SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-KSB
Annual Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 1999
Commission file number
0-24368
Flexpoint Sensor Systems, Inc.
(Exact name of registrant as specified in its charter)
Deleware 87-0620425
(State or other jurisdiction of (IRS employer identification
incorporation) number)
6906 South 300 West Midvale, UT 84047 (801) 568-5111
(Address of principal executive offices) (Registrant's telephone number
including area code)
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.001 Par Value None
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. Yes x No
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB.
The issuer's revenues for its most recent fiscal year were $773,233.
The aggregate market value of the voting stock held by
non-affiliates (i.e., does not include directors, executive officers
or ten percent stockholders identified in Item 11 hereof) of the
issuer as of March 2, 2000 was $34,091,134.
The number of shares outstanding of the issuer's Common Stock as of
March 2, 2000 was 19,107,639, $.001 par value.
<PAGE>
TABLE OF CONTENTS TO ANNUAL REPORTON FORM 10-KSB YEAR ENDED December 31, 1999
PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Properties. . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . 11
Item 6. Management's Discussion and Analysis or Plan of Operation. . . . . 12
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 19
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 19
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.. . . . . . . . 19
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 21
Item 11. Security Ownership of Certain Beneficial Owners and Management. . 23
Item 12. Certain Relationships and Related Transactions. . . . . . . . . . 24
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 24
2
<PAGE>
PART I
Item 1. Description of Business.
Company Background
- ------------------
The registrant was incorporated in 1992 as a Delaware corporation
under the name Nanotech Corporation. The registrant had no
operations until April 1998. On that date, the registrant acquired
Sensitron, Inc. ("Sensitron"), a Utah corporation, through a merger
with a subsidiary of the registrant (the "Acquisition"). The
registrant changed its name to "Micropoint, Inc." ("Flexpoint") and
Sensitron became a wholly owned subsidiary of Flexpoint. During the
shareholders meeting in June of 1999 the Company's name was changed
to Flexpoint Sensor Systems, Inc., subsequently the Company's symbol
was change to "FLXP". At the closing of the Acquisition, the
officers and directors of Flexpoint resigned and the nominees of
Sensitron were appointed as the officers and directors of Flexpoint.
In addition, the outstanding securities of Sensitron became
outstanding securities of Flexpoint. Prior to the Acquisition,
neither Sensitron nor any affiliate of Sensitron had an interest in
Flexpoint. Sensitron is engaged in the business, through Flexpoint,
Inc. and Technology and Machine Company, Inc. ("Tamco") which are
wholly owned subsidiaries of Sensitron, of developing manufacturing
and marketing proprietary patented sensor technology know as the
Bend Sensor(R) technology (the "Technology"). Except as otherwise
stated or implied by the context, all references to the "Company"
herein will be deemed to refer to Flexpoint, Sensitron, Flexpoint,
Inc. and Tamco on a consolidated basis. Sensitron and Flexpoint,
Inc. were incorporated in 1995 as Utah corporations. Since 1995
Flexpoint, Inc. has been engaged in the research and further
development of the Technology.
The Company manufactures a technology that reduced the dimensions of
typical sensor devices by as much as ninety percent. Management
believes this thin flexible plastic is the lightest, most robust and
cost-effective variable resistor available. Flexpoint is able to
offer superior solution for applications that require accurate
measurement and sensing of deflection, acceleration, and range of
motion. Flexpoint has produced over 7,000,000
sensors for the toy and consumer industries to date.
In June 1998, the Company entered into a Purchase and Supply
Agreement ("Supply Agreement") with Delphi Automotive Systems
("Delphi") under which Delphi may purchase proprietary sensor mats
incorporating the Technology from the Company for integration into a
"smart" air bag system being developed for General Motors. Due to a
number of factors including technical issues with the sensor and
production readiness of various suppliers, production of the seat
sensors was delayed from the fall of 1999 to late 2000 or early
2001. The Company believes that General Motors and Delphi continue
to be committed to purchasing the Company's proprietary sensor mats
under the Supply Agreement. The Company currently has one production
line in place and it has demonstrated required capability by
producing over 15,000 pre-production seat sensors so far. The
Company believes all known technical and production issues have been
properly identified and resolutions are being implemented. It is not
anticipated that production will begin until the second half of 2000
or early 2001. There can be no assurance that General Motors and
Delphi will acquire seat sensors under the Supply Agreement, that
additional technical and production difficulties will not arise,
that production will be in the amounts anticipated, or that
production will begin when anticipated or at all.
The Company believes the potential market for the Technology
includes, among other products, automobile horn assemblies, crash
sensors, instrument switches, computer switch devices, industrial
control devices, instrument controls, medical devices and surgical
equipment.
Tamco was incorporated in 1990 as a Utah corporation. Tamco is a
manufacturing and machining company which machines metal parts and
injection molds based on custom orders for third parties. Generally,
Tamco receives orders for molds and tools then used by Tamco's
customers to produce a final product. The Company uses Tamco to
perform machining and manufacturing for Flexpoint, Inc. products and
for its manufacturing facilities. Tamco also operates a third party
business to the extent that excess capacity remains after servicing
Flexpoint, Inc.
The Company's principal executive offices are located at 6906 South
300 West, Midvale, Utah 84047. Its telephone number is (801) 568-5111.
3
<PAGE>
The Sensor Business
- -------------------
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.
The Company believes that the sensing devices that are most likely
to compete with the Technology are force transducer sensors and
certain fiber optic sensors. Management believes, however, that
force transducer sensors are not as reliable as the Technology and
that they are not capable of measuring the same range of motion as
the Technology. The Company also believes that fiber optic sensors
are not as cost effective as the Technology.
The Bend Sensor(R) Technology
- -----------------------------
The Technology is a potentiometer product consisting of a coated
substrate such as plastic that changes in electrical conductivity as
it is bent. Electronic systems can connect to the sensor and measure
with fine detail the amount of bending or movement that occurs.
Certain applications of the Bend Sensor(R) potentiometer have been
patented, including automobile horn switches and automotive occupant
classification. Other patent applications, such as accelerometers,
various automobile seat sensors and function controls, are pending.
A typical potentiometer functions through the means of metal
contacts swiping or rubbing across a resistive element. The Bend
Sensor(R) potentiometer is a single layer with no mechanical
assembly making it more reliable, significantly smaller and lighter
weight than mechanical potentiometers. Management believes many
sensor applications can be improved using the Technology and
utilization of the Technology will result in new products and new
sensor applications.
Production Contracts and Specific Applications
- ----------------------------------------------
Air Bag Applications
Automakers and regulators agree that smart air bag systems are the
solution to the rising concerns over deaths of children and small
adults by air bags. Smart air bag systems are those that can detect
not only the presence of a seat occupant, but also the size and
positioning of the seat occupant. This data is used to tailor the
speed and force of the air bag deployment to the seat occupancy
conditions at the time of impact. Reliable analog seat sensors such
as the Bend Sensor technology are a key component of the system.
General Motors, Ford, Chrysler, TRW, Lear, Takata, Magna, Allied
Signal, Autoliv, Johnson Controls, Siemens, and Delphi have asked
Flexpoint, Inc. to demonstrate its Bend Sensor(R) Technology in seat
occupant detection applications. Response continues to be positive.
By automatically sizing up a car's passenger, the Company's sensor
can distinguish between an infant car seat and an adult passenger
and deactivate an air bag when a person under 60 pounds or a car
seat is in the seat. The market opportunity is substantial
considering a market of 15,000,000 vehicles in North America and
55,000,000 worldwide.
In June 1998, the Company entered into a Purchase and Supply
Agreement (the "Supply Agreement") with Delphi Automotive Systems
("Delphi") for the Company to 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 supplied to General Motors,
through Delphi. The Company's sensor mat system is in the final
stages of development. After development is completed, of which
there can be no assurance, the Company could have over $300,000,000
in sales under the Supply Agreement based on estimates that were
produced jointly by General Motors, Delphi and the Company. Delphi
is not obligated under the terms of the Supply Agreement however to
purchase any minimum number of sensor mats and there can be no
assurance that the Supply Agreement will result in a material amount
of sales. As of the date of this filing, the Company had not entered
into any firm agreement for a continued supply of Bend Sensor(R)
products that are currently in effect. Although management is highly
confident that significant contracts can be obtained, there can be
no assurance as to future sales levels of Bend Sensor(R) products.
4
<PAGE>
Automobile Horn Applications
The Company has also developed an automobile horn application of the
Technology. Traditional automobile horn assemblies, when receiving
pressure on any part of the horn assembly surface, activate the horn
control system. On current airbag configurations, horn switches are
generally placed on sides of the column. Because the Flexpoint, Inc.
switch is a thin sheet of screen printed plastic that can be
laminated between the airbag assembly and a flexible cover to the
steering wheel, the device can be placed over the airbag assembly on
the steering wheel in place of the traditional switch. All products
will be integrated with electronic assembly counterparts in their
configuration. The Company has not entered into any sales, license
or distribution agreements with respect to the horn application that
are currently in effect. The Company has two patents relating to the
horn switch assembly.
Toy Applications
In May, 1997 the Company entered into a License Agreement (the
"License Agreement"). Whereby the Company granted to Ohio Art the
exclusive right to sell products incorporating the Bend Sensor(R)
Technology in the toy, traditional games and video markets. The
License Agreement provided for certain up front fees and minimum
royalties in order for Ohio Art to maintain such exclusive rights.
In December 1999, the license with Ohio Art expired and in 2000 the
Company will market direct to the various toy manufacturers.
Presently, there are three different toy products that utilize the
Technology which are manufactured by Irwin Toys Limited, Toy Biz,
Inc. and Jakks Toys. These toys can now be found at major retailers,
including Target, Wal-Mart and Toys R Us. The Company expects toy
revenues for 2000 to exceed 1999 due to an increase in product
designed to utilize the Company's sensor. Further, the Company will
seek the opportunity to sell the sensor assembly potentially raising
the average sale price and gross sales opportunity. There can be no
assurance as to what level, if any, of sales that the Company will
secure in the future.
Other Applications
Management believes the potential market for the Technology includes
using the Technology to replace or upgrade devices used in
industrial control systems, medical equipment and instrumentation,
computer peripherals, automotive transmission equipment, commercial
vending equipment and other devices. The Company intends to further
identify applications of the Technology in numerous fields and
industries. A core sales strategy is to seek applications of the
Technology for products used by customers that emphasize
functionality, reliability, quality, and user convenience.
Business Strategy
- -----------------
Management believes that its success will depend upon its ability to
coordinate its product design, manufacturing, distribution and
service strategies in a long-term business model. A sales strategy
of the Company is to offer a line of standard sensor products with
corresponding hardware and software to facilitate ease of
implementation of the Technology into a customer's system. The
standard product line is expected to be sold directly to the
customer and through manufacturer's representatives, distributors
and the internet. The Company will further seek to expand its
product offering to include substantially complete value-added
assemblies. The Company will continue to consider licensing or
partnership arrangements. The Company anticipates selling primarily
to original equipment manufacturers ("OEMs") initially in the United
States and eventually worldwide. For the international and smaller
volume domestic customers, the Company plans to contract, sell and
distribute its products through various manufacturer representatives
and distributors.
Since the Company's intended customers are typically technology
companies, the design phase of the sales cycle is extremely
important. The Company anticipates that the OEM will typically
approach the Company with a conceptual product requiring the Company
to produce a prototype. The prototype will then be tested in the
environment in which the ultimate product will be placed. During
this process, customer contact with the Company's application
engineers and internal sales support individuals will be critical
for a successful design to occur.
In the long term the Company will attempt to add value by expanding
its sensor product line through licensing, strategic agreements,
and/or acquisition of other entities. It is anticipated that such
diversification of sensor products will enhance the ability of the
Company to offer sensor "system " solutions to its customer. These
product lines, when combined, could create a much larger value added
profit margin. There is, however, no assurance that such profit
margins will be achieved. Eventually, by adding circuit boards,
enclosures, etc., management expects to integrate to a more
extensive product line.
5
<PAGE>
Research and Development
- ------------------------
The applications of the Technology are wide spread. The Bend
Sensor(R) coatings can be applied to many different substrates from
metal wire to plastic film. Industries with potential applications
range from aerospace to toys.
Although the Company holds the patent to the base Bend Sensor(R)
product as well as other applications there will be others working
to develop competing technologies. To stay on the forefront of the
technology, and to serve the needs of the customer, the Company will
need to aggressively pursue improvements to existing systems and
develop new systems as well. The Company spent $3,339,916 and
$1,382,101 in research and development activities during 1999 and
1998, respectively. Of said amounts, $1,907,623 and $705,265 in 1999
and 1998, respectively, were spent to fund development of the
software that will used with the smart air bag system. There can be
no assurance that the Company will be successful in pursuing
improvements to existing systems and/or developing new systems.
The Company believes that the coatings for the Bend Sensor(R)
products are difficult to duplicate. The Company must develop new
coatings to fit emerging customer needs and to stay ahead of the
competition. There can be no assurance that the Company will be
successful in developing new coatings.
Marketing, Distribution, Sales and Customers
- --------------------------------------------
The Company will principally market its products to OEMs. The
Company's primary marketing objectives are to generate demand for
its products, enhance name recognition and support OEMs. The
Company's products are expected to be purchased primarily by OEMs.
The Company believes that the successful use of its products by OEMs
will create additional demand for higher quantity of existing
products. The Company also anticipates that the success of its
existing products will allow the Company to successfully introduce
new products to the market.
The Company will seek to support OEMs through telephone access to
the Company's in-house sales force and regular mailing of product.
The Company will also seek to generate interests and explore
additional applications to its Technology through attendance and
participation at trade shows and publicity in trade magazines.
The Company believes that its relationship with OEMs is
an important part of its overall sales strategy. The Company
believes that the OEMs will initiate purchase orders for its
products. To date they have not done so in significant quantities.
The loss of any of the major OEMs with which the Company has
developed a relationship could have a significant adverse effect on
its results of operations until alternative distribution channels
could be established. The Company would consider contractual
commitments to OEMs in exchange for fees and royalties. In addition,
because the Company does not sell directly to end users, the Company
is dependent, in part, on its OEM for information about retail
product sales. Accordingly, any rapid cessation of purchases or
switch to other companies' products by end users may not be
immediately evident to the Company, and could result in increased
product returns.
The Company intends to develop a field sales force
including direct marketing employees in strategic areas and
manufacturers representatives nationwide to generate OEM customers.
Currently the Company is selling directly to the automotive industry
and utilizes outside representatives in the toy industry. Further,
the Company has expanded its inside support to expand market
opportunities. As the market grows in North American, the Company
anticipates expanding its distribution network throughout the world.
There can be no assurance that the Company will be successful in
developing such a sales force or in expanding its distribution network.
6
<PAGE>
Manufacturing and Suppliers
- ---------------------------
The Company currently owns equipment installed in its facility
located at 6906 South 300 West, Midvale, Utah, enabling it to
manufacture up to 25 million finger size Bend Sensors(R) per year.
In preparation to supply Delphi, the Company has completed the first
phase of its automotive sensor production facility at its 60,000
square foot leased facility located near the Salt Lake International
Airport. The Company will continue to use its Midvale, Utah
facility for research and development and non-automotive sensor
production.
The Company uses standard components for its products and has taken
steps to eliminate dependence on components which can be obtained
from a single or a limited number of sources. Currently, all
components necessary to manufacture the products, other than ink,
are standard components available from several sources. Flexpoint,
Inc. has developed its own proprietary inks for the Flexpoint, Inc.
products. The Company has established some long-term contractual
relationships with certain strategic suppliers which require these
suppliers to maintain increased inventory levels of materials
provided to the Company. In keeping with the Company's goal of
producing quality products at a low cost, the Company will also work
with its strategic suppliers to minimize component cost.
Certain domestic and international organizations set recognized
standards for production quality and certify manufacturers who are
able to comply with those standards. Those standards are commonly
known in the industry as International Standards of Organization
("ISO"). There are different ISO levels. The automotive industry has
embraced the ISO standards but the organization has augmented these
requirements. The organization developed what is known as QS 9000
compliance for automotive suppliers. The Company is seeking QS 9000
quality certifications for its manufacturing facilities and those of
its contract manufacturers. In order to obtain a QS 9000
certification, the Company must apply to the organization that sets
those standards and prove to the organization that those standards
have been met. Due to production delays and financial constraints,
the Company's efforts to obtain QS 9000 quality certification has
been delayed. However, management believes it has built its
operating foundation on such principles and will be able to obtain
the appropriate certification in due time. However, there is no
assurance the Company will obtain the required certification.
Competition
- -----------
The sensor business is highly competitive and competition is
expected to continue to increase. The Company will compete directly
with firms that have longer operating histories, more experience,
substantially greater financial resources, greater size, more
substantial research and development and marketing organizations,
established distribution channels and are better situated in the
market than the Company. The Company does not have an established
customer base and is likely to encounter a high degree of
competition in developing a customer base.
As per management's knowledge and except as noted below, technology
similar to that of the Company is not currently in production by any
competitor. Management believes that the Company's products will be
sufficiently distinguishable from the existing products so that it
will not compete directly with existing sensor products. A majority
of all sensing devices require physical contacts. The Company is
aware of one other manufacturer who utilizes similar potentiometer
technology, but to management's knowledge such use is not
widespread. Certain force transducer sensors and fiber optic sensors
are comparable to the Company's Bend Sensors(R). However, management
believes that the force transducer sensor is not as reliable as the
Company's Bend Sensor(R) and that the fiber optic sensors are not as
cost effective as the Bend Sensor(R). As this new area grows,
additional manufacturers may attempt to introduce similar products
and competition could intensify.
In the medical electronics field, the Company's competitors are the
numerous potentiometer manufacturers. In the auto seat field the
Company's competitors are the numerous capacitive, piezo, infrared,
and ultrasonic sensor manufacturers. Such competitors may use their
economic strength to influence the market to continue to buy their
existing products. One or more of these competitors could use their
resources to improve their current products or develop new products
that may compete more effectively with the Company's products. New
competitors may emerge and may develop products and capabilities
which compete directly with the Company's products. No assurance can
be given that the Company will be successful in competing in this
industry.
The Company intends to compete on the basis of early entry into the
market with its products, enhanced features, performance, ease of
use, compatibility, reliability, price, marketing, distribution,
quality and support. Management also believes its intellectual
property provides it an advantage over its competitors. Although
management believes that its products will be well received in its
markets because of innovative features, performance characteristics
and cost-effective pricing, there can be no assurance that
comparable or superior products incorporating more advanced
technology or other features or having better price/performance
characteristics will not be introduced by competitors.
7
<PAGE>
Intellectual Property
- ---------------------
The Company regards certain of its product designs as proprietary
and attempts to protect them with patents and by restricting
disclosure of such as trade secrets. The Company has six issued
United States patents and five additional pending applications for
patents in the United States. The Company also has one issued patent
in Canada and has four patent applications pending in foreign
countries evolving from and based upon one application under the
Patent Cooperation Treaty. All patents and patent applications
relate to the Technology. The Company is aware of one potentially
conflicting patent which the Company believes will not affect the
Company's current or planned use of the Technology.
There can be no assurance that the protection provided by patents
and patent applications, if issued, will be broad enough to prevent
competitors from introducing similar products or that such patents,
if challenged, will be upheld by the courts of any jurisdiction.
Patent infringement litigation, either to enforce the Company's
patents or defend the Company from infringement suits, would be
expensive and, if it occurs, could divert Company resources from
other planned uses. Any adverse outcome in such litigation could
have a material adverse effect on the Company. Patent applications
filed in foreign countries and patents in such countries are subject
to laws and procedures that differ from those in the United States.
Patent protection in such countries may be different from patent
protection under U.S. laws and may not be as favorable to the
Company. The Company also attempts to protect its proprietary
information through the use of confidentiality agreements and by
limiting access to its facilities. There can be no assurance that
the Company's program of patents, confidentiality agreements and
restricted access to its facilities will be sufficient to protect
the Company's proprietary Technology.
Management believes that because of the rapid pace of technological
change in its markets, legal protection of its proprietary
information is less significant to the Company's competitive
position than factors such as continuing product innovation in
response to evolving industry standards, technical and
cost-effective manufacturing expertise, effective product marketing
strategies and customer service. Without legal protection, however,
it may be possible for third parties to exploit commercially the
proprietary aspects of the Company's products.
Business of Tamco
- -----------------
Tamco is an operating manufacturing and machining company. TAMCO
derives revenue from contracting machining services to third parties
. Generally, Tamco receives orders for molds and tools used by
Tamco's customers to produce final products. The Company uses Tamco
for its manufacturing facilities and to perform machining and
manufacturing for Flexpoint, Inc. products and to outside parties to
the extent excess capacity remains. Tamco's business is extremely
competitive. Competitors range from small part-time shops to large
shops with significantly greater resources.
Employees
- ---------
As of December 31, 1999, the Company had thirty-nine full-time
employees and three part-time employees. The Company is also
utilizing the services of outside contractors and consultants in
connection with its ink, hardware and software development. The
Company is currently spending more on its outside contractors and
consultants than it spends to compensate its employees. As
development of its air bag sensor mat system is completed it is
expected that the amount spent on outside contractors and
consultants will decrease. Although there is competition for
qualified personnel in the business operated by the Company, to date
the Company has not had significant problems recruiting and
retaining qualified personnel. None of the Company's employees are
subject to collective bargaining agreements, and the Company has
experienced no work stoppages. Management believes that its employee
relations are good.
8
<PAGE>
Item 2. Description of Property.
- -------------------------------
The Company's principal offices are located at 6906 South 300 West,
Midvale, Utah, under terms of a lease which was extended to
October 2000 , with a monthly rent of approximately $5,700. The
lease covers approximately 13,000 square feet of space which is
anticipated to accommodate the manufacture of up to 25 million
finger size Bend Sensor(R) units per year. The Company has the
option to extend the existing lease for an additional one year term.
The Midvale facility is currently being used for research and
development and non-automotive production. The physical condition of
the leased property is adequate for the Company's needs.
On November 18, 1998, the Company entered into an Industrial Space
Lease with Prudential Insurance Company of America for approximately
61,250 square feet of manufacturing space located at 635 North Billy
Mitchell Road in Salt Lake's International Center. The Company is
using this facility for it automotive sensor production. The Company
believes that the physical condition of the property is adequate for
the Company's needs. The lease expires in the year 2004 and contains
an extension option for an additional three year term, with a
monthly rent of approximately $20,825 per month. The lease also
includes a Right of First Offer for an additional 60,000 square feet
of space adjacent to the premises in two 30,000 square feet
increments. The Company intends to move its headquarters and
principal manufacturing from its current location at 6906 South
300 West to the new International Center facility.
Item 3. Legal Proceedings.
- -------------------------
On February 13, 1998, Private Equity Partners LLC ("PEP") filed suit
against Sensitron in the Third Judicial District Court in Salt Lake
County, Utah. PEP alleges, among other things, that Sensitron owes
PEP investment banking fees and warrants with respect to an
agreement, and that Sensitron's refusal to pay such fees constitutes
fraud. The suit seeks to obtain investment banking fees equal to
6.5% of all money raised by Sensitron, warrants to purchase 2% of
Sensitron's equity, punitive damages of $5,000,000 and other relief.
Discovery has been completed and both PEP and Sensitron filed
Cross-Motions for Summary Judgment. The Court took the Cross-Motions
for Summary Judgment under advisement and in March 1999 denied both
motions. Additional discovery has been conducted and the parties
resubmitted their cross motions for summary judgment. These cross
motions are scheduled to be argued on May 1, 2000.
In October, 1996, John Clayton and Blaine Taylor filed suit against
Sensitron, Flexpoint, Inc. and certain of their officers in the
Third Judicial District Court in Salt Lake County, Utah. The suit
alleges, among other things, that the plaintiffs had a binding
agreement pursuant to which the bend sensor technology of Gordon
Langford would be transferred to a public shell company for which
the plaintiffs would raise investment capital. The plaintiffs were
seeking (i) declaratory judgment that they own a 21.72% interest in
the company that owns the Technology, or actual and punitive
damages, and (ii) repayment of certain costs and expenses. The
defendants have responded that there was no binding agreement with
the plaintiffs, and that in any event the plaintiffs failed to
perform. The defendants did not dispute the repayment claim and paid
the plaintiffs the sum of $48,016.17 to resolve the repayment claim
in full. In August of 1998, the Court granted defendants' Motion for
Summary Judgment dismissing all other claims asserted by plaintiffs
with prejudice, except for the remaining claim as to attorney fees.
In November 1999, the Company issued to plaintiffs one hundred
thousand shares of its restricted Common Stock in full settlement of
the claims and the lawsuit was dismissed with prejudice.
Item 4. Submission of Matters to a Vote of Security Holders.
- -----------------------------------------------------------
No matter was submitted to a vote of security holders during the
fourth quarter of 1999.
Stockholders Proposals
- ----------------------
The Company anticipates holding its Annual Stockholders Meeting on
or about August 29, 2000. Any stockholder who desires to have a
proposal included in the Company's proxy soliciting material
relating to the Company's 2000 Annual Meeting of Stockholders should
send to the Secretary of the Company a signed Notice of Intent.
This Notice, including the text of the proposal, must be received no
later than June 1, 2000.
9
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholers Matters.
- ------------------------------------------------------------------------------
Share Price History
- -------------------
The Company's common stock (the "Common Stock") has been quoted on
the NASD Over-the-Counter market since September 14, 1998 under the
trading symbol "MICP." Prior to such date, no active trading market
existed for the Company's Common Stock. During the shareholders
meeting in June of 1999 the Company's name was changed to Flexpoint
Sensor Systems, Inc., subsequently the Company's symbol was changed
to "FLXP". The following table sets forth the high and low bid
information of the Common Stock for the periods indicated. The price
information was obtained from IDD Information Services, Inc. and
other sources the Company believes is reliable. It should be
understood that such over the counter market quotations reflect
inter-dealer prices without retail markup, markdown or commission,
and the quotations may not reflect any actual market transactions in
the Common Stock.
Quarter Ended High Low
- ------------- ------------ ----------
1998
- ----
September 30 . . . . . . $8.50 $5.50
December 31 . . . . . . $8.3125 $6.375
1999
- ----
March 31 . . . . . . . . $6.8281 $4.25
June 30 . . . . . . . . $4.9375 $2.825
September 30 . . . . . . $3.875 $1.9375
December 31 . . . . . . $2.875 $1.59375
Dividend Policy
- ---------------
To date, the Company has not paid dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion
of the Company's Board of Directors (the "Board") and will depend
upon the Company's earnings, its capital requirements and financial
condition, and other relevant factors. See "Management's Discussion
and Analysis or Plan of Operation." The Board does not intend to
declare any dividends in the foreseeable future, but instead intends
to retain all earnings, if any, for use in the Company's operations.
Holders of Record
- -----------------
As of , 2000, there were 453 holders of record of the
Company's Common Stock. The number of holders of record was
calculated by reference to the Company's stock transfer agent's books.
Issuance of Securities
- ----------------------
In March 1999, the Company completed a private placement wherein it
raised gross proceeds of approximately $3,362,137 through the sale
of 840,534 shares of Common Stock to accredited investors at $4.00
per share (the "March Offering"). During the March Offering the
Company began discussions with several people regarding a private
offering that the Company began in May (the "May Offering"). In the
May Offering the Company sold 536 Units, each Unit being comprised
of one share of Series A Convertible Preferred Stock and Series A
Warrants to Purchase 250 shares of Common Stock. The Company gave
March Offering investors the right to exchange the securities
purchased in the March Offering for the securities the investor
could have purchased in the May Offering had the investment been
made under the May Offering terms rather than the March Offering
terms. In July and August, investors who acquired 489,523 shares of
Common Stock in the March Offering elected to convert to the May
Offering terms. As a result, 489,523 shares of outstanding Common
Stock were cancelled and the Company issued 2,238 shares of Series A
Convertible Preferred Stock and Series A Warrants to purchase
559,551 shares of Common Stock. The transactions 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 transaction.
10
<PAGE>
In October 1999, there were 130,000 shares of Common Stock that were
issued upon exercise of outstanding stock options at an exercise
price of $.77 per share. The Common Stock issued upon exercise of
the stock options was 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.
In November and December 1999, the Company issued convertible notes
in the principal amount $865,001. The notes were convertible into
Common Stock at the conversion rate of $1.70 per share and upon
conversion the holder received a Series C Warrant to acquire a
number of shares of Common Stock equal to the number of shares of
Common Stock issued on the conversion date. The Series C Warrants
are exercisable at prices ranging from $2.00 per share for a period
of three years from the date of grant. In December 1999, all of the
notes were converted and the Company issued 508,825 shares of Common
Stock and Series C Warrants to acquire 508,825 shares of Common
Stock. The notes and the Common Stock and warrants issued upon
conversion of the notes 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.
In November 1999, the Company issued 100,000 shares of
Common Stock in full settlement of the John Clayton and Blaine
Taylor litigation. See "Legal Proceedings." The Common Stock was
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 6. 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 Company's consolidated results of operations and financial
condition. The discussion should be read in conjunction with the
consolidated financial statements and notes thereto. Wherever in
this discussion the term "Company" is used, it should be understood
to refer to Flexpoint, Sensitron, Flexpoint, Inc. and Tamco, on a
consolidated basis, except where the context clearly indicates to
the contrary. Prior to the Acquisition, Flexpoint had no operations.
The April 1998 Acquisition was accounted as a reorganization of
Sensitron. The historical financial statement prior to the
Acquisition are those of Sensitron and have been restated
accordingly. See Note 2 to the Company's Notes to Consolidated
Financial Statements.
Overview
- --------
The Company is in the development stage and since inception, has
incurred losses from operations. As of December 31, 1999, the
Company had cumulative losses applicable to common shareholders
totaling $15,041,600. The Company is primarily engaged in the sensor
business and is currently marketing proprietary patented sensor
technology know as the Bend Sensor 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.
Financial Position
- ------------------
The Company had $134,642 in cash as of December 31, 1999. This
represented a decrease of $523,133 from December 31, 1998. Working
capital (deficit) as of December 31, 1999 also decreased to
($2,167,065) as compared to $2,317,976 at December 31, 1998. These
decreases were largely due to funds spent on operating and capital
expenditures during 1999.
Years Ended December 31, 1999 and 1998
- --------------------------------------
During the year ended December 31, 1999, the Company had operating
revenues $773,233, compared with operating revenues of $1,915,628
for the year ended December 31, 1998. In 1999 operating revenues
were comprised of $332,182 in product sales and $441,051 in
engineering fee revenues. In 1998 operating revenues were comprised
of $1,767,476 in product sales, including $511,291 in royalties
associated with the Ohio Art agreement, and $201,786 in engineering
fee revenues.
11
<PAGE>
The Company has entered into a Purchase and Supply Agreement
("Supply Agreement") with Delphi Automotive Systems ("Delphi") under
which Delphi may purchase proprietary sensor mats incorporating the
Technology from the Company for integration into a "smart" air bag
system being developed for General Motors. Due to a number of
factors including technical issues with the sensor and production
readiness of various suppliers, production of the seat sensors was
delayed from the fall of 1999 to late 2000 or early 2001. The
Company believes that General Motors and Delphi continue to be
committed to purchasing the Company's proprietary sensor mats under
the Supply Agreement. The Company currently has one production line
in place and it has demonstrated required capability by producing
over 15,000 pre-production seat sensors so far. The Company believes
all known technical and production issues have been properly
identified and resolutions are being implemented. It is not
anticipated that production will begin until the second half of 2000
or early 2001. There can be no assurance that General Motors and
Delphi will acquire seat sensors under the Supply Agreement, that
additional technical and production difficulties will not arise,
that production will be in the amounts anticipated, or that
production will begin when anticipated or at all.
The Company was producing Sensors for plush toys under a license
agreement (the "License Agreement") with Ohio Art, Inc.
(manufacturer of Etch-A-Sketch). The License Agreement expired
December 31, 1999. There are several toys for the 2000 Christmas
season designed to use the Bend Sensor. Further, the Company is
seeking opportunity to supply the electronic assembly, including the
sensor, to increase sales potential. Due to the seasonality, the
Company currently has no agreements relating to the production 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.
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, and therefore reliance on the
other parties' marketing ability, marketing plans and
credit-worthiness; (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; (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 such other parties upon any renewals of their agreements.
General and administrative expenses were $3,915,562 for 1999,
compared with $1,953,432 for the prior year. Of the 1999 total,
$418,350 is comprise of salary and wages and fees relating to the
grant of stock options and warrants to employees and consultants at
less than market price. The increase in expenditures between 1999
and 1998 is also related to increases in salary and wage expenses as
a result of hiring additional production employees, depreciation
expenses relating to leasehold improvements, equipment at the
Company's new manufacturing facility, and travel expenses relating
to the Supply Agreement and consulting expenses.
Research and development expenses were $3,339,916 for 1999, compared
with $1,382,101 for the prior year. Of the 1999 total, $1,907,623 is
comprised of consulting expenses relating to software development of
the Company's proprietary sensor mats. The increase in expenditures
between 1999 and 1998 is primarily related to increases in salary
and wage expenses as a result of hiring additional engineering
personnel and increased consulting expenses.
Interest expense was $194,229 for 1999, compared to $17,157 for the
prior year. The difference between the periods relates mainly to an
increase in outstanding debt during the periods. Interest income was
$23,288 for 1999, compared with $22,177 for the prior year. The
difference in interest income between said periods relates mainly to
interest earned on funds on deposit.
Amortization of debt discount was $1,666,936 in 1999 and no
amortization of debt discount was incurred in the prior year. The
amortization of debt discount related primarily to the Company's
issuance of warrants with notes payable and convertible notes
payable. Notes totaling $865,001 were convertible into
Common Stock and, as additional consideration, for each share of
Common Stock received upon conversion the holder received a warrant
12
<PAGE>
to acquire one share of Common Stock. The convertible notes were
converted into Common Stock and warrants in November and December
1999. Warrants were issued with the notes payable. Proceeds from the
notes were allocated between the fair value of the warrants and the
notes, resulting in a discount to the notes of $1,265,000. This
resulted in the Company recognizing $1,557,136 in amortization of
interest expense discount. The $1,557,136 amortization of the debt
discount includes the $1,153,074 recording the value of the warrants
and $404,062 in beneficial conversion of the convertible notes. The
$1666,936 in amortization of debt discount also included $109,800 in
recording the warrants issued as additional consideration for two
$100,000 promissory notes. The Company anticipates recognizing an
additional $112,826 in 2000 as the balance of the discount is
amortized.
Net other income (expense) was ($120,311) in 1999 and $12,493 in the
prior year. The difference between the two periods relates primarily
to the issuance of 100,000 restricted shares to settle the
litigation. At the time of the settlement the share price was
$1.75, therefore the Company recognized an expense of $175,000
related to the settlement. Also included as other income was the
collection of over $54,000 of previously written off receivables.
Preferred dividends were ($693,551) in 1999 and no preferred
dividends were paid in the prior year. The preferred dividends
related to the issuance of Series A Convertible Preferred Stock and
Series A Warrants. Proceeds from the issuance were allocated to the
preferred stock and the warrants based upon their relative fair
values. The resulting preferred stock discount of $693,551 was
amortized immediately as a preferred stock dividend.
Restatement of Quarterly Financial Statements
- ---------------------------------------------
During 1999, the Company's quarterly financial statements did not
account for the (i) $418,350 in non-cash salary, wages and
consulting fees relating to the grant of stock options and warrants
to employees and consultants at less than market price; (ii) the
Amortization of debt discount of $1,666,936; or (iii) the
($693,551) in preferred dividends, which items are discussed
above. The Company anticipates restating its first, second and third
quarter financial statement to reflect these transactions.
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 $11,326,833 and $6,117,703 in net proceeds through
financing activities from inception through December 31, 1999 and in
1999, respectively. The Company has used net cash in operating
activities of $9,912,264 and $4,695,288 and has used $1,279,927 and
$1,945,548 in investment activities from inception through December
31, 1999 and in 1999, respectively. As of December 31, 1999, the
Company's current and total liabilities were $2,542,436. The Company
had a working capital (deficit) as of December 31, 1999 of
($2,167,065).
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 terms of
the financing, an investor initially provided the Company with
proceeds of $2,000,000 (less a ten percent placement fee and other
offering costs of investor and the Company of approximately $15,000)
in exchange for an 8% Convertible Debenture (the "Debenture") in the
principal amount of $2,000,000 and Series 2000-A Warrants (the
"2000-A Warrants") exercisable for 1,283,697 shares of the Company's
Common Stock for a four year period as further described below.
Under the Securities Purchase Agreement and subject to certain
contingencies, the investor has agreed to make additional
investments of $500,000 each in April, May, June, July, August and
September 2000. The additional investments will be reduced by a ten
percent placement fee and certain offering costs. The terms of the
subsequent investments provide that the investor will receive a
Debenture in the principal amount of the funds invested plus 2000-A
Warrants. The Debentures are convertible into Common Stock and the
2000-A Warrants are exercisable for a number of shares of Common
Stock and at an exercise price that vary depending on the market
price of the Company's securities and other factors.
The estimated relative fair value of the warrants as of March 3,
2000 was $1,026,301. This amount is estimated due to the holders
option to convert at the lower of the fifteen trading days at
closing or the fifteen days prior to conversion. The actual
relative fair value of the warrants will be amortized over 60 days
and recorded as amortization of debt discount.
13
<PAGE>
The Company has committed to spend $248,265 in lease payment 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. In connection therewith, the
Company contracted for certain improvements to its physical
facilities. As of March 13, 2000, the Company does not have material
commitments for capital expenditures. At December 31, 1999, the
Company also has short term loan obligations in the principal
amounts of $1,047,174. These loans bear interest at various rates
between ten percent per annum and twenty percent per annum.
As of March 13, 2000, the Company currently has outstanding stock
options and warrants to acquire 9,943,613 shares of Common Stock.
The exercise of all the outstanding stock options and warrants would
result in an equity infusion to the Company of approximately
$16,727,999. The warrant exercise price for warrants to acquire
1,283,697 shares of Common Stock, however, fluctuates based on
market price so the amount of total equity infusion upon exercise is
an approximation and may differ materially from the amount
described. There is no assurance that any of such options or
warrants will be exercised.
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 any certain product utilizing the Technology to commercial
viability, the level of sales and marketing for the Company's
products and the amounts owed on any debt that is not converted. The
Company believes that existing funds, fund received under the
Securities Purchase Agreement and funds generated from sales will be
sufficient to support the Company's operations through September
2000. At a minimum, in 2000 the Company will need to raise
approximately $4,000,000 in additional funding to support its
operations during 2000 and the Company needs to raise in 2001 at
least $11,000,000 in additional funding to fully execute its
business plan assuming production proceeds as currently projected.
The Company is working to obtain this additional funding from
several sources, but it has no firm commitments with respect thereto
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 additional financing in
the amounts described above will have a material adverse effect on
the Company, including possibly requiring the Company to
significantly curtail or cease its operations.
Inflation
- ---------
The Company does not expect the impact of inflation on operations to be
significant.
Year 2000
- ---------
The Company had developed plans to address the possible exposures
related to the impact on its computer systems of the Year 2000.
Since entering the Year 2000, the Company has not experienced any
major disruptions to its business nor is it aware of any significant
Year 2000related disruptions impacting its customers and suppliers.
Furthermore, the Company did not experience any material impact on
business at calendar year end. The Company will continue to monitor
its critical systems over the next several months but does not
anticipate any significant impacts due to Year 2000 exposures from
its internal systems as well as from the activities of its suppliers
and customers.
Forward-Looking Statements
- --------------------------
When used in this Form 10-KSB, in 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. 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, the Company's actual results for future periods could differ
materially from those anticipated or projected.
14
<PAGE>
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.
Risk Factors
- ------------
The Company is subject to certain other risk factors due to its
development stage status, the industry in which it competes and the
nature of its operations. These risk factors include the following:
HISTORY OF LOSSES/UNCERTAIN PROFITABILITY. The Company has a limited
operating history, having commenced operations in 1993. The
Company's growth has been limited by lack of working capital. There
can be no assurance that the Company will be able to achieve a
significant level of sales or profitability. In addition, future
revenues will be dependent upon the ability of the Company to market
its proprietary Technology and develop new applications therefor.
The Company's ability to generate future revenues will be dependent
on a number of factors, many of which are beyond the Company's
control, including, among others, competition. Because of the
foregoing factors, among others, the Company is unable to forecast
its revenues, if any, or the rate at which it can generate revenues,
if any, on its current products with any degree of accuracy. There
can be no assurance that the Company will be able to increase its
sales in accordance with its internal forecasts or to a level that
meets the expectations of investors.
MANAGEMENT OF EXPANDED OPERATIONS; DEPENDENCE ON KEY PERSONNEL. The
Company may not be equipped to successfully manage any future
periods of rapid growth or expansion, which could be expected to
place a significant strain on the Company's managerial, operating,
financial and other resources. The Company is highly dependent upon
the efforts of management, and the Company's future performance will
depend, in part, upon the ability of management to manage growth
effectively, which will require the Company to implement financial
controls systems, management information systems capabilities, to
develop its operating, administrative, financial and accounting
systems and controls, to maintain close coordination among
engineering, accounting, finance, marketing, sales and operations,
and to hire and train additional technical and marketing personnel.
There is intense competition for management, technical and marketing
personnel in the areas of the Company's activities. The loss of the
services of any of the Company's management or the failure to
attract and retain additional key employees could have a material
adverse effect on the Company's business, operating results and
financial condition.
DEFAULT RISKS. As of March 2, 2000, the Company had outstanding loan
obligations in the principal amount of approximately $3,282,174. The
Company's cash reserves are not sufficient to pay the principal or
interest payments due under the Company's outstanding loans.
Approximately $3 million of the outstanding debt is convertible into
Common Stock or Common Stock and warrants to purchase Common Stock.
There can be no assurance that any portion of the outstanding loan
obligations will be converted. The Company expects that if the loans
are not converted, the Company will need to raise funds to pay the
loan obligations. The Company does not have funding commitments in
place to pay off these loans. There can be no assurance that if the
debts are not converted, the Company will be able to obtain funding
to pay off the debts. Any inability to obtain funding to pay of the
debts will have a material adverse effect on the Company, including
possibly requiring the Company to significantly curtail or cease
operations.
COMPETITION. The market for sensor devices is extremely competitive
and the Company expects that competition will intensify in the
future. Many of the Company's competitors and potential competitors
have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships than the
Company. Such competitors may be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing new products and
markets than the Company. There can be no assurance that the Company
will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will
not materially adversely affect the Company's business, operating
results or financial condition. Further, as a strategic response to
changes in the competitive environment, the Company may make certain
pricing, service or marketing decisions or enter into acquisitions
or new ventures that could have a material adverse effect on the
Company's business, operating results or financial condition.
15
<PAGE>
RISKS OF TECHNOLOGICAL CHANGE. The market for electronic devices
such as sensors is characterized by rapid technological
developments, frequent new product introductions and evolving
industry standards. The emerging nature of these products and
services and their rapid evolution will require that the Company
continually improve the performance, features and reliability of its
products particularly in response to competitive offerings. There
can be no assurance that the Company will be successful in
responding quickly, cost effectively or sufficiently to these
developments. There may be a time-limited market opportunity for the
Company's products, and there can be no assurance that the Company
will be successful in achieving widespread acceptance of its
products before competitors offer products and services with
features and performance similar to the Company's current offerings.
In addition, the widespread adoption of new technologies or
standards, could require substantial expenditures by the Company to
modify or adapt its products and services and which could have a
material adverse effect on the Company's business, operating results
and financial condition. In addition, new products offered by the
Company may contain design flaws or other defects that could have a
material adverse effect on the Company's business, operating results
and financial condition.
DEPENDENCE ON CONTINUED RESEARCH AND DEVELOPMENT. Most of the
Company's products that utilize the Technology are still in various
stages of development. The Company is also exploring additional
applications for the Technology. The continued development of its
products and development of additional applications of the
Technology is important to the long-term success of the Company.
There can be no assurance that all of such applications or products
will be developed or, if developed, that they will be successful.
DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS. The Company's future
success depends in part on its ability to protect its intellectual
property and maintain the proprietary nature of its Technology
through a combination of patents and other intellectual property
arrangements. There can be no assurance that the protection provided
by patents, if issued, will be broad enough to prevent competitors
from introducing similar products or that such patents, if
challenged, will be upheld by the courts of any jurisdiction. Patent
infringement litigation, either to enforce the Company's patents or
defend the Company from infringement suits, would be expensive and,
if it occurs, could divert Company resources from other planned
uses. Any adverse outcome in such litigation could have a material
adverse effect on the Company. Patent applications filed in foreign
countries and patents in such countries are subject to laws and
procedures that differ from those in the United States. Patent
protection in such countries may be different from patent protection
under U.S. laws and may not be as favorable to the Company. The
Company also attempts to protect its proprietary information through
the use of confidentiality agreements and by limiting access to its
facilities. There can be no assurance that the Company's program of
patents, confidentiality agreements and restricted access to its
facilities will be sufficient to protect the Company's proprietary
Technology from competitors.
PRODUCT LIABILITY. The sale of the Company's devices entails an
inherent risk of liability in the event of product failure or claim
of harm caused by product operation. There can be no assurance that
the Company will not be subject to such claims, that any claim will
be successfully defended or if the Company is found liable, that the
claim will not exceed the limits of the Company's insurance. The
Company maintains product liability insurance. There is no assurance
that the Company will maintain product liability insurance on
acceptable terms in the future. Product liability claims could have
a material adverse effect on the Company.
LITIGATION. On February 13, 1998, Private Equity Partners LLC
("PEP") filed suit against Sensitron in the Third Judicial District
Court in Salt Lake County, Utah. PEP alleges, among other things,
that Sensitron owes PEP investment banking fees and warrants with
respect to an agreement, and that Sensitron's refusal to pay such
fees constitutes fraud. The suit seeks to obtain investment banking
fees equal to 6.5% of all money raised by Sensitron, warrants to
purchase 2% of Sensitron's equity, punitive damages of $5,000,000
and other relief. Discovery has been completed and both PEP and
Sensitron filed Cross-Motions for Summary Judgment. The Court took
the Cross-Motions for Summary Judgment under advisement and in March
1999 denied both motions. Additional discovery has been conducted
and the parties resubmitted their cross motions for summary
judgment. These cross motions are scheduled to be argued on May 1,
2000.
16
<PAGE>
The PEP litigation is in the early stages and has unresolved issues.
The lawsuit is subject to all of the risks and uncertainties of
litigation and the outcome cannot presently be predicted.
Specifically, there is no assurance that the Company will be fully
successful in the litigation or that the lawsuit will be resolved on
acceptable terms, and the Company may incur significant costs in
asserting its defenses. The Company is not engaged in any other
legal proceedings.
ANTI-TAKEOVER EFFECT OF PREFERRED STOCK AND DELAWARE CORPORATE LAW.
The Company has authorized 1,000,000 shares of Preferred Stock
("Preferred Stock"), of which 2,348 are outstanding. The Board has
the authority to issue the Preferred Stock with such voting and
other rights superior to those of the Common Stock, which could
effectively deter any takeover attempt of the Company. In addition,
the Delaware General Corporation Law prohibits certain mergers,
consolidations, sales of assets or similar transactions between the
Company on the one hand and another company which is, or is an
affiliate of, a beneficial holder of 15% or more of the Company's
voting power (defined as an "interested stockholder"), for three
years after the acquisition of the voting power, unless the
acquisition of the voting power was approved beforehand by the
Company's Board or the transaction is approved by a majority of
Company shareholders, (excluding the interested stockholder). The
provisions prohibiting interested stockholder transactions could
also preserve control of the Company by management.
ANTI-TAKEOVER PROVISIONS OF CERTIFICATE AND BYLAWS. The Certificate
of Incorporation of the Company provides for the division of the
Board into three classes substantially equal in number. At each
annual meeting of stockholders one class of directors is to be
elected for a three-year term. Amendments to this provision must be
approved by a two-thirds vote of all the outstanding stock entitled
to vote; the number of directors may be changed by a majority of the
entire Board or by a two-thirds vote of the outstanding stock
entitled to vote. Meetings of stockholders may be called only by the
Board, the Chief Executive Officer or the President of the Company,
and stockholder action may not be taken by written consent. These
provisions could have the effect of (i) discouraging attempts at
non-negotiated takeovers of the Company which may provide for
stockholders to receive a premium price for their stock or (ii)
delaying or preventing a change of control of the Company which some
stockholders may believe is in their interest.
EFFECT OF FAILURE TO COMPLY WITH SECURITIES LAW. In the event that
it is later determined that any securities offering of the Company
was not exempt from registration under federal and any applicable
state securities laws, it is possible that an investor may have the
right to rescind his or her purchase of the securities. If a number
of purchasers were to successfully seek rescission, the Company
could face severe financial demands that could adversely affect the
Company.
GENERAL ECONOMIC AND MARKET CONDITIONS. Use of devices in which
Company sensors are incorporated are dependent upon general economic
conditions. During recessionary periods, the markets in which the
Company competes could be characterized by decreased product demand
and price erosion. Although the Company does not believe such
factors will affect the Company, there can be no assurance that the
Company will not be affected by such factors or by future events in
the industry.
Item 7. Financial Statements.
- ----------------------------
See attached financial statements.
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
-----------------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.
----------------------------------------------------------
Set forth below is certain information concerning each of the
directors and executive officers of the Company as of March 13, 2000.
17
<PAGE>
With
the
Company
Name Age Position Since
------------------ ---- -------------------------- ------
Douglas M. Odom 38 President, Chief Executive 1995
Officer and Director
Thomas E. Danielson 37 Vice-President 1995
Jeffrey A. Coleman 40 Director 1998
Don M. Jackson, Jr. 63 Director 1998
M. Richard Wadley 56 Director 1999
John Sindt 55 Director 1999
- ------------------
DOUGLAS M. ODOM. Mr. Odom has been the President, Chief Executive
Officer and Director of Flexpoint since April 1998, and has held the
same positions with respect to Flexpoint, Inc. since 1995 and with
respect to Sensitron since 1996. From 1993 to 1995, Mr. Odom served
as the Marketing and Sales Manufacturing Director of Xymox
Technologies, Inc. Xymox Technologies, Inc. is one of the world's
largest manufacturers of membrane switches and related electronic
interface devices. Prior to his employment at Xymox Technologies,
Inc., Mr. Odom was a key executive in the reorganization of EEC,
Inc. from a public company in bankruptcy to private company posting
profits and positive cash flow. From 1985 to 1990, Mr. Odom was Vice
president of Operations of Comptec, Inc., a world-wide plastic
injection molder and electronic device corporation. From 1983 to
1985, Mr. Odom was the manager of manufacturing engineering at AMP
Keyboard Technologies. Mr. Odom received a bachelors degree in
General Science/Chemistry from Grinnell College, Grinnell, Iowa in
1982. He completed his masters studies at the American Graduate
School of International Management in Glendale, Arizona and
furthered graduate studies at Harvard University, Cambridge,
Massachusetts.
THOMAS E. DANIELSON. Mr. Danielson has been the Vice-President of
Flexpoint since 1995. Mr. Danielson was with Xymox Technologies,
Inc., Milwaukee, Wisconsin from 1993 to 1995, in an operations
management and sales management role. Prior to that, Mr. Danielson
was with W.H. Brady Company, Milwaukee, Wisconsin from 1986 to 1993,
in a variety of roles, including engineering, manufacturing and
sales. Mr. Danielson holds a bachelors of science degree in Civil
Engineering from the University of Wisconsin and a MBA in Production
Operations Management from the University of Wisconsin-Whitewater.
JEFFREY E. COLEMAN. Mr. Coleman has been a director of Flexpoint
since April 1998, and served as a director of Sensitron since
January 1998. From 1998 to present, Mr. Coleman has been operating
as owner and partner of a national real estate development and
contractor company, Majestic West, LLC. Mr. Coleman has been a
managing member of Coleman Capital Partners, a private equity
investment group, since 1996. From 1985 to 1997, he was Director of
Operations for the Pyramid Group, a national real estate
development, investment and management firm. From 1982 to 1983 he
was a consultant in the Management Information Consulting Division
of Arthur Andersen & Co. Mr. Coleman received an MBA from the Amos
Tuck School of Business at Dartmouth College and a BA (honors) from
Stanford University.
DON M. JACKSON, JR., PhD. Dr. Jackson has been a director of
Flexpoint since April 1998, and served as a director of Sensitron
since January 1998. Dr. Jackson founded SITEK Incorporated , a
semiconductor material and equipment business in July of 1998. Dr.
Jackson has been President and Chairman since inception of that
company. Dr. Jackson has been active in the founding and operating
of a number of semiconductor equipment and materials companies since
1976 when he founded ASM America in Phoenix. From 1960 until 1976,
Dr. Jackson held a number of technical and management positions in
the semiconductor industry, specifically Motorola and General
Electric Corporation. Dr. Jackson is a director of M & I Thunderbird
Bank in Phoenix and three other high-technology corporations. He
received a Ph.D. in Electrical Engineering from Arizona State
University, an M.S. in Physics from Iowa State University and a B.A.
in Physics from William Jewell College.
M. RICHARD WADLEY. Mr. Wadley has served as a Director of the
Company since July, 1999. He has over 25 years of successful general
Management and marketing experience with almost 20 years of full
operational and P&L responsibility as General Manager/President/CEO
of organizations with yearly sales of $30-$400 million. From
1993-1999, Mr. Wadley served as Board Chairman and Chief Executive
Officer for T-Chem Products, a private label household cleaning
product company. Prior to that he handled the acquisition of
Alta-Dena Dairy, a 150 million food products company and was its CEO
from 1989-1991. From 1986 to 1988, Mr. Wadley was
Vice-President/General Manager of Tambrands' largest division with
sales of almost $400 million and responsibility for over 3,000
employees. From 1981 to 1986, he was a Corporate Director of
Product Management for Hallmark Cards.. From 1968 to 1981, Mr.
Wadley held positions of increasing marketing management
responsibility with Proctor and Gamble including a successful launch
of several new products such as Dawn dishwashing liquid. Mr. Wadley
has a BA degree from Brigham Young University and an MBA from
Northwestern University.
18
<PAGE>
JOHN SINDT. Mr. Sindt has been a director of Flexpoint since
December 1999. Mr. Sindt is a Salt Lake County constable. He is the
president of the National Constables Association having previously
served as its corporate secretary and director. Mr. Sindt has owned
and operated a successful chain of retail consumer goods stores. Mr.
Sindt has served on the Governor's Task Force for the State of Utah
and has held office as a Senatorial District Chairman for the
Republican party. Mr. Sindt currently has an ownership interest in
and provides business advisory services to a high speed internet
service provider.
Executive officers of the Company are elected by the Board on an
annual basis and serve at the discretion of the Board.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officer, directors and persons who beneficially
own more than 10% of the Company's Common Stock to file initial
reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission ("SEC"). Such persons are
required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the
Company and representations from certain reporting persons,
management believes that all filing requirements under Section 16(a)
applicable to the Company's executive officers, directors and more
than 10% stockholders were complied with during the fiscal year
ended December 31, 1999, except that (i) Mr. Jeff Coleman, a
director of the Company, filed a Form 4 in March 2000 reporting a
June 1999 distribution to the equity owners of an entity with whom
Mr. Coleman is affiliated of 225,303 shares of the Company's Common
Stock, (ii) Mr. Richard Wadley, a director of the Company, filed a
Form 3 in February 2000 reporting his initial beneficial ownership
in the Company upon his appointment to the Board July 1999; (iii)
Mr. Jules A. deGreef, a ten percent stockholder of the Company,
filed seven Forms 4 in March 2000 reporting transactions in the
Company's securities in January, March, July, August, September,
November, and December, 1999; and (iv) Mr. John A. Sindt, a director
of the Company, filed a Form 4 in March 2000 reporting a
transaction in the Company's securities in July 1999.
Item 10. Executive Compensation.
- --------------------------------
The tables below set forth certain information concerning
compensation paid by the Company to its Chief Executive Officer and
all other executive officers with annual compensation in excess of
$100,000 (determined for the year ended December 31, 1999) (the
"Named Executive Officers"). The tables include information related
to stock options granted to the Named Executive Officers.
SUMMARY COMPENSATION TABLE. The following table provides certain
information regarding compensation paid by the Company to the Named
Executive Officers.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
------------------------- ------------------------------------
Securities
Restricted Underlying All Other
Name and Other Annual Stock Options/ LTIP Compensation
Principal Position Year Salary($) Bonus ($) Compensation Awards ($) SARs (#) Payouts ($) ($)
- ------------------ ---- --------- --------- ------------ ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas M. Odom (1) 1997 120,000 - - - 520,000(2) - -
President, CEO and 1998 120,000 10,000 - - - -
Director 1999 120,000 15,000 - - - - $1,275(3)
- -----------------
</TABLE>
19
<PAGE>
(1) Note Summary Compensation Table reflects salary and
bonus compensation paid by Flexpoint, Inc. to Mr. Odom. Mr. Odom
received no compensation from Flexpoint, Sensitron or TAMCO during
the periods specified.
(2) These options were granted by Sensitron and converted
into outstanding obligations of Flexpoint as part of the
Acquisition. Options to acquire 5,000 shares were exercised in
October 1998, options to acquire 415,000 shares are currently
exercisable.
(3) Represents terms life insurance premiums paid by the
Company on behalf of Mr. Odom.
Compensation of Directors
- -------------------------
Mr. Richard Wadley was compensated for service on the Board through
the grant of stock options to purchase 80,000 shares of the
Company's Common Stock which stock options are exercisable at $2.00
per share. Of such options, twenty five percent vested on the date
of grant and the remaining options vest in equal installments of
twenty five percent as long as Mr. Wadley is a member of the Board.
Mr. Wadley is also entitled to compensation of $72,000 and options
exercisable for 75,000 shares of Common Stock at $2.00 for
consulting services during 1999. In 2000, Mr. Wadley will receive
stock options exercisable for 20,000 shares of Common Stock and
$24,000 for consulting services. Jeff Coleman and Don Jackson were
each granted options to acquire 80,000 shares of Common Stock on the
dates they were elected to the Board. These stock options vest in
equal installments of twenty five percent per year beginning on the
date of grant. The other members of the Board did not receive any
compensation for their service as directors. All directors are
entitled to reimbursement for reasonable expenses incurred in the
performance of their duties as Board members. The Company has made
no other agreements regarding compensation of directors.
Employment Agreements
- ---------------------
Effective December 31, 1997, Flexpoint, Inc. entered into an
employment agreement with Mr. Odom as its Chief Executive Officer.
Under the Employment Agreement, Flexpoint, Inc. pays Mr. Odom an
annual base salary of $120,000 per year plus such discretionary
bonus as the Flexpoint, Inc. Board may deem appropriate. The
Employment Agreement has an initial term of three years and will be
automatically renewed successive one-year terms (the "Renewal
Terms") unless terminated by either party. The Employment Agreement
also provides Mr. Odom with options to acquire 780,000 shares of
Common Stock of Flexpoint at an exercise price between $.16 and $.77
per share under the Company's Omnibus Stock Option Plan (the
"Plan"). As of December 31, 1999, options to acquire 775,000 shares
of Common Stock were exercisable and options to acquire 5,000 shares
had been exercised. All of the above described options became
obligations of Flexpoint as part of the Acquisition. The Company
does not have employment agreements with any of its other employees.
Indemnification for Securities Act Liabilities
- ----------------------------------------------
Delaware law authorizes, and the Company's Bylaws and Indemnity
Agreements provide for, indemnification of the Company's directors
and officers against claims, liabilities, amounts paid in settlement
and expenses in a variety of circumstances. Indemnification for
liabilities arising under the Act may be permitted for directors,
officers and controlling persons of the Company pursuant to the
foregoing or otherwise. However, the Company has been advised that,
in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable.
Stock Options
- -------------
The Company has adopted an Omnibus Stock Option Plan for the benefit
of officers, directors, employees and consultants of the Company.
The grant of options to acquire an aggregate of 6,000,000 shares of
Common Stock have been authorized under the Plan. The Plan will
permit the Company to grant "non-qualified stock options" and/or
"incentive stock options" to acquire shares of the Company's Common
Stock. The total number of shares authorized for the Plan may be
allocated between the non-qualified stock options and the incentive
stock options from time to time, subject to certain requirements of
the Internal Revenue Code of 1986, as amended (the "Code").
The Plan is currently being administered by the Board, which will
select optionees and determine the number of shares of Common Stock
subject to each option. The Plan provides that no option which is to
be a qualified option may be granted at an exercise price less than
the fair market value of the Common Stock of the Company on the date
of grant and in all cases the term of the stock option shall not
exceed ten years. Options to acquire 4,733,221 shares of Common
Stock at exercise prices ranging from $.16 to $4.00 are presently
outstanding under the Plan.
20
<PAGE>
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
No executive officers of the Company serve on the Compensation
Committee (or in a like capacity) for the Company or any other entity.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
---------------------------------------------------
The following table sets forth certain information with respect to
the beneficial ownership of the Common Stock of the Company as of
March 2, 2000, for: (i) each person who is known by the Company to
beneficially own more than five percent of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the
Company's Named Executive Officers (defined below), and (iv) all
directors and executive officers as a group. As of March 2, 2000,
the Company had 19,107,639 shares of Common Stock outstanding.
Percentage
Name and Address Shares Benefically of Total
of Beneficial Owner(1) Owned (2)(3) (2)(3) Position
- ---------------------- ----------------- ---------- -----------------
Douglas Odom 580,000(4) 3.0% President, CEO and
Director
Jeffrey A. Coleman 77,553(5) * Director
Don M. Jackson, Jr. 40,000(6) * Director
M. Richard Wadley 153,334(7) * Director
John A. Sindt 1,463,610(8) 7.4% Director
All officers and directors 2,314,497 11.3%
as a group (5 persons)
Northridge Investments, 1,447,750(9) 7.4%
LLC
47 East 7200 south, #221
Midvale, UT 84047
Jules A. deGreef 2,154,575(10) 10.7%
47 East 7200 South, #201
Midvale, UT 84047
*Less than 1%
- ------------------------
(1) Except where otherwise indicated, the address of the
beneficial owner is deemed to be the same address as the Company.
(2) Beneficial ownership is determined in accordance with
SEC rules and generally includes holding voting and investment power
with respect to the securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for computing the percentage of the
total number of shares beneficially owned by the designated person,
but are not deemed outstanding for computing the percentage for any
other person.
(3) The Company has Common Stock and Series A Convertible
Preferred Stock outstanding. The Common Stock and Series A
Convertible Preferred Stock vote as a single voting group, unless
otherwise required by law. The total outstanding Series A
Convertible Stock comprises less than five percent of the total
outstanding voting securities. As a result, no information relating
to the Series A Preferred Stock is included in the table.
(4) Includes vested options to purchase 580,000 shares.
(5) Includes 37,553 shares. Also includes options to acquire 40,000
shares of Common Stock. Does not include options to acquire 40,000
shares of Common Stock that vests in equal installments in July 2000
and 2001.
(6) Includes options to acquire 40,000 shares of Common Stock. Does not
include options to acquire 40,000 shares of Common Stock that vests
in equal installments in July 2000 and 2001.
(7) Includes 33,334 shares. Also includes options to acquire 120,000
shares of Common Stock. Does not include options to acquire 60,000
shares of Common Stock that vests in equal installments in July
2000, 2001 and 2002.
21
<PAGE>
(8) Includes15,860 shares held by Mr. Sindt and 894,250 shares Mr.
Sindt claims beneficial ownership of through an entity. Also Includes
warrants to acquire 553,500 shares of Common Stock.
(9) Includes 894,250 shares of Common Stock and warrants to acquire
553,500 shares of Common Stock.
(10) Includes 311,292 shares. Also includes 769,783 shares
that Mr. deGreef claims beneficial ownership of through his
membership interest in an entity and warrants and stock options to
acquire 1,073,500 shares of Common Stock.
The Company is not aware of any arrangements, the operation of which
may, at a subsequent date, result in a change in control of the
Company.
Item 12. Certain Relationships and Related Transactions.
- --------------------------------------------------------
Mr. Jehu Hand, an officer and director of Flexpoint prior to the
April 1998 Acquisition, acted as legal counsel for Flexpoint.
Sens Partnership, LLC, with which Mr. Coleman was affiliated, was
issued 30,303 shares of the Company's Common Stock in December 1998.
These shares were issued to satisfy in full certain obligations that
the Company made to Mr. Coleman in connection with his investment in
the Company in December 1997.
Item 13. Exhibits and Reports on Form 8-K.
- -----------------------------------------
Exhibits
- --------
Listed on page 26 hereof.
Reports on Form 8-K
- --------------------
No reports on Form 8-K were filed by the Company during the fourth
quarter ended December 31, 1999.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLEXPOINT SENSOR SYSTEMS, INC.
(Registrant)
Date March 30,2000 By /s/ Douglas M. Odom
------------------------------
Douglas M.Odom,
President, Chief Executive Officer and Director
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Douglas M. Odom President, Chief Executive
- ----------------------------- Officer and Dirctor (Principal
Douglas M. Odom Exeuctive Officer)
/s/ Jeffrey Coleman Director March 30, 2000
- -----------------------------
Jeffrey Coleman
/s/ Don M. Jackson Director March 30, 2000
- -------------------
Don M. Jackson
/s/ M. Richard Wadley
- ----------------------------- Director March 30, 2000
M. Richard Wadley
/s/ Jon Sindt Director March 30, 2000
- -----------------------------
Jon Sindt
/s/ Thomas N. Strong Comptroller (Principal
- ----------------------------- Financial and Accounting
Thomas N. Strong Officer) March 30, 2000
23
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants . . . . . . . . 1
Consolidated Balance Sheets - December 31, 1999 and 1998 . . . . . 2
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 and for the Period from January 5,
1995 (Date of Inception) through December 31, 1999. . . . . . . . 3
Consolidated Statements of Stockholders' Equity (Deficit)
for the Period from January 5, 1995 (Date of Inception) through
December 31, 1995 and for the Years Ended December 31, 1996,
1997, 1998 and 1999 . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998 and for the Period from January
5, 1995 (Date of Inception) through December 31, 1999 . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . 7
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
Flexpoint Sensor Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Flexpoint Sensor Systems, Inc. and subsidiaries (a company in the
development stage) as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years then ended and for the
cumulative period from January 5, 1995 (date of inception) through
December 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Flexpoint Sensor Systems, Inc. and subsidiaries as of December 31,
1999 and 1998 and the results of their operations and their cash
flows for the years then ended and for the cumulative period from
January 5, 1995 (date of inception) through December 31, 1999, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered losses
from operations and has had negative cash flows from operating
activities during the years ended December 31, 1999 and 1998 and
cumulative from inception through December 31, 1999. These conditions
raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to those matters are also
described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to
continue as a going concern.
HANSEN, BARNETT & MAXWELL
March 24, 2000
Salt Lake City, Utah
1
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . $ 134,642 $ 657,775
Trade accounts receivable, net of allowance
for doubtful accounts of $3,000 and $ 90,721,
respectively . . . . . . . . . . . . . . . . . . . . 36,656 298,586
Royalty receivable. . . . . . . . . . . . . . . . . . - 152,570
Receivable from shareholder . . . . . . . . . . . . . - 1,573,750
Inventory . . . . . . . . . . . . . . . . . . . . . . 174,750 42,691
Prepaid expenses. . . . . . . . . . . . . . . . . . . 29,323 50,915
----------- -----------
Total Current Assets. . . . . . . . . . . . . . . . 375,371 2,776,287
----------- -----------
Property and Equipment. . . . . . . . . . . . . . . . . 3,403,651 1,273,326
Less accumulated depreciation . . . . . . . . . . . . (847,172) (387,858)
----------- -----------
Net Property and Equipment. . . . . . . . . . . . . 2,556,479 885,468
----------- -----------
Deposits. . . . . . . . . . . . . . . . . . . . . . . . 54,549 246,441
Patents, net of accumulated amortization of
$59,418 and $45,018. . . . . . . . . . . . . . . . . . 119,921 101,331
Goodwill, net of accumulated amortization of
$101,832 and $77,871 . . . . . . . . . . . . . . . . . 17,970 41,931
----------- -----------
Total Assets. . . . . . . . . . . . . . . . . . . . . . $ 3,124,290 $ 4,051,458
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable. . . . . . . . . . . . . . . . $ 956,206 $ 348,473
Related party payable . . . . . . . . . . . . . . . . - 1,234
Accrued liabilities . . . . . . . . . . . . . . . . . 539,056 100,290
Accrued income taxes. . . . . . . . . . . . . . . . . - 8,314
Notes payable, net of discount of $112,826. . . . . . 1,047,174 -
----------- -----------
Total Current Liabilities . . . . . . . . . . . . . 2,542,436 458,311
----------- -----------
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; 2,438 and 0 shares issued
and outstanding; liquidation preference -
$2,133,250 . . . . . . . . . . . . . . . . . . . . . 2,125,175 -
Common stock - $0.001 par value; 100,000,000
shares authorized; 19,077,310 and 16,990,296
shares issued and outstanding. . . . . . . . . . . . 19,077 16,990
Additional paid-in capital. . . . . . . . . . . . . . 13,615,677 9,127,091
Deficit accumulated during the development stage. . . (15,041,600) (5,550,934)
Unearned compensation . . . . . . . . . . . . . . . . (136,475) -
----------- -----------
Total Stockholders' Equity. . . . . . . . . . . . . 581,854 3,593,147
----------- -----------
Total Liabilities and Stockholders' Equity. . . . . . . $ 3,124,290 $ 4,051,458
=========== ===========
</TABLE>
The accompaning notes are an integral part of these consolidated
financial statements.
2
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
January 5, 1995
For the Years Ended (Date of Inception)
December 31, Through
------------------------ December 31,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . $ 773,233 $ 1,915,628 $ 4,063,958
Cost of goods sold. . . . . . . . . . . . . . . . . 356,682 819,931 1,884,985
----------- ----------- ------------
Gross Profit. . . . . . . . . . . . . . . . . . . . 416,551 1,095,697 2,178,973
General and administrative expenses . . . . . . . . 3,915,562 1,953,432 7,858,600
Research and development. . . . . . . . . . . . . . 3,339,916 1,382,101 6,643,865
----------- ----------- ------------
Loss From Operations. . . . . . . . . . . . . . . . (6,838,927) (2,239,836) (12,323,492)
Interest expense. . . . . . . . . . . . . . . . . . (194,229) (17,157) (265,430)
Interest from amortization of debt discount . . . . (1,666,936) - (1,666,936)
Interest income . . . . . . . . . . . . . . . . . . 23,288 22,177 58,899
Other income (expense), net . . . . . . . . . . . . (120,311) 12,493 (151,090)
----------- ----------- ------------
Net Loss. . . . . . . . . . . . . . . . . . . . . . (8,797,115) (2,222,323) (14,348,049)
Preferred dividends . . . . . . . . . . . . . . . . (693,551) - (693,551)
----------- ----------- ------------
Loss applicable to common shareholders. . . . . . . $(9,490,666) $(2,222,323) $(15,041,600)
=========== =========== ============
Basic and diluted loss per common share . . . . . . $ (0.54) $ (0.16) $ (1.22)
=========== =========== ============
Weighted average number of common
shares used in per share calculation . . . . . . . 17,684,212 14,259,935 12,323,797
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Additional During the Stockholders'
------------------------ Paid-In Development Equity
Shares Amount Capital Stage (Deficit)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 5, 1995
(Date of inception) . . . . . . . . . . . . . . . . - $ - $ - $ - $ -
1995:
Issuance for cash, $0.00 per share . . . . . . . . . 3,705,000 3,705 (1,705) - 2,000
Issuance for cash, $0.46 per share . . . . . . . . . 649,987 65 299,350 - 300,000
Issuance for cash, $0.74 per share . . . . . . . . . 852,800 85 631,147 - 632,000
Contribution of patents by stockholder, no additional
shares issued . . . . . . . . . . . . . . . . . . . - - 22,232 - 22,232
Issuance to acquire Flexpoint, Inc., $(0.02) per share 5,395,000 5,395 (99,579) - (94,184)
Issuance to acquire Tamco, $0.46 per share . . . . . 130,000 13 59,870 - 60,000
1996:
Issuance for services, $0.77 per share . . . . . . . 260,000 26 199,740 - 200,000
Issuance for cash, $0.77 per share . . . . . . . . . 123,500 12 94,876 - 95,000
Issuance for cash, $0.54 per share, net of offering
costs of $246,547 . . . . . . . . . . . . . . . . . 1,957,111 1,957 1,051,496 - 1,053,453
1997:
Issuance for cash, $0.97 per share . . . . . . . . . 143,000 14 109,857 - 110,000
Issuance for cash, $0.04 per share . . . . . . . . . 1,820,000 1,820 78,180 - 80,000
Issuance for cash and a $390,000 receivable,
$0.72 per share . . . . . . . . . . . . . . . . . . 1,116,375 1,116 802,884 - 804,000
Redemption from officers, $0.03 per share. . . . . . (6,308,666) (6,309) (193,691) - (200,000)
Conversion of debt, $0.57 per share. . . . . . . . . 100,672 10 53,852 - 53,952
Cumulative net loss. . . . . . . . . . . . . . . . . - - - (3,328,611) (3,328,611)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997. . . . . . . . . . . . . 9,944,779 10,976 3,108,509 (3,328,611) (210,158)
Issuance of 30,303 warrants for services . . . . . . - - 22,727 - 22,727
Issuance for cash, $4.00 per share . . . . . . . . . 288,841 28 1,155,073 - 1,155,362
Conversion of notes payable, $0.80 per share . . . . 248,833 24 199,751 - 200,000
Conversion of debt, $0.61 per share. . . . . . . . . 69,602 69 42,759 - 42,828
Acquisition of Nanotech Corporation, $0.50 per share 6,000,000 6,000 2,977,275 - 2,983,275
Exercise of options, $0.16 per share . . . . . . . . 14,500 15 2,296 - 2,311
Exercise of warrants, $0.00 per share. . . . . . . . 30,303 30 (30) - -
Issuance for receivable from shareholder . . . . . . 393,438 394 1,573,356 - 1,573,750
Compensation related to grant of stock options . . . - - 45,375 - 45,375
Net loss . . . . . . . . . . . . . . . . . . . . . . - - - (2,222,323) (2,222,323)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998. . . . . . . . . . . . . 16,990,296 $ 16,990 $ 9,127,091 $(5,550,934) $ 3,593,147
=========== =========== =========== =========== ===========
(Continued)
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Common Stock Additional During the Stockholders'
------------------------ ----------------------- Paid-In Development Unearned Equity
Shares Amount Shares Amount Capital Stage Compensation (Deficit)
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998 - $ - 16,990,296 $ 16,990 $ 9,127,091 $(5,550,934) $ - $ 3,593,147
Issuance for cash, $4.00
per share. . . . . . . . - - 158,258 158 632,867 - - 633,025
Issuance of convertible
preferred stock and
134,000 warrants for
cash, net of offering
costs of $8,263. . . . . 536 326,738 - - 134,000 - - 460,738
Conversion of common shares
into convertible preferred
stock and 559,551 warrants 2,238 1,398,886 (489,523) (490) (1,398,396) - - -
Amortization of preferred
stock discount as
preferred dividend . . . - 693,551 - - - (693,551) - -
Issuance of common shares
and 476,600 warrants for
cash, $2.00 per share,
net of offering costs of
$12,000. . . . . . . . . - - 476,600 477 940,723 - - 941,200
Conversion of Convertible
preferred stock into
common stock and 147,000
warrants, $2.00 per
share. . . . . . . . . . (336) (294,000) 147,000 147 293,853 - - -
Beneficial conversion
feature of 8% convertible
promissory notes - - - 404,062 - - 404,062
Conversion of 8% convertible
promissory notes into
common stock, $1.70 per
share. . . . . . . . . . - - 508,825 509 864,492 - - 865,001
Compensation related to
grant of stock options . - - - - 369,825 - (369,825) -
Amortization of unearned
compensation . . . . . . - - - - - - 233,350 233,350
Exercise of options for
cash, $0.16 to $0.47 per
share. . . . . . . . . . - - 919,094 919 306,521 - - 307,440
Issuance of 508,825
warrants in connection
with notes payable . . . - - - - 1,265,900 - - 1,265,900
Issuance of 45,000 warrants
in payment of interest . - - - - 109,800 - - 109,800
Compensation related to
100,000 warrants granted
for services . . . . . . - - - - 185,000 - - 185,000
Exercise of warrants for
cash, $0.77 per share. . - - 237,510 238 182,545 - - 182,783
Exercise of warrants for
services, $0.77 per
share. . . . . . . . . . - - 29,250 29 22,494 - - 22,523
Issuance in settlement
of lawsuit, $1.75 per
share. . . . . . . . . . - - 100,000 100 174,900 - - 175,000
Net loss. . . . . . . . . - - - - - (8,797,115) - (8,797,115)
---------- ----------- ----------- ---------- ----------- ------------ ---------- -----------
Balance - December 31, 1999 2,438 $ 2,125,175 19,077,310 $ 19,077 $13,615,677 $(15,041,600) $ (136,475) $ 581,854
========== =========== =========== ========== =========== ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
January 5, 1995
For the Years Ended (Date of Inception)
December 31, Through
------------------------- December 31,
1999 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Loss. . . . . . . . . . . . . . . . . . . . . $ (9,490,666) $(2,222,323) $(15,041,600)
Adjustments to reconcile net loss to
net cash used by operating activities:
Gain on sale of available-for-sale securities. - (21,225) (21,225)
Loss on sale of assets . . . . . . . . . . . . - 9,227 9,227
Depreciation and amortization. . . . . . . . . 497,675 227,233 1,020,758
Amortization of debt discount. . . . . . . . . 1,557,136 - 1,557,136
Preferred dividend . . . . . . . . . . . . . . 693,551 - 693,551
Issuance of warrants for interest. . . . . . . 109,800 - 109,800
Compensation paid with stock options . . . . . 233,350 45,375 278,725
Compensation paid by grant of warrants . . . . 185,000 - 185,000
Issuance of common stock to settle lawsuit . . 175,000 - 175,000
Exercise of warrants in exchange for services. 22,523 - 22,523
Stock issued for services. . . . . . . . . . . - 22,727 222,727
Allowance for doubtful accounts. . . . . . . . (87,721) 90,721 154,567
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . 349,651 (343,484) (55,182)
Other receivable . . . . . . . . . . . . . . . 152,570 (152,570) -
Inventory. . . . . . . . . . . . . . . . . . . (132,059) (42,691) (174,750)
Accounts payable . . . . . . . . . . . . . . . 607,733 (157,259) 777,392
Accrued liabilities. . . . . . . . . . . . . . 438,766 (263,428) 470,072
Deferred revenue . . . . . . . . . . . . . . . - (200,000) (6,163)
Other assets . . . . . . . . . . . . . . . . . (7,597) (284,075) (289,822)
------------ ----------- ------------
Net Cash Used In Operating Activities. . . . . (4,695,288) (3,291,772) (9,912,264)
------------ ----------- ------------
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 . . . . . . . . . . . . . . . . . . . - 455,082 455,082
Net cash received in Nanotech acquisition . . . . - 1,492,907 1,492,907
Payments received from related parties. . . . . . - 34,661 34,661
Collection of receivable from escrow agent. . . . - 64,825 64,825
Payments to purchase equipment. . . . . . . . . . (1,912,558) (379,263) (2,913,355)
Proceeds from sale of equipment . . . . . . . . . - 14,592 22,682
Issuance of note receivable . . . . . . . . . . . - - (12,507)
Payments received on note receivable. . . . . . . - 4,950 12,505
Payments for patents. . . . . . . . . . . . . . . (32,990) (39,029) (143,314)
------------ ----------- ------------
Net Cash Provided By (Used In) Investing
Activities. . . . . . . . . . . . . . . . . . (1,945,548) 1,648,725 (1,279,927)
------------ ----------- ------------
Cash Flows From Financing Activities
Proceeds from issuance of preferred stock . . . . 460,738 - 460,738
Proceeds from issuance of common stock. . . . . . 2,064,448 1,157,664 6,155,112
Cash payments to officers to repurchase stock . . - - (50,000)
Cash paid for offering costs. . . . . . . . . . . - - (123,020)
Cash paid for loan costs. . . . . . . . . . . . . (5,000) - (5,000)
Collection of receivables from issuance of
common stock . . . . . . . . . . . . . . . . . . 1,573,750 390,000 1,963,750
Proceeds from borrowings. . . . . . . . . . . . . 865,001 - 1,168,961
Principal payments of debt. . . . . . . . . . . . - (353,336) (398,751)
Borrowings from Nanotech prior to acquisition . . - 1,000,000 1,000,000
Proceeds from related party notes . . . . . . . . 1,510,000 - 1,570,208
Principal payments of related party notes . . . . (351,234) - (415,165)
------------ ----------- ------------
Net Cash Provided By Financing Activities. . . 6,117,703 2,194,328 11,326,833
------------ ----------- ------------
Net Change In Cash. . . . . . . . . . . . . . . . . (523,133) 551,281 134,642
Cash - Beginning of Period. . . . . . . . . . . . . 657,775 106,494 -
------------ ----------- ------------
Cash - End of Period. . . . . . . . . . . . . . . . $ 134,642 $ 657,775 $ 134,642
============ =========== ============
</TABLE>
Supplemental cash flow information and Noncash investing and financing
activities - Note 6
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(Flexpoint) and its wholly-owned subsidiaries. The operations of
acquired entities have been included from the dates of their
acquisitions. Intercompany transactions and accounts have been
eliminated in consolidation.
NATURE OF OPERATIONS -The Company has been a development stage
enterprise engaged principally in designing, engineering, and
manufacturing sensors and related equipment using its flexible
potentiometer technology. Through December 31, 1998, a majority of
Flexpoint's sales were to toy manufacturers. Flexpoint has negotiated
a significant contract to supply flexible sensors to an automobile
component manufacturer. Sales under the contract are scheduled to
begin upon Flexpoint's completion of required research and
development of applicable sensors and establishment of a manufacturing
facility.
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 these estimates.
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 years ended
December 31, 1999 and 1998 and cumulative from inception through
December 31, 1999, 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. Subsequent to year end, the Company has received $1,800,000
in net proceeds from the issuance of a convertible debenture.
Management plans to obtain the remainder of the $5,000,000 commitment
under the convertible debenture agreement and to obtain additional
financing through issuance of debt or equity securities. The Company
is negotiating with other possible financing sources. However, no
agreements have been reached and there is no assurance that additional
financing will be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amounts reported as cash,
trade accounts receivable, other receivable, trade accounts payable,
accrued liabilities and notes payable are considered to be reasonable
approximations of their fair values. The fair value estimates were
based on information available to management at the time of the
preparation of the financial statements.
INVESTMENT IN SECURITIES - During the year ended December 31, 1998,
Flexpoint sold marketable securities for $455,082 and realized gross
gains of $21,225. The gain is included in other income (expense), net
in the accompanying statements of operations.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS -The Company has
concentration of risk with respect to cash on deposit with a bank in
excess of insured limits, and from doing business in one-industry.
The latter subjects Flexpoint to a concentration of credit risk
relating to trade accounts receivable. During the year ended December
31, 1999, 76% of Flexpoint's revenues were from customers in the auto
industry. During 1999, revenue from two major customers totaled 59%
and 17% of sales, respectively. During the year ended December 31,
1998, 85% of Flexpoint's revenues were from customers in the toy
industry. During 1998, revenues from two major customers totaled 40%
and 35% of sales, respectively. Flexpoint relies on a few significant
production contracts for its revenue and generally does not require
collateral from its customers with respect to trade receivables.
INVENTORY - Inventory is valued at the lower of cost or market. Cost
is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are 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 operations. 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 three to seven years.
LONG-LIVED ASSETS - The realization of non-current assets is evaluated
periodically when events or circumstances indicate a possible
inability to recover the carrying amount. Such evaluation is based
upon various analyses, including estimates of net future cash flows,
and involves significant management judgement. No impairment losses
were required to be recognized as a result of the evaluation of these
assets through December 31, 1999.
REVENUE RECOGNITION - Revenue from the sale of products is recorded at
the time of shipment to the customers. Revenue from research and
development engineering contracts is recognized as the services are
provided and accepted by the customer. Revenue from contracts to
license Flexpoint's technology to others is deferred until all
conditions under the contracts are met and then recognized as
licensing royalty over the remaining term of the contracts.
ADVERTISING COSTS - During the years ended December 31, 1999 and 1998,
Flexpoint incurred $260,983 and $65,635 of advertising costs,
respectively. Flexpoint follows the policy of expensing these
advertising costs at the time the advertising services are rendered.
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 the options are granted. Flexpoint 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 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 9,174,055 and 6,944,310 potentially issuable common
shares at December 31, 1999 and 1998, respectively, were excluded
from the calculation of diluted loss per share as they would have
decreased loss per share.
NOTE 2 - ACQUISITIONS
Nanotech Corporation ("Nanotech") was incorporated June 11, 1992 under
the laws of the state of Delaware, and was a publically-held shell
corporation. On December 30, 1997, Sensitron entered into an
Agreement and Plan of Reorganization (the "Agreement") with Nanotech
whereby Sensitron became a wholly owned subsidiary of Nanotech. The
agreement required Nanotech to raise capital of approximately
$3,000,000 in a private placement prior to completion of the
reorganization. The $3,000,000 was raised and the reorganization was
consummated in April 1998. Nanotech changed its name to Micropoint,
Inc., and subsequently to Flexpoint Sensor Systems, Inc.
("Flexpoint"), and the shareholders of Sensitron exchanged each of
their shares of common stock for 13 shares of Flexpoint common stock
which resulted in the issuance of 9,860,279 shares of common stock to
the Sensitron shareholders. As a result, the Sensitron shareholders
became the majority shareholders of Flexpoint in a transaction
intended to qualify as a tax-free reorganization.
The Agreement has been accounted for as a recapitalization of
Sensitron in a manner similar to a stock split. The accompanying
historical financial statements prior to the reorganization are those
of Sensitron and have been restated to reflect the effects of the
13-for-1 stock split resulting from the conversion of the outstanding
Sensitron common shares into Flexpoint shares. The accompanying
financial statements have been restated for the effects of the stock
split for all periods presented. The agreement was further considered
to be the issuance of 6,000,000 common shares for Nanotech's net
assets of $2,983,275, which were primarily cash and cash equivalents.
The accompanying consolidated financial statements include the
operations of Flexpoint from the date of the reorganization.
In April 1995, Sensitron acquired 100 shares of common stock of
Flexpoint Inc., a Utah Corporation, in exchange for the forgiveness of
$50,000 of accounts receivable. On September 26, 1995, Sensitron
completed the acquisition of Flexpoint, Inc. by exchanging 5,395,000
shares (post-split) of Sensitron's common stock for the remaining
outstanding common stock of Flexpoint, Inc. in a purchase business
combination accounted for in a manner similar to a pooling of
interests. Flexpoint, Inc. and Sensitron were principally owned by
the same individuals prior to the combination.
On September 26, 1995, Sensitron acquired all of the outstanding stock
of Tamco, a company engaged in manufacturing and selling various molds
and dies. The purchase price was approximately $170,000, consisting of
$25,000 of cash, a long-term note payable of $85,000 and 130,000
common shares (post-split) valued at $60,000. The purchase price was
allocated based on the estimated fair values of the net assets
acquired. This allocation resulted in recording of goodwill of $119,802.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31,
------------------------
1999 1998
----------- -----------
Furniture and fixtures . . . . . . . . . $ 90,350 $ 75,356
Machinery and equipment. . . . . . . . . 1,692,100 674,682
Office equipment . . . . . . . . . . . . 276,255 143,234
Software . . . . . . . . . . . . . . . . 34,979 29,924
Leasehold improvements . . . . . . . . . 1,309,967 350,130
----------- -----------
Total. . . . . . . . . . . . . . . . . . $ 3,403,651 $ 1,273,326
=========== ===========
Depreciation expense for the years ended December 31, 1999 and 1998
was $459,314 and $188,873, respectively.
NOTE 4 - OTHER ASSETS
Costs to obtain patents have been capitalized and are being amortized
over a five year period. Flexpoint currently has the rights to several
patents. Flexpoint is in the process of developing new patents and
protecting its existing patents internationally. Cost associated with
the development of new patents are capitalized. Amortization of
patents is recognized from the date the patents are awarded. The total
patent cost capitalized as of December 31, 1999 and 1998 was $179,339
and $146,349, respectively, of which $73,470 and $73,470 relates to
patents being amortized, respectively. Amortization expense from
patents for the years ended December 31, 1999 and 1998 was $14,400 and
$14,400, respectively.
Goodwill associated with the acquisition of Tamco is being amortized
over five years using the straight-line method. Amortization expense
from goodwill for the years ended December 31, 1999 and 1998 was
$23,960 and $23,960, respectively.
NOTE 5 - LICENSE AGREEMENT
In May 1997, Flexpoint granted an otherwise unrelated third party the
worldwide exclusive license to use and sell flexible potentiometers
covered under Flexpoint's patents for use in toys, traditional games
and video game industries. The license does not include the right to
manufacture sensors manufactured by Flexpoint. A licensing fee of
$500,000 was recognized as sales under the agreement relating to the
exclusive use of the technology through December 1998. After 1998, the
exclusive license is to be maintained under the agreement by the
licensee providing revenue from royalties and fees to Flexpoint of at
least $500,000 per year. Royalties to be received are 2% of sales of
the licensee's products in the United States and 3% of related
products to the licensee's international partners. Minimum payments
were not received under the agreement during the year ended December
31, 1999. As a result, the exclusive rights under the agreement are
no longer in force.
Under the agreement, Flexpoint guaranteed that it would deliver
flexible potentiometers in marketable quantities to the licensee by
June 1, 1998. That obligation was fulfilled by Flexpoint and the
initial $200,000 licensing fee was recognized as sales at that date.
Additional sales have been recognized as products have been delivered
under the agreement. At December 31, 1998, Flexpoint had a royalty
receivable as a result of this licensing agreement of $152,570 which
was included in trade accounts receivable, and was subsequently
collected.
NOTE 6 - CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION - Cash payments for interest were
$5,000 and $15,726 for the years ended December 31, 1999 and 1998,
respectively.
NONCASH INVESTING AND FINANCING ACTIVITIES - In connection with the
acquisition of Nanotech on April 11, 1998, liabilities were assumed as
follows:
Fair value of assets acquired . . . . . . . . . . . $ 1,991,589
Advances from Nanotech prior to acquisition . . . . 1,000,000
Fair value of common stock issued in acquisition. . (2,983,275)
-----------
Liabilities assumed. . . . . . . . . . . . . . . $ 8,314
===========
On September 26, 1995, Flexpoint acquired all of the common stock of
Tamco. In connection with this acquisition, liabilities were assumed
as follows:
Fair value of assets acquired, including goodwill
of $119,802. . . . . . . . . . . . . . . . . . . . $ 170,000
Cash paid in acquisition. . . . . . . . . . . . . . (25,000)
Fair value of stock issued in acquisition . . . . . (60,000)
-----------
Liabilities assumed. . . . . . . . . . . . . . . $ 85,000
===========
On September 26, 1995, the Company acquired all of the common stock of
Flexpoint, Inc. in exchange for 5,395,000 shares of common stock. The
following assets and liabilities were acquired at their historical
cost basis:
Historical cost of assets acquired. . . . . . . . . $ 394,660
Capital deficiency. . . . . . . . . . . . . . . . . 94,184
Advances to Flexpoint prior to acquisition. . . . . (268,413)
-----------
Liabilities assumed. . . . . . . . . . . . . . . $ 220,431
===========
During 1995, the Company assumed $13,792 of legal costs associated
with patents in connection with the assignment of patents to the
Company by an officer. During the year ended December 31, 1996,
260,000 shares of common stock were issued for services valued at
$0.77 per share, or $200,000.
During the year ended December 31, 1997, $111,816 of notes payable
were issued to acquire leasehold improvements. The Company issued
110,672 shares of common stock upon conversion of $53,952 of accounts
payable and notes payable. Common stock was redeemed from officers in
exchange for $50,000 of cash and $150,000 of notes payable. The
Company issued common stock in exchange for stock subscription
receivables totaling $390,000 which were subsequently collected.
During the year ended December 31, 1998, 318,435 shares of common
stock were issued upon conversion of $242,828 of debt. The Company
issued 393,438 shares of common stock for a subscription receivable of
$1,573,731 which was collected subsequent to year end.
During the year ended December 31, 1999, $865,001 of notes payable
were converted to common stock as described in Note 10.
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following:
December 31,
----------------------
1999 1998
---------- ----------
Note payable to shareholder, due June 18, 2000,
interest accrues at 20% $ 100,000 $ -
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 1,000,000 -
Note payable to a shareholder, due July 15, 1999,
monthly interest accrues at 10%, the Company is
is default, additional interest totaling $59,877
has been accrued since default 60,000 -
---------- ----------
Total Notes Payable 1,160,000 -
Less: Discount on notes payable 112,826 -
---------- ----------
Notes Payable, net of discount $1,047,174 $ -
========== ==========
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 had been drawn under the note payable or
letter of credit at December 31, 1998, 1999 or subsequently. The
promissory note and letter of credit are secured by $50,000 of cash on
deposit with the bank. In addition to the cash on deposit with the
bank, a commitment fee of 1% of the unused portion of the amount of
the credit facility is due annually. Subsequent to December 31, 1999,
the credit facility was reduced to $40,000.
From January through March of 1998, management of the Company
negotiated the terms of conversion of notes payable issued during
1997. In March 1998, the holders of $200,000 in notes payable
accepted the conversion terms and converted those notes into 248,833
shares of common stock. The notes were converted at $0.80 per share
which was at or above the fair value of the common stock at the time
the conversion terms were established. In addition, $42,828 of debt
was issued during 1997 which was convertible into common stock at
$0.61 per share, which approximated the fair value of the common
stock on the date the notes were issued. The debt was converted into
69,602 shares of common stock during October 1998.
During the year ended December 31, 1999, the Company issued several 8%
convertible promissory notes. The notes were convertible into common
stock during 1999 as further discussed in Note 9. In addition to the
convertible notes, the Company issued non-convertible notes. Warrants
to purchase 780,000 shares of the common stock were issued with the
notes. The proceeds of the notes were allocated between the fair
value of the warrants and to the note payable based upon their
relative fair values. This resulted in a discount on the notes of
$1,265,900 which was credited to additional paid-in capital. The
discount is being amortized over the maturity of the notes. During
the year ended December 31, 1999, $1,153,074 of the discount was
amortized to interest expense.
NOTE 8 - EMPLOYMENT AND COMPENSATION AGREEMENTS
Effective August 26, 1997, two officers resigned from the Board of
Directors and sold 6,308,666 shares of common stock to the Company for
$200,000, or approximately $0.03 per share. One of the officers was
granted options to acquire 650,000 shares of common stock at $0.30 per
share and 325,000 shares for $0.77 per share for a period of five years.
The Company has an employment agreement with an officer which includes
an annual base salary $120,000 per year through December 31, 2001.
Effective May 1, 1995, Flexpoint entered into a royalty agreement
whereby an officer was to provide technical assistance and be paid a
monthly fee of $8,333 for five years. During 1997, Flexpoint
suspended payments under the royalty agreement. An agreement was
signed April 15, 1998 whereby Flexpoint agreed to pay the officer
$160,000 in settlement of all past and future obligation under the
compensation agreement. The amount paid was recognized in general and
administrative expense during 1998.
The Company entered an agreement with a board member for marketing,
business development, investor and financial advisory services
effective July 1, 1999. The terms of the agreement require the
Company to pay $12,000 per month. No formal term was stated in the
contract; however, no services were provided after February 2000.
The Company entered an agreement for financing and business management
advisory services effective August 1, 1999. The terms of the
agreement require the Company to pay $6,250 per month for eighty hours
of services per month. Any service over and above the eighty hours
will be billed at $80 per hour. The agreement is effective for three
years from the effective date.
12
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY
PREFERRED STOCK-During the year ended December 31, 1999, 4,500 shares
of preferred stock were designated as Series A convertible preferred
stock with a stated value of $875. The preferred stock will rank,
with respect to rights on liquidation, senior to all classes of common
stock and each other class of capital stock or series of preferred
stock established after the date designated by the Board of Directors.
The preferred stock has no stated dividend rate and no dividends will
be payable thereon unless declared by the Board of Directors. Each
share of preferred stock outstanding is entitled to 250 votes. The
preferred shares are entitled to a preference in liquidation over the
common shares equal to $875 per preferred share.
Shares of preferred stock may be convertible at any time, in whole or
in part, at the option of the holder thereof into common stock at a
conversion price of $3.50 per share. The outstanding shares of
preferred stock will automatically be converted into common stock if
the closing bid price for the common stock for 15 successive trading
days is equal to or greater than $12.00 per share.
Series A convertible preferred stock and Series A warrants to purchase
250 shares of common stock were issued as a unit in an offering from
May through July 1999. In addition to units sold, shareholders who
purchased common stock under the Company's prior private offering were
given the option of converting the shares of common stock purchased
into units of the new offering. The offering resulted in the issuance
of 536 shares of convertible preferred stock and Series A warrants to
purchase 134,000 shares of common stock at $4.00 per share. The
conversion resulted in the cancellation of 489,523 shares of common
stock and the issuance 2,238 shares of convertible preferred stock and
Series A warrants to purchase 559,551 of common stock at $4.00 per
share. The gross proceeds from the offering before $8,263 offering
costs were $469,000. These proceeds and the conversion of the common
shares were allocated on the dates received to (a) the Series A
Warrants to purchase common stock based upon their fair value in the
amount of $ 693,551 and (b) $1,725,624 was allocated to the
convertible preferred stock. The resulting discount on the preferred
stock of $693,551 was immediately amortized as a preferred stock
dividend on the dates the convertible preferred stock was issued. The
convertible preferred stock is convertible into 693,551 shares of
common stock through January 1, 2001.
As the result of a subsequent offering of common stock 336 shares of
Series A convertible preferred stock were cancelled and converted into
common stock.
COMMON STOCK-In connection with the reorganization agreement with
Nanotech, the Company's common stock was split 13-for-1 on April 11,
1998. All references to common shares in these financial statements
reflect the change in the number of common shares outstanding for all
periods presented.
In January 1995, an officer and shareholder assigned certain patents
to the Company as an additional contribution to capital of $22,232. No
additional shares were issued to the shareholder for the contribution.
On March 18, 1996, the Company entered into a share purchase agreement
whereby the Company agreed to issue 1,957,111 shares of its common
stock for $1,300,000 in a private placement offering. The proceeds
were received and the shares were issued throughout 1996 as required
by the Company's cash flow needs. Offering costs incurred in
connection with the offering were $246,547.
On August 26, 1997, the Company entered into a settlement agreement
with two officers of the Company whereby the relationship between the
officers and the Company was terminated. As part of the agreement, the
Company redeemed 6,308,666 shares of common stock from the officers
for $200,000, or approximately $0.03 per share by paying $50,000 in
cash and by issuing $150,000 of notes payable.
13
<PAGE>
On December 24, 1997, the Company issued 422,500 shares of common
stock in exchange for stock subscriptions in the amount of $390,000
receivable from the investors. The subscriptions were collected in
January 1998.
In January 1998, the Company recognized compensation related to an
agreement with a shareholder whereby the shareholder would be able to
maintain a 1% equity interest in the Company through the date of the
merger with Nanotech. The agreement has been accounted for as the
grant of a warrant to the shareholder for the purchase of 30,303
shares of common stock at a zero purchase price. $22,727 of
compensation expense was recognized on the date the warrant was
granted, based upon a $0.75 fair value of the stock on that date. The
warrant was exercised on October 14, 1998.
On December 23, 1998, Flexpoint issued 618,588 shares of common stock
in exchange for a stock subscription in the amount of $2,474,350
receivable from the investor. The Company collected $1,573,750 of the
subscription through February 16, 1999. On March 31, 1999, the Company
closed the private placement offering, released a shareholder from a
$900,600 receivable under the subscription contract and cancelled the
related 225,150 shares of common stock.
Units consisting of 10,000 shares of common stock and Series B
warrants to purchase 10,000 shares of common stock were issued as a
unit in an offering from July through October 1999. In addition to
units sold, shareholders who purchased convertible preferred stock
under the Company's prior private offering were given the option of
converting the shares of convertible preferred stock purchased into
units of the new offering. The offering resulted in the issuance of
476,600 shares of common stock and Series B Warrants to purchase
476,600 shares of common stock at $3.50 per share. The conversion
resulted in the cancellation of 336 shares of Series A Convertible
Preferred Stock and the issuance of 147,000 shares of common stock and
Series B Warrants to purchase147,000 shares of common stock at $3.50
per share. The gross proceeds from the offering before $12,000
offering costs were $953,200.
Convertible debt and Series C warrants to purchase common stock were
issued as a unit in an offering in November 1999. The offering
resulted in the issuance of warrants to purchase 508,825 shares of
common stock at priced ranging from $2.00 to $2.25 per share and
$865,001 of notes payable which were convertible into common stock at
$1.70 per share. The excess of the market value of the common stock
over the conversion price at the dates the notes payable were issued
ranged from $0.52 to $1.02 per share and was a beneficial conversion
feature of the convertible debt. The gross proceeds from the offering
were $865,001 and were allocated on the dates received to (a) to the
beneficial conversion feature of the notes payable based upon the
excess of the fair value of the common stock over the conversion price
in the amount of $404,062, and (b) $460,939 to the notes payable. The
resulting discount to the notes payable was amortized immediately as
the notes were convertible upon issuance and resulted in $404,062 of
interest expense. The notes payable were converted into 508,825 shares
of common stock in December 1999.
In November 1999, the Company issued 100,000 shares of common stock in
settlement of a stock ownership claim as explained further in Note 15.
NOTE 10 - STOCK OPTIONS
On April 1, 1995, the Board of Directors and shareholders adopted an
Omnibus Stock Option Plan (the "Plan"). Under the terms of the Plan,
as amended in October 1997, Flexpoint may grant options to employees,
directors and consultants to purchase up to 5,037,500 shares of common
stock. Incentive or non-qualified options may be granted under the
Plan. Options granted under the Plan are exercisable over periods
determined by the Board of Directors, not to exceed 10 years from the
date of grant. Options generally vest from immediately to five years.
The exercise price of options granted under the Plan generally have
been equal to or in excess of the fair value of Flexpoint's common
stock on the date of grant. Generally, the only condition for exercise
of options granted under the Plan is that the employees remain
employed through the date the options are exercised or vested.
14
<PAGE>
In October 1995, the Company granted options, exercisable at $0.77 per
share, to an officer for 195,000 shares of common stock which vested
upon Flexpoint obtaining specified levels of sales and gross profit.
During August 1997, the Company agreed upon the terms of a new
employment agreement with the officer. The agreement was executed in
December 1997 and included canceling 130,000 options exercisable at
$0.77 and granting 390,000 options exercisable at $0.38, which
management considered to be the fair value of the Company's common
stock in August 1997. The new options vest through 2001 and do not
have any performance criteria for vesting. The modification to the
options did not result in additional compensation over the amount
referred to below.
Flexpoint measures compensation under stock-based options and plans
using the intrinsic value method prescribed in Accounting Principles
Board Opinion 25, Accounting for Stock Issued to Employees, and
related interpretations, for stock options granted to employees, and
determines compensation cost granted to non-employees based on the
fair value at the grant dates consistent with the alternative method
set forth under Statement of Financial Accounting Standards No. 123,
(SFAS 123) Accounting for Stock-Based Compensation. Stock-based
compensation charged to operations was $233,350 and $45,375 for the
years ended December 31, 1999 and 1998, respectively. Had
compensation cost been determined based on the fair value of the
options at the grant dates consistent with the alternative
method of SFAS No. 123, Accounting for Stock-Based Compensation,
Flexpoint's net loss and loss per share would have increased to the
pro forma amounts indicated below. The weighted average assumptions
used to estimate the fair value of each option grant, using the
Black-Scholes option-pricing model, are also presented:
Years Ended December 31,
---------------------------
1999 1998
------------ ------------
Net Loss
As reported . . . . . . . . . . . $ (9,490,666) $ (2,222,323)
Pro forma . . . . . . . . . . . . (9,790,042) (2,342,574)
Primary and Diluted Loss per share
As reported . . . . . . . . . . . $(0.54) $(0.16)
Pro forma . . . . . . . . . . . . $(0.55) $(0.16)
Weighted-Average Assumptions:
Divided yield . . . . . . . . . . 0.0% 0.0 %
Expected volatility . . . . . . . 77.29% 53.42%
Risk-free interest rate . . . . . 5.44% 5.53%
Expected life of options, in years 6.34 5.0
A summary of the status of stock options as of December 31, 1999 and
1998 and changes during the years ended on those dates are presented
below:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------
1999 1998
---------------------- ----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period. . . 5,507,550 $ 0.42 4,717,050 $ 0.42
Granted . . . . . . . . . . . . . . . . 315,000 3.06 805,000 0.75
Exercised . . . . . . . . . . . . . . . (919,094) 0.34 (14,500) 0.16
Forfeited . . . . . . . . . . . . . . . (195,000) - 0.00
---------- ----------
Outstanding at end of year. . . . . . . 4,708,456 0.62 5,507,550 0.42
========== ==========
Options exercisable at end of year. . . 3,456,411 0.51 3,617,554 0.41
========== ==========
Weighted-average fair value of
options granted during period. . . . . $ 3.25 $ 0.47
========== ==========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------------- --------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ------------ -------------- --------------- ------------ ---------------
<C> <C> <C> <C> <C> <C>
$ 0.00 - 0.50 3,350,000 2.3 years $ 0.34 2,494,119 $ 0.33
0.51 - 0.99 1,063,550 4.3 0.76 876,886 0.76
2.00 - 2.99 106,000 5.6 2.01 45,500 2.01
3.00 - 3.99 43,000 6.1 3.50 11,500 3.51
4.00 - 4.99 145,906 5.6 4.00 37,406 4.00
------------ ------------
$ 0.00 - 4.99 4,708,456 3.0 0.62 3,456,411 0.51
============ ============
</TABLE>
NOTE 11 - STOCK PURCHASE WARRANTS
In connection with the acquisition of Flexpoint, Inc. and Tamco
during 1995, the Company issued warrants to purchase 22,750 shares of
its common stock exercisable at $0.77 per share (which was the fair
value of the common stock on the date of the issuance as determined by
the Board of Directors) to its outside legal counsel for services.
Additionally, the Company issued warrants during 1995 to purchase
23,010 shares of its common stock at a purchase price of $0.77 per
share to equity investors.
During 1996, warrants were issued to purchase 214,500 shares of common
stock at $0.77 per share to equity investors in the Company and
warrants to purchase 6,500 shares at $0.77 per share were issued to
outside legal counsel for services.
During 1997, Flexpoint issued warrants to purchase 260,000 shares of
common stock at $0.77 per share to equity investors. Additionally,
warrants to purchase 910,000 shares of common stock at $1.15 per share
were issued to a retiring member of the Board of Directors.
All of the above warrants had no material fair value on the date
issued. On the date issued, the fair value of each warrant was
estimated using the Black-Scholes option-pricing model.
During 1999, warrants to purchase 1,722,048 shares of common stock
were issued as part of offerings as further described in Note 10.
Warrants to purchase 780,000 shares of common stock were issued with
notes payable as further discussed in Note 7. An additional 100,000
warrants were issued to a consultant for services. Compensation of
$185,000 was recognized from the grant of these warrants.
The following table summarizes information about warrants outstanding
at December 31, 1999:
Weighted-Average
Warrants Remaining
Exercise Prices Outstanding Contractual Life
--------------- ------------ -----------------
$ 0.00 - 0.99 260,000 1.7 years
1.00 - 1.99 910,000 0.7
2.00 - 2.99 1,053,825 3.8
3.00 - 3.99 938,600 2.8
4.00 - 4.99 609,623 1.0
$ 0.00 - 4.00 3,772,048 2.2
NOTE 12 - 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 years
ended December 31, 1999 and 1998 were as follows:
1999 1998
----------- -----------
Products
Sales of sensors. . . . . . . . . . $ 289,264 $ 1,051,023
Licensing royalty . . . . . . . . . 250 511,291
Tooling and dies. . . . . . . . . . 42,668 205,162
----------- -----------
Total Products . . . . . . . . . 332,182 1,767,476
Engineering Services . . . . . . . . . 441,051 148,152
----------- -----------
Total Sales. . . . . . . . . . . . . . $ 773,233 $ 1,915,628
=========== ===========
NOTE 13 - INCOME TAXES
There was no provision for, or benefit from, income tax for any
period. The components of the net deferred tax asset as of December
31, 1999 and 1998 were as follows:
1999 1998
----------- -----------
Operating loss carry forwards . . . . . $ 5,132,458 $ 1,921,033
Allowance for doubtful accounts . . . . 1,119 -
Amortization of intangibles . . . . . . 14,711 11,167
----------- -----------
Total Deferred Tax Assets. . . . . . 5,145,288 1,932,200
Valuation Allowance . . . . . . . . . . (5,148,288) (1,932,200)
----------- -----------
Net Deferred Tax Asset . . . . . . . $ - $ -
=========== ===========
For tax reporting purposes, the Company had net operating loss carry
forwards in the amount of $14,081,751at December 31, 1999 that will
expire beginning in the year 2012.
The following is a reconciliation of the amount of benefit that would
result from applying the federal statutory rate to pretax loss with
the provision for income taxes for the years ended December 31, 1999
and 1998:
For the Years Ended
December 31,
-------------------------
1999 1998
------------ -----------
Tax at statutory rate (34%). . . . . . . . . $ (2,991,019) $ (755,590)
Non-deductible expenses. . . . . . . . . . . 100,275 1,030
Increase in valuation allowance. . . . . . . 4,177,296 937,153
State tax benefit, net of federal tax effect (290,305) (73,337)
Change in effective tax rate . . . . . . . . (996,247) (109,256)
------------ -----------
Provision for Income Taxes . . . . . . . . $ - $ -
============ ===========
NOTE 14 -- LONG-TERM CONTRACTS
On May 28, 1998, Flexpoint entered into a purchase and supply
agreement with an automotive manufacturer. Under the terms of the
agreement, Flexpoint is to provide engineering and support to the
automotive manufacturer. For the years ended December 31, 1999 and
1998, Flexpoint received $424,551 and $148,152, respectively from such
services. The agreement for the engineering and support services runs
through December 31, 2001 and is to provide Flexpoint with an
additional $455,382 of related revenue. Flexpoint is also to provide
the automotive manufacturer with sensors for use as a component in
automobile manufacturing. The agreement for the sensors runs through
December 31, 2003. The agreement may be renewed for one or more
successive one-year terms upon the mutual written agreement of both
parties.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
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 December 31, 1999 was $40,000. Future
minimum lease payments under operating leases at December 31, 1999
are as follows:
Year Ending December 31:
2000. . . . . . . . . . . . . . . . . . $ 322,922
2001. . . . . . . . . . . . . . . . . . 309,850
2002. . . . . . . . . . . . . . . . . . 249,900
2003. . . . . . . . . . . . . . . . . . 249,900
-----------
Total . . . . . . . . . . . . . . . . . $ 1,132,570
===========
Lease expense for the years ended December 31, 1999 and 1998 was
$366,270 and $82,751, respectively.
In 1995, a third party entity loaned $35,000 to a former officer of
the Company as a personal loan. This entity made a claim against the
former officer for repayment of the advance and for other
consideration. Flexpoint was required to provide compensation to the
former officer sufficient to settle the claim during the year ended
December 31, 1998, in the amount of $48,618 in settlement of the
loan. During the year ended December 31, 1999, the third party
appealed its share ownership claim. In November 1999, the Company
settled the share ownership claim by issuing 100,000 shares of common
stock valued at $1.75 per share, the fair market value on the date of
settlement. As a condition of the settlement agreement, each party
released the other party from any further liability.
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 claims 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 is seeking punitive damages of $5,000,000.
Flexpoint answered the complaint in March 1998 and the action is in
the discovery stage. Flexpoint has been and continues to contest the
case vigorously. Given the early stage of the action, legal counsel
for Flexpoint is unable to provide any evaluation of the likelihood of
an unfavorable outcome, if any, or the amount or range of potential
loss. Management believes, after consulting with legal counsel, that
there is only a remote possibility that Flexpoint will be subject to a
punitive damage award under the suit. Management has tendered $75,000
to the plaintiff to completely settle the action and Management
maintains that the most Flexpoint owes the plaintiff is $75,000.
Flexpoint has accrued a liability of $75,000 relating to this action
in its financial statements at December 31, 1999 and 1998.
NOTE 16 - SUBSEQUENT EVENTS
The Company issued a note payable dated January 17, 2000 to an
individual. The note was for $100,000 with an interest rate of 14%.
The note is due April 1, 2000. As additional consideration, the
Company issued warrants to purchase 100,000 shares of common stock at
$1.80 per share. The warrant has a three-year term from January 17,
2000. The loan is secured by certain equipment. The proceeds from
the loan will be allocated to the warrants based upon their fair
value. The resulting discount to the note of $100,000 will be
recognized and amortized over the term of the note.
Subsequent to year end, the Company issued 8% convertible promissory
notes totaling $135,000. The notes are convertible into 79,412 shares
of common stock and Series C warrants to purchase an additional 79,412
shares of common stock. Allocation of the proceeds to the warrants
will result in a discount to the notes of $81,391 which will be
recognized as interest expense.
On March 3, 2000, the Company signed a convertible debenture for up to
$5,000,000. At signing, the Company received $1,785,000 net of
related costs of $215,000 in exchange for an 8% convertible debenture
in the principal amount of $2,000,000 and Series 2000-A warrants to
purchase 1,283,697 shares of common stock for a four year period. The
note is due March 1, 2001 and interest at an annual rate of 8% is
payable quarterly. If the Company's stock price falls below $1.00 per
share for five consecutive days, the principal balance will become
redeemable at the option of the purchaser. The redemption amount is
equal to 125% of the outstanding principal plus accrued interest.
Under the agreement and subject to certain contingencies the investor
may purchase additional debentures of $500,000 each in subsequent
months. Subsequent purchases will be reduced by a ten percent
placement fee and certain other offering costs.
The debenture is convertible to common stock of the Company at the
option of the purchaser at a conversion price which is the lower of
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 the average of the three lowest closing bid prices for
the common stock during the 15 trading days preceding conversion,
subject to a maximum price of $3.00 per share and a minimum price of
$1.00 per share. Up to 33% of the aggregate principal and accrued
interest may be converted immediately, on or after the 30th day
following the date of the agreement, of the aggregate principal and
accrued interest 67% may be converted and the entire aggregate
principal balance and accrued interest may be converted after 60 days.
If the stock price on the due date of the debenture is greater than
$2.00, the purchaser is obligated to convert all of the outstanding
debenture into common shares.
The estimated relative fair value of the warrants as of March 3, 2000
was $1,026,301. The estimated relative fair value will be recorded as
a discount on the debenture and amortized over 60 days, the period
until the debenture is fully convertible.
The purchaser of the debenture is not obligated to purchase the
remaining $3 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.
Subsequent to year end, the Company defaulted on its note payable to a
shareholder by not making payment on February 10, 2000, the maturity
date. The Company was already in default of the prepaid interest of
$70,000 due August 11,1999. The shareholder 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 shareholder also
required a prepayment of interest of $70,000, payment of the $70,000
pre-payment due August 11, 1999, plus attorney fees. The entire
payment required in addition to the warrants totals $141,920.
Management accepted the offer to extend the note for six months by
effectively issuing the warrants and making payment of the default and
pre-payment interest on March 27, 2000.
EXHIBIT INDEX
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 Certificate of Incorporation of Flexpoint (Incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form 10-SB, dated June 17, 1994).
3(i).2 Certificate of Amendment to Certificate of Incorporation
(Incorporated by referenced to Exhibit 3.1 of the Company's Current
Report on Form 8-K, dated April 9, 1998).
3(i).3 Articles of Incorporation of Sensitron (Incorporated by
referenced to Exhibit 3.(i).3 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
3(i).4 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).5 Articles of Incorporation of Tamco (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 Bylaws of Flexpoint (Incorporated by reference to
Exhibit 3.2 of the Company's Registration Statement on Form 10-SB,
dated June 17, 1994).
3(ii).2 Bylaws of Sensitron (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 Tamco (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
(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
of 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. (Incorporated by reference to
Exhibit 10.5 of the Company's Annual Report on Form 10-KSB, dated
December 31, 1998).
10.6 Securities Purchase Agreement between the Company and
Aspen Capital Resources, LLC, (Incorporated by reference to Exhibit
10.1 of the Company's Current Report on Form 8-K, dated March 16,
2000).
10.7 Promissory secured promissory note between the Company
and Jerry and Vicki Moyes Family Trust, dated August 10, 1999.
10.8 Security Agreement between the Company and Jerry and
Vicki Moyes Family Trust, dated August 10, 1999.
21.1 Schedule of Subsidiaries (Incorporated by referenced to
Exhibit 21.1 of the Company's Annual Report on Form 10-KSB, dated
March 31, 1998).
27.1 Financial Data Schedule
24
<PAGE>
EXHIBIT 10.7
SECURED PROMISSORY NOTE
$1,000,000.00 Phoenix, Arizona
August 10, 1999
1. FUNDAMENTAL PROVISIONS.
The following terms will be used as defined terms in this Note:
Payee and Holder: The Jerry and Vicki Moyes Family Trust dated
12-11-1987.
Maker: Flexpoint Sensor Systems, Inc., a Utah corporation
Principal Amount: One Million Dollars ($1,00000.00)
Interest Accrual Date: Interest to maturity date will be prepaid
to payee upon funding
Interest Rate: Fourteen percent (14%) per annum
Default Interest Rate: Twenty-eight percent (28%) per annum
Maturity Date: February 10, 2000
Business Day: Any day of the year other than Saturdays, Sundays,
or legal holidays.
Loan Documents: The Note and Security Agreement, Uniform
Commercial Code Financing Statements and any other
documents executed in connection with the Loan including,
but not limited to, the Warrant to Purchase 500,000 shares
of FLEXPOINT SENSOR SYSTEMS, INC. COMMON SHARES.
Loan: The loan from Payee to Maker in the Principal
Amount and evidenced by this Note.
2. PROMISE TO PAY.
For value received, Maker promises to pay to the order of Holder, at
the office of Lender at 2200 S. 75th Avenue, Phoenix, AZ 85043 or
at such other place as the Holder hereof may from time to time
designate in writing, the Principal Amount of One Million Dollars
($1,00000.00), together with accrued interest from the date of
disbursement on the unpaid principal balance at the Interest Rate.
1
<PAGE>
3. INTEREST; PAYMENTS.
(a) Absent an Event of Default hereunder or under any of the
Loan Documents, the interest on this Note shall be prepaid by Maker
to Lender upon funding. Any future advances or unpaid balances
beyond the maturity date shall bear interest at the Interest Rate
stated. Throughout the term of this Note, interest shall be
calculated on a 360-day year with respect to the unpaid balance of
the Principal Amount beyond the maturity date and, in all cases,
shall be computed for the actual number of days in the period for
which interest is charged, which period shall consist of 360 days on
an annual basis.
(b) All payments due hereunder shall be made (i) without
deduction of any present and future taxes, levies, imposts,
deductions, charges or withholdings, which amounts shall be paid by
Maker, and (ii) without any other set off. Maker will pay the
amounts necessary such that the gross amount of the principal and
interest received by the Holder hereof is not less than that
required by this Note.
(c) One (1) final "balloon" payment of all unpaid principal,
interest, if any, and any other amounts due hereunder shall be due
and payable on the Maturity Date.
(d) If any payment to be made by maker hereunder shall become
due on a day which is not a Business Day, such payment shall be made
on the next succeeding Business Day.
4. PREPAYMENT.
Maker shall have the right to prepay the Principal Amount, or any
portion thereof, without premium or penalty, provided that Maker
shall provide the Holder with at least five (5) days prior written
notice of Maker's intent to make any prepayment.
5. LAWFUL MONEY.
Principal and interest are payable in lawful money of the United
States of America.
6. APPLICATION OF PAYMENTS/LATE CHARGE.
(a) Absent the occurrence of an Event of Default hereunder or
under any of the other Loan Documents, any payments received by the
Holder hereof pursuant to the terms hereof shall be applied first to
sums, other than principal and interest, due the Holder hereof
pursuant to the Loan Documents, next to the payment of all interest
accrued to the date of such payment, and the balance, if any, to the
payment of principal. Any payments received by the Holder hereof
after the occurrence of an Event of Default hereunder or under any
of the Loan Documents, shall be applied to the amounts specified in
this Paragraph 6 (a) in such order as the Holder hereof may, in its
sole discretion, elect.
(b) If any payment of interest and/or principal is not received
by the Holder hereof when such payment is due, then in addition to
the remedies conferred upon the Holder hereof pursuant to Paragraph
9 hereof and the other Loan Documents, (i) a late charge of five
percent (5%) of the amount of the installment due and unpaid will be
added to the delinquent amount to compensate the Holder hereof for
the expense of handling the delinquency for any payment past due in
excess of ten (10) days, regardless of any notice and cure periods,
and (ii) the amount due and unpaid (including, without limitation,
the late charge) shall bear interest at the Default Interest Rate,
computed from the date on which the amount was due and payable until
paid unless Section 9 is applicable.
2
<PAGE>
7. SECURITY.
This Note is secured by a lien upon the equipment described in the
Security Agreement of even date herewith and the Form UCC-1
Financing Statement of even date herewith attached hereto as
Exhibit AA@.
8. EVENT OF DEFAULT.
The occurrence of any of the following shall be deemed to be an
event of default (Event of Default) hereunder:
(a) default in the payment of principal or interest when due; or
(b) the occurrence of an Event of Default under any of the Loan
Documents, including but not limited to this Note.
9. REMEDIES.
Upon the occurrence of an Event of Default, then at the option of
the Holder hereof:
(a) the entire balance of principal together with all accrued
interest thereon, and all other amounts payable by Maker under the
Loan Documents shall, without demand or notice, immediately become
due and payable. Upon the occurrence of an Event of Default, (and
so long as such Event of Default shall continue), the entire balance
of principal hereof, together with all accrued interest thereon, all
other amounts due under the Loan Documents, and any judgment for
such principal, interest, and other amounts shall bear interest at
the Default Interest Rate from the date of the last interest
payment, subject to the limitations contained in Paragraph 14
hereof. No delay or omission on the part of the Holder hereof in
exercising any right under this Note or under any of the other Loan
Documents hereof shall operate as a waiver of such right.
10. WAIVER.
Maker, endorsers, guarantors, and sureties of this Note hereby waive
diligence, demand for payment, presentment for payment, protest,
notice of nonpayment, notice of protest, notice of non payment,
notice of intent to accelerate, notice of acceleration, notice of
dishonor, any notice of nonpayment, and all other notices or demands
of any kind (except notices specifically provided for in the Loan
Documents) and expressly agree that, without in any way affecting
the liability of Maker, endorsers, guarantors, or sureties, the
Holder hereof may extend any maturity date or the time for payment
of any installment due hereunder, otherwise modify the Loan
Documents, accept additional security, release any person liable,
and release any security or guaranty. Maker, endorsers, guarantors,
and sureties waive, to the full extent permitted by law, the right
to plead any and all statutes of limitations as a defense.
3
<PAGE>
11. CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
No provision of this Note may be changed, discharged, terminated, or
waived except in writing signed by the party against whom
enforcement of the change, discharge, termination or waiver is
sought. No failure on the part of the Holder hereof to exercise and
no delay by the Holder hereof in exercising any right or remedy
under this Note or under the law shall operate as a waiver thereof.
12. ATTORNEYS' FEES.
If this Note is not paid when due or if any Event of Default occurs,
Maker promises to pay all costs of enforcement and collection and
preparation therefor, including but not limited to, reasonable
attorneys' fees, whether or not any action or proceeding is brought
to enforce the provisions hereof (including, without limitation, all
such costs incurred in connection with any bankruptcy, receivership,
or other court proceedings (whether at the trial or appellate level).
13. SEVERABILITY.
If any provision of this Note is unenforceable, the enforceability
of the other provisions shall not be affected and they shall remain
in full force and effect.
14. INTEREST RATE LIMITATION.
Maker hereby agrees to pay an effective rate of interest that is the
sum of the interest rate provided for herein, together with any
additional rate of interest resulting from any other charges of
interest or in the nature of interest paid or to be paid in
connection with the Loan, including, without limitation, any fees to
be paid by maker pursuant to the provisions of the Loan Documents.
Holder and Maker agree that none of the terms and provisions
contained herein or in any of the Loan Documents shall be construed
to create a contract for the use, forbearance or detention of money
requiring payment of interest at a rate in excess of the maximum
interest rate permitted to be charged by the laws of the State of
Arizona. In such event, if any Holder of this Note shall collect
monies which are deemed to constitute interest which would otherwise
increase the effective interest rate on this Note to a rate in
excess of the maximum rate permitted to be charged by the laws of
the State of Arizona, all such sums deemed to constitute interest in
excess of such maximum rate shall, at the option of the Holder, be
credited to the payment of other amounts payable under the Loan
Documents or returned to Maker.
15. NUMBER AND GENDER.
In this Note the singular shall include the plural and the masculine
shall include the feminine and neuter gender, and vice versa.
16. HEADINGS.
Headings at the beginning of each numbered section of this Note are
intended solely for convenience and are not part of this Note.
4
<PAGE>
17. CHOICE OF LAW.
This Note shall be governed by and construed in accordance with the
laws of the State of Arizona without giving effect to conflict of
laws principles. Exclusive jurisdiction on all litigation will be
in the Superior Court of Maricopa County, Arizona.
18. INTEGRATION.
The Loan Documents contain the complete understanding and agreement
of the Holder hereof and Maker and supersede all prior
representations, warranties, agreements, arrangements,
understandings, and negotiations.
19. BINDING EFFECT.
The Loan Documents will be binding upon, and inure to the benefit
of, the Holder hereof, Maker, and their respective successors and
assigns. Maker may not delegate its obligations under the Loan
Documents.
20. TIME IS OF THE ESSENCE.
Time is of the essence with regard to each provision of the Loan
Documents as to which time is a factor.
21. SURVIVAL.
The representations, warranties, and covenants of the Maker in the
Loan Documents shall survive the execution and delivery of the Loan
Documents and the making of the Loan.
22. WAIVER OF JURY TRIAL.
MAKER HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS NOTE
OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT, OR AGREEMENT DELIVERED
(OR WHICH MAY IN THE FUTURE BE DELIVERED) IN CONNECTION HEREWITH OR
ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH
THIS NOTE. MAKER AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE
TRIED BEFORE THE COURT AND NOT BEFORE A JURY.
MAKER
Flexpoint, Inc., a Utah corporation
By: /s/ Douglas M. Odom
----------------------------
Its:
5
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made and entered into this 10th day of
August, 1999, by Flexpoint Sensor Systems, Inc., a Utah corporation,
whose offices are located 6906 South 300 West, Midvale, Utah 84047
(hereinafter called ADebtor@) in favor of The Jerry and Vicki Moyes
Family Trust dated 12-11-87 (hereinafter called ASecured Party@)
whose address is 2200 S. 75th Avenue, Phoenix, AZ 85043
1. RECITALS
1.1 Secured Party has contemporaneously herewith loaned to
Debtor the aggregate principal sum of One Million Dollars
($1,000,000.00) as evidenced by the Note made contemporaneously
with this Security Agreement.
1.2 The making of such loan by Secured Party is conditioned upon
Debtor's securing the Note by giving to Secured Party a security
interest in the property described on Exhibit A attached hereto and
incorporated herein by reference (hereinafter called the Collateral).
2. SECURITY INTEREST
2.1 In consideration of the loan described above, Debtor hereby
grants to Secured Party a security interest (hereinafter called the
Security Interest) in the property described on Exhibit A (Collateral).
2.2 This Security Agreement is given for the purpose of
securing, in such order of priority as Secured Party may elect:
(a) Payment of the aggregate sum of $1,000,000.00 with interest
thereon, extension and other fees, late charges, prepayment premiums
and attorneys' fees, according to the terms of that Promissory Note
dated of this date, made by Debtor, payable to the order of Secured
Party, and all extensions, modifications, renewals or replacements
thereof (hereinafter called the Note);
(b) Payment, performance and observance by Debtor of each
agreement, term, provision and condition contained herein and of all
monies expended or advanced by Secured Party pursuant to the terms
hereof, or to preserve any right of Secured Party hereunder, or to
protect or preserve the Collateral or any part thereof;
6
<PAGE>
(c) Payment and performance of any and all other indebtedness,
obligations and liabilities of Debtor to Secured Party of every kind
and character, direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter incurred, whether such
indebtedness is from time to time reduced and thereafter increased
or entirely extinguished and thereafter reincurred.
All of the indebtedness and obligations secured by this Security
Agreement are hereinafter collectively called the Obligation.
3. WARRANTIES, COVENANTS AND AGREEMENTS OF DEBTOR
3.1 Debtor represents and warrants that:
(a) Debtor is the true and lawful owner of the Collateral and
has full power, right and authority to execute and deliver this
Agreement;
(b) The Collateral, as of the date hereof, is valid and in good
and current standing, not having been altered, amended, changed,
terminated or canceled in any way;
(c) The Collateral represents a bona fide, valid and legally
enforceable obligation of the person or entity named therein in
accordance with its terms. No payments have been made, collected or
remitted under the Collateral in advance of the accrual thereof;
(d) No defense, setoff, claim or counterclaim exists against
Debtor that could be asserted against Secured Party, whether in any
proceeding to enforce Secured Party's interest in the Collateral or
otherwise;
(e) Debtor has not conveyed, transferred, or assigned the
Collateral or any of its rights or interest therein and has not
executed any other document or instrument that might prevent or
limit Secured Party from operating under the terms and conditions of
this Agreement;
(f) Debtor will make no other assignment of the Collateral or of
any right or interest therein; and
(g) Debtor has taken all steps necessary to ensure that the
Note, this Security Agreement and the Loan Documents are binding
obligations of the Debtor, including but not limited to, adoption by
Debtor=s Board of Directors of any Board Resolutions reasonably
necessary to fully obligate Debtor hereunder and effectuate the
intent of the Debtor and Secured Party in entering into the Loan
Documents.
7
<PAGE>
3.2 Debtor does hereby make, constitute and appoint Secured
Party, its successors and assigns, Debtor's true and lawful
attorney-in-fact, in Debtor's name, place and stead, or otherwise:
(a) To do all acts and to execute, acknowledge, obtain and
deliver any and all instruments, documents, items or things
necessary, proper or required as a term, condition or provision of
the Collateral or in order to exercise any rights of Debtor under
the Collateral or to receive and enforce any performance due Debtor
under the Collateral;
(b) To give any notices, instructions, or other communications
to any other parties to the Collateral or to any person or entity in
connection therewith;
(c) To demand and receive all performances due under or with
respect to the Collateral and to take all lawful ways and means for
the enforcement thereof and to compromise and settle any claim or
cause of action in Debtor arising from or related to the Collateral
and give acquittance and other sufficient discharges relating
thereto; and
(d) To file any claim or to take any other action or proceeding,
either in its own name or in that of its nominee, or in the name of
Debtor or otherwise, to enforce performances due under or related to
the Collateral or to protect and preserve the right, title and
interest of Secured Party hereunder.
The power of attorney given herein is a power coupled with an
interest and shall be irrevocable so long as any part of the
Obligation remains unpaid or unperformed. Secured party shall have
no obligation to exercise any of the foregoing rights and powers in
any event.
3.3 No change, amendment or modification shall be made to the
Collateral or to the instructions of Debtor contained herein without
the prior written approval of Secured Party.
3.4 Debtor shall promptly notify Secured Party of any default or
breach of or under the Collateral or of any failure of performance
or other condition that with the giving of notice or the passage of
time, or both, could become a default or breach under the Collateral.
3.5 Debtor shall pay all taxes, assessments, and other charges
that may be levied or assessed against the Collateral current
through August 1999 and thereafter.
8
<PAGE>
3.6 Debtor shall immediately give Secured Party written notice
of any change in location of Debtor's executive office.
3.7 Debtor, at its cost and expense, shall protect and defend
this Agreement, all of the rights of Secured Party hereunder and the
Collateral against all claims and demands of other parties. Debtor
shall pay all claims and charges that in the opinion of Secured
Party might prejudice, imperil or otherwise affect the Collateral or
the Security Interest. Debtor shall promptly notify Secured Party
of any levy, distraint or other seizure by legal process or
otherwise of any part of the Collateral and of any threatened or
filed claims or proceedings that might in any way affect or impair
the terms of this Agreement.
3.8 The Security Interest, at all times, shall be perfected and
shall be prior to any other interests in the Collateral. Debtor
shall act and perform as necessary and shall execute and file all
Security Agreements, financing statements, continuation statements
and other documents deemed necessary by Secured Party to establish,
maintain and continue the perfected Security Interest. Debtor, on
demand, shall promptly pay all costs and expenses of filing and
recording, including the costs of any searches, deemed necessary by
Security Party from time to time to establish and determine the
validity and the continuing priority of the Security Interest.
3.9 If Debtor shall fail to pay any expenses or charges, to keep
all of the Collateral free from other security interests,
encumbrances or claims or to perform otherwise as required herein,
Secured Party may advance the monies necessary to pay the same.
3.10 All rights, powers and remedies granted Secured Party
herein, or otherwise available to Secured Party, are for the sole
benefit and protection of Secured Party, and Secured Party may
exercise any such right, power or remedy at its option and in its
sole and absolute discretion without any obligation to do so. In
addition, if under the terms hereof, Secured Party is given two or
more alternative courses of action, Secured Party may elect any
alternative or combination of alternatives at its option and its
sole and absolute discretion. All monies advanced by Secured Party
under the terms hereof and all amounts paid, suffered or incurred by
Secured Party in exercising any authority granted herein, including
reasonable attorneys' fees, shall be added to the Obligation, shall
be secured by the Security Interest, shall bear interest at the
highest rate payable on the Obligation until paid, and shall be due
and payable by Debtor to Secured Party immediately without demand.
9
<PAGE>
3.11 Debtor shall furnish to Secured Party, or to any proposed
assignee of the Note, within five (5) days after request therefore,
a written statement in form satisfactory to Secured Party, duly
acknowledge, certifying the amount of the Principal and interest
then owing under the Note, whether any claims, offsets or defenses
exist there against or against this Security Agreement or any of the
terms and provisions of any other agreement securing the Obligation.
4. EVENTS OF DEFAULT; REMEDIES
4.1 The occurrence of any of the following events or conditions
shall constitute and is hereby defined to be an Event of Default:
(a) Any failure to pay principal or interest or any other part
of the Obligation pursuant to the provisions contained in the Note
or other Security Instrument after notice as provided in the
Promissory Note.
(b) Any failure or neglect to perform or observe any of the
terms, provisions, or covenants of this Security Agreement, any of
the Note, the Loan Agreement or any other document or instrument
executed or delivered in connection with the Obligation and such
failure or neglect either cannot be remedied or, if it can be
remedied, it continues unremedied for a period of thirty (30) days
after written notice thereof to Debtor.
(c) Any warranty, representation or statement contained in this
Security Agreement, the Note, or any other document or instrument
executed or delivered in connection with the Obligation, or made or
furnished to Secured Party by or on behalf of Debtor, that shall be
or shall prove to have been materially false when made or furnished.
(d) The filing by Debtor, (or against Debtor) in which Debtor
acquiesces or which is not dismissed within sixty (60) days after
the filing thereof of any proceeding under the federal bankruptcy
laws or hereafter existing or any other similar statute now or
hereafter in effect; the entry of an order for relief under such
laws with respect to Debtor or the appointment of a receiver,
trustee, custodian or conservator of all or any part of the assets
of Debtor.
(e) The insolvency of Debtor, or the execution by Debtor of an
assignment for the benefit of creditors; or the convening by Debtor
of a meeting of its creditors, or any class thereof, for purposes of
effecting a moratorium upon or extension or composition of its
debts; or the failure of Debtor to pay its debts as they mature; or
if Debtor is generally not paying its debts as they mature.
10
<PAGE>
(f) The admission in writing by Debtor that it is unable to pay
its debts as they mature or that it is generally not paying its
debts as they mature.
(g) The liquidation, termination or dissolution of Debtor, if a
corporation, partnership or joint venture, if the Secured Party is
not reasonably reassured of timely payment and performance hereunder
and under the Note and all other Loan Documents.
(h) Any attachment, garnishment, levy or execution upon, or
judicial seizure of, any portion of the Collateral.
(i) The existence or the filing of any lien or encumbrance
against any portion of the Collateral which may impair the first
lien position of secured party.
(j) The institution of any legal action or proceedings to
enforce a lien or security interest in any portion of the Collateral.
(k) The abandonment by Debtor of all or any part of the Collateral.
(l) The loss, theft or destruction of, or any substantial damage
to, any portion of the Collateral that is not replaced, restored or
returned within thirty (30) days.
(m) The occurrence of any Event of Default under any of the Note
or any other document or instrument executed or delivered in
connection with the Obligation.
(n) The occurrence of any Event of Default under any document or
instrument given by Debtor in connection with any other indebtedness
of Debtor to Secured Party.
4.2 Upon the occurrence of any Event of Default at any time
thereafter while such Event of Default is continuing, Secured Party
shall have the following rights and remedies and may do one or more
of the following:
(a) Declare all or any part of the Obligation including any or
all of the Note immediately due and payable, and the same, with all
costs and charges, shall be collectible thereupon by action at law.
(b) Pursue any legal remedy available to collect the Obligation,
to enforce its title in and right to possession of the Collateral
and to enforce any and all other rights or remedies available to it.
11
<PAGE>
(c) Apply any funds in any Impound Accounts held by Secured
Party for the benefit of Debtor to the Obligation in any manner as
Secured Party elects.
(d) After notice to Debtor as provided in Paragraph 4.3 herein,
sell such Collateral at public or private sale either with or
without having such Collateral at the place of sale. The proceeds
of such sale, after deducting therefrom all expenses of Secured
Party in collecting and selling the Collateral (including reasonable
attorneys' fees) shall be applied to the payment of the Obligation,
and any surplus thereafter remaining shall be paid to Debtor or any
other person that may be legally entitled thereto. In the event of
a deficiency between such net proceeds from the sale of the
Collateral and the total amount of the Obligation, Debtor, upon
demand, shall promptly pay the amount of such deficiency to Secured
Party. Secured Party may purchase all or any part of the Collateral
offered at any public or private sale made in the enforcement of
Secured Party's rights and remedies hereunder.
4.3 Secured Party shall give Debtor reasonable notice of any
sale or other disposition of all or any part of the Collateral.
Debtor agrees that notice and demand shall be deemed to be
commercially reasonable and effective if such notice is given to
Debtor at least ten (10) days prior to such sale or other
disposition in the manner provided herein for the giving of notices.
4.4 Debtor shall and does hereby indemnify and hold Secured
Party harmless from any and all damages and losses arising as a
result of or related to the Collateral, this Agreement or the
exercise by Secured Party of any of its rights under this Agreement,
including, without limitation, any judgment, amounts paid in
settlement, and all costs and expenses, including reasonable
attorneys fees, incurred in defending or settling any action, suit
or proceeding in connection with the foregoing.
4.5 All sums advanced or paid by Secured Party under the terms
hereof, all amounts paid, suffered or incurred by Secured Party in
exercising any authority granted herein, including reasonable
attorneys fees, and all other amounts due Secured Party in
connection with this Agreement shall be added to the Obligation,
shall be secured by all lien and security documents securing the
Obligation, shall bear interest at the highest rate payable on any
of the Obligation until paid, and shall be due and payable by Debtor
to Secured Party immediately without demand.
4.6 Debtor shall pay all costs and expenses, including without
limitation costs of Uniform Commercial Code searches, court costs
and reasonable attorneys' fees, incurred in enforcing payment and
performance of the Obligation or in exercising the right and
remedies of Secured Party whether in civil, probate, bankruptcy or
appellate courts. Such court costs and attorneys' fees shall be set
by the court and not by jury, shall be included in any judgment
obtained by Secured Party, shall be added to the obligation and
shall be secured by this Security Agreement.
12
<PAGE>
4.7 In addition to the remedies provided herein for an Event of
Default, Secured Party shall have all the rights and remedies
afforded a secured party under the Uniform Commercial Code. No
failure on the part of Secured Party to exercise any of its rights
hereunder arising upon any Event of Default shall be construed to
prejudice its rights upon the occurrence of any other or subsequent
Event of Default. No delay on the part of Secured Party in
exercising any such rights shall be construed to preclude it from
the exercise thereof any time during the continuance of that Event
of Default. Secured Party may enforce any one or more remedies or
rights hereunder successively or concurrently. By accepting payment
or performance of any of the Obligation after its due date, Secured
Party shall not thereby waive the agreement contained herein that
time is of the essence, nor shall Secured Party waive either its
right to require prompt payment or performance when due of the
remainder of the Obligation or its right to consider the failure to
so pay or perform an Event of Default.
5. OPTIONAL REMEDIES
5.1 In addition to the remedies provided Secured Party by
Section 4 above, Secured Party shall have, at its sole and
exclusive option, upon written Notice to the Debtor, the following
Optional Remedies upon any Event of Default:
(a) Secured Party may forgive the Note and any and all
indebtedness represented thereby in exchange for THREE MILLION
DOLLARS ($3,000,000.00) in shares of the Debtor=s common voting
stock at the closing market price on the day of the Event of
Default, or on the next Business Day thereafter if the Event of
Default occurs on a day that is not a Business Day as defined in the
Note. In the event that the Debtor=s stock is not publically traded
at the time that the Secured Party exercises its Optional Remedy
under this Section 5.1(a), Secured Party shall be entitled to THREE
MILLION DOLLARS ($3,000,000.00) in shares of the Debtor=s Common
Stock at the closing market price on the last day that the Debtor=s
Common Stock was publically traded. In the event that Secured Party
exercises its Optional Remedy under this Section 5.1(a), Secured
Party shall be entitled to retain all prepaid interest, interest,
principal and Warrants paid and/or issued by Debtor to the Secured
Party in connection with the Note and the Loan Documents. In
addition, Debtor agrees that Debtor=s Board of Directors will take
all actions necessary to immediately expand the Debtor=s Board of
Directors by one Board Member and immediately appoint Secured
Party=s nominee (ANominee@) to the newly created Board of Director=s
position. Nominee shall serve for one regular term on the Debtor=s
Board of Directors. After Nominee has served one term on Debtor=s
Board of Directors Nominee shall be entitled to stand for
re-election to the Debtor=s Board of Directors at the next regularly
scheduled meeting of the Debtor=s Stockholders held after the end of
Nominee=s first term; or
13
<PAGE>
(b) Secured Party may extend the term of the Note for an
additional six (6) months on the same terms and conditions as
contained in the Note and the Loan Documents, including but not
limited to, all of the terms and conditions contained in this
Security Agreement. As a condition of extending the term of the
Note an additional six (6) months pursuant to this Section 5.1(b)
the Debtor shall issue to the Secured Party a Warrant for an
additional FIVE HUNDRED THOUSAND (500,000) Shares of the Debtor=s
common voting stock at the same Exercise Price and on the same terms
as set forth in the Warrant issued to the Secured Party as part of
this Loan Agreement and as set forth in the Loan Documents. In the
event that the Secured Party exercises its Optional Remedy under
this Section 5.1(b) the Note, as extended, shall bear interest at
the Note Interest Rate, which shall be prepaid within ten (10)
Business Days of Notice to Debtor that Secured Party is exercising
its Optional Remedy pursuant to this Section 5.1(b). In the event
that Debtor fails to make the required prepayment of interest within
ten (10) Business Days of Notice by Secured Party, Secured Party
shall be entitled to exercise any and all of its remedies under the
terms of the Loan Documents, including but not limited to its
remedies pursuant to Sections 4 and 5 of this Security Agreement.
In the event that Secured Party exercises its Optional Remedy under
this Section 5.1(b) and Debtor then subsequently Defaults under the
Note, as extended, Secured Party shall be entitled to any and all
rights and remedies available to it, and Debtor shall be bound by
all of Debtor=s warranties and obligations, under the Loan Documents
including, but not limited to, these Sections 4 and 5 of this
Security Agreement.
6. MISCELLANEOUS PROVISIONS
6.1 The acceptance of this Security Agreement by Secured Party
shall not be considered a waiver of or in any way to affect or
impair any other security that Secured Party may have, acquire
simultaneously herewith, or hereafter acquire for the payment or
performance of the Obligation, nor shall the taking by Secured Party
at any time of any such additional security be construed as a wavier
of, or in any way to affect or impair, the Security Interest;
Secured Party may resort, for the payment or performance of the
Obligation, to its several Security Interests therefor in such order
and manner as it may determine.
6.2 Secured Party, by accepting this Agreement, shall not be
subject to any obligation or liability under the Collateral,
including, without limitation, any duty to perform any of the terms,
conditions, provisions or agreements thereof, but any and all such
obligations and liabilities shall continue to rest upon Debtor as
though this Agreement had not been made.
14
<PAGE>
6.3 Without notice or demand, without affecting the obligations
of Debtor hereunder or the personal liability of any person for
payment or performance of the Obligation, and without affecting the
Security Interest or the priority thereof, Secured Party, from time
to time, may (i) extend the time for payment of all or any part of
the Obligation, accept a renewal note therefore, reduce the payments
thereon, release any person liable for all or any part thereof, or
otherwise change the terms of all or any part of the Obligation;
(ii) take and hold other security for the payment or performance of
the Obligation and enforce, exchange, substitute, subordinate, waive
or release any such security; (iii) join in any extension or
subordination agreement; or (iv) release any part of the Collateral
from the Security Interest.
6.4 Debtor waives and agrees not to assert: (i) any right to
require Secured Party to proceed against any guarantor, to proceed
against or exhaust any other security for the Obligation, to pursue
any other remedy available to Secured Party, or to pursue any remedy
in any particular order or manner; (ii) the benefits of any statute
of limitations affecting the enforcement hereof; (iii) demand,
diligence, presentment for payment, protest and demand, and notice
of extension, dishonor, protest, demand and nonpayment, relating to
the Obligation; and (iv) any benefit of, and any right to
participate in, any other security now or hereafter held by Secured
Party.
6.5 No failure or delay on the part of Secured Party in
exercising any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise of any
right, power, or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or
privilege. The rights, powers and remedies hereunder are cumulative
and may be exercised by Secured Party either independently of or
concurrently with any other right, power, or remedy contained herein
or in any instrument executed in connection with the Obligation.
6.6 The terms herein shall have the meanings in and be construed
under the Uniform Commercial Code. This Agreement shall be governed
by and construed in accordance with the laws of the State of
Arizona. Each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law, but
if any provision of this Agreement is held to be void or invalid,
the same shall not affect the remainder hereof which shall be
effective as though the void or invalid provision has not been
contained herein.
6.7 No modification, rescission, waiver, release or amendment of
any provision of this Security Agreement shall be made except by a
written agreement subscribed by Debtor and a duly authorized officer
of Secured Party.
15
<PAGE>
6.8 This Security Agreement shall remain in full force and
effect until all of the Obligation shall have been paid and
performed in full.
6.9 No offset or claim that Debtor now has or may in the future
have against Secured Party shall relieve Debtor from paying or
performing the Obligation.
6.10 Time is of the essence hereof. This Security Agreement
applies to, inures to the benefit of, and binds all parties hereto,
their heirs, personal representatives, successors and assigns. The
term Secured Party shall include not only the original Secured Party
hereunder but also any future owner and holder, including pledgees,
of the Note. The provisions hereof shall apply to the parties
according to the context thereof and without regard to the number or
gender of words or expressions used.
6.11 All notices required or permitted to be given hereunder
shall be in writing, and shall be delivered and become effective two
days after deposit with the U.S. Postal Service to:
If to Debtor:
Flexpoint Sensor Systems, Inc.
6906 South 300 West
Midvale, Utah 84047
If to Secured Party:
The Jerry and Vicki Moyes Family Trust
2200 S. 75th Avenue
Phoenix, AZ 85043
with a copy to:
Richard Spector
Spector Law Offices, P.C.
6900 E. Camelback Rd., Suite 640
Scottsdale, Arizona 85251
6.12 A carbon, photographic or other reproduced copy of this
Security Agreement and/or any financing statement relating hereto
shall be sufficient for filing and/or recording as a financing
statement.
7. TIME FOR PERFORMANCE UNDER NOTE
16
<PAGE>
7.1 Notwithstanding anything to the contrary contained herein or
any prior written agreements including any and all commitments,
responsibilities and/or obligations which have been set forth either
in writing or verbally are not binding upon either party except for
any non disclosure or confidentiality agreement signed by the
parties which will remain in full force for the term as specified in
the non disclosure or confidentiality agreement, until such time as
Secured Party delivers to Debtor and Debtor receives the proceeds of
the One Million dollar ($1,000,000) loan as contemplated by the Note
and the Loan Documents and any revisions thereto. Further, Secured
Party and Debtor mutually agree that Debtor has the sole right not
to accept the One Million dollar ($1,000,000) loan from Secured
Party if funding has not been completed by Wednesday August 11,
1999, 5 p.m. Mountain Standard Time.
This Security Agreement has been executed and delivered on behalf of
and in the name of Debtor on the date indicated above.
DEBTOR:
Flexpoint Sensor Systems,Inc.,
By: /s/ Douglas M. Odom
-------------------
Its:
STATE OF UTAH )
) ss.
County of )
The foregoing instrument was acknowledged before me
this ___ day of August,
1999, by ________________________, ________________ of
Flexpoint Sensor Systems Inc., a Utah corporation, on
behalf of such company.
___________________________
Notary Public
My Commission Expires:
____________________
17
<PAGE>
SECURED PARTY:
The Jerry and Vicki Moyes Family Trust
By: _______________________
its:
STATE OF ARIZONA )
) ss.
County of Maricopa )
The foregoing instrument was acknowledged before me
this ___ day of August,
1999, by ________________________ on behalf of The
Jerry and Vicki Moyes Family Trust.
___________________________
Notary Public
My Commission Expires:
____________________
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETE AS OF DECEMBER 31, 1999, AND STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31,1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 134,642
<SECURITIES> 0
<RECEIVABLES> 39,656
<ALLOWANCES> (3,000)
<INVENTORY> 174,750
<CURRENT-ASSETS> 375,371
<PP&E> 3,403,651
<DEPRECIATION> (847,172)
<TOTAL-ASSETS> 3,124,290
<CURRENT-LIABILITIES> 2,542,436
<BONDS> 0
0
2,125,175
<COMMON> 19,077
<OTHER-SE> (1,562,398)
<TOTAL-LIABILITY-AND-EQUITY> 3,124,290
<SALES> 332,182
<TOTAL-REVENUES> 773,233
<CGS> 153,231
<TOTAL-COSTS> 356,682
<OTHER-EXPENSES> 7,255,478
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,861,165
<INCOME-PRETAX> (8,797,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,797,115)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,797,115)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
