1
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
Commission File Number 0-24368
MICROPOINT, INC.
(Exact name of small business issuer as identified in its charter)
Delaware 33-0615178
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6906 South 300 West, Midvale, Utah 84047
(Address of principal executive offices)
(Zip Code)
(801) 568-5111
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[x] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of November 13, 1998: 15,929,808.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
September 30, December 31,
ASSETS 1998 1997
--------------- ---------------
Current Assets
Cash $ 354,158 $ 106,494
Trade accounts receivable, net of
allowance of $0 and $151,567 385,606 45,823
Stock subscription receivable - 390,000
Inventory 182,895 -
Prepaid expenses 50,884 -
Note receivable 1,042 4,952
Related party receivable - 47,989
--------------- ----------------
Total Current Assets 974,585 595,258
--------------- ----------------
Property and Equipment 1,305,062 924,696
Less accumulated depreciation (280,979) (205,808)
--------------- ----------------
Net Property and Equipment 1,024,083 718,888
--------------- ----------------
Goodwill, Net of Accumulated Amortization
of $71,881 and $53,911 47,921 65,891
Deposits 16,279 13,279
Patents, net of accumulated amortization
of $41,418 and $30,618 97,158 76,702
--------------- ----------------
Total Assets $ 2,160,026 $ 1,470,018
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Trade accounts payable $ 210,726 $ 505,732
Related party payable 6,071 14,562
Accrued liabilities 76,268 398,473
Income taxes payable 8,314 -
Deferred revenue - 200,000
Notes payable 258,073 561,409
--------------- ----------------
Total Current Liabilities 559,452 1,680,176
--------------- ----------------
Stockholders' Equity (Deficit)
Preferred stock no shares issued - -
Common stock $0.001 par value;
100,000,000 shares authorized;
15,860,279 and 9,860,279 shares
issued and outstanding 15,860 9,860
Additional paid-in capital 6,085,867 3,108,593
Deficit accumulated during the
development stage (4,501,153) (3,328,611)
--------------- -----------------
Total Stockholders' Equity (Deficit) 1,600,574 (210,158)
--------------- -----------------
Total Liabilities and Stockholders'
Equity (Deficit) $ 2,160,026 $ 1,470,018
=============== =================
The accompanying notes are an integral part of these financial statements.
3
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the Period
January 5, 1995
For the Three Months For the Nine Months (Date of
Ended September 30 Ended September 30 Inception)
-------------------------- ------------------------- Through
1998 1997 1998 1997 Sept. 30, 1998
------------ ------------ ------------ ----------- --------------
Sales $ 957,378 $ 22,925 $ 1,314,509 $ 260,273 $ 2,689,606
Cost of sales 453,087 8,110 608,625 92,079 1,316,997
------------ ------------ ------------ ----------- --------------
Gross profit 504,291 14,815 705,884 168,194 1,372,609
General and administrative
expense 350,253 146,108 1,133,699 733,846 3,124,615
Research and development 324,887 244,183 764,709 397,362 2,684,912
------------ ------------ ------------ ----------- --------------
Loss from operations (170,849) (375,476) (1,192,524) (963,014) (4,436,918)
Interest expense - (8,797) (40) (8,797) (54,084)
Interest income 5,441 - 22,028 - 32,538
Other income/expense 583 (10,831) (2,006) (10,831) (42,689)
------------ ------------ ------------ ----------- --------------
Net Loss Before Income Taxes (164,825) (395,104) (1,172,542) (982,642) (4,501,153)
Provisions for income taxes - - - - -
------------ ------------ ------------ ----------- --------------
Net Loss $ (164,825) $ (395,104) $ 1,172,542) $ (982,642) $ (4,501,153)
============ ============ ============ =========== ==============
Basic and Diluted Loss Per
Common Share $ (0.01) $ (0.03) $ (0.09) $ (0.09) $ (0.42)
============ ============ ============ =========== ==============
Weighted average number of
common shares used in per
share calculation 15,860,279 11,574,786 13,618,521 11,198,236 10,630,695
============ ============ ============ =========== ==============
The accompanying notes are an integral part of these financial statements.
4
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the Period
January 5, 1995
For the Nine Months (Date of Inception)
Ended September 30, Through
------------------------------- Sept. 30
1998 1997 1998
--------------- -------------- -----------------
Cash Flows From Operating Activities
Net loss $ (1,172,542) $ (982,642) $ (4,501,153)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 103,941 161,815 399,791
Stock issued for services - - 200,000
Changes in operating assets and liabilities:
Accounts receivable (339,783) (20,516) (249,565)
Inventory (182,895) - (182,895)
Accounts payable (295,006) 273,457 31,912
Accrued liabilities (316,134) (54,098) (21,400)
Deferred revenue (200,000) 200,000 (6,163)
Other assets (50,685) 180 (48,835)
--------------- -------------- -----------------
Net Cash Used By Operating Activities (2,453,104) (421,804) (4,378,308)
--------------- -------------- -----------------
Cash Flows From Investing Activities
Payments to Flexpoint prior to acquisition - - (268,413)
Cash paid to acquire Tamco - - (25,000)
Collection of receivable from escrow agent 64,825 - 64,825
Payments for the purchase of property
and equipment (388,366) (90,000) (1,009,900)
Proceeds received from sale of securities
available-for-sale 434,568 - 434,568
Investment in patents (31,256) (11,769) (102,551)
Payments received from related parties 33,427 - 33,427
Other - - 3,138
Net cash received from Nanotech acquisition 1,492,906 - 1,492,906
-------------- -------------- -----------------
Net Cash Used By Investing Activities 1,606,104 (101,769) 623,000
-------------- -------------- -----------------
Cash Flows From Financing Activities
Proceeds from the issuance of common stock - 400,375 2,933,000
Cash payments to officers to repurchase stock - (50,000) (50,000)
Cash paid for offering costs - - (123,020)
Proceeds from borrowings - (176,416) 303,960
Principal payments of long-term debt (295,336) (10,000) (340,751)
Proceeds of bridge loan 1,000,000 - 1,000,000
Proceeds from stock subscription receivable 390,000 - 390,000
Proceeds from related party notes - 39,562 60,208
Principal payments of related party notes - - (63,931)
-------------- -------------- -----------------
Net Cash Provided By Financing
Activities 1,094,664 556,353 4,109,466
-------------- -------------- -----------------
Net Change In Cash 247,664 32,780 354,158
Cash at Beginning of Period 106,494 761 -
-------------- -------------- -----------------
Cash at End of Period $ 354,158 $ 33,541 $ 354,158
============== ============== =================
The accompanying notes are an integral part of these financial statements.
<PAGE > 5
NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The accompanying consolidated financial
statements include the accounts of Sensitron, Inc. (Sensitron) for all periods
prsented and the accounts of Micropoint Inc. (formerly Nanotech Corporation),
Flexpoint, Inc. (Flexpoint) and Technology and Machine Company, Inc. (Tamco)
from the dates of their acquisitions in 1995 through September 30, 1998.
These entities are collectively referred to as "the Company". All significant
intercompany transactions and account balances have been eliminated in
consolidation.
Nature of Operations Sensitron Inc. was incorporated under the laws of
the State of Utah on January 5, 1995. Upon its formation, the Company began
operations and is a development stage enterprise engaged principally in
designing, engineering, and manufacturing sensor technology and equipment
using flexible potentiometer technology owned by Sensitron. Sales have
principally been to automobile component manufacturers and toy manufacturers.
Nanotech Corporation (now Micropoint) was incorporated in June 1992 as a shell
corporation looking for investment opportunities. On December 30, 1997,
Sensitron entered into an agreement with Micropoint, Inc. ("Micropoint,)
whereby Sensitron Acquisition Corporation, a newly-formed wholly-owned
subsidiary of Micropoint, was to be merged into Sensitron. The agreement
required Micropoint to raise capital of approximately $3,000,000 in a private
placement before the merger was to occur. The $3,000,000 was raised and the
merger was consummated in April 1998. As a result, the Sensitron shareholders
became the majority shareholders of the Company in a transaction intended to
qualify as a tax-free reorganization. The merger has been accounted for by the
purchase method of accounting with the acquisition at Micropoint's historical
cost; therefore, no goodwill has been recognized for this transaction.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Interim Financial Statements The accompanying consolidated financial
statements at September 30, 1998 and for the three and nine months ended
September 30, 1998 and 1997 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 results of operations for the nine
months period ended September 30, 1998 are not necessarily indicative of the
operating results to be expected for the full year.
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These financial statements include modifications and reclassifications from
the interim unaudited statements included in Form 10QSB as of June 30, 1998.
None of these modifications or reclassifications are material to the financial
position or results of operations of the Company.
Business Condition The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplates 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 during the years ended December 31, 1997 and 1996
and cumulative from inception through September 30, 1998, which conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's continued existence is dependent upon its ability to
achieve profitable operations. The Company has negotiated a significant
contract to supply flexible sensors to an automobile component manufacturer,
which, if successful, would provide significant revenue to the Company.
Management believes this and other similar potential contracts will provide
sufficient cash flows for the Company to continue as a going concern and to
ultimately establish profitable operations.
Fair Values of Financial Instruments The amounts reported as cash, accounts
receivable, accounts payable, and notes payable are considered to be
reasonable approximations of their fair values. The fair value estimates were
based on market information available to management at the time of the
preparation of the financial statements. The Company's investments in
securities were sold during the nine months ended September 30, 1998. Total
proceeds from the sale of securities were $434,568 with gross realized gain of
$711. The net realized gain is included as other income in the accompanying
statements of operations.
Concentration of Risk and Major Customers At September 30, 1998 the Company
had cash in excess of insured limits. The concentration of business in one-
industry subjects the Company to a concentration of credit risk relating to
trade accounts receivable. The Company relies on large production contracts
for its business and generally does not require collateral from its customers
with respect to the Company's trade receivables.
Inventory The Company values its inventory at the lower of cost or market.
Cost is determined using the first-in, first-out method.
Property and Equipment Property and equipment is stated at cost. Additions
and major improvements are capitalized while maintenance and repairs are
charged to operations. Upon retirement, sale or disposition, the cost and
accumulated depreciation of the items sold are eliminated from the accounts,
and any resulting gain or loss is recognized in operation. Depreciation is
computed using the straight-line and the double-declining-balance methods and
is recognized over the estimated useful lives of the property and equipment,
which are
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five to seven years.
Long-Lived Assets The realization of non-current assets is evaluated
periodically when events or circumstances indicate a possible inability to
recover the carrying amount. Such evaluation is based upon various analyses
and significant management judgement. No impairment losses were required to
be recognized in the accompanying financial statements.
Revenue Recognition Revenue from the sale of products is recorded at the
time of shipment to the customers. Revenue from research and development
contracts is recognized as the contracts are completed. Revenue from
contracts to license the Company's technology to others is deferred until all
conditions under the contracts are met by the Company and then recognized as
revenue over the remaining term of the contracts. As of December 31, 1997 the
Company had $200,000 in deferred revenue from a licensing agreement with Ohio
Art. During the each of the second and third quarters of 1998, the Company
recognized $100,000 in licensing revenues.
Stock-Based Compensation Stock-based compensation arising from granting
stock options to employees is measured by the intrinsic-value method. This
method recognizes compensation expense based on the difference between the
fair value of the underlying common stock and the exercise price on the date
granted. The Company also presents pro forma results of operations assuming
compensation had been measured by the fair-value method.
Basic and Diluted Loss Per Share In 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No.128, Earnings Per Share. Statement
No. 128 specifies the computation, presentation, and disclosure requirements
for earnings per share. Loss per share for all periods presented was
restated; however, the effect of the change to loss per share for those
periods was not material.
Basic loss per common share is computed by dividing net loss by the number of
common shares outstanding during the period. Diluted loss per share is
calculated to give effect to stock warrants, options and convertible notes
payable except during loss periods when those potentially issuable commons
shares would decrease the loss per share and have been excluded from the
calculation.
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NOTE 2 PROPERTY AND EQUIPMENT
At December 31, 1997 and September 30, 1998, property and equipment consisted
of the following:
September 30,1998 December 31, 1997
----------------- -----------------
Furniture and fixtures $ 189,449 $ 152,140
Machinery and equipment 546,818 391,672
Office equipment 190,042 104,062
Software 29,029 24,650
Leasehold improvements 349,724 252,172
----------------- -----------------
Total $ 1,305,062 $ 924,696
================ =================
Depreciation expense for the nine months ended September 30, 1998 and 1997 was
$75,146 and $97,538 respectively.
NOTE 3 OTHER ASSETS
Costs to obtain patents have been capitalized and are being amortized over a
five year period. The Company currently has the rights to several patents. The
Company is in the process of developing new patents and protecting its
existing patents internationally. Costs associated for the development of
these new patents have are capitalized. The Company does not amortize any
patents until they have been perfected. The total patent cost capitalized as
of September 30, 1998 and December 31, 1997 was 138,576 and $107,320,
respectively, of which $62,583 relates to perfected patents. Amortization
expense for the nine months ended September 30, 1998 and for the year ending
December 31, 1997 was $10,800 and $12,021, respectively.
Goodwill associated to the acquisition of Tamco is being amortized over five
years using the straight-line method. The carrying value of goodwill was
$23,921 and $35,881 as of September 30, 1998 and 1997, respectively.
Amortization expense for the nine months ending September 30, 1998 and1997 was
$8,970.
Deposits of $16,279 and $13,279 are included in other assets at September 30,
1998 and December 31, 1997. The increase in deposits is due to a payment of
$2,500 for use of equipment and $500 on deposit with Federal Express Company.
NOTE 4 LICENSE AGREEMENT
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In May 1997, the Company granted an otherwise unrelated third party the
worldwide exclusive license to use and sell flexible potentiometers covered
under the Company's patents for use in toy, traditional games and video game
industries. The license does not include the right to manufacture sensors
which will be purchased from the Company. A licensing fee of $500,000 was
required under the agreement relating to the exclusive use of the technology
through December 1998, of which $200,000 had been received by the Company as
of December 31, 1997. An additional $50,000 was received in February 1998. The
remaining $250,000 is due December 31, 1998. After 1998, the exclusive license
is to be maintained under the agreement by the licensee providing revenue from
royalties and fees to the Company of at least $500,000 per year. Royalties to
be received are 2% of sales of the licensee's products in the United States
and 3% of related products to the licensee's international partners.
Under the agreement, the Company guaranteed that it would deliver flexible
potentiometers in marketable quantities to the licensee by June 1, 1998, and
if this condition was not met, it would return any amounts received under the
licensing agreement. Accordingly, recognition of the $200,000 licensing fee
received by December 31, 1997 was deferred at that date. As of September 30,
1998 the Company has met all of its obligations under the agreement and
therefore has recognized the full $200,000 as licensing revenues. Additional
payments received in the future will be recognized as revenue evenly over the
period associated with the payments received.
NOTE 5 CASH FLOW INFORMATION
Supplemental Cash Flow Information Cash payments for interest were $40 and
none during the three and nine months ended September 30, 1998 and $8,797
during both of the same periods in 1997. Due to the cash proceeds generated
from the acquisition of Nanotech, the Company has earned $22,028 in interest
for the nine months ending September 30, 1998 compared to $0 for the same
period last year.
Noncash Investing and Financing Activities In connection with the
reorganization of Sensitron, Inc. on April 11, 1998 the Company acquired all
of the common stock of Nanotech Corporation. In conjunction with this
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 1,991,589
Advances from Nanotech prior to acquisition 1,000,000
Fair value of common stock issued in acquisition (2,983,275)
===============
Net liabilities assumed $ 8,314
On September 26, 1995, the Company acquired all of the common stock of Tamco.
In connection with this acquisition, liabilities were assumed as follows:
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Fair value of assets acquired, including
goodwill of $119,802 $ 170,000
Cash paid in acquisition (25,000)
Fair value of stock issued in acquisition (60,000)
---------------
Net liabilities assumed $ 85,000
===============
On September 26, 1995 the Company acquired all of the common stock of
Flexpoint in exchange for 5,395,000 shares of common stock of the Company.
The following assets and liabilities were acquired at their historical cost
basis:
Historical cost of assets acquired $ 174,229
Advances to Flexpoint prior to acquisition (268,413)
---------------
Net liabilities assumed $ (94,184)
===============
During the period ended December 31, 1995, the Company assumed $13,792 of
legal costs associated with the patents, in connection with the assignment of
patents to the Company by an officer. The Company accepted notes receivable
for $24,000 as consideration of 31,200 shares of common stock.
During the year ended December 31, 1996, the Company issued 260,000 shares of
common stock valued at $0.77 per share, or $200,000, for services. The Company
also offset the deferred offering costs against the proceeds from the sale of
common stock.
During the year ended December 31, 1997, $111,816 of notes payable were issued
to acquire leasehold improvements. The Company issued 110,672 shares of
common stock upon conversion of $53,952 of accounts payable and notes payable.
Common stock was redeemed from officers in exchange for $50,000 of cash and
$150,000 of notes payable. The Company issued common stock in exchange for
stock subscription receivables totaling $390,000.
NOTE 6 EMPLOYMENT AND COMPENSATION AGREEMENTS
During the period ended December 31, 1995, the Company entered into employment
agreements with four officers. Two of the agreements included annual base
salaries of $50,000 and $75,000, respectively. Both agreements were renewed
for one year under the terms of the agreement. Effective August 26, 1997,
both officers resigned from the Board of Directors and sold 6,308,666 shares
of common stock to the Company for approximately $0.03 per share (see Note 8).
As part of the settlement agreement, one of the officers was granted options
to acquire 650,000 shares of common stock at $0.30 per share and 325,000
shares for $0.77 per share for a period of five years. One of the officers
was retained as a consultant for a period of one year. Under the terms of the
agreement the Company and the officers released each other from any future
obligation.
An agreement with a third officer included annual compensation payments of
$50,000. The agreement will expire during 1998. The fourth agreement included
an annual base salary
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of $90,000 during the first year of employment and $120,000 a year thereafter.
This agreement had an initial term of three years and included a $30,000
signing bonus. On December 31, 1997, this agreement was extended for an
additional two years, through December 31, 2000. Under the terms of the
agreement, the officer was granted options to purchase 650,000 shares of
common stock at $0.77 per share.
Effective May 1, 1995, the Company entered into a compensation agreement
whereby an officer was to provide the Company technical assistance and be paid
a monthly fee of $8,333 for five years. During 1997, the Company temporarily
suspended payments which resulted in approximately $38,500 being accrued in
accrued liabilities at December 31, 1997. An agreement was signed April 15,
1998 whereby the Company agreed to pay the officer $160,000 in settlement of
all past and future obligation under the compensation agreement.
NOTE 7 NOTES PAYABLE Notes payable consisted of the following as of
September 30, 1998 and December 31, 1997
September December
30, 1998 31, 1997
------------ ------------
8% note; payable in quarterly payments of $7,083 through April 1,
1998; unsecured $ - $ 49,585
8.5% promissory notes; convertible into common stock through
February 28, 1998 at $0.93 to $1.23 per share; due March 28
1998; secured by equipment 200,000 200,000
Non-interest bearing notes; unsecured; issued for cash and
leasehold improvements; terms for repayment have not
been established 8,073 105,791
Non-interest bearing notes payable to former shareholders; issued in
redemption of common stock; paid February 1998 - 145,000
18% note payable; guaranteed by shareholders; convertible into
common stock at $0.93 per share; due October 17, 1998 50,000 50,000
Other notes - 11,033
----------- ------------
Total Notes Payable $ 258,073 $ 561,409
=========== ============
As of September 30, 1998 management believes $250,000 of the notes payable
will be converted to common stock prior to year end 1998; therefore, no
interest accruals have been made.
NOTE 8 STOCKHOLDERS' EQUITY
In connection with the reorganization agreement with Sensitron, the Company's
common stock was split 13-for-1 on April 11, 1998. All references to shares
in these financial statements reflect the change in the number of shares
outstanding for all periods presented.
In January 1995, an officer and shareholder assigned certain patents to the
Company as an additional contribution to capital of $22,232. No additional
shares were issued to the shareholder for the contribution.
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On March 18, 1996, the Company entered into a share purchase agreement whereby
the Company agreed to issue 1,957,111 shares of its common stock for
$1,300,000 in a private placement offering. The proceeds were received and the
shares were issued throughout 1996 as required by the Company's cash flow
needs. Offering costs incurred in connection with the offering were $246,547.
The deferred offering costs consist primarily of legal and audit fees related
to the preparation of the private placement memorandum.
On August 26, 1997, the Company entered into a settlement agreement with two
officers of the Company whereby the relationship between the officers and the
Company was terminated. As part of the agreement, the Company purchased
6,308,666 shares of common stock from the officers for approximately $0.03 per
share by paying $50,000 in cash and issuing $150,000 of notes payable.
On December 24, 1997, the Company issued 422,500 shares of common stock in
exchange for stock subscriptions in the amount of $390,000 receivable from the
investors. The subscriptions were collected in January 1998.
NOTE 9 STOCK OPTIONS
On April 1, 1995, the Company adopted the Omnibus Stock Option Plan (the
"Plan"). Under the terms of the Plan as amended in October 1997, the Company
may grant options to employees, directors and consultants for up to 5,037,500
shares of common stock. Incentive or non-qualified options may be granted
under the Plan. Options may be granted for a maximum of 10 years. Options
generally vest from immediately to five years and expire five years from the
date of grant. The exercise price of each option granted under the Plan has
been equal to or in excess of the market price of the Company's common stock
on the date of grant.
Generally, the only condition for exercise of options granted under the Plan
is that the employees remain employed through the exercise date. However, in
October 1995, the Company granted an officer options for 325,000 shares whose
vesting is contingent upon the Company obtaining specified levels of sales and
gross profit. Options for 65,000 shares vested at the end of 1996 due to
meeting non-sales performance criteria. Vesting of options for 65,000 shares
were contingent upon the Company achieving $2,000,000 of sales with a minimum
gross profit margin of 50% during 1997. That target was not met and the 65,000
options were forfeited during 1997. The remaining 195,000 options vest
annually based upon the Company having sales of $4,000,000 in 1998 with a
minimum gross profit margin of 50%, and further increases in sales during 1999
and 2000 by amounts not yet determined by the Board of Directors.
The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its Plan. Accordingly, no
compensation cost has been recognized for its fixed or performance stock
options granted under the Plan. Had compensation cost for the Plan been
determined based on the fair value at the grant dates for awards under the
Plan consistent with the alternative method of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net loss and loss per share would have
increased to the pro forma amounts indicated below. The weighted average
assumptions used to estimate the fair value of each option grant, using the
Black-Scholes option-pricing model, are also presented:
For the nine Years Ended December 31,
Months Ended ---------------------------
Sept. 30, 1998 1997 1996
--------------- ------------ ------------
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Net Loss
As reported $ (1,172,542) $(1,541,058) $ (1,417,297)
Pro forma (1,320,095) (1,567,655) (1,465,469)
Primary and Diluted Loss per share
As reported $ (0.09) $ (0.13) $ (0.12)
Pro forma (0.10) (0.13) (0.12)
For the nine Years Ended December 31,
Months Ended --------------------------
Sept. 30, 1998 1997 1996
--------------- ------------ ------------
Weighted -Average Assumptions:
Divided yield 0.0% 0.0% 0.0%
Expected volatility 62.7% 0.0% 0.0%
Risk-free interest rate 5.0% 5.0% 5.0%
Expected life of options, in years 5.0 4.5 5.0
A summary of the status of stock options as of September 30, 1998 and December
31, 1997 and 1996 and changes during the periods ended on those dates is
presented below:
Options Outstanding
--------------------------------------------------------------
September 30, 1998 December 31, 1997 December 31, 1996
------------------- -------------------- ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ------------ --------- ---------- --------
Outstanding at beginning of period 5,042,050 $ 0.42 1,455,350 $ 0.60 1,443,000 $ 0.60
Granted 270,000 0.56 3,651,700 0.35 12,350 0.77
Exercised (4,445)
Forfeited - - (65,000) 0.77 - -
---------- ------------ ----------
Outstanding at end of period 5,307,605 0.40 5,042,050 0.42 1,455,350 0.60
========== ============ ==========
Options exercisable at end
of period 3,247,109 0.38 3,059,550 0.40 935,650 0.51
========== ============ ==========
Weighted-average fair value of
options granted during period $ - $ - $ 0.17
======== ======== ========
The following table summarized information about stock options outstanding at
September 30, 1998
Outstanding Exercisable
- ----------------------------------------------------------------- -----------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ----------------- ----------- ----------------
$0.15 846,555 3.9 years $0.15 866,555 $0.15
0.30 650,000 1.9 0.30 650,000 0.30
0.38 1,852,500 3.9 0.38 455,000 0.38
0.46 780,000 1.6 0.46 780,000 0.46
0.75 205,000 4.9 0.75 62,004 0.75
0.77 953,550 3.2 0.77 433,550 0.77
----------- -----------
$0.15 to 0.77 5,287,605 3.2 0.42 3,247,109 0.40
=========== ===========
NOTE 10 STOCK PURCHASE WARRANTS
14
In connection with the acquisition of Flexpoint and Tamco during 1995, the
Company issued warrants to purchase 22,750 shares of its common stock
exercisable at $0.77 per share ( which was the fair value of the common stock
on the date of the issuance as determined by the Board of Directors) to its
outside legal counsel. Additionally, the Company issued warrants during 1995
to purchase 23,010 shares of its common stock at a purchase price of $0.77 per
share to equity investors in the Company.
During 1996, warrants were issued to purchase 214,500 shares of common stock
at $0.77 per share to equity investors in the Company, and warrants to
purchase 6,500 shares at $0.77 per share were issued to outside legal counsel.
During 1997, the Company issued warrants to purchase 260,000 shares of common
stock at $0.77 per share to equity investors in the Company. Additionally,
warrants to purchase 910,000 shares of common stock at $1.15 per share were
issued to a retiring member of the Board of Directors.
All of these warrants were deemed to have no material fair value and are
therefore not recorded in the accompanying consolidated balance sheet. The
fair value of each warrant was estimated on the date issued using the Black-
Scholes option-pricing model.
The following table summarizes information about warrants outstanding at June
30, 1998:
Weighted-Average
Range of Warrants Remaining
Exercise Prices Outstanding Contractual Life
--------------- ----------- ----------------
$0.77 526,760 2.7 years
1.15 910,000 2.2
------------
$0.77 to 1.15 1,436,760 2.4
============
NOTE 11 INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the net deferred tax asset were as follows:
September 30, December 31,
1998 1997
------------- -------------
Operating loss carry forwards 1,525,243 1,105,749
Difference in amortization of intangibles 10,151 6,804
------------- -------------
Total Deferred Tax Assets 1,535,394 1,112,553
Valuation Allowance (1,535,394) (1,112,553)
------------- -------------
Net Deferred Tax Asset $ - $ -
============= =============
For tax reporting purposes, the Company had net operating loss carry forwards
in the amount of $4,085,923 and $3,252,203 at September 30, 1998 and December
31, 1997, respectively, that will expire beginning in the year 2010.
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes for the nine months ended September 30, 1998 and
for the years ended December 31, 1997 and 1996:
15
For the Years Ended
For the Nine Months December 31,
Ended Sept. 30, ----------------------
1998 1997 1996
------------------- ---------- -----------
Tax at statutory rate (34%) $ (398,664) $(523,960) $ (481,881)
Non-deductible expenses 7,487 9,867 9,915
Increase in valuation allowance 539,127 571,574 524,831
State tax benefit, net of federal
tax effect (38,694) (57,481) (52,865)
Change in effective tax rate (109,256)
------------------- ---------- -----------
Net Income Tax Expense $ $ $
=================== ========== ===========
NOTE 12 COMMITMENTS AND CONTINGENCIES
The Company is obligated under operating lease agreements for office space.
Future minimum lease payments at December 31, 1997 for the years ending
December 31, 1998 and 1999 were $81,745 and $65,376, respectively. Lease
expense for the nine months ended September 30, 1998 and for the years ended
December 31, 1997 and 1996 was $65,925, $93,854 and $53,436, respectively.
In 1995, a third party entity loaned $35,000 to a former officer of the
Company as a personal loan. This entity has made a claim against the former
officer for repayment of the advance and for other consideration. The Company
may be required to provide compensation to the former officer sufficient to
settle the claim on behalf of the former officer. Management believes, after
consulting with legal counsel, that resolution of this claim may result in a
cost of approximately $52,000 to the Company. This amount has been accrued in
the accompanying consolidated balance sheets at June 30, 1998 and December
31, 1997.
In February of 1998, a unrelated third party filed suit against the Company
alleging it provided investment banking and financial advisory services
pursuant to an agreement with the Company. The plaintiff claims to have
sustained damages for breach of contract and seeks damages in the amount of
6.5% of financing obtained from an equity investor, plus the issuance of a
warrant to purchase a 2% equity ownership interest in the Company at a price
of $5.00 per share. In addition, the plaintiff is seeking punitive damages of
$5,000,000. The Company answered the complaint in March 1998 and the action is
in the discovery stage. The Company has been and continues to contest the case
vigorously. Given the early stage of the action, legal counsel for the
Company is unable to provide any evaluation of the likelihood of an
unfavorable outcome, if any, or the amount or range of potential loss.
Management believes, after consulting with legal counsel, that there is only a
remote possibility that the Company will be subject to a punitive damage award
under the suit. Management has tendered $75,000 to the plaintiff to
completely settle the action and Management maintains that the most the
Company owes the Plaintiff is $75,000. The Company has recorded $75,000 as an
expense relating to this action in the accompanying statement of operations
during the year ended December 31, 1997.
Item 2. Management's Discussion and Analysis or Plan of Operation.
16
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the condensed consolidated
financial statements, related notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended March 31,
1998 and the financial information contained in the Company's Current Report
on Form 8-K, dated April 9, 1998, as amended. Wherever in this discussion the
term "Company" is used, it should be understood to refer to Micropoint, Inc.
("Micropoint") and its subsidiaries on a consolidated basis, except where the
context clearly indicates otherwise. Prior to the April 1998 merger wherein
Micropoint acquired its subsidiary corporations (the "Merger"), Micropoint had
no operations.
Overview
In July 1998, the Company decided to modify its accounting periods from
a March 31 fiscal year end to a December 31 fiscal year end. Accordingly,
under the new fiscal year calendar, the Company's quarters will each be
comprised of four calendar months ending March 31, June 30, September 30 and
December 31 and the Company has opted to file its quarterly reports within the
transition period based on the newly adopted fiscal year. Within ninety days
after December 31, 1998 the Company will file a transition report on Form 10-
KSB covering the transition period from March 31, 1998 through December 31,
1998.
The Company is a development stage company and, since inception, has
incurred losses from operations. As of September 30, 1998, the Company had
cumulative net losses totaling $4,501,153. 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.
Financial Position
The Company had $354,158 in cash as of September 30, 1998. This
represented an increase of $247,664 from December 31, 1997. Working capital as
of September 30, 1998, increased to $415,133 as compared to ($1,084,918) at
December 31, 1997. These increases were largely due to the completion of a
private placement of securities by the Company that closed in April 1998.
Results of Operations
During the three months and nine months ended September 30, 1998, the
Company had total operating revenues of $957,378 and $1,314,509, respectively,
comprised primarily of product sales and engineering fees; compared with total
operating revenues of $22,925 and $260,273 for the comparable periods from the
prior year, comprised primarily of product sales and engineering fees.
In May 1997, the Company entered into a License Agreement (the "License
Agreement") whereby the Company granted to Ohio Art the exclusive worldwide
right to sell products incorporation 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. A substantial amount of the Company's product sales for the
three and nine ended September, 1998 and 1997, were derived under the License
Agreement. In the nine months ended September 30, 1998, the Company had orders
for over 6,000,000 toy sensors and had invoiced and collected over $700,000
relating thereto. However, the toy industry is cyclical. As a result, the
Company expects that revenues generated under the License Agreement will be
greater in the second and third quarters in any given year. In addition, there
is no
17
assurance that the Company will secure additional orders or that these sales
levels will be achieved in future years.
In June 1998, the Company entered into a Purchase and Supply Agreement
(the "Supply Agreement") with Delphi Automotive Systems ("Delco") for the
Company to supply its proprietary sensor mats to Delco for integration into a
weight based suppression system for use in automotive applications. The
Company's sensor mat system is still in the development stage. Delco is not
obligated under the terms of the Supply Agreement to purchase any minimum
number of sensor mats. Even if the sensor mats are successfully implemented,
there can be no assurance that the Supply Agreement will result in a material
amount of sales.
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, and therefore reliance on the other parties' marketing ability,
marketing plans and credit-worthiness; (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; (iii) the Company may have only limited protection from changes in
manufacturing costs and raw materials costs; and (iv) if the Company is
reliant on other parties for all or substantially all of its sales, the
Company may be limited in its ability to negotiate with such other parties
upon any renewals of their agreements.
General and administrative expenses were $350,253 and $1,133,699 for the
three and nine months ended September 30, 1998, respectively, compared with
$146,108 and $733,846 for the comparable periods from the prior year. The
increase in expenditures between the 1998 and 1997 periods resulted primarily
from increases in salary and wage expenses as a result of hiring additional
accounting, management and clerical employees and increases in advertising and
consulting expenses. General and administrative expenses during 1997 were also
limited by a lack of available funds.
Research and development expenses were $324,887 and $764,709 for the
three and nine months ended September 30, 1998, respectively, compared with
$244,183 and $397,362 for the comparable periods from the prior year. The
increase in expenditures between the 1998 and 1997 periods resulted primarily
from increases in salary and wage expenses as a result of hiring additional
engineering personnel and increases in consulting, equipment and software
costs. Research and development expenses were also limited in 1997 by a lack
of available funds.
Net interest and other income was $6,024 and $20,022 for the three and
nine months ended September 30, 1998, respectively, compared with $(10,831)
for the comparable periods from the prior year. The difference in net interest
and other income between said periods relates mainly to interest earned on
funds on deposit. As funds on deposit have increased so has the net interest
income.
Liquidity and Capital Resources
To date, the Company has financed its operations principally through
private placements of equity securities and product sales. The Company
generated $4,109,466 in net proceeds through financing activities from
inception through September 30, 1998. The Company used net cash in operating
activities of $2,453,104 during the nine months ended September 30, 1998. As
of September 30, 1998, the Company's liabilities totaled $559,452. The Company
had working capital as of September 30, 1998 of $415,133.
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. The Company believes that existing funds
and funds generated from sales will be sufficient to support the Company's
operations through 1998. With the award of the Supply Agreement, the Company
will need to materially increasing spending for additional facilities,
equipment and personnel. At a minimum the Company will need $5,000,000 in
additional funding to support its operations during 1999 and the Company needs
at least $8,000,000 in additional funding during 1999 to fully execute its
business plan.
18
The Company is working to obtain this additional funding from several
sources, but it has no firm commitments with respect thereto and there can be
no assurance that additional funding will be available to the Company on
commercially reasonable terms or in the necessary amounts. Any inability to
obtain additional financing in the amounts described above 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 principally for product design, product
prototyping and administrative functions such as communications, word
processing, accounting and management and financial reporting. The Company's
principal computer systems have been purchased since December 31, 1995. The
software utilized by the Company is generally standard "off the shelf"
software, typically available from a number of vendors. While the Company
believes it is taking all appropriate steps to assure year 2000 compliance, it
is dependent substantially on vendor compliance. The Company intends to modify
or replace those systems that are not year 2000 compliant. The Company is
verifying with its system and software vendors that the services and products
provided are, or will be, year 2000 compliant. The Company estimates that the
cost to redevelop, replace or repair its technology will not be material.
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, creditors and
financial service organizations domestically and globally who use computer
systems. It is impossible for the Company to monitor all such systems, and
there can be no assurance that the failure of such systems would not have a
material adverse impact on the Company's business and operations. 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.
Forward-Looking Statements
When used in this Form 10-Q 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.
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.
19
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
No change from descriptions contained in the Company's quarterly
report on Form 10-Q for the period ended June 30, 1998.
Item 2. Changes in Securities.
In August, 1998, stock options were exercised under the Company's
Omnibus Stock Option Plan to acquire 4,445 shares of the Company's common
stock for total proceeds of $720. The common stock was issued under Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1993, as amended.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Securityholders.
None.
Item 5. Other Information.
None.
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 (Incorporated by
reference 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 Micropoint.
3(i).2 Articles of Incorporation of Sensitron, Inc.
(Incorporated by reference to Exhibit 3(i).3 of the
Company's Annual Report on Form 10-KSB, dated March 31,
1998).
3(i).3 Articles of Incorporation of Flexpoint, Inc.
(Incorporated by reference to Exhibit 3(i).4 of the
Company's Annual Report on Form 10-KSB, dated March 31,
1998).
3(i).4 Articles of Incorporation of Technology and Machine
Company, Inc. (Incorporated by reference 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 Micropoint.
3(ii).2 Bylaws of Sensitron, Inc. (Incorporated by reference 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 reference to
Exhibit 3(ii).3 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
20
3(ii).4 Bylaws of Technology and Machine Company, Inc.
(Incorporated by reference 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 (Incorporated
by reference to Exhibit 10.3 of the Company's current
report on Form 8-K, dated April 9, 1998).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A Form 8-K was filed on July 20, 1998 reporting on the Supply Agreement.
A Form 8-K/A was filed on September 10, 1998 amending a Report on Form
8-K reporting on the April 1998 reorganization.
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.
MICROPOINT, INC.
Date: 11/13/98 By /s/ Douglas M. Odom
-----------------------
Douglas M. Odom
President, Chief Executive Officer, Director
Date: 11/13/98 By /s/ Thomas N. Strong
------------------------
Thomas N. Strong
Chief Accounting Officer