FORM 10-QSB/A
(Amendment No. 2)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number 0-24368
FLEXPOINT SENSOR SYSTEMS, INC.
(Formerly Micropoint, Inc.)
(Exact name of small business issuer as identified in its charter)
Delaware 87-0620425
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6906 South 300 West, Midvale, Utah 84047
(Address of principal executive offices)
(Zip Code)
(801) 568-5111
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ]No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of November 9, 1999: 17,854,391
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
September 30, December 31,
1999 1998
--------------- --------------
ASSETS
Current Assets
Cash $ 15,366 $ 657,775
Trade accounts receivable, net of allowance
of $41,606 and $90,721 210,287 298,586
Royalties receivable - 152,570
Receivable from shareholder - 1,573,750
Inventory 155,965 42,691
Prepaid expense 45,702 50,915
--------------- --------------
Total Current Assets 427,320 2,776,287
--------------- --------------
Property and Equipment 3,389,313 1,273,326
Less accumulated depreciation (726,809) (387,858)
--------------- --------------
Net Property and Equipment 2,662,504 885,468
--------------- --------------
Goodwill, Net of Accumulated Amortization of
$95,842 and $77,871 23,960 41,931
Deposits 49,549 246,441
Patents, net of accumulated amortization of
$55,818 and $45,018 127,711 101,331
--------------- --------------
Total Assets $ 3,291,044 $ 4,051,458
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 723,368 $ 348,473
Related party payable - 1,234
Accrued liabilities 312,427 100,290
Income taxes payable 8,314 8,314
Notes payable, net of unamortized discount
of $776,699 433,301 -
--------------- --------------
Total Current Liabilities 1,477,410 458,311
--------------- --------------
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 shares issued and
outstanding; liquidation preference
$2,427,250 2,419,175 -
Common stock - $0.001 par value; 100,000,000
shares authorized; 17,755,291 and 16,990,296
shares issued and outstanding 17,755 16,990
Additional paid in capital 11,087,815 9,127,091
Unearned Compensation (175,961) -
Deficit accumulated during the
development stage (11,535,150) (5,550,934)
--------------- --------------
Total Stockholders' Equity 1,813,634 3,593,147
--------------- --------------
Total Liabilities and Stockholders' Equity $ 3,291,044 $ 4,051,458
=============== ==============
The accompanying notes are an integral part of these financial statements.
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FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
For the
Period
January 5,
1995
(Date of
Inception)
For the Three Months For the Nine Months Through
Ended Sept. 30, Ended Sept.30, Sept. 30,
1999 1998 1999 1998 1999
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 345,648 $ 957,378 $ 633,598 $ 1,314,509 $ 3,924,323
Cost of sales 153,045 453,087 233,722 608,625 1,762,025
------------ ----------- ------------ ------------ ------------
Gross profit 192,603 504,291 399,876 705,884 2,162,298
General and administra-
tive expense 1,192,096 350,253 2,825,355 1,133,699 6,768,393
Research and development 905,358 324,887 2,369,178 764,709 5,673,127
------------ ----------- ------------ ------------ ------------
Loss from operations (1,904,851) (170,849) (4,794,657) (1,192,524) (10,279,222)
Interest expense (72,267) - (76,618) (40) (147,819)
Interest expense of
debt discount (466,308) - (489,251) - (489,251)
Interest income 3,898 5,441 20,542 22,028 56,153
Other income/expense 48,783 583 49,319 (2,006) 18,540
------------ ----------- ------------ ------------ ------------
Net Loss (2,390,745) (164,825) (5,290,665) (1,172,542) (10,841,599)
Preferred dividends (559,551) - (693,551) - (693,551)
------------ ----------- ------------ ------------ ------------
Loss applicable to
common shareholders $(2,950,296) $ (164,825) $(5,984,216) $(1,172,542) $(11,535,150)
============ =========== ============ ============ ============
Basic and Diluted Loss
Per Common Share $ (0.17) $ (0.01) $ (0.35) $ (0.09) $ (0.96)
============ =========== ============ ============ ============
Weighted average number
of common shares used in
per share calculation 17,194,020 15,860,279 17,201,774 13,618,521 11,962,394
============ =========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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</TABLE>
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<TABLE>
<CAPTION>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the Period
January 5, 1995
(Date of
Inception)
For the Nine Months Through
Ended Sept. 30, Sept 30,
1999 1998 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (5,290,665) $ (1,172,542) $ (10,841,599)
Adjustments to reconcile net loss to
net cash used by operating activities - - (21,225)
Gain on Sale of available-for-sale
securities - - -
Loss on sale of assets - - 9,227
Depreciation and amortization 367,722 103,941 890,805
Amortization of unearned compensation 378,864 45,375 424,239
Interest for warrants 489,201 - 489,201
Stock issued for services - - 222,727
Allowance for doubtful accounts (49,115) - 193,173
Write-off of related party receivable - - -
Exercise of warrants in exchange for
services 22,523 - 22,523
Changes in operating assets and
liabilities:
Accounts receivable 289,984 (339,783) (267,419)
Inventory (113,274) (182,895) (155,965)
Accounts payable 374,895 (295,006) 544,554
Accrued liabilities 212,137 (316,134) 243,443
Deferred revenue - (200,000) (6,163)
Other assets (15,662) (50,685) (297,887)
-------------- -------------- ---------------
Net Cash Used By Operating Activities (3,333,390) (2,453,104) (8,550,366)
-------------- -------------- ---------------
Cash Flows From Investing Activities
Payments to Flexpoint prior to
acquisition - - (268,413)
Cash paid to acquire Tamco - - (25,000)
Proceeds from the sale of available-for-
sale securities - 434,568 455,082
Net cash received from Nanotech
acquisition - 1,492,906 1,492,907
Payments received from related parties - 33,427 34,661
Collection of receivables from
escrow agent - 64,825 64,825
Payments for the purchase of property
and equipment (1,898,220) (388,366) (2,899,017)
Proceeds received from sale of property
and equipment - - 22,682
Investment in patents (37,180) (31,256) (147,506)
-------------- -------------- ---------------
Net Cash Used By Investing Activities (1,935,400) 1,606,104 (1,269,779)
-------------- -------------- ---------------
Cash Flows From Financing Activities
Proceeds from the issuance of preferred
stock 460,738 - 460,738
Proceeds from the issuance of common
stock 1,403,390 - 5,494,054
Cash payments to officers to repurchase
stock - - (50,000)
Cash paid for offering costs (20,263) - (143,283)
Proceeds from borrowings 1,510,000 - 1,813,960
Borrowings from Nanotech prior to
acquisition - 1,000,000 1,000,000
Principal payments of long-term debt (300,000) (295,336) (698,751)
Proceeds from stock subscription
receivable 1,573,750 390,000 1,963,750
Proceeds from related party notes - - 60,208
Principal payments of related party notes (1,234) - (65,165)
-------------- -------------- ---------------
Net Cash Provided By Financing
Activities 4,626,381 1,094,664 9,835,511
-------------- -------------- ---------------
Net Change In Cash (642,409) 247,664 15,366
Cash at Beginning of Period 657,775 106,494 -
-------------- -------------- ---------------
Cash at End of Period $ 15,366 $ 354,158 $ 15,366
============== ============== ===============
The accompanying notes are an integral part of these financial statements.
4
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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 dated of their acquisitions. Intercompany Transactions
and accounts have been eliminated in consolidation.
Restatement - As further discussed in Note 5, the accompanying condensed
consolidated financial statements have been restated to correctly reflect
compensation resulting from the grant of stock options, to allocate a portion
of the proceeds from issuing of notes payable with warrants, to the warrants,
to amortize the preferred stock discount as preferred dividends and to correct
timing of depreciation of property and equipment. These restated condensed
consolidated financial statements should be read in conjunction with the
annual financial statements included in Form 10-KSB as of December 31, 1999.
Nature of Operations -The Company is a development stage enterprise engaged
principally in designing, engineering, and manufacturing sensor technology and
equipment using flexible potentiometer technology. Flexpoint, Inc. entered
into a Purchase and Supply Agreement (the "Supply Agreement") with Delphi
Automotive Systems ("Delphi") in June 1998. Under the terms of the Supply
Agreement, the Company will supply its proprietary sensor mats to Delphi for
integration into a weight based suppression system as a critical part of a
smart air bag system. The Supply Agreement provides that such sensor mats will
be exclusively supplied to General Motors, through Delphi, by the Company
through 2002. The Company is looking to the Supply Agreement to provide the
bulk of its revenues in the immediate future. The information regarding the
Supply Agreement is forward looking information. Such forward looking
information is subject to many risks and uncertainties, including the fact
that Delphi is not obligated under the terms of the Supply Agreement to
purchase any minimum number of sensor mats and there can be no assurance that
the Supply Agreement will result in any material amount of sales.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Interim Financial Statements - The accompanying condensed consolidated balance
sheets, statements of operations and cash flows are unaudited. In the opinion
of management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position, results
of operations and cash flows for the periods presented. The financial
statements have been condensed and do not contain all of the disclosure
required by generally accepted accounting principles. Accordingly, these
statements should be read in conjunction with the annual financial statements
included in the annual reports on Form 10-KSB, dated December 31, 1998 and
1999. The results of operations for the nine months ended September 30, 1999
are not necessarily indicative of the operating results which occurred for the
entire year.
Business Condition -The accompanying financial statements contemplate
continuation of the Company as a going concern. However, the Company has
suffered losses from operations and has had negative cash flows from operating
activities which conditions raise substantial doubt about the Company's
ability to
5
<PAGE>
continue as a going concern. With the award of the Supply Agreement and
subsequent increase in the projected manufacturing output under the agreement,
the Company has needed to materially increase spending for additional
facilities, equipment and personnel. The Company will need to raise a
significant amount of additional capital to fulfill its obligations under the
Supply Agreement.
The Company is concurrently seeking funding from several sources. The Company
has no material current contractual arrangements with respect to additional
financing and there can be no assurance that additional financing will be
available on commercially reasonable terms or at all. Any inability to obtain
additional financing will have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail or cease its
operations.
NOTE 2 - STOCKHOLDER'S 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 the Series A warrants to purchase common stock based upon their
fair value in the amount of $693,551 and $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 - 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. During the quarter ended September
30, 1999, the offering resulted in the issuance of 220,000 shares of common
stock and Series B Warrants to purchase 220,000 shares of common stock at
$3.50 per share. The gross proceeds during the quarter from the offering
before $12,000 offering costs were $440,000.
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During the quarter ended September 30, 1999, warrants and options to purchase
865,260 shares of common stock were exercised at prices ranging from $0.16 to
$0.47 per share.
NOTE 3 - NOTES PAYABLE
On June 18, 1999, the Company borrowed $200,000 from a non-affiliated
accredited lender to provide the Company necessary funding. The notes bear
interest at 20% per annum. The principal is payable in two equal installments
of $100,000 on September 18, 1999 and December 18, 1999. The principal amount
of $100,000 and accrued interest were paid on September 18, 1999. As
additional consideration the company issued Warrants to purchase 75,000 shares
of common stock. The warrants are exercisable at approximately $3.44 per share
through 2004. 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 $175,900 which was credited to
additional paid-in capital. The discount is being amortized over the maturity
of the notes. During the three months ended September 30, 1999, $152,957 of
the discount was amortized to interest expense.
On June 18, 1999, the Company borrowed $110,000 from a non-affiliated
accredited lender. The note bares interest of 10%, payable monthly. On
October 11, 1999 a principal payment of $50,000 was made.
On July 30, 1999 the Company borrowed $200,000 from a non-affiliated
accredited lender. The note bore interest at 14%. The note was repaid in
August 1999 and all interest payable thereunder was forgiven. As part of the
consideration the Company issued Warrants to acquire 160,000 shares of common
stock. The warrants are exercisable at approximately $3.15 per share through
2004. 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 note of $200,000 which was credited to
additional paid-in capital. The discount was amortized over the maturity of
the notes. During the three months ended September 30, 1999, $66,667 of the
discount was amortized to interest expense.
On August 11, 1999 the Company borrowed $1,000,000 from a non-affiliated
accredited lender. The note bears interest at 14% and is due and payable in
February 2000. The note is secured by Company equipment. As part of the
consideration the Company issued Warrants to acquire 500,000 shares of common
stock. The warrants are exercisable at approximately $3.15 per share through
2004. 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 $890,000 which was credited to
additional paid-in capital. The discount is being amortized over the maturity
of the notes. During the three months ended September 30, 1999, $246,685 of
the discount was amortized to interest expense.
NOTE 4 - NONCASH COMPENSATION
The Company measures compensation under stock-based options granted to
employees using the instrinsic value method prescribed by Accounting
Principles Opinion 25, Accounting for Stock Issued to Employees and related
interpretations. The Company determines compensation cost under options
granted to non-employees based upon the fair value of the options granted
consistent with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation.
During the nine months ended September 30, 1999, the Company granted options
to acquire 293,000 shares of common stock to employees, which are exercisable
from $0.75 to $4.00 per share. The intrinsic value of these options was
$369,925 and is being amortized as compensation over the period the options
vest. Amortization of the unearned compensation of $121,189 and $193,864 was
recognized during the three and nine months ended September 30, 1999,
respectively.
7
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NOTE 5 - RESTATEMENT
For the three and nine months ended September 30, 1999, the Company recognized
additional compensation of $121,189 and $193,864, respectively. This
compensation is the result of the grant of stock options at an exercise price
equal to the price at which restricted common stock was sold by the Company in
a Private Placement that was below market price. As a result of the issuance
of warrants associated with the borrowing of funds as referenced in note 3,
the Company recognized a total 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 three months ended September 30, 1999,
$466,308 of the discount was amortized to interest expense. During the three
months ending September 30, 1999, the Company recognized $185,000 in
additional compensation associated with the issuance of 100,000 warrants to an
outside consultant. As of September 30, 1999 and as a result of the issuance
of warrants with convertible preferred stock, the Company recognized a
discount on preferred stock of $693,551,of which $134,000 was amortized as a
preferred stock dividend during the three months ending June 30, 1999. The
remaining $559,551 was amortized as a preferred stock dividend during the
three months ended September 30, 1999. These transactions were not recorded on
the financial statements included in the Company's original filing.
NOTE 6 - SUBSEQUENT EVENTS
Subsequent to September 30, 1999, the Company has raised $681,320 in equity
capital from the sale to accredited investors, of common stock in a private
placement and from the exercise of outstanding options and warrants.
8
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Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
consolidated results of operations and financial condition of Flexpoint Sensor
Systems, Inc. The discussion should be read in conjunction with the condensed
consolidated financial statements, related notes and Management's Discussion
and Analysis or Plan of Operation for the year ended December 31, 1998.
Wherever in this discussion the term "Company" is used, it should be
understood to refer to Flexpoint Sensor Systems, Inc. and its wholly owned
subsidiary, Sensitron, Inc. ("Sensitron"), a Utah corporation, and Sensitron's
wholly owned subsidiaries, Flexpoint, Inc. and Technology and Machine Company,
Inc. ("Tamco"), on a consolidated basis, except where the context clearly
indicates to the contrary. The business operations of the Company are
conducted through Flexpoint, Inc. and Tamco. Prior to the April 1998, merger
wherein Flexpoint Sensor Systems, Inc. acquired Sensitron (the "Acquisition"),
Flexpoint Sensor Systems Inc. had no operations. The Acquisition was accounted
as a reorganization of Sensitron. The historical financial statements prior to
the Acquisition are those of Sensitron and have been restated accordingly.
Overview
The Company is a development stage company and, since inception, has
incurred losses from operations. As restated, as of September 30, 1999, the
Company had cumulative net losses totaling $11,532,949 The Company is
primarily engaged in the sensor business and is currently marketing
proprietary patented sensor technology know as the Bend Sensor TM 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.
Restatement
For the three and nine months ended September 30, 1999, the Company
recognized additional compensation of $121,189 and $193,864, respectively.
This compensation is the result the grant of stock options at an exercise
price equal to the price at which restricted common stock was sold by the
Company in a Private Placement that was below market price. As a result of the
issuance of warrants associated with the borrowing of funds as referenced in
note 3 to the accompanying financial statements, the Company recognized a
total 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 three months ended September 30, 1999, $466,308 of the
discount was amortized to interest expense. During the three months ending
September 30, 1999, the Company recognized $185,000 in additional compensation
associated with the issuance of 100,000 warrants to an outside consultant. As
of September 30, 1999 and as a result of the issuance of warrants with
convertible preferred stock, the Company recognized a discount on preferred
stock of $693,551,of which $134,000 was amortized as a preferred stock
dividend during the three months ending June 30, 1999. The remaining $559,551
was amortized as a preferred stock dividend during the three months ended
September 30, 1999. These transactions were not recorded on the financial
statements included in the Company's original filing.
Financial Position
As restated, the Company had $15,366 in cash as of September 30, 1999.
This represented a decrease of $642,409 from December 31, 1998. Working
capital deficiency as of September 30, 1999 was $(1,050,090) as compared to
working capital of $2,317,976 at December 31, 1998. The decrease is largely
due to the acquisition of $2,115,987 in new equipment and leasehold
improvements and payment of $1,382,865 in fees and expenses to
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outside consultants for software development relating to the Company's sensor
mats for use in the smart air bag system (discussed below).
Three and Nine Months Ended September 30, 1999 and 1998
As restated, during the three and nine months ended September 30, 1999,
the Company had sales of $345,648 and $633,598, respectively, comprised almost
entirely of development fees; compared with sales of $957,378 and $1,314,509
for the comparable periods from the prior year, comprised primarily of product
sales and engineering fees.
Approximately one-half of the Company's revenues during the three and
nine months ended September 30, 1999 were generated under a Purchase and
Supply Agreement (the "Supply Agreement") between the Company and Delphi
Automotive Systems ("Delphi"). Under the Supply Agreement the Company will
supply its proprietary sensor mats to Delphi for integration into a weight
based suppression system as a critical part of a smart air bag system. The
Supply Agreement provides that such sensor mats will be exclusively supplied
to General Motors, through Delphi, by the Company through 2002.
The Company anticipates that its future success will be highly dependent
on Delphi. Although the Supply Agreement has not accounted for substantial
revenue to date, the Company could have over $300,000,000 in sales under that
Supply Agreement and it anticipates that the revenue generated from the Supply
Agreement will become a significant portion of the Company's revenues. The
projected sales and timing thereof is forward looking information and is
subject to many risks and uncertainties, including the fact that although the
Supply Agreement is a multi-year contract, it does not require Delphi to
purchase a specific minimum quantity of products. In addition, with the award
of the Supply Agreement and subsequent increases in the projected
manufacturing output under the agreement, the Company will need to materially
increase spending for additional facilities, equipment and personnel. The
Company presently does not have the funding to make the required expenditure.
See "--Liquidity and Capital Resources." As a result, the Company's business,
financial condition or results of operations could be materially adversely
affected if sufficient additional funding is not timely acquired or if sales
do not materialize as projected under the Supply Agreement, of which there can
be no assurance.
Approximately one-half of the Company's revenues during the three months
ended September 30, 1999 were generated under a license agreement (the
"License Agreement") whereby the Company granted to Ohio Art the exclusive
worldwide right to sell products incorporating the Technology in the toy,
traditional games and video game markets. The License Agreement provided for
certain up front fees and minimum royalties in order for Ohio Art to maintain
such exclusive rights. Certain toy customers of the Company have indicated
that they will be getting out of the plush toy business and/or will not be
manufacturing products using sophisticated sensor systems. During the three
months ended September 30, 1999, the Company received orders for and shipped
over 2,500,000 sensors generating $206,108 in revenues. Ohio Art has not
committed to manufacture or sell any other licensed products during 1999 or
thereafter. The toy industry is cyclical and the Company expects that the bulk
of annual royalty revenues will be greater in the second and third quarters of
any given year. As a result, the Company believes that the revenues under the
License Agreement during 1999 will be substantially less than in 1998. There
can be no assurance as to what level of sales, if any, the Company will secure
under the License Agreement in future years.
License and supply arrangements, such as those discussed above, create
certain risks for the Company, including (i) reliance for sales of products on
other parties; (ii) if the Company's products are marketed under other
parties' labels, goodwill associated with use of the products may inure to the
benefit of the other parties rather than the Company; and (iii) the Company
may have only limited protection from changes in manufacturing costs and raw
materials costs.
As restated, general and administrative expenses for the three and nine
months ended September 30, 1999 were $1,192,096 and $2,825,355, respectively,
compared with $350,253 and $1,133,699 for the comparable periods from the
prior year. Included in the nine month total is $193,864 associated with non
cash compensation related to the grant of stock to employees at less than
market price and $185,000 expense associated with the issuance of warrants to
a consultant as part of his compensation. Additional increases between the
periods resulted primarily from increases in salary and wage expenses as a
result of hiring additional manufacturing employees, increases in advertising,
depreciation expenses relating to leasehold improvements & equipment at the
Company's new manufacturing facility and consulting expenses relating to the
Supply Agreement. The Company does not expect that general and administrative
expenses will be reduced below current levels without reducing the number of
employees. Such reductions may have a material adverse effect on the Supply
Agreement and the commercialization of the Company's other products. Although
Management has liquidity concerns, management does not intend to reduce
general and administrative costs.
As restated, research and development ("R&D") expenses for the three and
nine months ended September 30, 1999 were $905,358 and $2,369,178,
respectively, compared with $324,887 and $764,709 for the comparable periods
from the prior year. The increase in expenditures between the periods resulted
primarily from increases in R&D spending relating to the Supply Agreement.
Specifically, $1,382,865 of R&D expenses during the nine months ended
September 30, 1999 related to consulting expenses for the development of the
software associated with the Supply Agreement. The Company expects that during
1999 most of such software development will be completed. As a result, the
Company expects software consulting expenses relating to the Supply Agreement
will be significantly reduced in once Delphi proves out the software
associated with the sensor mat. The Company is, however, looking to expand
into additional markets and R&D efforts associated therewith, including
related software development expenditures, may be substantial. As a result,
the Company does not expect that R&D will be reduced below current levels
unless a lack of funding requires the Company to make such reductions.
Reductions in R&D expenditures would comprise primarily reductions in R&D
staff. Such staff reductions could have a material adverse effect on product
development and on the Company. Although Management has liquidity concerns,
management does not intend to reduce R&D efforts.
Interest expense for the three and nine months ended September 30, 1999
were$72,267 and $76,618 respectively, compared to $0 and $40 for comparable
periods in the prior year. The differences relate to the increase in
outstanding debt during the periods. Interest income for the three and nine
months ended September 30, 1999 was $3,898 and $20,542, respectively, compared
to $5,441 and $22,028 for comparable periods from the prior year. The
difference in interest income between periods relates to interest earned on
funds on deposit.
As restated, amortization of debt discount for the three and nine months
ending September 30, 1999 was $466,308 and $489,251 respectively, compared to
$0 for the prior year. The amortization of debt discount related to the
Company's issuance of warrants as additional consideration with notes payable.
Proceeds of the notes were allocated between the fair value of the warrants
and the notes, resulting in a discount to the notes of $1,265,900. The
discount is being amortized over the life of the notes, resulting in the
recognition of additional interest expense. The Company will need to
recognize additional amounts in future periods.
As restated, preferred dividends for the three and nine months ended
September 30, 1999 were $599,551 and $693,551 respectively, and none for the
comparable periods for the prior year. The preferred dividends relate to the
issuance of Series A Convertible Preferred Stock and Series A Warrants.
Proceeds for the issuance were allocated to the preferred stock and the
warrants based upon their relative fair values. The resulting preferred
discount of $693,551 was amortized based upon the conversion rights given and
recognized in the second and third quarters 1999.
11
<PAGE>
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of debt, equity securities and sales. The Company generated
$9,835,481 in net proceeds through financing activities from inception through
September 30, 1999. The Company used net cash in operating activities of
$3,333,390 during the nine months ended September 30, 1999. As of September
30, 1999, the Company's liabilities totaled $1,477,410 including a discount of
$776,699 on notes. The Company had working capital deficiency as of September
30, 1999 of $(1,050,090).
The Company has committed to spend $82,530 in lease payment for its
physical facilities during the remainder of 1999 and $322,890, $309,850,
$249,900 and $249,900 in physical facilities lease payments for the years 2000
through 2003, respectively. In connection therewith, the Company contracted
for certain improvements to its physical facilities. During the three months
ended September 30, 1999 the Company paid $275,000 for the improvements made
at the new facility leaving approximately $165,166 owing. The Company also
has short term loan obligations in the principal amounts of $210,000 and
$1,000,000 that are due in December 1999 and February 2000, respectively.
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 the certain product
utilizing the Technology to commercial viability and the level of sales of and
marketing for the Company's products. With the award of the Supply Agreement
and subsequent increase in the projected manufacturing output under the
agreement, the Company has needed to materially increase spending for
additional facilities, equipment and personnel. The Company will need to
raise substantial additional funding to fully execute its business plan which
includes completing two additional production lines its anticipated
manufacturing obligations under the Supply Agreement, as amended.
The Company is concurrently seeking additional funding from several
sources. The Company has no material current contractual arrangements with
respect to additional financing and there can be no assurance that additional
financing will be available on commercially reasonable terms or at all. Any
inability to obtain additional financing will have a material adverse effect
on the Company, including possibly requiring the Company to significantly
curtail or cease its operations.
Year 2000
The Company uses computers systems and microprocessors that are embedded in
systems the Company uses. Computers and embedded microprocessors have the
potential for operational problems if they lack the ability to handle the
transition to the Year 2000. Because this issue has the potential to cause
disruption of the Company's business operations, the Company has and is
seeking to identify and remediate potential Year 2000 problems in its business
information systems and other systems embedded in its engineering and
manufacturing operations. In addition, the Company has communicated with its
major suppliers, dealers, distributors and other third parties in order to
assess and reduce the risk that the Company's operations could be adversely
affected by the failure of these third parties to adequately address the Year
2000 issue.
The Company uses computers systems principally for product design, product
prototyping, manufacturing and administrative functions such as
communications, word processing, accounting and management and financial
reporting. The Company uses embedded microprocessors principally in its
manufacturing and engineering operations. The Company's principal computer
systems (including the embedded microprocessors systems) have been purchased
since December 31, 1997 and the vendors supplying such systems have generally
represented that such systems are Year 2000 compliant. The software utilized
by the Company is generally standard "off the shelf" software, typically
available from a number of vendors. The Company has verified with its software
vendors that the services and products provided are, or will be, Year 2000
compliant. In addition, the Company has certain
12
<PAGE>
software that has been written specifically for use by the Company and the
suppliers of such software have warranted that it is Year 2000 compliant.
Based on such verification, the Company believes that its computer systems and
software is Year 2000 compliant in all material respects. The Company
estimates that the cost to redevelop, replace or repair its technology will
not be material. The Company is not using any independent verification or
validation procedures. There can be no assurance, however, that such systems
and/or programs are or will be Year 2000 compliant and that the failure of
such would not have a material adverse impact on the Company's business and
operations.
In addition to its own computer systems, in connection with its business
activities, the Company interacts with suppliers, customers, and financial
service organizations who use computer systems. The Company has communicated
with such parties regarding their state of Year 2000 readiness. Based on its
assessment activity to date, the Company believes that a majority of the
suppliers, customers and financial service organizations with whom it
interacts are making acceptable progress toward Year 2000 readiness. The
Company currently believes that the most reasonable likely worst case scenario
is that there will be some localized disruptions of supplier, customer and/or
financial services that will affect the Company and its suppliers, and
distribution channels for a short time rather than systemic or long-term
problems affecting its business operations as a whole. In view of the
foregoing, the Company does not currently anticipate that it will experience a
significant disruption of its business as a result of the Year 2000 issue.
However, there is still uncertainty about the broader scope of the Year 2000
issue as it may affect the Company and third parties that are critical to the
Company's operations. For example, lack of readiness by electrical and water
utilities, financial institutions, government agencies or other providers of
general infrastructure could pose significant impediments to the Company's
ability to carry on its normal operations in the area or areas so affected.
The Company is currently evaluating what contingency plans, if any, to make in
the event the Company or parties with whom the Company does business
experience Year 2000 problems.
The statements made herein about the costs expected to be associated with
the Year 2000 compliance and the results that the Company expects to achieve,
constitute forward looking information. As noted above, there are many
uncertainties involved in the Year 2000 issue, including the extent to which
the Company will be able to successfully and adequately provide for
contingencies that may arise, as well as the broader scope of the Year 2000
issues as it may affect third parties that are not controlled by the Company.
Accordingly, the costs and results of the Company's Year 2000 program and the
extent of any impact on the Company's operations could vary materially from
those stated herein.
Forward-Looking Statements
When used in this Form 10-QSB, in other filings by the Company with the
SEC, in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer of the Company, the words or phrases "would be," "will
allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to risk of product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product development,
commercialization, and technology, and other risks. In addition, sales and
other revenues may not commence and/or continue as anticipated due to delays
or otherwise. As a result, the Company's actual results for future periods
could differ materially from those anticipated or projected. Please refer to
the "Management's Discussion and Analysis or Plan of Operation" and
specifically the discussion under "Other Factors" that is found in the
Company's Annual Report on Form 10-KSB for the period ended December 31, 1998,
for more details.
13
<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.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Reorganization (Schedules are omitted)
(Incorporated by referenced to Exhibit 2.1 of the Company's
Current Report on Form 8-K, dated April 9, 1998.
3(i).1 Restated Certificate of Incorporation of Flexpoint Sensor
Systems, Inc. (Incorporated by reference to Exhibit 3(i).1 of
the Company's Quarterly Report on Form 10-QSB, dated September
30, 1998.
3(i).2 Amended Certificate of Incorporation of Flexpoint Sensor
Systems, Inc. (Incorporated by reference to Exhibit 3(i).2 of
the Company's Quarterly Report on Form 10-QSB, dated June 30,
1999).
3(i).3 Certificate of Designation of Series A Convertible Preferred
Stock of Flexpoint Sensor Systems, Inc. (Incorporated by
reference to Exhibit 3(i).3 of the Company's Quarterly Report on
Form 10-QSB, dated June 30, 1999).
3(i).4 Articles of Incorporation of Sensitron, Inc. (Incorporated by
referenced to Exhibit 3(i).3 of the Company's Annual Report on
Form 10-KSB, dated March 31, 1998).
3(i).5 Articles of Incorporation of Flexpoint, Inc. (Incorporated by
referenced to Exhibit 3(i).4 of the Company's Annual Report on
Form 10-KSB, dated March 31, 1998).
3(i).6 Articles of Incorporation of Technology and Machine Company,
Inc. (Incorporated by referenced to Exhibit 3(i).5 of the
Company's Annual Report on Form 10-KSB, dated March 31, 1998).
3(ii).1 Restated and Amended Bylaws of Flexpoint Sensor Systems, Inc.
(Incorporated by reference to Exhibit 3(ii).1 of the Company's
Quarterly Report on Form 10-QSB, dated September 30, 1998).
3(ii).2 Bylaws of Sensitron, Inc. (Incorporated by referenced to Exhibit
3(ii).2 of the Company's Annual Report on Form 10-KSB, dated
March 31, 1998).
3(ii).3 Bylaws of Flexpoint, Inc. (Incorporated by referenced to Exhibit
3(ii).3 of the Company's Annual Report on Form 10-KSB, dated
March 31, 1998).
3(ii).4 Bylaws of Technology and Machine Company, Inc. (Incorporated by
referenced to Exhibit 3(ii).4 of the Company's Annual Report on
Form 10-KSB, dated March 31, 1998).
10.1 Employment Agreement with Douglas M. Odom (Incorporated by
reference to Exhibit 10.1 of the Company's current report on
Form 8-K, dated April 9, 1998).
10.2 Lease Agreement between 72nd South Associates and the Company
(Incorporated by reference to Exhibit 10.2 of the Company's
current report on Form 8-K, dated April 9, 1998).
10.3 Agreement between Ohio Art and the Company (certain portions of
the agreement were omitted from the exhibit pursuant to a grant
of confidential treatment) (Incorporated by reference to Exhibit
10.3 of the Company's current report on Form 8-K, dated April 9,
1998).
14
<PAGE>
10.4 Purchase and Supply Agreement by and among Flexpoint, Inc. and
Delphi Automotive Systems (certain portions of the agreement
were omitted from the exhibit pursuant to a grant of
confidential treatment) (Incorporated by reference to Exhibit
10.4 to the Company's annual report on Form 10-KSB, dated
December 31, 1998).
10.5 Industrial Space Lease between Prudential Insurance Company of
America and Flexpoint, Inc. (Incorporated by reference to
Exhibit 10.5 to the Company's annual report on Form 10-KSB,
dated December 31, 1998).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: April 24, 2000 FLEXPOINT, INC.
By /s/ Douglas M. Odom
---------------------------
Douglas M. Odom
President, Chief Executive Officer,
Director
Date: April 24, 2000 By /s/ Thomas N. Strong
-------------------------------
Thomas N. Strong
Chief Accounting Officer
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