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 June 30, 1999 Commission File Number 0-24368 FLEXPOINT SENSOR SYSTEMS, INC. (Formerly Micropoint, 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 August 12, 1999: 17,238,670. PART I FINANCIAL INFORMATION Item 1. Financial Statements. FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Company in the Development Stage) CONDENSED CONSOLIDATED BALANCE SHEETS UNAUDITED June 30, December 31, 1999 1998 --------------- -------------- ASSETS Current Assets Cash $ 206,798 $ 657,775 Trade accounts receivable, net of allowance of $90,721 50,728 298,586 Royalties receivable - 152,570 Receivable from shareholder - 1,573,750 Inventory 194,748 42,691 Prepaid expense 46,670 50,915 --------------- -------------- Total Current Assets 498,944 2,776,287 --------------- -------------- Property and Equipment 3,326,129 1,273,326 Less accumulated depreciation (610,243) (387,858) --------------- -------------- Net Property and Equipment 2,715,886 885,468 --------------- -------------- Goodwill, Net of Accumulated Amortization of $89,851 and $77,871 29,950 41,931 Deposits 49,549 246,441 Patents, net of accumulated amortization of $52,218 and $45,018 116,234 101,331 --------------- -------------- Total Assets $ 3,410,563 $ 4,051,458 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable $ 631,178 $ 348,473 Related party payable - 1,234 Accrued liabilities 577,185 100,290 Income taxes payable 8,314 8,314 Notes payable, net of unamortized discount of $152,957 157,043 - --------------- -------------- Total Current Liabilities 1,373,720 458,311 --------------- -------------- Stockholders' Equity Preferred stock - $0.001 par value;1,000,000 shares authorized; 4,500 shares designated Series A convertible preferred; $875 stated value per share; 536 Preferred shares issued and outstanding; liquidation preference $469,000 460,738 - Common stock - $0.001 par value; 100,000,000 shares authorized;17,159,554 and 16,990,296 shares issued and outstanding 17,160 16,990 Additional paid in capital 10,239,732 9,127,091 Unearned Compensation (95,450) - Deficit accumulated during the development stage (8,585,337) (5,550,934) --------------- -------------- Total Stockholders' Equity 2,036,843 3,593,147 --------------- -------------- Total Liabilities and Stockholders' Equity $ 3,410,563 $ 4,051,458 =============== ============== The accompanying notes are an integral part of these financial statements. 2 FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Company in the Development Stage) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED For the Period January 5, 1995 (Date of Inception) For the Three Months For the Six Months Through Ended June 30, Ended June 30, June 30, 1999 1998 1999 1998 1999 ------------ ----------- ------------ ------------ ------------ Sales $ 166,193 $ 297,042 $ 287,950 $ 357,130 $ 578,675 Cost of sales 79,832 110,813 80,677 155,539 1,608,980 ------------ ----------- ------------ ------------ ------------ Gross profit 86,361 186,229 207,273 201,591 1,969,695 General and administra- tive expense 959,677 475,713 1,633,740 770,841 5,576,778 Research and development 793,741 272,117 1,463,820 439,822 4,767,769 ------------ ----------- ------------ ------------ ------------ Loss from operations (1,667,057) (561,601) (2,890,287) (1,009,072) (8,374,852) Interest expense (4,351) - (4,351) (40) (75,552) Interest expense of debt discount (22,943) - (22,943) - (22,943) Interest income 4,798 13,663 16,643 13,663 52,254 Other income/expense (152) (60) 535 (3,517) (30,244) ------------ ----------- ------------ ------------ ------------ Net Loss (1,689,705) (547,998) (2,900,403) (998,966) (8,451,337) Preferred dividend (134,000) - (134,000) - (134,000) ------------ ----------- ------------ ------------ ------------ Loss applicable to common shareholders $(1,823,705) $ (547,988) $(3,034,403) $ (998,966) $(8,585,337) ============ =========== ============ ============ ============ Basic and Diluted Loss Per Common Share $ (0.11) $ (0.06) $ (0.18) $ (0.08) $ (0.74) ============ =========== ============ ============ ============ Weighted average number of common shares used in per share calculation 17,153,510 9,860,279 17,205,718 12,479,064 11,668,375 ============ =========== ============ ============ ============ The accompanying notes are an integral part of these financial statements. 3 FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES (A Company in the Development Stage) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED For the Period January 5, 1995 (Date of Inception) For the Six Months Through Ended June 30, June 30, 1999 1998 1999 -------------- -------------- -------------- Cash Flows From Operating Activities Net loss $ (2,900,403) $ (998,966) $ (8,451,337) Adjustments to reconcile net loss to net cash used by operating activities - - (21,225) Gain on Sale of available-for-sale securities - - - Loss on sale of assets - - 9,227 Depreciation and amortization 241,566 69,315 764,649 Amortization of unearned compensation 72,675 45,375 118,050 Amortization of debt discount 22,943 - 22,943 Stock issued for services - - 222,727 Allowance for doubtful accounts - - 242,288 Write-off of related party receivable - - - Changes in operating assets and liabilities: Accounts receivable 400,428 (38,559) (156,975) Inventory (152,057) (353,489) (194,748) Accounts payable 282,705 (44,945) 452,364 Accrued liabilities 476,895 (403,868) 508,201 Deferred revenue - (100,000) (6,163) Other assets (16,630) 30,490 (298,855) -------------- -------------- -------------- Net Cash Used By Operating Activities (1,571,878) (1,794,647) (6,788,854) -------------- -------------- -------------- Cash Flows From Investing Activities Payments to Flexpoint prior to acquisition - - (268,413) Cash paid to acquire Tamco - - (25,000) Proceeds from the sale of available-for- sale securities - 153,497 455,082 Net cash received from Nanotech acquisition - 1,492,906 1,492,907 Payments received from related parties - 3,128 34,661 Collection of receivables from escrow agent - - 64,825 Payments for the purchase of property and equipment (1,835,036) (268,242) (2,835,833) Proceeds received from sale of property and equipment - - 22,682 Investment in patents (22,103) (18,459) (132,429) -------------- -------------- -------------- Net Cash Used By Investing Activities (1,857,139) 1,362,830 (1,191,518) -------------- -------------- -------------- Cash Flows From Financing Activities Proceeds from the issuance of preferred stock 460,738 - 460,738 Proceeds from the issuance of common stock 634,786 8,000 4,725,450 Cash payments to officers to repurchase stock - - (50,000) Cash paid for offering costs - - (123,020) Proceeds from borrowings 310,000 - 613,960 Principal payments of long-term debt - (310,118) (398,751) Borrowings from Nanotech prior to acquisition - 1,000,000 1,000,000 Proceeds from stock subscription receivable 1,573,750 390,000 1,963,750 Proceeds from related party notes - - 60,208 Principal payments of related party notes (1,234) - (65,165) -------------- -------------- -------------- Net Cash Provided By Financing Activities 2,978,040 1,087,882 8,187,170 -------------- -------------- -------------- Net Change In Cash (450,977) 656,065 206,798 Cash at Beginning of Period 657,775 106,494 - -------------- -------------- -------------- Cash at End of Period $ 206,798 $ 762,559 $ 206,798 ============== ============== ============== The accompanying notes are an integral part of these financial statements. 4 NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Through April 1998, the Company operated through Sensitron, Inc. a Utah Corporation, at which time it changed its name to Micropoint, Inc. In June 1999 the name was changed to Flexpoint Sensor Systems, Inc. Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Flexpoint Sensor Systems, Inc. (Flexpoint) and its wholly owned subsidiaries. The operations of acquired entities have been included from the dated of their acquisitions. Intercompany Transactions and accounts have been eliminated in consolidation. Restatement - As further discussed in Note 6, the accompanying condensed consolidated financial statements have been restated to correctly reflect compensation resulting from grants of stock options, to allocate a portion of the proceeds from the issuing notes payable with warrants, to the warrants, to amortized the preferred stock discount as preferred dividends and to correct timing of depreciation on property and equipment. These restated condensed consolidated financial statements should be read in conjunction with the annual financial statements included in Form 10 KSB as of December 31, 1999. Nature of Operations -The Company is a development stage enterprise engaged principally in designing, engineering, and manufacturing sensor technology and equipment using flexible potentiometer technology. Flexpoint, Inc. entered into a Purchase and Supply Agreement (the "Supply Agreement") with Delphi Automotive Systems ("Delphi") in June 1998. Under the terms of the Supply Agreement, the Company 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 is looking to the Supply Agreement to provide the bulk of its revenues in the immediate future. . The information regarding the Supply Agreement is forward looking information. Such forward looking information is subject to many risks and uncertainties, including the fact that Delphi is not obligated under the terms of the Supply Agreement to purchase any minimum number of sensor mats and there can be no assurance that the Supply Agreement will result in any material amount of sales. Organization and Principles of Consolidation - Sensitron, Inc. ("Sensitron") was incorporated under the laws of the State of Utah on January 5, 1995. During 1995, Sensitron acquired Flexpoint, Inc. and Technology and Manufacturing Company, Inc., Utah corporations On April 11, 1998, Sensitron was reorganized into a wholly-owned subsidiary of Nanotech Corporation, a publicly-held Delaware Corporation, and changed its name to Micropoint, Inc. At the annual stockholders' meeting held on June 16, 1999, its stockholders authorized Micropoint, Inc. to change its name to Flexpoint Sensor Systems, Inc. The accompanying consolidated financial statements include the accounts of Sensitron for all periods presented, the accounts of its wholly-owned subsidiaries from their dates of acquisition in 1995 and the accounts of Flexpoint Sensor Systems, Inc. from April 11, 1998. These entities are collectively referred to herein as the "Company," except where the context clearly indicates to the contrary All significant intercompany transactions and account balances have been eliminated in the consolidation. Nature of Operations -The Company is a development stage enterprise engaged principally in designing, engineering, and manufacturing sensor technology and equipment using flexible potentiometer technology. Flexpoint, Inc. entered into a Purchase and Supply Agreement (the "Supply Agreement") with Delphi Automotive Systems ("Delphi") in June 1998. Under the terms of the Supply Agreement, the Company 5 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 is looking to the Supply Agreement to provide the bulk of its revenues in the immediate future. The information regarding the Supply Agreement is forward looking information. Such forward looking information is subject to many risks and uncertainties, including the fact that Delphi is not obligated under the terms of the Supply Agreement to purchase any minimum number of sensor mats and there can be no assurance that the Supply Agreement will result in any material amount of sales. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Interim Financial Statements - The accompanying condensed consolidated balance sheets and statements of operations and cash flows are unaudited. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position, results of operations and cash flows for the periods presented. The financial statements have been condensed and do not contain all of the disclosure required by generally accepted accounting principles. Accordingly, these statements should be read in conjunction with the annual financial statements included in the annual reports on Form 10-KSB, dated December 31, 1998 and 1999. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the operating results which occurred for the entire year. Business Condition - The accompanying financial statements contemplate continuation of the Company as a going concern. However, the Company has suffered losses from operations and has had negative cash flows from operating activities, which conditions raise substantial doubt about the Company's ability to continue as a going concern. 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 will need to raise substantial additional capital to fulfill its anticipated obligations under the Supply Agreement, as amended. The Company is concurrently seeking funding from several sources. 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. Any inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. NOTE 2 - PROPERTY AND EQUIPMENT At June 30, 1999 property and equipment consisted of the following: Furniture and fixtures $ 92,838 Machinery and equipment 1,671,284 Office equipment 219,685 Software 33,354 Leasehold improvements 1,308,968 ------------------ Total $ 3,326,129 ================== 6 Of the $1,308,968 of leasehold improvements, $906,502 is for the infrastructure required by the Supply Agreement. Depreciation expense for the six months ended June 30, 1999 and 1998 was $222,384 and $32,068 respectively. NOTE 3 - NOTES PAYABLE On June 18, 1999, the Company borrowed $310,000 from a non-affiliated accredited lender to provide the Company necessary funding. Of said amount, $200,000 bears interest at 20% per annum, payable monthly. The principal is payable in two equal installments of $100,000 on September 18, 1999 and December 18, 1999. The remaining principal amount of $110,000 bore interest at 10% per annum and was payable and was to be repaid on July 15, 1999 but was extended. These notes are unsecured and included in total current liabilities. As part of the consideration for these notes, the Company granted to said lender warrants to acquire 75,000 shares of the Company's common stock. Said warrants are exercisable at approximately $3.44 per share for a period expiring in June 2004. The proceeds of the notes were allocated between the fair value of the warrants and to the note payable based upon their relative fair values. This resulted in a discount on the notes of $175,900 which was credited to additional paid-in capital. The discount is being amortized over the maturity of the notes. During the three months ended June 30, 1999, $22,943 of the discount was amortized to interest expense. NOTE 4 -PREFERRED STOCK During the three months ended June 30, 1999, the Company offered and sold to accredited investors in a private placement 536 Units (defined below) for gross proceeds of $469,000, with related offering costs of $8,263. Each Unit consisted of one share of Series A Convertible Preferred Stock (the "Preferred Stock") and Series A Warrants to purchase 250 shares of the Company's common stock. The Preferred Stock is convertible, at the option of the holder, at any time into common stock at the conversion rate of 250 shares of common stock for one share of Preferred Stock. The Series A Warrants are exercisable at $4.00 per share through January 1, 2001. Each Unit was sold for $875. The proceeds were allocated on the dates received to (a) the Series A Warrants to purchase common stock based upon their fair value in the amount of $134,000 and (b) $326,738 was allocated to the convertible preferred stock. The resulting discount on the preferred stock of $134,000 was immediately amortized as a preferred stock dividend on the dates the convertible preferred stock was issued. The convertible preferred stock is convertible into 134,000 shares of common stock through January 1, 2001. NOTE 5 - NONCASH COMPENSATION The Company measures compensation under the stock-based options granted to employees using the intrinsic value method prescribed by Accounting Principals Option 25, Accounting for Stock Issued to Employees and related interpretations. The Company determines compensation cost under options granted to non employees based upon the fair valueof the options granted consistent with Statement of Financial Accounting Standards No 123, Accounting for Stock-Based Compensation. During the six months ending June 30, 1999, the Company granted options to acquire 176,000 shares of common stock to employees, which are exercisable form $.75 to $4.00 per share. The intrinsic value of these options was $168,125 and is being recognized as compensation over the period the options vest. Amortization of the unearned compensation of $21,136 and $72,675 was recognized during the three and six months ended June 30, 1999, respectively. 8 NOTE 6 - RESTATEMENT During the three months and six months ending June 30, 1999, the Company recognized additional compensation to employees in the amount of $21,136 and 72,675, respectively, associated with the grant of stock options at an exercise price equal to the price of restricted common stock being sold by the Company in a Private Placement which was below the current market price. As referenced in Note 3, during the three months ended June 30, 1999, the Company borrowed $310,000 and issued warrants as additional compensation in relation thereto. With the issuance of the warrants the Company recognized a discount on the notes of $175,900 that was credited to additional paid-in capital. The discount is being amortized over the maturity of the notes. During the three months ended June 30, 1999, $22,136 of the discount was amortized to interest expense. In reference to the Preferred Stock discussed in Note 4, the Company recognized a discount on preferred stock of $134,000 that was immediately amortized as a preferred stock dividend. The discounts on notes and the additional compensation were not recorded on the financial statements included in the Company's original filing. NOTE 7 - SUBSEQUENT EVENTS On July 30, 1999, the Company borrowed $200,000 from a non-affiliated lender. The note bears interest at 14% per annum. The note was repaid in August 1999 and all interest payable thereunder was forgiven. As part of the consideration for the note, the Company granted to said lender warrants to acquire 160,000 shares of the Company's common stock. Said warrants are exercisable at $3.15 per share for a period expiring in July 2004. Debt discount totaling $200,000 will be recognized and amortized over the maturity of the note. On August 11, 1999, the Company borrowed $1,000,000 from a non-affiliated lender. The note bears interest at 14% per annum. The interest was prepaid in full at funding and the principal is due and payable on February 10, 2000. The note is secured by Company equipment. As part of the consideration for the note, the Company granted to said lender warrants to acquire 500,000 shares of the Company's common stock. Said warrants are exercisable at $2.15 per share for a period expiring in July 2004. Debt discount of $890,000 will be recognized and amortized over the maturity of the note. 8 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 restated, as of June 30, 1999, the Company had cumulative net losses totaling $8,451,377. The Company is primarily engaged in the sensor business and is currently marketing proprietary patented sensor technology know as the Bend Sensor TM 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 better 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. Restatement During the three months and six months ending June 30, 1999, the Company recognized additional compensation to employees in the amount of $21,136 and 72,675, respectively, associated with the grant of stock options at an exercise price equal to the price of restricted common stock being sold by the Company in a Private Placement which was below the current market price. As referenced in Note 3 to the accompanying financial statements, during the three months ending June 30, 1999, the Company borrowed $310,000 and issued warrants as additional compensation in relation thereto. With the issuance of the warrants the Company recognized a discount on the notes of $175,900 that was credited to additional paid-in capital. The discount is being amortized over the maturity of the notes. During the three months ended June 30, 1999, $22,136 of the discount was amortized to interest expense. In reference to the Preferred Stock discussed in Note 4 to the accompanying financial statements, the Company recognized a discount on preferred stock of $134,000 that was immediately amortized as a preferred stock dividend. The discount on notes and the additional compensation were not recorded on the financial statements included in the Company's original filing. Financial Position As restated, the Company had $206,798 in cash as of June 30, 1999. This represented a decrease of $450,977 from December 31, 1998. Working capital deficiency as of June 30, 1999 was $(874,776) as compared to working capital of $2,317,976 at December 31, 1998. The decrease is largely due to the acquisition of $799,747 in new equipment, investment of $958,838 in leasehold improvements, payment of $851,000 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 $76,451 in office equipment. 9 Three and Six Months Ended June 30, 1999 and 1998 As restated, during the three and six months ended June 30, 1999, the Company had sales of $166,193 and $287,950, respectively, comprised almost entirely of development fees; compared with sales of $297,042 and $357,130 for the comparable periods from the prior year, comprised primarily of product sales and engineering fees. Substantially all of the Company's revenues during the three and six months ended June 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 future success will be highly dependent on Delphi. Although the Supply Agreement has not accounted for substantial revenue to date, the Company could have over $300,000,000 in sales under that Supply Agreement and it anticipates that the revenue generated from the Supply Agreement will become a significant portion of the Company's revenues. 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, 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 will need 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. Substantially all of the Company's revenues during the three and six months ended June 30, 1998 were generated under a license agreement (the "License Agreement") whereby the Company granted to Ohio Art the exclusive worldwide right to sell products incorporating the Technology in the toy, traditional games and video game markets. The License Agreement provided for certain up front fees and minimum royalties in order 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. In July 1999, the Company received orders that are expected to result in $136,000 in revenues under the License Agreement. These orders resulted in total revenues of over $185,000. Ohio Art has not committed to manufacture or sell any other licensed products during 1999 or thereafter. The toy industry is cyclical and 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 believes that the revenues under the License Agreement during 1999 will be substantially less than in 1998. There can be no assurance as to what level of sales, if any, the Company will secure 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. As restated, general and administrative expenses for the three and six months ended June 30, 1999 were $959,677 and $1,633,740, respectively, compared with $475,713 and $770,841 for the comparable periods from the prior year. Included in the six month total is $72,675 associated with non cash compensation related to the grant of stock to employees at less than market price. The increase in expenditures between the periods resulted primarily from increases in salary and wage expenses as a result of hiring additional manufacturing employees, increases in advertising, depreciation expenses relating to leasehold improvements & equipment at the Company's new 10 manufacturing facility and consulting expenses relating to 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 reduce general and administrative costs. As restated, research and development ("R&D") expenses for the three and six months ended June 30, 1999 were $793,741 and $1,463,820, respectively, compared with $272,117 and $439,822 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, $851,000 of R&D expenses during 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 software consulting expenses relating to the Supply Agreement will be significantly reduced in once Delphi proves out the software associated with the sensor mat. 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. Although Management has liquidity concerns, management does not intend to reduce R&D efforts. As restated, net interest and other income for the three and six months ended June 30, 1999 was $(22,648) and $(10,116), respectively, compared with $13,603 and $10,106 for the comparable periods for the prior year. Included in the six and three month totals is a charge of $22,943 in interest expense due to the amortization of the debt discount associated with the issuance of warrants as part of the consideration for the debt. Interest income for the three and six months ended June 30, 1999 was $4,798 and $16,643, respectively. Interest income is earned on funds on deposit with local financial institutions. 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 $8,187,170 in net proceeds through financing activities from inception through June 30, 1999. The Company used net cash in operating activities of $1,571,878 during the six months ended June 30, 1999. As of June 30, 1999, the Company's liabilities totaled $1,373,720, net of debt discount of $152,957. The Company had working capital deficiency as of June 30, 1999 of $(874,776). The Company has committed to spend $233,010 in lease payment for its physical facilities during the remainder of 1999 and $309,480, $299,550, $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. The Company believes that approximately $417,000 is owed for the improvements and the contractor is claiming approximately $487,000 is owing. The Company also has short term loan obligations in the principal amounts of $100,000, $100,000, and $110,000 that are due in July 1999, September 1999, and December 1999, respectively. 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 the certain product utilizing the Technology to commercial viability and the level of sales of 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 will need to raise substantial additional funding to fully execute its business plan 11 which includes completing two additional production lines to fulfill its anticipated manufacturing obligations under the Supply Agreement, as amended. The Company is concurrently seeking additional funding from several sources. 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. Any inability to obtain additional financing will have a material adverse effect on the Company, including possibly requiring the Company 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. 12 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. 13 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBIT 2.1 Agreement and Plan of Reorganization (Schedules are omitted) (Incorporated by referenced to Exhibit 2.1 of the Company's Current Report on Form 8-K, dated April 9, 1998). 3(i).1 Restated Certificate of Incorporation of Flexpoint Sensor Systems, Inc. (Incorporated by reference to Exhibit 3(i).1 of the Company's Quarterly Report on Form 10-QSB, dated September 30, 1998). 3(i).2 Amended Certificate of Incorporation of Flexpoint Sensor Systems, Inc. (Incorporated by reference to Exhibit 3(i).2 of the Company's Quarterly Report on Form 10-QSB, dated June 30, 1999). 3(i).3 Certificate of Designation of Series A Convertible Preferred Stock of Flexpoint Sensor Systems, Inc. (Incorporated by reference to Exhibit 3(i).3 of the Company's Quarterly Report on Form 10-QSB, dated June 30, 1999). 3(i).4 Articles of Incorporation of Sensitron, Inc. (Incorporated by referenced to Exhibit 3(i).3 of the Company's Annual Report on Form' 10-KSB, dated March 31, 1998). 3(i).5 Articles of Incorporation of Flexpoint, Inc. (Incorporated by referenced to Exhibit 3(i).4 of the Company's Annual Report on Form' 10-KSB, dated March 31, 1998). 3(i).6 Articles of Incorporation of Technology and Machine Company, Inc. (Incorporated by referenced to Exhibit 3(i).5 of the Company's Annual' Report on Form 10-KSB, dated March 31, 1998). 3(ii).1 Restated and Amended Bylaws of Flexpoint Sensor Systems, Inc. (Incorporated by reference to Exhibit 3(ii).1 of the Company's Quarterly Report on Form 10-QSB, dated September 30, 1998). 3(ii).2 Bylaws of Sensitron, Inc. (Incorporated by referenced to Exhibit 3(ii).2 of the Company's Annual Report on Form 10-KSB, dated March 31, 1998). 3(ii).3 Bylaws of Flexpoint, Inc. (Incorporated by referenced to Exhibit 3(ii).3 of the Company's Annual Report on Form 10-KSB, dated March 31, 1998). 3(ii).4 Bylaws of Technology and Machine Company, Inc. (Incorporated by referenced to Exhibit 3(ii).4 of the Company's Annual Report on Form 10-KSB, dated March 31, 1998). 10.1 Employment Agreement with Douglas M. Odom (Incorporated by reference to Exhibit 10.1 of the Company's current report on Form 8-K, dated April 9, 1998). 10.2 Lease Agreement between 72nd South Associates and the Company (Incorporated by reference to Exhibit 10.2 of the Company's current report on Form 8-K, dated April 9, 1998). 10.3 Agreement between Ohio Art and the Company (certain portions of the agreement were omitted from the exhibit pursuant to a grant of confidential treatment) (Incorporated by reference to Exhibit 10.3 of the Company's current report on Form 8-K, dated April 9, 1998). 14 10.4 Purchase and Supply Agreement by and among Flexpoint, Inc. and Delphi Automotive Systems (certain portions of the agreement were omitted from the exhibit pursuant to a grant of confidential treatment) (Incorporated by reference to Exhibit 10.4 to the Company's annual report on Form 10-KSB, dated December 31, 1998). 10.5 Industrial Space Lease between Prudential Insurance Company of America and Flexpoint, Inc. (Incorporated by reference to Exhibit 10.5 to the Company's annual report on Form 10-KSB, dated December 31, 1998). 27.1 Financial Data Schedule (b) Reports on Form 8-K: None. 15 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. Date: April 24, 2000 FLEXPOINT, INC. By /s/ Douglas M. Odom --------------------------- Douglas M. Odom President, Chief Executive Officer, Director Date: April 24, 2000 By /s/ Thomas N. Strong --------------------------- Thomas N. Strong Chief Accounting Officer