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 September 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 25, 2005, Flexpoint Sensor Systems, Inc. had a total of
22,992,887 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.......17
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 September 30, 2005, the condensed
consolidated statements of operations for the three month periods ended
September 30, 2005 and 2004, the nine month period ended September 30, 2005,
the interim period from February 24, 2004 (the date of our emergence from
bankruptcy) through September 30, 2004, and the condensed consolidated
statements of cash flows and stockholders' equity for the nine month period
ended September 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 nine month period ended September 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)
September 30, 2005 and December 31, 2004................................4
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended September 30, 2005 and 2004, for
the Nine Months Ended September 30, 2005, for the Period
from February 24, 2004 (Date of Emergence from Bankruptcy)
through September 30, 2004 and for the Cumulative Period
from February 24, 2004 (Date of Emergence from Bankruptcy)
through September 30, 2005..............................................5
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) for the Nine Months Ended September 30, 2005................6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2005, for the Period
from February 24, 2004 (Date of Emergence from Bankruptcy)
through September 30, 2004, and for the Cumulative Period
from February 24, 2004 (Date of Emergence from Bankruptcy)
through September 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)
September 30, December 31,
2005 2004
- ------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,400,671 $ 54,358
Accounts receivable 8,247 749
Prepaid expenses 2,600 -
- ------------------------------------------------------------------------------
Total Current Assets 2,411,518 55,107
Property and equipment, net of accumulated
depreciation of $164,285 and $47,695 1,273,276 1,311,139
Patents and proprietary technology, net of
accumulated amortization of $226,425 and
$112,702 1,741,925 1,827,501
Goodwill 5,356,414 5,356,414
Deposits 6,500 6,500
- ------------------------------------------------------------------------------
Total Assets $ 10,789,633 $ 8,556,661
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,852 $ 116,378
Accrued liabilities 83,196 20,470
Notes payable - related party 1,000 410,958
- ------------------------------------------------------------------------------
Total Current Liabilities 87,048 547,806
- ------------------------------------------------------------------------------
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; 22,992,887 shares and
19,998,202 shares issued and outstanding 22,992 19,998
Additional paid-in capital 13,777,276 11,768,255
Warrants outstanding 2,699,565 731,328
Deficit accumulated during the development stage (5,797,248) (4,510,726)
- ------------------------------------------------------------------------------
Total Stockholders' Equity 10,702,585 8,008,855
- ------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 10,789,633 $ 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 2004 (Date
of Emergence of Emergence
from from
For the Three Months Ended For the Nine Bankruptcy) Bankruptcy)
---------------------------- Months Ended through through
Sept 30, 2005 Sept 30, 2004 Sept 30, 2005 Sept 30, 2004 Sept 30, 2005
- ---------------------------------------------------------------------------------------------------------
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Revenue $ 3,063 $ 52,296 $ 21,698 $ 107,796 $ 367,131
Cost of revenue (11,268) (64,425) (100,865) (111,830) (187,470)
Amortization of patents and
proprietary technology (32,027) - (96,081) - (192,163)
- ---------------------------------------------------------------------------------------------------------
Gross Profit (Loss) (40,232) (12,129) (175,248) (4,034) (12,502)
General and administrative expense (500,679) (304,481) (1,147,724) (1,374,731) (4,327,641)
Interest expense - (707) (7,231) (1,559,125) (1,576,054)
Interest income 16,721 - 45,765 - 45,765
Other income 972 - 2,916 - 2,916
Gain on forgiveness of debt - - (5,000) - 70,268
- ---------------------------------------------------------------------------------------------------------
Net Loss $ (523,218) $ (317,317) $ (1,286,522) $ (2,937,890) $ (5,797,248)
=========================================================================================================
Basic and Diluted Loss Per Share $ (0.02) $ (0.02) $ (0.06) $ (0.16)
==========================================================================================
Basic and Diluted
Weighted-Average Common
Shares Outstanding 22,989,081 18,798,718 22,465,878 18,335,703
==========================================================================================
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 NINE MONTHS ENDED SEPTEMBER 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 $0.77
per share and 2,826,335
warrants at $0.61 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 1,977,294 1,926,937 - 3,907,207
Issued 30,000 warrants at
$1.38 per warrant for
services rendered July 2005 - - - 41,300 - 41,300
Issued common stock at $1.73
per share, as compensation
to director of Company for
services rendered, August
2005 18,350 18 31,727 - - 31,745
Net loss - - - - (1,286,522) (1,286,522)
- ----------------------------------------------------------------------------------------------------------
Balance- September 30, 2005 22,992,887 $ 22,992 $ 13,777,276 $ 2,699,565 $ (5,797,248) $ 10,702,585
==========================================================================================================
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 Cumulative
Period from Period from
February 24, February 24,
2004 (Date 2004 (Date
of Emergence of Emergence
For the Nine from from
Months Ended Bankruptcy) Bankruptcy)
September 30, through through
2005 Sept 30, 2004 Sept 30, 2005
- -------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Cash Flows from Operating Activities:
Net loss $ (1,286,522) $ (2,937,890) $ (5,797,248)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 116,590 31,797 164,285
Amortization of patents and proprietary technology 113,723 75,241 226,425
Issuance of common stock and warrants for services 73,045 846,008 2,695,053
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 (7,499) (40,390) (8,248)
Accounts payable (113,526) (4,554) (205,254)
Accrued liabilities 62,727 102,869 81,705
Deferred revenue - (18,750) (343,750)
Prepaid expenses (2,600) - (2,600)
Deposits - (3,290) (6,500)
- --------------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (1,044,062) (332,293) (1,579,466)
- --------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for the purchase of equipment (78,727) (16,369) (188,829)
Payments for patents (28,147) (13,327) (43,626)
Payment for acquisition of equipment and proprietary
technology from Flexpoint Holdings, LLC - (265,000) (265,000)
- -------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (106,874) (294,696) (497,455)
- -------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock and warrants 3,907,207 - 3,907,207
Principal payments on notes payable - related parties (409,958) (13,000) (460,300)
Proceeds from notes payable - related parties - 240,300 445,300
Proceeds from borrowings under convertible note payable - 583,334 583,334
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 3,497,249 810,634 4,475,541
- -------------------------------------------------------------------------------------------------------
Net Change in Cash 2,346,313 183,645 2,398,620
Cash at Beginning of Period 54,358 2,051 2,051
- -------------------------------------------------------------------------------------------------------
Cash at End of Period $ 2,400,671 $ 185,696 $ 2,400,671
=======================================================================================================
Supplemental Cash flow Information:
- -------------------------------------------------------------------------------------------------------
Interest paid $ 7,231 $ - $ 16,888
=======================================================================================================
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 years ended December 31, 2004, included in the Company's Form 10-KSB filed
with the Securities and Exchange Commission on March 31, 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 September 30, 2005 there were
warrants outstanding to purchase 3,656,335 shares of common stock, and at
September 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.
Share Based Compensation - The Company accounts for its share-based
compensation to employees and directors under APB 25, Accounting for Stock
Issued to Employees, and related interpretations. Under APB 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. On August 25, 2005
the Board of Directors of the Company approved the 2005 Stock Incentive Plan
("the Plan"). Adoption of the Plan is contingent upon shareholder approval.
Under the Plan, the exercise price for all options issued will not be less
than the average closing price of the Company's stock for the thirty day
period immediately preceding the grant date plus a premium of ten percent.
The maximum aggregate number of shares that may be sold under the Plan is
2,500,000.
The Company accounts for its share-based compensation 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.
8
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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), the
Company has determined to adopt Statement 123(R) on the modified-prospective
basis beginning on January 1, 2006 will result in the recognition of the
remaining unamortized grant-date fair value compensation over the remaining
vesting period.
Impairment of Long-Lived Assets, Including Goodwill - The Company's management
evaluates annually long-lived assets, including goodwill for possible
impairment. Management has considered recent appraisals, valuations and its
estimate of future cash flows related to the long-lived assets other than
goodwill. In evaluating goodwill, management has considered factors such as
market capitalization and book value of the Company. Neither long-lived
assets nor goodwill were determined to be impaired.
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 nine month period ending September 30, 2005 the Company
repaid $409,958 leaving a balance of $1,000. Interest expense for the nine
months ended September 30, 2005 related to the notes payable was $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.
9
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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%, estimated life of two years and dividend yield of
0%. 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.
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.
On July 20, 2005, the Company issued an investor relations firm 30,000
warrants for services rendered. The fair value of the warrants issued was
$1.38 per warrant, for a total valuation of $41,300 as determined by the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 4.40%, volatility of 200%, estimated life of two years, and
dividend yield of 0%. These warrants were issued with a callable feature in
which the Company shall have the right to call the warrants, thereby forcing
exercise by the investor if at any time after six months from the date of
issue the closing price of the common stock is greater than $5.00 per share
(the exercise price) for five consecutive trading days.
On August 25, 2005, the Company issued to a director 18,350 shares of common
stock for services rendered as a member of the Board of Directors. The fair
value of the stock on the day of this transaction was $1.73 per share for a
total value of $31,745.
NOTE 6 - REGISTRATION OF RESTRICTED COMMON STOCK
In August 2005, the Company filed a Registration Statement, form SB-2, with
the Security and Exchange Commission to register 8,932,670 shares of the
Company's restricted common stock (includes 3,656,335 underlying shares for
the conversion of warrants) as free trading 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.
As a result of the confirmation of our reorganization plan, we used
fresh-start reporting from the February 24, 2004, date of emergence from
bankruptcy and the following discussions relate to the unaudited financial
statements for the interim period from February 24, 2004, through September
30, 2004 (the "2004 interim period").
We recorded revenue of $21,698 for the nine-month period ended Septmber 30,
2005 (the "2005 nine month period"), but recorded a net loss of $1,286,522 for
that same period. During the first quarter of 2005 we completed a private
placement offering that provided net 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.
In late 2004, we restructured our management team and brought in an
experienced group of executive level management personnel to direct the growth
of our business operations. During the 2005 nine month period this new
management team evaluated our business plan and directed 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.
In September 2005 we entered into a manufacturing agreement with R&D Products,
LLC, a Utah limited liability company, doing business in Midvale, Utah. R&D
Products has developed a mattress with multiple air chambers that use Bend
Sensors and we agreed to manufacture the Bend Sensors for the mattresses.
The initial order is for 300,000 Bend Sensors to be used to begin manufacture
of 10,000 mattresses.
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. Management continues its efforts to
negotiate automotive contracts and has met with automotive suppliers and
manufacturers in Europe and in the United States. We have completed the
initial phase of testing of the pedestrian sensor and results have been sent
to several original equipment manufacturers and Tier 1 suppliers, but we have
not entered into a major contract for the sale of our products as of the date
of this report. Accordingly, we cannot guarantee that we will realize
significant revenues or that we will become profitable within the next twelve
months.
11
LIQUIDITY AND CAPITAL RESOURCES
Our revenues are not to a level to support our operations. Net cash used by
operating activities was $1,044,062 for the 2005 nine month period compared to
net cash used by operating activities of $332,293 for 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 September 30,
2005, we had $2,400,671 in cash.
We intend to use revenues and our cash to purchase and install equipment and
develop our QS-9001 certified facility. QS-9001 is shorthand for "Quality
System Requirements QS-9001:2000 (ISO/TS16949)." It is a common supplier
quality standard for DaimlerChyrsler Corporation, Ford Motor Company and
General Motors Corporation and it contains requirements that are particular to
the automotive industry.
For the 2005 nine month period net cash used in investing activities was
$106,874 and was primarily related to the purchase of equipment and payment
for patents. For the 2004 interim period net cash used in investing
activities was $294,696, 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 other agreements will come to fruition in
the future or that a desired technological application can be brought to
market.
FINANCING
For the 2005 nine month period net cash provided from financing activities was
$3,497,249, 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
$810,634 and was primarily related to proceeds of $583,334 from borrowings
under a convertible line of credit we executed as part of our bankruptcy
reorganization and $240,300 proceeds from notes payable. We relied on the
$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
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the expansion of our operations.
COMMITMENTS AND CONTINGENCIES
Our principal commitments at September 30, 2005, consist of an operating lease
and our total current liabilities of $87,048, 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 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 Nine month from 2/24/04
period ended period ended period ended through
Sept. 30, 2005 Sept. 30, 2004 Sept. 30, 2005 Sept. 30, 2004
-------------- -------------- -------------- --------------
<s> <c> <c> <c> <c>
Revenue $ 3,063 $ 52,296 $ 21,698 $ 107,796
Cost of revenue (11,268) (64,425) (100,865) (111,830)
Amortization of (32,027) - (96,081) -
proprietary technology
Gross profit (loss) (40,232) (12,129) (175,248) (4,034)
General and (500,679) (304,481) (1,147,724) (1,374,731)
administrative expense
Interest expense - (707) (7,231) (1,559,125)
Interest income 16,721 - 45,765 -
Other income 972 - 2,916 -
Gain (loss) on - - (5,000) -
forgiveness of debt
Net loss (523,218) (317,317) (1,286,522) (2,937,890)
Net loss per share $ (0.02) $ (0.02) $ (0.06) $ (0.16)
Our revenues for all periods were primarily from licensing fees and royalties,
and engineering services. Revenue
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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 exceeded our revenues for the 2004 and 2005 periods. Cost
of revenue was primarily related to materials and labor associated with
product sales and customer prototype development. As a result, we recorded
gross losses for the 2004 and 2005 periods.
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. 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 September 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.
September 30, 2005 December 31, 2004
------------------ -----------------
Cash $ 2,400,671 $ 54,358
Total current assets 2,411,518 55,107
Total Assets 10,789,633 8,556,661
Total current liabilities 87,048 547,806
Deficit accumulated during (5,797,248) (4,510,726)
the development stage
Total stockholders equity $ 10,702,585 $ 8,008,855
Cash increased at September 30, 2005, primarily as a result of the proceeds
from our private placement. Our total assets at September 30, 2005, included
total current assets of $2,411,518, property and equipment valued at
$1,273,276, patents and proprietary technology of $1,741,925, goodwill of
$5,356,414, and a deposit of $6,500.
Total current liabilities at September 30, 2005, decreased from $547,806 at
December 31, 2004 to $87,048 and included accounts payable of $2,852, accrued
liabilities of $83,196, 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.
14
We have a history of losses and may never become profitable.
We are unable to fund our day-to-day operations from revenues and the lack of
revenues for continued growth may cause us to delay our business plans. We
anticipate proceeds from our private placement in March of 2005 will fund our
operations for the next twelve months; however, we anticipate that revenues
will not increase until late 2006 or early 2007. In addition, if we decide to
expand our business activities outside the automotive market in 2006, we
anticipate needing more than approximately $1,000,000 in additional funding.
We may not have adequate experience to successfully manage
anticipated growth.
In January 2005 we restructured our management team and brought in an
experienced group of executive level management personnel to direct the growth
of our business operations. However, 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 between engineering, programming,
accounting, finance, marketing, sales and operations, and
.. attract and retain additional qualified 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.
Based on projected orders under anticipated agreements, we will need to
complete a second production line and have it installed and approved in 2006.
We have completed installation of our first production line and are in the
process of qualifying our own manufacturing facility for QS-9001:2000
(ISO/TS16949), a Quality Management System that contains the particular
requirements for the application of ISO 9001:2000 for automotive production
and relevant service part organization (formerly QS-9000 and referred to in
this report as QS-9001). However, we cannot assure you that we will satisfy
QS-9001 qualification or that the production lines will produce product in the
volumes required or that the production lines will satisfy the requirements of
our customers. The second manufacturing line is expected to result in
increased manufacturing capacity and manufacturing efficiencies.
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. There can be no assurance 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 primary competitors
in the air bag market are International Electronics and Engineering, Siemens,
Robert Bosch GmbH, Denso, Inc., Breed Technologies, TRW Automotive, Delphi
Corporation, Autoliv Inc., 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.
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 can be no assurance
that the protection provided by our patents will be broad enough to prevent
competitors from introducing similar products or
15
that our patents, if challenged, will be upheld by courts of any jurisdiction.
Patent infringement litigation, either 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. Our
products may not meet the proposed National Highway Transportation and Safety
Administration standards or the standards may be modified. 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. 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.
Ongoing industry consolidation among worldwide automotive parts suppliers
may limit the market potential for our products.
In the automotive parts industry, there is a trend of consolidation through
business combinations and acquisitions of complementary technologies among
worldwide suppliers as these suppliers seek to build stronger customer
relationships with automobile manufacturers. Automobile manufacturers look to
Tier 1 suppliers (major suppliers) to provide fully engineered systems and
pre-assembled combinations of components rather than individual components.
This trend of consolidation of suppliers may result in fewer Tier 1 suppliers
and thus limit the marketing opportunities for our Bend Sensor technology.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chairman of the Board 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 changes made in
our internal controls over financial reporting during the third quarter of
2005 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 25, 2005 our board of directors authorized the issuance of 18,350
shares of restricted common stock to Ruland J. Gill, Jr. in consideration for
services rendered as a member of our board of directors. These shares were
valued at $31,746. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
ITEM 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)
21.1 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: November 1, 2005 ______________________________________________
Clark M. Mower
President, Chief Executive Officer and Director
Date: November 1, 2005 /s/ John A. Sindt
______________________________________________
John A. Sindt
Chairman of the Board
Principal Financial and Accounting Officer
/s/ B. Fred Atkinson, Jr.
Date: November 1, 2005 ______________________________________________
B. Fred Atkinson, Jr.
Secretary/Treasurer and Comptroller
18