UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
Commission file number: No. 0-24368
FLEXPOINT SENSOR SYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 87-0620425
(State of incorporation) (I.R.S. Employer Identification No.)
47 East 7200 South, Suite 204, Midvale, Utah 84047
(Address of principal executive offices) (Zip code)
Issuer's telephone number: 801-568-5111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Check if disclosure of delinquent filers in response to item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year: $30,220
As of February 9, 2004, the registrant had 76,534,709 shares of common stock
outstanding. The market value of the 26,247,849 shares of voting common stock
held by non-affiliates was approximately $3,805,938 on that date.
Check if the issuer has filed all documents and reports required to be filed
by Section 12, 13, 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [X]
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS
PART I
Item 1. Description of Business...........................................3
Item 2. Description of Property...........................................7
Item 3. Legal Proceedings.................................................7
Item 4. Submission of Matters to a Vote of Security Holders...............8
PART II
Item 5. Market for Common Equity, Related Stockholder Matters
and Issuer Purchase of Securities...............................8
Item 6. Management's Discussion and Analysis.............................10
Item 7. Financial Statements.............................................15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................40
Item 8A. Controls and Procedures..........................................40
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act..............40
Item 10. Executive Compensation...........................................40
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.....................41
Item 12. Certain Relationships and Related Transactions...................43
Item 13. Exhibits and Reports on Form 8-K.................................43
Item 14. Principal Accountant Fees and Services...........................44
Signatures................................................................44
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FORWARD LOOKING STATEMENTS
In this annual report references to "Flexpoint Sensor," "we," "us," and "our"
refer to Flexpoint Sensor Systems, Inc. and its subsidiaries.
This annual report contains certain forward-looking statements and any
statements contained in this annual report that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "estimate" or "continue" or comparable terminology are intended
to identify forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, and actual results may differ
materially depending on a variety of factors, many of which are not within
Flexpoint Sensor's control. These factors include, but are not limited to,
economic conditions generally, our ability to have our proposed bankruptcy
plan confirmed by the bankruptcy court, our ability to take our technological
applications to market, competition within our markets and our ability to
successfully develop business relationships.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Historical Development
Flexpoint Sensor Systems, Inc. was incorporated in the state of Delaware in
June 1992 as Nanotech Corporation. In April 1998, Nanotech acquired Sensitron,
Inc., a Utah corporation ("Sensitron"), as a wholly-owned subsidiary through a
reverse triangular merger. Nanotech also acquired Sensitron's wholly-owned
subsidiary, Flexpoint, Inc. As part of this acquisition, Nanotech changed the
company name to Micropoint, Inc. In July 1999 Micropoint changed its name to
Flexpoint Sensor Systems, Inc. ("Flexpoint Sensors").
On or about April 7, 2001, our board of directors authorized the issuance of
10% of the stock of our subsidiaries, Flexpoint, Inc. and Sensitron, to our
President, John A. Sindt, as partial compensation to him for his efforts to
rehabilitate Flexpoint Sensor.
Flexpoint Sensor was forced to seek bankruptcy protection on July 3, 2001, and
we filed a voluntary petition for reorganization pursuant to Chapter 11 of the
United States Bankruptcy Code. (See, Part I, Item 3. Legal Proceedings,
below).
Business
We are a development stage company principally engaged in designing,
engineering and manufacturing sensor technology and equipment using a flexible
potentiometer technology. For the past two fiscal years our operations have
been minimal while in bankruptcy. We have had losses since inception;
however, we believe upon confirmation of our proposed Chapter 11 bankruptcy
plan, debt of approximately $7,7 million will be settled, disallowed or
compromised. Management expects the bankruptcy plan to be confirmed within
the next 30 days. (See, Part II, Item 6. Management's Discussion and
Analysis, below)
We are a holding company operating through our subsidiaries, Sensitron and
Flexpoint, Inc. Sensitron owns several patents and other intellectual
properties and makes its money from licensing the patents and/or selling
rights to use the patents to manufacture various product applications based
upon those patents or intellectual properties.
Flexpoint, Inc.'s business purpose is to provide engineering, research and
development services in connection with the licensing and development of
Sensitron's patents. It will interface with the engineering and research and
development staffs of companies that are in the process of developing products
or manufacturing products based upon the licensing of Sensitron's patents and
intellectual properties. It will derive its revenues, if any, from
engineering services, research and development and the manufacture of
prototypes.
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Bend Sensor(R) Technology
Sensitron owns the rights to our Bend Sensor(R) technology, which is a
flexible potentiometer bend sensor product consisting of a coated substrate,
such as plastic, that changes electrical conductivity as it is bent.
Electronic systems can connect to this sensor and measure with fine detail the
amount of bending or movement that occurs. Certain applications of the Bend
Sensor(R) potentiometer have been patented, including automobile horn switches
and automotive occupant classification.
A typical potentiometer functions through the means of metal contacts swiping
or rubbing across a resistive element. The Bend Sensor(R) potentiometer is a
single layer with no mechanical assembly that makes it more reliable and
significantly smaller and lighter weight than mechanical potentiometers.
Management believes many sensor applications can be improved using our
technology and the use of our technology will result in new products and new
sensor applications.
As of December 31, 2003, we have entered into only one firm agreement to
develop Bend Sensor(R) products, although management is highly confident that
significant contracts can be obtained in the future. However, there can be no
assurance as to future sales levels of Bend Sensor(R) products.
We have developed, or plan to develop, the following applications for Bend
Sensor(R) technology.
Air Bag Applications. Automakers and regulators agree that smart air
bag systems are the solution to the rising concerns over deaths of children
and small adults by air bags. Smart air bag systems are those that can detect
not only the presence of a seat occupant, but also the size and positioning of
the seat occupant. This data is used to tailor the speed and force of the air
bag deployment to the seat occupancy conditions at the time of impact.
Reliable analog seat sensors such as the Bend Sensor(R) technology are a key
component of a smart air bag system.
We have developed a crash sensor, which is a series of sensors mounted in
strategic places on the side and door panels to detect an impact, as well as
the speed, direction and force of the impact. This allows an onboard computer
to deploy side airbags where needed. We have also developed an auto seat
passenger measuring device that uses a series of sensors in an automobile seat
to sense whether an object on a seat is a human being and whether it is a
child or an adult. By automatically sizing up a car's passengers, our sensors
can distinguish between an object, an infant car seat, a child or an adult
passenger and are capable of deactivating an air bag when a person under 60
pounds or a car seat is in the seat. Additionally, we have developed our seat
positioning device measure that tells the onboard computer how far from the
airbag a person is sitting in the seat. This allows the airbag to deploy in a
fashion so as to improve the safety of the passenger. The market opportunity
for these applications is substantial considering a market of 15,000,000
vehicles in North America and 55,000,000 worldwide.
Automobile Horn Applications. We have also developed an automobile horn
application of our technology and have two patents relating to the horn switch
assembly. Traditional automobile horn assemblies, when receiving pressure on
any part of the horn assembly surface, activate the horn control system. On
current airbag configurations, horn switches are generally placed on sides of
the column. Because our switch is a thin sheet of screen printed plastic that
can be laminated between the airbag assembly and a flexible cover to the
steering wheel, the device can be placed over the airbag assembly on the
steering wheel in place of the traditional switch. All products will be
integrated with electronic assembly counterparts in their configuration.
Toy Applications. Between 1998 and 1999 we granted license agreements
to a third party for the exclusive right to sell products incorporating the
Bend Sensor(R) technology in toys, traditional games and video markets. The
license agreement expired in December 1999, and in 2000 we intended to market
direct to the various toy manufacturers. Due to our reduction in operations,
we have not be able to pursue this marketing initiative. There can be no
assurance as to what level, if any, of sales related to the toy applications
we will secure in the future.
Other Applications. Management believes the potential market for our
technology includes using the technology to replace or upgrade devices used in
industrial control systems, medical equipment and instrumentation, computer
peripherals, automotive transmission equipment, commercial vending equipment
and other devices. We
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have developed
.. pedestrian sensor, which allows an automobile onboard computer to deploy
a protective device designed to cushion the impact on a pedestrian;
.. steering wheel position device that communicates to an automobile
onboard computer the amount of rotation of the steering wheel to assist
the computer in stabilizing control over the vehicle;
.. mattress sensor for medical beds which detects movement and allows
medical staff to monitor patients; and
.. Sensing devices for medical equipment.
We intend to further identify applications of our technology in numerous
fields and industries. A core sales strategy is to seek applications of our
technology for products used by customers that emphasize functionality,
reliability, quality, and user convenience.
Business Strategy
Management believes that our future success will depend upon our ability to
coordinate our product design, manufacturing, distribution and service
strategies in a long-term business model. One sales strategy is to offer a
line of standard sensor products with corresponding hardware and software to
facilitate ease of implementation of our technology into a customer's system.
The standard product line is expected to be sold directly to the customer and
through manufacturer's representatives, distributors and the Internet. We will
seek to expand our product offering to include substantially complete
value-added assemblies. We will continue to consider licensing or partnership
arrangements. We anticipate selling primarily to original equipment
manufacturers initially in the United States and eventually worldwide. For
the international and smaller volume domestic customers, we plan to contract,
sell and distribute our products through various manufacturer representatives
and distributors.
Since our intended customers are typically technology companies, the design
phase of the sales cycle is extremely important. We anticipate that the
original equipment manufacturers will typically approach us with a conceptual
product and request that we produce a prototype. The prototype will then be
tested in the environment in which the ultimate product will be placed. During
this process, customer contact with our application engineers and internal
sales support individuals will be critical for a successful design to occur.
In the long term we will attempt to add value by expanding our sensor product
line through licensing, strategic agreements, and/or acquisition of other
entities. It is anticipated that such diversification of sensor products will
enhance our ability to offer sensor "system" solutions to our customer. These
product lines, when combined, could create a much larger value added profit
margin. There is; however, no assurance that such profit margins will be
achieved. Eventually, by adding circuit boards, enclosures, etc., management
expects to move toward a more extensive product line.
Research and Development
Although we hold the patent to the basic Bend Sensor(R) technology as well as
other applications there will be others working to develop competing
technologies. Due to lack of funding we did not spend money on research and
development during the past two years. To stay on the forefront of the
technology, and to serve the needs of the customer, we will need to
aggressively pursue improvements to existing systems and develop new systems
as well. Also, we believe that the coatings for the Bend Sensor(R) products
are difficult to duplicate. We must develop new coatings to fit emerging
customer needs and to stay ahead of the competition. There can be no assurance
that we will be successful in developing new coatings.
Marketing, Distribution, Sales and Customers
We intend to market our products primarily to original equipment
manufacturers. Our primary marketing objectives are to generate demand for
our products, enhance name recognition and support original equipment
manufacturers. We believe that the successful use of our products by original
equipment manufacturers will create additional demand for a higher quantity of
existing products. We also anticipate that the success of our existing
products will
5
allow us to successfully introduce new products to the market.
We intend to support original equipment manufacturers through telephone access
to an in-house sales force and regular mailing of product. We will also seek
to generate interests and explore additional applications to our technology
through attendance and participation at trade shows and publicity in trade
magazines.
We believe that our relationship with original equipment manufacturers will be
an important part of our overall sales strategy. We believe that the original
equipment manufacturers will initiate purchase orders for our products. As we
launch operations, we likely will be dependent on a few original equipment
manufacturers and if we lose their business it will have a significant adverse
effect on our results of operations until alternative distribution channels
can be established. We may consider contractual commitments to original
equipment manufacturers in exchange for fees and royalties. In addition,
because we do not sell directly to end users, we are dependent, in part, on
any original equipment manufacturers for information about retail product
sales. Accordingly, any rapid cessation of purchases or switch to other
companies' products by end users may not be immediately evident to us, and
could result in increased product returns.
We intend to develop a field sales force including direct marketing employees
in strategic areas and manufacturers representatives nationwide to generate
original equipment manufacturer customers. As the market grows in the United
States, we anticipate expanding our distribution network throughout the world.
There can be no assurance that we will be successful in developing such a
sales force or in expanding our distribution network.
License and supply arrangements, such as those discussed above, create certain
risks for us, including:
.. Reliance for sales of products on other parties, and therefore reliance
on the other parties' marketing ability, marketing plans and
credit-worthiness;
.. If our 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 Flexpoint Sensor and its subsidiaries;
.. We may have only limited protection from changes in manufacturing costs
and raw materials costs; and
.. If we are reliant on other parties for all or substantially all of our
sales, we may be limited in our ability to negotiate with such other
parties upon any renewals of their agreements.
Manufacturing and Suppliers
Due to lack of funding we have been forced to abandon our manufacturing
operations. However, other than our proprietary inks, our products use
standard components that are available from several sources.
Competition
The sensor business is highly competitive and competition is expected to
continue to increase. We will compete directly with firms that have longer
operating histories, more experience, substantially greater financial
resources, greater size, more substantial research and development and
marketing organizations, established distribution channels and are better
situated in the market. We do not have an established customer base and we
are likely to encounter a high degree of competition in developing a customer
base.
To management's knowledge technology similar to our technology is currently in
production by other competitors. Management believes that our products will be
sufficiently distinguishable from the existing products so that it will not
compete directly with existing sensor products. Certain force transducer
sensors and fiber optic sensors are comparable to our Bend Sensors
technology. However, management believes that the force transducer sensor is
not as reliable as our Bend Sensor(R) technology and that the fiber optic
sensors are not as cost effective as the Bend Sensor(R) technology. As this
new area grows, additional manufacturers may attempt to introduce similar
products and competition could intensify.
In the medical electronics field, our competitors are the numerous
potentiometer manufacturers. In the auto seat field our competitors are the
numerous capacitive, piezo, infrared, and ultrasonic sensor manufacturers.
Such competitors may use their economic strength to influence the market to
continue to buy their existing products. One
6
or more of these competitors could use their resources to improve their
current products or develop new products that may compete more effectively
with our products. New competitors may emerge and may develop products and
capabilities which compete directly with our products. No assurance can be
given that we will be successful in competing in this industry.
We intend to compete by offering products that have enhanced features, ease of
use, compatibility, reliability, comparable price, quality and support.
Management also believes our intellectual property provides an advantage over
our competitors. Although management believes that our products will be well
received in our markets because of innovative features, performance
characteristics and cost-effective pricing, there can be no assurance that
comparable or superior products incorporating more advanced technology or
other features or having better price/performance characteristics will not be
introduced by competitors.
Patents and Intellectual Property
We regard certain of our designs as proprietary and attempt to protect them
with patents and by restricting disclosure of the designs as trade secrets.
Sensitron owns nine United States patents and four foreign patents related to
the Bend Sensor(R) technology. The earliest patent will expire in October
2009; however, we have improved these technologies and expect to file new
patents based on the enhancements. Patents do expire and it will be necessary
for us to file patents for each application we develop so that it is protected
from competition. In addition, we must file patents on any technology for
which we develop enhancements which contain material improvements to the
original technology. We are aware of three potentially conflicting patents
which we believe will not affect our current or planned use of our technology.
There can be no assurance that the protection provided by patents and patent
applications, if issued, will be broad enough to prevent competitors from
introducing similar products or that such patents, if challenged, will be
upheld by the courts of any jurisdiction. Patent infringement litigation,
either to enforce our patents or defend us from infringement suits, would be
expensive and, if it occurs, could divert resources from other planned uses.
Patent applications filed in foreign countries and patents in such countries
are subject to laws and procedures that differ from those in the United
States. Patent protection in such countries may be different from patent
protection under United States laws and may not be as favorable to us. We
also attempt to protect our proprietary information through the use of
confidentiality agreements and by limiting access to our facilities. There
can be no assurance that our program of patents, confidentiality agreements
and restricted access to our facilities will be sufficient to protect our
proprietary technology.
Management believes that because of the rapid pace of technological change in
our markets, legal protection of our proprietary information is less
significant to our competitive position than factors such as continuing
product innovation in response to evolving industry standards, technical and
cost-effective manufacturing expertise, effective product marketing strategies
and customer service. Without legal protection; however, it may be possible
for third parties to exploit commercially the proprietary aspects of our
products.
Employees
As of December 31, 2003, we do not have any employees. We have reduced overall
operations, but anticipate an increase in employees if we are able to finalize
agreements to develop our technological applications after our proposed
bankruptcy plan is confirmed.
ITEM 2. DESCRIPTION OF PROPERTY
We do not currently own or lease any property. We intend to use office space
in the office of our President until we recognize sufficient income to seek
independent office space.
ITEM 3. LEGAL PROCEEDINGS
On July 3, 2001, Flexpoint Sensor Systems, Inc. filed a voluntary petition for
reorganization pursuant to Chapter 11
7
of the United States Bankruptcy Code. The petition was filed in the United
States Bankruptcy Court for the District of Utah, File No. 01-29577JAB. The
bankruptcy court assumed jurisdiction over the business and assets of
Flexpoint Sensor and left the existing directors and officers in possession of
the business and assets, subject to the supervision and orders of the Court.
The Court set the deadline for confirmation for December 15, 2003, but due to
changes in our proposed bankruptcy plan, we moved for an extension to March 1,
2004. On February 19, 2004, the Court will hold a hearing on confirmation of
our proposed bankruptcy plan.
In the bankruptcy proceeding, we objected to the $1,700,000 claim made by
Delco Electronics, Inc., related to the Delphi Automotive Systems ("Delphi")
supply and purchase agreement, for funds it advanced to Flexpoint, Inc. for
supplying our sensor products to General Motors. (See, Part II, Item 6.
Management's Discussion and Analysis - Reasons for Bankruptcy, below) We
believe that Delphi is precluded by the terms of the agreement from any
financial recovery due to its breach of the sponsorship agreement. Other
potential claims are breach of contract, breach of fiduciary duties owed to
Flexpoint, Inc. pursuant to the contract, and intentional and negligent
interference with Flexpoint, Inc.'s contractual and business relationship with
General Motors. We believe Delphi will owe a yet to be determined amount of
damages for these claims. We intend to litigate this claim under the
supervision of the bankruptcy court. Our final discharge from bankruptcy will
be delayed until the Delphi claim is resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit a matter to a vote of our shareholders during the fourth
quarter of the 2002 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OR SECURITIES
Market Information
Our common stock is traded on the Pink Sheets, L.L.C., formerly the National
Quotation Bureau, under the symbol "FLXP." Our common stock is thinly traded
and we do not have an active trading market at the time of this filing. The
following table lists the range for the high and low bid prices of our common
stock for each quarter for the years ended December 31, 2002 and 2001 as
reported by Pink Sheets, L.L.C. Over-the-counter market bid quotations
reflect inter-dealer prices, without retail mark-up, mark-downs or
commissions, and may not necessarily represent actual transactions.
Fiscal Quarter Ended High Low
-------------------- ------ ------
March 31, 2001 $ 0.25 $ 0.04
June 30, 2001 0.85 0.03
September 30, 2001 0.05 0.04
December 31, 2001 0.06 0.02
March 31, 2002 $ 0.05 $ 0.02
June 30, 2002 0.22 0.02
September 30, 2002 0.17 0.06
December 31, 2002 0.20 0.06
Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and
Exchange Act, commonly referred to as the "penny stock" rule. The rule
defines penny stock to be any equity security that has a market price less
than $5.00 per share, subject to certain exceptions. The rule provides that
any equity security is considered to be a penny stock unless that security is:
.. Registered and traded on a national securities exchange meeting
specified criteria set by the SEC;
.. Authorized for quotation from the NASDAQ stock market;
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.. Issued by a registered investment company; or
.. Excluded from the definition on the basis of share price or the issuer's
net tangible assets.
These rules may restrict the ability of broker-dealers to trade or maintain a
market in our common stock and may affect the ability of shareholders to sell
their shares. Broker-dealers who sell penny stocks to persons other than
established customers and accredited investors must make a special suitability
determination for the purchase of the security. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 together with their spouse, and certain
institutional investors. The rules require the broker-dealer to receive the
purchaser's written consent to the transaction prior to the purchase and
require the broker-dealer to deliver a risk disclosure document relating to
the penny stock prior to the first transaction. A broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, and current quotations for the security. Finally, monthly
statements must be sent to customers disclosing recent price information for
the penny stocks.
Holders
As of February 9, 2004, we had approximately 449 stockholders of record of our
common stock.
Dividends
We have not paid cash or stock dividends and have no present plan to pay any
dividends. Under the proposed bankruptcy plan we can not pay any dividend
until all payments required under that plan have been made. We intend to
retain any earnings to finance the operation and expansion of our business and
the payment of any cash dividends on our common stock is unlikely. However,
our board of directors may revisit this matter from time to time and may
determine our earnings, financial condition, capital requirements and other
factors allow the payment of dividends.
Recent Sales of Unregistered Securities
The following discussion describes all securities sold without registration by
Flexpoint Sensor during the past three years.
On March 30, 2001, our board of directors authorized the issuance of 5,000,000
common shares to John A. Sindt as compensation. These shares were valued at
$400,000. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
During the year ended December 31, 2001, we issued 155,371 shares of common
stock for services rendered valued at $7,769. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
During the year ended December 31, 2000, we issued an aggregate of 51,309,955
shares of common as a result of conversion of a portion of convertible
debentures granted in 1999, along with accrued interest. We issued 298,500
shares of common stock for 1,194 shares of Series A convertible preferred
stock. Also, options were exercised at $0.16 to $4.00 per share for 30,235
shares of common stock. We relied on an exemption from registration for a
private transaction not involving a public distribution provided by Section
4(2) of the Securities Act.
During the year ended December 31, 2000, We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
In November 2000, we issued 82,250 shares of common stock valued at $7,996 to
employees as compensation for services rendered. We relied on an exemption
from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
In September 2000, we issued 7,500 shares of common stock valued at $2,100 for
a legal settlement. We relied on
9
an exemption from registration for a private transaction not involving a
public distribution provided by Section 4(2) of the Securities Act.
In June 2000 we issued 450,000 shares of common stock to a new member of the
board and directors and two other persons for services rendered valued at
$534,375. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
In each of the private transactions above we believe that each purchaser was
aware:
.. That the securities had not been registered under federal securities
laws;
.. Acquired the securities for his/her/its own account for investment
purposes and not with a view to or for resale in connection with any
distribution for purposes of the federal securities laws;
.. Understood that the securities would need to be held indefinitely unless
registered or an exemption from registration applied to a proposed
disposition; and
.. Was aware that the certificate representing the securities would bear a
legend restricting their transfer.
We believe that, in light of the foregoing, the sale of our securities to the
respective acquirers did not constitute the sale of an unregistered security
in violation of the federal securities laws and regulations by reason of the
exemptions provided under Sections 3(b) and 4(2) of the Securities, and the
rules and regulations promulgated thereunder.
Issuer Purchase of Securities
None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Overview
We have had minimal operations since September 2000. While under the
protection of the bankruptcy laws, third parties have expressed confidence in
our technology and a willingness to assist us financially and otherwise;
however, the uncertainty of our pending Chapter 11 bankruptcy has stifled our
ability to complete technology agreements that will allow us to resume full
operations.
Third parties that have expressed a willingness to assist us include First
Technology, Inc. who entered into a strategic alliance with Sensitron in
September 2001 which provided an influx of $400,000 on a consolidated basis.
First Technology has expressed a willingness to help us take some of our
sensor technologies to market. In addition, several companies purchased
assignments of approximately $5.6 million of bankruptcy creditor claims filed
against Flexpoint Sensors. These companies expressed a willingness to accept
stock for these debts rather than cash. (See, Part III, Item 11. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters, below.) Also, Broad Investment Partners, LLC, has agreed to provide
a credit line of $1.5 million to Sensitron.
Our primary challenge is to have our proposed bankruptcy plan confirmed. We
must complete confirmation of our proposed bankruptcy plan no later than March
1, 2004, to avoid Chapter 7 bankruptcy. Management is working diligently to
complete the necessary steps for confirmation of our plan.
Reasons for Bankruptcy
In 1998 Sensitron partnered with Delphi Automotive Systems, a subsidiary of
General Motors ("GM"), to mass produce a seat sensor system for a smart air
bag system for GM automobiles. In July 1998 Flexpoint Sensors entered into a
$150 million dollar contract to supply seat sensors for several automobiles
produced by GM. As a result of this contract, we raised $1.5 million in a
private placement and expanded our production facilities in Midvale, Utah. In
early 1999 we leased a 60,000 square foot manufacturing facility for
production of the GM seat sensors and we purchased production equipment for
the automotive seat sensor. In July 1999 Delphi reported that laboratory
testing had demonstrated that our Bend Sensor(R) technology was affected by
humidity in laboratory conditions; however, field testing in humid
geographical areas did not show the same result. Since Delphi was
10
required under its contract with GM to accept system accountability for the
sensor system, Delphi expressed a lack of confidence in the seat sensor system
and withdrew its financial support of our operations, which was approximately
$300,000 per month. As a result, GM cancelled its contract. After these
developments, Aspen Capital Resources who had provided a $5 million line of
credit to us in early 2000 refused to continue its funding.
After we lost these sources of funding, we could not satisfy our multiple
financial obligations. We were forced to shut down our operations and lay off
nearly all of our employees. We abandoned our production facility and
defaulted on our obligations. We were forced to seek bankruptcy protection on
July 3, 2001, and under Chapter 11 of the federal bankruptcy laws, certain
claims against Flexpoint Sensor in existence prior to the filing of the
petition for relief were stayed while the company continued business
operations as a debtor-in-possession
Proposed Bankruptcy Reorganization Plan
The proposed bankruptcy plan is contingent upon the approval of various
creditor classes and equity shareholders entitled to vote on the plan. We
anticipate that the required vote will be obtained and that the proposed
reorganization will be confirmed by the bankruptcy court; however, we cannot
guarantee that the required vote will be obtained.
The essence of the proposed bankruptcy reorganization plan is to restructure
our current equity stockholders by effecting a 7-to-1 reverse split and
issuing approximately 6,879,474 new shares of free trading stock for creditor
claims. Of those shares, 3,879,474 will be used to satisfy debt totaling $5.6
million and 3 million shares will be held in escrow for Broad Investment
Partners, LLC. The reverse of our outstanding common stock and issuance of
common stock pursuant to the plan will dilute current shareholder interests.
The credit line from Broad Investment Partners will be used to pay a portion
of creditor claims, provide initial operating capital as we emerge from
bankruptcy and will provide a reserve to satisfy a portion of Delphi's claim
if we are not successful in that litigation (See, Part I, Item 3. Legal
Proceedings, above). In addition, Broad Investment Partners intends to
convert this debt to free trading common stock at $.50 per share.
Pre-petition options, warrants or executory contracts for acquisition of
equity will be cancelled upon confirmation of the bankruptcy plan. Preferred
stock and super-voting preferred stock will also be cancelled upon
confirmation. The creditors and all expenses of the bankruptcy will be paid
in full upon the effective date of the confirmation of the proposed bankruptcy
plan with proceeds from the credit line or by equity.
The settlement of these claims enables Flexpoint Sensor to emerge from
bankruptcy virtually debt free, with our technology intact and with sufficient
financial backing to operate our business and take our technology applications
to market. The term of the proposed bankruptcy plan will be dependent upon
the time it takes for Flexpoint Sensor to challenge the merits of Delphi's
creditor claim. The bankruptcy court will retain jurisdiction over our
bankruptcy case until the litigation with Delphi is complete, at that time the
bankruptcy court is expected to enter a final decree closing the Flexpoint
Sensor bankruptcy case.
Liquidity and Capital Resources
For the next twelve months, management believes that we can rely on the Broad
Investment Partners credit line to fund our operations. However, as we enter
into new technology agreements, we must ensure that those agreements provide
adequate funding for any pre-production research and development and
manufacturing costs. If we are successful in establishing agreements with
adequate initial funding, management believes that our operations for the long
term will be funded by revenues, licensing fees and royalties related to these
agreements. However, we have not formalized any additional agreements as of
the date of this filing and may be unable to finalize any agreements.
Operations. Net cash used in operating activities for the 2002 year was
$169,934 compared to $72,812 that was provided by operations during the 2001
fiscal year. Net cash used in operating activities for the 2000 year was
$5,113,213. The 2002 and 2001 year expenses were related to general and
administrative expenses, where the 2000 year expenses included general and
administrative expense, research and development costs and contract and
11
manufacturing activity exit costs.
Based upon ongoing negotiations with third parties, management believes that
several technology agreements may be signed shortly after confirmation of the
proposed bankruptcy plan. It is critical to our continued operations that we
are successful in closing these agreements. We project that contracts to
conclude research and development, license technologies and enter into
pre-production and production agreements will provide sufficient cash flow
during the pre-production development phase. Then we anticipate that
operations based on revenues from research and development income, licensing
fees and contributions from strategic partners will provide adequate funding
for our operations. Management estimates that a potential influx of funds
could be as high as $1 million from these tentative discussions. However,
there can be no assurance that any of these contracts will come to fruition or
that the desired technological application can be brought to market.
If we are discharged from bankruptcy and finalize new technology application
agreements, then our plan will be to rehabilitate our operations to the point
that mass production and incorporation of our products into new model
automobiles will begin within two years after our proposed bankruptcy plan is
confirmed. However, this will be subject to successful confirmation of our
proposed bankruptcy plan and our ability to market our products to customers
who can exploit the potential of the patents we own.
Financing. Net cash provided by financing activities was $15,000 from loans
for the 2002 year compared to $71,700 from loans for the 2001 year. For the
2000 year net cash provided by financing activities was $5,072,276, with
$2,753,581 proceeds from loans and $1,809,202 proceeds from the issuance of
warrants and $1,076,218 proceeds from beneficial conversion features related
to convertible promissory notes. As discussed above, we intend to rely on the
$1.5 million credit line from Broad Investment Partners to satisfy a portion
of the funding required for our operations after confirmation of our proposed
bankruptcy plan. In addition, we intend to enter agreements for the
development of our technology that will include funding as a condition of the
agreement.
Commitments and Contingencies
Certain claims against Flexpoint Sensor in existence prior to the filing of
the petition for relief under Chapter 11 of the federal bankruptcy laws were
stayed while the company continued business operations as a
debtor-in-possession. These claims are reflected in the December 31, 2002 and
2001 balance sheets as "liabilities subject to compromise" and total
approximately $7.7 million. During the 2001 year, we reclassified debt
obligations of $4,537,700, accounts payable of $869,291, and accrued
liabilities of $654,588 to liabilities subject to compromise. Claims secured
against Flexpoint Sensor's assets were also stayed, although the holders of
these claims had the right to move the bankruptcy court for relief from the
stay. Secured claims were secured primarily by liens on Flexpoint Sensor's
property, plant and equipment.
Management has determined that there is insufficient collateral to cover the
interest portion of scheduled payments on its pre-petition debt obligations.
Therefore, we have discontinued accruing interest on these obligations.
Contractual interest on those obligations was $620,999 as of December 31,
2002, and $678,645 as of December 31, 2001.
We are in default under capital leases for equipment which we entered into in
the 2000 year and have accrued $84,950 for these lease obligations. We are
also obligated under two operating leases for our production facilities and
our office space. In October 2000 we entered into an extension of our office
space lease at a rate of $5,995 per month. During 2001 we abandoned the
leased office space prior the end of the extension and the amounts owing are
included in accounts payable. We also defaulted on our production facility
5-year lease for 60,000 square feet. According to the acceleration provisions
in this lease agreement 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 remaining obligation of $975,000 was recognized as a current
liability and charged to operations for the year ended December 31, 2000.
During 2001, the lessor's bankruptcy claim reduced the liability to $574,255.
We intend to litigate the Delphi claim and if we are successful in challenging
this claim, no further payment will be required under the proposed bankruptcy
plan. (See, Part I, Item 3. Legal Proceedings, above.) If this dispute is
12
resolved against us, then we expect to pay this claim from the Broad
Investment Partner credit line.
Also, Sensitron owes approximately $6,900,000 to Flexpoint Sensor for funding
provided to this company during its startup. This inter-company debt is
secured by the patents owned by Sensitron and is documented by demand notes
that bear interest of 6.0%. Sensitron received proceeds from a licensing and
prepaid royalty agreement in excess of $400,000 during 2001, but it has not
made any payment on the inter-company notes. Sensitron has paid approximately
$1,250 to Flexpoint Sensor to cover quarterly fees owed to the office of the
U.S. Trustee's Office during the course of the bankruptcy case. For financial
reporting purposes of the parent company, Flexpoint Sensor Systems, Inc., the
intercompany receivable from Sensitron has been netted with the investment in
Sensitron and was reduced by equity in consolidated net loss.
Off Balance Sheet Arrangements
None.
Results of Operations
The following discussions are based on the consolidated operations of
Flexpoint Sensor and its subsidiaries and should be read in conjunction with
our financial statements for the years ended December 31, 2002, 2001and 2000,
included in this report at Part II, Item 7, below. The charts below present a
summary of our statement of operations for 2002, 2001, and 2000 and our
balance sheet for the 2002 and 2001 years.
Comparison of 2002, 2001 and 2000 Fiscal Year Operations
-----------------------------------------------------------
2002 2001 2000
-------------- ------------- --------------
Sales $ 63,523 $ 15,795 $ 351,059
Cost of goods sold 6,750 43,050 116,812
Gross profit 56,773 (27,255) 234,247
-------------- ------------- --------------
Total operating expenses 333,260 1,218,517 8,724,632
Income (loss) from operations (276,487) (1,245,772) (8,490,385)
Total other income and (expense), net (28,793) (350,868) (6,865,685)
Loss from continuing operations (305,280) (1,596,640) (15,356,070)
Total reorganization items (20,287) (51,211) -
Discontinued operations gain - - 49,235
Minority interest in consolidated loss - 200,000 -
Net loss (325,567) (1,447,851) (15,306,835)
-------------- ------------- --------------
Net loss per share $ (0.00) $ (0.02) $ (0.48)
During the 2000 year we began to shut down our operations due to lack of
funding and as a result our sales, costs of goods sold, total operating
expenses, and total other income dropped significantly in the 2001 and 2002
years. Sales for the 2002 and 2001 years were primarily from licensing fees
and royalties and engineering services, where sales
13
of sensors and engineering services were the primary sources of revenues for
the 2000 year.
Reorganization items for the 2002 year reflected loss on disposal of assets
and professionals fees. Reorganization items for the 2001 year reflected a
$707,116 loss on disposal of assets related to the abandonment of office
equipment, software, furniture and fixtures and leasehold improvements and
professional fees of $111,160, which were offset by $767,065 for forgiveness
of debt related to differences between bankruptcy claims and liability
carrying amounts.
The discontinued operations gain for the 2000 year was related to the sale of
our subsidiary, Technology and Machine Company.
The minority interest in consolidated loss in the 2001 year relates to the 10%
interest in our subsidiaries that we granted to our President, John A. Sindt.
As of December 31, 2001 the carrying amount of the minority interest has been
decreased to zero due to absorbing a portion of our consolidated net loss in
2001.
Comparison of 2002 and 2001 Fiscal Year Balance Sheet
------------------------------------------------------
2002 2001
------------ ------------
Total assets $ 12,705 $ 397,581
Total current liabilities 1,222,011 1,196,321
Liabilities subject to compromise 7,677,379 7,762,378
Total stockholders deficit $(8,886,685) $(8,561,118)
Total assets decreased in the 2002 year as a result of the loss of property
and equipment foreclosed on in 2001. Total current liabilities included
accounts payable, accrued liabilities, capital lease obligations, deferred
revenues and notes payable. Deferred revenue of $368,750 for the 2002 year
and $393,750 for the 2001 year were primarily related to prepaid royalties and
software license rights sold to customers and amortized over the 6-year term
of the agreements.
Liabilities subject to compromise represent the creditors' claims that we
anticipate will be settled, compromised or disallowed in the bankruptcy
proceeding if our proposed bankruptcy plan is confirmed.
Factors Affecting Future Performance
We have recorded net losses since inception and
may be unable to attain or maintain profitability.
We are unable to fund our day-to-day operations and until the proposed
bankruptcy plan is confirmed, the anticipated line of credit will not be
available. In the past we have not been successful at marketing our sensor
products on the scale contemplated by the proposed bankruptcy plan and may be
unable to attain those levels. In addition, we may not realize revenues from
our subsidiaries or may be unable to increase revenues to the point that we
attain and are able to maintain profitability.
Management is in discussions with several third parties for
technology agreements; however, we can not guarantee these
agreements will be completed.
We are in negotiations with third parties for sensor technology agreements,
but do not have formal agreements with any party other than First Technology.
We believe these third parties are reluctant to sign a formal agreement until
our proposed bankruptcy plan is confirmed. Until confirmation, potential
strategic partners and customers may avoid or delay entering into technology
agreements with us.
14
Research and development may result in problems which may
become insurmountable to full implementation of production.
Customers request that we create prototypes and perform pre-production
research and development. As a result, we are exposed to the risk that we may
find problems in our designs that are insurmountable to fulfill production.
However, we are currently unaware of any insurmountable problems with ongoing
research and development that may prevent further development of an
application.
ITEM 7. FINANCIAL STATEMENTS
15
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors
Flexpoint Sensor Systems, Inc.
We have audited the accompanying consolidated balance sheets of Flexpoint
Sensor Systems, Inc. and subsidiaries (a development stage,
debtor-in-possession company) as of December 31, 2002 and 2001 and the related
consolidated statements of operations, stockholder's equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2002,
and for the cumulative period from January 5, 1995 (date of inception) through
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Flexpoint Sensor
Systems, Inc. and subsidiaries as of December 31, 2002 and 2001 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002, and for the cumulative period from
January 5, 1995 (date of inception) through December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered losses from continuing
operations and has had negative cash flows from operating activities for each
of the three years in the period ended December 31, 2002, and cumulative from
inception through December 31, 2002. In addition, the Company filed
petitions for relief under Chapter 11 of the federal bankruptcy laws. The
Company is currently in bankruptcy proceedings but has not yet received
confirmation of its plan of reorganization from the bankruptcy court. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to those matters are also
described in Note 1. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
/s/ Hansen, Barnett & Maxwell
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
January 16, 2004
16
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
CONSOLIDATED BALANCE SHEETS
December 31, 2002 2001
-------------------------------------------------- ------------- -------------
ASSETS
Current Assets
Cash $ 8,402 $ 163,336
-------------------------------------------------- ------------- -------------
Total Current Assets 8,402 163,336
-------------------------------------------------- ------------- -------------
Property and Equipment - 325,572
Less: Accumulated depreciation - (111,220)
-------------------------------------------------- ------------- -------------
Net Property and Equipment - 214,352
-------------------------------------------------- ------------- -------------
Other Assets
Deposits - 12,000
Patents, net of accumulated amortization
of $13,891 and $10,260 4,303 7,893
-------------------------------------------------- ------------- -------------
Total Other Assets 4,303 19,893
-------------------------------------------------- ------------- -------------
Total Assets $ 12,705 $ 397,581
================================================== ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities Not Subject to Compromise - Current
Accounts payable $ 555,939 $ 549,044
Accrued liabilities 67,977 39,182
Capital lease obligation 84,950 84,950
Deferred revenue 368,750 393,750
Notes payable 144,395 129,395
-------------------------------------------------- ------------- -------------
Total Liabilities Not Subject to Compromise-Current 1,222,011 1,196,321
-------------------------------------------------- ------------- -------------
Liabilities Subject to Compromise 7,677,379 7,762,378
-------------------------------------------------- ------------- -------------
Stockholders' Deficit
Preferred stock - $0.001 par value; 1,000,000
shares authorized
Series A Convertible Preferred; $875 stated
value per share; 4,500 shares designated;
1,244 shares issued and outstanding;
liquidation preference $2,133,250 1,080,426 1,080,426
Super-voting preferred stock - $0.001 par
value; voting rights equivalent to 100 shares
of common stock; 800,000 shares authorized;
no shares issued or outstanding - -
Common stock - $0.001 par value; 100,000,000
shares authorized; 76,534,709 shares issued
and outstanding 76,535 76,535
Additional paid-in capital 22,078,206 22,078,206
Deficit accumulated during the development stage (32,121,852) (31,796,285)
-------------------------------------------------- ------------- -------------
Total Stockholders' Deficit (8,886,685) (8,561,118)
-------------------------------------------------- ------------- -------------
Total Liabilities and Stockholders' Deficit $ 12,705 $ 397,581
================================================== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
17
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
CONSOLIDATED STATEMENTS OF OPERATIONS For the
Period from
January 5,
1995 (Date
of Inception)
Through
December 31,
For the Years Ended December 31, 2002 2001 2000 2002
------------------------------------------------ ------------- ------------- -------------- -------------
Sales $ 63,523 $ 15,795 $ 351,059 $ 3,820,269
Cost of Goods Sold 6,750 43,050 116,812 1,901,113
------------------------------------------------ ------------- ------------- -------------- -------------
Gross Profit 56,773 (27,255) 234,247 1,919,156
------------------------------------------------ ------------- ------------- -------------- -------------
Operating Expenses
General and administrative expenses 333,260 1,218,517 4,235,251 12,885,585
Research and development - - 2,116,054 8,759,919
Contract and manufacturing activity exit costs - - 2,373,327 2,373,327
------------------------------------------------ ------------- ------------- -------------- -------------
Total Operating Expenses 333,260 1,218,517 8,724,632 24,018,831
------------------------------------------------ ------------- ------------- -------------- -------------
Loss From Operations (276,487) (1,245,772) (8,490,385) (22,099,675)
------------------------------------------------ ------------- ------------- -------------- -------------
Other Income and (Expenses)
Interest expense (28,793) (375,228) (1,587,793) (2,257,244)
Interest from amortization of debt discount - - (5,210,097) (6,877,033)
Interest income - 2,541 20,591 82,031
Other income (expense), net - 21,819 (88,386) (214,420)
------------------------------------------------ ------------- ------------- -------------- -------------
Total Other Income and (Expense), Net (28,793) (350,868) (6,865,685) (9,266,666)
------------------------------------------------ ------------- ------------- -------------- -------------
Loss from Continuing Operations (305,280) (1,596,640) (15,356,070) (31,366,341)
------------------------------------------------ ------------- ------------- -------------- -------------
Reorganization Items - Income (Expense)
Loss on disposal of assets (13,145) (707,116) - (720,261)
Forgiveness of liabilities - 767,065 - 767,065
Professional fees (7,142) (111,160) - (118,302)
------------------------------------------------ ------------- ------------- -------------- -------------
Total Reorganization Items (20,287) (51,211) - (71,498)
------------------------------------------------ ------------- ------------- -------------- -------------
Discontinued Operations
Loss from discontinued Tamco operations - - (75,868) (315,566)
Gain on disposal of Tamco - - 125,103 125,103
------------------------------------------------ ------------- ------------- -------------- -------------
Gain (Loss) from Discontinued Operations - - 49,235 (190,463)
------------------------------------------------ ------------- ------------- -------------- -------------
Minority Interest in Loss of
Consolidated Subsidiaries - 200,000 - 200,000
------------------------------------------------ ------------- ------------- -------------- -------------
Net Loss (325,567) (1,447,851) (15,306,835) (31,428,301)
------------------------------------------------ ------------- ------------- -------------- -------------
Preferred Dividends - - - (693,551)
------------------------------------------------ ------------- ------------- -------------- -------------
Loss Applicable to Common Shareholders $ (325,567) $ (1,447,851) $ (15,306,835) $(32,121,852)
================================================ ============= ============= ============== =============
Basic and Diluted Loss Per Common Share:
Loss from Continuing Operations $ - $ (0.02) $ (0.48)
Net Loss $ - $ (0.02) $ (0.48)
================================================ ============= ============= ==============
Weighted Average Number of Common
Shares Used in Per Share Calculation 76,534,709 75,313,403 32,157,424
================================================ ============= ============= ==============
The accompanying notes are an integral part of these consolidated financial statements.
3
18
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Total
---------------------- ---------------------- Paid-in Development Stockholders'
Shares Amount Shares Amount Capital Stage Deficit
------------------------------------ --------- ------------ ----------- ---------- ------------- ------------ -------------
Balance January 5, 1995
(Date of Inception) - $ - - $ - $ - $ - $ -
1995:
Issuance for cash, $0.00 per share - - 3,705,000 3,705 (1,705) - 2,000
Issuance for cash, $0.46 per share - - 649,987 650 299,350 - 300,000
Issuance for cash, $0.74 per share - - 852,800 853 631,147 - 632,000
Contribution of patents by stock-
holder, no additional shares issued - - - - 22,232 - 22,232
Issuance to acquire Flexpoint, Inc.,
$(0.02) per share - - 5,395,000 5,395 (99,579) - (94,184)
Issuance to acquire Tamco, $0.46
per share - - 130,000 130 59,870 - 60,000
1996:
Issuance for services, $0.77 per share - - 260,000 260 199,740 - 200,000
Issuance for cash, $0.77 per share - - 123,500 124 94,876 - 95,000
Issuance for cash, $0.54 per share,
net of offering costs of $246,547 - - 1,957,111 1,957 1,051,496 - 1,053,453
1997:
Issuance for cash, $0.97 per share - - 143,000 143 109,857 - 110,000
Issuance for cash, $0.04 per share - - 1,820,000 1,820 78,180 - 80,000
Issuance for cash and a $390,000
receivable, $0.72 per share - - 1,116,375 1,116 802,884 - 804,000
Redemption from officers, $0.03
per share - - (6,308,666) (6,309) (193,691) - (200,000)
Conversion of debt, $0.57 per share - - 100,672 100 53,852 - 53,952
1998:
Issuance of 30,303 warrants for
services - - - - 22,727 - 22,727
Issuance for cash, $4.00 per share - - 288,841 289 1,155,073 - 1,155,362
Conversion of notes payable, $0.80
per share - - 248,833 249 199,751 - 200,000
Conversion of debt, $0.61 per share - - 69,602 69 42,759 - 42,828
Acquisition of Nanotech Corporation,
$0.50 per share - - 6,000,000 6,000 2,977,275 - 2,983,275
Exercise of options, $0.16 per share - - 14,500 15 2,296 - 2,311
Exercise of warrants, $0.00 per share - - 30,303 30 (30) - -
Issuance for receivable from
shareholder - - 393,438 394 1,573,356 - 1,573,750
Compensation related to grant of
stock options - - - - 45,375 - 45,375
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
4
19
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Unearned Total
---------------------- ---------------------- Paid-in Development Compen- Stockholders'
Shares Amount Shares Amount Capital Stage sation Deficit
----------------------- --------- ------------ ----------- ---------- ------------- ------------- ----------- -------------
1999:
Issuance for cash,
$4.00 per share - $ - 158,258 $ 158 $ 632,867 $ - $ - $ 633,025
Issuance of convertible
preferred stock and
134,000 warrants for
cash 536 326,738 - - 134,000 - - 460,738
Conversion of common
shares into convertible
preferred stock and
559,551 warrants 2,238 1,398,886 (489,523) (490) (1,398,396) - - -
Amortization of preferred
stock discount as
preferred dividend - 693,551 - - - (693,551) - -
Issuance of common shares
and 476,600 warrants
for cash, $2.00 per
share, net of offering
costs - - 476,600 477 940,723 - - 941,200
Conversion of convertible
preferred stock into
common stock and
147,000 warrants,
$2.00 per share (336) (294,000) 147,000 147 293,853 - - -
Beneficial conversion
option of 8%
convertible
promissory notes - - - - 404,062 - - 404,062
Conversion of 8%
convertible
promissory notes
into common stock,
$1.70 per share - - 508,825 509 864,492 - - 865,001
Compensation related to
grant of stock options - - - - 369,825 - (369,825) -
Amortization of unearned
compensation - - - - - - 233,350 233,350
Exercise of options for
cash, $0.16 to $0.47
per share - - 919,094 919 306,521 - - 307,440
Issuance of 508,825
warrants for cash - - - - 1,265,900 - - 1,265,900
Issuance of 45,000
warrants for interest - - - - 109,800 - - 109,800
Grant of 100,000
warrants for services - - - - 185,000 - - 185,000
Exercise of warrants for
cash, $0.77 per share - - 237,510 238 182,545 - - 182,783
Exercise of warrants for
services, $0.77 per
share - - 29,250 29 22,494 - - 22,523
Issuance in settlement
of lawsuit, $1.75
per share - - 100,000 100 174,900 - - 175,000
Cumulative net loss for
the period from
January 5, 1995 (date
of inception) through
December 31, 1999 - - - - - (14,348,048) - (14,348,048)
----------------------- --------- ------------ ----------- ---------- ------------- ------------- ----------- -------------
Balance -
December 31, 1999 2,438 $ 2,125,175 19,077,310 $ 19,077 $ 13,615,677 $(15,041,599) $ (136,475) $ 581,855
----------------------- --------- ------------ ----------- ---------- ------------- ------------- ----------- -------------
The accompanying notes are an integral part of these consolidated financial statements.
5
20
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
Deficit
Accumulated
Preferred Stock Common Stock Additional During the Unearned Total
---------------------- ---------------------- Paid-in Development Compen- Stockholders'
Shares Amount Shares Amount Capital Stage sation Deficit
----------------------- --------- ------------ ----------- ---------- ------------- ------------- ----------- -------------
Balance -
December 31, 1999 2,438 $ 2,125,175 19,077,310 $ 19,077 $ 13,615,677 $(15,041,599) $ (136,475) $ 581,855
Issuance of warrants
for cash - - - - 3,039,202 - - 3,039,202
Beneficial conversion
options of notes
payable - - - - 1,076,218 - - 1,076,218
Contingent beneficial
conversion option
of debentures - - - - 579,851 - - 579,851
Conversion of preferred
stock, $3.50 per share (1,194) (1,044,749) 298,500 298 1,044,451 - - -
Conversion of promissory
notes, $1.70 per share - - 120,588 121 204,879 - - 205,000
Conversion of debentures,
$1.00 per share - - 703,555 703 702,852 - - 703,555
Conversion of debentures,
$0.50 per share - - 606,400 606 302,594 - - 303,200
Conversion of debentures,
$0.001 per share - - 50,000,000 50,000 - - - 50,000
Exercise of stock options
for cash, $0.16 to
$4.00 per share - - 30,235 31 8,432 - - 8,463
Stock issued for services,
$1.19 per share - - 450,000 450 533,925 - - 534,375
Warrants issued for
services - - - - 434,400 - - 434,400
Issuance for services,
$0.09 per share - - 85,250 85 7,911 - - 7,996
Issuance of common shares
and warrants in
settlement of lawsuit,
$0.28 per share - - 7,500 9 4,193 - - 4,202
Compensation related to
grant of stock options - - - - 156,137 - (156,137) -
Amortization of unearned
compensation - - - - - - 257,482 257,482
Net loss - - - - - (15,306,835) - (15,306,835)
----------------------- --------- ------------ ----------- ---------- ------------- ------------- ----------- -------------
Balance -
December 31, 2000 1,244 1,080,426 71,379,338 71,380 21,710,722 (30,348,434) (35,130) (7,521,036)
Issuance for services,
$0.05 per share - - 155,371 155 7,614 - - 7,769
Issuance for services,
$0.01 per share - - 5,000,000 5,000 395,000 - - 400,000
Forfeiture of stock
options by terminated
employees - - - - (35,130) - 35,130 -
Net loss - - - - - (1,447,851) - (1,447,851)
----------------------- --------- ------------ ----------- ---------- ------------- ------------- ----------- -------------
Balance -
December 31, 2001 1,244 1,080,426 76,534,709 76,535 22,078,206 (31,796,285) - (8,561,118)
Net loss - - - - - (325,567) - (325,567)
----------------------- --------- ------------ ----------- ---------- ------------- ------------- ----------- -------------
Balance -
December 31, 2002 1,244 $ 1,080,426 76,534,709 $ 76,535 $ 22,078,206 $(32,121,852) $ - $ (8,886,685)
======================= ========= ============ =========== ========== ============= ============= =========== =============
The accompanying notes are an integral part of these consolidated financial statements.
6
21
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period
January 5,
1995 (Date
of Inception)
Through
December 31,
For the Years Ended December 31, 2002 2001 2000 2002
------------------------------------------------ ------------- ------------- -------------- -------------
Cash Flows From Operating Activities
Net loss $ (325,567) $ (1,447,851) $ (15,306,835) $(31,428,302)
Adjustments to reconcile net loss to net cash
used by operating activities:
Loss on disposition of assets 13,146 714,616 (7,366) 729,623
Contract and manufacturing activity exit costs - - 2,373,327 2,373,327
Depreciation and amortization 19,836 81,625 606,567 1,728,786
Amortization of debt discount and loan costs - - 5,910,096 7,467,232
Amortization of unearned compensation - - 257,482 536,207
Stock compensation issued for services - 407,769 980,971 2,103,790
Write off of patent expenses - - 101,718 101,718
Forgiveness of debt - (767,065) - (767,065)
Changes in operating assets and liabilities:
Accounts receivable - 15,590 15,388 130,363
Inventory - 41,273 38,477 (95,000)
Accounts payable 6,898 193,407 (292,911) 684,786
Accrued liabilities 28,793 408,987 169,562 1,077,414
Accrued liabilities subject to compromise 100,000 - - 100,000
Deferred revenue - 400,000 - 393,837
Other assets (13,040) 24,461 40,311 (259,315)
------------------------------------------------ ------------- ------------- -------------- -------------
Net Cash Provided by (Used in) Operating
Activities (169,934) 72,812 (5,113,213) (15,122,599)
------------------------------------------------ ------------- ------------- -------------- -------------
Cash Flows From Investing Activities
Payments to Flexpoint prior to acquisition - - - (268,413)
Cash paid to acquire Tamco - - - (25,000)
Proceeds from sale of available-for-sale
securities - - - 455,082
Net cash received in Nanotech acquisition - - - 1,492,907
Payments to purchase equipment - (6,942) (137,896) (3,058,193)
Issuance of note receivable - - - (12,507)
Payments for patents - - (3,116) (146,430)
Other - - 73,073 207,746
------------------------------------------------ ------------- ------------- -------------- -------------
Net Cash Used In Investing Activities - (6,942) (67,939) (1,354,808)
------------------------------------------------ ------------- ------------- -------------- -------------
Cash Flows From Financing Activities
Proceeds from issuance of preferred stock - - - 460,738
Proceeds from issuance of common stock - - 8,463 6,040,555
Cash payments to officers to repurchase stock - - - (50,000)
Proceeds from issuance of warrants - - 1,809,202 1,809,202
Collection of receivables from shareholders - - - 1,963,750
Proceeds from borrowings 15,000 71,700 3,804,799 6,055,460
Principal payments of debt - - (476,039) (874,790)
Proceeds from related party notes - - 25,000 1,595,208
Principal payments of related party notes - - (5,000) (420,165)
Payment of capital lease obligation - - (94,149) (94,149)
------------------------------------------------ ------------- ------------- -------------- -------------
Net Cash Provided By Financing Activities 15,000 71,700 5,072,276 16,485,809
------------------------------------------------ ------------- ------------- -------------- -------------
Net Change In Cash (154,934) 137,570 (108,876) 8,402
Cash at Beginning of Period 163,336 25,766 134,642 -
------------------------------------------------ ------------- ------------- -------------- -------------
Cash at End of Period $ 8,402 $ 163,336 $ 25,766 $ 8,402
================================================ ============= ============= ============== =============
The accompanying notes are an integral part of these consolidated financial statements.
22
7
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Petition for Relief Under Chapter 11 - On July 3, 2001, Flexpoint Sensor
Systems, Inc. (the "Company") filed petitions for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for the
District of Utah. Under Chapter 11, certain claims against the Company in
existence prior to the filing of the petitions for relief under the federal
bankruptcy laws are stayed while the Company continues business operations as
debtor-in-possession. These claims are reflected in the December 31, 2002 and
2001 balance sheets as "liabilities subject to compromise." Additional claims
(liabilities subject to compromise) may arise subsequent to the bankruptcy
filing date resulting from rejection of executory contracts, including leases,
and from the determination by the court (or agreed to by parties in interest)
of allowed claims for contingencies and other disputed amounts. Claims secured
against the Company's assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the court for relief from the
stay. Secured claims are secured primarily by liens on the Company's property,
equipment and technology.
The Company has determined that there is insufficient collateral to cover the
interest portion of scheduled payments on its pre-petition debt obligations;
therefore, the Company has discontinued accruing interest on these
obligations. The contractual interest due on those obligations as of December
31, 2002 and 2001 amounted to $620,999 and $693,936, respectively, which was
$592,206 and $318,708 in excess of reported accrued interest, respectively.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Flexpoint Sensor Systems, Inc. and its
90%-owned subsidiary, Sensitron, Inc., and Sensitron Inc.'s 90%-owned
subsidiary, Flexpoint, Inc. The Company has recorded a minority interest for
the 10% ownership of the subsidiaries that was granted to the Company's CEO,
chairman and director in March 2001. As of December 31, 2001, the minority
interest had been decreased to zero due to absorbing a portion of the
Company's loss in 2001. The operations of acquired entities have been
included from the date of their acquisitions. Intercompany transactions and
accounts have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from these estimates.
8
23
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Condition - The accompanying consolidated financial statements have
been prepared in conformity with generally accepted accounting principles,
which contemplate continuation of the Company as a going concern. However, the
Company has filed petitions for relief under Chapter 11 of the federal
bankruptcy laws in the United States Bankruptcy Court for the District of Utah
and has suffered losses from operations and has had negative cash flows from
operating activities during each of the three years in the period ended
December 31, 2002 and cumulative from inception through December 31, 2002. In
addition, the Company has ceased its manufacturing activities and has
defaulted on major debt and lease obligations.
All of these conditions raise substantial doubt about the Company's ability to
continue as a going concern. The Company's continued existence is dependent
upon its ability to obtain bankruptcy court approval for its plan of
reorganization, obtain additional financing and establish business
arrangements that will enable the Company to generate profitable operations.
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. The Company's plan of reorganization may require the issuance of
common stock or common stock equivalents upon confirmation, thereby diluting
current equity interests.
Fair Values of Financial Instruments - The amounts reported as deposits,
trade accounts payable, accrued liabilities and notes payable are considered
to be reasonable approximations of their fair values. The fair value
estimates were based on information available to management at the time of the
preparation of the financial statements. Amounts classified as liabilities
subject to compromise are subject to uncertainty pending the outcome of
bankruptcy proceedings.
Property and Equipment - Property and equipment are stated at cost. Additions
and major improvements are capitalized while maintenance and repairs are
charged to operations. Upon retirement, sale or disposition, the cost and
accumulated depreciation of the items sold are eliminated from the accounts,
and any resulting gain or loss is recognized in operations. Depreciation is
computed using the straight-line and the double-declining-balance methods and
is recognized over the estimated useful lives of the property and equipment,
which were three to seven years.
Valuation of Long-lived Assets - The carrying values of the Company's
long-lived assets were reviewed for impairment whenever events or changes in
circumstances indicate that they may not have been recoverable. When
projections indicate that the carrying value of the long-lived asset is not
recoverable, the carrying value of the long-lived asset is reduced by the
estimated excess of the carrying value over the projected discounted cash
flows.
Intangible Assets - The Company currently has the rights to several patents.
Patents are amortized from the date the Company is awarded the patent, over
their estimated useful lives. Impairment is recognized if the carrying amount
is not recoverable and the carrying amount exceeds the fair value of the
intangible asset. Costs to obtain or develop patents are capitalized and
amortized over a five year period.
Revenue Recognition - Revenue from the sale of products is recorded at the
time of shipment to the customers. Revenue from research and development
engineering contracts is recognized as the services are provided and accepted
by the customer. Revenue from contracts to license technology to others is
deferred until all conditions under the contracts are met and then recognized
as licensing royalty revenue over the remaining term of the contracts.
As of December 31, 2002, the Company had deferred revenue of $368,750,
consisting of $250,000 of prepaid royalties to be deferred and recognized as
royalty sales are reported to the Company by the customer over the remaining
term of the agreement, and software license rights sold to the customer that
will be amortized over the six-year term of the contract.
9
24
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising Costs - During the years ended December 31, 2002, 2001 and 2000,
the Company incurred $350, $378 and $20,983 of advertising costs,
respectively. The Company follows the policy of expensing these advertising
costs at the time the advertising services are rendered.
Stock Based Compensation - The Company accounts for its stock-based
compensation issued to employees and directors under Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Under
APB Opinion No. 25, compensation related to stock options, if any, is recorded
if an option's exercise price on the grant date is less than the fair value of
the Company's common stock on the grant date, and amortized over the vesting
period. Compensation expense for stock awards or purchases, if any, is
recognized if the award or purchase price on the measurement date is below the
fair value of the Company's common stock, and is recognized on the date of
award or purchase.
The Company accounts for its stock-based compensation issued to non-employees
using the fair value method in accordance with SFAS No. 123, Accounting for
Stock Based Compensation, and related interpretations. Under SFAS No. 123,
stock-based compensation is determined as either the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. The measurement date for these
issuances is the earlier of the date at which a commitment for performance by
the recipient to earn the equity instruments is reached or the date at which
the recipient's performance is complete.
At December 31, 2002, 2001 and 2000, the Company has a stock-based employee
compensation plan, which is described more fully in Note 9. Stock-based
employee compensation expense was $0, $0 and $176,958 during the years ended
December 31, 2002, 2001, and 2000, respectively. Had compensation expense for
its employee stock options been determined in accordance with the method
prescribed by SFAS No. 123, the Company's net loss and basic and diluted loss
per common share would have been increased to the pro forma amounts indicated
below for the years ended December 31, 2002, 2001, and 2000:
For the Years Ended December 31, 2002 2001 2000
-------------------------------------- ------------ ------------ -------------
Net loss, as reported $ (325,567) $(1,447,851) $(15,306,835)
Add: Stock-based compensation expense
included in net loss - 407,769 1,234,253
Deduct: Total stock-based employee
compensation expense determined under
the fair-value method for all awards - (415,510) (1,617,253)
-------------------------------------- ------------ ------------ -------------
Pro forma net loss (325,567) (1,455,592) (15,689,835)
-------------------------------------- ------------ ------------ -------------
Basic and diluted loss per common
share as reported $ - $ (0.02) $ (0.48)
-------------------------------------- ------------ ------------ -------------
Basic and diluted loss per common
share pro forma $ - $ (0.02) $ (0.49)
-------------------------------------- ------------ ------------ -------------
10
25
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 5,029,775 shares,
6,396,100 shares and 28,620,662 potentially issuable common shares at December
31, 2002, 2001 and 2000, respectively, were excluded from the calculation of
diluted loss per share.
Recently Enacted Accounting Standards - In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for acquisitions and requires
separate accounting for certain intangibles acquired in such transactions.
The application of this standard did not have an impact on the Company's
financial position and results of operations.
SFAS No. 142 changes the accounting for goodwill and intangible assets with
indefinite lives from an amortization method to an impairment-only approach.
The Company's adoption of this statement on January 1, 2002 had no effect on
the Company's operations as it has continued to amortize its intangible assets
over their respective useful lives.
In August 2001, the FASB issued SFAS No. 143 , Accounting for Asset Retirement
Obligations. This statement establishes financial accounting and reporting
standards for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. The Company's adoption
of this statement on January 1, 2002, did not have any effect on the Company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement establishes financial
accounting and reporting standards for the impairment or disposal of
long-lived assets. The adoption of this statement on January 1, 2002, did not
have any effect on the Company's financial position or results of operations.
The results from discontinued operations from prior periods have not been
restated for the effects from adoption of this statement.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, this statement modifies the criteria for
classification of gains or losses on debt extinguishment such that they are
not required to be classified as extraordinary items if they do not meet the
criteria for classification as extraordinary items in APB Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. The Company will be required to apply the provisions
of this standard to transactions occurring after December 31, 2002. However,
as a result of the reorganization of the company, the provision of SFAS No.
145 have been essentially adopted by the company and the gain from forgiveness
of liabilities has been included in reorganization items in the accompanying
consolidated statements of operations.
11
26
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The statement requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
Company will be required to apply this statement prospectively for any exit or
disposal activities initiated after December 31, 2002. Management is
currently evaluating the effect that will result from adoption of this
statement, has not concluded that evaluation, but has determined that the
statement could have a material effect on the company's consolidated results
of operation in the future given the present reorganization of the company.
In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB No. 123 was issued. SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. It also amends disclosure requirements of SFAS No. 123
requiring disclosures in both annual and interim financial statements about
the method of accounting for stock based employee compensation and the effect
of the method used on reported results. The Company continues to recognize
stock-based compensation to employees by the intrinsic value method and has
adopted the disclosure provisions of this statement.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the
existing disclosure requirements for most guarantees. It also clarifies that
at the time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the obligation it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has not guaranteed the indebtedness of others
and, accordingly, does not expect the recognition and measurement provisions
of FIN 45 to have a material effect on its future interim or annual financial
statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 provides guidance on the identification of entities for which control
is achieved through means other than through voting rights ("variable interest
entities" or "VIEs") and how to determine when and which business enterprise
should consolidate the VIE (the "primary beneficiary"). This new model for
consolidation applies to an entity in which either (1) the equity investors do
not have a controlling financial interest or, (2) the equity investment at
risk is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. The
provisions of FIN 46 become effective for the company as of December 31, 2003.
The Company does not have an interest in a variable interest entity and there
does not expect the provisions of FIN 46 to have a material effect on its
future, interim or annual financial statements.
NOTE 2 - ACQUISITIONS
Nanotech Corporation ("Nanotech") was incorporated June 11, 1992 under the
laws of the state of Delaware, and was a publicly-held shell corporation. On
December 30, 1997, Sensitron entered into an Agreement and Plan of
Reorganization (the "Agreement") with Nanotech whereby Sensitron became a
wholly-owned subsidiary of Nanotech. In April 1998, Nanotech changed its name
to Micropoint, Inc., and subsequently to Flexpoint Sensor Systems, Inc. and
the shareholders of Sensitron exchanged each of their shares of common stock
for 13 shares of Nanotech common stock resulting in the issuance of 9,860,279
shares of common stock to the Sensitron shareholders. As a result, the
Sensitron shareholders became the majority shareholders of Nanotech.
12
27
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Agreement was accounted for as a recapitalization of Sensitron in a manner
similar to a stock split. The accompanying financial statements have been
restated for the effects of the stock split for all periods presented. The
agreement was further considered to be the issuance of 6,000,000 common shares
for Nanotech's net assets of $2,983,275, which were primarily cash and cash
equivalents.
In April 1995, the Company acquired 100 shares of common stock of Flexpoint
Inc., a Utah Corporation, in exchange for the forgiveness of $50,000 of
accounts receivable. On September 26, 1995, the Company completed the
acquisition of Flexpoint, Inc. by exchanging 5,395,000 shares of the Company's
common stock for the remaining outstanding common stock of Flexpoint, Inc. in
a purchase business combination accounted for in a manner similar to a pooling
of interests because Flexpoint, Inc. and the Company were principally owned by
the same individuals prior to the combination.
On September 26, 1995, the Company acquired all of the outstanding stock of
Tamco, a company engaged in manufacturing and selling various molds and dies.
The purchase price was approximately $170,000, consisting of $25,000 of cash,
a long-term note payable of $85,000 and 130,000 common shares (post-split)
valued at $60,000. The purchase price was allocated based on the estimated
fair values of the net assets acquired. This allocation resulted in recording
of goodwill of $119,802.
Technology and Machine Company, Inc. ("Tamco"), a wholly owned subsidiary of
Sensitron, Inc., was sold to an unrelated party effective September 27, 2000.
As a result of the sale, the Company recognized a gain of $125,103 on the
disposition of Tamco, reflected separately in the accompanying consolidated
statement of operations for the year ended December 31, 2000. The accompanying
consolidated financial statements have been retroactively restated to reflect
the loss on the Tamco discontinued operations separately for each of the years
presented. Tamco's sales for the period ended September 27, 2000 were not
material.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, 2002 2001
-------------------------------------------- -------------- -------------
Furniture and fixtures $ - $ 61,627
Machinery and equipment held for sale - 185,000
Office equipment - 76,445
Leasehold improvements - 2,500
Total $ - $ 325,572
============================================ ============== =============
The Company owned machinery and equipment related to the production process of
its specialized sensors and designated the equipment as collateral for a note
payable due to a stockholder that matured on February 10, 2000. The note was
in default during 2001 and the stockholder foreclosed on equipment with a
carrying value of $572,685 and took possession of the equipment. The Company
disputed the foreclosure and petitioned a court for the return of the
equipment; however, during 2002, the court ruled that the stockholder's
possession of the equipment was deemed a sale of equipment valued at $185,000.
Since the Company did not have possession or use of the assets, it recognized
impairment of the equipment of $387,685 which wrote the carrying value of the
equipment down to $185,000, the amount deemed by the Court to have been sold.
This equipment is reflected as machine and equipment held for sale at December
31, 2001.
13
28
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2001, the Company abandoned office equipment, software, furniture and
fixtures and leasehold improvements with a cost of $694,240. The cost of all
property and equipment abandoned and impaired during 2001 was $2,177,166. The
Company recognized an impairment charge on the foreclosed equipment, office
equipment, software, furniture and fixtures and leasehold improvements of
$714,615.
During 2002 the court order officially ruled the foreclosure of the equipment
as a sale. To reflect this transaction, the Company wrote off $185,000 of
equipment and reduced the note payable due to the stockholder by the same
amount.
During 2002, the Company abandoned additional office equipment, furniture and
fixtures and leasehold improvements with a cost of $140,572, and recorded a
loss on disposal of the property of $13,146.
During the years ended December 31, 2002 and 2001, the Company recorded
depreciation expense of $79,878 and $16,207, respectively.
NOTE 4 - INTANGIBLE ASSETS
Patents - Patent costs for two active patents perfected during 2000 was
$18,154 as of December 31, 2002 and 2001, and accumulated amortization was
$13,891 and $10,260 as of December 31, 2002 and 2001, respectively.
Capitalized patent costs are being amortized over a period of six years.
Amortization expense from patents for the years ended December 31, 2002, 2001
and 2000 was $3,631, $1,746 and $11,679, respectively. During the year ended
December 31, 2000, the Company wrote off $101,718 in carrying value of
patents, representing patent costs for patents that had not been perfected
because the applications of the patents had been abandoned. The impairment
charge was classified as general and administrative expense on the
consolidated statement of operations.
The estimated aggregate amortization expense for the remaining lives of the
patents is as follows:
Year Ending December 31:
-------------------------------------------------------
2003 $ 2,742
2004 1,453
2005 108
-------------------------------------------------------
Total $ 4,303
-------------------------------------------------------
Amortization expense from goodwill for the years ended December 31, 2002, 2001
and 2000 and 1999 was $0, $0 and $17,970, respectively.
As of January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS. SFAS No. 142 provides that goodwill and intangible
assets deemed to have indefinite lives are no longer amortized, but are
subject to annual impairment tests. The Company has evaluated the estimated
useful lives of the patents and has determined that they will remain unchanged
under SFAS no. 142. The following presents the adjustments to net loss and
basic and diluted loss per share from excluding goodwill amortization:
14
29
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ending December 31, 2002 2001 2000
----------------------------------- ------------- ------------- -------------
Net loss, as reported $ (325,567) $ (1,447,851) $(15,306,835)
Add back goodwill amortization - - 17,970
----------------------------------- ------------- ------------- -------------
Net loss, excluding goodwill
amortization $ (325,567) $ (1,447,851) $(15,288,865)
----------------------------------- ------------- ------------- -------------
Basic and diluted loss per share:
Net loss, as reported $ - $ (0.02) $ (0.48)
----------------------------------- ------------- ------------- -------------
Net loss, excluding goodwill
amortization $ - $ (0.02) $ (0.48)
----------------------------------- ------------- ------------- -------------
NOTE 5 - CASH FLOW INFORMATION
Supplemental Cash Flow Information - Cash payments for interest were $0, $0
and $314,432 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Noncash Investing and Financing Activities - During the year ended December
31, 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 year, the Company acquired equipment totaling
$211,287 for a note payable of $144,435 and capital leases of $66,852. In
addition, $1,255,000 of convertible notes payable, accrued interest of $6,755,
and 1,194 shares of convertible preferred stock totaling $1,044,750 was
converted into 1,729,034shares of common stock.
During the year ended December 31, 2001, the Company reclassified debt
obligations of $4,537,700, accounts payable of $869,291, and accrued
liabilities of $2,355,387 to liabilities subject to compromise, due to the
Company filing for bankruptcy protection during 2001.
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following:
December 31, 2002 2001
------------------------------------- -------------- -------------
Note payable to a vendor, due on
demand, interest accrues at 10%,
in default $ 129,395 $ 129,395
Note payable to a shareholder,
due December 31, 2004, interest
accrues at 10%, payable at maturity 15,000 -
------------------------------------- -------------- -------------
Total Notes Payable $ 144,395 $ 129,395
===================================== ============== =============
NOTE 7 - LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise includes liabilities incurred prior to the
commencement of the Chapter 11 filing and consist primarily of amounts
outstanding under notes payable, leases, accounts payable, accrued interest,
accrued restructuring costs, and other accrued expenses. The amounts
represent the Company's estimate of known or potential claims to be resolved
in connection with the Chapter 11 Filing. Such claims remain subject to future
adjustments resulting from (1) negotiations; (2) actions of the bankruptcy
court; (3) further development with respect to disputed claims; (4) future
rejection of additional executory contracts or unexpired leases; (5) the
determination as to the value of any collateral securing claims; (6) proofs
of claim; or (7) other events. Payment terms for these amounts, which are
currently considered long-term liabilities, will be established in connection
with the Chapter 11 proceedings.
15
30
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2002 and 2001, liabilities subject to compromise included
the following:
For the Years Ended December 31, 2002 2001
---------------------------------------------- ------------- -------------
Accounts payable $ 869,291 $ 869,291
Accrued wages 175,890 75,890
Accrued interest 394,498 579,497
Delphi liability under supply agreement 1,700,000 1,700,000
Convertible debentures payable to shareholder,
due on demand, 8% interest rate, 10.5%
default interest rate, in default 3,450,000 3,450,000
Convertible promissory note to employee,
due June 30, 2000, 8% interest rate,
in default 20,000 20,000
Note payable to a shareholder, due February 10,
2000, 14% interest rate, 28% default
interest rate, in default 1,067,700 1,067,700
---------------------------------------------- ------------- -------------
Liabilities Subject to Compromise $ 7,677,379 $ 7,762,378
============================================== ============= =============
Accrued Wages - Since March 30, 2001, the Company has accrued a salary of
$100,000 per year for its chief executive officer. Under the current
reorganization plan, the Company's chief executive officer has offered to
release the Company from all liabilities owed to him.
Delphi Automotive Systems Supply Agreement - The Company 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. As of December 31, 2000, the Company had received loan payments of
$1,700,000 from Delphi.
In August 2000, Delphi notified the Company of its intent to terminate the
Supply Agreement. However, the Company believes that Delphi is not entitled to
terminate the agreement or has not followed the appropriate contractual
provisions for termination of the Supply Agreement. As a result, the Company
significantly reduced its workforce and operating costs in order to conserve
resources and sought protection under the United States Federal bankruptcy
laws.
Delphi has made a claim to the bankruptcy court against the Company of
$1,700,000. Litigation of the claim is estimated to begin after the
confirmation date of the Company's bankruptcy reorganization.
Convertible Debentures Payable to Shareholder - During 2000, the Company
received aggregate proceeds of $3,800,000from issuing debentures, was charged
default penalties of $700,000, and converted $1,050,000 plus accrued interest
into common stock, resulting in a principal balance due of $3,450,000. The
balance due is in default. The series of transactions and related terms
resulting in the balance due were as follows:
16
31
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 per share. The warrants
expire on dates through March 3, 2004. The debenture notes were due March 1,
2001, with interest at 8% per annum, payable quarterly.
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 payable. Of the remaining
$1,554,583 of net proceeds, $965,574 was allocated to the beneficial
conversion option of the convertible debentures, and $777,911 was allocated to
the convertible debentures payable, before $188,902 of loan costs.
The resulting $2,759,088 discount on the promissory notes was based on an
imputed interest rate of 2357%. The discount and the loan costs were
amortized through the date the notes were convertible and resulted in
amortization expense of $2,947,990 during the year ended December 31, 2000.
In addition, the Agreement stated that in an event of default, all of the
debentures became immediately convertible. In June 2000, the holder gave the
Company notices of conversion relating to a total of $700,000 of principal
under the debentures and $3,555 of accrued interest. The conversion rate on
these dates was $1.00 per share which resulted in 703,555 shares of common
stock being issued.
Under the terms of the debentures, if the Company's stock price fell below
$1.00 per share for five consecutive days, the principal balance would become
mandatorily redeemable at the option of the lender with a redemption amount
equal to 125% of the outstanding principal plus accrued interest payable in
ten days. If not redeemed, the conversion price would be reduced by $0.50 per
share. Upon the debentures becoming mandatorily redeemable, default interest
accrued at 10.5% per month
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 the entire 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. The Company did not redeem the debentures by July
17, 2000, which constituted 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 accrued on
the remaining $3,200,000 principal balance at the default interest rate of
10.5% per month. Also as a result of the default, the Company recognized a
default penalty of $700,000 which was recorded as an addition to the principal
amount due. 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
recognized as interest expense.
17
32
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 5, 2000, the holder of 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. In addition, the holder of
these 8% convertible debentures loaned the Company $300,000 during 2000. These
loans were unsecured notes payable bearing interest at 12% per annum and were
due upon demand.
Convertible Promissory Note to Employee - During the year ending December 31,
2000 the Company borrowed $155,000 from employees, officers or affiliated
shareholders under terms of 8% convertible notes. Of the amount borrowed,
$135,000 was converted into common stock during 2000. As of December 31, 2001
and 2002, $20,000 in principal remained due to an employee and is in default.
Notes Payable to Shareholder - During August 1999 the Company received
proceeds of $1,000,000 from a shareholder under terms of a 14% note due
February 2000. The Company issued warrants to purchase 500,000 shares of
common stock at $2.50 through August 10, 2004 to the shareholder as a fee for
extending the due date 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 was accounted for as unamortized loan costs
and was amortized over the six-month period ended August 10, 2000. Interest
expense resulting from amortization of these loan costs was $1,230,000 during
the year ended December 31, 2000. The shareholder loaned an additional $67,700
to the Company during 2001. Both loans are currently in default.
NOTE 8 - STOCKHOLDERS' EQUITY
Preferred Stock - During the year ended December 31, 1999, 4,500 shares of
preferred stock were designated as Series A Convertible Preferred Stock
("Series A Preferred") with a stated value of $875 per share. The Series A
Preferred ranks, with respect to rights on liquidation, senior to all classes
of common stock and each other class of capital stock or series of preferred
stock established after the date designated by the Board of Directors. The
Series A Preferred has no stated dividend rate and no dividends are payable
thereon unless declared by the Board of Directors. Each share of Series A
Preferred outstanding is entitled to 250 votes. The Series A Preferred shares
are entitled to a preference in liquidation over the common shares equal to
$875 per preferred share.
Shares of Series A Preferred may be convertible at any time, in whole or in
part, at the option of the holder thereof into common stock at a conversion
price of $3.50 per share. The outstanding shares of Series A Preferred will
automatically be converted into common stock if the closing bid price for the
common stock for 15 successive trading days is equal to or greater than $12.00
per share.
Series A Preferred and Series A warrants to purchase 250 shares of common
stock were issued as a unit in an offering from May through July 1999. In
addition to units sold, shareholders who purchased common stock under the
Company's prior private offering were given the option of converting the
shares of common stock purchased into preferred units of the new offering.
The offering resulted in the issuance of 536 shares of convertible preferred
stock and Series A warrants to purchase 134,000 shares of common stock at
$4.00 per share. The conversion resulted in the cancellation of 489,523 shares
of common stock and the issuance of 2,238 shares of convertible preferred
stock and Series A warrants to purchase 559,551 of common stock at $4.00 per
share. The warrants expired on January 1, 2001. The gross proceeds from the
offering before $8,263 offering costs were $469,000. These proceeds and the
conversion of the common shares were allocated on the dates received to (a)
the Series A Warrants to purchase common stock based upon their fair value in
the amount of $ 693,551 and (b) $1,725,624 was allocated to the convertible
preferred stock. The resulting discount on the preferred stock of $693,551
was recognized as a preferred stock dividend on the dates the convertible
preferred stock was issued.
During the year ended December 31, 2000, 1,194 shares of Series A convertible
preferred stock were converted into 298,500 shares of common stock,
respectively.
18
33
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Super Voting Preferred Stock - On April 13, 2001, the Company authorized a
class of stock designated as Series 2001 Super-Voting Preferred, with a par
value of $0.001, each share of the Super-Voting Preferred having 100 votes per
share, with voting rights to expire July 1, 2004. The stock will not pay
dividends and will not participate in liquidation. The stock is redeemable at
$0.001 per share.
Common Stock - In connection with the reorganization agreement with Nanotech,
the Company's common stock was split 13-for-1 on April 11, 1998. All
references to common shares in these financial statements reflect the change
in the number of common shares outstanding for all periods presented.
On August 26, 1997, the Company entered into a settlement agreement with two
officers of the Company whereby the relationship between the officers and the
Company was terminated. As part of the agreement, the Company redeemed
6,308,666 shares of common stock from the officers for $200,000, or
approximately $0.03 per share, by paying $50,000 in cash and by issuing
$150,000 of notes payable.
During the year ended December 31, 2000, the Company received total cash
proceed of $10,338 from holders of common stock options, principally from an
employee of the Company through payroll deductions. In connection with these
purchases the Company issued 30,705 shares of common stock. A portion of
those shares of common stock had previously been reflected as constructively
issued in the 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 of $1,875 and the 470 shares of
common stock were cancelled.
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. In November 2000, the Company issued
85,250 shares of common stock valued at $7,996 to employees as compensation
for services rendered. In September 2000, the Company issued 7,500 shares of
common stock valued at $2,100 in connection with a legal settlement.. On
March 30, 2001, the Company issued 5 million common shares to its chief
executive officer as compensation. The shares were valued at $400,000, or
$0.08 per share based upon the quoted market price of the shares on the date
issued.
NOTE 9 - STOCK OPTIONS
On April 1, 1995, the Board of Directors and shareholders adopted an Omnibus
Stock Option Plan (the "Plan"). Under the terms of the Plan, as amended in
October 1997, the Company may grant options to employees, directors and
consultants to purchase up to 5,037,500 shares of common stock. Incentive or
non-qualified options may be granted under the Plan. Options granted under the
Plan are exercisable over periods determined by the Board of Directors, not to
exceed 10 years from the date of grant. Options generally vest from
immediately to five years. Generally, the only condition for exercise of
options granted under the Plan is that the employees remain employed through
the date the options are exercised or vested.
Between 1995 and 2000 the Company issued an aggregate of 3,331,100 options to
purchase common shares under the Plan. The Company terminated the majority of
its employees in September 2000. A summary of the status of stock options as
of December 31, 2002 and 2001 and changes during the years ended on those
dates are presented below:
19
34
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002 2001 2000
----------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------- ------------- -------- ------------- -------- ------------ --------
Outstanding at
beginning of year 1,302,500 $ 0.76 3,331,100 $ 0.60 4,708,456 $ 0.62
Granted - - - - 709,750 0.83
Expired (747,500) 0.38 (1,324,091) 0.45 (30,235) 0.33
Forfeited - - (704,509) 0.56 (2,056,871) 0.73
--------------------- ------------- -------- ------------- -------- ------------ --------
Options outstanding
at end of year 555,000 $ 1.28 1,302,500 $ 0.76 3,331,100 $ 0.76
--------------------- ------------- -------- ------------- -------- ------------ --------
Options exercisable
at end of year 555,000 $ 1.28 1,282,500 $ 0.74 2,586,591 $ 0.58
--------------------- ------------- -------- ------------- -------- ------------ --------
The weighted-average fair value of the options granted during 2000 was $0.70
per share determined by use of the Black-Scholes option pricing model with the
following weighted-average assumptions: dividend yield of 0%; volatility of
136%; risk-free interest rate of 6.6%; and estimated life of 5.9 years. The
following table summarizes information about stock options outstanding at
December 31, 2002:
$ 0.77 325,000 4.67 $ 0.77 325,000 $ 0.77
$ 2.00 230,000 2.37 $ 2.00 230,000 $ 2.00
------------- ------------- -------------- ------------- -------------- --------------
$0.77 - 2.00 555,000 $ 1.28 555,000 $ 1.28
------------- ------------- -------------- ------------- -------------- --------------
NOTE 10 - STOCK PURCHASE WARRANTS
From 1995 through 1999, the Company issued warrants to equity investors in
connection with equity offerings. During 2000, Series C and Series D
convertible notes and other notes payable were issued with for an aggregate
principal balance of $405,000 together with warrants to purchase 220,588
common shares with exercise prices of $1.70 to $2.25 and expiring during 2003.
The proceeds from the notes were allocated between the convertible notes and
the warrants based upon their relative fair values. The estimated fair value
of the warrants of $241,176 was determined using the Black-Scholes option
pricing model with the following weighted-average assumptions: dividend yield
of 0%; volatility of 125.7%; risk-free interest rate of 6.8%; and estimated
life of 3 years. The warrants were allocated $213,783 of the net proceeds of
the convertible notes payable, $110,644 was allocated to the beneficial
conversion option of the convertible notes, and $80,572 was allocated to the
convertible notes payable. The resulting $324,428 discount on the promissory
was amortized through the date the notes were convertible and resulted in
amortization expense of $324,428 during the year ended December 31, 2000.
During 2000, warrants were issued to a note holder for consideration for an
extension of terms and also issued warrants for services to outside legal
counsel, and to others for services. Warrants issued carried an exercise price
equal to the estimated fair value of the underlying shares on each issuance
and expired from July 2004 through August 2004. The fair value of warrants
issued for services were estimated on the date of issuance using the
Black-Scholes option-pricing module. The Board of Directors estimated the fair
value of the underlying common shares when there was no active trading market
for the Company's common shares, into which the warrants were convertible. The
estimated fair value of the warrants closely approximated the estimated fair
value of the underlying shares at each of the issuance dates. Pursuant to the
bankruptcy plan of reorganization, if executed, warrants outstanding would be
cancelled. Warrants issued for services from 1995 through 2000 were as
follows:
20
35
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
Number of Exercise Expense
Year Warrants Consideration Price Fair Value Recognized
------- ---------- --------------------- --------- ----------- --------------
1995 22,750 Legal services $ 0.77 $ 0.77 $ 17,518
1996 6,500 Legal services 0.77 0.77 5,005
1997 910,000 Director services 1.15 1.15 1,046,500
1999 100,000 Consulting services 1.85 1.85 185,000
2000 240,000 Services 2.00 1.81 434,400
2000 10,000 Litigation Settlement 1.50 0.21 2,100
------- ---------- --------------------- --------- ----------- --------------
The following table summarizes information about warrants outstanding at
December 31, 2002:
-----------------------------------------------------------------
Weighted-Average
Warrants Remaining Contractual
Exercise Prices Outstanding Life in Years
--------------------- --------------------- ---------------------
$0.77 - $1.80 530,923 0.89
$2.00 - $2.50 3,300,159 1.23
$3.15 - $3.44 335,000 1.56
--------------------- --------------------- ---------------------
$0.77 - $3.44 4,166,082 1.22
--------------------- --------------------- --------------------
NOTE 11 - PRODUCTS AND SERVICES
The Company operates in one segment. Within that segment the Company has had
revenues in the following areas:
For the Years Ended December 31, 2002 2001 2000
------------------------------------- ------------- ------------ -------------
Products
Sales of sensors $ 8,454 $ 1,441 $ 175,029
Licensing fees and royalties 25,000 11,887 10,000
Tooling and dies 2,975 - 1,856
------------------------------------- ------------- ------------ -------------
Total Product Sales 36,429 13,328 186,885
Engineering Services 27,094 2,467 164,174
------------------------------------- ------------- ------------ -------------
Total Sales $ 63,523 $ 15,795 $ 351,059
===================================== ============= ============ =============
21
36
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES
There was no provision for, or benefit from, income tax for any period. The
components of the net deferred tax asset were as follows:
December 31, 2002 2001
--------------------------------------------- ------------- -------------
Operating loss carry forwards $ 11,446,155 $ 11,352,386
Deferred license and royalty income 137,544 146,869
Accrued rent expense 120,343 120,343
Amortization of intangibles 15,050 15,704
--------------------------------------------- ------------- -------------
Total Deferred Tax Assets 11,719,092 11,635,302
Valuation allowance (11,719,092) (11,635,302)
--------------------------------------------- ------------- -------------
Net Deferred Tax Asset $ - $ -
============================================= ============= =============
For tax reporting purposes, the Company had net operating loss carry forwards
of $30,686,744 at December 31, 2002 that will expire beginning in the year
2012.
The following is a reconciliation of the amount of benefit that would result
from applying the federal statutory rate to pretax loss with the provision for
income taxes for the years ended December 31, 2002 and 2001:
For the years ended December 31, 2002 2001 2000
-------------------------------------- ------------- ------------ ------------
Tax at statutory rate (34%) $ (110,693) $ (492,269) $(5,204,324)
Non-deductible expenses 37,646 37,596 114,428
Increase in valuation allowance 83,790 502,452 5,595,022
State tax benefit, net of federal
tax effect (10,743) (47,779) (505,126)
-------------------------------------- ------------- ------------ ------------
Provision for Income Taxes $ - $ - $ -
====================================== ============= ============ ============
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Capital Leases - During the year ended December 31, 2000, the Company entered
into capital lease arrangement for certain equipment with an original cost of
$66,852. As of December 31, 2002, these capital lease obligations are in
default and payment of the full amount was due. In January 2001, the lessor
sued the Company for the accelerated lease payments of $84,950, plus accrued
interest, which was $67,414 and $39,184 as of December 31, 2002 and 2001,
respectively. No additional action has been taken by the lessor. The Company
has accrued $84,950 for these lease obligations and has reflected these
obligations as current liabilities in the accompanying consolidated balance
sheets as of December 31, 2002 and 2001.
Operating Leases - The Company was obligated under two operating lease
agreements for its facilities and office space. The lease on the Company's
office space and smaller production, prototyping and development facility
expired in 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. During 2001, the Company abandoned the leased office space
prior to the end of the extension. Unpaid amounts due under the lease are
included in accounts payable classified as liabilities subject to compromise.
22
37
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1998, the Company 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 Company 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 was issued by a bank to the lessor and was
secured by $50,000 of cash on deposit with the bank. The Company defaulted on
this lease, and the letter of credit was drawn and applied against the
Company's obligation. The entire amount of the remaining lease payments for
the balance of the term of the lease is due and payable in full. As a result,
the total amount of the remaining obligation of $975,000 was recognized as a
current liability and charged to operations during year ended December 31,
2000. As of December 31, 2000, estimated remaining payments under this lease
were $896,890. During 2001, as a result of the landlord filing a claim under
the Company's bankruptcy proceedings, the liability was reduced to $574,255.
Rent expense for the years ended December 31, 2002, 2001 and 2000 was $46,590,
$90,127 and $288,870, respectively.
In addition to the claims under the control of the bankruptcy court, the
Company has been involved in other claims and legal proceedings in which
monetary damages and other relief are sought. These claims are reflected as
liabilities in the consolidated financial statements.
Employment and Consulting Agreements - The Company entered an agreement with a
former officer for consulting services effective September 1, 2001. The terms
of the agreement required the Company to pay $4,000 per month through February
2002.
NOTE 14 - CONTRACT AND MANUFACTURING ACTIVITY EXIT COSTS
As discussed in Note 7, in August 2000, the Company received the Delphi Notice
and, as a result, 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 had incurred significant costs
in order to meet the projected production requirements of the Supply
Agreement. The Company defaulted on the lease commitment, abandoned the
premises, and accrued a liability for the remaining commitment on the
property.
Contract and manufacturing activity exit costs for the year ended December 31,
2000 are as follows:
-------------------------------------------------------- ------------
Accrued rent on manufacturing facility $ 975,000
Leasehold improvements written off, net of
accumulated depreciation of $90,650 816,357
Software written off, net of accumulated
depreciation of $36,109 108,326
Deposit on equipment forfeited 64,507
Inventory write off 95,000
Impairment of property and equipment 280,000
Other 34,137
-------------------------------------------------------- ------------
Total Contract and Manufacturing Activity Exit Costs $ 2,373,327
======================================================== ============
23
38
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
(Debtor-in-Possession as of July 3, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - CONDENSED FINANCIAL STATEMENTS
The following condensed financial statements reflect the financial position
and results of operations of only Flexpoint Sensor Systems, Inc., the legal
entity under Chapter 11bankruptcy. The following condensed financial
statements are prepared on the same basis as the consolidated financial
statements.
BALANCE SHEET
December 31, 2002 2001
----------------------------------------------- -------------- -------------
ASSETS
Cash $ - $ 541
----------------------------------------------- -------------- -------------
Total Assets $ - $ 541
=============================================== ============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities Not Subject to Compromise
Trade accounts payable $ 128,946 $ 128,942
----------------------------------------------- -------------- -------------
Total Current Liabilities 128,946 128,942
----------------------------------------------- -------------- -------------
Liabilities Subject to Compromise
Other 7,677,379 7,762,378
Payable to subsidiaries 1,080,360 670,339
----------------------------------------------- -------------- -------------
Total Liabilities Subject to Compromise 8,757,739 8,432,717
----------------------------------------------- -------------- -------------
Stockholders' Deficit
Preferred stock 1,080,426 1,080,426
Common stock 76,535 76,535
Additional paid-in capital 22,078,206 22,078,206
Deficit accumulated during the development stage (32,121,852) (31,796,285)
----------------------------------------------- -------------- -------------
Total Stockholders' Deficit (8,886,685) (8,561,118)
----------------------------------------------- -------------- -------------
Total Liabilities and Stockholders' Deficit $ - $ 541
=============================================== ============== =============
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002 2001 2000
------------------------------------ ------------- ------------- -------------
Operating Expenses
General and administrative expenses $ 101,097 $ 776,057 $ 1,638,089
Contract and manufacturing activity
exit costs - - 1,785,346
------------------------------------ ------------- ------------- -------------
Total Operating Expenses (101,097) (776,057) (3,423,435)
------------------------------------ ------------- ------------- -------------
Other Income and (Expenses)
Equity in loss of subsidiaries (224,470) (1,115,670) (5,049,672)
Gain on forgiveness of liabilities - 767,065 -
Interest expense - (346,998) (1,584,241)
Interest from amortization of
debt discount - - (5,210,097)
Interest income - 1,990 20,178
Other income (expense), net - 21,819 (59,568)
------------------------------------ ------------- ------------- -------------
Total Other Income and (Expense), Net (224,470) (671,794) (11,883,400)
------------------------------------ ------------- ------------- -------------
Net Loss $ (325,567) $ (1,447,851) $(15,306,835)
==================================== ============= ============= =============
24
39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have not had a change in or disagreement with our independent accountant
for the years ended December 31, 2002 and 2001.
ITEM 8A. CONTROLS AND PROCEDURES
Our Chief Executive Officer, who also acts in the capacity of our principal
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report and
determined that there was no significant deficiencies in these procedures.
However, we failed to file in a timely manner due to lack of funding. There
were no changes made or corrective actions to be taken related to our internal
control over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
Our executive officer and directors are listed below. Our directors who serve
until our next annual meeting or until each is replaced by a qualified
director. Our executive officers are appointed by our board of directors and
serve at its discretion.
Name Age Position Held Director Since
---- ---- ------------- --------------
John A. Sindt 59 President, CEO, Chairman of the Board December 1999
Donald E. Shelley 56 Director April 2001
Eric Jergensen 44 Director April 2001
John A. Sindt. Mr. Sindt's has been employed since 1965 as a Salt Lake
County, Utah constable and he currently heads that department. Mr. Sindt has
owned and operated a successful chain of retail jewelry stores. He has served
as president, corporate secretary and director for the National Constables
Association.
Donald E. Shelley. Mr. Shelley is the owner of Shelley and Company,
Certified Public Accountants. His firm conducts audits and performs
accounting services for individual and business clients and Mr. Shelley
supervises five persons. Mr. Shelley is a certified public accountant.
Erci Jergensen. Mr. Jergensen is the President and CEO of Contour
Composites, Inc. This company is a provider of highly technical composite
products for the aerospace, industrial and medical industries. Mr. Jergensen
holds a Bachelor of Science degree as a civil engineer and an MBA from the
University of Utah.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
executive officers and persons who own more than five percent of a registered
class of our equity securities to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
our common stock. Officers, directors and ten-percent or more beneficial
owners of our common stock are required by SEC regulations to furnish
Flexpoint Sensor with copies of all Section 16(a) reports they file and
provide written representation that no Form 5 is required. Based upon a
review of these forms furnished to us during the fiscal year ended December
31, 2002, we believe that no Forms 3, 4 or 5 were required to be filed.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation paid to our named executive
officers in all capacities during the years
40
ended December 31, 2002, 2001 and 2000.
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Name Other Securities All
and principal Fiscal annual underlying other
position Year Salary compensation options/SARs compensation
---------------- ------ ----------- ------------- ------------- ------------
John A. Sindt 2002 $100,000(1) $ 0 0 $ 0
President, CEO 2001 100,000(1) 400,000(2) 0 0
Director 2000 0 0 0 0
(1) Represents accrued salary which will be waived upon confirmation of our
proposed bankruptcy plan.
(2) Represents 5,000,000 common shares, which will be cancelled upon
confirmation of our proposed bankruptcy plan.
Compensation of Directors
We do not have any standard arrangement for compensation of our directors for
any services provided as a director, including services for committee
participation or for special assignments.
Employment Contracts
We have not entered into an employment contract with our executive officer;
however, our proposed bankruptcy plan provides that our President, Mr. Sindt,
will be paid a monthly salary of $8,000 post-confirmation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership
The following table lists the beneficial ownership of our outstanding common
stock by our management and each person or group known to us to own
beneficially more than 5% of our outstanding common stock. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Based on
these rules, two or more persons may be deemed to be the beneficial owners of
the same securities. Except as indicated by footnote, the persons named in
the table below have sole voting power and investment power with respect to
the shares of common stock shown as beneficially owned by them. The
percentage of beneficial ownership is based on 76,534,709 shares of common
stock outstanding as of February 9, 2004, plus any shares which each of the
following persons may acquire within 60 days by the exercise of rights,
warrants and/or options. However, any outstanding rights, warrants and
options will be cancelled upon confirmation of our proposed bankruptcy plan
and our outstanding common stock will be subject to a 7-to-1 reverse upon
confirmation.
CERTAIN BENEFICIAL OWNERS
------------------------
Common Stock Beneficially Owned
-------------------------------
Name and address of Percentage
beneficial owners Number of shares of class
--------------------------------- ---------------- ----------
First Equity Holdings Corp. 50,000,000 (1) 65.3%
2157 S. Lincoln Street
Salt Lake City, Utah 84106
41
(1) First Equity Holdings Corp. owns the right to receive these shares as
part of its assignment agreement with Aspen Capital Resources.
MANAGEMENT
----------
Common Stock Beneficially Owned
--------------------------------
Name and address of Percentage
beneficial owners Number of shares of class
------------------------------------ ---------------- -------------
John A. Sindt 5,223,860 (2) 6.8%
47 East 7200 South, Suite #204
Midvale, Utah 84047
Donald E. Shelley 63,000 Less than 1%
656 West 7250 South
Midvale, Utah 84047
Directors and officers 5,286,860 6.9%
as a group
(2) Represents 15,860 shares owned by Mr. Sindt; 200,000 shares owned
jointly by Mr. Sindt and his spouse; 8,000 shares owned by his spouse;
and 5,000,000 shares our board has agreed to issue to Mr. Sindt.
However, the obligation to issue the 5,000,000 shares will be cancelled
upon confirmation of our bankruptcy plan.
Changes in Control
The following table lists the beneficial ownership of each person known to us
who will own beneficially 10% or more of our outstanding common stock after
confirmation of our proposed bankruptcy plan and the issuance of the shares
pursuant to the plan. The percentage ownership is based on 17,813,003 common
shares outstanding after the 7-to-1 reverse of our outstanding common stock
and the issuance of shares to satisfy creditors' claims.
Name of beneficial owner Number of common shares Percentage
------------------------ ----------------------- ----------
First Equity Holdings Corp. 7,142,857 40.1%
Broad Investment Partners, LLC 3,000,000 16.8%
Securities Under Equity Compensation Plans
The following table lists the securities authorized for issuance under any
equity compensation plans approved by our shareholders and any equity
compensation plans not approved by our shareholders. This chart also includes
individual compensation arrangements.
EQUITY COMPENSATION PLAN INFORMATION
-----------------------------------
Number of
securities
remaining
available for
future issuance
under equity
Number of securities Weighted-average compensation
to be issued upon exercise price of plans (excluding
exercise of out- outstanding securities
standing options, options, warrants reflected
Plan category warrants and rights and rights in column (a))
(a) (b) (c)
---------------- ---------------------- ------------------- ---------------
42
Equity
compensation
plans approved by
security holders 555,000 $ 1.28 0
---------------- ---------------------- ------------------- ---------------
Equity
compensation
plans not
approved by
security holders 0 0.0 0
---------------- ---------------------- ------------------- ---------------
Total 555,000 (1) $ 1.28 0
---------------- ---------------------- ------------------- ---------------
(1) These warrants, options and rights will be cancelled upon
confirmation of our proposed bankruptcy plan.
Our board of directors and shareholders approved the Omnibus Stock Option Plan
on April 1, 1995. As of December 31, 2000, we had issued an aggregate of
3,331,100 options to purchase common shares under this plan. However, as a
result of our bankruptcy and the related termination of a majority of our
employees many of the options were cancelled.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information summarizes transactions we have either engaged in
during the last two years, or propose to engage in, involving our executive
officers, directors, more than 5% stockholders, or immediate family members of
these persons.
In March 2001 we granted a 10% interest in our subsidiaries to our President,
John A. Sindt, in consideration for his efforts to revive our operations.
John A. Sindt, our President, has agreed to compromise his claims in
bankruptcy by surrendering his right to receive
.. Any options granted to him prior to bankruptcy;
.. 5,000,000 common shares for accrued wages through March 2000;
.. 800,000 super-voting preferred shares that were authorized to be issued
to him in April 2001; and
.. Accrued wages of $300,000 through December 31, 2003.
These transactions between Flexpoint Sensors and our officer have been
negotiated between related parties without "arms length" bargaining and, as a
result, the terms of these transactions may be different than transactions
negotiated between unrelated persons.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
3.1(i) Certificate of Incorporation of Nanotech Corporation (Incorporated by
reference to exhibit 3.1 of Form 10-SB registration statement, filed
June 17,1994.)
3.1(ii) Certificate of Amendment to Certificate of Incorporation of
Micropoint, Inc. (Incorporated by reference to exhibit 3.1 of Form
8-K, filed April 9, 1998)
3.2 Restated by-laws of Nanotech Corporation (Incorporated by reference
to exhibit 3.2 of Form 10-SB, filed on June 17, 1994)
21 Subsidiaries of Flexpoint Sensor Systems, Inc.
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
Reports on Form 8-K
None
43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During the 2002 and 2001 years we have not been billed for audit fees,
audit-related fees, tax fees or other fees while in bankruptcy.
We do not have an audit committee currently serving and as a result our entire
board of directors performs the duties of an audit committee. Our board of
directors will evaluate and approve in advance the scope and cost of the
engagement of an auditor before the auditor renders audit and non-audit
services. We do not rely on pre-approval policies and procedures.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FLEXPOINT SENSOR SYSTEMS, INC.
/s/ John A. Sindt
Date: February 18, 2004 By: _______________________________________
John A. Sindt
President, CEO and Chairman
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934. This
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Donald E. Shelley
Date: February 18 , 2004 By:_____________________________________
Donald E. Shelley
Director
44