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 March 31, 2006
[ ] 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 May 1, 2006, 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.........12
Item 3. Controls and Procedures...........................................17
PART II: OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......17
Item 6. Exhibits..........................................................18
Signatures................................................................19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to our condensed
consolidated financial position as of March 31, 2006, the condensed
consolidated statements of operations for the three month periods ended March
31, 2006 and 2005, and the condensed consolidated statements of cash flows and
stockholders' equity for the three month period ended March 31, 2006 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 three month
period ended March 31, 2006, 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) March 31, 2006
and December 31, 2005.....................................................4
Condensed Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 2006 and 2005, and for the
Cumulative period from February 24, 2004, (Date of Emergence from
Bankruptcy) through March 31, 2006........................................5
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
for the period from February 24, 2004 (Date of Emergence from
Bankruptcy) through December 31, 2004, for the year ended December 31,
2005 and for the Three Months Ended March 31, 2006 .......................6
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 2006 and 2005, and for the Cumulative
period from February 24, 2004, (Date of Emergence from Bankruptcy)
through March 31, 2006....................................................7
Notes to Condensed Consolidated Financial Statements....................8-11
3
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2006 2005
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,563,239 $ 1,964,487
Prepaid expenses 25,056 34,661
- ---------------------------------------------------------------------------
Total Current Assets 1,588,295 1,999,148
Long-Term deposits 6,500 6,500
Property and Equipment, net of accumulated
depreciation of $246,632 and $205,640 1,199,674 1,238,404
Patents and Proprietary Technology, net of
accumulated amortization of $302,909
and $264,667 1,665,441 1,703,683
Goodwill 5,356,414 5,356,414
- ---------------------------------------------------------------------------
Total Assets $ 9,816,324 $ 10,304,149
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 45,242 $ 41,737
Accrued liabilities 54,839 43,325
- ---------------------------------------------------------------------------
Total Current Liabilities 100,081 85,062
- ---------------------------------------------------------------------------
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 issued
and outstanding 22,992 22,992
Additional paid-in capital 13,777,275 13,777,276
Warrants and options outstanding 2,752,818 2,699,565
Deficit accumulated during the development stage (6,836,842) (6,280,746)
- ---------------------------------------------------------------------------
Total Stockholders' Equity 9,716,244 10,219,087
- ---------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 9,816,324 $ 10,304,149
============================================================================
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 Cumulative
Period from
February 24, 2004
(Date of Emergence)
For the Three Months From Bankruptcy)
Ended March 31, through
2006 2005 March 31, 2006
- ------------------------------------------------------------------------------------
Design, Contract and Testing Revenue $ 742 $ 16,547 $ 358,770
- ------------------------------------------------------------------------------------
Operating Costs and Expenses
Amortization of patents and
proprietary technology (38,242) (37,461) (262,433)
Cost of revenue (433) (82,179) (94,730)
Administrative and marketing expense (423,410) (262,471) (4,822,927)
Research and development expense (106,981) - (586,396)
- ------------------------------------------------------------------------------------
Total Operating Costs and Expenses (569,066) (382,111) (5,766,486)
- ------------------------------------------------------------------------------------
Other Income and Expenses
Interest expense - (6,122) (1,576,054)
Interest income 11,256 4,518 70,800
Sublease rent income 972 972 4,860
Gain (loss) on forgiveness of debt - - 71,268
- ------------------------------------------------------------------------------------
Net Other Income (Expense) 12,228 (632) (1,429,126)
- ------------------------------------------------------------------------------------
Net Loss $ (556,096) $ (366,196) $ (6,836,842)
====================================================================================
Basic and Diluted Loss Per Share $ (0.02) $ (0.02)
====================================================================================
Basic and Diluted Weighted-Average
Common Shares Outstanding 22,992,887 21,408,554
====================================================================================
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 STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 24, 2004 (DATE OF EMERGENCE
FROM BANKRUPTCY) THROUGH DECEMBER 31, 2004, FOR THE YEAR ENDED DECEMBER 31, 2005,
AND FOR THE THREE MONTHS ENDED MARCH 31, 2006
(UNAUDITED)
Deficit
Accumulated
Common Stock Additional Warrants During the Total
------------------------- Paid-in and Options Development Stockholders'
Shares Amount Capital Outstanding Stage Equity
- --------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Balance-February 24,
2004 (Date of Emergence
from Bankruptcy) 14,098,202 $ 14,098 $ 4,952,166 $ - $ - $ 4,966,264
Beneficial debt
conversion option - - 1,500,000 - - 1,500,000
Conversion of note payable,
March 31 and May 19, 2004,
$.50 per share 3,000,000 3,000 1,497,000 - - 1,500,000
Issuance for consulting
services, March 3 2004,
$1.15 per share 100,000 100 114,580 - - 114,680
Stock based compensation
from 650,000 warrants
issued on March 3, 2004
for consulting services - - - 731,328 - 731,328
Issuance for acquisition
of equipment and
proprietary technology
from Flexpoint Holdings
LLC, a company controlled
by a stockholder, March 31,
2004, $ 1.21 per share 1,600,000 1,600 1,929,709 - - 1,931,309
Issuance for compensation
November 24, 2004, $1.48
per share 1,200,000 1,200 1,774,800 - - 1,776,000
Net loss - - - - (4,510,726) (4,510,726)
- ----------------------------------------------------------------------------------------------------------
Balance-December 31, 2004 19,998,202 19,998 11,768,255 731,328 (4,510,726) 8,008,855
Issuance of common stock
at $ .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
Issuance of 30,000
warrants at $1.38 per
warrant for services
rendered July 2005 - - - 41,300 - 41,300
Issuance of 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 - - - - (1,770,020) (1,770,020)
- ----------------------------------------------------------------------------------------------------------
Balance -
December 31, 2005 22,992,887 22,992 13,777,276 2,699,565 (6,280,746) 10,219,087
Stock-based compensation
to employees from stock
options - - - 53,253 - 53,253
Net loss - - - - (556,096) (556,096)
- ----------------------------------------------------------------------------------------------------------
Balance - March 31, 2006 22,992,887 22,992 13,777,276 2,752,818 (6,836,842) 9,716,244
==========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
6
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Cumulative
Period from
February 24, 2004
For the Three For the Three (Date of Emergence)
Months Ended Months Ended From Bankruptcy)
March 31, March 31, through
2006 2005 March 31, 2006
- -------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net loss $ (556,096) $ (366,196) $ (6,836,842)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 40,992 38,129 246,632
Amortization of patents and proprietary technology 38,242 37,461 302,909
Issuance of common stock and warrants for services - - 2,695,053
Expenses paid by increase in convertible note payable - - 60,000
Amortization of discount on note payable - - 1,556,666
Stock-based compensation to employees 53,253 - 53,253
Changes in operating assets and liabilities:
Accounts receivable - (6,646) -
Accounts payable 4,792 (43,030) (161,577)
Accrued liabilities 11,514 33,544 52,347
Deferred revenue - - (343,750)
Prepaid expenses 9,605 - (25,056)
Deposits - - (6,500)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (397,698) (306,738) (2,406,865)
- --------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for the purchase of equipment (2,262) (31,792) (197,574)
Payments for patents - (2,977) (43,626)
Payment for acquisition of equipment and proprietary
technology from Flexpoint Holdings, LLC - - (265,000)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,262) (34,769) (506,200)
- --------------------------------------------------------------------------------------------------------
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 - (384,768) (460,300)
Proceeds from notes payable - related parties - - 445,300
Proceeds from borrowings under convertible note payable - - 583,334
- --------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities - 3,522,439 4,475,541
- --------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents (399,960) 3,180,932 1,562,476
Cash and Cash Equivalents at Beginning of Period 1,964,487 54,358 2,051
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,564,527 $ 3,235,290 $ 1,564,527
========================================================================================================
Supplemental Cash flow Information:
Cash paid for interest $ - $ 10,634 $ 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 consolidated financial statements of Flexpoint Sensor
Systems, Inc. and subsidiaries for the years ended December 31, 2005, included
in the Company's Form 10-KSB filed with the Securities and Exchange Commission
on March 15, 2006. 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, 2006.
Nature of Operations - The Company is located in Salt Lake City, Utah and 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. At March 31, 2006, the Company had not
entered into any manufacturing agreements except as discussed in Note 4. Even
though the Company is making strides forward with its business plan, it is
likely that significant progress may not occur within the next four to six
months. Accordingly, the Company may not realize significant revenues or
become profitable within the next twelve months which would require additional
financing to fund its long-term cash needs. The Company may be required to
rely on debt financing, loans from related parties, and private placements of
common stock for additional funding.
Valuation of Long-lived Assets - The carrying values of the Company's
long-lived assets are reviewed for impairment annually and whenever events or
changes in circumstances indicate that they may not be recoverable. When
projections indicate that the carrying value of the long-lived asset is not
recoverable, the carrying value is reduced by the estimated excess of the
carrying value over the projected discounted cash flows. As a result of
management's assessment of the recoverability of long-lived assets at March
31, 2006, no impairment was recognized at that date.
Research and Development - Research and development costs are recognized as
expense during the period incurred until the conceptual formulation, design,
and testing of a process is completed and the process has been determined to
be commercially viable.
Stock Based Compensation - In December 2004, the FASB issued Statement No. 123
(Revised 2004), "Share-Based Payment" ("SFAS No.123R"). SFAS No. 123R
supersedes APB 25 and 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 APB 25, no compensation was recorded in
earnings for the Company's stock-based options granted under the 2005 Stock
Incentive Plan (the "Plan"). The pro forma effects on net income and earnings
per share for the awards issued under the Plan were instead disclosed in a
footnote to the financial statements. Under SFAS No. 123R, all share-based
compensation is measured at the grant date, based on the fair value of the
award, and is recognized as an expense in earnings over the requisite service
period. On January 1, 2006, the
8
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company adopted the provisions of SFAS No. 123R, for its share-based
compensations plans and began recognizing the unvested portion of employee
compensation from stock options and awards equal to the unamortized grant-date
fair value over the remaining vesting period. Furthermore, compensation costs
will also be recognized for any awards issued, modified, repurchased, or
canceled after January 1, 2006.
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 March 31, 2006, there were
warrants to purchase 4,306,335 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.
NOTE 2 - COMMON STOCK
Private Placement of Common Stock and Warrants - 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 $3,907,207, net of $347,294 of cash offering
costs. As part of this private placement, 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 estimated by
the Company using 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.
Compensation to Board Members - On August 25, 2005, the company issued to a
Director 18,350 shares of restricted common stock for director services valued
at $31,745 or $1.73 per share, the quoted market value of the stock on the day
of this transaction.
NOTE 3 - STOCK OPTION PLANS
On August 25, 2005, the Board of Directors of the Company approved and adopted
the 2005 Stock Incentive Plan (the Plan). The Plan became effective upon its
adoption by the Board and will continue in effect for ten years, unless
terminated. This plan was approved by the stockholders of the Company on
November 22, 2005. Under the Plan, the exercise price for all options issued
will not be less than the average quoted closing market price of the Company's
trading common 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 awarded under the plan is 2,500,000.
The Company utilized the Black-Scholes model for calculating the fair value
pro forma disclosures under SFAS No. 123 and will continue to use this model,
which is an acceptable valuation approach under SFAS No. 123R. This model
requires the input of subjective assumptions, including the expected price
9
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
volatility of the underlying stock. Projected data related to the expected
volatility and expected life of stock options is based upon historical and
other information, and notably, the Company's common stock has limited trading
history. Changes in these subjective assumptions can materially affect the
fair value of the estimate, and therefore, the existing valuation models do
not provide a precise measure of the fair value of the Company's employee
stock options.
On August 25, 2005 the Company granted options to employees to purchase an
aggregate 1,159,000 shares of common stock at an exercise price of $1.91 per
share. The options vest over three years on the employee's employment
anniversary. The Company used the following assumptions in estimating the
fair value of the options issued August 25, 2005: market value at time of
issuance - $1.73; expected holding period - 8 years; risk-free interest rate -
4.18%; dividend yield - 0%; expected volatility - 200%; estimated forfeiture
percentage - 10%. Using these assumptions, the options granted have a
weighted average fair value of $1.72 per share.
On February 27, 2006 the Company granted options to employees to purchase an
aggregate 75,000 shares of common stock at an exercise price of $2.07 per
share. The options vest over three years on the employee's employment
anniversary. The Company used the following assumptions in estimating the
fair value of the options issued February 27, 2006: market value at time of
issuance - $2.00; expected holding period - 7 years; risk-free interest rate -
4.26%; dividend yield - 0%; expected volatility - 200%; estimated forfeiture
percentage - 10%. Using these assumptions, the options granted have a weighted
average fair value of $1.99 per share.
During the period ended March 31, 2006, the Company recognized $53,253 of
stock-based compensation expense. Information about all employee options
outstanding is as follows:
Weighted
average
exercise
For the Period Ending March 31, 2006 Shares price
-----------------------------------------------------------
Outstanding at beginning of year 1,159,000 $ 1.91
Granted Jan - March 2006 75,000 2.07
-----------------------------------------------------------
Outstanding at end of period 1,234,000 $ 1.92
===========================================================
A summary of employee options outstanding and employee options exercisable
under the Company's plan is set forth below:
Outstanding Exercisable
-------------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Number of Remaining Average Number of Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------
$1.91 - $2.07 1,234,000 9.44 $ 1.92 274,000 $ 1.91
- ---------------------------------------------------------------------------
10
FLEXPOINT SENSOR SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RELATED PARTY MANUFACTURING CONTRACT
In September 2005 the Company entered into a manufacturing agreement with R&D
Products, LLC, a Utah limited liability company, doing business in Midvale,
Utah. For the purpose of this contract, management considers R&D Products to
be a Related Party because a controlling member of R&D Products, LLC is also a
non-controlling interest shareholder of Flexpoint Sensor Systems, Inc. R&D
Products has developed a mattress with multiple air chambers that use Bend
Sensors(r) and the Company has agreed to manufacture the Bend Sensors(r) for
the mattresses. The initial order is for 300,000 Bend Sensors(r) to be used
to begin manufacture of 10,000 mattresses. The realization of the
manufacturing and sales of the Bend Sensors(r) is dependent upon R&D Products
selling either their bed directly or licensing their technology to a third
party. There are no guarantees that R&D will make such sales in such
quantities to meet the demands of this contract.
NOTE 5 - PATENT PROTECTION PROCEEDINGS
In January 2006, the Company filed a complaint in the United States District
Court for the District of Utah in Salt Lake City against Michael W. Wallace
for possible Patent encroachment.
11
In this report references to "Flexpoint Sensor," "we," "us," and "our" refer
to Flexpoint Sensor Systems, Inc. and its subsidiary.
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 Bend Sensor(R)technology and equipment. Our
planned operations have not commenced and our activities primarily include
acquiring equipment and technology, organizing activities, obtaining financing
and seeking manufacturing contracts.
During the past quarter we have concentrated our development efforts with our
customers. Negotiations for potential automotive applications using our Bend
Sensors(R) technology are in process, but we have not yet entered into a major
contract for the sale of our automotive products. We are also continuing to
develop new products that we may sell or license to an industrial control
company.
Finalizing a major contract with a customer remains our greatest challenge.
We must continue to obtain funding to operate and expand our operations so
that we can deliver our product to the market. 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 four to six
months. Accordingly, we cannot guarantee that we will realize significant
revenues or that we will become profitable within the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Our revenues are not to a level to support our operations. Our revenues are
primarily from design, contract and testing services. For the quarter ended
March 31, 2006 ("2006 first quarter") net cash used by operating activities
was $397,698 compared to $306,738 for the quarter ended March 31, 2005 ("2005
first quarter"). For the past twelve months we have relied on proceeds from a
private offering to satisfy our cash shortfalls.
We conducted the private offering during the first quarter of 2005 to raise
funds for operations. We realized net proceeds of $3,907,207 from our private
placement and as a result we had $1,563,239 in cash and cash equivalents at
March 31, 2006. 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 $8,929,005, 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,
12
the warrant holders will determine when and if the warrants are exercised.
Management believes that our current cash burn rate is $150,000 per month and
that the remaining proceeds from the private placement will fund our
operations for at least the next six months. We will require additional
financing to fund our long-term cash needs and we may be required to rely on
debt financing, loans from related parties, and private placements of our
common stock for additional funding. However, we cannot assure you that we
will be able to obtain financing, or that sources of financing, if any, will
continue to be available, and if available, that they will be on terms
favorable to us. We intend to use revenue and our cash to purchase and
install equipment and develop our ISO/TS-16949 certified facility.
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 during the past year and there can be no assurance that
agreements will come to fruition in the future or that a desired technological
application can be brought to market.
COMMITMENTS AND CONTINGENCIES
Our principal commitments consist of total current liabilities of $100,081 at
March 31, 2006 and our operating lease. 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 as of December
31, 2005 were $395,889.
Our total current liabilities include accounts payable of $45,242 related to
normal operating expenses, including health insurance, utilities, production
supplies and travel expense; also expenses for professional fees regarding
audit fees and legal fees related to the defense of patent rights. Accrued
liabilities at March 31, 2006 were $54,839 and were related to payroll tax
liabilities, accrued audit and tax expenses, accrued lease expense and accrued
PTO.
In January 2006 we initiated a legal action for patent encroachment and we
anticipate that this legal action will result in legal costs of approximately
$100,000. We will divert a portion of our financial resources to continue
this legal matter.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Estimates of
particular significance in our financial statements include goodwill and the
annual tests for impairment of goodwill and valuing stock option compensation.
We annually test goodwill for impairment or when a triggering event occurs.
Impairment is indicated if undiscounted cash flows are less then the carrying
value of the assets. The amount of impairment is measured using a
discounted-cash-flows model considering future revenues, operating costs and
risk-adjusted discount rate and other factors. We performed a goodwill
impairment test during 2005 and concluded there was no impairment of goodwill.
We account for stock options under Statement of Financial Accounting Standards
No. 123(R), effective January 1, 2006. Statement 123(R) requires that
recognition of the cost of employee services received in exchange for stock
options and awards of equity instruments be based on the grant-date fair value
of such options and awards, over the period they vest.
13
The fair value of the options we have granted is estimated at the date of
grant using the Black-Scholes American option-pricing model. Option pricing
models require the input of highly sensitive assumptions, including expected
stock volatility. Also, our stock options have characteristics significantly
different from those of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimate. Management
believes the best input assumptions available were used to value the options
and that the resulting option values are reasonable. During the 2006 first
quarter we recognized $53,253 of stock-based compensation expense for our
stock options.
RESULTS OF OPERATIONS
The following discussions are based on the consolidated operations of
Flexpoint Sensor and its subsidiary, Sensitron, and should be read in
conjunction with our unaudited financial statements the three month periods
ended March 31, 2006 and 2005. These financial statements are included in
this report at Part I, Item 1, above.
SUMMARY OPERATING RESULTS
--------------------------
Quarter ended Quarter ended
March 31, 2006 March 31, 2005
--------------- --------------
Revenue $ 742 $ 16,547
Total operating costs and expenses (569,066) (382,111)
Net other income (expense) 12,228 (632)
Net profit (loss) (556,096) (366,196)
Basic and diluted loss per share $ (0.02) $ (0.02)
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. Revenue from the
sale of a product is recorded at the time of shipment to the customer.
For the 2006 and 2005 first quarters our revenue was primarily from design,
contract and testing services. The decrease in revenue for the 2006 first
quarter is a result of decrease in revenue from design engineering work.
Total operating costs and expenses increased for the 2006 first quarter
compared to the 2005 first quarter primarily as a result of increases in
administrative and marketing expenses related to litigation fees and expense
for share-based option compensation according to SFAS No. 123(R). In
addition, we recorded research and development expense of $106,981 primarily
related to a change in account methodology to directly expense research and
development costs rather than include them in general administrative expense.
Cost of revenue for the 2006 first quarter decreased to $433 compared to
$82,179 for the 2005 first quarter because research and development costs were
allocated to cost of revenue in 2005, but were expensed separately as research
and development expense in 2006.
Total other income for the 2006 and 2005 first quarters was primarily the
result of interest income related to interest on the proceeds of the private
placement offering which were deposited in a savings account. Total other
expense of $632 for the 2005 first quarter was primarily the result of
interest expense of $6,122 related to loans.
As a result of the above, we recorded a net loss for both the 2006 and 2005
first quarters.
14
SUMMARY BALANCE SHEET INFORMATION
The chart below presents a summary of our balance sheets at March 31, 2006 and
December 31, 2005.
March 31, 2006 December 31, 2005
-------------- -----------------
Cash and cash equivalents $ 1,563,239 $ 1,964,487
Total current assets 1,588,295 1,999,148
Total assets 9,816,324 10,304,149
Total current liabilities 100,081 85,062
Deficit accumulated during (6,836,842) (6,280,746)
the development stage
Total stockholders equity $ 9,716, 244 $ 10,219,087
Cash and cash equivalents decreased at March 31, 2006 compared to December 31,
2005 because we had minimal revenue in the 2006 first quarter to provide cash.
Until our revenue increases, our cash will continue to decrease.
Our non-current assets decreased at March 31, 2006 due to adjustments for
depreciation and amortization. These assets include property and equipment
valued at $1,199,674, patents and proprietary technology of $1,665,441,
goodwill of $5,356,414, and deposits of $6,500.
Total current liabilities increased at March 31, 2006 primarily as a result of
increases in accounts payable and accrued liabilities.
Factors Affecting Future Performance
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. For
the 2006 first quarter, we incurred a net loss of $556,096 and had negative
cash flows from operating activities of $397,698. We anticipate proceeds from
our private placement in March of 2005 will fund our operations for at least
the next six 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
.. attracting and retaining additional qualified technical and marketing
personnel.
15
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 contracts.
Based on projected orders under anticipated agreements, we will need to
complete a second production line and have it installed and approved in 2006.
The second manufacturing line is expected to result in increased manufacturing
capacity and manufacturing efficiencies. We have completed installation of
our first production line and are in the process of qualifying our own
manufacturing facility for ISO/TS-16949 certification. However, we cannot
assure you that we will satisfy ISO/TS-16949 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.
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 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, will be expensive and 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.
Research and development may result in problems which may become
insurmountable to full implementation of production.
Customers 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.
In that event, we will be unable to recover the costs of the pre-production
research and development. However, we are currently unaware of any
insurmountable problems with ongoing research and development that may prevent
further development of an application.
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 Seat Mat System and we believe that our Seat 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(R)
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.
16
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(R) 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.
Ongoing industry consolidation among worldwide automotive parts suppliers
and financial difficulties of U.S.auto makers 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(R) technology.
In addition, in recent months large U.S. auto makers have announced plans to
close plants and reduce their work force, some Tier 1 suppliers are in
bankruptcy or in financial difficulty, and two automobile manufacturers have
reported increased financial difficulties. These industry trends may limit
the market for our products.
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our filings under the Exchange
Act is recorded, processed, summarized and reported within the periods
specified in the rules and forms of the SEC. This information is accumulated
and communicated to our executive officers to allow timely decisions regarding
required disclosure.
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 first quarter of
2006 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 27, 2006 we authorized the issuance of options to purchase 75,000
shares of common stock to Ryan C. Willard. The options were granted under our
2005 Stock Incentive Plan, have an exercise price of $2.07 and vest in 25,000
increments over a three year period. 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.
17
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)
4.1 Common stock purchase warrant of Investors Stock Daily, Inc., dated
July 26, 2005 (Incorporated by reference to exhibit 4.1 to Form 10-KSB
filed March 15, 2006)
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)
10.4 Manufacturing Agreement between Flexpoint Sensor and R&D Products,
Inc., dated September 28, 2005 (Incorporated by reference to exhibit
10.1 of Form 8-K, filed October 3, 2005)
20.1 Flexpoint Sensor Systems, Inc. 2005 Stock Incentive Plan (Incorporated
by reference to Schedule 14A, filed October 27, 2005)
20.2 Audit Committee Charter (Incorporated by reference to Schedule 14A,
filed October 27, 2005)
21.1 Subsidiaries of Flexpoint Sensor Systems, Inc. (Incorporated by
reference to exhibit 21.1 to Form 10-KSB filed March 15, 2006)
18
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: May 9, 2005 _______________________________________
Clark M. Mower
President, Chief Executive Officer and
Director
/s/ John A. Sindt
Date: May 9, 2005 _______________________________________
John A. Sindt
Chairman of the Board
Principal Financial and Accounting Officer
/s/ B. Fred Atkinson, Jr.
Date: May 9, 2005 _______________________________________
B. Fred Atkinson, Jr.
Secretary/Treasurer and Comptroller
19