FORM 10-QSB
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.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
ASSETS
September 30, December 31,
1999 1998
---------------- --------------
Current Assets
Cash $ 15,366 $ 657,775
Trade accounts receivable, net
of allowance of $41,606 and $90,721 210,287 298,586
Royalties receivable - 152,570
Receivable from shareholder - 1,573,750
Inventory 155,965 42,691
Prepaid expense 45,702 50,915
---------------- --------------
Total Current Assets 427,320 2,776,287
---------------- --------------
Property and Equipment 3,389,313 1,273,326
Less accumulated depreciation (536,850) (387,858)
---------------- --------------
Net Equipment 2,852,463 885,468
---------------- --------------
Goodwill, Net of Accumulated Amortization
of $95,842 and $77,871 23,960 41,931
Deposits 49,549 246,441
Patents, net of accumulated amortization
of $55,818 and $45,018 127,711 101,331
---------------- --------------
Total Assets $ 3,481,003 $ 4,051,458
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Trade accounts payable $ 723,366 $ 348,473
Related party payable - 1,234
Accrued liabilities 309,300 100,290
Income taxes payable 8,314 8,314
Notes payable 1,210,000 -
---------------- --------------
Total Current Liabilities 2,250,980 458,311
---------------- --------------
Stockholders' Equity (Deficit)
Preferred stock - $0.001 par value;
100,000,000 shares authorized; 536
shares issued 1 -
Common stock - $0.001 par value;
100,000,000 shares authorized;
18,215,614 and 17,215,446 shares
issued and outstanding 18,215 17,215
Additional paid in capital 10,990,002 10,027,475
Less receivable from shareholder - (900,609)
Deficit accumulated during the
development stage (9,778,195) (5,550,934)
---------------- --------------
Total Stockholders' Equity (Deficit) 1,230,023 3,593,147
---------------- --------------
Total Liabilities and Stockholders' Equity
(Deficit) $ 3,481,003 $ 4,051,458
================ ==============
The accompanying notes are an integral part of these financial statements.
2
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the Period
January 5,1995
(Date of
Inception)
For the Three Months For the Nine Months Through
Ended Sept. 30, Ended Sept. 30, Sept. 30,
1999 1998 1999 1998 1999
------------- ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Sales $ 345,648 $ 957,378 $ 633,598 $ 1,314,509 $ 3,880,219
Cost of sales 153,045 453,087 233,722 608,625 1,730,161
------------- ------------- ------------ ------------ --------------
Gross profit 192,603 504,291 399,876 705,884 2,150,058
General and administrative
expense 817,481 350,253 2,276,886 1,133,699 6,195,748
Research and development 902,253 324,887 2,343,494 764,709 5,670,022
------------- ------------- ------------ ------------ --------------
Loss from operations (1,527,131) (170,849) (4,220,504) (1,192,524) (9,715,712)
Interest expense (72,267) - (76,618) (40) (147,819)
Interest income 3,898 5,441 20,542 22,028 66,796
Other income/expense 48,784 583 49,319 (2,006) 18,539
------------- ------------- ------------ ------------ --------------
Net Loss Before Income Taxes (1,546,715) (164,825) (4,227,261) (1,172,542) (9,778,196)
Provision for income taxes - - - - -
------------- ------------- ------------ ------------ --------------
Net Loss $ (1,546,715) $ (164,825) $(4,227,261) $(1,172,542) $ (9,778,195)
============= ============= ============ ============ ==============
Basic and Diluted Loss Per
Common Share $ (0.09) $ (0.01) $ (0.24) $ (0.09) $ (0.55)
============= ============= ============ ============ ==============
Weighted average number of
common shares used in per
share calculation 17,682,081 15,860,279 17,682,081 13,618,521 17,682,081
============= ============= ============ ============ ==============
The accompanying notes are an integral part of these financial statements.
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</TABLE>
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the Period
January 5, 1995
(Date of Inception)
For the Nine Months Through
Ended September 30, September 30,
1999 1998 1999
-------------- -------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (4,227,261) $ (1,172,542) $ (9,778,195)
Adjustments to reconcile net loss to
net cash used by operating activities
Gain on Sale of available-for-sale securities - - (21,225)
Loss on sale of assets - - 9,227
Depreciation and amortization 177,762 103,941 700,845
Stock issued for services - - 268,102
Allowance for doubtful accounts - - 242,288
Changes in operating assets and liabilities:
Accounts receivable 240,869 (339,783) (316,534)
Inventory (113,274) (182,895) (155,965)
Accounts payable 374,895 (295,006) 544,554
Accrued liabilities 210,899 (316,134) 242,205
Deferred revenue - (200,000) (6,163)
Other assets 193,237 (50,685) (88,989)
-------------- -------------- -----------------
Net Cash Used By Operating Activities (3,142,873) (2,453,104) (8,359,850)
-------------- -------------- -----------------
Cash Flows From Investing Activities
Payments to Flexpoint prior to acquisition - - (268,413)
Cash paid to acquire Tamco - - (25,000)
Proceeds from the sale of available-for
sale securities - 434,568 455,082
Net cash received from Nanotech acquisition - 1,492,907 1,492,907
Payments received from related parties - 33,427 34,661
Collection of receivables from escrow agent - 64,825 64,825
Payments for the purchase of property
and equipment (2,115,987) (388,366) (3,116,784)
Proceeds received from sale of property
and equipment - - 22,682
Investment in patents (31,436) (31,256) (141,760)
-------------- -------------- -----------------
Net Cash Used By Investing Activities (2,147,423) 1,606,104 (1,481,800)
-------------- -------------- -----------------
Cash Flows From Financing Activities
Proceeds from the issuance of common stock 1,395,137 - 5,485,802
Proceeds from the issuance of preferred stock 469,000 - 469,000
Cash payments to officers to repurchase stock - - (50,000)
Cash paid for offering costs - - (123,020)
Proceeds from borrowings 1,510,000 1,000,000 2,813,960
Principal payments of long-term debt (300,000) (295,336) (698,751)
Collection of stock subscription receivable 1,573,750 390,000 1,963,750
Proceeds from related party notes - - 60,208
Principal payments of related party notes - - (63,933)
-------------- -------------- -----------------
Net Cash Provided By Financing Activities 4,647,887 1,094,664 9,857,016
-------------- -------------- -----------------
Net Change In Cash (642,409) 247,664 15,366
Cash at Beginning of Period 657,775 106,494 -
-------------- -------------- -----------------
Cash at End of Period $ 15,366 $ 354,158 $ 15,366
============== ============== =================
The accompanying notes are an integral part of these financial statements.
4
</TABLE>
<PAGE>
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Flexpoint Sensor Systems, Inc. ("Flexpoint
Sensor Systems"), for all periods presented and the accounts of Sensitron Inc.
("Sensitron"), Flexpoint, Inc. ("Flexpoint") and Technology and Machine
Company, Inc. ("Tamco") from the dates of their acquisitions in 1995 through
September 30, 1999. These entities are collectively referred to as "the
Company". All significant intercompany transactions and account balances have
been eliminated in the consolidation.
Nature of Operations - 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 better 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.
Over the past two years the Company's primary focus has been towards
fulfilling its obligations under its agreement with Delphi, one of the largest
automotive component manufactures in the world. The agreement requires the
Company to have a first class, QS9000 certified, manufacturing facility in
place prior to shipping large quantities of sensor mats. In relation thereto,
the Company has leased 62,000 square feet of additional manufacturing space,
acquired new equipment and hired additional personnel to complete the testing
and R&D necessary under the agreement. All of which has been accomplished
without generating any significant revenues under the agreement (excluding
engineering fees). The Company has been shipping pre-production parts for
testing since June 1999 and the ramp up of production to ship significant
volume is to begin the first quarter 2000. Over a five year period the
contract could generate revenues upwards of $300,000,000. The projected
revenue is forward looking information. Such forward looking information is
subject to many risks and uncertainties, including the fact the component
manufacture is not obligated under the terms of the agreement to purchase any
minimum number of sensor mats and there can be no assurance that the agreement
will result in any material amount of revenues.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Interim Financial Statements - The accompanying consolidated and condensed
balance sheet, statement of operations and cash flows for the nine months
ended September 30, 1999 and 1998 are unaudited. In the opinion of management,
all necessary adjustments (which include only normal recurring adjustments)
have been made to present fairly the financial position, results of operations
and cash flows for the periods presented. The financial statements have been
condensed and do not contain all of the disclosure required by generally
accepted accounting principals. Accordingly, these statements should be read
in conjunction with the annual financial statements included in the annual
report on Form 10-KSB dated December 31, 1998. The results of operations for
the nine months ended September 30, 1999 are not necessarily indicative of the
operating results expected for the entire year.
Business Condition - The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplates continuation of the Company as a going concern. However, the
Company has suffered losses from operations and has had negative cash flows
from
5
<PAGE>
operating activities during the years ended December 31, 1998 and 1997 and
cumulative from inception through September 30, 1999, which conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's continued existence is dependent upon its ability to achieve
profitable operations. The Company has negotiated a significant supply
agreement for flexible sensors to be used as a component in a smart airbag
application with an automobile component manufacturer. Additionally, the
Company has received proceeds from borrowing and the issuance of stocks, and
Management is continuing to raise capital via equity and debt. Management
believes the Delphi agreement and other similar potential contracts will
provide sufficient cash flows for the Company to continue as a going concern
and to ultimately establish profitable operations. However, there is no
assurance that these objectives will be accomplished.
Financial Instruments - The amounts reported as cash, accounts receivable,
accounts payable, and notes payable are considered to be reasonable
approximations of their fair values. The fair value estimates were based on
market information available to management at the time of the preparation of
the financial statements.
Property and Equipment - Property and equipment is stated at cost. Additions
and major improvements are capitalized while maintenance and repairs are
charged to operations. Upon retirement, sale, or disposition, the cost and
accumulated depreciation of the items sold are eliminated from the accounts,
and any resulting gain or loss is recognized in operation. Depreciation is
computed using the straight-line and the double-declining-balance methods and
is recognized over the estimated useful lives of the property and equipment,
which are five to seven years.
Inventory - The Company values its inventory at cost using the FIFO method.
Long-Lived Assets - Impairment losses are recorded when indicators of
impairment are present and undiscounted cash flows estimated to be generated
by those assets are less than the carrying amount. No impairment losses were
required to be recognized in the accompanying financial statements.
Revenue Recognition - Revenue from the sale of products is recorded at the
time of shipment and customers acceptance. Revenue from research and
development contracts is recognized as the contracts are completed. Revenue
from contracts to license the Company's technology to others is deferred until
all conditions under the contracts are met by the Company and then recognized
as revenue over the remaining term of the contracts. Of the $633,598 in
revenues recognized through September 30, 1999 over $342,000 were for
engineering fees associated with the automotive contract mentioned above. The
Company has been shipping pre-production parts to the automotive manufacturer
which has accounted for over $30,000 in revenues so far this year.
Stock-Based Compensation - Stock-based compensation arising from granting
stock options to employees is measured by the intrinsic-value method. This
method recognizes compensation expense based on the difference between the
fair value of the underlying common stock and the exercise price on the date
granted. The Company also presents pro forma results of operations assuming
compensation had been measured by the fair-value method.
Basic and Diluted Loss Per Share - Basic loss per common share is computed by
dividing net loss by the number of common shares outstanding during the
period. Diluted loss per share reflects potential dilution which could occur
if all potentially issuable common shares from stock purchase warrants and
options or convertible notes payable resulted in the issuance of common stock.
Inasmuch as the Company incurred losses during all periods presented in the
accompanying financial statements, diluted loss per share is the same as basic
loss per share because potentially issuable common shares would decrease the
loss per share and have been excluded from the calculation.
6
<PAGE>
NOTE 2 STOCKHOLDER'S EQUITY
Between May and July 1999, the Company offered and sold to accredited
investors in a private placement 536 shares of Series A Convertible Preferred
Stock (the "Preferred Stock") and Series A Warrants to purchase 134,000
shares of the Company's common stock for gross proceeds of $469,000, of which
$8,750 was received during the three months ended September 30, 1999. The
Preferred Stock is convertible, at the option of the holder at any time, into
the Company's common stock at the conversion rate of 250 shares of common
stock for every one share Preferred Stock. All proceeds were allocated to
Preferred Stock and additional paid in capital. The Series A Warrants are
exercisable at $4.00 per share through January 1, 2001.
Between July and October 1999, the Company offered and sold to accredited
investors in a private placement 44 Units for gross proceeds of $440,000. Each
Unit consisted of 10,000 shares of the Company's common stock and a Series B
Warrant to purchase 10,000 shares of common stock. All proceeds were allocated
to Common Stock and Additional Paid in Capital. The Series B Warrants are
exercisable at $3.50 per share for a period ending on the two year anniversary
of the date of grant.
During the three months ending September 30, 1999, there were 107,510 shares
of common stock issued upon exercise of outstanding warrants at exercise price
$.77 per share and 728,500 shares of common stock were issued upon exercise of
outstanding options at exercise prices ranging from $.16 - $.47 per share.
The Company has also issued warrants to acquire 735,000 shares of common stock
to various lenders as described in Note 3 below.
NOTE 3 NOTES PAYABLE
On June 18, 1999, the Company borrowed $200,000 from a non-affiliated
accredited lender. The note bears interest at 20% per annum. Principal of
$100,000 and accrued interest was paid on September 18, 1999. Another
principal and interest payment is due on December 18, 1999.
On June 18, 1999 the Company also borrowed $110,000 from a non-affiliated
accredited lender. This note bears interest at 10% per annum. On October 11,
1999 a $50,000 principal payment was made.
On July 30, 1999 the Company borrowed $200,000 from a non-affiliated
accredited lender. The note bore interest at 14% per annum. The note was
repaid in August 1999 and all interest payable thereunder was forgiven. As
part of the consideration of the above referenced notes, the Company granted
to the lenders warrants to acquire 235,000 shares of the Company's common
stock. Said warrants are exercisable at a range form $3.15 to $4.34 for a
period expiring in July 2004.
On August 11, 1999 the Company borrowed $1,000,000 from a non-affiliated
accredited lender. The note bears interest at 14% per annum. The interest was
prepaid in full at funding and the principal is due and payable on February
10, 2000. The note is secured by Company equipment. As part of the
consideration for the note, the Company granted to said lender warrants to
acquire 500,000 shares of the Company's common stock. Said warrants are
exercisable at $3.15 per share and expire in July 2004.
NOTE 4 SUBSEQUENT EVENTS
Subsequent to September 30, 1999, the Company has raised $873,360 in equity
capital from the sale of common stock in a private placement and from the
exercise of outstanding stock options and warrants.
7
<PAGE>
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.
8
<PAGE>
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 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
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<PAGE>
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.
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 and 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
$2100,000 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
10
<PAGE>
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.
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
11
<PAGE>
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.
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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
12
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
No change from descriptions contained in the Company's annual report on
Form 10-KSB for the period ended December 31, 1998.
Item 2. Changes in Securities.
Between May and July 1999, the Company offered and sold to accredited
investors in a private placement 536 shares of Series A Convertible Preferred
Stock (the "Preferred Stock") and Series A Warrants to purchase 134,000 shares
of the Company's common stock for gross proceeds of $469,000, of which $8,750
was received during the three months ended September 30, 1999. The Preferred
Stock is convertible, at the option of the holder at any time, into the
Company's common stock at the conversion rate of 250 shares of common stock
for every one share of Preferred Stock. The Series A Warrants are exercisable
at $4.00 per share through January 1, 2001. The Preferred Stock and Series A
Warrants were issued under Rule 506 of Regulation D, Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") and Section 4(6) of
the Securities Act. The Company did not use an underwriter in connection with
this private placement.
Between July and October 1999, the Company offered and sold to accredited
investors in a private placement 44 Units for gross proceeds of $440,000. Each
Unit consisted of 10,000 shares of the Company's common stock and a Series B
Warrant to purchase 10,000 shares of common stock. The Series B Warrants are
exercisable at $3.50 per share for a period ending on the two year anniversary
of the date of grant. The Units were issued under Rule 506 of Regulation D,
Section 4(2) of the Securities Act and Section 4(6) of the Securities Act. The
Company did not use an underwriter in connection with this private placement.
During the three months ending September 30, 1999, there were 107,510
shares of common stock were issued upon exercise of outstanding warrants an
exercise price of $.77 per share and 728,500 shares of common stock were
issued upon exercise of outstanding options at exercise prices ranging from
$.16 - $.47 per share. The Company also issued warrants to acquire 735,000
shares of common stock to various lenders in connection with loan transactions
in the aggregate principal amount of $1,510,000. The warrants and common stock
issued upon conversion of the warrants and stock options were exempt from
registration under Rule 506 of Regulation D, Section 4(2) of the Securities
Act and Section 4(6) of the Securities Act. The Company did not use an
underwriter in connection with the exercise of the warrants and stock options.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Securityholders.
None.
Item 5. Other Information.
The following stockholder letter is being prepared for mailing to the
Company's stockholders.
13
<PAGE>
Dear Shareholder:
The purpose of this letter is to bring you up to date relative to the
activities at Flexpoint.
As you recall, in last June's Shareholder Meeting, I outlined the continuing
progress being made toward the use of our unique Bend Sensors in General
Motors launch of smart air bags. We highlighted our goal of initiating
production and shipments by the end of 1999 for use in the Cadillac Seville
platform. Everything we discussed at that meeting was in line with the
Company's business plan at the time you became investors.
In early September, we reported via a Shareholder letter that preparations
were continuing to move forward on schedule including getting our new "state
of the art" manufacturing facility fully up and running. We wanted Flexpoint
to be ready to start up even if other vendors involved in getting the final
seat assembly to General Motors were delayed for some reason.
We are happy to report today that Flexpoint's preparations continue to track
toward us being capable and ready to start production by year-end. This is
despite having to work through the usual barrage of last minute development
"hiccups" that virtually every new start up company, no matter what industry
they are in or how well financed they are, experiences in launching new
products. If there is a modest delay beyond that point, it will most likely be
related to other vendors finishing up their preparations rather than to delays
at Flexpoint.
Given that, it is somewhat perplexing to me that the Company's stock price has
experienced substantial erosion as we approach the long awaited kickoff of the
new seat sensor product. And it is very perplexing to see this caused by
valued stockholders selling stock into the traditionally "thin" trading market
that almost always accompanies an early stage company like ours, particularly
when the Company continues to be largely on target with its seat sensor
introductory plan
In any event, the message I'd like to bring you today is:
1. Flexpoint continues to have an exciting future and we know of nothing
that has changed in the months since the stockholder meeting to alter that
opportunity.
2. Our new sensor production line is in place and has already been used to
produce several thousand seat sensors for use by Delphi, General Motors, and
others in finalizing their assembly preparations.
3. General Motors appears to be on track and committed to launching the
passenger seat air bag sensor program using Flexpoint's Bend Sensors. I have
enclosed reprints of articles from mass media publications largely placed by
General Motors which highlights their plan to use Flexpoint sensors beginning
with the Seville. It seems to me that if General Motors were not committed and
ready to proceed, they would not be making this type of public announcement.
The industry's commitment to seat safety systems is further bolstered by
pending Government regulation regarding passenger seat safety and recent news
announcements regarding its importance.
4. Flexpoint has just received updated notification from Delphi on the
quantities of seat sensors we will provide for the Cadillac Seville model
kickoff. The next step in the process will be the official Delphi Production
release that initiates our production.
5. Development work is underway with other automobile makers in the U.S.
and abroad not only on the seat sensor safety system, but also on horn
switches and accelerometers reflecting the tremendous and growing interest in
the Bend Sensor product in the automotive world. Additionally, work is
beginning on some high potential non-automotive applications that will help
diversify the Company and that can add substantially to its long-term revenue
and profit results.
14
<PAGE>
6. Flexpoint has just initiated an aggressive public relations campaign
aimed at the brokerage community. The purpose of this effort is to build
awareness of the Company, its products, and future potential as an attractive
investment opportunity. Over the next several weeks I will spend substantial
time meeting directly with targeted and interested brokerage firms in an
effort to create interest in and excitement about our Company.
I hope this update and the attached press releases help you feel comfortable
that the Company is moving full speed ahead on all key programs and is on
track with the business plan that excited you enough to become investors in
the first place. Of course, like any early stage company, it is difficult to
accurately predict the future. However, we continue to be very excited about
the breadth of possible uses for the Bend Sensor and in turn the Company's
bright long-term outlook.
We remain totally committed to achieving the Company's potential and to
maximizing the value of shareholder investments. We hope you will continue to
embrace the Company's goals and be excited by its potential for success today
as much or more so than you were when you initially invested in Flexpoint.
Sincerely,
/s/ Doug Odom
President
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) INDEX TO EXHIBITS
EXHIBIT NO.
DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Reorganization (Schedules are omitted)
(Incorporated by referenced to Exhibit 2.1 of the Company's Current
Report on Form 8-K, dated April 9, 1998).
3(i).1 Restated Certificate of Incorporation of Flexpoint Sensor Systems,
Inc. (Incorporated by reference to Exhibit 3(i).1 of the Company's
Quarterly Report on Form 10-QSB, dated September 30, 1998).
3(i).2 Amended Certificate of Incorporation of Flexpoint Sensor Systems,
Inc.(Incorporated by reference to Exhibit 3(i).2 of the Company's
Quarterly Report on Form 10-QSB, dated June 30, 1999).
3(i).3 Certificate of Designation of Series A Convertible Preferred Stock
of Flexpoint Sensor Systems, Inc. (Incorporated by reference to]
Exhibit 3(i).3 of the Company's Quarterly Report on Form 10-QSB,
dated June 30, 1999).
3(i).4 Articles of Incorporation of Sensitron, Inc. (Incorporated by
referenced to Exhibit 3(i).3 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
3(i).5 Articles of Incorporation of Flexpoint, Inc. (Incorporated by
referenced to Exhibit 3(i).4 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
3(i).6 Articles of Incorporation of Technology and Machine Company, Inc.
(Incorporated by referenced to Exhibit 3(i).5 of the Company's
Annual Report on Form 10-KSB, dated March 31, 1998).
3(ii).1 Restated and Amended Bylaws of Flexpoint Sensor Systems, Inc.
(Incorporated by reference to Exhibit 3(ii).1 of the Company's
Quarterly Report on Form 10-QSB, dated September 30, 1998).
3(ii).2 Bylaws of Sensitron, Inc. (Incorporated by referenced to Exhibit
3(ii).2 of the Company's Annual Report on Form 10-KSB, dated March
31, 1998).
3(ii).3 Bylaws of Flexpoint, Inc. (Incorporated by referenced to Exhibit
3(ii).3 of the Company's Annual Report on Form 10-KSB, dated March
31, 1998).
3(ii).4 Bylaws of Technology and Machine Company, Inc. (Incorporated by
referenced to Exhibit 3(ii).4 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
10.1 Employment Agreement with Douglas M. Odom (Incorporated by reference
to Exhibit 10.1 of the Company's current report on Form 8-K, dated
April 9, 1998).
10.2 Lease Agreement between 72nd South Associates and the Company
(Incorporated by reference to Exhibit 10.2 of the Company's current
report on Form 8-K, dated April 9, 1998).
10.3 Agreement between Ohio Art and the Company (certain portions of the
agreement were omitted from the exhibit pursuant to a grant of
confidential treatment) (Incorporated by reference to Exhibit 10.3
of the Company's current report on Form 8-K, dated April 9, 1998).
<PAGE> 16
10.4 Purchase and Supply Agreement by and among Flexpoint, Inc. and
Delphi Automotive Systems (certain portions of the agreement were
omitted from the exhibit pursuant to a grant of confidential
treatment) (Incorporated by reference to Exhibit 10.4 to the
Company's annual report on Form 10-KSB, dated December 31, 1998).
10.5 Industrial Space Lease between Prudential Insurance Company of
America and Flexpoint, Inc. (Incorporated by reference to Exhibit
10.5 to the Company's annual report on Form 10-KSB, dated December
31, 1998).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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.
Date: November 12, 1999 FLEXPOINT, INC.
By /s/ Douglas M. Odom
--------------------------
Douglas M. Odom
President, Chief Executive
Officer, Director
Date: November 12, 1999 By /s/ Thomas N. Strong
----------------------
Thomas N. Strong
Chief Accounting Officer
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