FORM 10-QSB/A (Amendment No. 1) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1999 Commission File Number 0-24368 FLEXPOINT SENSOR SYSTEMS, INC. (Exact name of small business issuer as identified in its charter) Delaware 87-0620425 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 6906 South 300 West, Midvale, Utah 84047 (Address of principal executive offices) (Zip Code) (801) 568-5111 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ x ] Yes [ ]No State the number of shares outstanding of each of the issuer's classes of common equity, as of November 9, 1999: 17,854,391. Item 2. Management's Discussion and Analysis or Plan of Operation. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of Flexpoint Sensor Systems, Inc. The discussion should be read in conjunction with the condensed consolidated financial statements, related notes and Management's Discussion and Analysis or Plan of Operation for the year ended December 31, 1998. Wherever in this discussion the term "Company" is used, it should be understood to refer to Flexpoint Sensor Systems, Inc. and its wholly owned subsidiary, Sensitron, Inc. ("Sensitron"), a Utah corporation, and Sensitron's wholly owned subsidiaries, Flexpoint, Inc. and Technology and Machine Company, Inc. ("Tamco"), on a consolidated basis, except where the context clearly indicates to the contrary. The business operations of the Company are conducted through Flexpoint, Inc. and Tamco. Prior to the April 1998, merger wherein Flexpoint Sensor Systems, Inc. acquired Sensitron (the "Acquisition"), Flexpoint Sensor Systems Inc. had no operations. The Acquisition was accounted as a reorganization of Sensitron. The historical financial statements prior to the Acquisition are those of Sensitron and have been restated accordingly. Overview The Company is a development stage company and, since inception, has incurred losses from operations. As of September 30, 1999, the Company had cumulative net losses totaling $9,778,195. The Company is primarily engaged in the sensor business and is currently marketing proprietary patented sensor technology know as the Bend Sensor(R) technology (the "Technology"). Sensing devices can be used to measure or sense changes in deflection and are typically used to trigger an electronic device when the sensor is activated. The worldwide market for sensing devices has grown significantly as a result of improved technology and new applications for sensing technology. This growth has resulted in a corresponding increase in demand for high performance sensing products. Management believes this worldwide market growth will continue. Financial Position The Company had $15,366 in cash as of September 30, 1999. This represented a decrease of $642,409 from December 31, 1998. Working capital deficiency as of September 30, 1999 was $1,823,660 as compared to working capital of $2,317,976 at December 31, 1998. The decrease is largely due to the acquisition of $1,090,535 in new equipment, investment of $958,838 in leasehold improvements, payment of $1,313,800 in fees and expenses to outside consultants for software development relating to the Company's sensor mats for use in the smart air bag system (discussed below), and purchase of $97,317 in office equipment. Three and Nine Months Ended September 30, 1999 and 1998 During the three and nine months ended September 30, 1999, the Company had sales of $345,648 and $633,598, respectively, comprised of product sales and engineering fees; compared with sales of $957,378 and $1,314,509 for the comparable periods from the prior year, comprised primarily of product sales and engineering fees. Approximately one-half of the Company's revenues during the three and nine months ended September 30, 1999 were generated under a Purchase and Supply Agreement (the "Supply Agreement") between the Company and Delphi Automotive Systems ("Delphi"). Under the Supply Agreement the Company will supply its proprietary sensor mats to Delphi for integration into a weight based suppression system as a critical part of a smart air bag system. The Supply Agreement provides that such sensor mats will be exclusively supplied to General Motors, through Delphi, by the Company through 2002. The Company anticipates that its success is highly dependent on Delphi. Although the Supply Agreement has not accounted for substantial revenue to date (excluding engineering fees), the Company could have over $300,000,000 in sales under that Supply Agreement. The Company anticipates that the revenue generated from the Supply Agreement will become a significant portion of the Company's revenues. The Company does not expect significant sales to begin under the Supply Agreement until the second half of 2000. The projected sales and timing thereof is forward looking information and is subject to many risks and uncertainties, including the fact that although the Supply Agreement is a multi-year contract, and it does not require Delphi to purchase a specific minimum quantity of products. In addition, with the award of the Supply Agreement and subsequent increases in the projected manufacturing output under the agreement, the Company has had to materially increase spending for additional facilities, equipment and personnel. The Company presently does not have the funding to make the required expenditure. See "--Liquidity and Capital Resources." As a result, the Company's business, financial condition or results of operations could be materially adversely affected if sufficient additional funding is not timely acquired or if sales do not materialize as projected under the Supply Agreement, of which there can be no assurance. Approximately one-half of the Company's revenues during the three and nine months ended September 30, 1999 and substantially all of the Company's revenues during the comparable periods from the prior year were generated under a license agreement (the "License Agreement"). Under the agreement the Company granted Ohio Art the exclusive worldwide right to sell products incorporating the Technology in the toy, traditional games and video game markets. The License Agreement provides for certain up front fees and minimum royalties for Ohio Art to maintain such exclusive rights. Certain toy customers of the Company have indicated that they will be getting out of the plush toy business and/or will not be manufacturing products using sophisticated sensor systems. During the three months ended September 30, 1999, the Company received orders for and shipped over 2,500,000 sensors generating $206,108 in revenues. Ohio Art has not committed to manufacture or sell any other licensed products during 1999 or thereafter. Because the toy industry is cyclical, the Company expects that the bulk of annual royalty revenues will be greater in the second and third quarters of any given year. As a result, the Company's revenues under the License Agreement during 1999 have been substantially less than in 1998. There can be no assurance as to what level of sales, if any, the Company will achieve under the License Agreement in future years. License and supply arrangements, such as those discussed above, create certain risks for the Company, including (i) reliance for sales of products on other parties; (ii) if the Company's products are marketed under other parties' labels, goodwill associated with use of the products may inure to the benefit of the other parties rather than the Company; and (iii) the Company may have only limited protection from changes in manufacturing costs and raw materials costs. General and administrative expenses for the three and nine months ended September 30, 1999 were $817,481 and $2,276,886, respectively, compared with $350,253 and $1,133,699 for the comparable periods from the prior year. The increase in expenditures between the periods resulted primarily from increases in salary and wage expenses as a result of hiring additional engineering and manufacturing employees and increases in advertising, rent, depreciation and consulting expenses associated with the production line qualifications and set-up under the Supply Agreement. The Company does not expect that general and administrative expenses will be reduced below current levels without reducing the number of employees. Such reductions may have a material adverse effect on the Supply Agreement and the commercialization of the Company's other products. Although Management has liquidity concerns, management does not intend to materially reduce general and administrative costs. Research and development ("R&D") expenses for the three and nine months ended September 30, 1999 were $902,253 and $2,343,494, respectively, compared with $324,887 and $764,709 for the comparable periods from the prior year. The increase in expenditures between the periods resulted primarily from increases in R&D spending relating to the Supply Agreement. Specifically, $1,313,800 of R&D expense for the nine months ended September 30, 1999 related to consulting expenses for the development of the software associated with the Supply Agreement. The Company expects that during 1999 most of such software development will be completed. As a result, the Company expects that software consulting expenses related to the Supply Agreement will be significantly reduced in 2000. The Company is, however, looking to expand into additional markets and R&D efforts associated therewith, including related software development expenditures, may be substantial. As a result, the Company does not expect that R&D will be reduced below current levels unless a lack of funding requires the Company to make such reductions. Reductions in R&D expenditures would comprise primarily reductions in R&D staff. Such staff reductions could have a material adverse effect on product development and on the Company's future profitablility. Although Management has liquidity concerns, management does not intend to reduce R&D efforts at this time. Net interest expense for the three and nine months ended September 30, 1999 was $68,369 and $56,076, respectively, compared with net interest income of $5,441 and $21,988 for the comparable periods for the prior year. The net interest and other income relates mainly to interest earned on funds on deposit. Net other income for the three and nine months ended September 30, 1999 was $48,784 and $49,319, respectively, compared with $583 and ($2,006) for the comparable periods for the prior year. The net other income relates mainly to collection of bad debt previously written off during 1997 and 1998 . Liquidity and Capital Resources To date, the Company has financed its operations principally through private placements of debt equity securities and sales. The Company generated $9,857,016 in net proceeds through financing activities from inception through September 30, 1999. The Company used net cash in operating activities of $3,142,873 during the nine months ended September 30, 1999. As of September 30, 1999, the Company's liabilities totaled $2,250,980, including $1,210,000 in short-term debt. The Company had a working capital deficiency as of September 30, 1999 of $1,823,660. The Company has committed to spend $82,530 in lease payment for its physical facilities during the remainder of 1999 and $322,890, $309,850, $249,900 and $249,900 in physical facilities lease payments for the years 2000 through 2003, respectively. In connection therewith, the Company contracted for certain improvements to its physical facilities. During the three months ending September 30, 1999, the Company paid $275,000 for the improvements made at the new facility, leaving a balance of approximately $165,166 owing. The Company also has short term loan obligations in the principal amounts of $210,000 and $1,000,000 that are due in December 1999 and February 2000, respectively. In September 1999, $100,000 was also paid on short term loan obligations. Most of the interest due on these loans has been paid. The Company's working capital and other capital requirements for the foreseeable future will vary based upon a number of factors, including the costs to expand facilities, complete development and bring certain product utilizing the Technology to commercial viability and the level of sales and marketing for the Company's products. With the award of the Supply Agreement and subsequent increase in the projected manufacturing output under the agreement, the Company has needed to materially increase spending for additional facilities, equipment and personnel. The Company believes that existing funds and funds generated from sales will be sufficient to support the Company's operations through December 31, 1999. Restructuring of operations has allowed the Company to delay certain capital expenses from 1999 to 2000. The Company estimates that it will need to raise at least an additional $10,700,000 in 2000 to fully execute its business plan with respect to the Supply Agreement, which includes completing two additional production lines to fulfill its anticipated manufacturing obligations under the Supply Agreement, as amended. To the extent that the Company seeks to expand its business activities outside the seat sensor market, it is anticipated that additional funding will be required. The Company has been exploring alternative long and short-term capital proposals to provide needed capital to meet the current expansion and equipment purchases under the Supply Agreement and otherwise. The Company is currently negotiating with several groups that may provide the required funding. Although the Company expects to have the necessary financing available by year end, the Company has no material current contractual arrangements with respect to additional financing and there can be no assurance that additional financing will be available on commercially reasonable terms or at all. The inability to obtain additional financing will have a material adverse effect on the Company. This includes the possibly that the Company may have to significantly curtail or cease its operations. Year 2000 The Company uses computers systems and microprocessors that are embedded in systems the Company uses. Computers and embedded microprocessors have the potential for operational problems if they lack the ability to handle the transition to the Year 2000. Because this issue has the potential to cause disruption of the Company's business operations, the Company has and is seeking to identify and remediate potential Year 2000 problems in its business information systems and other systems embedded in its engineering and manufacturing operations. In addition, the Company has communicated with its major suppliers, dealers, distributors and other third parties in order to assess and reduce the risk that the Company's operations could be adversely affected by the failure of these third parties to adequately address the Year 2000 issue. The Company uses computers systems principally for product design, product prototyping, manufacturing and administrative functions such as communications, word processing, accounting and management and financial reporting. The Company uses embedded microprocessors principally in its manufacturing and engineering operations. The Company's principal computer systems (including the embedded microprocessors systems) have been purchased since December 31, 1997 and the vendors supplying such systems have generally represented that such systems are Year 2000 compliant. The software utilized by the Company is generally standard "off the shelf" software, typically available from a number of vendors. The Company has verified with its software vendors that the services and products provided are, or will be, Year 2000 compliant. In addition, the Company has certain software that has been written specifically for use by the Company and the suppliers of such software have warranted that it is Year 2000 compliant. Based on such verification, the Company believes that its computer systems and software is Year 2000 compliant in all material respects. The Company estimates that the cost to redevelop, replace or repair its technology will not be material. The Company is not using any independent verification or validation procedures. There can be no assurance, however, that such systems and/or programs are or will be Year 2000 compliant and that the failure of such would not have a material adverse impact on the Company's business and operations. In addition to its own computer systems, in connection with its business activities, the Company interacts with suppliers, customers, and financial service organizations who use computer systems. The Company has communicated with such parties regarding their state of Year 2000 readiness. Based on its assessment activity to date, the Company believes that a majority of the suppliers, customers and financial service organizations with whom it interacts are making acceptable progress toward Year 2000 readiness. The Company currently believes that the most reasonable likely worst case scenario is that there will be some localized disruptions of supplier, customer and/or financial services that will affect the Company and its suppliers, and distribution channels for a short time rather than systemic or long-term problems affecting its business operations as a whole. In view of the foregoing, the Company does not currently anticipate that it will experience a significant disruption of its business as a result of the Year 2000 issue. However, there is still uncertainty about the broader scope of the Year 2000 issue as it may affect the Company and third parties that are critical to the Company's operations. For example, lack of readiness by electrical and water utilities, financial institutions, government agencies or other providers of general infrastructure could pose significant impediments to the Company's ability to carry on its normal operations in the area or areas so affected. The Company is currently evaluating what contingency plans, if any, to make in the event the Company or parties with whom the Company does business experience Year 2000 problems. The statements made herein about the costs expected to be associated with the Year 2000 compliance and the results that the Company expects to achieve, constitute forward looking information. As noted above, there are many uncertainties involved in the Year 2000 issue, including the extent to which the Company will be able to successfully and adequately provide for contingencies that may arise, as well as the broader scope of the Year 2000 issues as it may affect third parties that are not controlled by the Company. Accordingly, the costs and results of the Company's Year 2000 program and the extent of any impact on the Company's operations could vary materially from those stated herein. Forward-Looking Statements When used in this Form 10-QSB, in other filings by the Company with the SEC, in the Company's press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur, and which involve various risks and uncertainties, including but not limited to risk of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, commercialization, and technology, and other risks. In addition, sales and other revenues may not commence and/or continue as anticipated due to delays or otherwise. As a result, the Company's actual results for future periods could differ materially from those anticipated or projected. Please refer to the "Management's Discussion and Analysis or Plan of Operation" and specifically the discussion under "Other Factors" that is found in the Company's Annual Report on Form 10-KSB for the period ended December 31, 1998, for more details. Unless otherwise required by applicable law, the Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FLEXPOINT, INC. Date: November 15, 1999 By /s/ Douglas M. Odom ----------------------- Douglas M. Odom President, Chief Executive Officer, Director Date: November 15, 1999 By /s/ Thomas N. Strong ------------------------- Thomas N. Strong Chief Accounting Officer