UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Amendment No. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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.)
106 West Business Park Drive, Draper, Utah 84020
(Address of principal executive offices) (Zip code)
Issuer's telephone number: 801-568-5111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if 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 [X] No [ ]
As of April 23, 2004 the Registrant had a total of 18,698,202 shares of common
stock issued and outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
THIS QUARTERLY REPORT HAS BEEN AMENDED TO RESTATE THE FINANCIAL STATEMENTS
AND RELATED DISCLOSURE FOR THE IDENTIFIED PERIOD.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements...............................................2
Unaudited Consolidated Balance Sheet...............................3
Unaudited Consolidated Statements of Operations....................4
Unaudited Consolidated Statement of Stockholders' Equity...........4
Unaudited Consolidated Statement of Cash Flows.....................5
Notes to Unaudited Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis..............................14
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Issuer's Purchases of Equities.........17
Item 5. Other Information................................................18
Item 6. Exhibits and Reports on Form 8-K.................................19
Signatures................................................................20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
As a result of our reorganization under a court approved Chapter 11 bankruptcy
plan, we are now a development stage company with a date of inception of
February 24, 2004. We used fresh-start reporting (See Note 3 of the Notes to
Unaudited Consolidated Financial Statements, below) and all assets of
Flexpoint Sensor Systems, Inc. have been restated to reflect their
reorganization value, which approximates the fair value at the date of
reorganization.
We have restated our financial statements as of March 31, 2004 and for the
period from February 24, 2004 through March 31, 2004. An quantitative
explanation of the effect of the restatement is located in Note 1 -
"Restatement of Financial Statements" in the notes to the financial
statements. The following is a summary of the significant reasons for the
restatement:
. We have changed the estimated amount of a beneficial conversion option
on the conversion of a note payable on March 31, 2004 in the amount of
$1,500,000 as compared to the previously estimated amount of $42,840.
. In February 2004 we estimated a reorganization value of $5,634,000 based
on the negotiated price at which creditors were willing to convert their
claims into common stock, and allocated that value to the net assets
based on their estimated fair values. As of December 31, 2004, an
independent valuation determined the reorganization value at $5,637,612,
with cash of $2,051, patents valued at $279,147 and goodwill valued at
$5,356,414. The original allocation was restated to reflect the
estimated appraised values.
. The acquisition of equipment and proprietary technology from Flexpoint
Holdings, LLC on March 31, 2004 has been reallocated based on an
independent appraisal of the estimated fair value of the assets
acquired.
The financial information set forth below with respect to our consolidated
financial position as of March 31, 2004 and the consolidated statements of
operations, stockholders' equity and cash flows for the interim period from
February 24, 2004 through March 31, 2004 is unaudited. This financial
information, in the opinion of management, includes all adjustments consisting
of normal recurring entries necessary for the fair presentation of such data.
2
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
(UNAUDITED)
------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 74,138
------------------------------------------------------------------------------
Total Current Assets 74,138
------------------------------------------------------------------------------
Property and equipment 1,248,732
Patents and proprietary technology 1,926,245
Goodwill 5,356,414
------------------------------------------------------------------------------
Total Assets $ 8,605,529
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 81,199
Accrued liabilities 3,678
Deferred revenue 337,500
Notes payable - related party 16,000
------------------------------------------------------------------------------
Total Current Liabilities 438,377
------------------------------------------------------------------------------
Stockholders' Equity
Common stock - $0.001 par value; 100,000,000 shares authorized;
18,598,718 shares issued and outstanding 18,598
Additional paid-in capital 9,893,655
Warrants outstanding 309,587
Deficit accumulated during the development stage (2,054,688)
------------------------------------------------------------------------------
Total Stockholders' Equity 8,167,152
------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 8,605,529
==============================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 24, 2004 (DATE OF EMERGENCE FROM
BANKRUPTCY) THROUGH MARCH 31, 2004
(UNAUDITED)
------------------------------------------------------------------------------
Sales $ 15,750
General and administrative expense (513,397)
Interest expense (1,557,041)
------------------------------------------------------------------------------
Net loss $ (2,054,688)
==============================================================================
Basic and Diluted Loss Per Share $ (0.13)
==============================================================================
Basic and Diluted Weighted-Average Shares Outstanding 16,253,758
==============================================================================
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 24, 2004 (DATE OF EMERGENCE FROM
BANKRUPTCY) THROUGH MARCH 31, 2004
(UNAUDITED)
Deficit
Accumulated
Common Stock Additional During the Total
-------------------------- Paid-in Warrants Development Stockholders'
Shares Amount Capital Outstanding Stage Equity
-------------------------- ------------- ------------ ------------- ----------- ------------ -------------
Balance - February 24, 2004
(Date of Emergence from
Bankruptcy - Note 3) 14,098,718 $ 14,098 $ 4,952,166 $ - $ - $ 4,966,264
Beneficial debt conversion
option - - 1,500,000 - - 1,500,000
Conversion of note payable,
March 31, 2004, $0.50 per
share 2,800,000 2,800 1,397,200 - - 1,400,000
Issuance for consulting
services, March 3, 2004,
$1.15 per share 100,000 100 114,580 - - 114,680
Issuance of warrants for
consulting services,
March 3, 2004 $1.15
per share - - - 309,587 - 309,587
Issuance for acquisition
of equipment and
proprietary technology
from Flexpoint Holdings,
LLC, a company controlled
by a shareholder, March 31,
2004, $1.21 per share 1,600,000 1,600 1,929,709 - - 1,931,309
Net loss - - - - (2,054,688) (2,054,688)
-------------------------- ------------- ------------ ------------- ----------- ------------ -------------
Balance - March 31, 2004 18,598,718 $ 18,598 $ 9,893,655 $ 309,587 $(2,054,688) $ 8,167,152
=========================== ============= ============ ============= =========== ============ =============
The accompanying notes are an integral part of these unaudited consolidated financial statements
4
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 24, 2004 (DATE OF EMERGENCE FROM
BANKRUPTCY) THROUGH MARCH 31, 2004
(UNAUDITED)
---------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (2,054,688)
Adjustments to reconcile net loss to net cash used
in operating activities:
Issuance of stock and vesting of warrants granted for services 424,267
Expenses paid by increase in convertible note payable 60,000
Interest expense from beneficial conversion option of
convertible note payable 1,500,000
Interest expense from origination fees on convertible notes payable 56,666
Changes in operating assets and liabilities:
Accounts payable (126,907)
Accrued liabilities 2,186
Deferred revenue (6,250)
--------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (144,726)
--------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for patents (1,521)
Payment for acquisition of equipment and proprietary
technology from Flexpoint Holdings, LLC (265,000)
--------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (266,521)
--------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from borrowings under convertible note payable 483,334
--------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 483,334
--------------------------------------------------------------------------------------
Net Change in Cash 72,087
Cash at Beginning of Period 2,051
--------------------------------------------------------------------------------------
Cash at End of Period $ 74,138
======================================================================================
Supplemental Cash Flow Information
Cash paid for interest $ -
======================================================================================
Supplemental Schedule of Non Cash Investing and Financing Activities:
Short-term advances of $102,000 were repaid from an increase in a convertible
note payable.
Issuance of 1,600,000 shares of common stock valued at $ 1,931,309, assumption of
$ 698,000 convertible note payable and cash payment of $ 265,000 to Flexpoint
Holdings LLC, a company controlled by a shareholder, in exchange for equipment and
proprietary technology with fair values of $1,248,732 and $1,645,577, respectively.
The principal balance of a $1,400,000 convertible note payable was converted to
2,800,000 shares of common stock.
======================================================================================
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Nature of Operations - Flexpoint Sensor Systems, Inc. (the Company) is a
development stage enterprise engaged principally in designing, engineering,
and manufacturing sensor technology and equipment using flexible potentiometer
technology. On February 24, 2004, the Company's plan of reorganization was
confirmed by the U.S. Bankruptcy Court and the Company emerged from
bankruptcy. As discussed further in Note 3, the emergence from bankruptcy was
accounted for using fresh start accounting and the Company is considered a new
entity for financial reporting purposes. The new entity is in the development
stage as planned operations have not commenced. Development stage activities
include acquiring equipment and technology, organization operations, obtaining
financing and seeking manufacturing contracts.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Flexpoint Sensor Systems, Inc. and its
90%-owned subsidiaries, Sensitron, Inc. and Flexpoint, Inc. Minority interests
in subsidiaries are carried at no value based on their historical cost.
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.
Interim Financial Statements - The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America. In
the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to fairly present the Company's
consolidated financial position as of March 31, 2004, its consolidated results
of operations and cash flows for the period from February 24, 2004 (date of
emergence from bankruptcy) through March 31, 2004. The results of operations
for the period from February 24, through March 31, 2004, may not be indicative
of the results that may be expected for the period ending December 31, 2004.
Business Condition - The accompanying unaudited consolidated financial
statements have been prepared assuming that the Company will continue as a
going concern. The Company is in the development stage and its efforts are
primarily obtaining necessary capital to complete its production facility and
re-start operations following its emergence from Chapter 11 bankruptcy
proceedings. The Company incurred a loss of $2,054,688 and used cash from
operations of $144,726 for the period from February 24, 2004 (date of
emergence from bankruptcy) through March 31, 2004. Through March 31, 2004, the
Company has accumulated a deficit during the development stage of $2,054,688.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The unaudited consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, which
may include the need to obtain additional financing, and ultimately to attain
profitable operations. While the Company has received some customer deposits
against future deliveries, the Company does not have sufficient cash flow to
finance its operations on an on-going basis. To date, the Company has met its
short-term cash needs through confirmation of its plan of reorganization and
through proceeds from a convertible note payable as described in Note 2.
Management plans to issue equity securities through a private placement
offering. However, there can be no assurance that such sources of financing,
if any, will be completed as planned or continue to be available, and if
available, that they will be on terms favorable to the Company or in amounts
sufficient to meet the Company's cash flow requirements.
6
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fair Values of Financial Instruments - The amounts reported as 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.
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 method and is recognized over the estimated
useful lives of the property and equipment, which are three to seven years. No
depreciation expense was recognized during the period ended March 31, 2004
because the property was acquired on March 31, 2004.
Valuation of Long-lived Assets - The carrying values of the Company's
long-lived assets will be reviewed for impairment whenever events or changes
in circumstances indicate that they may not be 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,
including sales of software licenses, 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 March 31, 2004, Sensitron, the Company's subsidiary, had deferred
revenue of $337,500, consisting of $250,000 of prepaid licensing royalties to
be deferred and recognized as the related licensing royalty sales are reported
to the Company by the customer over the remaining term of the agreement, and
$87,500 of deferred sales related to software license rights sold to the
customer that is being amortized over the six-year term of the contract.
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, and
related interpretations. 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. Employee stock options
have not been granted nor have any employee stock awards occurred; therefore,
no employee stock-based compensation has been recognized in the accompanying
financial statements nor would there have been any employee stock-based
compensation using the fair value method to value grants or awards.
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. Under SFAS No. 123, stock-based compensation is
determined as the fair value of the equity instruments issued. 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. Stock-based
compensation to non-employees totaled $424,267.
7
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2004, the Company has a stock-based employee compensation plan,
which is described more fully in Note 7. As of March 31, 2004 no stock options
had been granted or were outstanding.
Basic and Diluted Loss Per Share - Basic and diluted loss per share is
computed by dividing net loss by the weighted-average number of common shares
outstanding during the period. At March 31, 2004, there were outstanding
stock equivalents to purchase 650,000 shares of common stock that were not
included in the computation of diluted net loss per share as their effect
would have been anti-dilutive, thereby decreasing the net loss per common
share.
Restatement of Financial Statements - The Company has restated its financial
statements as of March 31, 2004 and for the period from February 24, 2004
(date of emergence from bankruptcy) through March 31, 2004 as follows:
As Previously Effect of
Reported Restatement As Restated
------------------------------------------------------------------------------
For the Period from February 24, 2004
(Date of Emergence from Bankruptcy)
through March 31, 2004
General and administrative expense $ 514,042 $ (645) $ 513,397
Interest expense 99,881 1,457,160 1,557,041
Net loss (598,173) (1,456,515) (2,054,688)
Basic and diluted loss per share $ (0.04) $ (0.09) $ (0.13)
------------------------------------------------------------------------------
As of March 31, 2004
Property and equipment $ 1,698,000 $ (449,268) $ 1,248,732
Patents and proprietary technology 6,736,437 (4,813,274) 1,923,163
Goodwill - 5,356,414 5,356,414
Total assets 8,508,575 96,954 8,605,529
Additional paid-in capital 8,340,186 1,553,469 9,893,655
Deficit accumulated during the
development stage $ (598,173) $ (1,456,515) $ (2,054,688)
------------------------------------------------------------------------------
The following is a summary of the significant reasons for the restatement:
The Company has changed the estimated amount of a beneficial conversion option
in the amount of $1,500,000, as compared to the previously estimated amount of
$42,840, on the conversion of a note payable on March 31, 2004.
The Company estimated a reorganization value of $5,634,000 based on the
negotiated price at which creditors were willing to convert their claims into
common stock, and allocated that value to the net assets based on their
estimated fair values. As of December 31, 2004, an independent valuation
determined that the reorganization value consisted of patents valued at
$279,147 and goodwill valued at $5,356,414. The original allocation was
restated to reflect the estimated appraised values.
The acquisition of equipment and proprietary technology from Flexpoint
Holdings, LLC on March 31, 2004 has been reallocated based on an independent
appraisal of the estimated fair value of the assets acquired.
8
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CONFIRMATION OF PLAN OF REORGANIZATION
On February 24, 2004, the Bankruptcy Court confirmed the Company's plan of
reorganization. The confirmed plan provided for the following:
Reverse Stock Split - The shares of common stock outstanding prior to the
confirmation were reverse split on a 1-for-7 basis. All shares amounts are
presented in the accompanying financial statements on a post-split basis.
Cancellation of Common Stock - The Company cancelled 714,286 shares of common
stock issued to an officer during 2001, as provided for by the confirmed plan
of reorganization.
Convertible Debentures Payable - Convertible debentures of $3,681,280 were
forgiven in exchange for the Company agreement not to contest the issuance of
7,142,087 shares of common stock that were issued to Aspen Capital based upon
the exercise of warrants prior to the bankruptcy petition.
Convertible Promissory Note to Former Employee - The Company converted
$194,620 of claims that included accounts payable, accrued wages and a
convertible promissory note to a former employee of $20,000, into 377,682
shares of common stock at a conversion price of $0.5153 per share.
Note Payable to Stockholder - The Company exchanged $1,230,218 of notes
payable to a stockholder for 2,387,382 shares of common stock at a conversion
price of $0.5153 per share.
Lease Obligation - A lease obligation of $574,255 was exchanged for 1,114,410
shares of common stock at a conversion price of $0.5153 per share.
Delphi Automotive Systems Supply Agreement - Flexpoint 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. The Company believes that Delphi was not entitled to
terminate the agreement or had not followed the appropriate contractual
provisions for termination of the Supply Agreement. As a result of the
termination, the Company was required to significantly reduce its workforce
and its operating costs. In addition, the Company sought protection under the
United States federal bankruptcy laws.
The Company believes it was damaged and has offsets to the loan from Delphi.
Accordingly, the note payable was reduced to zero.
Litigation under the Delphi Supply Agreement remains under the jurisdiction of
the bankruptcy court and the outcome of the future legal proceedings between
the Company and Delphi is uncertain. However, on February 24, 2004, the
Company concluded that the likelihood that this contingency will require that
the Company transfer assets to Delphi is remote, and therefore, the liability
was accounted for as extinguished with the resulting gain included in gain on
forgiveness of debt in the pre-confirmation consolidated statements of
operations.
9
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Convertible Note Payable - The plan of reorganization provided for the Company
to draw upon a convertible note payable. During March 2004, the Company
borrowed $1,343,334, net of origination fees of $56,666, from the note. The
terms of the convertible note payable provide that interest accrues on
outstanding balance at 10% per annum, and that all amounts become due within
three years of the date of the agreement. Proceeds of $698,000 were used for
the acquisition of assets from Flexpoint Holdings, LLC, as described in Note
3, and proceeds of $102,000 were used to repay a short-term advance from
Flexpoint Holdings, LLC. The Company borrowed $483,334 under the note and
$60,000 was borrowed from the direct payment to settle certain secured and
priority claims determined in the reorganization plan and to pay operating
expenses. The $1,400,000 balance under the note payable was converted into
common stock on March 31, 2004 at the rate of $0.50 per share resulting in the
issuance of 2,800,000 shares of common stock. At March 31, 2004, $100,000
remains available for borrowing under the terms of the note payable. If
borrowed, the note is convertible in to common stock at the rate of $0.50 per
share.
Although the Company received proceeds under the note of $1,343,334 through
March 31, 2004, principal due under the note was $1,400,000, which resulted in
a discount to the note of $56,666. The terms of the convertible note payable
provided that interest accrued on the outstanding balance at 10% per annum and
that the principal and accrued interest were due three years from the date of
the agreement. As provided for in the plan of reorganization, the $1,500,000
total principal amount available under the note was convertible into 3,000,000
shares of common stock at $0.50 per share. The fair value of the common stock
at the date of reorganization was $1.00 per share, based on its average market
value for the three-day period before and after February 24, 2004, and
resulted in the lender receiving a $1,500,000 beneficial debt conversion
option under the conversion terms of the promissory note. The original
discount on the note and the discount from the beneficial conversion option
were amortized and recognized as interest expense through March 31, 2004 when
$1,400,000 of the note was converted into 2,800,000 shares of common stock.
NOTE 3 - FRESH START ACCOUNTING
In accordance with the requirements of SOP 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, the Company determined
that a change in control occurred in connection with its reorganization and
therefore the Company accounted for the reorganization using fresh-start
reporting. Accordingly, all assets of Flexpoint Sensor Systems, Inc. have been
restated to reflect their reorganization value, which approximates fair value
at the date of reorganization. Management estimated a reorganization asset
value of $5,637,612 based upon the negotiated price at which certain creditors
were willing to convert their claims into common stock. The Company obtained
an independent valuation which determined that the reorganization value
consisted of cash of $2,051, patents valued at $279,147 and goodwill valued at
$5,356,414.The patents have a weighted-average remaining life of 13.2 years
and are amortized on a straight-line basis with an average yearly amortization
of $21,732. Goodwill is not amortized; rather the Company evaluates the
carrying value of the goodwill to determine whether the carrying value should
reflect any impairment. No impairment was noted at March 31, 2004.
The following summarizes the effect of the plan of reorganization on the
Company's consolidated balance sheet, as of February 24, 2004, the date of
confirmation of the plan of reorganization:
10
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reorganized
As of Date of Confirmation Pre- Debt Exchange Balance
of Plan, February 24, 2004 Confirmation Discharge of Stock Fresh Start Sheet
------------------------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets - Cash $ 2,051 $ - $ - $ - $ 2,051
Patents 1,561 - - 277,586 279,147
Goodwill - - - 5,356,414 5,356,414
-----------------------------------------------------------------------------------------------------
Total Assets $ 3,612 $ - $ - $ 5,634,000 $ 5,637,612
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities Not Subject to
Compromise - Current
Accounts payable $ 244,642 $ (36,536) $ - $ - $ 208,106
Accrued liabilities 1,492 - - - 1,492
Deferred revenue 343,750 - - - 343,750
Short-term advance payable 102,000 - - - 102,000
Notes payable - related party 16,000 - - - 16,000
-----------------------------------------------------------------------------------------------------
Total Liabilities Not Subject
to Compromise - Current 707,884 (36,536) - - 671,348
-----------------------------------------------------------------------------------------------------
Liabilities Subject to Compromise 7,777,379 (7,777,379) - - -
-----------------------------------------------------------------------------------------------------
Stockholders' Equity (Deficit)
Preferred stock 1,080,426 - (1,080,426) - -
Common stock (old) 76,535 - (76,535) - -
Common stock (new) - 11,022 3,076 - 14,098
Additional paid-in capital 22,078,206 5,669,351 1,153,885 (23,949,276) 4,952,166
Deficit accumulated during the
development stage (31,716,818) 2,133,542 - 29,583,276 -
-----------------------------------------------------------------------------------------------------
Total Stockholders'
Equity (Deficit) (8,481,651) 7,813,915 - 5,634,000 4,966,264
-----------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity (Deficit) $ 3,612 $ - $ - $ 5,634,000 $ 5,637,612
=====================================================================================================
NOTE 4 - PROPERTY AND EQUIPMENT
On March 31, 2004, Flexpoint Sensor Systems, Inc. entered an asset purchase
agreement with Flexpoint Holdings, LLC, a company controlled by a shareholder,
to acquire equipment and proprietary technology with an aggregate fair value
of $4,302,643 in exchange for $265,000, the assumption of a $698,000
convertible note payable, and 1,600,000 shares of restricted common stock
valued at $1,931,309 or $1.21 per share. Flexpoint Holdings, LLC is a
holding company with the primary purpose to acquire and hold assets which one
of the Company's creditors caused to be seized during 2001 and sold at public
auction during 2002.
The acquisition of the assets of Flexpoint Holdings, LLC was not the purchase
of a business as Flexpoint Holdings, LLC had no operations. Accordingly, pro
forma financial information is not provided. The purchase price and the fair
values of the proprietary technology and equipment were established by
independent appraisals. The Company allocated the purchase price to the
property and equipment acquired and to the proprietary technology based on the
appraised fair values. The $1,408,334 excess of the appraised fair values of
the acquired assets over the fair value of the consideration paid was
allocated pro rata to reduce the values assigned to assets acquired. At March
31, 2004, the allocated value of the assets acquired was as follows:
------------------------------------------------------
Property and equipment $ 1,248,732
Proprietary technology 1,645,577
------------------------------------------------------
Net assets acquired $ 2,894,309
======================================================
11
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The equipment consists of manufacturing equipment to produce the Company's
product, and the technology rights consist of software algorithms that
interpret data provided by the Company's flexible sensor technology. The
technology has an estimated weighted-average useful life of 13.2 years.
NOTE 5 - NOTE PAYABLE - RELATED PARTY
The Company carries a $16,000 unsecured note payable to a shareholder with
interest stated at 10% with repayment terms requiring payment of the principal
and interest by December 31, 2004.
NOTE 6 - INCOME TAXES
There was no provision for, or benefit from, income tax during the period. The
components of the net deferred tax asset as of March 31, 2004 are as follows:
----------------------------------------------------------------
Operating loss carry forwards $ 9,327,783
Deferred license and royalty income 125,888
Patents and proprietary technology 103,540
Goodwill 1,997,942
----------------------------------------------------------------
Total Deferred Tax Assets 11,555,153
Valuation allowance (11,555,153)
----------------------------------------------------------------
Net Deferred Tax Asset $ -
================================================================
As a result of the confirmation of the bankruptcy plan, $7,813,915 in debt was
discharged. For tax reporting purposes, net operating loss carry forwards were
$25,007,462 at March 31, 2004. Although net operating losses begin to expire
in the year 2012 those carry forwards will be limited or unavailable, under
the tax laws, due to a change of greater than 50% in ownership of the Company
upon emergence from bankruptcy.
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 period from February 24, 2004 through March 31, 2004:
----------------------------------------------------------------
Tax at statutory rate (34%) $ (698,594)
Change in valuation allowance 766,399
State tax benefit, net of federal tax effect (67,805)
----------------------------------------------------------------
Provision for Income Taxes $ -
================================================================
NOTE 7 - STOCK OPTION PLAN
On April 1, 1995, the Board of Directors and shareholders adopted an Omnibus
Stock Option Plan (the "Plan"). Under the terms of the Plan, as amended in
October 1997, Flexpoint may grant options to employees, directors and
consultants to purchase up to 719,643 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. As of the date of the
confirmation of the plan of reorganization, all previously outstanding stock
options were cancelled. No stock options have been issued since the Company
emerged from bankruptcy.
12
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONSULTING AGREEMENT
On March 3, 2004, the Company entered into a twelve-month consulting agreement
with Summit Resource Group ("Summit") whereby Summit agreed to provide
consulting services for the Company related to investor relations, including
dealing with direct investor relations, broker/dealer relations and the
investing public. A 45-day written notice from either party is required to
terminate the agreement. In consideration for the consulting services, the
Company issued Summit 100,000 common shares and warrants to purchase an
additional 650,000 common shares. The warrants are exercisable for five years
from the date awarded at the following exercise prices: warrants to purchase
300,000 shares are exercisable at $0.70 per share and warrants to purchase
350,000 shares are exercisable at $0.80 per share. The Company granted Summit
certain registration rights with respect to the 650,000 common shares
underlying the warrants including an obligation for all related registration
costs.
The Company valued the issuance of 100,000 common shares to Summit at
$114,680, or $1.15 per share, based on the quoted market value of the stock on
the date of the agreement. The Company valued the warrants at $731,328,
estimated on the grant date using the Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate of 3.06%;
expected dividend yield of 0.0%; expected life of 5 years and estimated
volatility of 200%. The value of the warrants is being recognized as
consulting expense during the period from March 2004 through September 2004,
the period over which the warrants vest and resulted in recognizing $309,587
of consulting expense during the period ended March 31, 2004.
NOTE 9 - LEASE COMMITMENT
Effective March 31, 2004, the Company agreed to sub-lease offices and a
manufacturing facility in which the Company's acquired equipment is located.
The sublease expires in October 2004 with monthly lease payments of $6,500.
Total future minimum lease payments as of March 31, 2004 are $45,500.
13
In this report references to "Flexpoint Sensor," "we," "us," and "our" refer
to Flexpoint Sensor Systems, Inc. and its subsidiaries.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements and for this purpose
any statements contained in this report that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as "may," "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 and in the industries which we may participate;
competition in the sensor technology market, technological innovations by our
competitors within our market and failure by Flexpoint Sensor to successfully
develop business relationships.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Overview
Our Chapter 11 bankruptcy reorganization plan was confirmed by the bankruptcy
court on February 24, 2004 and effected on March 5, 2004. As a result,
Flexpoint Sensor is considered a new entity for financial reporting purposes.
We are a development stage company focused on obtaining necessary capital to
complete our production facility and re-starting operations following our
reorganization. The settlement of the creditor claims in the bankruptcy
reorganization enabled Flexpoint Sensor to emerge from Chapter 11 bankruptcy
with our technology intact and with financial backing to operate our business
in the short term.
We are engaged principally in designing, engineering and manufacturing sensor
technology and equipment using flexible potentiometer technology, which we
refer to as Bend Sensor technology. While we have recorded revenues of
$15,750 for the period from February 24, 2004 through March 31, 2004, we
currently do not have sufficient cash flow to finance our operations on an
on-going basis. We have relied upon confirmation of our bankruptcy
reorganization plan and proceeds from a convertible line of credit for our
short-term cash needs.
We acquired the assets of Flexpoint Holdings, LLC on March 31, 2004, which
allowed us to establish a production line in our new manufacturing facility.
(See Part II, Item 5, below) We have rehired previous senior managers who have
many years of experience with our products and industry. In March 2004 we
resumed our agreement with Ricochet Development and started fulfilling orders
for the Bend Sensor technology. We intend to commercialize and market
patented automotive applications of Bend Sensor technology in the coming
year.
Our primary challenge is to manage the timing of distribution and promotion of
our products. Our plan is to rehabilitate our operations to the point that
mass production and incorporation of our products into new model automobiles
will begin within two years. However, this will be subject to our ability to
market our products to customers who can exploit the potential of the patents
we own. We intend to primarily market our products to original equipment
manufacturers to create demand. We also intend to resume old relationships or
establish new ones.
Bankruptcy Reorganization Plan
The essence of our bankruptcy reorganization plan was to restructure our
equity stockholders by completing a
7-to-1 reverse stock split that was effective March 5, 2004. All share and
per share amounts presented in this quarterly report reflect the reverse
split. The reorganization plan resulted in discharged debt of $7,813,915,
which included the issuance of 13,822,331 shares of stock for creditor claims
and conversion of $1,400,000 of notes payable to Broad Investment Partners.
The reorganization plan provided for the cancellation of 714,286 shares of
common stock issued to an officer during 2001.
14
The following creditors' claims were satisfied by equity transactions in the
reorganization:
. Convertible debentures of $3,681,280 were forgiven in exchange for our
agreement not to contest the issuance of 7,142,087 shares issued to Aspen
Capital Resources, LLC, upon its exercise of warrants related to the
convertible debenture agreement.
. $194,620 of claims of former employees, which included accounts payable,
accrued wages and a $20,000 convertible promissory note, were converted
for 377,682 shares.
. 2,387,382 shares were exchanged for $1,230,218 of notes payable to a
shareholder.
. A lease obligation of $574,255 was exchanged for 1,114,410 shares.
Options, warrants or executory contracts for acquisition of any common shares
entered into prior to our petition for bankruptcy protection were cancelled
upon confirmation of the reorganization plan. Preferred stock and
super-voting preferred stock were also cancelled upon confirmation.
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. Flexpoint, Inc, our subsidiary, partnered with Delphi
Automotive Systems, a then subsidiary of General Motors ("GM"), to mass
produce a seat sensor system for a smart air bag system for GM automobiles.
Delphi advanced approximately $300,000 per month to our subsidiary, Flexpoint,
Inc., to supply our sensor products to GM. In July 1999 Delphi withdrew its
financial support of Flexpoint, Inc.'s operations, which was a primary factor
that lead to Flexpoint Sensor's bankruptcy. We believe that Delphi is
precluded by the terms of the agreement from any financial recovery due to its
breach of the agreement. Any litigation related to this claim will be
conducted under the supervision of the bankruptcy court. The bankruptcy court
will retain jurisdiction over our bankruptcy case until the litigation with
Delphi is complete and at that time we anticipate that the bankruptcy court
will enter a final discharge closing the Flexpoint Sensor bankruptcy case.
Liquidity and Capital Resources
For the next twelve months, management anticipates that we will rely on
revenues and private placements of our common stock to fund our on-going
operations. In addition, 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 formalized
only a few additional agreements since confirmation of our bankruptcy
reorganization plan and there can be no assurance that agreements will come to
fruition in the future or that a desired technological application can be
brought to market.
Operations. Net cash used in operating activities for the period from
February 24, 2004 through March 31, 2004 was $144,726. Net cash used in
investing activities was $266,521 with $265,000 of that amount related to the
payment for acquisition of equipment from Flexpoint Holdings LLC. We are
fulfilling orders for Bend Sensor technology and anticipate that on-going
negotiations with third parties may result in several technology agreements.
It is critical to our continued operations that we are successful in closing
these agreements.
Financing. Net cash provided by financing activities was proceeds of
$483,334 primarily from the $1.5 million convertible line of credit. During
March 2004, we drew approximately $1,343,000, net of origination fees of
approximately $57,000, from this line of credit. Of the amount drawn from the
line of credit, we used $698,000 to acquire the assets of Flexpoint Holdings,
LLC, and $102,000 was used to repay a short-term advance from Flexpoint
Holdings, LLC. We borrowed approximately $483,000 for operations and $60,000
was borrowed to settle certain secured and priority claims of the
reorganization plan. We had approximately $100,000 remaining available on
this line of credit.
The $1,400,000 amount drawn from the line of credit was converted into common
stock at $0.50 per share and resulted in the issuance of 2,800,000 shares to
Broad Investment Partners and its assignees in March 2004 as provided by the
reorganization plan. We initially placed 3,000,000 free trading shares in an
escrow account as part
15
of our reorganization plan for conversion of the credit line and 200,000
shares remained available for future conversion of debt related to this line
of credit. The terms of the line of credit provide that interest accrues on
the outstanding balance at 10% per annum, and all amounts become due within
three years of the date of the agreement.
Commitments and Contingencies
Our principal commitments consist of our total current liabilities, discussed
in more detail below in "Results of Operations," and an operating lease. We
are obligated to make monthly payments of $6,500 per month for the sublease of
office and manufacturing space in which our equipment is located. (See Part
II, Item 5, below for more details about the sublease.) The total future
minimum payments under this sublease as of March 31, 2004 were $45,000.
We have extinguished our contingent liability related to the Delphi creditor's
claim. We characterized the funds advanced to Flexpoint, Inc. by Delphi as a
contingent liability and accrued $1.7 million as of December 31, 2003.
However, as of March 31, 2004 management concluded that the likelihood that
this contingency will require us to transfer assets was remote and we
extinguished the contingent liability and included it in gain on forgiveness
of debt in the pre-confirmation consolidated statements of operations.
Off-balance Sheet Arrangements
None.
Results of Operations
The following discussions are based on the consolidated operations of
Flexpoint Sensor and its 90% owned subsidiaries, Sensitron, Inc. and
Flexpoint, Inc. The information should be read in conjunction with our
unaudited consolidated financial statements included in this report at Part I,
Item 1, above. The charts below present a summary of our unaudited
consolidated statement of operations for the period from February 24, 2004
through March 31, 2004 and further details are presented in our unaudited
consolidated financial statements and the accompanying notes.
Summary Operating Results for the Interim Period
from February 24, 2004 through March 31,2004
------------------------------------------------
Sales $ 15,750
General and administrative expenses (513,397)
Interest expense (1,557,041)
Net loss (2,054,688)
Net loss per share $ (0.13)
Sales for the period from February 24, 2004 through March 31, 2004 were
primarily from licensing fees and royalties and engineering services. General
and administrative expenses consisted of professional fees and consulting
expense. The consulting expense represented $424,267 of the general and
administrative expense and was related to the issuance of 100,000 shares of
common stock and partial vesting of warrants to purchase 650,000 shares to
Summit Resource Group in consideration for consulting services. (See Part II,
Item 2 and 5, below.)
Interest expense was primarily related to our convertible line of credit.
Although we received proceeds under the convertible note of $1,343,334 through
March 31, 2004, principal due under the note was $1,400,000, which resulted in
a discount to the note of $56,666. As provided for in the plan of
reorganization, the $1,500,000 total
16
principal amount available under the note was convertible into 3,000,000
shares of common stock at $0.50 per share. The fair value of the common stock
at the date of reorganization was $1.00 per share, based on its average market
value for the three-day period before and after February 24, 2004, and
resulted in the lender receiving a $1,500,000 beneficial debt conversion
option under the conversion terms of the promissory note. The original
discount on the note and the discount from the beneficial conversion option
were amortized and recognized as interest expense through March 31, 2004 when
$1,400,000 of the note was converted into 2,800,000 shares of common stock.
Summary Balance Sheet Information as of March 31, 2004
-------------------------------------------------------
Cash $ 74,138
Total assets 8,605,529
Total current liabilities 438,377
Accumulated deficit (2,054,688)
Total stockholders equity $ 8,167,152
Our total assets at March 31, 2004 included property and equipment valued at
$1,248,732, patents and proprietary technology of $1,926,245 and goodwill of
$5,356,414. Total current liabilities included accounts payable, accrued
liabilities, deferred revenue and notes payable to a related party. Deferred
revenue related to Sensitron's prepaid royalties and software license rights
sold to customers and amortized over the 6-year term of the agreements was
$337,500, or 77.0%, of total liabilities as of March 31, 2004.
Factors Affecting Future Performance
We have recorded a net loss since inception and may be unable to attain
or maintain profitability.
We are unable to fund our day-to-day operations with our revenues and must
obtain additional financing. In the past we have not been successful at
marketing our sensor products on the scale contemplated in the bankruptcy
reorganization plan and we 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.
Research and development may result in problems which may become
insurmountable to full implementation of production.
Customers may 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND ISSUER'S PURCHASES OF EQUITIES
Sales of Unregistered Securities
On March 3, 2004 we issued 100,000 restricted common shares and warrants to
purchase 650,000 common shares to Summit Resource Group in consideration for
investor relations consulting services. The shares were valued at $114,680,
or $1.15 per share, and the warrants were valued at $731,328 based on the
Black-Scholes option pricing model, or a fair value of $1.13 per share.
Warrants to purchase 150,000 shares at $0.70 vested at the execution of
17
the agreement, warrants to purchase 150,000 shares at $0.70 per share vest on
May 1, 2004, and warrants to purchase 350,000 shares at $0.80 per share vest
on September 1, 2004. The warrants have a five year term from the date they
are awarded. 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.
On March 5, 2004, pursuant to the bankruptcy reorganization plan, our board
authorized the issuance of an aggregate of 6,679,474 shares of common stock to
our creditors in satisfaction of debt valued at $2.0 million and for
conversion of a $1.4 million line of credit. We relied upon an exemption from
registration provided by Section 1145 of the Bankruptcy Code.
On March 31, 2004 we issued 1,600,000 shares valued at approximately
$1,931,309, or $1.21 per share, as partial payment to purchase the assets of
Flexpoint Holdings, LLC. 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.
ITEM 5. OTHER INFORMATION
New Manufacturing Facility
As part of the asset purchase agreement with Flexpoint Holdings, LLC, we are
using that company's office and manufacturing facility as our principal
offices. Flexpoint Holdings, LLC, subleased approximately 11,500 square feet
of office and manufacturing space. This facility has executive offices and
space for research and development, manufacturing and fulfillment. The
building is located in a business park in Draper, Utah consisting primarily of
high tech manufacturing firms and it is located adjacent to Utah's main
interstate.
Flexpoint Holdings, LLC, entered into a sublease with Ortho Development
Corporation for the office and manufacturing space on September 1, 2003. The
sublease has a term of one year, expiring September 30, 2004, and requires a
monthly payment of $6,500. We installed one full production line with the
capacity to produce over 50 million Bend Sensors units per year in this
facility and this property provides enough space to assemble a second
production line, if needed.
Asset Acquisition
We are providing the required disclosures related to our acquisition of the
assets of Flexpoint Holdings, LLC, in this report in lieu of filing a separate
Current Report on Form 8-K.
On March 31, 2004 Flexpoint Sensor entered into an asset purchase agreement
with Flexpoint Holdings, LLC, a company controlled by a shareholder of
Flexpoint Sensor. The agreement provided that Flexpoint Sensor acquire
substantially all of Flexpoint Holding's equipment and proprietary technology.
Flexpoint Holdings, LLC was a Utah limited liability company formed to acquire
and hold the assets which one of Flexpoint Sensor's creditor's caused to be
seized during 2001 and sold at public auction during 2002. Flexpoint Holdings
LLC was not a business and had no operations. Accordingly, pro forma
financial information was not provided.
The acquisition has been accounted for using the purchase method of
accounting. We agreed to pay $265,000 in cash, we assumed a $698,000
convertible note payable and issued 1,600,000 common shares valued at
$1,931,309 for assets with an aggregate value of $4,302,643. We acquired
$1,248,732 in property and equipment and $1,645,577 in proprietary technology.
The equipment consisted of manufacturing equipment to produce our Bend Sensor
products and the technology consisted of the software algorithms that
interpret data provided by the sensor technology. The excess of $1,408,334 of
the appraised value was allocated pro rata to reduce the values assigned to
the assets acquired.
Consulting Agreement
On March 3, 2004, Flexpoint Sensor entered into a consulting agreement with
Summit Resource Group. Summit
18
Resource Group agreed to provide consulting services related to investor
relations, including dealing with direct investor relations and broker/dealer
relations and the investing public. The term of the agreement is for a twelve
month period and the agreement may be terminated after the first 90 days by a
45-day written notice from either party. We agreed to pay Summit Resource
Group 100,000 restricted common shares, valued at $114,680, and warrants to
purchase 650,000 common shares, valued at $731,328. Warrants to purchase
150,000 shares at $0.70 vested at the execution of the agreement, warrants to
purchase 150,000 shares at $0.70 per share vest on May 1, 2004, and warrants
to purchase 350,000 shares at $0.80 per share vest on September 1, 2004. The
warrants expire five years after the vesting date and have demand
registrations rights. If the agreement is terminated by either party, then
the warrants to purchase 350,000 shares at $0.80 per share will vest pro rata
through the date of termination, as a percentage of the days outstanding from
March 3, 2004 through September 1, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Part I Exhibits
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
Part II Exhibits
2.1 Order Confirming Plan, dated February 24, 2004 (Incorporated by reference
to exhibit 2.1 for Form 8-K filed March 5, 2004)
2.2 Debtor's Plan of Reorganization, dated January 14, 2004 (Incorporated by
reference to exhibit 2.2 for Form 8-K filed March 5, 2004)
2.3 Asset Purchase Agreement between Flexpoint Sensor and Flexpoint Holdings,
LLC, dated March 31, 2004 (Filed May 3, 2004)
3.1 Certificate of Incorporation of Nanotech Corporation (Incorporated by
reference to exhibit 3.1 of Form 10-SB registration statement, filed June
17,1994.)
3.2 Certificate of Amendment to Certificate of Incorporation of Nanotech
Corporation (Incorporated by reference to exhibit 3.1 of Form 8-K, filed
April 9, 1998)
3.3 Certificate of Amendment to Certificate of Incorporation of Micropoint
Inc. (Filed May 3, 2004)
3.4 Restated bylaws of Flexpoint Sensor (Filed May 3, 2004)
10.1 Credit Line Agreement between Flexpoint Sensor and Broad Investment
Partners, LLC, dated January 14, 2004 (Incorporated by reference to
exhibit 10.1 for Form 8-K filed March 5, 2004)
10.2 Sublease Agreement between Flexpoint Holdings, LLC and Ortho Development
Corporation, dated September 1, 2003 (Filed May 3, 2004)
10.3 Consulting Agreement between Flexpoint Sensor and Summit Resource Group,
dated March 3, 2004 (Filed May 3, 2004)
21 Subsidiaries of Flexpoint Sensor Systems, Inc. (Incorporated by reference
to exhibit 21 of Form 10-KSB, filed February 18, 2004)
Reports on Form 8-K
On March 5, 2004, we filed a Current Report on Form 8-K, dated February 24,
2004, including items 1, 3, and 5 related to the confirmation of our
bankruptcy reorganization plan.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, who are duly
authorized.
FLEXPOINT SENSOR SYSTEMS, INC.
/s/ Clark M. Mower
Date: May 12, 2005 By: _______________________________________
Clark M. Mower
President, Chief Executive Officer and
Director
/s/ John A. Sindt
Date: May 12, 2005 By: _______________________________________
John A. Sindt
Secretary/Treasurer
Chairman of the Board
Principal Financial and Accounting Officer
20