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 June 30, 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 August 4, 2004, Flexpoint Sensor Systems, Inc. had a total of 18,798,202
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..........5
Unaudited Consolidated Statement of Cash Flows....................6
Notes to Unaudited Consolidated Financial Statements..............7
Item 2. Management's Discussion and Analysis.............................15
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................18
Signatures................................................................19
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.
We have restated our financial statements as of June 30, 2004 and for the
period from February 24, 2004 through June 30, 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.
. Amortization of patents and proprietary technology and depreciation of
equipment has also changed in the restatement in order to reflect the
reallocated values.
The financial information set forth below with respect to our consolidated
financial position as of June 30, 2004 and the consolidated statements of
operations, stockholders' equity and cash flows for the interim period from
February 24, 2004 through June 30, 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 Company in the Development Stage)
UNAUDITED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 68,155
Accounts receivable 33,500
Prepaid expenses 3,292
------------------------------------------------------------------------------
Total Current Assets 104,947
------------------------------------------------------------------------------
Property and equipment, net of $15,899 of accumulated depreciation 1,238,697
Patents and proprietary technology, net of $32,348
accumulated amortization 1,908,069
Goodwill 5,356,414
------------------------------------------------------------------------------
Total Assets $ 8,608,127
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 212,864
Accrued liabilities 74,233
Deferred revenue 331,250
Notes payable - related party 3,000
------------------------------------------------------------------------------
Total Current Liabilities 621,347
------------------------------------------------------------------------------
Stockholders' Equity
Common stock - $0.001 par value; 100,000,000 shares authorized;
18,798,718 shares issued and outstanding 18,798
Additional paid-in capital 9,993,455
Warrants outstanding 595,100
Deficit accumulated during the development stage (2,620,573)
------------------------------------------------------------------------------
Total Stockholders' Equity 7,986,780
------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 8,608,127
==============================================================================
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
For the Period From
For the Three February 24, 2004
Months Ended (date of emergence)
June 30, from bankruptcy)
2004 through June 30,2004
------------------------------------------------------------------------------
Sales $ 39,750 $ 55,500
Cost of Revenue (47,405) (47,405)
------------------------------------------------------------------------------
Gross profit (7,655) 8,095
General and administrative expense (556,853) (1,070,250)
Interest expense (1,377) (1,558,418)
------------------------------------------------------------------------------
Net loss $ (565,885) $ (2,620,573)
==============================================================================
Basic and Diluted Loss Per Share $ (0.03) $ (0.15)
==============================================================================
Basic and Diluted Weighted-Average
Shares Outstanding 18,691,026 18,026,460
==============================================================================
The accompanying notes are an integral part of these unaudited
consolidated financials statements.
4
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FEBRUARY 24, 2004 (DATE OF EMERGENCE FROM
BANKRUPTCY) THROUGH JUNE 30, 2004
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
Issuance for consulting
services, March 3, 2004,
$1.15 per share 100,000 100 114,580 - - 114,680
Stock based compensation
from 650,000 warrants
issued on March 3, 2004
for consulting services - - - 595,100 - 595,100
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
Conversion of note payable,
March 31, and May 19,
2004, $050 per share 3,000,000 3,000 1,497,000 - - 1,500,000
Net loss - - - - (2,620,573) (2,620,573)
--------------------------------------------------------------------------------------------------------
Balance - June 30, 2004 18,798,718 $ 18,798 $ 9,993,455 $ 595,100 $ (2,620,573) $ 7,986,780
========================================================================================================
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 24, 2004 (DATE OF EMERGENCE FROM
BANKRUPTCY) THROUGH JUNE 30, 2004
-----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (2,620,573)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 15,899
Amortization of intangible assets 32,348
Issuance of stock and warrants for services 709,780
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 receivable (33,500)
Prepaid expense (3,292)
Accounts payable 4,758
Accrued liabilities 72,741
Deferred revenue (12,500)
-----------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (217,673)
-----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for patents (15,693)
Purchase of equipment (5,864)
Payment for acquisition of equipment and proprietary technology
from Flexpoint Holdings, LLC (265,000)
-----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (286,557)
-----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Principal payments on related party debt (13,000)
Proceeds from borrowings under convertible note payable 583,334
-----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 570,334
-----------------------------------------------------------------------------------------------------
Net Change in Cash 66,104
Cash at Beginning of Period 2,051
-----------------------------------------------------------------------------------------------------
Cash at End of Period $ 68,155
=====================================================================================================
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, issuance of a $698,000
convertible note payable and a cash payment of $265,000 to Flexpoint Holdings, LLC, a
company controlled by a shareholder, in exchange for equipment and proprietary technology
with a fair value of $ 1,248,732 and $ 1,645,577 respectively.
The principal balance of a $1,500,000 convertible note payable was converted into 3,000,000
shares of common stock.
------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
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 June 30, 2004, its consolidated results
of operations and cash flows for the period from February 24, 2004 (date of
inception of the development stage) through June 30, 2004. The results of
operations for the period from February 24, 2004 through June 30, 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 $2,620,573 and used cash from
operations of $217,673 for the period from February 24, 2004 (date of
inception of development stage) through June 30, 2004. Through June 30, 2004,
the Company has accumulated a deficit during the development stage of
$2,620,573. 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.
7
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
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.
Accounts Receivable - The Company regularly reviews its accounts receivable
and makes provisions for potentially uncollectible balances. At June 30,
2004, management believed the Company had incurred no material impairments in
the carrying values of its accounts receivable.
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.
Depreciation expense was $982 for the period from February 24, 2004 (date of
inception of development stage) through June 30, 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 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 June 30, 2004, Sensitron, the Company's subsidiary, had deferred revenue
of $331,250, 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
$81,250 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.
8
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
At June 30, 2004, the Company has a stock-based employee compensation plan,
which is described more fully in Note 7. As of June 30, 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 June 30, 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 June 30, 2004 and for the period from February 24, 2004 (date
of emergence from bankruptcy) through June 30, 2004 as follows:
As Previously Effect of
Reported Restatement As Restated
------------------------------------------------------------------------------
For the Period from February 24,
2004 (Date of Emergence from
Bankruptcy) through June 30, 2004
Cost of Revenue $ 18,871 $ 28,534 $ 47,405
General and Administrative Expense 1,052,525 17,725 1,070,250
Interest Expense 101,258 1,457,160 1,558,418
Net Loss (1,117,154) (1,503,419) (2,620,573)
Basic and Diluted Loss Per Share $ (0.06) $ (0.09) $ (0.15)
------------------------------------------------------------------------------
As of June 30, 2004
Property and Equipment, net $ 1,702,882 $ (464,185) $ 1,238,697
Patents and Proprietary Technology 5,668,252 (3,760,183) 1,908,069
Goodwill - 5,356,414 5,356,414
Total Assets 8,558,077 50,050 8,608,127
Additional Paid-in Capital 8,439,986 1,553,469 9,993,455
Deficit Accumulated During the
Development Stage $ (1,117,154) $ (1,503,419) $ (2,620,573)
------------------------------------------------------------------------------
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 in 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 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.
9
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of equipment and proprietary technology from Flexpoint
Holdings, LLC on March 31, 2004 has been allocated based on an independent
appraisal of the estimated fair value of the assets acquired.
Amortization of patents and proprietary technology and depreciation of
equipment has also changed in the restatement in order to reflect the
reallocated values.
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 share 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.
10
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
Convertible Note Payable - Under the plan of reorganization, Broad Investment
Partners, LLC (the "lender") agreed to provide financing to Company under the
terms of a $1,500,000 convertible promissory note. Under the terms of the
note, the lender advanced $698,000 to Flexpoint Holdings, LLC, which debt was
assumed by the Company as an increase to the promissory note upon the
acquisition of assets from Flexpoint Holdings, LLC in March 2004, and the note
was increased in March 2004 by $102,000 that was used to repay a short-term
advance from Flexpoint Holdings, LLC. The Company borrowed $583,334 under the
note and the note was increased by $60,000 through direct payments by the
lender to settle certain secured and priority claims determined in the
reorganization plan and other operating expenses.
Although the Company received proceeds under the note of $1,443,334 through
March 31, 2004, principal due under the note was $1,500,000, which resulted in
a discount to the note of $56,666. The terms of the convertible note payable
provided that interest accrued on the $1,500,000 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 principal balance 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 and May 19, 2004 when the note was converted into 2,800,000
shares and 200,000 shares of common stock, respectively.
NOTE 3 - FRESH START ACCOUNTING
In accordance with the fresh start requirements of SOP 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code, 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 value of $5,634,000
based upon the negotiated price at which certain creditors were willing to
convert their claims into common stock. 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:
11
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
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
Patent, net 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
======================================================
12
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
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 had $16,000 of unsecured notes payable to a shareholder with
interest stated at 10% with repayment terms requiring payment of the principal
and interest by December 31, 2004. The Company paid $13,000 of payments on
the notes during April and May 2004, leaving a remaining balance of $3,000 as
of June 30, 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 June 30, 2004 are as follows:
----------------------------------------------------------------
Operating loss carry forwards $ 9,541,189
Deferred license and royalty income 123,556
Patents and proprietary technology 103,540
Goodwill 1,997,942
----------------------------------------------------------------
Total Deferred Tax Assets 11,766,227
Valuation allowance (11,766,227)
----------------------------------------------------------------
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
reduced to $25,580,000 at June 30, 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 June 30, 2004:
----------------------------------------------------------------
Tax at statutory rate (34%) $ (890,995)
Change in valuation allowance 977,474
State tax benefit, net of federal tax effect (86,479)
----------------------------------------------------------------
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.
13
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
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 approximately $1.15 per share, based on the estimated market
value of the stock issued on the date of the agreement, with the related
expense charged to operations. The Company valued the warrants granted to
Summit at $731,328, estimated on the date granted 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 expected 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 $595,100 of consulting expense during the period from February
24, 2004 through June 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 $5,500.
Total future minimum lease payments as of June 30, 2004 are $22,000.
14
In this report references to "Flexpoint Sensor," "we," "us," and "our" refer
to Flexpoint Sensor Systems, Inc. and its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission ("SEC") encourages companies to
disclose forward-looking information so that investors can better understand
future prospects and make informed investment decisions. This report contains
these types of statements. Words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "project," or "continue" or comparable terminology
used in connection with any discussion of future operating results or
financial performance identify forward-looking statements. You are cautioned
not to place undue reliance on the forward-looking statements, which speak
only as of the date of this report. All forward-looking statements reflect
our present expectation of future events and are subject to a number of
important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Overview
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. On February 24, 2004 our Chapter 11
bankruptcy reorganization plan was confirmed by the bankruptcy court 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 re-start operations following our
reorganization.
While we recorded sales of $39,750 for the three month period ended June 30,
2004 (the "2004 second quarter"); we recorded a net loss of $565,885 for the
2004 second quarter and a net loss of $2,620,573 from inception on February
24, 2004 through June 30, 2004. Our auditors have expressed doubt that we can
continue as a going concern because we do not have sufficient cash flow to
finance our operations on an on-going basis. We will require additional
financing to fund our short-term cash needs and we will likely rely on debt
financing and private placements of our common stock for additional funding.
During the second quarter of 2004 we have focused our efforts on renewing
contacts with old customers and developing new applications for our Bend
Sensor technology. Management believes these projects will provide the
quickest and best return on our investment with the least amount of risk
involved. While these new development projects are related to industrial
controls and medical applications, there has been a strong interest in our
sensor technology from the auto industry. Management is excited that we are
receiving contact from many companies that believe in our sensor technology as
a viable product for their industry.
During the second quarter of 2004 we established an operating production line
in our new manufacturing facility located in Draper, Utah. Management
believes that even though we are making positive strides forward with our
business plan, it is likely that significant progress may not occur for the
next six months to one year. Accordingly, we cannot guarantee that we will
realize significant progress or that the progress will result in
profitability.
Our primary challenge is to manage the timing of distribution and promotion of
our products. Our plan is to rehabilitate our operations within the next two
years to the point that we can offer mass production and incorporation of our
products into new applications. 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 will continue to reestablish old relationships and
establish new ones.
15
Liquidity and Capital Resources
For the next twelve months, management anticipates that we will rely on
revenues, debt financing 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.
Net cash used in operating activities for the period from February 24, 2004
through June 30, 2004 was $217,673. Net cash used in investing activities for
that interim period was $286,557, with $265,000 of that amount related to the
payment for acquisition of equipment from Flexpoint Holdings LLC in March
2004. We are fulfilling orders for Bend Sensor technology and it is critical
to our continued operations that we are successful in closing more orders.
Financing. We have relied on a $1.5 million convertible line of credit which
was part of our bankruptcy reorganization plan. Through March 2004, we drew
approximately $1,443,000 from the line of credit, which resulted in a discount
of the note of $56,666. 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 $583,000 for operations and $60,000 was borrowed to settle
certain secured and priority claims of the reorganization plan.
We initially placed 3,000,000 free trading shares in an escrow account for
conversion of the credit line as part of our reorganization plan. In March
2004 the $1,400,000 amount drawn from the line of credit was converted into
common stock at a rate of $0.50 per share. This conversion resulted in the
issuance of 2,800,000 shares of common stock to Broad Investment Partners and
its assignees. During May 2004 we borrowed the remaining $100,000 on the
convertible line of credit and the balance was immediately converted into
200,000 shares of common stock at a rate of $0.50 per share.
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. We also recognized
interest expense through May 19, 2004 when $100,000 of the note was converted
into 200,000 shares of common stock.
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.
Effective March 31, 2004 we were obligated to make monthly payments of $5,500
per month for the sublease of office and manufacturing space in which our
equipment is located. The total future minimum payments under this sublease
as of June 30, 2004 were $22,000.
Off-balance Sheet Arrangements - None.
Results of Operations
The following discussions are based on the consolidated operations of
Flexpoint Sensor, its 90% owned
16
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 three
month period ended June 30, 2004 and further details are presented in our
unaudited consolidated financial statements and the accompanying notes.
Summary Operating Results for the Three Months Ended June 30, 2004
------------------------------------------------------------------
Three months
ended
June 30, 2004
-------------
Sales $ 39,750
Cost of Revenue (47,405)
Gross profit (loss) (7,655)
General and administrative expenses (556,853)
Interest expense (1,377)
Net loss (565,885)
Net loss per share $ (0.03)
Revenue from the sale of a product is recorded at the time of shipment to the
customer. 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 contract are met and then the sale is recognized as
licensing royalty revenue over the remaining term of the contract.
Sales for the 2004 second quarter were primarily from licensing fees and
royalties and engineering services. General and administrative expenses
consisted of professional fees and consulting expense. Consulting expense
represented $285,513 of the general and administrative expense and was related
to the partial vesting of warrants to purchase 650,000 shares granted to
Summit Resource Group in consideration for public and investor relations
consulting services. Interest expense was primarily related to our $1.5
million convertible line of credit.
Summary Balance Sheet Information as of June 30, 2004
-----------------------------------------------------
Cash $ 68,155
Total assets 8,608,127
Total current liabilities 621,347
Accumulated deficit (2,620,573)
Total stockholders equity $ 7,986,780
Our total assets at June 30, 2004 included total current assets of $104,947,
property and equipment valued at $1,238,697, patents and proprietary
technology of $1,908,069, and goodwill of $5,356,414.
17
Total current liabilities included accounts payable, accrued liabilities,
deferred revenue and notes payable to a related party. Accounts payable of
$212,864 and deferred revenue of $331,250 represented the majority of total
current liabilities. Deferred revenues consisted of $250,000 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 $81,250 of deferred sales related to software
license rights sold to the customer that are being amortized over the six-year
term of the contract.
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 fulfill 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 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 (Incorporated by reference to exhibit 2.3 of
Form 10-QSB, 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. (Incorporated by reference to exhibit 3.3 of Form 10-QSB, filed May
3, 2004)
3.4 Restated bylaws of Flexpoint Sensor (Incorporated by reference to exhibit
3.4 of Form 10-QSB, 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 (Incorporated by reference to
exhibit 10.2 of Form 10-QSB, filed May 3, 2004)
18
10.3 Consulting Agreement between Flexpoint Sensor and Summit Resource Group,
dated March 3, 2004 (Incorporated by reference to exhibit 10.3 of Form
10-QSB, 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
None.
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 is 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
19