UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended June 30, 2005
[ ] 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
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of July 14, 2005, Flexpoint Sensor Systems, Inc. had a total of 22,974,537
shares of common stock issued and outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements..............................................2
Index to financial Statements.....................................3
Item 2. Management's Discussion and Analysis or Plan of Operation........11
Item 3. Controls and Procedures..........................................16
PART II: OTHER INFORMATION
Item 5. Other Information................................................16
Item 6. Exhibits.........................................................17
Signatures................................................................18
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to our condensed
consolidated financial position as of June 30, 2005, the condensed
consolidated statements of operations for the three month periods ended June
30, 2005 and 2004, the six month period ended June 30, 2005, the interim
period from February 24, 2004 (the date of our emergence from bankruptcy)
through June 30, 2004, and the condensed consolidated statements of cash flows
and stockholders' equity for the six month period ended June 30, 2005 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. The results of operations for the six month period
ended June 30, 2005, are not necessarily indicative of results to be expected
for any subsequent period.
2
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
Index to Financial Statements
Page
Condensed Consolidated Balance Sheets (Unaudited) June 30, 2005
and December 31, 2004....................................................4
Condensed Consolidated Statements of Operations (Unaudited) for
the Three Months Ended June 30, 2005 and 2004, for the Six Months
Ended June 30, 2005, for the Period from February 24, 2004 (Date
of Emergence from Bankruptcy) though June 30, 2004 and for the
Cumulative Period from February 24, 2004 (Date of Emergence from
Bankruptcy) through June 30, 2005........................................5
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
for the Six Months Ended through June 30, 2005...........................6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2005, for the Period from February 24,
2004 (Date of Emergence from Bankruptcy) through June 30, 2004,
and for the Cumulative Period from February 24, 2004 (Date of
Emergence from Bankruptcy) through June 30, 2005.........................7
Notes to Condensed Consolidated Financial Statements........................8
3
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2005 2004
- ------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 2,801,003 $ 54,358
Accounts receivable 7,294 749
Prepaid expenses 8,398 -
- ------------------------------------------------------------------------------
Total Current Assets 2,816,695 55,107
- ------------------------------------------------------------------------------
Property and equipment, net of accumulated
depreciation of $128,087 and $47,695 1,266,347 1,311,139
Patents and proprietary technology, net of
accumulated amortization of $188,473 and $112,702 1,767,388 1,827,501
Deposit 6,500 6,500
Goodwill 5,356,414 5,356,414
- ------------------------------------------------------------------------------
Total Assets $ 11,213,344 $ 8,556,661
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 16,007 $ 116,378
Accrued liabilities 43,578 20,470
Notes payable - related party 1,000 410,958
- ------------------------------------------------------------------------------
Total Current Liabilities 60,585 547,806
- ------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock - $0.001 par value;
1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock - $0.001 par value;
100,000,000 shares authorized;
22,974,537 shares and 19,998,202
shares issued and outstanding 22,974 19,998
Additional paid-in capital 13,745,550 11,768,255
Warrants outstanding 2,658,265 731,328
Deficit accumulated during the development stage (5,274,030) (4,510,726)
- ------------------------------------------------------------------------------
Total Stockholders' Equity 11,152,759 8,008,855
- ------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 11,213,344 $ 8,556,661
==============================================================================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the
For the Cumulative
Period from Period from
February 24, February 24,
2004 (Date of 2004 (Date of
For the Three Months Emergence from Emergence from
Ended June 30 For the Six Bankruptcy) Bankruptcy)
--------------------------- Months Ended through through
2005 2004 June 30, 2005 June 30, 2004 June 30, 2005
- -------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Revenue $ 2,088 $ 39,750 $ 18,635 $ 55,500 $ 364,068
Cost of revenue (7,418) (47,405) (89,597) (47,405) (176,202)
Amortization of proprietary
technology (32,026) (32,348) (64,054) - (160,136)
- -------------------------------------------------------------------------------------------------------
Gross Profit (Loss) (37,356) (40,003) (135,016) 8,095 27,730
General and administrative expense
(including non-cash compensation) (379,141) (524,505) (647,045) (1,070,250) (3,826,962)
Interest expense (1,109) (1,377) (7,231) (1,558,418) (1,576,054)
Interest income 24,526 - 29,044 - 29,044
Other income 972 - 1,944 - 1,944
Gain (loss) on forgiveness of debt (5,000) - (5,000) - 70,268
- -------------------------------------------------------------------------------------------------------
Net Loss $ (397,108) $ (565,885) $ (763,304) $ (2,620,573) $ (5,274,030)
=======================================================================================================
Basic and Diluted Loss Per Share $ (0.02) $ (0.03) $ (0.03) $ (0.15)
========================================================================================
Basic and Diluted Weighted-Average
Common Shares Outstanding 22,974,537 18,691,026 22,208,079 18,026,460
========================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
Deficit
Accumulated
Additional During the Total
Common Stock Paid-in Warrants Development Stockholders'
Shares Amount Capital Outstanding Stage Equity
- ------------------------------------------------------------------------------------------------------------
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Balance - December 31, 2004 19,998,202 $ 19,998 $ 11,768,255 $ 731,328 $ (4,510,726) $ 8,008,855
Private placement offering
of common stock at $0.70
per share and warrants at
$0.68 per warrant for cash,
net of $347,294 cash offering
costs and 140,000 common
shares and 140,000 warrants,
January through March 2005 2,976,335 2,976 1,977,295 1,926,937 - 3,907,208
Net loss - - - - (763,304) (763,304)
- ------------------------------------------------------------------------------------------------------------
Balance - June 30, 2005 22,974,537 $ 22,974 $ 13,745,550 $ 2,658,265 $ (5,274,030) $ 11,152,759
============================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
For the Period Cumulative
from Period from
February 24, February 24,
2004 (Date of 2004 (Date of
For the Six Emergence from Emergence from
Months Ended Bankruptcy) Bankruptcy)
June 30, through through
2005 June 30, 2004 June 30, 2005
- ----------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Cash Flows from Operating Activities:
Net loss $ (763,304) $ (2,620,573) $ (5,274,030)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 80,392 15,899 128,087
Amortization of patents and proprietary technology 75,771 32,348 188,473
Issuance of common stock and warrants for services - 709,780 2,622,008
Expenses paid by increase in convertible note payable - 60,000 60,000
Amortization of discount on note payable - 1,556,666 1,556,666
Changes in operating assets and liabilities:
Accounts receivable (6,545) (33,500) (7,294)
Accounts payable (100,372) 1,466 (192,100)
Accrued liabilities 23,108 72,741 42,086
Deferred revenue - (12,500) (343,750)
Prepaid Expenses (8,398) - (8,398)
Other assets - - (6,500)
- -----------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (699,348) (217,673) (1,234,752)
- -----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for the purchase of equipment (35,599) (15,693) (145,701)
Payments for patents (15,658) (5,864) (31,137)
Payment for acquisition of equipment and proprietary
technology from Flexpoint Holdings, LLC - (265,000) (265,000)
- -----------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (51,257) (286,557) (441,838)
- -----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock
and warrants 3,907,208 - 3,907,208
Principal payments on notes payable
- related parties (409,958) (13,000) (460,300)
Proceeds from notes payable - related parties - - 445,300
Proceeds from borrowings under convertible
note payable - 583,334 583,334
- -----------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 3,497,250 570,334 4,475,542
- -----------------------------------------------------------------------------------------------
Net Change in Cash 2,746,645 66,104 2,798,952
Cash at Beginning of Period 54,358 2,051 2,051
- -----------------------------------------------------------------------------------------------
Cash at End of Period $ 2,801,003 $ 68,155 $ 2,801,003
===============================================================================================
Supplemental Cash flow Information:
Interest paid $ 7,231 $ - $ 27,522
===============================================================================================
Supplemental Schedule of Noncash Investing and Financing Activities - Note 5
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Interim Financial Statements - The accompanying unaudited condensed
consolidated financial statements include the accounts of Flexpoint Sensor
Systems, Inc. and its subsidiaries (the "Company"). These financial
statements are condensed and, therefore, do not include all disclosures
normally required by accounting principles generally accepted in the United
States of America. These statements should be read in conjunction with the
most recent annual financial statements of Flexpoint Sensor Systems, Inc. for
the year ended December 31, 2004, included in the Company's Form 10-KSB filed
with the Securities and Exchange Commission on June 30, 2005. In particular,
The Company's significant accounting principles were presented as Note 1 to
the Consolidated Financial Statements in that Report. In the opinion of
management, all adjustments necessary for a fair presentation have been
included in the accompanying condensed consolidated financial statements and
consist of only normal recurring adjustments. The results of operations
presented in the accompanying condensed consolidated financial statements are
not necessarily indicative of the results that may be expected for the full
year ending December 31, 2005.
Nature of Operations - Flexpoint Sensor Systems, Inc. (the Company), located
in Salt Lake City, Utah, is a development stage company engaged principally in
designing, engineering, and manufacturing sensor technology and equipment
using flexible potentiometer technology. The Company is in the development
stage as planned operations have not commenced. Development stage activities
primarily include acquiring equipment and technology, organizing activities,
obtaining financing and seeking manufacturing contracts.
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. Diluted loss per share is computed by dividing
net loss by the weighted-average number of common shares and common
equivalents outstanding during the period. At June 30, 2005, there were
warrants outstanding to purchase 3,626,335 shares of common stock and at June
30, 2004 there were warrants outstanding to purchase 650,000 shares of common
stock. These warrants were not included in the computation of diluted loss
per share as their effect would have been anti-dilutive, thereby decreasing
loss per common share.
Recent Accounting Pronouncements - In December 2004, the FASB issued Statement
No. 123 (Revised 2004), Share-Based Payment ("Statement 123(R)"). Statement
123(R) revises Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123(R) requires the recognition of the cost of employee services
received in exchange for stock options and awards of equity instruments based
on the grant-date fair value of such options and awards, over the period they
vest. Under the options for adoption available under Statement 123(R) as
modified by the securities and exchange commission, the Company has determined
to adopt Statement 123(R) on the modified-prospective basis beginning on
January 1, 2006, which will result in the recognition of the remaining
unamortized grant-date fair value compensation, at January 1, 2006 over the
remaining vesting period.
NOTE 2 - NOTES PAYABLE - RELATED PARTY
The Company had unsecured notes payable to shareholders with interest stated
at 12% and repayment terms which required payment of the principal and
interest by December 31, 2004. Under amended terms, payment of the entire
principal and interest was due to the shareholders by the extended due date of
March 31, 2005. On December 31, 2004 the principal balance of the note was
$410,958. During the six month period ended June
8
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
30, 2005, the Company repaid $409,958 of the total balance due. Interest
expense for the six months ended June 30, 2005, related to the notes payable
was of $7,231.
NOTE 3 - CONVERTIBLE NOTE PAYABLE
Under the Company's plan of reorganization, which was confirmed on February
24, 2004, 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 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 and assumed amounts due under the note
of $1,443,334 through March 31, 2004, the principal amount due under the note
was $1,500,000, which resulted in a discount on 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 recognized as interest
expense through March 31, 2004 when the note was converted into 3,000,000
shares of common stock.
NOTE 4 - PRIVATE PLACEMENT
From January 25, 2005 through March 31, 2005, the Company issued 2,836,335
shares of common stock and warrants to purchase 2,836,335 shares of common
stock at $3.00 per share from October 1, 2005 through September 30, 2007 in a
private placement offering. The Company realized proceeds of $3,907,208, net
of $347,294 of cash offering costs. The Company also issued the placement
agent 140,000 shares of common stock and 140,000 warrants exercisable at $3.00
per share for the agent's services in connection with the offering. The fair
value of the warrants issued was $4,047,816 as determined by the Black-Scholes
pricing model with the following assumptions: risk free interest rate of
4.58%, volatility of 200% and an estimate life of two years. The net proceeds
were allocated to the shares of common stock and the warrants based upon their
relative fair values and resulted in allocating $1,980,271 to the shares of
common stock and $1,926,937 to the warrants.
An investor may not exercise their warrants if the exercise of the warrant
would cause the investor to own more than 4.99% of the then issued and
outstanding common stock of the Company. If the closing bid price of the
Company's common stock is greater than $4.00 per share for five consecutive
trading days after October 1, 2005, the Company may call the warrants, in
whole or in part, for no consideration, which would require the investor to
either exercise the warrants within fifteen trading days or forfeit the
warrants.
9
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITES
On March 31, 2004, the Company issued 1,600,000 shares of common stock valued
at $1,931,309, assumed a $698,000 convertible note payable and paid cash of
$265,000 to Flexpoint Holdings, LLC, a company controlled by a shareholder, in
exchange for equipment valued at $1,248,732 and proprietary technology value
at $1,645,577. On March 31, 2004, a $1,500,000 convertible note payable was
converted into 3,000,000 shares of common stock.
10
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 OR PLAN OF OPERATIONS
EXECUTIVE OVERVIEW
We are a development stage company engaged principally in designing,
engineering and manufacturing flexible potentiometer technology that we call
Bend Sensor technology. We are primarily involved in development stage
activities of acquiring equipment and technology, organizing our business
operations, obtaining funding and seeking manufacturing contracts.
While we recorded revenue of $18,635 for the six month period ended June 30,
2005 (the "2005 six month period"), we recorded an accumulated deficit of
$5,274,030 at June 30, 2005. During the first quarter of 2005 we completed a
private placement offering that provided proceeds of approximately $3.9
million. Management anticipates that the proceeds from the private offering
will fund operations for approximately the next twelve months. We may require
additional financing and will likely rely on debt financing, loans from
related parties, and private placements of our common stock for additional
funding.
During the 2005 six month period a new management team began to evaluate our
business plan and direct changes for growth of our business operations. We
have added engineering personnel and are in the process of adding to our sales
and manufacturing departments. We are also manufacturing and shipping our
Bend Sensor products for non-automotive applications. Management continues
its efforts to negotiate automotive contracts and has met with automotive
suppliers and manufacturers in Europe and in the United States, but we have
not entered into a major contract for the sale of our products as of the date
of this filing.
Finalizing a major contract with a customer remains our greatest challenge.
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 revenues or that we will become profitable within the
next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Our revenues are not to a level to support our operations. Net cash used by
operating activities was $699,348 for the 2005 six month period compared to
net cash used for by operating activities of $217,673 for the period from our
date of emergence from bankruptcy, February 24, 2004, through June 30, 2004
(the "2004 interim period"). During the first quarter of 2005 we conducted a
private offering to raise funds for operations. As a result of the private
offering, at June 30, 2005, we had $2,801,003 in cash.
We intend to use revenues and our cash to purchase and install equipment and
develop our QS-9000 certified
11
facility. QS-9000 is shorthand for "Quality System Requirements QS-9000." It
is a common supplier quality standard for DaimlerChyrsler Corporation, Ford
Motor Company and General Motors Corporation. QS-9000 is based on the 1994
edition of ISO 9001, but it contains additional requirements that are
particular to the automotive industry.
For the 2005 six month period net cash used in investing activities was
$51,257 and was primarily related to the purchase of equipment and patents.
For the 2004 interim period net cash used in investing activities was
$286,557, with $265,000 of that amount related to the acquisition of equipment
and proprietary technology from Flexpoint Holdings, LLC in March 2004. The
equipment acquired consisted of manufacturing equipment to produce our Bend
Sensor products and the technology acquired consisted of the software
algorithms that interpret data provided by the sensor technology.
As we enter into new technology agreements in the future, 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.
FINANCING
For the 2005 six month period net cash provided from financing activities was
$3,497,250, with $3,907,208 representing net proceeds from the private
placement. In this private placement we issued an aggregate of 2,836,335
units to purchasers and 140,000 units were issued to the placement agent.
Each unit consisted of one share and one warrant to purchase one share at an
exercise price of $3.00. If all of the warrants issued in the private
placement are exercised, then we may realize an additional $8,509,005, based
on an exercise price of $3.00 per warrant. Except for the "call" provision,
the warrant holders have total discretion as to when or if the warrants are
exercised. The "call" provision requires that if the closing bid price of our
common stock is greater than $4.00 per share for five consecutive trading days
after October 1, 2005 and during the exercise term of the warrant, then we
have the right to call the warrant in whole or in part, forcing the investor
to exercise the warrant within fifteen trading days or the warrant is
forfeited. We cannot guarantee that the price of our common stock will reach
$4.00 and, in that case, the warrant holders will determine when and if the
warrants are exercised.
For the 2004 interim period net cash provided by financing activities was
$570,334 and was primarily related to proceeds from borrowings under a
convertible line of credit we executed as part of our bankruptcy
reorganization. We relied on this $1.5 million convertible line of credit from
Broad Investment Partners to fund our operations after bankruptcy. During
March 2004, we drew $1,443,334 from this line of credit, which resulted in a
discount to the note of $56,666. Of the amount drawn from the line of credit,
we assumed debt of $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 $583,334 from the credit line for operations and $60,000 was
borrowed from the credit line to settle certain secured and priority claims of
the reorganization plan.
Management anticipates that the proceeds from our private placement will fund
our operations in the short term, but we may still require debt financing,
notes from related parties, and private placements of our common stock to fund
the expansion of our operations.
COMMITMENTS AND CONTINGENCIES
Our principal commitments at June 30, 2005, consist of an operating lease and
our total current liabilities of $60,585, discussed in more detail below in
"Results of Operations." The operating lease has average monthly payments of
$8,718, including common area maintenance and a 2% annual increase. The total
future minimum
12
payments under this lease are $497,710 as of December 31, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
None.
RESULTS OF OPERATIONS
The following discussions are based on the unaudited condensed consolidated
operations of Flexpoint Sensor and its subsidiaries and should be read in
conjunction with our financial statements included in this report at Part I,
Item 1, above.
SUMMARY OPERATING RESULTS
Interim period
Three month Three month Six month from 2/24/04
period ended period ended period ended through
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Revenue $ 2,088 $ 39,750 $ 18,635 $ 55,500
Cost of revenue (7,418) (47,405) (89,597) (47,405)
Amortization of
proprietary technology (32,026) (32,348) (64,054) -
Gross profit (loss) (37,356) (40,003) (135,016) 8,095
General and
administrative expense (379,141) (524,505) (647,045) (1,070,250)
Interest expense (1,109) (1,377) (7,231) (1,558,418)
Interest income 24,526 - 29,044 -
Other income 972 - 1,944 -
Gain (loss) on
forgiveness of debt (5,000) - (5,000) -
Net loss (397,108) (565,885) (763,304) (2,620,573)
Net loss per share $ (0.02) $ (0.03) $ (0.03) $ (0.15)
Our revenues for all periods were primarily from licensing fees and royalties,
and engineering services. 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.
Our revenues have decreased in the 2005 periods compared to the 2004 periods
and cost of revenue consistently
13
exceeds our revenues. Cost of revenue was primarily related to materials and
labor associated with product sales and customer prototype development.
General and administrative expenses for all periods consisted of professional
fees, consulting expense and patent amortization. For the 2004 interim period
general and administrative expense included consulting expense of $285,513
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 the interest on loans. For the 2004
interim period $1,500,000 of the interest expense was the result of the
beneficial conversion option of the $1.5 million convertible line of credit.
In March and May 2004 the $1,500,000 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 3,000,000 shares of common stock to Broad
Investment Partners and its assignees. The conversion right was granted on
the date we emerged from bankruptcy when our common stock was trading at an
average $1.00 per share. We considered the difference between the conversion
right and market value of our common stock to be a beneficial conversion
option for which we recorded a $1,500,000 charge to operations.
Interest income for the 2005 periods was related to the interest from bank
accounts.
As a result of the above, we recorded net losses for all periods.
SUMMARY BALANCE SHEET INFORMATION
The chart below presents a summary of our balance sheet at June 30, 2005 and
December 31, 2004. Further details are presented in our unaudited financial
statements included in this report at Part I, Item 1, above.
June 30, 2005 December 31, 2004
-------------- -----------------
Cash $ 2,801,003 $ 54,358
Total current assets 2,816,695 55,107
Total Assets 11,213,344 8,556,661
Total current liabilities 60,585 547,806
Deficit accumulated during (5,274,030) (4,510,726)
the development stage
Total stockholders equity $ 11,152,759 $ 8,008,855
Cash increased at June 30, 2005, primarily as a result of the proceeds from
our private placement. Our total assets at June 30, 2005, included total
current assets of $2,816,695, property and equipment valued at $1,266,347,
patents and proprietary technology of $1,767,388, goodwill of $5,356,414, and
a deposit of $6,500.
Total current liabilities at June 30, 2005, decreased from $547,806 at
December 31, 2004 to $60,585 and included accounts payable of $16,007, accrued
liabilities of $43,578, and notes payable to related parties of $1,000.
Factors Affecting Future Performance
You should consider carefully the following risk factors and other information
in this report before investing in our common stock.
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We have a history of losses and may never become profitable.
We are unable to fund our day-to-day operations from revenues. We anticipate
proceeds from our recent private placement will fund the development of a
QS-9000 manufacturing facility. However, we anticipate that sales will not
increase until late 2005 or early 2006. In addition, if we decide to expand
our business activities outside the automotive market in 2005, we anticipate
needing more than approximately $1,000,000 in additional funding. The lack of
revenues or funding may cause us to delay planned growth or the execution of
our business plan.
We may not have adequate experience to successfully manage
anticipated growth.
We may not be equipped to successfully manage any future periods of rapid
growth or expansion, which could be expected to place a significant strain on
our managerial, operating, financial and other resources. Our future
performance will depend, in part, on our ability to manage growth effectively,
which will require us to:
.. improve existing and implement new financial controls and systems,
management information systems, operating, administrative, financial and
accounting systems and controls,
.. maintain close coordination among engineering- programming, accounting,
finance, marketing, sales and operations; and
.. attract and retain additional qualified management, technical and
marketing personnel. There is intense competition for management,
technical and marketing personnel in our business.
The loss of the services of any of our key employees or our failure to attract
and retain additional key employees could have a material adverse effect on
our ability to continue as a going concern.
We may not have adequate manufacturing capacity to meet anticipated
manufacturing.
We have completed installation of our first production line. Based on
projected orders under the current and anticipated agreements, we will need to
complete a second production line and have it installed and approved in 2006.
The second manufacturing line is expected to result in increased manufacturing
capacity and manufacturing efficiencies. We are currently on schedule to
complete the line by the estimated date. However, we cannot assure you that
we will successfully complete the second production line, that the production
lines will produce product in the volumes required, or that the production
lines will satisfy the requirements of our customers.
Because we are significantly smaller than the majority of our
competitors, we may lack the financial resources needed to capture
increased market share.
The market for sensor devices is extremely competitive, and we expect that
competition will intensify in the future. Our primary competitors in the
related sensor markets are International Electronics and Engineering, Siemens,
Robert Bosch Corporation, Denso, Breed Technologies, TRW, Delphi, Autoliv,
Takata and Temic. We believe that none of our competitors have a product that
is superior to our Bend Sensor technology at this time. However, many of our
competitors and potential competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships than we
do. These competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and devote substantially
more resources to developing new products and markets than we can. We cannot
assure you that we will be able to compete successfully against current or
future competitors or that competitive pressures we face will not materially
adversely affect our business, operating results or financial condition.
Our success is dependent on our intellectual property rights which are
difficult to protect.
Our future success depends on our ability to protect our intellectual
property. We use a combination of patents and other intellectual property
arrangements to protect our intellectual property. There is no assurance that
the protection provided by our patents will be broad enough to prevent
competitors from introducing similar products or that our patents, if
challenged, will be upheld by courts of any jurisdiction. Patent infringement
litigation, either
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to enforce our patents or defend ourselves from infringement suits, would be
expensive and, if it occurs, could divert our resources from other planned
uses. Patent applications filed in foreign countries and patents in these
countries are subject to laws and procedures that differ from those in the
U.S. and may not be as favorable to us. We also attempt to protect our
confidential information through the use of confidentiality agreements and by
limiting access to our facilities. There can be no assurance that our program
of patents, confidentiality agreements and restricted access to our facilities
will be sufficient to protect our confidential information from competitors.
Our products must satisfy governmental regulations in order to be
marketable
During the past several years, the automotive industry has been subject to
increased government safety regulation. Among other things, proposed
regulations from the National Highway Transportation and Safety Administration
would require automakers to incorporate advanced air bag technology into
vehicles beginning in 2005 with the phase-in to be completed by 2008. These
proposals call for upgraded air bag system performance tests for passenger
cars and light trucks. The new testing requirements are intended to improve
the safety of infants, children and out-of-position adults, and maximize the
protection of properly seated adults. The National Highway Transportation and
Safety Administration tests are similar to conditions that we have already
been using to test our Sensor Mat System and we believe that our Sensor Mat
System will meet the standards as proposed. There can be no assurance,
however, that our Sensor Mat System will meet the proposed National Highway
Transportation and Safety Administration standards or the standards will not
be modified. In addition, automakers may react to these proposals and the
uncertainty surrounding these proposals by curtailing or deferring investments
in new technology, including our Bend Sensor technology, until final
regulatory action is taken. We cannot predict what impact, if any, these
proposals or reforms might have on our financial condition and results of
operations.
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.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Secretary/Treasurer, who acts in the
capacity of our principal financial officer, evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on that evaluation, they concluded that our disclosure
controls and procedures were effective.
Also, these executive officers determined that there were no significant
changes made in our internal controls over financial reporting during the
second quarter of 2005 that have materially affected, or are reasonably likely
to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
New Officer
On July 12, 2005, John A. Sindt resigned as Secretary/Treasurer of the
company; but Mr. Sindt will continue to serve as the Chairman of the Board.
On the same date, our Board of Directors appointed B. Fred Atkinson, Jr. as
Secretary/Treasurer of the company.
Mr. Atkinson is 56 years old and has extensive experience in financial,
accounting and operational management
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for general corporate, retail and ISO 9000 and FDA manufacturing entities.
From 2004 through 2005, Mr. Atkinson was employed as Corporate Controller for
Wasatch Product Development. From 2001 to 2003 he was Controller and Finance
Manager for RP Sherrer West, Inc. And from 1998 to 2001 he was Controller and
Chief Financial Officer for Sorensen Medical, Inc. He received a Masters of
Business Administration in Finance from Concordia University.
ITEM 6. EXHIBITS
Part I Exhibits
No. Description.
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
Part II Exhibits
No. Description.
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 Lease Agreement between Flexpoint Sensor and F.G.B.P., L.L.C.,
dated July 12, 2004 (Incorporated by reference to exhibit 10.2
of Form 10-QSB, filed November 15, 2004, as amended)
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)
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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: July 15, 2005 By: __________________________________________
Clark M. Mower
President, Chief Executive Officer and
Director
/s/ B. Fred Atkinson, Jr.
Date: July 15, 2005 By: __________________________________________
B. Fred Atkinson, Jr.
Secretary/Treasurer and Comptroller
Principal Financial and Accounting Officer
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