FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number 0-24368
FLEXPOINT SENSOR SYSTEMS, INC.
(Exact name of small business issuer as identified in its charter)
Delaware 87-0620425
(State or other jurisdiction of (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.
[XX] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of November 16, 2000
----------------------------- -------------------------------------
Common Stock, $.001 par value 71,253,231
<PAGE>
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,
2000 1999
------------- -------------
ASSETS
Current Assets
Cash $ 91,738 $ 134,642
Trade accounts receivable, net of allowance for
doubtful accounts of $15,109 and $3,000 32,819 36,656
Inventory 52,184 174,750
Prepaid expenses 15,878 29,323
Unamortized loan costs - -
------------- -------------
Total Current Assets 192,619 375,371
------------- -------------
Property and Equipment 2,675,809 3,403,651
Less accumulated depreciation (1,309,512) (847,172)
------------- -------------
Net Property and Equipment 1,366,297 2,556,479
------------- -------------
Deposits 26,875 54,549
Patents, net of accumulated amortization
of $68,097 and $59,418 114,358 119,921
Goodwill, net of accumulated amortization
of $0 and $101,832 - 17,970
------------- -------------
Total Assets $ 1,700,149 $ 3,124,290
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Notes payable and convertible debentures, net
of unamortized discount of $0 and $112,826 $ 6,039,396 $ 1,047,174
Payable - related party 20,000 -
Capital lease obligation 61,085 -
Accrued lease obligation on abandoned office
and manufacturing facility 975,000 -
Trade accounts payable 619,469 956,206
Accrued liabilities 350,382 539,056
------------- -------------
Total Current Liabilities 8,065,332 2,542,436
------------- -------------
Commitments and Contingencies- Note 9
Stockholders' Equity (Deficit)
Preferred stock - $0.001 par value; 1,000,000
shares authorized; 4,500 shares designated
Series A Convertible Preferred; $875 stated
value per share; 1,695 and 2,438 shares issued
and outstanding; liquidation preference
$1,483,125 and $2,133,250 1,475,175 2,125,175
Common stock - $0.001 par value; 100,000,000
shares authorized; 21,181,312 and 19,077,310
shares issued and outstanding 21,181 19,077
Additional paid-in capital 21,152,037 13,615,677
Deficit accumulated during the development stage (28,950,052) (15,041,600)
Unearned compensation (63,524) (136,475)
------------- -------------
Total Stockholders' Equity (Deficit) (6,365,183) 581,854
------------- -------------
Total Liabilities & Stockholders' Equity (Deficit) $ 1,700,149 $ 3,124,290
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE> 2
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Period
January 5, 1995
For the Three Months For the Nine Months (Date of
Ended September 30, Ended September 30, Inception)Through
2000 1999 2000 1999 Sept. 30, 2000
-------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales $ 69,446 $ 297,558 $ 276,717 $ 498,701 $ 3,666,609
Cost of goods sold 26,902 143,440 123,272 201,902 1,857,773
-------------- ------------- ------------- -------------- ---------------
Gross Profit 42,544 154,118 153,445 296,799 1,808,836
-------------- ------------- ------------- -------------- ---------------
Operating Expenses
General and administrative
expenses 836,983 1,143,383 3,399,349 2,674,379 10,497,906
Research and development 496,328 905,358 2,042,555 2,369,178 8,686,420
Contract and manufacturing
activity exit costs 2,230,864 - 2,230,864 - 2,230,864
-------------- ------------- ------------- -------------- ---------------
Total Operating Expenses 3,564,175 2,048,741 7,672,768 5,043,557 21,415,190
-------------- ------------- ------------- -------------- ---------------
Loss From Continuing Operations (3,521,631) (1,894,623) (7,519,323) (4,746,758) (19,606,354)
Other Income (Expense)
Interest expense (973,819) (72,267) (1,197,681) (76,618) (1,463,111)
Interest from amortization
of debt discount and loan
costs (937,930) (466,308) (5,210,097) (489,251) (6,877,033)
Interest income 4,435 3,898 21,109 20,542 80,008
Other income (expense), net (51,695) 37,207 (51,695) 37,742 (199,548)
-------------- ------------- ------------- -------------- ---------------
Other Expense, Net (1,959,009) (497,470) (6,438,364) (507,585) (8,459,684)
-------------- ------------- ------------- -------------- ---------------
Net Loss From Continuing
Operations (5,480,640) (2,392,093) (13,957,687) (5,254,343) (28,066,038)
Discontinued Operations
Income (Loss) from
discontinued Tamco
operations (33,260) 1,348 (75,868) (36,322) (315,566)
Gain on disposal of Tamco 125,103 - 125,103 - 125,103
-------------- ------------- ------------- -------------- ---------------
Net Loss (5,388,797) (2,390,745) (13,908,452) (5,290,665) (28,256,501)
Preferred dividends - (559,551) - (693,551) (693,551)
-------------- ------------- ------------- -------------- ---------------
Loss applicable to common
shareholders $ (5,388,797) $ (2,950,296) $(13,908,452) $ (5,984,216) $ (28,950,052)
============== ============= ============= ============== ===============
Basic and diluted loss
per common share
Loss from Continuing
Operations $ (0.27) $ (0.17) $ (0.70) $ (0.35) $ (2.16)
============== ============= ============= ============== ===============
Net Loss $ (0.26) $ (0.17) $ (0.70) $ (0.35) $ (2.17)
============== ============= ============= ============== ===============
Weighted average number of
common shares used in per
share calculation 20,569,092 17,194,020 19,932,849 17,201,774 13,318,966
============== ============= ============= ============== ===============
The accompanying notes are an integral part of these
condenses consolidated financial statements.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Unearned Total
------------------- -------------------- Paid-in Development Compen- Stockholders'
Shares Amount Shares Amount Capital Stage sation Equity
------- ----------- ----------- -------- ------------ -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -December 31, 1999 2,438 $2,125,175 19,077,310 $ 19,077 $ 13,615,677 $ (15,041,600) $(136,475) $ 581,854
Issuance of warrants in
connection with notes
payable - - - - 3,039,202 - - 3,039,202
Beneficial conversion
feature of convertible
promissory notes - - - - 1,076,218 - - 1,076,218
Conversion of 8%
convertible promissory
notes into common stock,
$1.70 per share - - 120,588 121 204,879 - - 205,000
Conversion of preferred
stock into common stock (743) (650,000) 185,714 186 649,814 - - -
Exercise of stock options
for cash, $0.16 to $4.00
per share - - 30,705 31 10,307 - - 10,338
Conversion of convertible
debentures into common
stock, $1.00 per share - - 703,555 703 702,852 - - 703,555
Stock issued for services,
$1.19 per share - - 450,000 450 533,925 - - 534,375
Compensation related to
warrants granted for
services - - - - 434,400 - - 434,400
Conversion of convertible
debenture into common
stock, $0.50 per share - - 606,400 606 302,594 - - 303,200
Contingent beneficial
conversion feature of
convertible promissory
notes - - - - 579,851 - - 579,851
Issuance in settlement
of lawsuit, $0.28 per
share - - 7,500 7 2,093 - - 2,100
Issuance of warrants in
settlement of lawsuit - - - - 2,100 - - 2,100
Cancellation of options
exercised through payroll
deductions - - (460) - (1,875) - - (1,875)
Amortization of unearned
compensation - - - - - - 72,951 72,951
Net loss - - - - - (13,908,452) - (13,908,452)
------- ----------- ----------- -------- ------------ -------------- ---------- -------------
Balance -
September 30, 2000 1,695 $1,475,175 21,181,312 $ 21,181 $ 21,152,037 $ (28,950,052) $ (63,524) $ (6,365,183)
======= =========== =========== ======== ============ ============== ========== =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STAEMENTS OF CASH FLOWS
(UNAUDITED)
For the Period
Jan. 5, 1995
For the Nine Months Ended (Date of
September 30, Inception)
------------------------------ Through
2000 1999 Sept. 30, 2000
--------------- --------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Loss From Continuing Operations $ (13,957,687) $ (5,254,343) $ (28,066,038)
Adjustments to reconcile loss from continuing operations
to net cash used by operating activities:
Loss from discontinued Tamco operations (75,868) (36,322) (315,566)
Gain on disposal of Tamco 125,103 - 125,103
Contract and manufacturing activity exit costs 2,230,864 - 2,230,864
Gain on sale of available-for-sale securities - - (21,225)
Loss on disposition of assets (7,870) - 1,357
Depreciation and amortization 370,999 367,722 1,391,757
Amortization of debt discount and loan costs 5,210,096 489,201 6,767,232
Default penalty on convertible debentures 700,000 - 700,000
Issuance of warrants for interest - - 109,800
Compensation paid with stock options 72,951 378,864 351,676
Compensation paid by grant of warrants 434,400 - 619,400
Issuance of common stock and warrants to settle lawsuits 4,200 - 179,200
Exercise of warrants in exchange for services - 22,523 22,523
Stock issued for services 534,375 - 757,102
Allowance for doubtful accounts 12,109 (49,115) 166,676
Changes in operating assets and liabilities:
Accounts receivable (13,950) 289,984 (69,132)
Inventory 27,566 (113,274) (147,184)
Accounts payable (328,940) 374,895 448,452
Accrued liabilities (179,309) 212,137 290,763
Deferred revenue - - (6,163)
Other assets 19,531 (15,662) (270,291)
--------------- --------------- --------------
Net Cash Used In Operating Activities (4,821,430) (3,333,390) (14,733,694)
--------------- --------------- --------------
Cash Flows From Investing Activities
Payments to Flexpoint prior to acquisition - - (268,413)
Cash paid to acquire Tamco - - (25,000)
Proceeds from sale of Tamco 47,308 - 47,308
Proceeds from sale of available-for-sale securities - - 455,082
Net cash received in Nanotech acquisition - - 1,492,907
Payments received from related parties - - 34,661
Collection of receivable from escrow agent - - 64,825
Payments to purchase equipment (151,689) (1,898,220) (3,065,044)
Proceeds from sale of equipment - - 22,682
Issuance of note receivable - - (12,507)
Payments received on note receivable - - 12,505
Payments for patents (3,116) (37,180) (146,430)
Insurance proceeds 25,365 - 25,365
--------------- --------------- --------------
Net Cash Provided By (Used In) Investing Activities (82,132) (1,935,400) (1,362,059)
--------------- --------------- --------------
Cash Flows From Financing Activities
Proceeds from issuance of preferred stock - 460,738 460,738
Proceeds from issuance of common stock 8,463 1,403,390 6,163,575
Cash payments to officers to repurchase stock - - (50,000)
Proceeds from issuance of warrants 1,809,202 - 1,809,202
Proceeds from beneficial conversion feature related to
convertible promissory notes 1,076,218 - 1,076,218
Cash paid for offering costs - (20,263) (123,020)
Cash paid for loan costs (203,903) - (208,903)
Collection of receivables from issuance of common stock - 1,573,750 1,963,750
Proceeds from borrowings, net of discounts 2,582,484 1,510,000 3,751,445
Principal payments of debt (426,039) (300,000) (824,790)
Borrowings from Nanotech prior to acquisition - - 1,000,000
Proceeds from related party notes 55,000 - 1,625,208
Principal payments of related party notes (35,000) (1,234) (450,165)
Payments of capital lease obligations (5,767) - (5,767)
--------------- --------------- --------------
Net Cash Provided By Financing Activities 4,860,658 4,626,381 16,187,491
--------------- --------------- --------------
Net Change In Cash (42,904) (642,409) 91,738
Cash - Beginning of Period 134,642 657,775 -
--------------- --------------- --------------
Cash - End of Period $ 91,738 $ 15,366 $ 91,738
=============== =============== ==============
Supplemental cash flow information and non-cash investing and financing activities - Note 2
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</TABLE>
<PAGE> 5
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Through April 1998, the Company operated through Sensitron, Inc., a Utah
Corporation, at which time it changed its name to Micropoint, Inc. In June
1999, the name was changed to Flexpoint Sensor Systems, Inc.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Flexpoint Sensor Systems, Inc. and its
wholly owned subsidiaries (collectively "Flexpoint" or the "Company"). The
operations of acquired entities have been included from the date of their
acquisitions. Intercompany transactions and accounts have been eliminated in
consolidation.
Technology and Machine Company, Inc. (Tamco), a wholly owned subsidiary of
Sensitron, Inc., was sold to an unrelated party effective September 27, 2000.
The loss from operations of this discontinued operation have been reflected
separately in the accompanying condensed consolidated statements of operations
for all periods presented with the gain on sale of the discontinued operations
reflected separately in the condensed consolidated statement of operations for
the three and nine months ended September 30, 2000.
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 was 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 provided that such sensor mats were
to be exclusively supplied to General Motors, through Delphi, by the Company
through 2002. In May 2000, the Supply Agreement was amended, primarily
providing for Delphi to make loan payments to the Company to be used directly
for Delphi programs. In August 2000, Delphi notified the Company of its intent
to terminate the Supply Agreement under Sections 9 and 13. However, the
Company believes that as previously disclosed in a Form 8-K dated August 24,
2000, Delphi is not entitled to terminate the agreement or has not followed
the appropriate contractual provisions for termination of the Supply Agreement
(collectively referred to as the "Delphi Notice"). As a result, the Company
has significantly reduced its workforce and operating costs in order to
conserve resources. Discussions are being conducted with various potential
business partners for the application of its technology in automotive and
other applications. No new arrangements have been consummated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Interim Financial Statements - The accompanying condensed consolidated
financial statements are unaudited. In the opinion of management, all
necessary adjustments (which include only normal recurring adjustments) have
been made to present fairly the financial position, results of operations and
cash flows for the periods presented. The financial statements have been
condensed and do not contain all of the significant accounting policies and
disclosures required by generally accepted accounting principles. Accordingly,
these condensed financial statements should be read in conjunction with the
annual financial statements included in the annual report on Form 10-KSB dated
December 31, 1999. The results of operations for the nine months ended
September 30, 2000 are not necessarily indicative of the operating results
which will occur for the entire year ended December 31, 2000.
Business Condition - The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplates continuation of Flexpoint as a going concern. However, Flexpoint
has suffered losses from operations and has had negative cash flows from
operating activities during the nine months ended September 30, 2000 and
cumulative from inception through September 30, 2000. In addition, as a result
of the Delphi Notice, the Company has significantly reduced its manufacturing
capabilities and activities and has defaulted on major debt and lease
obligations. All of these 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 and establish
business arrangements that will enable the Company to generate profitable
operations. Management's plans include obtaining additional financing through
issuance of debt or equity securities and establishing business relationships
with potential business partners. The Company is involved in discussions with
possible financing sources and business partners. However, no agreements have
been reached and there is no assurance that additional financing will be
realized or business relationships established.
Basic and Diluted Loss Per Share - Basic loss per common share from continuing
operations is computed by dividing loss from continuing operations less
preferred dividends by the number of common shares outstanding during the
period. Basic loss per common share applicable to common shareholders is
calculated by dividing loss applicable to common shareholders 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 28,746,769 and
8,046,559 potentially issuable common shares at September 30, 2000 and 1999,
respectively, were excluded from the calculation of diluted loss per share as
they would have decreased loss per share.
Stock Based Compensation - The Company measures compensation under stock-based
options and plans using the intrinsic value method prescribed in Accounting
Principles Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations, for stock options granted to employees, and determines
compensation cost under options granted to non-employees based upon the fair
value of the options at the grant dates consistent with Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Amortization of deferred compensation relating to the issuance of options to
purchase common stock of $72,951 was recognized during the nine months ending
September 30, 2000. Had compensation cost for the Plan been determined based
upon the fair value of the options at the grant dates consistent with the
alternative method of SFAS No. 123, Accounting for Stock Based Compensation,
the Company would have recognized approximately $249,427 in non-cash
compensation.
NOTE 2 - CASH FLOW INFORMATION
Supplemental Cash Flow Information - Cash payments for interest were $364,432
and $0 for the periods ended September 30, 2000 and 1999, respectively.
Noncash Investing and Financing Activities - During the nine months ended
September 30, 2000, the Company issued warrants to purchase 500,000 shares of
common stock as a fee for extending the due date of a $1,000,000 note payable.
The warrants were valued at their estimated fair value of $2.46 per warrant or
$1,230,000. Also during the period, the Company acquired equipment totaling
$211,287 for a note payable of $144,435 and capital leases of $66,852. In
addition, $1,205,000 of convertible notes payable and accrued interest of
$6,755 was converted into 1,430,534 shares of common stock.
NOTE 3 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes payable and convertible debentures consisted of the following:
September 30, December 31,
2000 1999
------------- ------------
Convertible debentures payable, due on demand
interest accrued at 8% through default, interest
accrues at 2.5% per month thereafter............. $ 3,200,000 $ -
Convertible debentures payable, due June 30, 2000,
interest accrues at 8%, in default............... 10,000 -
Note payable to a vendor, due February 10, 2003,
interest accrues at 10%.......................... 129,396 -
Note payable to shareholder, due June 18, 2000,
interest accrues at 20% ......................... - 100,000
$1,000,000 Note payable to a shareholder, due
February 10, 2000, original interest rate of 14%,
interest of $70,000 was to be prepaid, the Company
defaulted by not prepaying the interest, default
interest rate of 28%, default interest of $56,611
has been accrued, date of note extended to August
10, 2000 by payment of $141,290 and issuance of
500,000 warrants, net of discount of $0 and
$112,826, respectively, based on imputed interest
at 1407%, in default............................. 1,000,000 887,174
Note payable to a customer, no stated interest rate,
payment to be in the form of future sales rebates 1,700,000 -
Note payable to a shareholder, due July 15, 1999,
monthly interest accrued at 10%.................. - 60,000
------------- ------------
Total Notes Payable and Convertible Debentures $ 6,039,396 $ 1,047,174
============= ============
Payable to a related party consisted of the following:
September 30, December 31,
2000 1999
------------- ------------
Payable to an employee, due upon demand, no
stated interest rate.............................$ 20,000 $ -
------------- ------------
Total Payable to a Related Party...................$ 20,000 $ -
============= ============
On November 20, 1998, Flexpoint obtained a $50,000 credit facility from a bank
which is available through January 15, 2001. The credit facility is evidenced
by a promissory note dated November 20, 1998. The bank issued a $50,000
irrevocable standby letter of credit in connection with the execution of a
real estate lease for manufacturing facilities. No amounts have been drawn
under the note payable or letter of credit. The promissory note and letter of
credit were secured by $50,000 of cash on deposit with the bank at December
31, 1999. In addition to the cash on deposit with the bank, a commitment fee
of 1% of the unused portion of the amount of the credit facility is due
annually. During 2000, the credit facility and the cash on deposit with the
bank were reduced to $40,000. Through September 30, 2000, $2,500 of interest
has been earned and credited to the balance of this certificate of deposit.
During the nine months ended September 30, 2000, the Company issued 8%
convertible promissory notes. All but $10,000 of these convertible notes had
been paid off or converted into common stock as of September 30, 2000.
On March 22, 2000, the Company issued warrants to purchase 500,000 shares of
common stock at $2.50 through August 10, 2004 to a note holder as a fee for
extending the due date of a $1,000,000 note payable from February 10, 2000 to
August 10, 2000. The fair value of the warrants was $1,230,000 as computed
using the Black-Scholes option pricing model with the following assumptions:
dividend yield of 0%, volatility of 121.1%, risk-free interest rate of 6.6%
and estimated life of four years. The loan extension fee has been accounted
for as unamortized loan costs and is being amortized over the six-month period
ending August 10, 2000. Interest expense resulting from amortization of these
loan costs was $1,230,000 during the nine months ended September 30, 2000.
This note is currently in default.
On March 3, 2000, the Company entered into a securities purchase agreement
(the "Securities Purchase Agreement") whereby the Company received proceeds of
$3,150,000, net of offering costs of $350,000, through June 1, 2000, in
exchange for $3,500,000 of convertible debentures and warrants to purchase
2,315,494 shares of common stock from $1.79 to $2.08 with expiration dates
through March 3, 2004. The debenture notes are due March 1, 2001 with interest
at 8% per annum payable quarterly. Under the terms of the debentures, if the
Company's stock price falls below $1.00 for five consecutive days, the
principal balance will become redeemable at the option of the lender. The
redemption amount is equal to 125% of the outstanding principal plus accrued
interest and is payable in ten days. If not redeemed, the conversion price is
reduced by $0.50 per share. The purchaser of the debenture is not obligated to
purchase the remaining $1.5 million in debentures if the Company is in default
or has breached any of its obligations under the agreement or the average of
the closing bid price for the Company's common stock is less than or equal to
$1.00.
The convertible debentures are convertible into common stock at a conversion
price of 80% of the lower of (a) the average of the three lowest closing bid
prices for the common stock during the 15 trading days preceding the date of
the purchase agreement or (b) the average of the three lowest closing bid
prices for the common stock during the 15 trading days preceding conversion,
subject to a maximum conversion price of $3.00 per share and a minimum
conversion price of $1.00 per share. Up to 33% of the aggregate principal and
accrued interest is convertible from March 3, 2000, an additional 33% is
convertible from April 2, 2000 and the remaining portion is convertible from
May 2, 2000. The notes are convertible through March 1, 2001. If the stock
price on the due date of the note is greater than $2.00, the lender is
required to convert all outstanding notes into common stock.
Through September 30, 2000, in connection with the issuance of the convertible
debentures, the Company also issued 2,315,494 warrants to purchase common
stock from $1.79 to $2.08 per share with expiration dates through March 3,
2004. The net proceeds from the Securities Purchase Agreement were allocated
between the convertible debentures and the warrants based upon their relative
fair values. The estimated fair value of the warrants of $3,698,168 was
determined using the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, volatility of 121% to 124%, risk-free
interest rate of 6.6% and estimated life of 3.75 years. The warrants were
allocated $1,595,417 of the net proceeds of the convertible debentures notes.
Of the remaining $1,554,583 net proceeds, $965,537 were allocated to the
beneficial conversion feature of the convertible debentures, and $777,948 were
allocated to the promissory notes, before $188,902 of loan costs.
The resulting $2,759,088 discount on the promissory notes is based on imputed
interest at 2357%. The discount and the loan costs are being amortized
through the date the notes are convertible and resulted in amortization
expense of $2,759,088 during the nine months ended September 30, 2000.
Under the terms of the default provisions of the convertible debentures
issued, at any time after issuance (i) an event of default occurs, or (ii) the
average of the closing bid prices for the Company's common stock for five
consecutive trading days, as quoted on the NASD's OTC Bulletin Board, is less
than or equal to $1.00, the Company is required to redeem, at the option of
the holder of the debenture, the debenture at 125% of the principal amount of
the debentures (plus accrued and unpaid interest and penalties thereon) within
ten days of the receipt of notice by the holder. If the Company does not make
the payment when due, interest will accrue on all outstanding debentures from
and after the redemption date at the default rate of 2.5% per month and the
conversion price in connection with any subsequent conversion of the
debentures will be reduced by $0.50 per share. In addition, the Agreement
states that in an event of default, all of the debentures shall be immediately
convertible.
On July 6, 2000, the holder of the debenture gave the Company a notice of
redemption under the terms of the Securities Purchase Agreement. The Company
was required to redeem all of the remaining $2,800,000 aggregate principal
amount of the debentures on or before July 17, 2000 at 125% of the outstanding
principal, or $3,500,000. This election was made by the holder because the
average closing bid prices for the Company's common stock for the previous
five consecutive trading days was less than or equal to $1.00. The Company did
not redeem the debentures by July 17, 1000 which was an event of default on
the debentures.
On July 18, 2000, the holder gave the Company a notice of conversion relating
to $300,000 of principal under the debentures and $3,200 of accrued interest.
The default conversion rate on July 18, 2000 was $0.50 per share which
resulted in 606,400 shares of common stock being issued. Interest will accrue
on the remaining $3,200,000 principal balance at the default interest rate of
2.5% per month. Also as a result of the default, the Company recognized a
default penalty of $700,000 which was recorded as additional interest expense.
In accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,"
the Company recorded an additional discount on the notes of $579,851 on July
18, 2000. This discount represents the contingent beneficial conversion
feature of the debentures due to the default. The discount was immediately
amortized to interest expense since the debentures are immediately
convertible.
In May 2000, the Company entered into an amendment to the Supply Agreement.
Under the terms of the amendment, Delphi was to provide the Company with a
$4,100,000 interest free loan. In May 2000, $800,000 was advanced to
Flexpoint, additional $300,000 payments were advanced in June, July and August
2000. Additional $300,000 payments were expected to be advanced during each of
the following nine months. However, these payments were terminated by Delphi
as a result of receipt of the Delphi Notice.
The Company issued a note payable dated January 17, 2000 to an individual. As
additional consideration, the Company issued warrants to purchase 100,000
shares of common stock at $1.80 per share. The warrants are exercisable
through January 17, 2002. The proceeds from the loan were allocated to the
warrants based upon their fair value. The resulting discount to the note of
$100,000 was recognized and amortized during the period ended September 30,
2000.
During the nine months ending September 30, 2000 the Company borrowed $55,000
from employees, officers or affiliated shareholders. As of September 30,
2000, $35,000 had been repaid. These are demand notes that bear 0% interest.
NOTE 4 - STOCKHOLDERS' EQUITY
Convertible debt and Series C warrants to purchase common stock were issued as
a unit in an offering in February 2000. The offering resulted in the issuance
of warrants to purchase 79,412 shares of common stock at $2.25 per share and
$135,000 of notes payable which were convertible into common stock at $1.70
per share. The net proceeds were allocated between the promissory notes and
the warrants based upon their relative fair values. The estimated fair value
of the warrants of $144,677 was determined using the Black Scholes option
pricing model with the following assumptions: dividend yield of 0%, volatility
of 119%, risk-free interest rate of 6.7% and estimated life of three years.
The warrants were allocated $69,812 of the net proceeds. Of the remaining
$65,188 net proceeds, $58,846 was allocated to the beneficial conversion
feature for the promissory note, and $6,342 was allocated to the promissory
notes. The resulting discount to the promissory notes was amortized
immediately as the notes were convertible upon issuance and resulted in
$128,658 of interest expense. The promissory notes were converted into 79,412
shares of common stock in February 2000.
Convertible debt and Series D warrants to purchase common stock were issued as
a unit in an offering in February and March 2000. The offering resulted in
the issuance of warrants to purchase 77,058 shares of common stock at $2.25
per share and $131,000 of promissory notes which were convertible into common
stock at $1.70 per share. The net proceeds were allocated between the
promissory notes and the warrants based upon their relative fair values. The
estimated fair value of the warrants of $78,887 was determined using the Black
Scholes option pricing model with the following assumptions: dividend yield of
0%, volatility of 121%, risk-free interest rate of 6.6% and estimated life of
three years. The warrants were allocated $43,972 of the net proceeds. Of the
remaining $87,028 net proceeds, $51,798 was allocated to the beneficial
conversion feature for the promissory note, and $35,230 was allocated to the
promissory notes. The resulting discount to the notes payable is being
amortized through the date the notes are convertible and resulted in interest
expense of $95,770 during the period ended September 30, 2000.
In March 2000, 743 shares of convertible preferred stock were converted into
185,714 shares of common stock.
During the period ended September 30, 2000, the Company has received total
cash proceed of $10,337 from holders of common stock options, principally from
an employee of the Company through payroll deductions. A portion of those
shares of common stock had previously been reflected as constructively issued
in the condensed consolidated financial statements. In August 2000, the
employee elected to rescind the exercise of the options and the Company
returned the amounts collected through payroll deduction and the related
shares of common stock reversed and no longer shown as constructively issued.
In connection with the Securities Agreement discussed in Note 3, the Company
issued 1,309,955 shares of common stock as a result of the conversion of a
portion of the related convertible debentures and associated accrued interest
having a total value of $1,006,755.
In June 2000, the Company issued 450,000 shares of common stock to a new
member of the board of directors and two other individuals or entities for
services rendered valued at $534,375.
NOTE 5 - STOCK PURCHASE WARRANTS
During the period ended September 30, 2000, warrants to purchase 2,536,082
shares of common stock were issued as part of financing transactions.
Warrants to purchase 500,000 shares of common stock were issued to extend the
terms of a note payable. In addition, warrants to purchase 240,000 shares of
common stock were issued as compensation for services. As described in Note 9,
warrants to purchase 10,000 shares of common stock were issued as partial
settlement of litigation.
NOTE 6 - PRODUCTS AND SERVICES
Flexpoint's only business relates to sales of electronic sensors and related
engineering. It produces sensors for sale to customers in the toy and
automotive industries. The components of sales for the nine months ended
September 30, 2000 and 1999 were as follows:
September 30,
--------------------------
2000 1999
------------- ------------
Products
Sales of sensors.............................$ 111,734 $ 139,904
Licensing royalty............................ - 251
Tooling and dies............................. 856 -
------------- ------------
Total Products........................... 112,590 140,155
Engineering Services........................... 164,127 358,546
------------- ------------
Total Sales....................................$ 276,717 $ 498,701
============= ============
NOTE 7 - SALE OF TECHNOLOGY AND MACHINE COMPANY, INC.
Effective September 27, 2000, the Company sold all of the outstanding common
stock of Technology and Machine Company, Inc. (Tamco), a wholly owned
subsidiary of Sensitron, Inc. for net proceeds of $47,308 plus 25% of the
profits from the operations of the business or sale of the assets of that
company for a twelve month period following the date of the sale. As a result
of the sale, the Company has recognized a gain of $125,103 on the disposition
of Tamco which has been reflected separately in the accompanying condensed
consolidated statement of operations for the three and nine months ended
September 30, 2000. This transaction has been reflected as a discontinued
operation. Accordingly, the accompanying condensed consolidated financial
statements have been restated for prior periods to reflect the income (loss)
of the Tamco discontinued operations separately for each of the periods
presented.
NOTE 8 - CONTRACT AND MANUFACTURING ACTIVITY EXIT COSTS
As discussed in Note 1, in August 2000, the Company received the Delphi
Notice. The Company had incurred significant costs in order to meet the
projected production requirements of the Supply Agreement. Principally as a
result of the Delphi Notice, the Company significantly reduced its operating
costs and number of employees and vacated its automotive related manufacturing
facility that was gearing up for production. The Company is still responsible
for the lease commitment since it has been unable to sublease the facility.
The remaining payments required by the lease total approximately $975,000 and
have been accrued in the accompanying condensed consolidated balance sheet.
Contract and manufacturing activity exit costs that have been reflected
separately in the accompanying condensed consolidated statements of operations
are as follows:
Accrued rent on manufacturing facility........................$ 975,000
Leasehold improvements written off, net of accumulated
depreciation of $90,650..................................... 816,357
Deposit on equipment forfeited................................ 64,507
Inventory write off........................................... 95,000
Impairment of property and equipment.......................... 280,000
------------
Total Contract and Manufacturing Activity Exit Costs........$ 2,230,864
============
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Capital Leases - During the nine months ended September 30, 2000, the Company
entered into capital lease arrangements for certain equipment. Property and
equipment under capital lease as of September 30, 2000 is as follows:
Machinery and equipment.........................$ 66,852
Accumulated depreciation........................ (6,337)
------------
Net Machinery and Equipment.....................$ 60,515
============
Future minimum lease payments as of September 30, 2000 are as follows:
Period Ending September 30,
2001.......................................$ 30,851
2002....................................... 24,947
2003....................................... 17,958
2004....................................... 14,463
2005....................................... 7,283
-------------
95,502
Less amount representing executory costs.......... 6,178
-------------
Net minimum lease payments........................ 89,324
Less amount representing interest................. 28,239
-------------
Present value..................................... 61,085
Less current portion.............................. -
-------------
Long-Term Capital Lease Obligation................$ 61,085
=============
These capital leases are presently in default and payment of the full amount
of the leases has been accelerated according to the provisions of the leases.
Accordingly, the total amounts of the lease obligations have been reflected as
current liabilities in the accompanying condensed consolidated balance sheets.
Operating Leases - Flexpoint is obligated under two operating lease agreements
for its facilities and office space. The lease on the Company's office space
and smaller production and prototyping and development facility expires
October 31, 2000. During October 2000, the Company entered into an extension
of that lease for an additional 18 months at an initial rate of $5,995 per
month. The Company has the option to terminate the lease at any time with 90
days written notice.
In November 1998, Flexpoint entered into a 5-year lease on 60,000 square feet
of space to be used primarily as a production facility for automotive related
products. The lease began in January 1999 and the Company has an option to
renew this 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 draw 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
September 30, 2000 was $40,000 plus accumulated interest. As discussed in Note
8, the Company has defaulted on this lease. According to acceleration
provision in the lease agreement relating to default, the entire amount of the
remaining lease payments for the balance of the term of the lease are due and
payable in full. As a result, the total amount of the remaining obligation of
$975,000 has been recognized as a current liability in the condensed
consolidated balance sheet at September 30, 2000 and as an expense in the
current period for the three and nine months ended September 30, 2000 in the
accompanying condensed consolidated statements of operations.
Future minimum lease payments under operating leases at September 30, 2000 are
as follows:
Period Ending September 30:
2001......................$ 1,046,940
2002...................... 41,965
------------
Total.....................$ 1,088,905
============
Lease expense for the periods ended September 30, 2000 and 1999 was $1,243,406
and $260,082, respectively.
In February of 1998, an unrelated third party filed suit against Flexpoint
alleging it provided investment banking and financial advisory services
pursuant to an agreement with Flexpoint. The plaintiff claimed to have
sustained damages for breach of contract and seeks damages in the amount of
6.5% of financing obtained from an equity investor, plus the issuance of a
warrant to purchase a 2% equity interest in Flexpoint at a price of $5.00 per
share. In addition, the plaintiff sought punitive damages of $5,000,000.
Flexpoint answered the complaint in March 1998. As of December 31, 1999,
Management believed, after consulting with legal counsel, that there is only a
remote possibility that Flexpoint will be subject to a punitive damage award
under the suit. Flexpoint had accrued a liability of $75,000 relating to this
action in its financial statements at March 31, 2000 and December 31, 1999.
On May 1, 2000, the court granted summary judgement in favor of Flexpoint and
dismissed the claims with prejudice. As of September 29, 2000, the Company
entered into a settlement agreement wherein the third party agreed to not
pursue an appeal of the ruling in exchange for 7,500 shares of the Company's
common stock and warrants to acquire 10,000 shares of the Company's common
stock at a price of $1.50 per share. The combined value of this consideration
was $4,200 and has been reflected as an expense in the accompanying condensed
consolidated financial statements. The $75,000 liability previously accrued is
no longer included in the condensed consolidated financial statements of the
Company.
NOTE 10 - SUBSEQUENT EVENTS
On October 5, 2000, the holder of the 8% convertible debentures described in
Note 3 converted $50,000 of the convertible debentures into 50,000,000 shares
of the Company's common stock. This transaction resulted in the holder of
these debentures assuming controlling ownership of the Company. In addition,
the holder of these 8% convertible debentures loaned to the Company $100,000
on October 11, 2000 and an additional $100,000 on November 8, 2000. These
loans are in the form of unsecured notes payable bearing interest at 12% per
annum and are due upon demand.
As discussed in Note 9, in October 2000, the Company entered into an 18 month
extension on the operating lease for its office space and prototyping and
development facility, effective November 1, 2000. The initial lease payments
are at a rate of $5,995 per month and the Company has the option to terminate
the lease at any time with 90 written notice.
In October 2000, 288 shares of convertible preferred stock were converted into
71,929 shares of common stock.
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information that the
Company believes is relevant to an assessment and understanding of its
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the Company's consolidated financial
statements and notes thereto. Except as otherwise stated or implied by the
context, all references to the "Company" refer to Flexpoint Sensor Systems,
Inc. and its subsidiaries on a consolidated basis.
Overview
The Company is in the development stage and since inception, has
incurred losses from operations. As of September 30, 2000, the Company had
cumulative losses totaling $28,950,052. The Company is primarily engaged in
the sensor business and is currently marketing its patented Bend Sensor
technology. Sensing devices can be used to measure or sense changes that occur
when a sensor is bent. Sensors typically trigger an electronic device when the
sensor is activated. The worldwide market for sensing devices has grown
significantly as a result of better technology and new applications for
sensing technology. This growth has resulted in a corresponding increase in
demand for high performance sensing products. The Company believes this
worldwide market growth will continue.
Financial Position
The Company had $91,738 in cash as of September 30, 2000. This
represented a decrease of $42,904 from December 31, 1999. Working capital
(deficit) as of September 30, 2000 increased to $(7,872,713) as compared to
working capital of $(2,167,065) at December 31, 1999. The increase in the
working capital (deficit) is largely due to an increase in the amounts owing
under notes payable, convertible debentures or other obligations that are
currently due or in default and increased general and administrative and
research and development expenses associated with the Supply Agreement (as
defined below). The Company currently has minimal cash and there is
substantial doubt whether the Company will continue as a going concern. See "
Liquidity and Capital Resources." The discussion for the three and nine months
ended September 30, 2000 and 1999, below, assumes that the Company will
continue as a going concern of which there can be no assurance.
Three and Nine Months Ended September 30, 2000 and 1999
During the three and nine months ended September 30, 2000, the Company
had revenues of $69,446 and $276,717, respectively. These revenues were
comprised of $8,200 and $164,127 in engineering fees for the respective
periods and $93,110 and $111,734 in product sales for the respective periods.
This is compared with revenues of $297,558 and $498,701 for the comparable
period from the prior year, comprised primarily of engineering fees.
Substantially all of the Company's revenues were generated under a
Purchase and Supply Agreement (the "Supply Agreement") between the Company and
Delphi Automotive Systems ("Delphi") that was executed in May, 1998. The
Company had expected to derive a substantial portion of its future income from
the sale of its Sensor Mat System to Delphi. However, in August 2000, Delphi
notified the Company of its intent to terminate the Supply Agreement under
sections 9 and 13. However, the Company believes that as previously disclosed
in a Form 8-K dated August 24, 2000, Delphi is not entitled to terminate the
agreement or has not followed the appropriate contractual provisions for
termination of the Supply Agreement (collectively referred to as the "Delphi
Notice"). No revenues related to this agreement are expected in the future.
There are several toys for the 2000 Christmas season designed to use the
Bend Sensor. The Company is also seeking opportunities to supply the
electronic assembly, including the sensor, to increase sales potential. Due to
the seasonality of the toy industry, the Company currently has no agreements
relating to the manufacture of sensors in the toy market and there can be no
assurance that the Company will successfully enter into toy related agreements
in the future. The Company expects that revenue from toy sales, if any, will
be substantially greater in the second half of any given year.
The Company is currently conducting discussions with several potential
strategic business partners regarding the use of the Flexpoint Bend Sensor(R)
technology in products in various stages of design and development in a
variety of field of application in the automotive and other industries. There
is no assurance that these discussions will ultimately result in the
consummation of commercially viable arrangements or that if such arrangements
are completed, the amount, nature and timing of revenues associated with such
arrangements will be sufficient to ensure the continued operations and
financial viability of the Company.
In addition, product supply arrangements, like those discussed above,
create certain risks for the Company, including (i) reliance from sales of
products on other parties, and therefore reliance on the other parties'
marketing ability, marketing plans and credit-worthiness; (ii) if the Company
products are marketed under other parties' labels, goodwill associated with
use of the products may inure to the benefit of the other parties rather than
to the Company; (iii) the Company may have only limited protection from
changes in manufacturing costs and raw materials costs; and (iv) if the
Company is reliant on other parties for all or substantially all of its sales,
the Company may be limited in its ability to negotiate with other parties upon
any renewals of their agreements.
General and administrative expenses for the three and nine months ended
September 30, 2000 were $836,983 and $3,399,349, respectively, compared with
$1,143,383 and $2,674,379 for the comparable periods from the prior year. The
increase in expenditures between the periods resulted primarily from an
increase in costs relating to compensation of directors and employees and
increases in depreciation expense.
Research and development expenses for the three and nine months ended
September 30, 2000 were $496,328 and $2,042,555, respectively, compared with
$905,358 and $2,369,178 for the comparable periods from the prior year. The
decrease in expenditures between the periods resulted primarily from decreases
in research and development spending relating to the cancellation of the
Supply Agreement.
Interest expense and interest expense from amortization debt discount
and loan costs for the three and nine months ended September 30, 2000 was
$1,911,749 and $6,407,778, respectively, compared with $538,375 and $565,864,
for the comparable periods from the prior year. The interest expense from
amortization of debt discount related to the Company's issuance of common
stock warrants and convertible notes. The proceeds of the loans were allocated
to the warrants based on the fair market value of the warrants. The resulting
discounts are amortized over the period through which the notes are
convertible. At September 30, 2000, the Company had no unamortized debt
discount related to these obligations.
Net interest and other income, excluding interest expense of debt
discount, was $(47,260) and $(30,586) for the three and nine months ended
September 30, 2000, respectively, and $41,105 and $58,284 for the comparable
periods from the prior year. The net interest and other income relates mainly
to interest earned on funds on deposit, netted against other expenses. As
funds on deposit have decrease and borrowing have increase, the Company has
incurred increased interest costs and decreased interest income.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of debt and equity securities and minimal sensor product
sales and engineering and development revenues. The Company generated
$16,187,491 in net proceeds through financing activities from inception
through September 30, 2000 and it received $4,860,658 in net proceeds from
financing activities during the nine months ended September 30, 2000. The
Company used net cash in operating activities of $14,733,694 from inception
through September 30, 2000 and the Company used $4,821,430 in operating
activities during the nine months ended September 30, 2000. As of September
30, 2000, the Company's total liabilities were $8,065,332. The Company had a
working capital (deficit) as of September 30, 2000 of $(7,872,713).
In September 2000, the Company sold its wholly owned subsidiary,
Technology and Machine Company, Inc. to a former employee for $47,308 cash,
and 25% of any profits from the operations of the business or sale of the
assets of that company for a twelve month period follow the date of the sale.
As of November 16, 2000, the Company had minimal cash. The Company has
committed to spend $17,740 in lease payments for its physical facilities
during the remainder of 2000 and up to $71,940 in 2001 and $23,980 in 2002.
The Company has the ability to cancel this lease upon 90 days written notice
based on an extension on the lease entered into in October 2000. The Company
was also leasing a 60,000 square foot facility under a five-year agreement
effective January 1999 with monthly lease payments plus related costs totaling
$24,915. The Company has vacated this facility and is in default on the lease.
Default provisions of the lease accelerate the entire amount of the remaining
unpaid lease payments for the full term of the lease. Approximately 33% of the
total facility was occupied by the Company. The Company has entered into an
informal arrangement with the property manager to sublease the space or
include the space in a lease or sale of the entire facility. There is no
assurance as to if or when the facility may be leased, sold or subleased and
The Company remains fully obligated under the terms of the lease there is no
assurance as to if or when the facility may be leased, sold or subleased to a
third party. The Company has $61,085 in net future minimum lease payments
relating to machinery and equipment under capital leases entered into in 2000.
These leases are currently in default and the payment of the full remaining
unpaid lease payments have been accelerated in accordance with the terms of
the lease agreements. The Company had paid a deposit of $64,507 toward the
purchase of a platen printing press. The Company has cancelled the order for
the press, has forfeited the deposit and expects to be relieved of its
obligation to complete the purchase of the press. The deposit is not
recoverable.
In February 2000, the Company defaulted on a note payable to an
investor in the principal amount of $1,000,000 by not making payment on
February 10, 2000, the maturity date. This loan is secured by certain assets
of the Company. The Company was also in default on the prepaid interest
provision of the note. The investor offered to extend the note for an
additional six months and waive any default interest for consideration of
500,000 warrants with an exercise price of $2.15. In order to extend the
maturity of the note, the investor also required a prepayment of interest,
plus attorney fees, in the total amount of $141,920. Management accepted the
offer to extend the note through August 10, 2000 by effectively issuing the
warrants and making payment of the interest on March 27, 2000. As of August
10, 2000, the Company is in default on this note and the Company does not have
the funds to repay the amounts owed. The note holder has notified the Company
of the default and has not notified the Company of their intent to exercise
any of the available default options. The note holder may foreclose on the
assets of the Company that secure the note as a result of this default. Such a
foreclosure would significantly impair the Company's ability to continue to do
business.
On March 3, 2000, the Company closed on a financing of up to $5,000,000
pursuant to a Securities Purchase Agreement, dated March 3, 2000 (the
"Securities Purchase Agreement"). Under the Securities Purchase Agreement the
investor made investments of $2,000,000 in March 2000 and additional
investments of $500,000 each in April, May and June, net of offering costs of
$350,000. In exchange for these investments, the investor received convertible
debentures in the total principal amount of $3,500,000 and Series 2000-A
Warrants exercisable for 2,315,494 shares of the Company's common stock at
exercise prices between $1.79 and $2.08 per share. Expected additional
investments of $500,000 in July, August and September were not received.
The debentures are due and payable in full on or before March 1, 2001 and
require the payment of quarterly interest payments at the rate of 8% per
annum. The investor may require the redemption of the debentures if the
Company's average closing bid price falls to $1 or less per share for five
consecutive days. In the event of mandatory redemption, the Company is
required to pay to the investor an amount equal to 125% of the aggregate
principal amount of the debentures plus accrued interest. In the event of
non-payment, the conversion price on any future conversions is reduced by $.50
per share and interest accrues on the unpaid amounts owing at the default rate
of 2.5% per month (collectively, the "Default Provisions").
During June 2000, the investor converted debentures in the principal
amount of $700,000 plus accrued interest of $3,555 into 703,555 shares of
common stock.
On July 6, 2000, the investor gave written notice to the Company of
mandatory redemption of debentures in the aggregate principal amount of
$2,800,000 as a result of the average closing bid price of the Company's
common stock being less than or equal to $1.00 for five consecutive days. In
July the investor also gave the Company notice that it is indefinitely
postponing any additional investments under the Securities Purchase Agreement.
The Company has minimal cash and cannot presently pay the principal or
interest payments due as a result of the mandatory redemption and is in
default under this note. On July 18, 2000 the investor gave the Company notice
and subsequently converted $303,200 in amounts owing under the debentures into
606,400 shares of common stock.
In October 2000, the investor in the 8% convertible debentures
converted $50,000 of the convertible debentures into 50,000,000 shares of the
Company's common stock. This transaction resulted in the holder of these
debentures assuming controlling ownership of the Company. The Company
currently owes to the investor and its assigns $3,150,000 in principal and
penalties plus accrued interest. Additional interest on said amount is
accruing at the default rate of 2.5% per month.
In addition, the holder of these 8% convertible debentures loaned to
the Company $100,000 in October 2000 and an additional $100,000 in November
2000. These loans are in the form of unsecured notes payable bearing interest
at 12% per annum and are due upon demand.
In addition, the Company is seriously past due in payments to unsecured
creditors, some of whom are pursuing collection of the unpaid balances.
If the Company is unable to repay the remainder of the obligation, of
which there can be no assurance, it will have a material adverse effect on the
Company, particularly in light of the Default Provisions, and may result in
the Company ceasing operations.
In May 2000, the Company entered into an amendment to the Supply
Agreement. Under the terms of the amendment, Delphi was to provide the Company
with a $4,100,000 interest free loan. In May 2000, $800,000 was advanced to
Flexpoint, additional $300,000 payments were advanced in June, July and August
2000. Additional $300,000 payments were expected to be advanced during each of
the following nine months. However, these payments were terminated by Delphi
as a result of receipt by the Company of the Delphi Notice. The loan proceeds
were to be used for costs directly related to the Delphi programs. At Delphi's
election, the loan could be repaid either through a rebate on the sales of
sensor mats from Flexpoint to Delphi, and/or as payment toward the purchase of
Flexpoint common stock pursuant to proposed warrants at a price not in excess
of $2.23 per share (115% percent of the closing price as of the effective date
of the amendment) or some combination of the foregoing which Delphi could
determine. With the the Delphi Notice, the manor in which the loan will be
repaid, if at all, and its potential effect on the Company is uncertain.
At September 30, 2000, the Company also has an additional $30,000 in
short term loans outstanding. The remaining amounts presently outstanding are
either in default or due on demand.
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including the
cost of basic administrative, design and development operations until new
business alliances and relationships can be completed and the timing of
entering into such arrangements. The Company intends on entering into
arrangements that will financially support related development activities and
associated overhead. There is no assurance that the Company will be successful
in entering into such arrangements or that if such arrangements are
consummated that they will be on terms that will cover the Company's operating
costs. The Company has received a commitment for the infusion of limited debt
funding, of which the Company has already received $200,000 with no assurance
of the extent, if any, to which other such funding might be provided. The
Company is seeking additional debt and equity capital. There can be no
assurance as to if and when the Company will be successful in obtaining any
additional funding. The Company has significantly reduced operating costs. Any
inability to obtain sufficient amounts of additional financing or entering
into business arrangements with new customers in the immediate future will
have a material adverse effect on the Company, including the inability of the
Company to continue its operations.
Mike Wallace d.b.a. Pure Imagination
The Company retained Mike Wallace d.b.a. Pure Imagination ("Wallace")
and a number of independent contractors to develop software intended to be
used in connection with automobile seat sensors as part of a "smart" air bag
system being developed for Delphi and General Motors. Management believes it
owns all right, title and interest to said software because the software was
developed at the request of the Company for which the Company has paid
compensation to both Wallace and the independent contractors. Disputes have
arisen between Wallace and the Company with respect to ownership rights in the
software. Wallace is asserting that he owns all rights to the software source
code and that the Company must pay additional compensation to use the software
with the Company's Bend Sensor(R) technology and for other non-Bend Sensor
applications. As a result of the dispute, Wallace is refusing to release the
software source code for the Company's use and is hindering the Company's
further development of the software including the Company's access to the
software development facility. The Company believes that this dispute was a
contributing factor in Delphi notifying the Company of the cancellation of the
Supply Agreement. In addition, Wallace is in possession of certain physical
property and equipment of the Company.
Forward-Looking Statements
When used in this Form 10-QSB, in the Company's filings with the SEC, in
its press releases or other public or stockholder communications, or in oral
statements made with the approval of its authorized executive officer, the
words or phrases "would be," "will allow," "intends to," "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project,"
or similar expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on its beliefs and the assumptions the Company made
using information currently available to us.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, are based on
certain assumptions and expectations which may or may not be valid or actually
occur, and which involve various risks and uncertainties, including but not
limited to risk of product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product development,
commercialization, and technology, and other risks. Furthermore, manufacturing
delays may result from product redesigns or otherwise. In addition, sales and
other revenues may not commence as anticipated due to delays or otherwise and
sales may not reach the levels anticipated. As a result, its actual results
for future periods could differ materially from those anticipated or
projected.
Unless otherwise required by applicable law, the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
Securities Purchase Agreement
On March 3, 2000, the Company closed on a financing of up to
$5,000,000 pursuant to the Securities Purchase Agreement. Under the Securities
Purchase Agreement the investor made investments of $2,000,000 in March 2000
and additional investments of $500,000 each in April, May and June, net of
offering costs of $350,000. In exchange for these investments, the investor
received convertible debentures in the total principal amount of $3,500,000
and Series 2000-A Warrants exercisable for 2,315,494 shares of the Company's
common stock at exercise prices between $1.79 and $2.08 per shares through
March 3, 2004. Additional investments of $500,000 each were expected in July,
August and September.
The debentures are convertible into common stock at a conversion price
of 80% of the lower of (a) the average of the three lowest closing bid prices
for the common stock during the 15 trading days preceding the date of the
purchase agreement or (b) the average of the three lowest closing bid prices
for the common stock during the 15 trading days preceding conversion, subject
to a maximum conversion price of $3.00 per share and a minimum conversion
price of $1.00 per share.
The debentures are due and payable in full on or before March 1, 2001
and require the payment of quarterly interest payments at the rate of 8% per
annum. The investor may require the redemption of the debentures if the
Company's average closing bid price falls to $1 or less per share for five
consecutive days. In the event of mandatory redemption, the Company is
required to pay to the investor an amount equal to 125% of the aggregate
principal amount of the debentures plus accrued interest. In the event of
non-payment, the conversion price on any future conversions is reduced by $.50
per share and interest accrues on the unpaid amounts owing at the default rate
of 2.5% per month (collectively, the "Default Provisions").
In June 2000, the investor converted debentures in the principal
amount of $700,000 plus accrued interest of $3,555 into 703,555 shares of
common stock.
On July 6, 2000, the investor gave written notice to the Company of
mandatory redemption of debentures in the aggregate principal amount of
$2,800,000 as a result of the average closing bid price of the Company's
common stock being less than or equal to $1.00 for five consecutive days. In
July the investor also gave the Company notice that it is indefinitely
postponing any additional investments under the Securities Purchase Agreement.
The Company has not paid the amount owning under the debentures and is
currently in default.
On July 18, 2000 the investor converted $303,200 in amounts owing on
the debentures into 606,400 shares of common stock.
On October 5, 2000, the investor converted $50,000 in amounts owing on
the debentures into 50,000,000 shares of common stock.
In October 2000, 288 shares of convertible preferred stock were
converted into 71,929 shares of common stock.
Amendment to Supply Agreement
In May 2000, the Company entered into an amendment to the Supply
Agreement. Under the terms of the amendment, Delphi was to provide the Company
with a $4,100,000 interest free loan. In May 2000, $800,000 was advanced to
Flexpoint, additional $300,000 payments were advanced in June, July and August
2000. The loan proceeds are to be used for costs directly related to the
Delphi programs. At Delphi's election, the loan could be repaid either through
a rebate on the sales of sensor mats from Flexpoint to Delphi, and/or as
payment toward the purchase of Flexpoint common stock pursuant to proposed
warrants at a price not in excess of $2.23 per share (115% percent of the
closing price as of the effective date of the amendment) or some combination
of the foregoing which Delphi shall determine. With the Delphi Notice, the
manor in which the loan will be repaid, if at all, and its potential effect on
the Company and the possible issuance of any of the Company's securities is
uncertain.
Other
None.
Item 3. Defaults Upon Senior Securities.
In February 2000, the Company defaulted on a note payable to an investor
in the principal amount of $1,000,000 by not making payment on February 10,
2000, the maturity date. This loan is secured by certain assets of the
Company. The Company was also in default of the prepaid interest provision of
the note. The investor offered to extend the note for an additional six months
and waive any default interest for consideration of 500,000 warrants with an
exercise price of $2.15. In order to extend the maturity of the note, the
investor also required a prepayment of interest, plus attorney fees, in the
total amount of $141,920. Management accepted the offer to extend the note
through August 10, 2000 by effectively issuing the warrants and making payment
of the interest on March 27, 2000. As of August 10, 2000, the Company is in
default on this note and the Company does not have the funds to repay the
amount owing as of that date. The note holder has notified the Company of the
default and has not notified the Company of their intent to exercise any of
the available default options. The note holder may foreclose on the assets of
the Company that secure the note as a result of this default. Such a
foreclosure would significantly impair the Company's ability to continue to do
business.
On March 3, 2000, the Company closed on a financing pursuant to the
Securities Purchase Agreement, dated March 3, 2000. Under the Securities
Purchase Agreement the investor made investments of $2,000,000 in March 2000
and additional investments of $500,000 each in April, May and June, net of
offering costs of $350,000. In exchange for these investments, the investor
received convertible debentures in the total principal amount of $3,500,000
and Series 2000-A Warrants exercisable for 2,315,494 shares of the Company's
common stock at exercise prices between $1.79 and $2.08 per share. Expected
additional investment of $500,000 in July, August and September were not
received.
The debentures are due and payable in full on or before March 1, 2001
and require the payment of quarterly interest payments at the rate of 8% per
annum. The investor may require the redemption of the debentures if the
Company's average closing bid price falls to $1 or less per share for five
consecutive days. In the event of mandatory redemption, the Company is
required to pay to the investor an amount equal to 125% of the aggregate
principal amount of the debentures plus accrued interest. In the event of
non-payment, the conversion price on any future conversions is reduced by $.50
per share and interest accrues on the unpaid amounts owing at the default rate
of 2.5% per month (collectively, the "Default Provisions").
In June 2000, the investor converted debentures in the principal
amount of $700,000 plus accrued interest of $3,555 into 703,555 shares of
common stock. On July 6, 2000, the investor gave written notice to the Company
of mandatory redemption of debentures in the aggregate principal amount of
$2,800,000 as a result of the average closing bid price of the Company's
common stock being less than or equal to $1.00 for five consecutive days. On
July 18, 2000 the investor gave the Company notice and subsequently converted
into common stock $303,200 in amounts owing under the debentures into 606,400
shares of common stock. In October 2000, the investor converted an additional
$50,000 into 50,000,000 shares of the Company's common stock. The Company is
in default with respect to this obligation and currently owes to the investor
and its assigns $3,150,000 in principal and penalties plus accrued interest,
with additional interest on said amount accruing at the default rate of 2.5%
per month.
Item 4. Submission of Matters to Vote of Securityholders.
None.
Item 5. Other Information.
None.
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).
10.4 Purchase and Supply Agreement by and among Flexpoint, Inc. and
Delphi Automotive Systems (certain portions of the agreement were
omitted from the exhibit pursuant to a grant of confidential
treatment) (Incorporated by reference to Exhibit 10.4 to the
Company's annual report on Form 10-KSB, dated December 31, 1998).
10.5 Industrial Space Lease between Prudential Insurance Company of
America and Flexpoint, Inc. (Incorporated by reference to Exhibit
10.5 to the Company's annual report on Form 10-KSB, dated
December 31, 1998).
10.6 Securities Purchase Agreement with Aspen Capital Resources, LLC,
(Incorporated by reference to Exhibit 10.1 of our Current Report
on Form 8-K, dated March 16, 2000).
10.7 Promissory secured promissory note in favor of Jerry and Vicki
Moyes Family Trust, dated August 10, 1999 (Incorporated by
reference to Exhibit 10.7 of our Annual Report on Form 10-KSB,
dated December 31, 1999).
10.8 Security Agreement with Jerry and Vicki Moyes Family Trust, dated
August 10, 1999 (Incorporated by reference to Exhibit 10.8 of our
Annual Report on Form 10-KSB, dated December 31, 1999).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On August 25, 2000, the Company filed a Current Report on Form 8-K, dated
August 24 2000, disclosing under Item 5 information relating to a notice of
cancellation to the Delphi/Delco Supply Agreement and related amendment.
On October 10, 2000, the Company filed an additional Current Report on
Form 8-K, dated October 5, 2000, disclosing under Item 1 changes in control of
the Company as a result of the conversion of certain convertible debentures by
Aspen Capital Resources LLP.
<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: November 16, 2000 FLEXPOINT SENSOR SYSTEMS, INC.
By /s/ John F. Trotter II
__________________________________________
John F. Trotter, President and Chief
Executive Officer
Date: November 16, 2000 By /s/ Charles D. Roe
__________________________________________
Charles D. Roe, Chief Financial Officer
