FORM 10-QSB/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 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 August 12, 1999: 17,238,670.
<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
June 30, December 31,
1999 1998
--------------- --------------
ASSETS
Current Assets
Cash $ 206,798 $ 657,775
Trade accounts receivable, net of
allowance of $90,721 50,728 298,586
Royalties receivable - 152,570
Receivable from shareholder - 1,573,750
Inventory 194,748 42,691
Prepaid expense 46,670 50,915
--------------- --------------
Total Current Assets 498,944 2,776,287
--------------- --------------
Property and Equipment 3,326,129 1,273,326
Less accumulated depreciation (610,243) (387,858)
--------------- --------------
Net Property and Equipment 2,715,886 885,468
--------------- --------------
Goodwill, Net of Accumulated Amortization of
$89,851 and $77,871 29,950 41,931
Deposits 49,549 246,441
Patents, net of accumulated amortization of
$52,218 and $45,018 116,234 101,331
--------------- --------------
Total Assets $ 3,410,563 $ 4,051,458
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 631,178 $ 348,473
Related party payable - 1,234
Accrued liabilities 577,185 100,290
Income taxes payable 8,314 8,314
Notes payable, net of
unamortized discount of $152,957 157,043 -
--------------- --------------
Total Current Liabilities 1,373,720 458,311
--------------- --------------
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; 536 Preferred shares
issued and outstanding; liquidation
preference $469,000 460,738 -
Common stock - $0.001 par value; 100,000,000
shares authorized;17,159,554 and 16,990,296
shares issued and outstanding 17,160 16,990
Additional paid in capital 10,239,732 9,127,091
Unearned Compensation (95,450) -
Deficit accumulated during the
development stage (8,585,337) (5,550,934)
--------------- --------------
Total Stockholders' Equity 2,036,843 3,593,147
--------------- --------------
Total Liabilities and Stockholders' Equity $ 3,410,563 $ 4,051,458
=============== ==============
The accompanying notes are an integral part of these financial statements.
2
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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 Six Months Through
Ended June 30, Ended June 30, June 30,
1999 1998 1999 1998 1999
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales $ 166,193 $ 297,042 $ 287,950 $ 357,130 $ 578,675
Cost of sales 79,832 110,813 80,677 155,539 1,608,980
------------ ----------- ------------ ------------ ------------
Gross profit 86,361 186,229 207,273 201,591 1,969,695
General and administra-
tive expense 959,677 475,713 1,633,740 770,841 5,576,778
Research and development 793,741 272,117 1,463,820 439,822 4,767,769
------------ ----------- ------------ ------------ ------------
Loss from operations (1,667,057) (561,601) (2,890,287) (1,009,072) (8,374,852)
Interest expense (4,351) - (4,351) (40) (75,552)
Interest expense of debt
discount (22,943) - (22,943) - (22,943)
Interest income 4,798 13,663 16,643 13,663 52,254
Other income/expense (152) (60) 535 (3,517) (30,244)
------------ ----------- ------------ ------------ ------------
Net Loss (1,689,705) (547,998) (2,900,403) (998,966) (8,451,337)
Preferred dividend (134,000) - (134,000) - (134,000)
------------ ----------- ------------ ------------ ------------
Loss applicable to
common shareholders $(1,823,705) $ (547,988) $(3,034,403) $ (998,966) $(8,585,337)
============ =========== ============ ============ ============
Basic and Diluted Loss
Per Common Share $ (0.11) $ (0.06) $ (0.18) $ (0.08) $ (0.74)
============ =========== ============ ============ ============
Weighted average number
of common shares used in
per share calculation 17,153,510 9,860,279 17,205,718 12,479,064 11,668,375
============ =========== ============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
</TABLE>
<PAGE>
<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 Six Months Through
Ended June 30, June 30,
1999 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (2,900,403) $ (998,966) $ (8,451,337)
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 241,566 69,315 764,649
Amortization of unearned compensation 72,675 45,375 118,050
Amortization of debt discount 22,943 - 22,943
Stock issued for services - - 222,727
Allowance for doubtful accounts - - 242,288
Write-off of related party receivable - - -
Changes in operating assets and liabilities:
Accounts receivable 400,428 (38,559) (156,975)
Inventory (152,057) (353,489) (194,748)
Accounts payable 282,705 (44,945) 452,364
Accrued liabilities 476,895 (403,868) 508,201
Deferred revenue - (100,000) (6,163)
Other assets (16,630) 30,490 (298,855)
-------------- -------------- --------------
Net Cash Used By
Operating Activities (1,571,878) (1,794,647) (6,788,854)
-------------- -------------- --------------
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 - 153,497 455,082
Net cash received from Nanotech
acquisition - 1,492,906 1,492,907
Payments received from related parties - 3,128 34,661
Collection of receivables from escrow agent - - 64,825
Payments for the purchase of property
and equipment (1,835,036) (268,242) (2,835,833)
Proceeds received from sale of property
and equipment - - 22,682
Investment in patents (22,103) (18,459) (132,429)
-------------- -------------- --------------
Net Cash Used By Investing Activities (1,857,139) 1,362,830 (1,191,518)
-------------- -------------- --------------
Cash Flows From Financing Activities
Proceeds from the issuance of preferred
stock 460,738 - 460,738
Proceeds from the issuance of common
stock 634,786 8,000 4,725,450
Cash payments to officers to repurchase
stock - - (50,000)
Cash paid for offering costs - - (123,020)
Proceeds from borrowings 310,000 - 613,960
Principal payments of long-term debt - (310,118) (398,751)
Borrowings from Nanotech prior to
acquisition - 1,000,000 1,000,000
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 2,978,040 1,087,882 8,187,170
-------------- -------------- --------------
Net Change In Cash (450,977) 656,065 206,798
Cash at Beginning of Period 657,775 106,494 -
-------------- -------------- --------------
Cash at End of Period $ 206,798 $ 762,559 $ 206,798
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
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 6, the accompanying condensed
consolidated financial statements have been restated to correctly reflect
compensation resulting from grants of stock options, to allocate a portion of
the proceeds from the issuing notes payable with warrants, to the warrants, to
amortized the preferred stock discount as preferred dividends and to correct
timing of depreciation on 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.
Organization and Principles of Consolidation - Sensitron, Inc. ("Sensitron")
was incorporated under the laws of the State of Utah on January 5, 1995.
During 1995, Sensitron acquired Flexpoint, Inc. and Technology and
Manufacturing Company, Inc., Utah corporations On April 11, 1998, Sensitron
was reorganized into a wholly-owned subsidiary of Nanotech Corporation, a
publicly-held Delaware Corporation, and changed its name to Micropoint, Inc.
At the annual stockholders' meeting held on June 16, 1999, its stockholders
authorized Micropoint, Inc. to change its name to Flexpoint Sensor Systems,
Inc.
The accompanying consolidated financial statements include the accounts of
Sensitron for all periods presented, the accounts of its wholly-owned
subsidiaries from their dates of acquisition in 1995 and the accounts of
Flexpoint Sensor Systems, Inc. from April 11, 1998. These entities are
collectively referred to herein as the "Company," except where the context
clearly indicates to the contrary All significant intercompany transactions
and account balances have been eliminated in the consolidation.
Nature of Operations -The Company is a development stage enterprise engaged
principally in designing, engineering, and manufacturing sensor technology and
equipment using flexible potentiometer technology. Flexpoint, Inc. entered
into a Purchase and Supply Agreement (the "Supply Agreement") with Delphi
Automotive Systems ("Delphi") in June 1998. Under the terms of the Supply
Agreement, the Company
5
<PAGE>
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 and 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 six months ended June 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 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
substantial additional capital to fulfill its anticipated obligations under
the Supply Agreement, as amended.
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 - PROPERTY AND EQUIPMENT
At June 30, 1999 property and equipment consisted of the following:
Furniture and fixtures $ 92,838
Machinery and equipment 1,671,284
Office equipment 219,685
Software 33,354
Leasehold improvements 1,308,968
------------------
Total $ 3,326,129
==================
6
<PAGE>
Of the $1,308,968 of leasehold improvements, $906,502 is for the
infrastructure required by the Supply Agreement. Depreciation expense for the
six months ended June 30, 1999 and 1998 was $222,384 and $32,068 respectively.
NOTE 3 - NOTES PAYABLE
On June 18, 1999, the Company borrowed $310,000 from a non-affiliated
accredited lender to provide the Company necessary funding. Of said amount,
$200,000 bears interest at 20% per annum, payable monthly. The principal is
payable in two equal installments of $100,000 on September 18, 1999 and
December 18, 1999. The remaining principal amount of $110,000 bore interest at
10% per annum and was payable and was to be repaid on July 15, 1999 but was
extended. These notes are unsecured and included in total current liabilities.
As part of the consideration for these notes, the Company granted to said
lender warrants to acquire 75,000 shares of the Company's common stock. Said
warrants are exercisable at approximately $3.44 per share for a period
expiring in June 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 June 30, 1999,
$22,943 of the discount was amortized to interest expense.
NOTE 4 -PREFERRED STOCK
During the three months ended June 30, 1999, the Company offered and sold to
accredited investors in a private placement 536 Units (defined below) for
gross proceeds of $469,000, with related offering costs of $8,263. Each Unit
consisted of one share of Series A Convertible Preferred Stock (the "Preferred
Stock") and Series A Warrants to purchase 250 shares of the Company's common
stock. The Preferred Stock is convertible, at the option of the holder, at any
time into common stock at the conversion rate of 250 shares of common stock
for one share of Preferred Stock. The Series A Warrants are exercisable at
$4.00 per share through January 1, 2001. Each Unit was sold for $875. The
proceeds were allocated on the dates received to (a) the Series A Warrants to
purchase common stock based upon their fair value in the amount of $134,000
and (b) $326,738 was allocated to the convertible preferred stock. The
resulting discount on the preferred stock of $134,000 was immediately
amortized as a preferred stock dividend on the dates the convertible preferred
stock was issued. The convertible preferred stock is convertible into 134,000
shares of common stock through January 1, 2001.
NOTE 5 - NONCASH COMPENSATION
The Company measures compensation under the stock-based options granted to
employees using the intrinsic value method prescribed by Accounting Principals
Option 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 valueof the options granted
consistent with Statement of Financial Accounting Standards No 123, Accounting
for Stock-Based Compensation.
During the six months ending June 30, 1999, the Company granted options to
acquire 176,000 shares of common stock to employees, which are exercisable
form $.75 to $4.00 per share. The intrinsic value of these options was
$168,125 and is being recognized as compensation over the period the options
vest. Amortization of the unearned compensation of $21,136 and $72,675 was
recognized during the three and six months ended June 30, 1999, respectively.
8
<PAGE>
NOTE 6 - RESTATEMENT
During the three months and six months ending June 30, 1999, the Company
recognized additional compensation to employees in the amount of $21,136 and
72,675, respectively, associated with the grant of stock options at an
exercise price equal to the price of restricted common stock being sold by
the Company in a Private Placement which was below the current market price.
As referenced in Note 3, during the three months ended June 30, 1999, the
Company borrowed $310,000 and issued warrants as additional compensation in
relation thereto. With the issuance of the warrants the Company recognized a
discount on the notes of $175,900 that was credited to additional paid-in
capital. The discount is being amortized over the maturity of the notes.
During the three months ended June 30, 1999, $22,136 of the discount was
amortized to interest expense. In reference to the Preferred Stock discussed
in Note 4, the Company recognized a discount on preferred stock of $134,000
that was immediately amortized as a preferred stock dividend. The discounts on
notes and the additional compensation were not recorded on the financial
statements included in the Company's original filing.
NOTE 7 - SUBSEQUENT EVENTS
On July 30, 1999, the Company borrowed $200,000 from a non-affiliated lender.
The note bears interest at 14% per annum. The note was repaid in August 1999
and all interest payable thereunder was forgiven. As part of the consideration
for the note, the Company granted to said lender warrants to acquire 160,000
shares of the Company's common stock. Said warrants are exercisable at $3.15
per share for a period expiring in July 2004. Debt discount totaling $200,000
will be recognized and amortized over the maturity of the note.
On August 11, 1999, the Company borrowed $1,000,000 from a non-affiliated
lender. The note bears interest at 14% per annum. The interest was prepaid in
full at funding and the principal is due and payable on February 10, 2000. The
note is secured by Company equipment. As part of the consideration for the
note, the Company granted to said lender warrants to acquire 500,000 shares of
the Company's common stock. Said warrants are exercisable at $2.15 per share
for a period expiring in July 2004. Debt discount of $890,000 will be
recognized and amortized over the maturity of the note.
8
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
consolidated results of operations and financial condition of Flexpoint Sensor
Systems, Inc. The discussion should be read in conjunction with the condensed
consolidated financial statements, related notes and Management's Discussion
and Analysis or Plan of Operation for the year ended December 31, 1998.
Wherever in this discussion the term "Company" is used, it should be
understood to refer to Flexpoint Sensor Systems, Inc. and its wholly owned
subsidiary, Sensitron, Inc. ("Sensitron"), a Utah corporation, and Sensitron's
wholly owned subsidiaries, Flexpoint, Inc. and Technology and Machine Company,
Inc. ("Tamco"), on a consolidated basis, except where the context clearly
indicates to the contrary. The business operations of the Company are
conducted through Flexpoint, Inc. and Tamco. Prior to the April 1998, merger
wherein Flexpoint Sensor Systems, Inc. acquired Sensitron (the "Acquisition"),
Flexpoint Sensor Systems Inc. had no operations. The Acquisition was accounted
as a reorganization of Sensitron. The historical financial statements prior to
the Acquisition are those of Sensitron and have been restated accordingly.
Overview
The Company is a development stage company and, since inception, has
incurred losses from operations. As restated, as of June 30, 1999, the Company
had cumulative net losses totaling $8,451,377. 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
During the three months and six months ending June 30, 1999, the Company
recognized additional compensation to employees in the amount of $21,136 and
72,675, respectively, associated with the grant of stock options at an
exercise price equal to the price of restricted common stock being sold by
the Company in a Private Placement which was below the current market price.
As referenced in Note 3 to the accompanying financial statements, during the
three months ending June 30, 1999, the Company borrowed $310,000 and issued
warrants as additional compensation in relation thereto. With the issuance of
the warrants the Company recognized a discount on the notes of $175,900 that
was credited to additional paid-in capital. The discount is being amortized
over the maturity of the notes. During the three months ended June 30, 1999,
$22,136 of the discount was amortized to interest expense. In reference to the
Preferred Stock discussed in Note 4 to the accompanying financial statements,
the Company recognized a discount on preferred stock of $134,000 that was
immediately amortized as a preferred stock dividend. The discount on notes and
the additional compensation were not recorded on the financial statements
included in the Company's original filing.
Financial Position
As restated, the Company had $206,798 in cash as of June 30, 1999. This
represented a decrease of $450,977 from December 31, 1998. Working capital
deficiency as of June 30, 1999 was $(874,776) as compared to working capital
of $2,317,976 at December 31, 1998. The decrease is largely due to the
acquisition of $799,747 in new equipment, investment of $958,838 in leasehold
improvements, payment of $851,000 in fees and expenses to outside consultants
for software development relating to the Company's sensor mats for use in the
smart air bag system (discussed below) and purchase of $76,451 in office
equipment.
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<PAGE>
Three and Six Months Ended June 30, 1999 and 1998
As restated, during the three and six months ended June 30, 1999, the
Company had sales of $166,193 and $287,950, respectively, comprised almost
entirely of development fees; compared with sales of $297,042 and $357,130 for
the comparable periods from the prior year, comprised primarily of product
sales and engineering fees.
Substantially all of the Company's revenues during the three and six
months ended June 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.
Substantially all of the Company's revenues during the three and six
months ended June 30, 1998 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. In July 1999, the
Company received orders that are expected to result in $136,000 in revenues
under the License Agreement. These orders resulted in total revenues of over
$185,000. 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 six
months ended June 30, 1999 were $959,677 and $1,633,740, respectively,
compared with $475,713 and $770,841 for the comparable periods from the prior
year. Included in the six month total is $72,675 associated with non cash
compensation related to the grant of stock to employees at less than market
price. The increase in expenditures 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
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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
six months ended June 30, 1999 were $793,741 and $1,463,820, respectively,
compared with $272,117 and $439,822 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,
$851,000 of R&D expenses during 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.
As restated, net interest and other income for the three and six months
ended June 30, 1999 was $(22,648) and $(10,116), respectively, compared with
$13,603 and $10,106 for the comparable periods for the prior year. Included in
the six and three month totals is a charge of $22,943 in interest expense due
to the amortization of the debt discount associated with the issuance of
warrants as part of the consideration for the debt. Interest income for the
three and six months ended June 30, 1999 was $4,798 and $16,643, respectively.
Interest income is earned on funds on deposit with local financial
institutions.
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
$8,187,170 in net proceeds through financing activities from inception through
June 30, 1999. The Company used net cash in operating activities of $1,571,878
during the six months ended June 30, 1999. As of June 30, 1999, the Company's
liabilities totaled $1,373,720, net of debt discount of $152,957. The Company
had working capital deficiency as of June 30, 1999 of $(874,776).
The Company has committed to spend $233,010 in lease payment for its
physical facilities during the remainder of 1999 and $309,480, $299,550,
$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. The Company believes that
approximately $417,000 is owed for the improvements and the contractor is
claiming approximately $487,000 is owing. The Company also has short term loan
obligations in the principal amounts of $100,000, $100,000, and $110,000 that
are due in July 1999, September 1999, and December 1999, 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
11
<PAGE>
which includes completing two additional production lines to fulfill 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 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.
12
<PAGE>
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.
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.
13
<PAGE>
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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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 141,449
<ALLOWANCES> 90,721
<INVENTORY> 194,748
<CURRENT-ASSETS> 498,944
<PP&E> 3,326,129
<DEPRECIATION> 610,243
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<CURRENT-LIABILITIES> 1,373,720
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460,738
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<OTHER-SE> 1,558,945
<TOTAL-LIABILITY-AND-EQUITY> 3,410,563
<SALES> 68,615
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<CGS> 80,677
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