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 June 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.
Yes__No
State the number of shares outstanding of each of the issuer's classes
of common equity, as of July 28, 1998: 15,860,279.
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
ASSETS
June 30, December 31,
1998 1997
--------- ---------
Current Assets
Cash $ 762,559 $ 106,494
Investment in securities
available-for-sale 269,656 -
Trade accounts receivable, net of
allowance of $0 and $151,567 149,207 45,823
Stock subscription receivable - 390,000
Inventory 353,489 -
Prepaid expenses 4,900 -
Note receivable 1,824 4,952
Related party receive - 47,989
---------- ---------
Total Current Assets 1,541,635 595,258
---------- ---------
Property and Equipment 1,192,938 924,696
Less accumulated depreciation (255,943) (205,808)
---------- ----------
Net Equipment 936,995 718,888
---------- ----------
Goodwill, Net of Accumulated
Amortization of $65,891 and $53,911 53,911 65,891
Deposits 16,279 13,279
Patents, net of accumulated amortization
of $37,818 and $30,618 87,961 76,702
---------- ---------
Total Assets $2,636,781 $1,470,018
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Trade accounts payable $ 460,787 $ 505,732
Related party payable 9,306 14,562
Accrued liabilities 39,980 398,473
Income taxes payable 158,458 -
Deferred revenue 100,000 200,000
Deferred tax liability 135,175 -
Notes payable 251,291 561,409
--------- ---------
Total Current Liabilities 1,154,997 1,680,176
--------- ---------
Stockholders' Equity (Deficit)
Preferred stock - no shares issued - -
Common stock - $0.001 par value;
20,000,000 shares authorized;
15,860,279 and 9,860,279 shares
issued and outstanding 15,860 9,860
Additional paid in capital 5,843,91 33,108,593
Unrealized loss on securities
available-for-sale (50,412) -
Deficit accumulated during the
development stage (4,327,577) (3,328,611)
---------- ----------
Total Stockholders' Equity (Deficit) 1,481,784 (210,158)
---------- ----------
Total Liabilities and Stockholders'
Equity (Deficit) $2,636,781 $1,470,018
========== ==========
The accompanying notes are an integral part of these financial statements.
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
For the
Period
January 5,
1995
Inception)
For the Six Months For the Three Months Through
Ended June 30, Ended June 30, June 30,
----------- ---------- ---------- ----------- ----------
1998 1997 1998 1997 1998
----------- ---------- ---------- ----------- ----------
Sales $ 357,130 $ 237,348 $ 297,042 $ 179,751 $1,732,227
Cost of sales 155,539 116,490 110,813 82,192 863,911
----------- ---------- ---------- ----------- ----------
Gross profit 201,591 120,858 186,229 97,559 868,316
General and
administrative
expense 770,841 515,097 475,713 250,82 2,762,093
Research and
development 439,822 153,179 272,117 122,246 2,360,025
----------- ---------- --------- --------- -----------
Loss from
operations (1,009,072) (547,418) (561,601) (235,511) (4,253,802)
Interest expense (40) - - - (54,084)
Interest income 13,663 - 13,663 - 27,097
Other income/
expense 526 - (60) - (42,745)
----------- --------- --------- ---------- -----------
Net Loss Before
Income Taxes (994,923) (547,418) (547,998) (275,511) (4,323,934)
Provision for
income taxes 4,043 - - - 4,043
----------- --------- --------- ---------- -----------
Net Loss $ (998,966) $(547,418) $(547,998) $ (275,511) $(4,327,577)
=========== ========= ========= ========== ===========
Basic and Diluted
Loss Per
Common Share $ (0.08) $ (0.04) $ (0.06) $ (0.02) $ (0.44)
=========== ========= ========= ========== ==========
Weighted average
number of common
shares used in per
share calculation 12,479,064 13,161,031 9,860,279 13,158,633 9,860,279
=========== ========== ========== ========== =========
The accompanying notes are an integral part of these financial statements.
MICROPOINT, INC. AND SUBSIDIARIES
(A Company in the Development Stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
For the
Period
January 5,
1995
(Date of
Inception)
For the Six Months Through
Ended June 30, June 30,
1998 1997 1998
----------- ------------ -----------
Cash Flows From
Operating Activities
Net loss $ (998,966) $ (547,418) $(4,327,577)
Adjustments to reconcile
net loss to net cash
used by operating activities:
Depreciation and amortization 69,315 128,956 365,165
Stock issued for services - - 200,000
Allowance for doubtful accounts - - 151,567
Write-off of related party
receivable - - -
(Gain)/loss on disposition
of equipment - - 3,185
Changes in operating assets and
liabilities:
Accounts receivable (38,559) 146,568 (99,908
Inventory (353,489) - (353,489)
Prepaid expenses (4,900) - (7,167)
Related party receivable 47,989 (21,376) 29,058
Accounts payable (44,945) 260,552 281,973
Accrued liabilities (358,493) (8,967) (63,759)
Deferred revenue (100,000) 100,000 93,837
Related party payable (5,256) (900) 9,306
Deferred tax liability (4,343) - (4,343)
Other assets (3,000) - (2,068)
---------- --------- ----------
Net Cash Used By
Operating Activities (1,794,647) (57,415) (3,724,220)
---------- --------- ----------
Cash Flows From Investing
Activities
Payments to Flexpoint
prior to acquisition - - (268,413)
Cash paid to acquire Tamco - - (25,000)
Payments for the purchase of
property and equipment (268,242) (75,189) (889,776)
Proceeds received from sale
of property and equipment - - 8,090
Proceeds received from sale
of securities available-for-
sale 153,497 - 153,497
Investment in patents (18,459) (27,789) (89,754)
Proceeds received on note
receivable 3,128 6,253 10,683
Issuance of note receivable - - (12,507)
Net cash received from
subsidiary in reverse
acquisition 1,492,906 - 1,492,906
Payments received
from related parties - - 646
---------- ------------ ------------
Net Cash Used By
Investing Activities 1,362,830 (96,725) 380,372
---------- ----------- ------------
Cash Flows From Financing
Activities
Proceeds from the issuance
of common stock - 10,000 2,939,000
Cash payments to officers
to repurchase stock - - (50,000)
Capital contribution 8,000 - 8,000
Cash paid for offering costs - - (123,020)
Proceeds from borrowings - 11,123 297,960
Principal payments of
long-term debt (310,118) - (355,533)
Proceeds of bridge loan 1,000,000 - 1,000,000
Proceeds from stock subscription
receivable 390,000 - 390,000
Proceeds from related party notes - - 45,000
Principal payments of related
party notes - - (45,000)
Payments of related party payable - - -
---------- ------------ -----------
Net Cash Provided By
Financing Activities 1,087,882 21,123 4,106,407
---------- ------------ -----------
Net Change In Cash 656,065 (18,187) 762,559
Cash at Beginning of Period 106,494 761 -
---------- ------------ -----------
Cash at End of Period $ 762,559 $ (17,426) $ 762,559
========== ============ ===========
The accompanying notes are an integral part of these financial statements.
NOTE 1- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation - Sensitron Inc.
("Sensitron") was incorporated on January 5, 1995 under the laws of the
State of Utah. Sensitron 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.
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 will be accounted for by the purchase
method of accounting with Sensitron being considered the acquiring
enterprise and Micropoint being the reporting entity.
The terms of the agreement were established on December 30, 1997 and the
investments in the Company's common stock from that date through the closing
of the reorganization agreement were with the intent to ultimately invest in
Sensitron. As of December 30, 1997, Micropoint had nominal assets with
2,000,000 shares of common stock outstanding. The business combination has,
therefore, been considered the acquisition of Micropoint at the historical
cost of its net liabilities in exchange for 2,000,000 shares of common stock
with no goodwill being recognized in connection with the transaction. From
January 1, 1998 through April 1998, investors contributed approximately
$3,000,000 of assets to Micropoint in exchange for 4,000,000 shares of
Micropoint's common stock. This transaction has been accounted for as the
issuance of 4,000,000 shares of common stock by the post-merger Company.
The shareholders of Sensitron exchanged each of their shares of common stock
for 13 shares of Micropoint common stock in connection with the merger
agreement which resulted in Micropoint issuing 9,860,279 shares of its
common stock to the Sensitron shareholders. The merger has been accounted
for as the reorganization of Sensitron with a related 13-for-1 split. The
accompanying financial statements have been restated for the effects of the
stock split for all periods presented.
The accompanying consolidated financial statements include the accounts of
Micropoint, Sensitron and its wholly-owned subsidiaries, Flexpoint, Inc.
(Flexpoint) and Technology and Marbire Company, Inc. (Tamco), from the date
of their acquisition. All significant intercompany transactions and account
balances have been eliminated in consolidation. The acquisition of Flexpoint
and Tamco occurred on September 26, 1995 (see Note 2).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in financial statements and
accompanying notes. Actual results could differ from those estimates.
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
cumulative from inception through June 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 will 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.
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.
Concentration of Risk - 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.
During the year ended December 31, 1997, sales totaling $34,906 were to one
customer. An allowance for doubtful accounts of $151,567 was provided at
December 31, 1997.
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 five to seven years.
Inventory - The Company values its inventory at cost using the FIFO method.
Long-Lived Assets - Impairment losses are recorded when indicators of
impairment are present and undiscounted cash flows estimated to be generated
by those assets are less than the carrying amount. 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 and acceptance by 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.
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 February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No.128, Earnings Per Share. Statement No. 128 specifies the
computation, presentation, and disclosure requirements for earnings per
share and was adopted as of December 31, 1997. Loss per share for the
cumulative period from inception through December 31, 1997 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
reflects potential dilution which could occur if all potentially issuable
common shares from stock purchase warrants and options or convertible notes
payable resulted in the issuance of common stock. Inasmuch as the Company
incurred losses during all periods presented in the accompanying financial
statements, diluted loss per share is the same as basic loss per share
because potentially issuable common shares would decrease the loss per share
and have been excluded from the calculation.
NOTE 2 - ACQUISITIONS
In April 1995, Sensitron acquired 100 shares of Flexpoint's common stock in
exchange for the forgiveness of $50,000 of accounts receivable. On
September 26, 1995, Sensitron completed the acquisition of Flexpoint by
exchanging 5,395,000 shares of Sensitron's common stock for the remaining
outstanding common stock of Flexpoint in a purchase business combination
accounted for in a manner similar to a pooling of interests. Flexpoint and
Sensitron were principally owned by the same individuals prior to the
combination. Flexpoint became a wholly owned subsidiary and is engaged in
manufacturing and selling of various electronic components and sensors.
On September 26, 1995, Sensitron acquired all of the outstanding stock of
Tamco, a company engaged in manufacturing and selling various molds and
dies. The purchase price was approximately $170,000, consisting of $25,000
of cash, a long-term note payable of $85,000 and 130,000 shares of the
Company's common stock valued at $60,000. The purchase price was allocated
based on the estimated fair values of the net assets acquired. This
allocation resulted in the recording of goodwill of $119,802. Goodwill is
being amortized over five years using the straight-line method.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at
June 30, December 31,
1998 1997
---------- -----------
Furniture and fixtures $ 189,449 $ 152,140
Machinery and equipment 456,904 391,752
Office equipment 175,396 104,062
Software 26,685 24,650
Leasehold improvements 344,504 252,172
---------- -----------
Total $1,192,938 $ 924,696
========== ===========
Depreciation expense for the six months ended June 30, 1998 and the year
ended December 31, 1997 was $50,135 and $130,051, respectively.
NOTE 4 - PATENTS
Costs to obtain patents have been capitalized and are being amortized over a
five year period. The Company has the rights to several patents. The cost of
these perfected patents is $62,583. The amortization expense for the six
months dated June 30, 1998 and the year ended December 31, 1997 was $7,200
and $12,021, respectively. The Company is in the process of developing new
patents and protecting existing patents internationally. Costs incurred for
the development of these new patents are capitalized. However, until the
new patents are perfected, these costs are not being amortized. The total
cost of the patents and patent being applied for at June 30, 1998 and
December 31, 1997 was $125,779 and $107,320, respectively.
NOTE 5 - LICENSE AGREEMENT
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. $106,000 had been recognized as of June 30, 1998. 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. $106,000 was
recognized during the six months ended June 30, 1998. The funds will be
recognized as revenue at the point when the Company begins shipping sensors
in marketable quantities. Additional payments received prior to January 1,
1999 will be recognized as revenue evenly over the period beginning at the
point the Company begins shipping sensors and ending December 31, 1998.
NOTE 6 - CASH FLOW INFORMATION
Supplemental Cash Flow Information
For the Year For the Year
Ended Ended
December 31, December 31,
1997 1998
------------ ------------
Interest Paid $ 34,879 $ 965
Noncash Investing and Financing Activities - During April 1998, the Company
acquired the net assets of Micropoint Inc. in a reverse acquisition as
described in Note 1. The fair value of the Micropoint net assets excluding
cost were $240,414. The Company acquired $1,492,906 in cash as part of the
transaction.
On April 15, 1998, an agreement was signed and payment was made to an
officer of $160,000 as a settlement of all past and future obligations under
a related compensation agreement.
On September 26, 1995, the Company acquired all of the common stock of
Tamco. In connection with this acquisition, liabilities were assumed as
follows:
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 $ 5,000
========
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 (258,413)
----------
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 was
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 7 - 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 10). 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 expired subsequent to December 31, 1997. The fourth
agreement included an annual base salary 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.
The following is a schedule of future payments due under the above
agreements as of December 31, 1997:
Years Ending December 31:
1998 $ 342
1999 120,000
2000 120,000
---------
$ 582,500
=========
NOTE 8 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of the following:
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
Non-interest bearing notes; unsecured;
issued for cash and leasehold
improvements; terms for repayment
have not been established 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 April 17, 1998 50,000
Other notes 11,033
----------
Total Notes Payable $ 561,409
==========
Future maturities of notes payable as of December 31, 1997 are as follows:
1998 - $561,409.
Notes totaling $300,376 were paid in full during the six months ended June
30, 1998.
NOTE 9 - RELATED PARTY TRANSACTIONS
Transactions with related parties during 1996 consisted of advances to
employees and a payable to a member of the Board of Directors for cash
advances to the Company in the amount of $20,000. During 1997, the Company
made cash advances to employees for travel and personal expenses and
incurred liabilities payable to employees for Company travel and to a
shareholder for rent of office space. Terms for collection of the advances
to employees as of December 31, 1997 have not been established. Amounts
payable at December 31, 1997 are due currently and were paid subsequent to
year end.
NOTE 10 - STOCKHOLDERS' EQUITY
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.
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 the year 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.
In April 1998, the Company issued stock to acquire Micropoint, Inc. as
described in Note 1.
NOTE 11 - 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:
December 31,
1997
-----------
Net Loss
As reported $(1,541,058)
Pro forma (1,567,655)
Primary and Diluted Loss per share
As reported $ (0.13)
Pro forma $ (0.13)
Weighted-Average Assumptions:
Divided yield 0.0%
Expected volatility 0.0%
Risk-free interest rate 5.0%
Expected life of options,
in years 4.5
A summary of the status of stock options as of December 31, 1997, 1996 and
1995, and changes during the periods ended on those dates is presented below:
Options Outstanding
1997
-------------------
Weighted-
Average
Exercise
Shares Price
--------- -------
Outstanding at beginning
of period 1,455,350 $ 0.60
Granted 3,651,700 0.35
Forfeited (60,000) 0.77
---------
Outstanding at end
of period 5,047,050 0.42
=========
Options exercisable at
end of period 3,059,550 0.40
=========
Weighted-average fair value of
options granted during period $ -
=========
The following table summarizes information about stock options outstanding
at December 31, 1997. Because options under the Plan are granted on
performance and sales criteria, no information has been presented for the
six months ended June 30, 1998.
Outstanding Exercisable
---------------------------------- ---------------------
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---------- -------- ----------- --------
$0.15 871,000 4.7 years $0.15 871,000 $0.15
0.30 650,000 2.7 0.30 650,000 0.30
0.38 1,787,500 4.7 0.38 130,000 0.38
0.46 780,000 2.3 0.46 780,000 0.46
0.77 953,550 4.0 0.77 628,550 0.77
--------- ---------
$0.15 to 0.77 5,042,050 3.9 0.42 3,059,550 0.40
========= =========
NOTE 12 - STOCK PURCHASE WARRANTS
In connection with the acquisition of Flexpoint and Tamco, 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
December 31, 1997:
Weighted-Average
Range of Warrants Remaining
Exercise Prices Outstanding Contractual Life
--------------- ----------- ------------------
$0.77 526,760 3.2 years
1.15 910,000 2.7
---------
$0.77 to 1.15 1,436,760 2.9
=========
NOTE 13 - INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the net deferred tax asset as of December 31, 1997 were as
follows:
Operating Loss
Carryforwards $1,105,749
Difference in
amortization of intangibles 6,804
----------
Total Deferred Tax Assets 1,112,553
Valuation Allowance (1,112,553)
----------
Net Deferred Tax Asset $ -
==========
For tax reporting purposes, the Company has net operating loss carry
forwards in the amount of $3,252,203 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 year ended December 31, 1997.
Tax at statutory rate (34%) $(523,960)
Non-deductible expenses 9,968
Change in valuation allowance 571,574
State tax benefit, net of
federal tax effect (57,481)
---------
Net Income Tax Expense $ -
=========
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company is obligated under operating lease agreements for office space.
Future minimum lease payments for the years ending December 31, 1998 and
1999 are $81,745 and $65,376, respectively. Lease expense for the six
months ended June 30, 1998 and the year ending December 31, 1997 was
$47,410, and $93,854, respectively.
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 sheet at June 30, 1998 and December
31, 1997.
In February of 1998, an otherwise 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.
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. 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 June 30, 1998, the Company had
cumulative net losses totaling $4,253,802. The Company is primarily engaged
in the sensor business and is currently marketing proprietary patented
sensor technology know as the Bend Sensor 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 $762,559 in cash as of June 30, 1998. This represented an
increase of $656,065 from December 31, 1997. Working capital as of June 30,
1998, increased to $386,638 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 as
discussed below.
Results of Operations
During the three months and six months ended June 30, 1998, the Company
had total operating revenues of $297,042 and $357,130, respectively,
comprised primarily of product sales and engineering fees; compared with
total operating revenues of $179,751 and $237,348 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. Substantially all of the Company's product sales for the
three and six months ended June 30, 1998 and 1997, were derived under the
License Agreement. Based upon estimates from customers, management currently
projects that over $600,000 in revenues will be generated from toy sensor
purchases in 1998. The Company does not have firm orders for such
quantities, however, and many factors could affect actual sales, such as
demand for the end products and unanticipated production delays. There can
be no assurance that such sales levels will be achieved.
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 $475,713 and $770,841 for the
three and six months ended June 30, 1998, respectively, compared with
$250,824 and $515,097 for the comparable periods from the prior year. The
increase in expenditures between the 1998 and 1997 periods resulted
primarily from product start up costs for toy sensor products, royalties
associated with the sale of toy sensor products, professional fees and
travel expenses.
Research and development expenses were $272,117 and $439,822 for the
three and six months ended June 30, 1998, respectively, compared with
$122,246 and $153,179 for the comparable periods from the prior year. The
increase in expenditures between the 1998 and 1997 periods resulted
primarily from additional research and development of the seat sensor mat.
Net interest income was $13,663 and $13,663 for the three and six
months ended June 30, 1998, respectively, compared with $0 for the
comparable periods from the prior year. Interest income relates to funds on
deposit acquired in April 1998 when the Company acquired Micropoint. Prior
to April 1998, the Company did not have funds on deposit. As a result, the
net interest income is the same for the three and six months ended June 30,
1998.
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 $4,106,407 in net proceeds through financing activities from
inception through June 30, 1998. The Company used net cash in operating
activities of $1,794,647 during the six months ended June 30, 1998. As of
June 30, 1998, the Company's liabilities totaled $1,154,997. The Company had
working capital as of June 30, 1998 of $1,481,784.
The Company's working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including the
costs to expand facilities, complete development and bring the certain
product utilizing the Technology to commercial viability and the level of
sales of and marketing for the Company's products. With the award of the
Supply Agreement, the Company believes that existing funds and funds
generated from sales will be sufficient to support the Company's operations
through 1998. As a result the Company will need to materially increasing
spending for additional facilities, equipment and personnel. Therefore, the
Company will need to raise additional funds in the immediate future through
a subsequent public or private offering or otherwise. There is no assurance
that any funding will be available or that, if available, the terms of such
offering or funding will be favorable to the Company.
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In October, 1996, John Clayton and Blaine Taylor (collectively
"plaintiffs") filed suit against Sensitron, Flexpoint, Inc. (a subsidiary of
the Company) and certain of their officers in the Third Judicial District
Court in Salt Lake County, Utah. The suit alleged, among other things, that
the plaintiffs had a binding agreement pursuant to which the bend sensor
technology of Gordon Langford would be transferred to a public shell company
for which the plaintiffs would raise investment capital. Sensitron filed a
Motion for Summary Judgment alleging that there was no binding agreement
with the plaintiffs, and that in any event the plaintiffs failed to perform.
In August of 1998, Sensitron prevailed on its Motion for Summary Judgment
which dismissed all of the claims against Sensitron except for the one
relating to a loan. Sensitron intends to seek further Court clarification as
to the terms of the alleged loan and the payment thereof to cease the
litigation.
Item 2. Changes in Securities.
In April 1998, the Company completed a private placement (the "Private
Placement") wherein it raised gross proceeds of $2,924,922 through the sale
of 3,899,896 shares of common stock to qualified investors for $.75 per
share. The common stock was issued under Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"). The Company did not use an underwriter in connection with the Private
Placement.
In connection with the Private Placement, the Company completed the Merger
in April 1998. As part of the Merger, the 758,483 shares of Sensitron, Inc.
("Sensitron") common stock issued and outstanding immediately prior to the
effective date of the Merger were converted into 9,860,279 shares of
Micropoint common stock. In addition, on the effective date of the Merger
options to purchase 370,900 shares of Sensitron common stock, warrants to
purchase 107,020 shares of Sensitron common stock and debt convertible into
18,927 shares of Sensitron common stock were respectively converted into the
right to acquire 4,821,700, 1,391,260 and 246,051 shares of Micropoint
common stock with a corresponding price adjustment and without any other
substantial changes to the terms of such instruments. These securities were
issued under Rule 506 of Regulation D and Section 4(2) of the Securities Act.
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
[CAPTION]
EXHIBIT NO. DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Reorganization (Incorporated by
referenced to Exhibit 2.1 of the Company's Current Report on
Form 8-K, dated April 9, 1998).
3(I).1 Certificate of Incorporation of Micropoint (Incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form 10-SB, dated June 17, 1994).
3(I).2 Certificate of Amendment to Certificate of Incorporation
(Incorporated by referenced to Exhibit 3.1 of the Company's
Current Report on Form 8-K, dated April 9, 1998).
3(I).3 Articles of Incorporation of Sensitron, Inc. (Incorporated
by referenced to Exhibit 3(I).3 of the Company's Annual
Report on Form 10-KSB, dated March 31, 1998).
3(I).4 Articles of Incorporation of Flexpoint, Inc. (Incorporated
by referenced to Exhibit 3(I).4 of the Company's Annual
Report on Form 10-KSB, dated March 31, 1998).
3(I).5 Articles of Incorporation of Technology and Machine Company,
Inc. (Incorporated by referenced to Exhibit 3(I).5 of the
Company's Annual Report on Form 10-KSB, dated March 31,
3(ii).1 Restated Bylaws of Micropoint (Incorporated by reference to
Exhibit 3.2 of the Company's Registration Statement on Form
10-SB, dated June 17, 1994).
3(ii).2 Bylaws of Sensitron, Inc. (Incorporated by referenced to
Exhibit 3(ii).2 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
3(ii).3 Bylaws of Flexpoint, Inc. (Incorporated by referenced to
Exhibit 3(ii).3 of the Company's Annual Report on Form
10-KSB, dated March 31, 1998).
3(ii).4 Bylaws of Technology and Machine Company, Inc. (Incorporated
by referenced to Exhibit 3(ii).4 of the Company's Annual
Report on Form 10-KSB, dated March 31, 1998).
10.1 Employment Agreement with Douglas M. Odom (Incorporated by
reference to Exhibit 10.1 of the Company's current report on
Form 8-K, dated April 9, 1998).
10.2 Lease Agreement between 72nd South Associates and the
Company (Incorporated by reference to Exhibit 10.2 of the
Company's current report on Form 8-K, dated April 9, 1998).
10.3 Agreement between Ohio Art and the Company (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 April 24, 1998 reporting a change in control of
the Company and the acquisition of certain assets.
A Form 8-K/A was filed on June 24, 1998 which contained certain financial
information relating to the initial current report that was filed on April
24, 1998.
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.
By /s/ Douglas M. Odom
Date: 8/13/97 _
Douglas M. Odom
President, Chief Executive Officer,
Director
Date: 8/13/97 By /s/ Thomas N. Strong
_
Thomas N. Strong
Chief Accounting Officer
EXHIBIT 27.1
Financial Data Schedule
Financial Data Schedule
As of and For the Six Months Ended June 30, 1998
Micropoint, Inc. and Subsidiaries
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
As of and For
the Six Month
Period Ended
June 30, 1998
-------------
Cash and cash items 762,559
Marketable securities 269,656
Notes and accounts receivable-trade 149,207
Allowances for doubtful accounts 0
Inventory 353,489
Total current assets 1,541,635
Property, plant and equipment 1,192,938
Accumulated depreciation 255,943
Total assets 2,636,781
Total current liabilities 1,154,997
Bonds, mortgages and similar debt 0
Preferred stock-mandatory redemption 0
Preferred stock-no mandatory redemption 0
Common stock 15,860
Other stockholders' equity 1,465,924
Total liabilities and stockholders' equity 2,636,781
Net sales of tangible products 357,130
Total revenues 357,130
Cost of tangible goods sold 155,539
Total costs and expenses applicable to sale and 1,366,202
Other costs and expenses 40
Provisions for doubtful accounts and notes 0
Interest and amortization of debt discount 13,663
Income before taxes and other items (994,923)
Income tax expense 4,043
Income/loss continuing operations (1,009,072)
Discontinued operations 0
Extraordinary items 0
Cumulative effect-changes in accounting principles 0
Net income or loss (998,966)
Earnings per share - primary 0
Earnings per share - fully diluted 0