FORM 10-QSB/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number 0-24368
FLEXPOINT SENSOR SYSTEMS, INC.
(Exact name of small business issuer as identified in its charter)
Delaware 87-0620425
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6906 South 300 West, Midvale, Utah 84047
(Address of principal executive offices)
(Zip Code)
(801) 568-5111
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [ x ] Yes [ ]No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of November 9, 1999: 17,854,391.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
consolidated results of operations and financial condition of Flexpoint Sensor
Systems, Inc. The discussion should be read in conjunction with the condensed
consolidated financial statements, related notes and Management's Discussion
and Analysis or Plan of Operation for the year ended December 31, 1998.
Wherever in this discussion the term "Company" is used, it should be
understood to refer to Flexpoint Sensor Systems, Inc. and its wholly owned
subsidiary, Sensitron, Inc. ("Sensitron"), a Utah corporation, and Sensitron's
wholly owned subsidiaries, Flexpoint, Inc. and Technology and Machine Company,
Inc. ("Tamco"), on a consolidated basis, except where the context clearly
indicates to the contrary. The business operations of the Company are
conducted through Flexpoint, Inc. and Tamco. Prior to the April 1998, merger
wherein Flexpoint Sensor Systems, Inc. acquired Sensitron (the "Acquisition"),
Flexpoint Sensor Systems Inc. had no operations. The Acquisition was accounted
as a reorganization of Sensitron. The historical financial statements prior to
the Acquisition are those of Sensitron and have been restated accordingly.
Overview
The Company is a development stage company and, since inception, has
incurred losses from operations. As of September 30, 1999, the Company had
cumulative net losses totaling $9,778,195. The Company is primarily engaged in
the sensor business and is currently marketing proprietary patented sensor
technology know as the Bend Sensor(R) technology (the "Technology"). Sensing
devices can be used to measure or sense changes in deflection and are
typically used to trigger an electronic device when the sensor is activated.
The worldwide market for sensing devices has grown significantly as a result
of improved technology and new applications for sensing technology. This
growth has resulted in a corresponding increase in demand for high performance
sensing products. Management believes this worldwide market growth will
continue.
Financial Position
The Company had $15,366 in cash as of September 30, 1999. This
represented a decrease of $642,409 from December 31, 1998. Working capital
deficiency as of September 30, 1999 was $1,823,660 as compared to working
capital of $2,317,976 at December 31, 1998. The decrease is largely due to the
acquisition of $1,090,535 in new equipment, investment of $958,838 in
leasehold improvements, payment of $1,313,800 in fees and expenses to outside
consultants for software development relating to the Company's sensor mats for
use in the smart air bag system (discussed below), and purchase of $97,317 in
office equipment.
Three and Nine Months Ended September 30, 1999 and 1998
During the three and nine months ended September 30, 1999, the Company
had sales of $345,648 and $633,598, respectively, comprised of product sales
and engineering fees; compared with sales of $957,378 and $1,314,509 for the
comparable periods from the prior year, comprised primarily of product sales
and engineering fees.
Approximately one-half of the Company's revenues during the three and
nine months ended September 30, 1999 were generated under a Purchase and
Supply Agreement (the "Supply Agreement") between the Company and Delphi
Automotive Systems ("Delphi"). Under the Supply Agreement the Company will
supply its proprietary sensor mats to Delphi for integration into a weight
based suppression system as a critical part of a smart air bag system. The
Supply Agreement provides that such sensor mats will be exclusively supplied
to General Motors, through Delphi, by the Company through 2002.
The Company anticipates that its success is highly dependent on Delphi.
Although the Supply Agreement has not accounted for substantial revenue to
date (excluding engineering fees), the Company could have over $300,000,000 in
sales under that Supply Agreement. The Company anticipates that the revenue
generated from the Supply Agreement will become a significant portion of the
Company's revenues. The Company does not expect significant sales to begin
under the Supply Agreement until the second half of 2000. The projected sales
and timing
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thereof is forward looking information and is subject to many risks and
uncertainties, including the fact that although the Supply Agreement is a
multi-year contract, and it does not require Delphi to purchase a specific
minimum quantity of products. In addition, with the award of the Supply
Agreement and subsequent increases in the projected manufacturing output under
the agreement, the Company has had to materially increase spending for
additional facilities, equipment and personnel. The Company presently does not
have the funding to make the required expenditure. See "--Liquidity and
Capital Resources." As a result, the Company's business, financial condition
or results of operations could be materially adversely affected if sufficient
additional funding is not timely acquired or if sales do not materialize as
projected under the Supply Agreement, of which there can be no assurance.
Approximately one-half of the Company's revenues during the three and
nine months ended September 30, 1999 and substantially all of the Company's
revenues during the comparable periods from the prior year were generated
under a license agreement (the "License Agreement"). Under the agreement the
Company granted Ohio Art the exclusive worldwide right to sell products
incorporating the Technology in the toy, traditional games and video game
markets. The License Agreement provides for certain up front fees and minimum
royalties for Ohio Art to maintain such exclusive rights. Certain toy
customers of the Company have indicated that they will be getting out of the
plush toy business and/or will not be manufacturing products using
sophisticated sensor systems. During the three months ended September 30,
1999, the Company received orders for and shipped over 2,500,000 sensors
generating $206,108 in revenues. Ohio Art has not committed to manufacture or
sell any other licensed products during 1999 or thereafter. Because the toy
industry is cyclical, the Company expects that the bulk of annual royalty
revenues will be greater in the second and third quarters of any given year.
As a result, the Company's revenues under the License Agreement during 1999
have been substantially less than in 1998. There can be no assurance as to
what level of sales, if any, the Company will achieve under the License
Agreement in future years.
License and supply arrangements, such as those discussed above, create
certain risks for the Company, including (i) reliance for sales of products on
other parties; (ii) if the Company's products are marketed under other
parties' labels, goodwill associated with use of the products may inure to the
benefit of the other parties rather than the Company; and (iii) the Company
may have only limited protection from changes in manufacturing costs and raw
materials costs.
General and administrative expenses for the three and nine months ended
September 30, 1999 were $817,481 and $2,276,886, respectively, compared with
$350,253 and $1,133,699 for the comparable periods from the prior year. The
increase in expenditures between the periods resulted primarily from increases
in salary and wage expenses as a result of hiring additional engineering and
manufacturing employees and increases in advertising, rent, depreciation and
consulting expenses associated with the production line qualifications and
set-up under the Supply Agreement. The Company does not expect that general
and administrative expenses will be reduced below current levels without
reducing the number of employees. Such reductions may have a material adverse
effect on the Supply Agreement and the commercialization of the Company's
other products. Although Management has liquidity concerns, management does
not intend to materially reduce general and administrative costs.
Research and development ("R&D") expenses for the three and nine months
ended September 30, 1999 were $902,253 and $2,343,494, respectively, compared
with $324,887 and $764,709 for the comparable periods from the prior year. The
increase in expenditures between the periods resulted primarily from increases
in R&D spending relating to the Supply Agreement. Specifically, $1,313,800 of
R&D expense for the nine months ended September 30, 1999 related to consulting
expenses for the development of the software associated with the Supply
Agreement. The Company expects that during 1999 most of such software
development will be completed. As a result, the Company expects that software
consulting expenses related to the Supply Agreement will be significantly
reduced in 2000. The Company is, however, looking to expand into additional
markets and R&D efforts associated therewith, including related software
development expenditures, may be substantial. As a result, the Company does
not expect that R&D will be reduced below current levels unless a lack of
funding requires the Company to make such reductions. Reductions in R&D
expenditures would comprise primarily reductions in R&D staff. Such staff
reductions could have a material adverse effect on product development and on
the Company's future profitablility. Although Management has liquidity
concerns, management does not intend to reduce R&D efforts at this time.
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Net interest expense for the three and nine months ended September 30,
1999 was $68,369 and $56,076, respectively, compared with net interest income
of $5,441 and $21,988 for the comparable periods for the prior year. The net
interest and other income relates mainly to interest earned on funds on
deposit.
Net other income for the three and nine months ended September 30, 1999
was $48,784 and $49,319, respectively, compared with $583 and ($2,006) for the
comparable periods for the prior year. The net other income relates mainly to
collection of bad debt previously written off during 1997 and 1998 .
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of debt equity securities and sales. The Company generated
$9,857,016 in net proceeds through financing activities from
inception through September 30, 1999. The Company used net cash in operating
activities of $3,142,873 during the nine months ended September 30, 1999. As
of September 30, 1999, the Company's liabilities totaled $2,250,980, including
$1,210,000 in short-term debt. The Company had a working capital deficiency as
of September 30, 1999 of $1,823,660.
The Company has committed to spend $82,530 in lease payment for its
physical facilities during the remainder of 1999 and $322,890, $309,850,
$249,900 and $249,900 in physical facilities lease payments for the years 2000
through 2003, respectively. In connection therewith, the Company contracted
for certain improvements to its physical facilities. During the three months
ending September 30, 1999, the Company paid $275,000 for the improvements made
at the new facility, leaving a balance of approximately $165,166 owing. The
Company also has short term loan obligations in the principal amounts of
$210,000 and $1,000,000 that are due in December 1999 and February 2000,
respectively. In September 1999, $100,000 was also paid on short term loan
obligations. Most of the interest due on these loans has been paid.
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including the
costs to expand facilities, complete development and bring certain product
utilizing the Technology to commercial viability and the level of sales and
marketing for the Company's products. With the award of the Supply Agreement
and subsequent increase in the projected manufacturing output under the
agreement, the Company has needed to materially increase spending for
additional facilities, equipment and personnel. The Company believes that
existing funds and funds generated from sales will be sufficient to support
the Company's operations through December 31, 1999. Restructuring of
operations has allowed the Company to delay certain capital expenses from 1999
to 2000. The Company estimates that it will need to raise at least an
additional $10,700,000 in 2000 to fully execute its business plan with respect
to the Supply Agreement, which includes completing two additional production
lines to fulfill its anticipated manufacturing obligations under the Supply
Agreement, as amended. To the extent that the Company seeks to expand its
business activities outside the seat sensor market, it is anticipated that
additional funding will be required.
The Company has been exploring alternative long and short-term capital
proposals to provide needed capital to meet the current expansion and
equipment purchases under the Supply Agreement and otherwise. The Company is
currently negotiating with several groups that may provide the required
funding. Although the Company expects to have the necessary financing
available by year end, the Company has no material current contractual
arrangements with respect to additional financing and there can be no
assurance that additional financing will be available on commercially
reasonable terms or at all. The inability to obtain additional financing will
have a material adverse effect on the Company. This includes the possibly that
the Company may have to significantly curtail or cease its operations.
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Year 2000
The Company uses computers systems and microprocessors that are embedded
in systems the Company uses. Computers and embedded microprocessors have the
potential for operational problems if they lack the ability to handle the
transition to the Year 2000. Because this issue has the potential to cause
disruption of the Company's business operations, the Company has and is
seeking to identify and remediate potential Year 2000 problems in its business
information systems and other systems embedded in its engineering and
manufacturing operations. In addition, the Company has communicated with its
major suppliers, dealers, distributors and other third parties in order to
assess and reduce the risk that the Company's operations could be adversely
affected by the failure of these third parties to adequately address the Year
2000 issue.
The Company uses computers systems principally for product design,
product prototyping, manufacturing and administrative functions such as
communications, word processing, accounting and management and financial
reporting. The Company uses embedded microprocessors principally in its
manufacturing and engineering operations. The Company's principal computer
systems (including the embedded microprocessors systems) have been purchased
since December 31, 1997 and the vendors supplying such systems have generally
represented that such systems are Year 2000 compliant. The software utilized
by the Company is generally standard "off the shelf" software, typically
available from a number of vendors. The Company has verified with its software
vendors that the services and products provided are, or will be, Year 2000
compliant. In addition, the Company has certain software that has been written
specifically for use by the Company and the suppliers of such software have
warranted that it is Year 2000 compliant. Based on such verification, the
Company believes that its computer systems and software is Year 2000 compliant
in all material respects. The Company estimates that the cost to redevelop,
replace or repair its technology will not be material. The Company is not
using any independent verification or validation procedures. There can be no
assurance, however, that such systems and/or programs are or will be Year 2000
compliant and that the failure of such would not have a material adverse
impact on the Company's business and operations.
In addition to its own computer systems, in connection with its business
activities, the Company interacts with suppliers, customers, and financial
service organizations who use computer systems. The Company has communicated
with such parties regarding their state of Year 2000 readiness. Based on its
assessment activity to date, the Company believes that a majority of the
suppliers, customers and financial service organizations with whom it
interacts are making acceptable progress toward Year 2000 readiness. The
Company currently believes that the most reasonable likely worst case scenario
is that there will be some localized disruptions of supplier, customer and/or
financial services that will affect the Company and its suppliers, and
distribution channels for a short time rather than systemic or long-term
problems affecting its business operations as a whole. In view of the
foregoing, the Company does not currently anticipate that it will experience a
significant disruption of its business as a result of the Year 2000 issue.
However, there is still uncertainty about the broader scope of the Year 2000
issue as it may affect the Company and third parties that are critical to the
Company's operations. For example, lack of readiness by electrical and water
utilities, financial institutions, government agencies or other providers of
general infrastructure could pose significant impediments to the Company's
ability to carry on its normal operations in the area or areas so affected.
The Company is currently evaluating what contingency plans, if any, to make in
the event the Company or parties with whom the Company does business
experience Year 2000 problems.
The statements made herein about the costs expected to be associated
with the Year 2000 compliance and the results that the Company expects to
achieve, constitute forward looking information. As noted above, there are
many uncertainties involved in the Year 2000 issue, including the extent to
which the Company will be able to successfully and adequately provide for
contingencies that may arise, as well as the broader scope of the Year 2000
issues as it may affect third parties that are not controlled by the Company.
Accordingly, the costs and results of the Company's Year 2000 program and the
extent of any impact on the Company's operations could vary materially from
those stated herein.
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Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to risk of product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product development,
commercialization, and technology, and other risks. In addition, sales and
other revenues may not commence and/or continue as anticipated due to delays
or otherwise. As a result, the Company's actual results for future periods
could differ materially from those anticipated or projected. Please refer to
the "Management's Discussion and Analysis or Plan of Operation" and
specifically the discussion under "Other Factors" that is found in the
Company's Annual Report on Form 10-KSB for the period ended December 31, 1998,
for more details.
Unless otherwise required by applicable law, the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FLEXPOINT, INC.
Date: November 15, 1999
By /s/ Douglas M. Odom
-----------------------
Douglas M. Odom
President, Chief Executive
Officer, Director
Date: November 15, 1999 By /s/ Thomas N. Strong
-------------------------
Thomas N. Strong
Chief Accounting Officer
