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 June 30, 2000
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
incorporation or organization) (IRS Employer Identification No.)
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.
[xx] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of August 18, 2000
----- ---------------------------------
Common Stock, $.001 par value 21,174,272
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2000 1999
------------- -------------
ASSETS
Current Assets
Cash $ 432,898 $ 134,642
Trade accounts receivable, net of allowance for
doubtful accounts of $2,595 and $3,000 135,845 36,656
Inventory 154,324 174,750
Prepaid expenses 154,599 29,323
Unamortized loan costs 283,670 -
------------- -------------
Total Current Assets 1,161,336 375,371
------------- -------------
Property and Equipment 3,633,075 3,403,651
Less accumulated depreciation (1,079,713) (847,172)
------------- -------------
Net Property and Equipment 2,553,362 2,556,479
------------- -------------
Deposits 93,232 54,549
Patents, net of accumulated amortization of
$66,958 and $59,418 115,497 119,921
Goodwill, net of accumulated amortization of
$113,812 and $101,832 5,990 17,970
------------- -------------
Total Assets $ 3,929,417 $ 3,124,290
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable, net of unamortized discount
of $74,409 and $112,826 $ 4,931,149 $ 1,047,174
Notes payable - related parties 20,000 -
Capital lease obligation - current portion 5,952 -
Trade accounts payable 473,600 956,206
Accrued liabilities 236,764 539,056
------------- -------------
Total Current Liabilities 5,667,465 2,542,436
------------- -------------
Long-Term Liabilities
Capital lease obligation 55,847 -
Note payable 84,837 -
------------- -------------
Total Long-Term Liabilities 140,684 -
------------- -------------
Stockholders' Equity
Preferred stock -$0.001 par value; 1,000,000
shares authorized; 4,500 shares designated
Series A Convertible Preferred; $875 stated
value per share;1,695 and 2,438 shares issued
and outstanding; liquidation preference
- $1,483,125 and $2,133,250 1,475,175 2,125,175
Common stock - $0.001 par value; 100,000,000
shares authorized; 20,567,862 and 19,077,310
shares issued and outstanding 20,568 19,077
Additional paid-in capital 20,267,274 13,615,677
Deficit accumulated during the development stage (23,561,255) (15,041,600)
Unearned compensation (80,494) (136,475)
------------- -------------
Total Stockholders' Equity (1,878,732) 581,854
------------- -------------
Total Liabilities and Stockholders' Equity $ 3,929,417 $ 3,124,290
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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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
For the Three Months For the Six Months Inception)
Ended June 30, Ended June 30, Through
2000 1999 2000 1999 June 30, 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 135,842 $ 166,193 $ 284,048 $ 287,950 $ 4,348,006
Cost of goods sold 96,628 79,832 111,737 80,677 1,996,722
------------- ------------- ------------- ------------- -------------
Gross Profit 39,214 86,361 172,311 207,273 2,351,284
General and administrative
expenses 1,862,884 959,677 2,666,372 1,633,740 10,524,972
Research and development 832,463 793,741 1,546,227 1,463,820 8,190,092
------------- ------------- ------------- ------------- -------------
Loss From Operations (2,656,133) (1,667,057) (4,040,288) (2,890,287) (16,363,780)
Interest expense (142,808) (4,351) (223,874) (4,351) (489,304)
Interest from amortization of
debt discount and loan costs (2,197,843) (22,943) (4,272,167) (22,943) (5,939,103)
Interest income 11,168 4,798 16,674 16,643 75,573
Other income (expense), net - (152) - 535 (151,090)
------------- ------------- ------------- ------------- -------------
Net Loss (4,985,616) (1,689,705) (8,519,655) (2,900,403) (22,867,704)
Preferred dividends - (134,000) - (134,000) (693,551)
------------- ------------- ------------- ------------- -------------
Loss applicable to common
shareholders $ (4,985,616) $ (1,823,705) $ (8,519,655) $ (3,034,403) $(23,561,255)
============= ============= ============= ============= =============
Basic and diluted loss per
common share $ (0.25) $ (0.11) $ (0.44) $ (0.18) $ (1.82)
============= ============= ============= ============= =============
Weighted average number of
common shares used in per
share calculation 19,553,484 17,153,510 19,365,249 17,205,718 12,963,609
============= ============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
</TABLE>
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<TABLE>
<CAPTION>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Unearned Total
------------------- -------------------- Paid-in Development Compen- Stockholders'
Shares Amount Shares Amount Capital Stage sation Equity
------- ----------- ----------- -------- ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -December 31, 1999 2,438 $2,125,175 19,077,310 $ 19,077 $ 13,615,677 $ (15,041,600) $(136,475) $ 581,854
Issuance of warrants in
connection with notes
payable - - - - 3,039,202 - - 3,039,202
Beneficial conversion
feature of convertible
promissory notes - - - - 1,076,218 - - 1,076,218
Conversion of 8%
convertible promissory
notes into common stock,
$1.70 per share - - 120,588 121 204,879 - - 205,000
Conversion of preferred
stock into common stock (743) (650,000) 185,714 186 649,814 - - -
Amortization of unearned
compensation - - - - - - 55,981 55,981
Exercise of stock options
for cash, $0.16 to $4.00
per share - - 30,705 31 10,307 - - 10,338
Conversion of convertible
debentures into common
stock, $1.00 per share - - 703,555 703 702,852 - - 703,555
Stock issued for services,
$1.19 per share - - 450,000 450 533,925 - - 534,375
Compensation related to
warrants granted for
services - - - - 434,400 - - 434,400
Net loss - - - - - (8,519,655) - (8,519,655)
------- ----------- ----------- -------- ------------ -------------- ---------- -------------
Balance - June 30, 2000 1,695 $1,475,175 20,567,872 $ 20,568 $ 20,267,274 $ (23,561,255) $ (80,494) $(1,878,732)
======= =========== =========== ======== ============ ============== ========== =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STAEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
January 5,
1995 (Date of
For the Six Months Inception)
Ended June 30, Through
2000 1999 June 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (8,519,655) $ (2,900,403) $ (22,867,704)
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 10,580 - 19,807
Depreciation and amortization 257,183 241,566 1,277,941
Amortization of debt discount 3,121,934 22,943 4,679,070
Amortization of loan costs 1,150,233 - 1,150,233
Issuance of warrants for interest - - 109,800
Compensation paid with stock options 55,981 72,675 334,706
Compensation paid by grant of warrants 434,400 - 619,400
Issuance of common stock to settle lawsuit - - 175,000
Exercise of warrants in exchange for services - - 22,523
Stock issued for services 534,375 - 757,102
Allowance for doubtful accounts (405) - 154,162
Changes in operating assets and liabilities:
Accounts receivable (98,784) 400,428 (153,966)
Inventory 20,426 (152,057) (154,324)
Prepaid expense (125,276) - (125,276)
Accounts payable (482,606) 282,705 294,786
Accrued liabilities (298,736) 476,895 171,336
Deferred revenue - - (6,163)
Other assets (38,683) (16,630) (328,505)
------------- ------------- --------------
Net Cash Used In Operating Activities (3,979,033) (1,571,878) (13,891,297)
------------- ------------- --------------
Cash Flows From Investing Activities
Payments to Flexpoint prior to acquisition - - (268,413)
Cash paid to acquire Tamco - - (25,000)
Proceeds from sale of available-for-sale securities - - 455,082
Net cash received in Nanotech acquisition - - 1,492,907
Payments received from related parties - - 34,661
Collection of receivable from escrow agent - - 64,825
Payments to purchase equipment (59,204) (1,835,036) (2,972,559)
Proceeds from sale of equipment - - 22,682
Issuance of note receivable - - (12,507)
Payments received on note receivable - - 12,505
Payments for patents (3,116) (22,103) (146,430)
Insurance proceeds 25,365 - 25,365
------------- ------------- --------------
Net Cash Provided By (Used In) Investing Activities (36,955) (1,857,139) (1,316,882)
------------- ------------- --------------
Cash Flows From Financing Activities
Proceeds from issuance of preferred stock - 460,738 460,738
Proceeds from issuance of common stock 10,337 634,786 6,165,449
Cash payments to officers to repurchase stock - - (50,000)
Proceeds from issuance of warrants 1,809,202 - 1,809,202
Proceeds from beneficial conversion feature related to
convertible promissory notes 1,076,218 - 1,076,218
Cash paid for offering costs - - (123,020)
Cash paid for loan costs (203,903) - (208,903)
Collection of receivables from issuance of common stock - 1,573,750 1,963,750
Proceeds from borrowings 1,982,483 310,000 3,151,444
Principal payments of debt (375,040) - (773,791)
Borrowings from Nanotech prior to acquisition - - 1,000,000
Proceeds from related party notes 55,000 - 1,625,208
Principal payments of related party notes (35,000) (1,234 (450,165)
Payments of capital lease obligations (5,053) - (5,053)
------------- ------------- --------------
Net Cash Provided By Financing Activities 4,314,244 2,978,040 15,641,077
------------- ------------- --------------
Net Change In Cash 298,256 (450,977) 432,898
Cash - Beginning of Period 134,642 657,775 -
------------- ------------- --------------
Cash - End of Period $ 432,898 $ 206,798 $ 432,898
============= ============= ==============
Supplemental cash flow information and non-cash investing and financing activities - Note 2
</TABLE>
<PAGE> 5
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Through April 1998, the Company operated through Sensitron, Inc., a Utah
Corporation, at which time it changed its name to Micropoint, Inc. In June
1999 the name was changed to Flexpoint Sensor Systems, Inc.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Flexpoint Sensor Systems, Inc. and its
wholly owned subsidiaries (collectively "Flexpoint" or "the Company"). The
operations of acquired entities have been included from the date of their
acquisitions. Intercompany transactions and accounts have been eliminated in
consolidation.
Nature of Operations - The Company is a development stage enterprise engaged
principally in designing, engineering, and manufacturing sensor technology and
equipment using flexible potentiometer technology. Flexpoint, Inc. entered
into a Purchase and Supply Agreement (the "Supply Agreement") with Delphi
Automotive Systems ("Delphi") in June 1998. Under the terms of 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 is looking to the Supply Agreement to provide the
bulk of its revenues in the immediate future. The information regarding the
Supply Agreement is forward looking information. Such forward looking
information is subject to many risks and uncertainties, including the fact
that Delphi is not obligated under the terms of the Supply Agreement to
purchase any minimum number of sensor mats and there can be no assurance that
the Supply Agreement will result in any material amount of sales.
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 condensed consolidated
financial statements 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 significant accounting policies and
disclosures required by generally accepted accounting principles. Accordingly,
these condensed financial statements should be read in conjunction with the
annual financial statements included in the annual report on Form 10-KSB dated
December 31, 1999. The results of operations for the six months ended June 30,
2000 are not necessarily indicative of the operating results which will occur
for the remainder of 2000.
Business Condition - The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplates continuation of Flexpoint as a going concern. However, Flexpoint
has suffered losses from operations and has had negative cash flows from
operating activities during the six months ended June 30, 2000 and cumulative
from inception through June 30, 2000, which conditions raise substantial doubt
about Flexpoint's ability to continue as a going concern. Flexpoint's
continued existence is dependent upon its ability to obtain additional
financing. Management's plans include obtaining additional financing
6
<PAGE>
through issuance of debt or equity securities. The Company is negotiating with
possible financing sources. However, no agreements have been reached and
there is no assurance that additional financing will be realized.
Advertising Costs - During the periods ended June 30, 2000 and 1999, Flexpoint
incurred $23,612 and $151,111, respectively, of advertising costs. Flexpoint
follows the policy of expensing these advertising costs at the time the
advertising services are rendered.
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 is calculated to give effect to stock warrants
and options using the treasury stock method and convertible preferred stock
and convertible notes payable using the if-converted method. Stock warrants
and options, convertible preferred stock, and convertible notes payable are
not included in diluted loss per share during loss periods when those
potentially issuable common shares would decrease the loss per share. The
effects of 15,247,600 and 9,174,055 potentially issuable common shares from
outstanding stock options and warrants at June 30, 2000 and 1999,
respectively, were excluded from the calculation of diluted loss per share as
they would have decreased loss per share.
Depreciation of Property and Equipment - Depreciation expense for the periods
ended June 30, 2000 and 1999 was $237,663 and $222,384, respectively.
Other Assets - Patent costs capitalized as of June 30, 2000 were $182,455 of
which $80,737 related to patents being amortized. Amortization expense from
patents for the periods ended June 30, 2000 and 1999 was $7,540 and $7,200,
respectively.
Goodwill associated with the acquisition of Tamco and Flexpoint, Inc., Utah
companies, is being amortized over five years using the straight-line method.
Amortization expense from goodwill for the periods ended June 30, 2000 and
1999 was $11,980 and $11,980, respectively.
NOTE 2 - CASH FLOW INFORMATION
Supplemental Cash Flow Information - Cash payments for interest were $364,432
for the periods ended June 30, 2000 and 1999, respectively.
Noncash Investing and Financing Activities - During the six months ended June
30, 2000, the Company issued warrants to purchase 500,000 shares of common
stock as a fee for extending the due date of a $1,000,000 note payable. The
warrants were valued at their estimated fair value of $2.46 per warrant or
$1,230,000. Also during the period, the Company acquired equipment totaling
$211,287 for a note payable of $144,435 and capital leases of $66,852. In
addition, $905,000 of convertible notes payable and accrued interest of $3,556
was converted into 824,143 shares of common stock.
The Company measures compensation under stock-based options and plans using
the intrinsic value method prescribed in Accounting Principles Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations, for
stock options granted to employees, and determines compensation cost under
options granted to non-employees based upon the fair value of the options at
the grant dates consistent with Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation.
During the period, the Company granted options to new employees which are
exercisable at $4.00 per share. Amortization of deferred compensation of
$55,981 was recognized during the six months ending June 30, 2000. Had
compensation cost for the Plan been determined based upon the fair value of
the options at the grant dates consistent with the alternative method of SFAS
No.
7
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123, Accounting for Stock Based Compensation, the Company would have
recognized approximately $301,565 in non-cash compensation.
NOTE 3 - NOTES PAYABLE
Notes payable consisted of the following:
June 30, December 31,
2000 1999
-------------- -------------
$2,800,000 Convertible debenture payable, due
March 1, 2001, interest accrues at 8%, net of
unamortized discount of $74,409 based on
imputed interest at 2357% $ 2,725,591 $ -
$61,000 Convertible debentures payable, due
June 30, 2000, interest accrues at 8%, net of
unamortized discount of $0 based on imputed
interest at 257% 61,000 -
Note payable to a vendor, due February 10, 2003,
interest accrues at 10% 129,395 -
Note payable to shareholder, due June 18, 2000,
interest accrues at 20% - 100,000
$1,000,000 Note payable to a shareholder, due
February 10, 2000, original interest rate of 14%,
interest of $70,000 was to be prepaid, the
Company defaulted by not prepaying the interest,
default interest rate of 28%, default interest
of $56,611 has been accrued, date of note
extended to August 10, 2000 by payment of
$141,290 and issuance of 500,000 warrants, net
of discount of $0 and $112,826, respectively,
based on imputed interest at 1407% 1,000,000 887,174
Note payable to a customer, no stated interest
rate, payment to be in the form of future
sales rebates 1,100,000 -
Note payable to a shareholder, due July 15, 1999,
monthly interest accrued at 10%, - 60,000
-------------- -------------
Total Notes Payable 5,015,986 1,047,174
Less: Current portion 4,931,149 1,047,174
-------------- -------------
Long-Term Notes Payable $ 84,837 $ -
============== =============
Notes payable to related parties consisted of the following:
June 30, December 31,
2000 1999
-------------- -------------
Note payable to an employee, due upon demand,
no stated interest rate $ 20,000 -
-------------- -------------
Total Notes Payable to Related Parties $ 20,000 $ -
============== =============
On November 20, 1998, Flexpoint obtained a $50,000 credit facility from a bank
which is available through January 15, 2001. The credit facility is evidenced
by a promissory note dated November 20, 1998. The bank issued a $50,000
irrevocable standby letter of credit in connection with the execution of a
real estate lease for manufacturing facilities. No amounts have been drawn
under the note payable or letter of credit. The promissory note and letter of
credit were secured by $50,000 of cash on deposit with the bank at December
31, 1999. In addition to the cash on deposit with the bank, a commitment fee
of
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1% of the unused portion of the amount of the credit facility is due annually.
During 2000, the credit facility and the cash on deposit with the bank were
reduced to $40,000.
During the six months ended June 30, 2000, the Company issued 8% convertible
promissory notes, a portion of which was converted into common stock.
On March 22, 2000, the Company issued warrants to purchase 500,000 shares of
common stock at $2.50 through August 10, 2004 to a note holder as a fee for
extending the due date of a $1,000,000 note payable from February 10, 2000 to
August 10, 2000. The fair value of the warrants was $1,230,000 as computed
using the Black-Scholes option pricing model with the following assumptions:
dividend yield of 0%, volatility of 121.1%, risk-free interest rate of 6.6%
and estimated life of four years. The loan extension fee has been accounted
for as unamortized loan costs and is being amortized over the six-month period
ending August 10, 2000. Interest expense resulting from amortization of these
loan costs was $951,381 during the six months ended June 30, 2000. This note
is currently in default.
On March 3, 2000, the Company entered into a securities purchase agreement
(the "Securities Purchase Agreement") whereby the Company received proceeds of
$3,150,000, net of offering costs of $350,000, through June 1, 2000, in
exchange for $3,500,000 of convertible debentures and warrants to purchase
2,315,494 shares of common stock from $1.79 to $2.08 with expiration dates
through March 3, 2004. The debenture notes are due March 1, 2001 with interest
at 8% per annum payable quarterly. Under the terms of the debentures, if the
Company's stock price falls below $1.00 for five consecutive days, the
principal balance will become redeemable at the option of the lender. The
redemption amount is equal to 125% of the outstanding principal plus accrued
interest and is payable in ten days. If not redeemed, the conversion price is
reduced by $0.50 per share. The purchaser of the debenture is not obligated to
purchase the remaining $1.5 million in debentures if the Company is in default
or has breached any of its obligations under the agreement or the average of
the closing bid price for the Company's common stock is less than or equal to
$1.00.
The convertible debentures are convertible into common stock at a conversion
price of 80% of the lower of (a) the average of the three lowest closing bid
prices for the common stock during the 15 trading days preceding the date of
the purchase agreement or (b) the average of the three lowest closing bid
prices for the common stock during the 15 trading days preceding conversion,
subject to a maximum conversion price of $3.00 per share and a minimum
conversion price of $1.00 per share. Up to 33% of the aggregate principal and
accrued interest is convertible from March 3, 2000, an additional 33% is
convertible from April 2, 2000 and the remaining portion is convertible from
May 2, 2000. The notes are convertible through March 1, 2001. If the stock
price on the due date of the note is greater than $2.00, the lender is
required to convert all outstanding notes into common stock.
Through June 30, 2000, in connection with the issuance of the convertible
debentures, the Company also issued 2,315,494 warrants to purchase common
stock from $1.79 to $2.08 per share with expiration dates through March 3,
2004. The net proceeds from the Securities Purchase Agreement were allocated
between the convertible debentures and the warrants based upon their relative
fair values. The estimated fair value of the warrants of $3,698,168 was
determined using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, volatility of 121% to 124%, risk-free
interest rate of 6.6% and estimated life of 3.75 years. The warrants were
allocated $1,595,417 of the net proceeds of the convertible debentures notes.
Of the remaining $1,554,583 net proceeds, $965,537 were allocated to the
beneficial conversion feature of the convertible debentures, and $777,948 were
allocated to the promissory notes, before $188,902 of loan costs.
The resulting $2,759,088 discount on the promissory notes is based on imputed
interest at 2357%. The discount and the loan costs are being amortized
through the date the notes are convertible and resulted in amortization
expense of $2,868,531 during the six months ended June 30, 2000.
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Under the terms of the default provisions of the convertible debentures
issued, at any time after issuance (i) an event of default occurs, or (ii) the
average of the closing bid prices for the Company's common stock for five
consecutive trading days, as quoted on the NASD's OTC Bulletin Board, is less
than or equal to $1.00, the Company is required to redeem, at the option of
the holder of the debenture, the debenture at 125% of the principal amount of
the debentures (plus accrued and unpaid interest and penalties thereon) within
ten days of the receipt of notice by the holder. If the Company does not make
the payment when due, interest will accrue on all outstanding debentures from
and after the redemption date at the default rate of 2.5% per month and the
conversion price in connection with any subsequent conversion of the
debentures will be reduced by $0.50 per share. In addition, the Agreement
states that in an event of default, all of the debentures shall be immediately
convertible.
On July 6, 2000, the holder of the debenture gave the Company a notice of
redemption under the terms of the Securities Purchase Agreement. The Company
was required to redeem all of the remaining $2,800,000 aggregate principal
amount of the debentures on or before July 17, 2000 at 125% of the outstanding
principal, or $3,500,000. This election was made by the holder because the
average closing bid prices for the Company's common stock for the previous
five consecutive trading days was less than or equal to $1.00. The Company did
not redeem the debentures by July 17, 1000 which was an event of default on
the debentures.
On July 18, 2000, the holder gave the Company a notice of conversion relating
to $300,000 of principal under the debentures and $3,200 of accrued interest.
The default conversion rate on July 18, 2000 was $0.50 per share which
resulted in 606,400 shares of common stock being issued. Interest will accrue
on the remaining $3,200,000 principal balance at the default interest rate of
2.5% per month.
In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
the Company will record an additional discount on the notes of $740,912 on
July 18, 2000. This discount represents the contingent beneficial conversion
feature of the debentures due to the default. The discount will be immediately
amortized to interest expense since the debentures are immediately
convertible.
The Company issued a note payable dated January 17, 2000 to an individual. As
additional consideration, the Company issued warrants to purchase 100,000
shares of common stock at $1.80 per share. The warrant is exercisable through
January 17, 2002. The proceeds from the loan were allocated to the warrants
based upon their fair value. The resulting discount to the note of $100,000
was recognized and amortized during the period ended June 30, 2000.
During the six months ending June 30, 2000 the Company borrowed $55,000 from
affiliated shareholders. As of June 30, 2000, $35,000 had been repaid. These
are demand notes that bear 0% interest.
NOTE 4 - STOCKHOLDERS' EQUITY
Convertible debt and Series C warrants to purchase common stock were issued as
a unit in an offering in February 2000. The offering resulted in the issuance
of warrants to purchase 79,412 shares of common stock at $2.25 per share and
$135,000 of notes payable which were convertible into common stock at $1.70
per share. The net proceeds were allocated between the promissory notes and
the warrants based upon their relative fair values. The estimated fair value
of the warrants of $144,677 was determined using the Black Scholes option
pricing model with the following assumptions: dividend yield of 0%, volatility
of 119%, risk-free interest rate of 6.7% and estimated life of three years.
The warrants were allocated $69,812 of the net proceeds. Of the remaining
$65,188 net proceeds, $58,846 was allocated to the beneficial conversion
feature for the promissory note, and $6,342 was allocated to the promissory
notes. The resulting discount to the promissory notes was amortized
immediately as the notes were convertible
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upon issuance and resulted in $128,658 of interest expense. The promissory
notes were converted into 79,412 shares of common stock in February 2000.
Convertible debt and Series D warrants to purchase common stock were issued as
a unit in an offering in February and March 2000. The offering resulted in
the issuance of warrants to purchase 77,058 shares of common stock at $2.25
per share and $131,000 of promissory notes which were convertible into common
stock at $1.70 per share. The net proceeds were allocated between the
promissory notes and the warrants based upon their relative fair values. The
estimated fair value of the warrants of $78,887 was determined using the Black
Scholes option pricing model with the following assumptions: dividend yield of
0%, volatility of 121%, risk-free interest rate of 6.6% and estimated life of
three years. The warrants were allocated $43,972 of the net proceeds. Of the
remaining $87,028 net proceeds, $51,798 was allocated to the beneficial
conversion feature for the promissory note, and $35,230 was allocated to the
promissory notes. The resulting discount to the notes payable is being
amortized through the date the notes are convertible and resulted in interest
expense of $95,770 during the period ended June 30, 2000.
In March 2000, 743 shares of convertible preferred stock were converted into
185,714 shares of common stock.
During the period ended June 30, 2000, the Company has received total cash
proceed of $10,337 from holders of common stock options, principally from an
employee of the Company through payroll deductions. The related shares have
been reflected as constructively issued in the accompanying consolidated
financial statements.
In connection with the Securities Agreement discussed in Note 3, the Company
issued 703,555 shares of common stock as a result of the conversion of a
portion of the related convertible debentures and associated accrued interest
having a total value of $703,555.
In June 2000, the Company issued 450,000 shares of common stock to a new
member of the board of directors and two other individuals or entities for
services rendered valued at $534,375.
NOTE 5 - STOCK PURCHASE WARRANTS
During the period ended June 30, 2000, warrants to purchase 2,536,082 shares
of common stock were issued as part of financing transactions. Warrants to
purchase 500,000 shares of common stock were issued to extend the terms of a
note payable. In addition, warrants to purchase 240,000 shares of common stock
were issued as compensation for services.
NOTE 6 - PRODUCTS AND SERVICES
Flexpoint's only business relates to sales of electronic sensors and related
engineering. It produces sensors for sale to customers in the toy and
automotive industries. The components of sales for the six months ended June
30, 2000 and 1999 were as follows:
June 30,
2000 1999
-------------- -------------
Products
Sales of sensors $ 18,624 $ 41,117
Licensing royalty - 229
Tooling and dies 109,497 27,597
-------------- -------------
Total Products 128,121 68,943
Engineering Services 155,927 219,006
-------------- -------------
Total Sales $ 284,048 $ 287,949
============== =============
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NOTE 7 - COMMITMENTS AND CONTINGENCIES
Capital Leases - During the period ended June 30, 2000, the Company entered a
capital lease for certain equipment. Property and equipment under capital
lease as of June 30, 2000 is as follows:
Machinery and equipment...................$ 66,852
Accumulated depreciation.................. (2,101)
-------------
Net Machinery and Equipment...............$ 64,751
=============
Future minimum lease payments as of June 30, 2000 are as follows:
Year Ending December 31,
2000.............................$ 15,369
2001............................. 26,346
2002............................. 26,346
2003............................. 15,453
2004............................. 14,463
Thereafter....................... 3,616
-----------
101,593
Less amount representing executory costs..... 6,331
-----------
Net minimum lease payments................... 95,262
Less amount representing interest............ 33,463
-----------
Present value................................ 61,799
Less current portion......................... 5,952
-----------
Long-Term Capital Lease Obligation...........$ 55,847
===========
Operating Leases - Flexpoint is obligated under operating lease agreements for
its facilities and office space. Flexpoint has an option to renew one lease
for an additional three year period. Flexpoint is also required under the
terms of the lease to maintain a letter of credit with a federally insured
bank in the amount of $50,000. The letter of credit has been issued by a bank
to the lessor and is secured by $50,000 of cash on deposit with the bank. If
Flexpoint falls into default under the lease, the lessor may drawn upon the
letter of credit. The letter of credit is to be reduced by $10,000 per year.
The unused balance of the letter of credit as of June 30, 2000 was $40,000.
Future minimum lease payments under operating leases at June 30, 2000 are as
follows:
Year Ending December 31:
2000......................$ 197,048
2001...................... 309,850
2002...................... 249,900
2003...................... 249,900
------------
Total.....................$ 1,006,698
============
Lease expense for the periods ended June 30, 2000 and 1999 was $180,706 and
$171,026, respectively.
In February of 1998, an unrelated third party filed suit against Flexpoint
alleging it provided investment banking and financial advisory services
pursuant to an agreement with Flexpoint. The plaintiff claimed to
have sustained damages for breach of contract and seeks damages in the amount
of 6.5% of financing obtained from an equity investor, plus the issuance of a
warrant to purchase a 2% equity interest in Flexpoint at a price of $5.00 per
share. In addition, the plaintiff sought punitive damages of $5,000,000.
Flexpoint answered the complaint in March 1998. As of December 31, 1999,
Management believed, after
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consulting with legal counsel, that there is only a remote possibility that
Flexpoint will be subject to a punitive damage award under the suit. Flexpoint
has accrued a liability of $75,000 relating to this action in its financial
statements at March 31, 2000 and December 31, 1999. On May 1, 2000, the court
granted summary judgement in favor of Flexpoint and dismissed the claims with
prejudice.
NOTE 8 SUBSEQUENT EVENTS
On July 6, 2000, the holder of the convertible debentures described in
Note 3 gave written notice to the Company of mandatory redemption of
debentures in the aggregate principal amount of $2,800,000 as a result of the
average closing bid price of the Company's common stock being less than or
equal to $1.00 for five consecutive days. On July 18, 2000, the investor gave
the Company notice of default and subsequently converted into common stock
$303,200 in amounts owing under the debentures into 606,400 shares of common
stock. The Company remains in default with respect to this obligation and
currently owes to the investor and its assigns $3,200,000 in principal and
penalties plus accrued interest.
In February 2000, the Company defaulted on a note payable to an investor
in the principal amount of $1,000,000 by not making payment on February 10,
2000, the maturity date. This loan is secured by the assets of the Company.
The Company was also in default of the prepaid interest provision of the note.
The investor offered to extend the note for an additional six months and waive
any default interest for consideration of 500,000 warrants with an exercise
price of $2.15. In order to extend the maturity of the note, the investor also
required a prepayment of interest, plus attorney fees, in the total amount of
$141,920. Management accepted the offer to extend the note through August 10,
2000, by effectively issuing the warrants and making payment of the interest
on March 27, 2000. As of August 10, 2000, the Company has not made payment of
the note payable. Consequently, the Company is in default on this note.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information that the
Company believes is relevant to an assessment and understanding of its
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Company's consolidated financial
statements and notes thereto. Except as otherwise stated or implied by the
context, all references to the "Company" refer to Flexpoint Sensor Systems,
Inc. and its subsidiaries on a consolidated basis.
Overview
The Company is in the development stage and since inception, has incurred
losses from operations. As of June 30, 2000, the Company had cumulative losses
totaling $23,561,255. The Company is primarily engaged in the sensor business
and is currently marketing its patented Bend Sensor technology. Sensing
devices can be used to measure or sense changes that occur when a sensor is
bent. Sensors typically 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. The Company believes this worldwide market
growth will continue.
Financial Position
The Company had $432,898 in cash as of June 30, 2000. This represented
an increase of $298,256 from December 31, 1999. Working capital (deficit) as
of June 30, 2000 increased to $(4,506,129) as compared to working capital of
$(2,167,065) at December 31, 1999. The increase is largely due to an increase
in the amounts owing under notes payable that are currently due or in default
and increased general and administrative and research and development expenses
associated with the Supply Agreement (as defined below). The Company currently
has minimal cash and there is substantial doubt whether the Company will
continue as a going concern. See " Liquidity and Capital Resources." The
discussion for the three and six months ended June 30, 2000 and 1999, below,
assumes that the Company will continue as a going concern of which there can
be no assurance.
Three and Six Months Ended June 30, 2000 and 1999
During the three and six months ended June 30, 2000, the Company had
revenues of $135,842 and $284,048, respectively. These revenues were comprised
of $72,101 and $155,927 in engineering fees for the respective periods and
$63,741 and $128,121 in product sales for the respective periods. This is
compared with revenues of $166,193 and $287,950 for the comparable period from
the prior year, comprised primarily of engineering fees.
Substantially all of the Company's revenues were generated under a
Purchase and Supply Agreement (the "Supply Agreement") between the Company and
Delphi Automotive Systems ("Delphi") that was executed in June, 1998. The
Company expects to derive a substantial portion of its future income from the
sale of its Sensor Mat System to Delphi. Under the Supply Agreement, Delphi
may purchase sensor mats incorporating the Bend Sensor technology into a
"smart" air bag system being developed for General Motors. The Company
currently has one production line in place. This line has produced over 15,000
pre-production seat sensors. Management previously believed that all known
technical and manufacturing issues had been properly identified and
resolutions were being implemented. Some of the proposed resolutions have not
been satisfactory. Additional technical and manufacturing issues have
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subsequently arisen. Solutions to outstanding technical and manufacturing
issues are being developed and are in the process of being implemented,
however, there can be no assurance that the Company will be successful in
resolving these issues. The Company is unsure when manufacturing will begin
under the Supply Agreement. There can be no assurance that General Motors and
Delphi will acquire the Sensor Mat Systems under the Supply Agreement, that
additional technical and manufacturing difficulties will not arise, that
production will be in the amounts anticipated, or that manufacturing will
begin when anticipated or at all.
There are several toys for the 2000 Christmas season designed to use the
Bend Sensor. The Company is also seeking opportunities to supply the
electronic assembly, including the sensor, to increase sales potential. Due to
the seasonality of the toy industry, the Company currently has no agreements
relating to the manufacture of sensors in the toy market and there can be no
assurance that the Company will successfully enter into toy related agreements
in the future. The Company expects that revenues from toy sales, if any, will
be substantially greater in the second half of any given year.
Product supply arrangements, like those discussed above, create certain
risks for the Company, including (i) reliance from sales of products on other
parties, and therefore reliance on the other parties' marketing ability,
marketing plans and credit-worthiness; (ii) if the Company 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 to the
Company; (iii) the Company may have only limited protection from changes in
manufacturing costs and raw materials costs; and (iv) if the Company is
reliant on other parties for all or substantially all of its sales, the
Company may be limited in its ability to negotiate with other parties upon any
renewals of their agreements.
General and administrative expenses for the three and six months ended
June 30, 2000 were $1,862,844 and $2,666,372, respectively, compared with
$959,677 and $1,633,740 for the comparable periods from the prior year. The
increase in expenditures between the periods resulted primarily from an
increase in costs relating to compensation of directors and employees and
increases in depreciation expense. Specifically, during the three months ended
June 30, 2000 the Company paid Steve Young $415,625 non-cash compensation for
joining the board and acting as a spokesman and advisor to the Company.
Additional non-cash compensation was paid to two entities associated with Mr.
Young valued at $553,150.
Research and development expenses for the three and six months ended June
30, 2000 were $832,463 and $1,546,227, respectively, compared with $793,741
and $1,463,820 for the comparable periods from the prior year. The increase in
expenditures between the periods resulted primarily from increases in research
and development spending relating to the Supply Agreement, including employee
additions.
Interest expense from amortization debt discount and loan costs for the
three and six months ended June 30, 2000 was $2,197,843 and $4,272,167,
respectively, compared with $22,943 for the three and six months ended June
30, 1999. The interest expense from amortization of debt discount related to
the Company's issuance of common stock warrants and convertible notes. The
proceeds of the loans were allocated to the warrants based on the fair market
value of the warrants. The resulting discounts are amortized over the period
through which the notes are convertible. At June 30, 2000, the Company had
unamortized debt discount of $74,409.
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<PAGE>
Net interest and other income, excluding interest expense of debt
discount, was $(131,640) and $(207,200) for the three and six months ended
June 30, 2000, respectively, and $295 and $12,827 for the comparable periods
from the prior year. The net interest and other income relates mainly to
interest earned on funds on deposit. As funds on deposit have decrease and
borrowing have increase, the Company has incurred increased interest costs
and decreased interest income.
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 $15,641,077 in net proceeds through financing activities from
inception through June 30, 2000 and it received $4,314,244 in net proceeds
from financing activities during the six months ended June 30, 2000. The
Company used net cash in operating activities of $13,891,297 from inception
through June 30, 2000 and the Company used $3,979,033 in operating activities
during the six months ended June 30, 2000. As of June 30, 2000, the Company's
total liabilities were $5,808,149, net of unamortized debt discount of
$74,409. The Company had a working capital (deficit) as of June 30, 2000 of
$(4,506,129).
As of August 15, 2000, the Company had minimal cash. The Company has
committed to spend $197,048 in lease payments for its physical facilities
during the remainder of 2000 and $309,850, $249,900 and $249,900 in physical
facilities lease payments for the years 2001 through 2003, respectively. The
Company has $97,977 in future minimum lease payments relating to machinery and
equipment during the remainder of 2000 through 2004 and $3,616 in minimum
payments thereafter. The Company has also committed to purchase a platen
printing press for $192,000 of which $64,000 has already been paid.
In February 2000, the Company defaulted on a note payable to an investor
in the principal amount of $1,000,000 by not making payment on February 10,
2000, the maturity date. This loan is secured by the assets of the Company.
The Company was also in default on the prepaid interest provision of the note.
The investor offered to extend the note for an additional six months and waive
any default interest for consideration of 500,000 warrants with an exercise
price of $2.15. In order to extend the maturity of the note, the investor also
required a prepayment of interest, plus attorney fees, in the total amount of
$141,920. Management accepted the offer to extend the note through August 10,
2000 by effectively issuing the warrants and making payment of the interest on
March 27, 2000. As of August 10, 2000, the Company is in default on this note
and the Company does not have the funds to repay the amounts owed. The note
holder may foreclose on the assets of the Company as a result of this default.
Such a foreclosure would likely result in the Company ceasing to conduct
business.
On March 3, 2000, the Company closed on a financing of up to $5,000,000
pursuant to a Securities Purchase Agreement, dated March 3, 2000 (the
"Securities Purchase Agreement"). Under the Securities Purchase Agreement the
investor made investments of $2,000,000 in March 2000 and additional
investments of $500,000 each in April, May and June, net of offering costs of
$350,000. In exchange for these investments, the investor received convertible
debentures in the total principal amount of $3,500,000 and Series 2000-A
Warrants exercisable for 2,315,494 shares of the Company's common stock at
exercise prices between $1.79 and $2.08 per shares. Additional investments of
$500,000 each were expected in July, August and September.
The debentures are due and payable in full on or before March 1, 2001 and
require the payment of quarterly interest payments at the rate of 8% per
annum. The investor may require the redemption of
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the debentures if the Company's average closing bid price falls to $1 or less
per share for five consecutive days. In the event of mandatory redemption, the
Company is required to pay to the investor an amount equal to 125% of the
aggregate principal amount of the debentures plus accrued interest. In the
event of non-payment, the conversion price on any future conversions is
reduced by $.50 per share and interest accrues on the unpaid amounts owing at
the default rate of 2.5% per month (collectively, the "Default Provisions").
During June 2000, the investor converted debentures in the principal
amount of $700,000 plus accred interest of $3,555 into 703,555 shares of
common stock.
On July 6, 2000, the investor gave written notice to the Company of
mandatory redemption of debentures in the aggregate principal amount of
$2,800,000 as a result of the average closing bid price of the Company's
common stock being less than or equal to $1.00 for five consecutive days. In
July the investor also gave the Company notice that it is indefinitely
postponing any additional investments under the Securities Purchase Agreement.
The Company has minimal cash and cannot presently pay the principal or
interest payments due as a result of the mandatory redemption and is in
default under this note. On July 18, 2000 the investor gave the Company notice
and subsequently converted $303,200 in amounts owing under the debentures into
606,400 shares of common stock. The Company currently owes to the investor and
its assigns $3,200,000 in principal and penalties and interest on said amount
is accruing at the rate of 2.5% per month. If the Company is unable to repay
the obligation, of which there can be no assurance, it will have a material
adverse effect on the Company, particularly in light of the Default
Provisions, and may result in the Company ceasing operations.
In May 2000, the Company entered into an amendment to the Supply
Agreement. Under the terms of the amendment, Delphi was to provide the Company
with a $4,100,000 interest free loan. In May 2000, $800,000 was advanced to
Flexpoint, additional $300,000 payments were advanced in June and July and
additional $300,000 payments are to be advanced during each of the following
nine months. The loan proceeds are to be used for costs directly related to
the Delphi programs. Delphi has the right to withhold future loan amounts in
the event Flexpoint is not using its best efforts to successfully implement
the occupant classification system or if related milestones are not achieved.
There can be no assurance that the Company will receive any additional
payments pursuant to the Supply Agreement, as amended. In addition, Delphi's
non-competition obligation in the Supply Agreement was deleted. At Delphi's
election, the loan will be repaid either through a rebate on the sales of
sensor mats from Flexpoint to Delphi, as payment toward the purchase price of
Flexpoint common stock at a price not in excess of $2.23 per share (115%
percent of the closing price as of the effective date of the amendment) or
some combination of the foregoing which Delphi shall determine at a future
date. The parties are discussing possible additional modifications to the
Supply Agreement. There can be no assurance that the Supply Agreement will be
revised or that if revised, that it will be on terms favorable to the Company.
At June 30, 2000, the Company also has an additional $81,000 in short
term loans outstanding. Of this amount, $51,000 was subsequently paid. The
remaining amounts presently outstanding are either in default or due on
demand. The Company has long term loans in the amount of $129,395.
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 products under
development to market, the level of sales and marketing for its products and
the
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amounts owed on debt and related penalties that is not converted. Management
had previously thought that existing funds received under the Securities
Purchase Agreement and funds generated from sales would be sufficient to
support its operations through September 2000. Due to the fact that all
funding under the Securities Purchase Agreement was indefinitely suspended and
notwithstanding the fact that the Company has received additional funding from
Delphi, the Company does not have sufficient cash to pay its current
liabilities and sustain current operating costs. The Company may need to
acquire additional debt or equity funding in order to sustain its operations
or may substantially reduce operating costs which may have a materially
adverse affect on the Company's ability to fulfill its obligations under the
Supply Agreement.
The Company is working to obtain additional funding from several
sources, including current and future customers. The Company has no
commitments for funding and there can be no assurance that additional funding
will be available to the Company on commercially reasonable terms or in the
necessary amounts. Any inability to obtain significant amounts of additional
financing in the immediate future will have a material adverse effect on the
Company, including the inability of the Company to continue its operations.
Mike Wallace d.b.a. Pure Imagination
The Company retained Mike Wallace d.b.a. Pure Imagination ("Wallace")
and a number of independent contractors to develop software intended to be
used in connection with automobile seat sensors as part of a "smart" air bag
system. Management believes it owns all right, title and interest to said
software because the software was developed at the request of the Company for
which the Company has paid compensation to both Wallace and the independent
contractors. Disputes have arisen between Wallace and the Company with respect
to ownership rights in the software. Wallace is asserting that he owns all
rights to the software source code and that the Company must pay additional
compensation to use the software with the Company's Bend Sensor Technology and
for other non-Bend Sensor applications. As a result of the dispute, Wallace is
refusing to release the software source code for the Company's use and is
hindering the Company's further development of the software including the
Company's access to the software development facility The Company and Wallace
are in negotiations regarding this matter. In the event the Company is not
able to successfully and timely resolve this matter through negotiations or
otherwise, of which there can be no assurance, it will likely result in the
Company incurring substantial additional software and development expenses and
will materially delay further development of the Company's seat sensor under
the Supply Agreement. A material delay could have an adverse affect on the
Company, including the inability to timely complete development of the seat
sensor under the Supply Agreement, and the termination of the Supply
Agreement.
Forward-Looking Statements
When used in this Form 10-QSB, in the Company's filings with the SEC, in
its press releases or other public or stockholder communications, or in oral
statements made with the approval of its authorized executive officer, 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.
These statements are based on its beliefs and the assumptions the Company made
using information currently available to us.
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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. Furthermore, manufacturing
delays may result from product redesigns or otherwise. In addition, sales and
other revenues may not commence as anticipated due to delays or otherwise and
sales may not reach the levels anticipated. As a result, its actual results
for future periods could differ materially from those anticipated or
projected.
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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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Securities Purchase Agreement
On March 3, 2000, the Company closed on a financing of up to $5,000,000
pursuant to the Securities Purchase Agreement. Under the Securities Purchase
Agreement the investor made investments of $2,000,000 in March 2000 and
additional investments of $500,000 each in April, May and June, net of
offering costs of $350,000. In exchange for these investments, the investor
received convertible debentures in the total principal amount of $3,500,000
and Series 2000-A Warrants exercisable for 2,315,494 shares of the Company's
common stock at exercise prices between $1.79 and $2.08 per shares through
March 3, 2004. Additional investments of $500,000 each were expected in July,
August and September.
The debentures are convertible into common stock at a conversion price
of 80% of the lower of (a) the average of the three lowest closing bid prices
for the common stock during the 15 trading days preceding the date of the
purchase agreement or (b) the average of the three lowest closing bid prices
for the common stock during the 15 trading days preceding conversion, subject
to a maximum conversion price of $3.00 per share and a minimum conversion
price of $1.00 per share.
The debentures are due and payable in full on or before March 1, 2001
and require the payment of quarterly interest payments at the rate of 8% per
annum. The investor may require the redemption of the debentures if the
Company's average closing bid price falls to $1 or less per share for five
consecutive days. In the event of mandatory redemption, the Company is
required to pay to the investor an amount equal to 125% of the aggregate
principal amount of the debentures plus accrued interest. In the event of
non-payment, the conversion price on any future conversions is reduced by $.50
per share and interest accrues on the unpaid amounts owing at the default rate
of 2.5% per month (collectively, the "Default Provisions").
In June 2000, the investor converted debentures in the principal amount
of $700,000 plus accrued interest of $3,555 into 703,555 shares of common
stock.
On July 6, 2000, the investor gave written notice to the Company of
mandatory redemption of debentures in the aggregate principal amount of
$2,800,000 as a result of the average closing bid price of the Company's
common stock being less than or equal to $1.00 for five consecutive days. In
July the investor also gave the Company notice that it is indefinitely
postponing any additional investments under the Securities Purchase Agreement.
The Company has not paid the amount owning under the debentures and is
currently in default.
On July 18, 2000 the investor converted $303,200 in amounts owing on the
debentures into 606,400 shares of common stock.
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Amendment to Supply Agreement
In May 2000, the Company entered into an amendment to the Supply
Agreement. Under the terms of the amendment, Delphi was to provide the Company
with a $4,100,000 interest free loan. In May 2000, $800,000 was advanced to
Flexpoint, additional $300,000 payments were advanced in June and July and
additional $300,000 payments were to be advanced during each of the following
nine months. The loan proceeds are to be used for costs directly related to
the Delphi programs. Delphi has the right to withhold future loan amounts in
the event Flexpoint is not using its best efforts to successfully implement
the occupant classification system or if related milestones are not achieved.
In addition, Delphi's non-competition obligation in the Purchase and Supply
Agreement was deleted. At Delphi's election, the loan will be repaid either
through a rebate on the sales of sensor mats from Flexpoint to Delphi, as
payment toward the purchase price of Flexpoint common stock at a price not in
excess of $2.23 per share (115% percent of the closing price as of the
effective date of the amendment) or some combination of the foregoing which
Delphi shall determine at a future date.
Other
In June 2000 the Company issued 350,000 shares of common stock to Steve
Young for joining the board of directors and acting as a spokesperson and
advisor to the Company and 100,000 shares to two others for services rendered
in connection therewith along with an additional 240,000 $2.00 common stock
warrants. In August 2000, Steve Young resigned as a director of the Company,
while agreeing to continue as a spokesman and advisor to the Company.
The above referenced transactions were exempt from registration under
Rule 506 of Regulation D, Section 4(2) of the Securities Act of 1933 and
Section 4(6) of the Securities Act of 1933. The Company did not use an
underwriter in connection with any of these transactions.
Item 3. Defaults Upon Senior Securities.
In February 2000, the Company defaulted on a note payable to an investor
in the principal amount of $1,000,000 by not making payment on February 10,
2000, the maturity date. This loan is secured by the assets of the Company.
The Company was also in default of the prepaid interest provision of the note.
The investor offered to extend the note for an additional six months and waive
any default interest for consideration of 500,000 warrants with an exercise
price of $2.15. In order to extend the maturity of the note, the investor also
required a prepayment of interest, plus attorney fees, in the total amount of
$141,920. Management accepted the offer to extend the note through August 10,
2000 by effectively issuing the warrants and making payment of the interest on
March 27, 2000. As of August 10, 2000, the Company is in default on this note
and the Company does not have the funds to repay the amount owing as of that
date. The note holder may foreclose on the assets of the Company as a result
of this default.
On March 3, 2000, the Company closed on a financing pursuant to the
Securities Purchase Agreement, dated March 3, 2000. Under the Securities
Purchase Agreement the investor made investments of $2,000,000 in March 2000
and additional investments of $500,000 each in April, May and June, net of
offering costs of $350,000. In exchange for these investments, the investor
received convertible debentures in the total principal amount of $3,500,000
and Series 2000-A Warrants exercisable for 2,315,494 shares of the Company's
common stock at exercise prices between $1.79 and
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$2.08 per shares.
The debentures are due and payable in full on or before March 1, 2001 and
require the payment of quarterly interest payments at the rate of 8% per
annum. The investor may require the redemption of the debentures if the
Company's average closing bid price falls to $1 or less per share for five
consecutive days. In the event of mandatory redemption, the Company is
required to pay to the investor an amount equal to 125% of the aggregate
principal amount of the debentures plus accrued interest. In the event of
non-payment, the conversion price on any future conversions is reduced by $.50
per share and interest accrues on the unpaid amounts owing at the default rate
of 2.5% per month (collectively, the "Default Provisions").
In June 2000, the investor converted debentures in the principal amount
of $700,000 plus accrued interest of $3,555 into 703,555 shares of common
stock. On July 6, 2000, the investor gave written notice to the Company of
mandatory redemption of debentures in the aggregate principal amount of
$2,800,000 as a result of the average closing bid price of the Company's
common stock being less than or equal to $1.00 for five consecutive days. On
July 18, 2000 the investor gave the Company notice and subsequently converted
into common stock $303,200 in amounts owing under the debentures into 606,400
shares of common stock. The Company is in default with respect to this
obligation and currently owes to the investor and its assigns $3,200,000 in
principal and penalties and interest on said amount is accruing at 2.5% per
month.
Item 4. Submission of Matters to Vote of Securityholders.
None.
Item 5. Other Information.
On August 16, 2000, Steve Young resigned as a director of the Company.
Mr. Young has agreed to continue acting as an advisor and spokesman for the
Company.
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
22
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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).
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).
10.6 Securities Purchase Agreement with Aspen Capital Resources, LLC,
(Incorporated by reference to Exhibit 10.1 of our Current Report on
Form 8-K, dated March 16, 2000).
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10.7 Promissory secured promissory note in favor of Jerry and Vicki Moyes
Family Trust, dated August 10, 1999 (Incorporated by reference to
Exhibit 10.7 of our Annual Report on Form 10-KSB, dated December 31,
1999).
10.8 Security Agreement with Jerry and Vicki Moyes Family Trust, dated
August 10, 1999 (Incorporated by reference to Exhibit 10.8 of our
Annual Report on Form 10-KSB, dated December 31, 1999).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On June 2, 2000, the Company filed a Current Report on Form 8-K, dated
May 5, 2000, disclosing under Item 5 information relating to the amendment to
the Supply Agreement and the addition of a member of the Company's board of
directors.
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: August 18, 2000 FLEXPOINT SENSOR SYSTEMS, INC.
By /s/ John F. Trotter II
_____________________________________
John F. Trotter, President and Chief
Executive Officer
Date: August 18, 2000
By /s/ Charles D. Roe
_____________________________________
Charles D. Roe, Chief Financial Officer
