase if the market price of our
stock declines, which will cause dilution to our existing stockholders.
The continuously adjustable conversion
price feature of our convertible debentures may encourage investors to make short sales in our common stock, which could have a
depressive effect on the price of our common stock.
So long as the market
price of our stock is below $4.00, the issuance of shares in connection with the conversion of the $100,000 convertible debenture
results in the issuance of shares at an effective 20% discount to the trading price of the common stock prior to the conversion.
The significant downward pressure on the price of the common stock as the selling stockholders convert and sell material amounts
of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common
stock. The selling stockholders could sell common stock into the market in anticipation of covering the short sale by converting
their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares
issued upon conversion or exercise of debentures and warrants, but also the mere perception that these sales could occur, may adversely
affect the market price of the common stock.
The issuance of shares upon conversion
of outstanding Series A and Series B Preferred Stock, the convertible debentures and exercise of outstanding warrants may cause
immediate and substantial dilution to our existing stockholders.
The issuance of shares
upon conversion of our outstanding Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, convertible debentures
and exercise of warrants would result in substantial dilution to the interests of other stockholders since the selling stockholders
may ultimately convert and sell the full amount issuable on conversion. Although Golden State may not convert its convertible debenture
and/or exercise their warrants if such conversion or exercise would cause it to own more than 9.9% of our outstanding common stock,
this restriction does not prevent the selling stockholders from converting and selling some of their holdings and then converting
the rest of their holdings. In this way, assuming the market price remains at a level acceptable to the selling stockholders, the
selling stockholders could continue on a "conversion-sell-conversion" trend while never holding more than 9.9% of our
common stock. Further, under the convertible debenture there is theoretically no upper limit on the number of shares that may be
issued, which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common
stock.
If we are unable to issue shares
of common stock upon conversion of the convertible debenture as a result of our inability to increase our authorized shares of
common stock or as a result of any other reason, we are required to pay penalties to Golden State, redeem the convertible debenture
at 130% and/or compensate Golden State for any buy-in that it is required to make.
If we are unable to
issue shares of common stock upon conversion of the convertible debenture as a result of our inability to increase our authorized
shares of common stock or as a result of any other reason, we are required to:
|
·
|
Pay late payments to Golden
State for late issuance of common stock upon conversion of the convertible debenture, in the amount of $100 per business day after
the delivery date for each $10,000 of convertible debenture principal amount being converted or redeemed;
|
|
·
|
In the event we are prohibited
from issuing common stock, or fail to timely deliver common stock on a delivery date, or upon the occurrence of an event of default,
then at the election of Golden State, we must pay to Golden State a sum of money determined by multiplying up to the outstanding
principal amount of the convertible debenture designated by Golden State by 130%, together with accrued but unpaid interest thereon;
and
|
|
·
|
If ten days after the date
we are required to deliver common stock to Golden State pursuant to a conversion, Golden State purchases (in an open market transaction
or otherwise) shares of common stock to deliver in satisfaction of a sale by Golden State of the common stock which it anticipated
receiving upon such conversion (a "Buy-In"), then we are required to pay in cash to Golden State the amount by which
its total purchase price (including brokerage commissions, if any) for the shares of common stock so purchased exceeds the aggregate
principal and/or interest amount of the convertible debenture for which such conversion was not timely honored, together with
interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full.
|
In the event that we
are required to pay penalties to Golden State or redeem the convertible debentures held by Golden State, we may be required to
curtail or cease our operations.
Risks Relating to Our Common Stock
:
The price of our common stock is
volatile and fluctuations in our operating results and announcements and developments concerning our business affect our stock
price, which may cause investment losses for our stockholders.
The market for our
common stock is highly volatile and the trading price of our stock on the OTC Pink Marketplace is subject to wide fluctuations
in response to, among other things, operating results, the number of stockholders desiring to sell their shares, changes in general
economic conditions and the financial markets, the execution of new contracts and the completion of existing agreements and other
developments affecting us. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms
or industry analysts relating to our market or relating to us could result in an immediate and adverse effect on the market price
of our common stock. The highly volatile nature of our stock price may cause investment losses for our shareholders. In the past,
securities class action litigation has often been brought against companies following periods of volatility in the market price
of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs
while diverting management’s attention and resources.
Our common stock is subject to the
"Penny Stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.
The Securities and
Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant
to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
|
·
|
That a broker or dealer approve
a person's account for transactions in penny stocks; and
|
|
·
|
The broker or dealer receives
from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
|
In
order to approve a person's account for transactions in penny stocks, the broker or dealer must:
|
·
|
Obtain financial information
and investment experience objectives of the person; and
|
|
·
|
Make a reasonable determination
that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny stocks.
|
The broker or dealer
must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
|
·
|
Sets forth the basis on which
the broker or dealer made the suitability determination; and
|
|
·
|
That the broker or dealer
received a signed, written agreement from the investor prior to the transaction.
|
Generally, brokers
may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has
to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies
available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Financial Industry Regulatory Authority,
Inc. (“FINRA”) sales practice requirements may limit a shareholder’s ability to buy and sell our common stock.
In addition to the
“penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending
speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of
these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at
least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our stock is thinly traded, so you
may be unable to sell your shares at or near the quoted bid prices if you need to sell a significant number of your shares.
The shares of our common
stock are thinly-traded on the OTC Pink Marketplace, meaning that the number of persons interested in purchasing our common stock
at or near bid prices at any given time may be relatively small or non-existent. As a consequence, there may be periods
of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which
has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or
be sustained, or that current trading levels will be sustained. Due to these conditions, we can give you no assurance that you
will be able to sell your shares at or near bid prices or at all if you need money or otherwise desire to liquidate your shares.
Shares eligible for future sale may
adversely affect the market.
From time to time,
certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general,
pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information
requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), and current
public information and notice requirements. Any substantial sales of our common stock pursuant to Rule 144 may have a material
adverse effect on the market price of our common stock.
We could issue additional common
stock, which might dilute the book value of our common stock.
Our Board of Directors
has authority, without action or vote of our shareholders, to issue all or a part of our authorized but unissued shares. Such stock
issuances could be made at a price that reflects a discount or a premium from the then-current trading price of our common stock.
In addition, in order to raise capital, we may need to issue securities that are convertible into or exchangeable for a significant
amount of our common stock. These issuances would dilute the percentage ownership interest, which would have the effect of reducing
your influence on matters on which our shareholders vote, and might dilute the book value of our common stock. You may incur additional
dilution if holders of stock options, whether currently outstanding or subsequently granted, exercise their options, or if warrant
holders exercise their warrants to purchase shares of our common stock.
Our common stock could be further
diluted as a result of the issuance of convertible securities, warrants or options.
In the past, we have
issued convertible securities (such as convertible debentures and notes), warrants and options in order to raise money or as compensation
for services and incentive compensation for our employees and directors. We have shares of common stock reserved for issuance upon
the exercise of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance
of these convertible securities, options and warrants could affect the rights of our stockholders, could reduce the market price
of our common stock or could result in adjustments to exercise prices of outstanding warrants (resulting in these securities becoming
exercisable for, as the case may be, a greater number of shares of our common stock), or could obligate us to issue additional
shares of common stock to certain of our stockholders.
We do not intend to pay dividends.
We do not anticipate
paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends.
Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The
declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend
upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements,
and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future,
and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
If we fail to maintain effective
internal controls over financial reporting, the price of our common stock may be adversely affected.
Our internal control
over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which
may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate internal
controls over financial reporting. Failure to establish those controls, or any failure of those controls once established,
could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In
addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that
need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any
actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure
of management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our
common stock.
We are required to comply with certain
provisions of Section 404 of the Sarbanes-Oxley Act of 2002 and if we fail to comply in a timely manner, our business could be
harmed and our stock price could decline.
Rules adopted by the
SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of internal controls over financial
reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting
firm. The standards that must be met for management to assess the internal controls over financial reporting as effective
are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We
expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult
for us to predict how long it will take or how costly it will be to complete the assessment of the effectiveness of our internal
control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting.
As a result, we may not be able to complete the assessment and remediation process on a timely basis. In addition, although
attestation requirements by our independent registered public accounting firm are not presently applicable to us we could become
subject to these requirements in the future and we may encounter problems or delays in completing the implementation of any resulting
changes to internal controls over financial reporting. In the event that our Chief Executive Officer or Chief Financial
Officer determine that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict
how regulators will react or how the market prices of our shares will be affected; however, we believe that there is a risk that
investor confidence and share value may be negatively affected.